Barriers to Entry - Cheat Your Way to Success

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MY DIRTY LITTLE START-UP SECRET B arrier-to-entry strategy for start-ups http://www.flickr.com/photos/sirmightymac/

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w hen dealing with competitors

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p rovided that you don't break the law

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c heating is good

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o ne of the best ways to cheat

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i s to change the rules of the game

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t o stack the deck

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so that competitors find it harder, or more expensive, to do the same thing as you

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in b-school, we teach Cheating 101

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b ut we call it B arriers to Entry * From Porter’s 5 Forces if you’re looking to impress at a dinner party

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i deally, you want to have low barriers to entry in any market space that you want to enter

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a nd then

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once you are in

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y ou immediately slap up high barriers, so that future competitors cannot follow you

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h istorically, start-ups have placed an over-emphasis on intellectual property

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IP gives you a government-protected monopoly to profit from a specific solution

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i t is no longer free-market competition

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y ou've changed the rules of the game

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e xcellent cheating!

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b ut IP is just one of dozens of barriers that a start-up has at its disposal

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and frankly, one of the weakest

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let’s take a tour

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS INTELLECTUAL PROPERTY VULNERABILITIES Innovation around the patent Reverse engineering Shameless piracy Prohibitive cost to enforce Inability to protect across all jurisdictions Public disclosure of IP required in registration Leverage the government sponsored monopoly privileges that come with registering patents, trade marks, or copyrights. Competitors are blocked from using your innovations without obtaining a license from you to do so. BACKGROUND COMBAT STATS Defence Strength LOW Cost to Setup HIGH Cost to Maintain MED COMBAT RATING LEGAL / GOV’T BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS TRADE REGULATION VULNERABILITIES Counter lobby Forfeit of future growth markets If your competitors pay an additional 15% import tax in order to sell into your market, you're cooking on gas! Similarly, if you can help design safety regulations, s ubsidies, zoning, licensing procedures, subsidies or other laws such that your competitor products are disadvantaged, you are also laughing all the way to the bank. BACKGROUND COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain MED COMBAT RATING LEGAL / GOV’T BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS RECIPROCITY VULNERABILITIES Be especially wary of jail time Reciprocity has a quick half-life. You need to earn quickly and spend quickly. In many political contexts, firms use lobbying, favours, outright bribes, or other creative means to create reciprocity debt with powerful market players. These reciprocity debt pools can be called upon when needed to address competitors in creative ways. BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup HIGH Cost to Maintain MED COMBAT RATING LEGAL / GOV’T BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CONTROL RAW MATERIALS VULNERABILITIES Competitor innovates an equivalent product from different raw material Suppliers break their contract with you Government intervention (anti-competition law) If you can control the raw materials required for production, you control the competitive landscape. For example, if the product absolutely requires Mangosteen extract to work, and you have 10-year exclusive contracts with 86% of the world's Mangosteen farmers, then your competitors won't be able to manufacture the product, as they simply won't be able to purchase raw material BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup HIGH Cost to Maintain MED COMBAT RATING SUPPLY CHAIN BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CONTROL TALENT VULNERABILITIES Spin out start-ups Someone always can pay more or give better perks High-flyers often don't get a long There are always new PhD's that put your PhD's to shame This is like control of raw materials, but specific to knowledge industries like high-tech, banking or pharma . In this case, you hire all the PhD's in the market so that competitors don't have access to the specific brain power. Then you comp them well and use bonus payments, equity, patenting support, etc to keep them locked-in BACKGROUND COMBAT STATS Defence Strength LOW Cost to Setup MED Cost to Maintain MED COMBAT RATING SUPPLY CHAIN BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS COST OF PRODUCTION VULNERABILITIES Once you drop your price, you may not be able to raise it again – you may win the war, but what you win is a no margin market. Niche or Blue Ocean Strategies Production / Manufacturing Innovation When you are big, and spending big wads of cash, your costs go down. For example, you get discounts for bulk ordering. With a reduced cost model, you can drop your price below what smaller competitors can sustain. Y ou can also leverage specialized know-how (which requires high cost/long time to duplicate) or favourable geographical location to reduce cost. BACKGROUND COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain MED COMBAT RATING MANUFACTURING BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CONTROL MANUFACTURING VULNERABILITIES Primarily works only for specialized (non