Competition Drives Innovation - An Entrepreneur's Dilemma

Having been a student of economics for a long time I’ve always enjoyed the readings and discussion surrounding competition, innovation, and the entrepreneur. Competition is generally understood by most people at an early age. One of my first memories of competition was competing against a classmate in 2nd grade. It was simple – complete the math tables and run and hand them to the teacher. I remember going home at night working extra hard to study just so I could be first. Yes, I was a nerd and still am, and am also a fierce competitor. My friends and my family all know this. While every individual’s competitive drive may vary, it is still deep inside all of us and whether it’s playing sports, a video game, or completing a simple math table we are at our best when we feel pressure to improve.

What economics teaches us about competition is that it drives innovation and sellers compete to sell more goods. Without competition, there is very little incentive for sellers to innovate to sell more goods. Being an entrepreneur or essentially becoming the seller creates a different dilemma. When you enter the market with your product you hope to have some sort of protection, head-start, first mover advantage or long-tail dynamic. The problem though that rises with protection is while it is advantageous to the entrepreneur it can be counter-productive to the rest of the market. That’s because it creates a short-term barrier to entry, sometimes up to thirty years for new products/innovations to enter the market. 

In my past life of managing sweetener brands I saw this in full swing. One product that had special protections was sucralose, which was commonly sold and marketed under the brand name Splenda. The protection on this product lasted from 1976 to 2009 and once the patent(s) expired not only did many other manufacturers jump to enter the market, but they offered lower costs, which ultimately ended up benefiting the consumers with lower prices. Not only did 2009 see a huge influx of sucralose manufacturers, but the year prior the FDA approved stevia to be sold and marketed as a sugar substitute and provided no protections to any supplier. It was in all sense; a competitive market. In 2009 alone there were four major brand launches of new products, of which the last 30 years had seen 2 (Equal and Splenda). That year, Truvia (Cargill), Pure Via (Merisant, owners of Equal), Sun Crystals (McNeil, formerly Splenda owners), and Stevia in the Raw (Cumberland Packaging Corp, owners of Sweet N Low) all launched their respective products and spent nearly $100MM in advertising to try and become the market leader.

The dilemma that arises for an entrepreneur that understands the driving forces of innovation is understanding the varying degrees of competition and how to manage them. There are two forms of competition that are commonly acknowledged but I believe there is a third that comes into play.

Direct – This is the best type of competition because it’s the one you can see right in front of you. You can keep an eye on it, manage it, review it, analyze it, and even create a competitive rivalry. Examples of direct competition are Ford vs. Toyota, Apple vs. Samsung, and Walmart vs. Amazon (formerly indirect competition).

Indirect – This is the type of competition that is hard to see because you don’t have a pulse on what another competitor is doing. Nearly 10 years ago Walmart was competing heavily with Target and it was a direct competitor. Amazon, at the time, was an indirect competitor that was innovating, building an e-commerce empire that in less than a decade would become more valuable than Walmart and eventually draw them in as a fierce competitor. Other examples of indirect competition are Time Warner vs. Facebook, Tesla vs. Solar City, and Canon vs. Apple.

Passive - This can be the most frustrating type of competition to face as an entrepreneur because it’s hard to see, it’s disguised, and usually comes in the form of another company/individual looking to work with you. These competitors can pose as a helping hand while potentially looking to learn from your experience/existing product. The biggest watch out for passive competition is that it can be a waste of precious time. 

My recommendation for entrepreneurs is to embrace competition as it will ultimately drive innovation, but never underestimate the importance of your experience and drive that got you to this point. For another great resource in learning about the role of competition and the entrepreneur I recommend checking out works from Austrian Economist Israel Kirzner, as he has been at the forefront of the discussion for nearly five decades.