December 4, 2005
How Can David Beat Goliath?- Strategy #8: Defend Against Goliath’s Attack (Part 1)!
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):
- 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).
- 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.
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).