Every week I encounter a business plan stating that the company has no competitor, and, therefore, it will be extremely successful. The ones that do stand out are those that only focus on direct competitors. That is why I find that kind of analysis to be very naïve. In my first week during business school, my finance professor extolled the great features found on a new financial calculator, named Bowmar, and he recommended that it would be a savvy stock investment for every student in the classroom. (I still have his finance textbook in my personal library.) Fortunately, being a poor student, I never got to purchase any equity in Bowmar. And since the professor taught finance and not marketing, maybe he shouldn’t have been the person talking about the benefits of the calculator. A year later, the company that supplied the parts for the Bowmar calculator began to sell its own brand. That company was Texas Instruments.
The key to survival to any business is to acknowledge the competitive environment. Once a company begins to appear in the radar screen, that company has to be paranoid – for only those that are paranoid are capable of survival.
Every company has two types of competitors – direct and indirect. In the case of calculators, the direct competitors are those that sell calculators similar to and within the geographic scope of the company. For example, H-P makes calculators that contain financial applications. Therefore, H-P is a direct competitor to Bowmar.
Bowmar’s mistake was identifying its indirect competitors. Another categorical description would be vertical suppliers. Bowmar’s indirect competitor was its only parts supplier – Texas Instruments. TI saw the opportunity and decided that, instead of licensing Bowmar to sell its brand to the public, TI undertook the direct marketing with better margins and cheaper price points that Bowmar could ever offer. It has been some time but, as I recall, Bowmar stop operating a year after TI entered the market.
So, in every business strategy, one has to plan for both direct and indirect competitors. It seems that any business school strategic plan should include the indirect competitors, not simply the direct ones. To me, this is a hallmar of excellent strategic business planning.