During recent months, I have been speaking with many companies/clients about the way they envision their competition. I must admit that I am somewhat blown away with what I have learned through these in-depth interviews and workshops.
In the IT industry - and particularly within software tech - it seems as if every single company I talk to perceives itself as uniquely positioned with hardly any other companies offering similar solutions to the ones they have developed.
I take such comments at face value but steer the discussion towards the results they are achieving. This is where the rubber hits the road. In my simple view, if you have something that is truly unique, something the market is waiting for, it must translate across into your growth numbers at some point.
As a rule of thumb, I view R&D investment at the same level as required for sales & marketing, although obviously not in parallel. In other words, if you invest $10M in product development, expect to invest half of that amount to “cross the chasm” to make it into the mainstream market via marketing, sales & distribution. Regardless of how unique your product may be, it simply won’t sell on its own.
“Key Hole Vision” – A barrier to differentiation
Another aspect is the so-called uniqueness of the software. At Boss Equity, we have an expression for this: “keyhole vision”. In most cases, the level of uniqueness is at its highest when you look through a key-hole. Once you open the door and look through the entire door opening, the level of uniqueness typically starts to fade. Most companies need help to expand the picture beyond their own keyhole vision, which affords an often limited perception of their competition.
Most of the new product development in the software tech sector seems to be stimulated by customer demand. In other words, a customer requires something new and is willing to cover some or perhaps even the lion’s share of the costs of developing it. This can work well at a micro level, hence the reason we see many of the so-called “local heroes”, who have developed a product they can successfully sell in their domestic market and once done, believe that they can easily internationalize their business.
This is where most businesses fail to achieve success. Internationally, competition is intense and costs can increase rapidly. Just this year, I have advised several clients to abandon their international expansion efforts or to limit them to just a few new countries. To succeed with international expansion requires a well-funded business, which typically means seeking out investors. They will naturally want to see a crystal clear picture of how and why your business is so much better than anyone else’s - Why the market requires your products. In other words, why your business is positioned as a much more attractive proposition than the local competition.
Establishing Your Competitive Space
Many of the companies we speak with lack proper competitor analysis, market assessment and, as a result, cannot easily communicate their positioning - Even at the most basic level. Being more aware of who and where your competitors are and what they offer, will enable you to establish your own unique “competitive space”. Don’t fall into the trap of being a diluted “me too” version.
I recently asked a few companies about their competitors’ pricing levels. I was baffled to hear that they had hardly any detailed understanding about competitor pricing, and even failed to identify their top 5 global competitors. One company mentioned they had only 1 competitor but also no clue about pricing levels. This company was struggling to make a profit. My perception was that their pricing was possibly at 20% of their competition’s pricing levels. I told them that if I were a potential customer, I would probably choose their competition’s product as they could provide the minimum level of service internationally. And additionally, how on earth could it be a good product if another highly respected and well-known vendor is asking 5x more for a similar product? My perception would be that it may not be the best fit for the respective market. (This was a software solution aimed at large enterprises – They might do better if they target SME markets).
Competitor Analysis is Key to Winning Positioning
In general, we see a major lack (or even negligence) in deploying proper competitor analysis and proper market assessment. Only the companies with significant revenues - those above the $60M-$100M - typically have systems and procedures in place to methodically and thoroughly follow their competition’s development. Most other companies undertake such research only occasionally or on an ad hoc basis, when they need to fill a slide in their PowerPoint presentation. In-depth competitor analysis enables you to develop sales messaging for your sales force to strengthen their negotiations. This, together with a unified understanding of the positioning and true benefits that your products and solutions provide, will enable you to differentiate your offering against your competitors.
Just recently, I met with a company owner who was involved with a company, submitting a tender for an Information Management system. In the event, the company declined to submit a tender but shared with the client their vision for how they felt the client should proceed. Their clear & unambiguous positioning and understanding of the real issues meant that the client decided to halt the entire tender process. Instead, he moved directly into a Proof of Concept with this software vendor for a much bigger solution. This was completed successfully and resulted in a >$500K license transaction.
Perfecting Positioning Powers Profit
A centralized approach is required, where everyone within a company can share and store information about the market and competitors. This should include viewing competitors’ blogs, engineers visiting technical congresses and learning what competitors’ engineers are working on, consistently following competitors’ news, collating and analysis of competitors’ wins, when possible, hiring competitors’ staff and gaining insights from partners about pricing etc.
The simple act of collecting all information about the competition sharpens the way a company perceives their own positioning and future development.
This is information that requires correct interpretation, in particular by Marketing, so that it can be used for decision making in product development, market development, positioning and especially, for helping sales people to ensure they occupy a winning position when pitching their own solutions.
By way of an example, whenever we hold a workshop with a company, we typically encounter as many different elevator pitches as there are people in the room. For us, this immediately indicates that a company’s positioning and narrative are, at best, a diluted story throughout the company. It cannot be stated often enough: a company’s narrative and positioning should be razor sharp.
Sell the Future – Not the Past
Future development of the company is a particularly critical element for us, as M&A advisors. We must develop the business case and plans over the next 3-5 years, in case of a valuation assessment. Simply making up numbers or a growth percentage to extrapolate in the future is not good enough. A thorough analysis and justification as to why and how future growth will be achieved is required, as any buyer or investor will scrutinize these figures carefully.
That is why competitive analysis, assessment of the marketplace and narrative/positioning development are pivotal in our work, helping clients on their way to a successful exit.
I welcome any thoughts on this subject as I love to hear from other people how they perceive this or maybe even recognize certain parts of this story.
About Geert Kruiter
M&A professional
