We market products in such a competitive world that we often dream of being a monopolist, and having a market to ourselves. Then why the question of whether competition is a good thing?
Actually, these days the typical answer ("yes") is based on the idea that competition fosters innovation (the Microsoft trial puts an emphasis on this explanation). Independent of whether competition drives innovation, however, is the fact that many companies actually need competition just to survive. How is this so?
The first important concept to understand here is the concept of primary and secondary demand.
PRIMARY AND SECONDARY DEMAND
Primary demand for a product is the total demand for all brands in a product category. For example, the category may be specialty coffees or personal digital assistants or customer relationship management software.
Primary demand would sum up all the brands competing in each of these categories. Continuing our examples, this would include Starbucks and Peets (for specialty coffee), Palm Pilots and Handspring (PDAs), and Siebel and Oracle (CRM).
Secondary demand is the demand for a given brand in a category. If you're, say, Handspring, your secondary demand is the demand for the Handspring PDA. Creating secondary demand is what we talk about when we say "brand competition" – competition for one brand over another.
When breaking open a new product category like PDAs, your first job is to create primary demand, not secondary demand. To see this, consider the following example.
Perhaps you remember the world when nobody knew about PDAs. Along came Apple with its Newton MessagePad. The task of Apple at that time was to create primary demand, not secondary demand. Why? Because Apple first had to educate a market about the PDA product category, since nobody knew what a PDA was or how it could be used to help them (note: we're not talking about the innovators - the first people who adopt a new technology - because they'll typically buy anything, but don't represent the average consumer).
Imagine if the Newton Message Pad were just advertised without any education about PDAs. Consumer would have no idea what the Newton was about, since they wouldn't know what a PDA is.
When Sharp, Casio and others introduced PDAs (and the market was educated), then Apple would need to focus on generating secondary demand. To be sure, it's difficult to figure out when to shift from generating primary to secondary demand.
WHY FIRST MOVERS NEED COMPETITION
This simple example illustrates the problems of the first mover. The first one to enter a product category (Apple) must generate primary demand for the category. This is done primarily through education of the market about the product category.
Education of a market is costly. For this reason, firms need competition. Competition helps to educate the market about the product category. They also make the new product category look legitimate. Sure there would be competition, but the market would grow and all firms would be better off.
But this poses a fundamental problem in business. Often the first firm in a product category must convince buyers that the product will satisfy a need. Why would a second firm want to jump in if a costly education task is at hand? The fact is, it's often best to sit back and wait until the first mover sufficiently educates the market.
IS THERE A FIRST MOVER ADVANTAGE?
This idea, of course, raises the question of a first mover advantage. This is a concept that is rampantly discussed on the Internet but in fact has no empirical basis (the Newton is just one example of this, but careful studies by academics have verified this point), and for the reason just stated.
The first mover must educate a market about a product category. Often the second mover waits until the product category is properly educated, then jumps in. If the second mover has enough money (which of course it has saved by not educating the market), it can often take away the market from the first mover.
Many people believe this insight about the problems of the first mover is relatively new, and you can find popular books on the subject (such as the "Innovator's Dilemma"). But in fact, Karl Marx spoke about this idea and so did Schumpeter – just without the fancy jargon.
THE REAL EDUCATION PROBLEM - CATEGORIZATION
The real education problem of the first mover in generating primary demand is to get customers to properly categorize the first mover's product. Categorization is an important concept, so let us briefly explain.
Consumers (and businesses) tend to put all products in a category. Categorization is the process of understanding what something is by relating it to prior knowledge.
For example, when combination phone/fax/printers came out, they might be categorized by customers as a phone – not a multifunction device. This is because they don't have an established category for multifunction devices, so they just stick the new product in the phone category – and it thereby competes with phones.
Here's another example. MS2.com sells software that helps firms make quicker marketing decisions - it hopes to open a brand new category. But here is an excerpt from an article written in the Computer Letter that shows the categorization problem:
"The trouble is, only people who've used the software seem to understand MS2's distinction. Those who merely see a demo and hear the words "team," "development," and "collaboration" immediately place MS2 in the same product bucket with the team portals and collaboration software. But although MS2's software promotes collaboration among team members, it falls into neither category. Clearly, the company will have its work cut out for it in articulating the benefits of what the product does."
This then is probably the most fundamental problem of the innovator – getting the new product category categorized appropriately. Even if the new idea is actively positioned as different, customers are likely to categorize into old and established categories.
So first think about whether you really want to be a first mover. Here are some questions you might want to ask yourself:
1) Do I have enough money to educate a market and own it before competition comes in? and,
2) Will customers easily and correctly categorize my new innovation?
If the answer to both of these is no, then gleefully accept (indeed encourage) competitors to enter your market.
