When Should You Fear a Competitor? Competitive Analysis and Standing Apart

In 1864 two young Americans met in Berlin and spent several days together. Edward Drinker Cope was the son of a wealthy Philadelphia family; Othniel Charles Marsh was attached to Yale. Both were chasing fossils, and they even named species after each other.

The friendship did not last. After a collecting trip together to Cope's marl pits in New Jersey, Marsh quietly paid the pit operators to send future finds to him instead. In 1868 Cope named a long-necked marine reptile from Kansas Elasmosaurus and drew its skeleton. He had put the head on the end of the tail. His mentor Joseph Leidy pointed out the error in March 1870, and Marsh made sure the story got around. Cope tried to recall the copies of his paper that had already gone out.

Then the war moved west. From 1877 to 1892 the two men's crews sent literally tons of bones east by mule wagon and by train. Both announced their finds in hasty telegrams and wrote proper descriptions later. Sometimes they gave new names to animals the other had already found. Skeletons assembled in a hurry left confusion that lasted for decades.

By the numbers, Marsh won: 80 new dinosaur species against Cope's 56. But when Cope died in 1897, both men were financially ruined. Cope had sold part of his collection and let out one of his houses. Marsh had mortgaged his home and asked Yale for a salary to live on. The quietest loser was Leidy. Unable to keep up with his rivals' reckless pace, he gave up his work in the West. After Leidy's death, Henry Fairfield Osborn noticed that neither rival had mentioned him once in their writings.

The price of fixating on a rival

Cope and Marsh were not wrong to fear each other. They wanted the same quarries, the same fields and the same fame. But every decision made out of that fear pulled them a little further from the work itself. Competition in startups often runs the same way: while you rush to answer every move your rival makes, you forget to look at your own customer.

In a 2014 lecture kept in Y Combinator's Startup Library, Peter Thiel sums it up bluntly: competition is for losers. In his view a company's value comes from two separate things: how much value it creates for the world, and how much of that value it manages to keep. His example is the airlines. In 2012 US domestic airline revenue was 195 billion dollars, while Google's was just over 50 billion. Yet in the airline business, where competition grinds profit away, cumulative profits across a hundred years of US history were, as Thiel puts it, roughly zero.

When should you fear a competitor?

• When you sell the same thing to the same customer. If your customer tells you the only difference between you and your rival is the price, you are in a race that melts profit.
• When you define your market as an artificial intersection. Thiel's example is "the only British restaurant in Palo Alto". Being alone in an intersection does not prove there is a separate market; a hungry person will happily try the restaurant round the corner.
• When your rival is writing your roadmap. If half your plan is "they did this, so should we", you are no longer setting your own agenda.

When can you ignore one?

When you own the whole of a small market. Thiel recalls that PayPal started, around the turn of 2000, with eBay's "power sellers", a group of about 20,000 people, and reached more than a quarter of them within a few months. Facebook began with about 10,000 students at Harvard and went to 60% of them in ten days. In Thiel's telling, these markets looked worthless at the time. Yet the whole of a small market is a stronger position than the edge of a large one.

And if your customers can say in their own words why they chose you, your rival's noise matters less. What you should really watch is whether that sentence changes.

Three ways to stand apart

Be ten times better on one dimension. That is Thiel's rough rule. In its early years Amazon offered ten times as many books as any shop. On eBay, PayPal did in a fraction of the time what cheques took seven to ten days to clear. Being a little better provokes your rival; being far better ends the race.

Start small and grow in rings. Amazon began with books, eBay with a handful of collectables. Each new ring was built on the trust earned in the one before.

Be the last mover, not the first. For Thiel, the valuable company is not the first into a category but the last one standing in it. He borrows a line from the chess champion Capablanca: you must begin by studying the endgame. In other words, ask today why it will still be you in ten years.

What does the word rival tell us?

The Turkish word for rival, rakip, comes through Persian from the Arabic raqīb, whose first meaning is "watchman, guard, sentry". A rival is someone who keeps an eye on you. The English rival comes from the Latin rivalis, linked to rivus, "a brook": someone who uses the same stream as another. The Romans also used rivalis for two men in love with the same woman.

Both words say the same thing: a rival is someone looking where you look and drinking from the water you drink. In his first book, published in 1961, the French thinker René Girard turned this into a theory: mimetic desire. For Girard, we often want something not for itself but because someone else wants it. We copy our desire from a model, and as the model comes closer, it becomes an obstacle, a rival. Girard is also the thinker Thiel met at Stanford and was influenced by. Perhaps what kept Cope and Marsh locked together for so long was not the fossils, but the fossils the other one wanted.

A last word

At the start of Works and Days, Hesiod speaks of two kinds of strife. The bad kind drives people into quarrels. The good kind stirs even the idle to work, because a man grows eager to work when he sees his neighbour hurrying to plough, plant and put his house in order. Then come these lines:

"καὶ κεραμεὺς κεραμεῖ κοτέει καὶ τέκτονι τέκτων, καὶ πτωχὸς πτωχῷ φθονέει καὶ ἀοιδὸς ἀοιδῷ."

Potter is angry with potter, and craftsman with craftsman; beggar is jealous of beggar, and minstrel of minstrel.

Hesiod does not forbid rivalry; he asks which kind sends you to work and which keeps you from it. Is your rival sending you out to your own field, or keeping you busy watching theirs?

To size up a small market before you start, How to Estimate Market Size: A Guide to TAM, SAM and SOM is worth a read.