commoditized) manufacturing processes Easy to have facilities break ranks unless they are well locked-in by contract or otherwise The idea here is to control all the factories that make your widget or you control the technology required to manufacture it. BACKGROUND COMBAT STATS Defence Strength MED Cost to Setup MED Cost to Maintain MED COMBAT RATING MANUFACTURING BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS SUNK COSTS VULNERABILITIES Competitors may not always be rational If the manufacturing process requires expensive start-up costs and because of the nature of production, those assets can not be redeployed to some other production process, then entrants will be wary to invest because they may end up losing big. BACKGROUND COMBAT STATS Defence Strength LOW Cost to Setup HIGH Cost to Maintain MED COMBAT RATING MANUFACTURING BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CONTROL RETAIL REAL ESTATE VULNERABILITIES E-Commerce Multi-level Marketing Channel margin war Why are there so many versions of Colgate on the shelf at your supermarket? It is not because they actually have that many distinct client segments. It is so that they can pack the limited shelf-space. If their competitors have no shelves upon which to display their products, nobody will be able to buy them. If you own shelf space your competitor is blocked. BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup HIGH Cost to Maintain MED COMBAT RATING DISTRIBUTION BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CLIENT LOCK-IN: BRAND LOYALTY VULNERABILITIES Brain rewashing It’s hard to brainwash in the first place Brainwashing is great. With brand loyalty lock-in, you convince your customers that their very sense of self (self image or personal brand) depends on your product. Without your product, or with another product, they are just sneetches without belly stars. BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup MED Cost to Maintain MED COMBAT RATING CUSTOMER BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CLIENT LOCK-IN: TYING VULNERABILITIES Anti-competition laws Need a pretty powerful product Y Tying happens when you force a customer to buy Product X if they buy Product Y. If Product Y is good enough, it locks in Product Y. BACKGROUND COMBAT STATS Defence Strength LOW Cost to Setup HIGH Cost to Maintain LOW COMBAT RATING CUSTOMER BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CLIENT LOCK-IN: SWITCHING COSTS VULNERABILITIES Adaptors Signing “buy-out” bonuses Make it financial difficult for a customer who has already purchased your product to switch to another one: Phone number portability Standards incompatibility & proprietary formats/APIs Warranty on the whole, not the parts Points & rewards programs All or nothing service agreements Licensing terms BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup LOW Cost to Maintain LOW COMBAT RATING CUSTOMER BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS NETWORK EFFECTS VULNERABILITIES Susceptibility to trend setters and new networks (Facebook vs MySpace ) A network effect occurs when customers gain more value as more customers buy. Once a network reaches critical mass, it is hard for a customer to leave the network unless all the other customers move too. BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup MED Cost to Maintain LOW COMBAT RATING CUSTOMER BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS PSYCHE WARFARE: VAPOURWARE VULNERABILITIES Clients may eventually see what you are doing Lead users may still buy if they are too excited to wait You are a small start-up that has come up with a cool new software product for enterprises. Microsoft sees it and thinks that it is a good idea, but it will take them 2 years to build, or they don't want to build it & just want to squish you like a bug so that the tech is killed in the womb. They announce that the feature will be supported in the next version of Windows. Lies, damn lies, statistics….and marketing. Will clients buy from you, or wait for MS? BACKGROUND COMBAT STATS Defence Strength MED Cost to Setup LOW Cost to Maintain LOW COMBAT RATING GENERAL BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS PSYCHE WARFARE : RETRIBUTION VULNERABILITIES You have to always win New punks with no memory will come eventually Nobody wants to enter a bloody, embarrassing battle (price or marketing war). If you respond to the first few competitors quickly, harshly, and with deadly force, you'll develop a reputation for retribution. Competitors will have learned not to mess with you and will self-divert to another market without you actually doing anything BACKGROUND COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain HIGH COMBAT RATING GENERAL BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS INNOVATIVE SPEED VULNERABILITIES Actually, you don't have the only smart team T he weight of operations will slow you down in practice Talent poaching K ey-man risk B urn out Just innovate faster than your competitors. You know, whip those engineers until they bleed!!! BACKGROUND COMBAT STATS Defence Strength LOW Cost to Setup MED Cost to Maintain MED COMBAT RATING GENERAL BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS WAR CHEST VULNERABILITIES Fight fire with fire – clash of the titans Just out spend! Having a big war chest is its own barrier. You can just spend more on everything – Marketing, R&D, Manufacturing Infrastructure BACKGROUND COMBAT STATS Defence Strength MED Cost to Setup HIGH Cost to Maintain HIGH COMBAT RATING GENERAL BARRIER

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BarrierS EnTry 2 THE TRADING CARD GAME FOR START-UPS CARTELS & EXCLUSIVE DEALING VULNERABILITIES Anti-competition law Join together independent business organizations to regulate production, pricing, and marketing of goods by the members. This can occur either vertically or horizontally. BACKGROUND COMBAT STATS Defence Strength HIGH Cost to Setup LOW Cost to Maintain MED COMBAT RATING GENERAL BARRIER

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ok, that’s my list so far

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if you've got a sneaky trick to play on a competitor, please email it to me so that I can add it

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t hanks for reading this far!

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