Course Curated By: Dr. G. Danford (London Business School MBA, Helsinki School of Economics PhD)
Advice Before Starting
The only proven method for measuring learning is to take a pre-quiz and post-quiz of the content.
- The business value formula
- The extreme binary view of markets
- The counter-intuitive small markets idea
- The characteristics of monopoly companies
- The methods for tracking user feedback
- The last-mover advantage
- Why competition is not always validation of success
- There are businesses which are perfectly competitive and, there are monopolies. Unfortunately, there’s very little in-between.
- There is not just one way to compete in an industry (there are many ways). Therefore, the essence of strategy is not about being the best, rather it is about meeting the needs of selective customers.
- If one was to follow the alternative course of action (attempting to capture a large share of a monopolized market) the startup becomes a ‘minnow in a vast ocean’, and that is not a very friendly ocean to be playing in.
- Therefore, how and where should you focus?
- There is a ‘chasm’ between the early adopters of a product (the technology enthusiasts and visionaries), and the early majority (the pragmatists).
- You want to be one of the last companies to survive in your category, ‘Last Mover’.
- We unnecessarily find ourselves very attracted to competition, and in one form or another we often find it reassuring if other people do the same things we are attempting to achieve. This is a fallacy!
1. Two Forms of Business
Peter Thiel (Founders Fund)
Founders Fund is a venture capital firm investing at every stage in companies with revolutionary technologies. The firm have been investors in prominent technology companies such as; PayPal, Facebook, Space Exploration Technologies (SpaceX), and Palantir Technologies. Funds raised, $2.1B.
The extreme binary view of business is that there exists only two fundamentally different forms. There are businesses which are perfectly competitive and, there are monopolies. Unfortunately, there’s very little in-between. However, this almost perfect competitive/monopolistic dichotomy is not understood very well. Partially this is due to the fact that people are constantly lying about the nature of their businesses. This duality is one of the most important yet misunderstood business ideas; just two kinds of businesses (perfectly competitive & monopolies). Distortions in the definitions of business occur due to the fallacies people tell about their businesses, and remarkably these fallacies are frequently in opposite directions (we are not a monopoly vs. we are monopoly).
If you’re a non-monopolist you will rhetorically describe your market as excessively small, because you’re the only one on that market. On the other hand, if you have a monopoly, you’ll describe your market as massive and by implication there’s lots of competition. This raises the question; ‘is the intersection real’? Does it make sense? Does it have value? In reality, the ‘something of somewhere’ is mostly just the ‘nothing of nowhere’. Thiel thinks that one must be super sensitive to the powerful incentives distorting the nature of markets.
Thiel proposes that one of the underlying reasons the technology sector in the U.S. has been so successful (financially and otherwise), is mostly due to the fact that this sector is prone to creating monopoly-like businesses. This is reflected in the fact that companies in the sector are accumulating hoards of cash, and they are unable to decide (or unwilling), about what to do with their bounty (after a certain point of depletion).
A very important counter-intuitive proposition which arises from this monopoly thread is that a startup should desire to go after small markets (small is beautiful). The dilemma one faces however, is that monopolies have a disproportionate share of markets. Therefore, how does a startup capture a large share of a monopolized market? The counter-intuitive proposition suggests that startups should begin by going after a really small market space.
Peter Thiel (Founders Fund)
That small market space can act as a springboard to take over the entire market space, and with time expand in that market concentrically. The one big mistake that many startups make is to go after a giant market from day one, That form of action is typically evidence that the startup has not correctly defined the market categories correctly. Such action normally results in too much competition, in one way or another. Alternatively,
Thiel suggests that the vast majority of successful companies in Silicon Valley have implemented a form of strategy which begins first by addressing small markets, and from there expand in concentric circles. Therefore, Thiel feels that niche markets (a subset of market upon which a specific product/service is focusing) are significantly underrated.
Two Kinds of Competition: Peter Thiel (4:30)
NOTE: this video will start and stop at the pre-assigned times 0:55-5:24
The instinctive gut reaction by most CEO’s is often ‘how do we win’ or how to ‘Be The Best’. The assumption is that if you can be the ‘BEST’ you will win. However, Professor Michael Porter (Harvard Business School), says the problem is that there is no ‘BEST’. Furthermore, there is not just one way to compete in an industry (there are many ways). Therefore, the essence of strategy is not about being the best, rather it is about meeting the needs of selective customers. Another very important starting point is to understand what strategy means. Strategy is essentially about competing to be unique. However, there are three common mistakes when thinking about strategy.
Strategy is not a goal (the strategy is the how). Strategy is not a single action (the strategy is holistic understanding of how). Strategy is not a mission-vision-intent (the strategy is made up of specific and concrete choices on how to compete).
In many companies people get business level strategy and corporate level strategy confused. Both of these are important, however, Porter focuses on business strategy. In business strategy one has to recognize that there are two pieces (industry structure and positioning). If the benefits of strategy are going to be realized, the strategy can not be a secret. One of the fundamental jobs of the leader is to be a ‘Strategy Communicator’. Ultimately, strategy is the responsibility of leadership, and leaders need to distinguish between operational issues and strategy. In a business, the strategy is tested every day and leadership must be clear, focused, understand the necessary trade-offs and be ready to alter their strategy if the business circumstances change significantly…