Many business owners overlook an important threat. They think it is not relevant to them or won’t affect them. They fail to evaluate the threat and sometimes ignore it altogether.
What is it? Indirect competition.
Before considering this threat, let’s explore what indirect competition is and what makes it different from direct competition.
When you think of competition, what comes to mind? If you’re an accountant, you may think of other accountants in your local area. If you’re a fitness trainer you may think of other fitness trainers who have a similar specialism to you, such as strength training, or gyms and the fitness industry in general.
These direct competitors are important to consider.
But they’re not the only important things to think about.
You also need to consider indirect competition.
For an accounting firm, their direct competitors are other accounting firms. Their indirect competitors are in-house accountants or companies offering a DIY accounting solution.
Let me ask you a question. If customers are not working with you, what might they be doing instead? Where else might they be spending their money?
It’s important to consider these questions. That is because indirect competition impacts how customers perceive value and make purchasing decisions, even if the competitors aren’t offering the exact same product or service. Let’s have a look at a couple of examples to demonstrate.
Consumers often compare options based on overall value rather than just direct product features. For instance, if you’re a coffee shop, indirect competition may come from high-end coffee machines or even instant coffee brands. In the end, if you can enjoy the high-quality coffee in the comfort of your home for a better price then it’s a win-win right. Understanding these alternatives helps you position your product more effectively. In this case, the coffee shop is an experience, an opportunity to disconnect from daily life, catch up with friends, or even get things done you never get time for, such as reading.
Failing to recognise indirect competition means missing opportunities for innovation and diversification. But it can also have more dangerous implications. Without awareness of indirect threats, a company may become complacent, making it more vulnerable to sudden shifts in the market or fundamental changes in consumer behaviour. There are many real-life examples of companies that failed as a result of overlooking indirect competition. Let’s have a look at some of these now.
Kodak was the market leader in the photography industry. However, by 2012, Kodak had filed for bankruptcy. So what happened? There are many reasons, but ultimately it came down to ignoring technological innovations and shifts in consumer needs. Kodak invented the first digital camera in 1975. However, they did not explore or transition to these emerging technologies, as they saw it as a threat to the film photography business upon which their business had heavily invested in. Furthermore, assuming the transition to digital would be slow, they completely underestimated how quickly consumers would adopt digital cameras.
Blockbuster enjoyed unrivalled success with its large network of rental stores in the era of VHS and DVD rentals. However, the industry landscape changed dramatically with the advent of online streaming services, such as Netflix. Blockbuster failed to recognise and respond to these rising digital alternatives. Blockbuster invested heavily in physical stores. Their dominant position in the video rental market led to complacency, preventing them from adequately responding to emerging threats. Meanwhile, consumers increasingly saw the advantage of the convenience of at-home viewing without the hassle of late fees or returning physical rentals. Blockbuster did not pivot quickly enough to meet these new preferences.
Both these examples show the risks of ignoring indirect competition. The failure of Kodak and Blockbuster to recognise the threat of indirect competition from digital alternatives was a huge contributor to their demise.
In conclusion, sometimes the least obvious competitors are your greatest threat. It’s important to be aware of who your indirect competitors are. But you also need to continue to assess how the market evolves. This includes taking note of the entrance of new technologies and innovations that could disrupt the industry and assessing changes in consumer preferences and behaviour. Be adaptable and be prepared to take action if necessary.