From the December 1999 issue of Entrepreneur

Felicia Lindau knows they're out there. Potential competitors for Sparks.com, an online retailer of real greeting cards founded by the San Francisco entrepreneur one year ago with partner Jason Monberg, 27, run the gamut, from the corner gift shop to Amazon.com. That awareness was brought home during a recent meeting with executives of another company, supposedly to explore setting up a strategic alliance with Lindau's 70-person firm.

"One of them laid down a briefcase and out popped one of our business plans from a year ago, which they had clearly [obtained] through channels we had not intended," recalls Lindau, 32. "Someone to whom we had given a confidential copy of our business plan had shared it with our competition."

Experts in competitive strategies say eventually, every firm will find out it has at least one serious competitor planning to take away its customers. How early you detect those threats may make the difference between whether you hang on to your customers or lose them to the competition.

"The key is to stay ahead of where the competition is emerging," says George E. Cressman Jr., a consultant on pricing and competitive strategy with Strategic Pricing Group Inc., located in Marlborough, Massachusetts. "You're ultimately looking to say to customers that they should buy from you, because there's no place else where they can get the kind of value you deliver."

The Early Bird . . .

Early warning systems are especially important as markets go global and information about business opportunities disseminates rapidly worldwide, says Paul Geroski, an economics professor at London Business School. These systems are most critical in industries that have rapidly changing technologies or whose markets are undergoing changes in consumer tastes, he explains.

To develop your own early warning system, Geroski recommends tracking information about your business and your market. The key questions: How do you make your money? What other profit opportunities exist in your field? This is the information that will inspire and guide competitors, and you can follow its flow to learn who those competitors are likely to be, notes Geroski.

Tracking information for your early warning system is largely a matter of networking, according to Philip C. Anderson, a business professor at Dartmouth College in Hanover, New Hampshire. Talk to vendors, customers, consultants and others who do business with companies in and around your field to find out if and when new competitors are likely to emerge, he says. Lindau says venture capitalists represent a fruitful source for competitive information for her because due diligence requires investors to research related businesses before backing a company.

Also look in related product markets, adds Geroski. These are the markets whose participants are most likely to understand your customers' needs. For example, he points to the way magazine publishers complement book publishers. Books provide content for periodicals, while magazines provide book publishers with publicity and reviews. Companies whose products complement each other in this way are more likely to become competitors than firms in unrelated industries, he says.

In addition, scan up and down the value chain for your product or service. Geroski points to Microsoft, which used its strength in PC operating systems to move up the value chain and sell in markets ranging from word processing software to online travel services. Companies that occupy spots on your value chain often understand your business and customers well enough to become potent rivals.

Also suspect companies with related competencies. Carefully scrutinize firms that have mastered technology similar to yours, even if they appear to operate in distant sectors, Geroski warns. He points to the way companies such as Motorola have used technologies originally developed for the defense industry to become serious competitors in consumer products such as cell phones. Geroski says that competencies can also concern nontechnological experience, such as management of retail outlets, new product development or even customer service.

Competitive Counters

Once you make note of information, complementary products and related competencies to identify potential competitors, prepare a plan to beat them. The best way may be to preempt them, introducing a new offering so appealing to consumers that competitors look elsewhere for profit opportunities.

How will you know whether you're successfully detecting and countering competitors? By keeping track of how and to whom you are losing sales, says Cressman. No one wins every sale, but if you start to lose sales to companies you've never heard of, you may be witnessing the birth of new and unexpected competitors, and your early warning system may be faulty.

Early warning may be more important for small companies than large ones, according to Geroski, because entrepreneurs are more likely to operate in newly emerging industries characterized by rapid changes in technology and consumer tastes. Devoting time and money to an early warning system is usually a necessary investment, not an option, he says.

You can hand over thousands of dollars to a big-name market research firm to perform a competitive analysis of your industry. But you don't have to spend a dime to do nearly as good a job yourself, says Anderson. He recommends using Internet indexes and search engines to keep abreast of new rivals. Once a week or so, type search words describing your market offerings into a Web-based search engine and see what turns up. Use terms your customers might use as opposed to technical or insider terms to describe your product or service, Anderson stresses.

He also recommends you subscribe to online news services that filter and forward articles according to parameters you designate. Finally, use social networking--talking to customers, vendors and colleagues--to find out what threats lie on the horizon.

It's possible to overdo competitive searches. Don't devote so much energy to the effort that you neglect other important elements of running your business, advises Cressman. "The time you spend trying to figure out where your competition is going to come from is time that could have been spent trying to get one more order," he says.

You can even damage your business by appearing to be overly concerned about competitors. Asking customers whether and why they do business with other firms may be perceived as a sign of weakness or lack of resolve. And keep in mind that in the process of pumping vendors and others for news, you inevitably reveal your concerns. You have to be careful not to give away too much of your own proprietary information in the pursuit of knowledge about others.

A well-designed early warning system will carry its weight and then some, however. That's especially true as the flow of information about all industries gets wider and faster. Because of the Internet, more companies are finding ways to compete in places and markets where they had no presence before.

Whatever the competitive scene looks like in the future, Lindau vows to keep her eyes peeled for evidence of new rivals.

"Things move too fast in this environment," Lindau says. "As soon as you get confident that nobody's coming, somebody's going to come out of the woodwork."

For more information, look for our feature story on competitive intelligence, scheduled to appear in the March 2000 issue.

Next Step

"Early Warning of New Rivals," by Paul Geroski, is an article on detecting potential competitors, that was originally published in the Spring 1999 issue of Sloan Management Review. You can view an online abstract and order reprints at http://mitsloan.mit.edu/smr/past/1999/smr40310.html.

Mark Henricks is Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for nine years.

Web Site

http://www.bizbuyer.com

By Robert McGarvey

Imagine an eBay that's geared to entrepreneurs--that's almost what you get at BizBuyer.com, where buyers enter their specs for products and services, and bidders respond with their best offers. Strictly a business-to-business site, BizBuyer.com doesn't handle Furbies of Elvis posters, but it does provide tools that let you seek bids on computer equipment, paging, legal services (patent and trademark law, for example), long-distance service and an expanding lineup of the stuff a small business needs to operate and grow.

Contact Source

Strategic Pricing Group Inc., (508) 481-9775, http://www.spgboston.com