Industry leaders are easy to beat if you follow this playbook

Twenty-seven cups of coffee ago, I wrote an article about how it can be difficult to take on industry giants head-on.

But if you avoid competing in a market segment they care about, the giants can be incredibly myopic. Their intense focus on individual products and profits margins leaves them with large blinds spots that are easy to attack.

The history of the cupholder highlights the fall of one of the biggest businesses in history — General Motors — to upstarts from Japan, and provides an effective playbook for startups to enter a market.

I started my career working at GM before ending up in Japan at a major steel manufacturer, and then at a supplier to Toyota. I had the opportunity to experience the cupholder war from both sides firsthand.

Death by a Million Cupholders

Back in ancient times, before Starbucks ruled the world, cars had ashtrays in the center console instead of cupholders. And door handles were door handles instead of cupholder armrests. No cup holders in the back seat, either.

So what did people do? We still drank coffee as we dashed to the office in.
But without cupholders, we’d fill our thermoses (“non-single-use hot/cold liquid containers” in the modern parlance) and hold them wedged between our legs as we drove. We spilled a lot of hot coffee on sensitive body parts and got into accidents.

At that time, Japanese cars made their entry into the US market as small, cheap, fuel-efficient vehicles, which became popular during the oil crisis of the 1970’s. The American Big 3 car makers (GM, Ford, Chrysler) were competing with each other to make the biggest, fastest cars and looked down on the little econoboxes with disdain.

When the oil crisis passed, GM figured the threat was over and breathed a sigh of relief. But instead of disappearing, the Japanese continued expanding market share. Everyone at GM was flummoxed.

Why would any want a shitbox (that was our term at GM for Japanese vehicles) Datsun when they could have a Caprice Classic?

Small cars were not a specialty of American manufacturers, but if a segment of the population wanted cheap shitboxes, they’d find a way to sell them. Instead of building small cars themselves, which they weren’t structured to do at a profit, they rebadged the Japanese cars as their own. That kept the dealers happy.

GM expected to be able upsell buyers to “real cars” when they were older and ready to splurge on the Caddy. Big mistake. Thinking everyone loved their cars but simply couldn’t afford them, they were killed by their own hubris.

The Japanese continued their relentless progress taking more and more market share. Suddenly, GM started paying attention.

The company hired expensive consultants to do extensive studies to determine why people were turning away from their cars and buying Japanese cars instead.

After months of interviews and analysis, they concluded the obvious: buyers thought the Japanese cars were more reliable and more affordable, and they had cupholders and other features that made them more user friendly.

Aha! the GM executives thought. We can fix this. Cupholders! We need cupholders. In fact, we can beat the Japanese at their own game — if their cars have 4 cupholders, ours will have 11. We’ll put cupholders in the console, cupholders in the armrests, cupholders in the backseat, cupholders in the floor. Everyone will love our cars again!

And so began the cupholder wars where the American car companies competed to have the most cupholders. Because that’s what they thought customers wanted — more cupholders. Not a better experience.

What Went Wrong at GM?

I won’t get into all the differences in corporate culture between Japan and the US, (see the publication Japonica for plenty of discussion about that) but the one that matters is that Japanese companies listened to their customers. They listened to their dealers. They didn’t hire consultants and focus groups to talk to customers — their own engineers and managers were required to spend a year or two working in the sales offices or at dealerships. They knew what customers wanted.

Most importantly, they built cars to delight customers while Americans built cars to make money.

That’s not to say the Japanese weren’t cost conscious, but the attitude was build a great car, make people happy, keep customers satisfied, and they’ll be back again.

And it’s not to say that Americans didn’t want to make a good car, but well…no, management really didn’t care about the car. The engineers and product design teams did, but management was focused squarely on the bottom line.

That meant great car designs got turned into awful cars by the need to share components. Parts were purchased from the lowest bidder regardless of quality.

In other words, they’d had the market to themselves so long they’d forgotten how to compete. Their attitude was that if the public was picking Japanese cars instead of theirs, instead of making better cars, they needed better marketing. The solution was to spend more on Super Bowl ads. Dealers were retrained to emphasize cupholders instead of horsepower.

That missed the point. It was never about cupholders. It was about what we now call user experience. It was about building a car around the driver instead of the other way around. The Japanese manufacturers studied users religiously. The Americas thought they could tell the customer what they wanted.

The Japanese car companies expanded from econoboxes into full sized sedans, SUVs, and later luxury vehicles. But success breeds complacency, and now they make boring cars that are purchased but not loved, too. Otherthan Toyota’s Prius, none has made inroads in the coming EV revolution.

What Do Cupholders Have to Do With Startups?

A battle between dinosaurs where even the upstarts have billions in revenue hardly seems to hold lessons for a ten-person startup still struggling with product-market fit.

But the insights are crucial because most startups will enter an industry dominated by giants, whether that’s Kellogg’s in frozen waffles, Facebook in social media, or 3M in adhesives.

The key question from investors, including myself, is how can a tiny startup survive when the giants decide to make something similar? They have all the advantages — a huge team to build the product, factories to produce it, resellers and distributors to sell it, loyal customers waiting to buy it. How does the startup avoid becoming roadkill?

The answer is to follow exactly what the Japanese car companies did — focus on a segment of the market the big guys don’t care about. In their case, it was compact vehicles.

Losing market share there didn’t matter much to the Americans — that segment didn’t make money. In fact, they were even willing to rebadge the Japanese cars and sell it through their dealerships themselves, thereby sowing the seeds of their own destruction.

Building a small, inexpensive, energy-efficient car takes a different mindset from building large, high-horsepower vehicles. It takes different skills and different suppliers. When GM finally tried to compete by creating Saturn and NUMMI Motors, both were disasters of corporate infighting instead of progress building better cars.

Once the startup has solid footing in a niche the giants have left open, it can develop a reputation for quality, responsiveness, and innovation. Then it can start marching upstream to take over bigger markets.

As long as a startup can stay out of the giants’ crosshairs and under their radar long enough, as an investor I don’t worry about them competing with giants. But many early-stage investors don’t see it the same as me.

When pushed on this question, many founders offer glib answers like, “the big guys aren’t interested in this market” or “it’s easier for them to acquire us than to build it inhouse”. Which might be true, but those answers are too simple to satisfy skeptical investors.

A better answer needs more details to explain what stops the giants from responding to a loss of market share.

The reason the giants can’t compete effectively is usually an issue with their own mindset and operations rather than anything startup does or their handful of patents. That may be obvious to a founder who comes from the industry, or even worked at the giant herself, but that won’t be obvious to investors who only see the resources a giant can bring to bear.

So take extra time to explain to investors:

  • where the big players are focused
  • why they’ve missed a large opportunity that’s clear to you
  • how you’ll stay under their radar for as long as possible
  • why they won’t be able to crush you once they realize the threat

That should make as interesting a story as the downfall of what was for 77 years the largest automaker in the world — GM — until it was dethroned by a scrappy loom manufacturer — Toyota. And how Toyota is in danger now of being made irrelevant by the next generation of EV upstarts.

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