How Companies Defend Themselves

Why do some survive… and others die? How do companies thrive in the face of copycats?

A company has the following possible sources of power:

• capital
• time and energy
• first mover advantage
• or simply the ingenuity of its people

And they can use these to build the following types of defensibility:

These are the things that will protect a company from competitors, protect its margin from being eroded and give it a right to win.

A few post-mortems

Let’s start in the past to see how this framework can apply.

Successes are easy enough to find. These are the companies that have endured the ups and downs in the S&P500, these are the ones on the ‘brag pages’ of the older VC firms, and well, there’s also just common knowledge.

Wordpress and Shopify an entire eco system around themselves thanks to economies of scale. Snapple, Hershey’s, Etsy, Coty built brands that helped it weather competition through the decades. Dow, Eli Lilly, Lockheed Martin have learning curves for processes, intellectual property and brands for recruiting. Bloomberg has network effects enabling them to charge $20,000 for terminals.

Despite it’s ‘secret formula, Coca-Cola doesn’t have intellectual property — it’s not that hard to make a Copy-cola. But it does have brand and learning curves on marketing, beverage manufacturing and distribution. Zynga may have felt like it leveraged network effects, but when you see its repeated success with different games, some solo-player, it feels more like it’s up the learning curve. Early Netflix had no source of defensibly, that’s why it’s building up it’s own intellectual property now.

Strategic failures are harder to dig up, forgotten quickly.

These are the companies that had value propositions that clicked, team and execution that worked, and sources of power: major investments, first mover advantage, even ingenuity… but they did not survive in the face of competition.

They are, by far, the most interesting ones to look at.

UC Browser had over 50% market share in China. It was acquired for one of the highest valuations ever - $3 billion+. Now it’s down to 9% market share, with no clear source of defensibility.

In the dotcom bubble, various ecommerce players — Beautyjungle.com, eToys.com, pets.com — all also rode first mover and capital to get to scale. But scale in itself is not a source of defensibility. And their brands were not as strong as competitors. What else did they have?

In the past, chip manufacturers have withered and died, as there was something better and faster around the corner. One of the ones that survived? Intel with its brand.

To clarify, for this exercise, I’ve overlooked companies that die for non-competitive reasons, such as operational or product-fit mistakes. For example, Webvan (online grocery ordering) can be argued to have execution mistakes.

The specific question here is, in the long run, how will companies survive in the face of a copy-cat?

Looking ahead

Anyways, hindsight is 2020 (especially in 2021). What does this framework predict about companies today?

Predicting some Winners…

Wayfair may seem like it’s building a brand, but it’s also quietly leveraging economies of scale to build out a nation-wide delivery network.

Slack, Atlassian, Spotify build up histories, imposing switching costs. Bumble has a brand, network effects, and is up the learning curve.

And some losers…

Here is where I potentially get in trouble, but I invite the debate. I couldn’t identify long-term barriers for the following companies.

(Although I would also note that not all companies are meant for long-term barriers to entry — some are angling for acquisition)

• Large userbases but low switching costs: Docusign, Zoom, Clubhouse, Robinhood, Zapier. Once another company is able to replicate the product, what keeps it defensible? While everyone often points to quick user growth for companies like this, the flip side is that this is also a sign of low barriers to entry.
• DTC companies? Do they actually have a brand? It’s a mixed bag. The learning curves on marketing that P&G, Coty and more enjoyed have been diminished, enabling the rise of DTC brands. For those that achieved real brands with raving reviews and genuine consumer affinity, and got established before others rushed into their vertical, they’ve got a shot. However, most like Away, brooklinen, and a host of DTC are not very strong ‘brands’ in this sense: poor customer reviews, and a lack of affinity.

Thoughts?

Agree or disagree? Thinking about a company or start-up you want to chat about? Find me on twitter.

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Apeksha Kothari is the Chief Operating Officer of RareCarat.com, America’s largest online marketplace for Diamonds and Engagement Rings.

Views expressed here are those of the author, and not those of Rare Carat. The author may own some of the stocks mentioned.