Market leaders are leaders for a reason.
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They are well-established, provide significant value to the end user, and have sustainable competitive advantages that are near impossible to defeat, especially as a start-up.
The example that I will use in this article about how to effectively compete against an established market leader is Microsoft's new search engine, Bing. If you haven't seen it yet, go check it out (www.Bing.com) and notice what is different from Google's search page. For starters, Bing is visually stimulating. They show background images of inspirational and natural places such as the mountains of Alaska to the Caribbean Sea. Bing's website design couldn't be more polar opposite than Google's simple white page search box design that made them infamous for making "search easy".
The other effective implementation that Bing has done to lure Google search addicts is they positioned themselves as the decision engine and positioned Google as causing consumer "search overload". The fact of the matter is, Google's search is great, but by using various competitive tactics, Bing is able to successfully position themselves against Google as a better alternative for making decisions and avoiding search overload. This has lead to Bing's early success. By focusing on your competitors differences you will be able to attract customers who value your unique features.
Bing is not competing with Google expecting to become the market leader in search. They are doing it to gain a portion of the search market that will help them leverage their other networks of services and businesses to strengthen their own competitive advantage in the software industry. If Bing were a stand alone company, it would not stand a chance of succeeding, but is a great example of how to compete effectively against even the largest market leaders like Google.
As a start-up, you should never try to directly compete against a market leader as Bing is (see Article: Your Target Market Segment May Define Your Success or Failure) with Google. Microsoft has the resources to go after Google's search market and even if they get 10% of the market it will result in billions of dollars in new revenue for Microsoft that will also further strengthen their competitive advantage. As a start-up, trying to achieve small market share in large, established markets is a recipe for failure.
However, what we can learn from products like Bing is how to compete and be successful. The moral of the story, be different, and find a unique way to position the market leader in a negative manner. As Bing says, Google is search overload and we are the solution you need to make decisions when searching for information. Finding the one position to take can take a lot of man hours and a lot of analysis, but it can pay off for firms like Microsoft and it can payoff for your company too.