Starting from Scratch

We are all familiar with the benefits that come from being large and established. But it turns out there are some surprising benefits that come from starting from scratch. Let me give you an example.

Years ago, before I became a tech entrepreneur, I was a direct marketing guy. I mailed tens of millions of letters and catalogs each year. The vendors that I used to get these mailings together were state-of-the-art.

Or so I thought. But when I moved to Paris several years later, I discovered that the equipment my European suppliers had, was way more sophisticated than what my US vendors were using.

It didn’t take long to figure out what was going on. The fact that the European shops were new to the game turned out to be a strength rather than a weakness. Because when it came time to gear up, they simply bought the newest state-of-the-art equipment. Everything was brand new. Whereas every one of my US vendors – even though they were larger and more experienced – were mostly making do with stuff they had bought 6 or 10 years ago.

This isn’t a new phenomenon.

In 1918, at the close of World War I, under the terms of their surrender, Germany was required to destroy or surrender virtually every piece of military equipment in their arsenal; rifles, planes, ships, ammunition. . . all of it.  Yet just a few dozen years later, Germany had the most modern and sophisticated army in the world because, as they re-armed, they were forced to start from scratch. Just like my European direct marketing suppliers, they were able to build back up unencumbered by older equipment that was “still perfectly good.”

Another example: In 1997 when we started Netflix, Blockbuster was apparently unassailable. They had 9,000 stores in nearly every zip code in the country, an advantage that it had taken them more than 10 years to build up.  And as prospective investors told me, “Why would someone ever rent a DVD by mail when there is a Blockbuster on every corner?”

But that very advantage would turn out to be their undoing. As Netflix slowly siphoned customers away, we didn’t need to take away a store’s entire customer base to put Blockbuster into a world of hurt.  It turned out that losing as little as 10% of a location’s revenue was sufficient to render that store unprofitable. But being locked into a brick-and-mortar footprint made it impossible to sufficiently reduce that store’s costs, leading to that store’s closure, and eventually turning the entire economics of Blockbuster’s business upside down.

Every company that has been around for a long time has these kinds of weaknesses.  An old product line that they don’t want to cannibalize. The “perfectly good” code base that holds back their rate of new feature development.  An existing line of distributors that they don’t want to upset by embracing a new direct sales model.

So, if you are a market leader, ask yourself:  Are aspects of your size, scale, and market penetration leaving you vulnerable to a smaller nimbler competitor? Are you periodically scraping your barnacles?

But if instead, you’re the scrappy start-up going up against a well-entrenched competitor, don’t overly fear their resources, their manpower, or their financial strength. The trick is to determine how their resources may be holding them back, and what you can do to take advantage of it.

Regardless of what size company you are, remember that your customers don’t care about your past. They don’t care that your last-generation equipment “still has a few good years left”.  They don’t care that your insistence on maintaining reverse compatibility is slowing your release of new features. All they care about is whether you can meet their needs today.

And if you are unwilling or unable to meet those needs…? Well, I promise that’s exactly what makes it so exciting to be a startup. Because you are the kind of company I’m going to come after.

To find other things I’ve written and much more, check out MarcRandolph.com