December 4, 2005

How Can David Beat Goliath?- Strategy #8: Defend Against Goliath’s Attack (Part 1)!

Posted in David vs. Goliath, management at 9:16 am by scottmaxwell

In a recent post, I described being stung by a yellow jacket that was part of a hive that had been built on my house. I discussed how it is possible for emerging growth companies to grow without being discovered (like the yellow-jacket hive). Ultimately, once the large company gets stung by you (or otherwise discovers you or your market niche), the large company may respond and try to take its “fair share” of your market (if it is aggressive, the large company will try to take more than its “fair share” of the market).

The key point here is that the large company can still do what I ultimately did to the yellow jackets if you do not set up and execute a solid defensive strategy (the yellow jackets didn’t have a strong-enough defense against my attack!).

In this posting (part 1), I focus on the attack vectors that the large company can use against the emerging growth company and an assessment of how well they work in different situations. In my next posting (part 2) I will discuss how the emerging growth company can set up to defend against Goliath’s attack.

The nature of Goliath’s attack…

The large company product market attack can come from several different angles (the “attack vectors”). They generally do one or more of the following (together or in sequence):

  1. Confuse the market with their “new product” announcements. This is well known as creating “Fear, Uncertainty, and Doubt” (F.U.D.), and is fast becoming the classic approach for large companies, especially those that sell to enterprises. The large company will have press releases, customer meetings, webinars and etc. to announce products and plans in your market, whether or not the products currently exist. They will also plant the announcements with the “media” outlets and the industry analysts (to whom they make significant yearly payments) so that these “influencers” can help spread the FUD. There are several dimensions that determine the effectiveness of the FUD attack:
    • The size of the buyer organization (and buyer decision-making group). FUD works much better for large enterprise products. At the SMB/department level, the FUD is much less meaningful (in many instances it may even backfire on the large company) and as you move toward internet-based applications and data, especially browser-based applications, the issue goes away almost completely.
    • The total cost of the product to the buyer. FUD works best the higher the price, the greater the implementation effort, the greater the user learning curve, and the greater the migration effort (the so-called switching costs) if/when the buyer moves off your product.
    • The relationship between your product and the large company product. The more your product relates to the large company product (competitive OR complimentary), the better FUD will work. This includes integration at the application or data level, and generally how closely related the buyer perceives your product to be to the large company product (btw, this point is stronger when the buyer already has the large company product installed!).
    • The relationship between the buyer and the large company. The greater the relationship, the better FUD will work.
    • The economic relationship that both your product and the large company’s products have with the large company’s channels of distribution. The more the economic loss with your product, the more effective FUD will be (the channels will help the FUD effort).
  2. Attack the reputation of the emerging growth company and/or its management. Most large companies probably won’t execute a large-scale reputation attack from the senior management level, but rather the seeds will grow in their employees (particularly the front-line employees). Their local sales reps or business development people may attack the emerging growth company’s reputation in one-on-one conversations. (There are much more aggressive strategies with respect to impugning the reputation of the emerging company and/or its management, but I like to believe that this is as far as it generally goes from an institutional level.)
  3. Claim (or aid in the claiming of) patent infringement against the emerging growth company. This attack vector can either be a direct attack (“you infringed on my patent”) or an indirect attack (funding or otherwise aiding a third party in attacking you for infringing on the third party’s patent). Of course, the approach only works when the large company has at least one patent that the emerging company might be infringing on OR if they can encourage a third party that has a patent the emerging growth company might be infringing on.
  4. Lobby for regulations that will help the incumbent large companies at the expense of the emerging growth companies and lobby against regulations that will help the emerging growth companies at the expense of the incumbents. This attack vector is difficult to assess broadly, but has been long term successful in many instances and unsuccessful in others.
  5. Execute an unfocused organic attack. Fortunately for the emerging growth company, this is the approach that many large companies take in many market situations. This attack is essentially building and launching the large company’s product within existing departments with existing staff. Generally, this attack vector will be much less effective, as the product will not get the attention and focus necessary to compete against a solid emerging growth company.
  6. Execute an all-out focused organic attack. This attack has a much greater chance of success than the unfocused attack and generally gets launched after a heavy dose of FUD. The approach includes
    • A reorganization of the large company to put together the right, focused team,
    • Heavy spending on product development,
    • Heavy sales and marketing,
    • Promotions and/or permanently lower price (the most aggressive attacks include completely free products), and
    • Some level of bundling, including possibly building your feature/function into their platform.
  7. Offer to purchase you. This approach is most effective when the emerging growth company is interested in being acquired AND the offer is in a range that seems fair to both sides. The offer a lot of times comes with a subtle threat of purchasing your best competitor and entering the market aggressively if you decline. Also, many people believe that at least some of these offers are intended more to understand your company and its products in detail rather than a true intent to purchase your company (truth here is difficult to determine, but there are many suspicious data points).
  8. Buy your best emerging growth competitor. The better the competitor, the more effective the approach.

