Direct Competitors: Understanding Direct Competition

Direct competition is a linear way to look at the business world, and compare a company with other similar companies, in the same industry. An example is comparing Tesla with other car companies, or Netflix with other streaming services.

Understanding direct competition

The direct competition looks at the business world in a linear way.

It works well to enable a business to understand what continuous improvements to bring in the marketplace, to create a service and product, which is incrementally better.

One example is to look at Netflix and analyze it from the perspective of the streaming service industry.

Thus, compare Netflix with other streaming services, which mostly serve the same kind of audience.

This sort of framework, to understand the marketplace, is useful to keep improving the core business model.

Netflix is the largest streaming video subscription service in the world. Created by Reed Hastings and Marc Randolph in 1997, the company has revolutionized the video content subscription model with over 139 million subscribers in 190 countries. The success of Netflix is due to two factors. The first is a recommendation system that gives suggestions on what customers should watch based on their viewing history. The second is the vast catalog of content on offer – produced by third parties and by Netflix itself. These factors have resulted in Netflix competing against influential TV networks and film producers for viewership.

Direct competition case studies

In light of looking at the marketplace as a linear place, where companies compare themselves on a similar stage, where there is a defined audience, below are some examples.

Spotify is the world’s largest music streaming platform with over 381 million users across 184 markets around the world. The company was founded by Martin Lorentzon and Daniel Ek in 2008 in response to the shutdown of peer-to-peer music service Napster. Spotify became a success because it was the first company to determine how to distribute the music legally and compensate the music industry at the same time. The platform now offers various curated music discovery services, music stations, audio customization, and private listening. In recent times, it has also ventured into the streaming of audiobooks, podcasts, comedy, poetry, and short stories.
Poshmark is a social commerce marketplace where users can buy and sell new or used clothing. The company was founded in 2011 by Manish Chandra, Tracy Sun, Gautam Golwala, and Chetan Pungaliya. Poshmark is one of many companies looking to profit from the explosive growth in the second-hand clothing and resale industry, which is expected to be worth around $51 billion by 2023. Scores of women, in particular, are opting to sell their unwanted fashion items online instead of donating them to charity or thrift stores.
Afterpay is an Australian fintech company operating in Australia, Canada, the United Kingdom, New Zealand, and the United States.  Founded in 2014 by Nick Molnar and Anthony Eisen, the company enjoyed a first-mover advantage in the buy-now-pay-later (BNPL) space. Less than seven years later, the company reached 13.1 million active customers with gross sales amounting to $10.1 billion. Despite its success, some suggest the company has lost its edge in the buy-now-pay-later space with the emergence of several high-profile competitors exerting their influence and giving merchants more choice.

Key takeaways

  • The direct competition looks at the business world, in a linear way, thus mostly guessing competition based on clear overlaps in terms of defined customers.
  • Direct competition analysis is useful to evaluate incremental improvements of products and services, for a given audience.
  • Direct competitor analysis helps companies create a linear roadmap for continuous product improvements.

Drawbacks of using direct competition as a primary compass to analyze the business world

In a business world, which is tech-driven, in the long run, competition becomes non-linear.

In short, niches that seemed completely disjoined from a market, end up creating whole new industries which might absorb existing marketplaces.

Let’s look at two examples.

Netflix vs. TikTok

As explained in the Netflix business model, there are two ways to look at its competitors.

One way is to guess the current customer base overlapping. In the Netflix specific case, it means, assessing the behaviors of paying members across the globe, and whether they are switching to other streaming services, or perhaps keeping various streaming services accounts.

This is fine to assess what content other streaming platforms are producing, and it helps steer the content development efforts for the company.

Source Nielsen

However, there is another way to look at it.

If instead of looking into customers, and members, we guess, what’s Netflix’s core asset? Meaning, what’s the thing that makes the company keep a long-term competitive advantage?

Based on that, we can reassess competition, and perhaps looks into where attention is going, especially for younger generations, and we get this:


In short, the competitors’ map changes all of a sudden, and you start reassessing the long-term strategy of the company, by looking at where attention is currently moving.

Why is this important? Well, because you ask different questions. Rather than thinking about content, based on the previous thinking framework that Netflix had successfully rolled out in the prior decade.

You now look at it with a different eye and understand that Netflix, to thrive in this decade, has to change its content development framework, or at least, redefine it.

Tesla vs. Insurance Companies

Another interesting case is Tesla and its insurance business.

A real-time insurance business model enables Tesla to build its own insurance arm, by dynamically adjusting the premiums, based on real-time driving behavior. Reduced insurance premiums hooked with the leasing arm, enable Tesla to scale its demand side of the business.

Now, if you look at Tesla, as just a car company, you think those are Tesla’s competitors:

As an electric automaker and builder of sports cars and now trucks, Tesla’s competitors comprise companies like Ford, Mercedes-Benz, Porsche, Lamborghini, Audi, Rivian Lucid Motors, Toyota, and more. At the same time, Tesla is an electric energy production and storage company (SolarCity); it competes with Sunrun, SunPower, and Vivint Solar. And as an autonomous driving company, it competes with companies like Zoox, Waymo, and Baidu with the self-driving software.

Thus, if you were a legacy company like Geico, this is your competitors’ map:

Yet, if you understand non-linear competition, you also know that Tesla is coming for the insurance business, as it can be a segment to ramp up its car operations.

And if you take into account that Tesla’s target is to sell millions of cars across the world, then, if you are Geico, you might want to change your competitors’ map!

This is why assessing non-linear/indirect competition is critical.

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