The large company will choose how aggressive and from what angle and sequence they attack based on several criteria:

  • How much they believe this new product market will damage their core business. The greater their fear, the more aggressive the response.
  • How large and profitable they believe this new market is and will be in the future. The larger and more profitable the market, the more aggressive their response.
  • How strategic this product market and/or your core strengths are to their current and future business needs. The more strategic, the greater the response (though, not as important a criteria as the first two).
  • How aggressive they need/want to be with respect to growth. The more aggressive the growth need, the more they may steer toward an acquisition.
  • Their interest and abilities with respect to organic growth vs. inorganic growth (i.e., growth through acquisition) and their buy vs. build analysis for your product market. Tough to handicap this one, although build analyses always underestimate costs and overestimate results.
  • Their understanding of their ability to successfully execute on a particular attack vector. Again, hard to handicap.
  • Their corporate culture and senior management style. Some companies are naturally more acquisition oriented, some naturally more organic growth oriented. Also, some are more oriented toward “take the high road” behavior and some are more agressive against their competitors (to the point their competitors call in the regulators).

Some of these attack vectors are pretty powerful and quite effective, particularly if you are not set up with a solid defensive strategic position. In my next post, I will discuss my thoughts on how the emerging growth companies can se up to be in the best position to defend against, and benefit from, these attack vectors. (I will also link part 2 to this post).

Advertisements

10 Comments »

  1. Raza said,

    Hi Scott,

    I have been reading your blog ever since Brad Feld introduced it on his blog. This series is really very interesting.

    I run a software company in Pakistan and i think i have a good cost advantage in whichever product market i plan to enter.

    Currently my focus is heavily on providing transparent outsourcing services to small to medium sized organizations who just cant afford to setup their own offshore offices.

    I also have a web based product under development that i ll be shortly launching.

    My question is can a company effectively launch & succeed in such case without actually being in US or where most of the prospective customers going to be ?

    Secondly do you invest in companies that are entirely based outside US ?

    – Thanks

  2. Stephen said,

    Scott — I find there is a stronger impact to FUD in the North American market than elsewhere, especially Europe, where the consumer seems to be able to distill the value of the technology out of all the marketing hype. In many respects, you could say the battles are fought in the US market but the truths are revealed in the other markets.

  3. […] In “part 1” of this topic, I described the attack vectors that Goliath might pursue. Depending on how aggressive and effective an attack the large company mounts, it will use a combination and sequence of the attack vectors. […]

  4. scottmaxwell said,

    Raza,
    thanks for the comment. Yes, we do invest in companies based entirely outside the U.S., although the goal would be to help bring the company to the U.S. as well as other global markets. In my view, it does not matter where a company starts, but rather how to take that starting point and build a great global company. From your perspective, to the extent you are looking for a VC partner, you want a partner that will help you meet your goals. If the goals are to build out in the U.S., then getting a great U.S. VC that has a proven track record doing this sort of thing would be a great match for you.

    In terms of needing to be in the markets that you are selling into, I think that the key issue is that you need to meet your customer’s needs. This includes a deep understanding of the culture, language, and specific customer issues in order to build the best product, marketing, sales, and service effort. In addition, if you need to visit your customers, it is probably more efficient to have people located in-country. These points generally lead to needing staff in the regions that you are selling and servicing, but I have seen some acceptable early efforts where that was not done. Eventually, you will serve your customers better by being in-country.
    Scott

  5. scottmaxwell said,

    Stephen,
    thanks for the comment. I built your thought into my part 2 post. Keep the thoughts coming!
    Scott

  6. Raza said,

    Scott,

    Thanks for the great advice. The more i am into reading blogs and interacting with people online i have seen the gaps (culture,language,specific customer issues,etc) shortening , but at the same time i realize that by just doing so i can’t create a truly global company.

    I met F.C. Kohli (the person known to be father of indian IT industry) a couple of days back. He had very interesting comments about outsourcing/offshoring. He still sees indian share of this market very small and see huge growth potential. I think the same after working with my recent client which is a small US organization. The key to such companies who fear outsourcing is to be very transparent to them which i am trying to achieve.

    Can i have your email , i wanted to share with you a few things ?

    Thanks

  7. […] The Nature of Goliath’s Attacks, and […]

  8. amber said,

    I am being attacked by a large company. They started a legal procedure against me thrue the court in Delaware USA, claiming that I am in their patent. Their patent is very broadly put, so anything could fit within their description. I own a Dutch company, operating mainly in the European market. I only deal with the USA every now and then.

    What can I do to protect myself against this attack, without having to spend thousands of dollars?

    I hope you can help me.

    Most regards, Amber Brand

  9. scottmaxwell said,

    Amber, I would ask for some legal advice on this one. If you need the name of a very good IP lawyer, send me an e-mail to smaxwell@openviewpartners.com
    s


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: