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.

 

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Content: Competition


  • 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

 

Learning Moments

  • 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.

 

Listen To Mark (3:00)

Mark Zuckerberg, co-founder, Facebook
NOTE: this video will start and stop at the pre-assigned times 1:05:22-1:08:07

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


2. What is Strategy?

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…

What Is Strategy? (3:00)

Professor Michael Porter (Harvard Business School)

NOTE: this video will start and stop at the pre-assigned times 1:05:22-1:08:07


3. Small vs. Big?

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. The outcome of that action is that one will be faced eventually with multiple competitors, and in fact one might not even be aware of who many of those competitors are.

The conclusion from this observation is that a startup must desire to become a ‘one of a kind’ company. In other words, becoming the only player in a small eco-system (network of organizations, suppliers, distributors, customers, competitors, government agencies etc. engaged in the delivery of a specific product/service via competitors and partners). Again, this counter-intuitive argument is that the startup must go after small (niche) markets. In fact, those markets are so small that the existing and potential competitors, don’t even consider that course of action to make any sense.

The benefits of taking this course are first of all; by doing so one captures a foothold in the marketplace, Secondly, if and when that niche market begins to expand, the startup can scale the business into a big potentially monopolistic business. There always exists very unique startups who are creating something which has never been accomplished before, and due to this action they end up having the potential of becoming a monopoly. One of the distinct characteristics of a monopoly technology company is that they posses some form of proprietary technology.

Thiel’s ‘crazy’ and somewhat arbitrary rule of thumb regarding this is that the startup should have a technology that’s one order of magnitude greater than the next best offering. In addition, Thiel feels that there are often positive network effects which kick in to support the formation of those monopolistic positions over time. However, the tricky thing about network effects is that they’re often very hard to initiate. Therefore, everyone appreciates how valuable the network effects are if and when they do occur. This raises the incredibly tricky question: why is it extremely valuable that the first person initiates something (which triggers the network effect phenomenon)?

Small Is Beautiful: Peter Thiel (4:30)

NOTE: this video will start and stop at the pre-assigned times 12:37-17:00


4. Segmentation & Targeting

The number one, most critical issue regarding startup segmentation is: ‘have the patience to work through focusing on what your segment is! Be as narrow as possible (Think Beachhead). This is because frequently, startups try to do far too much, and too soon and frequently fail. Therefore, FOCUS on what you can do uniquely well,  and for who? The result will be an ability to create a ‘beach head’ (Geoffrey Moore), where you can win. REMEMBER to ask yourself frequently (and especially at the start), the following questions:

  • How and where should you focus?
  • Would you rather: expand on success or contract on failure?

Data helps enable better market and customer segmentation. By the time a startup goes-to-market, they might not be talking in the same language as their ideal customers. Understanding markets and customer trends and habits. In that way the startup can understand who their ideal customer might be, and how to communicate with them. Customer Segmentation can be a powerful means to identify unmet customer needs. Startups that identify under-served segments can outperform the competition by developing uniquely appealing products and services. Furthermore, they can tailors offerings to segments that are the most profitable and serve them with distinct competitive advantages.

Brands can segment their customers not just by age group, income level, and education, they can also segment their customers by interests, preferences, trends, and more. By staying alert and open to the behavioral habits and interests of their customers, companies establish a connection to their audience through tapping into their interests, and as a result, the company can create content that speaks to the customers they want to cultivate as clients. Customer Segmentation requires:

  • Dividing the market into meaningful and measurable segments according to customers’ needs, their past behaviors or their demographic profiles.
  • Determining the profit potential of each segment by analyzing the revenue and cost impacts of serving each segment.
  • Considering targeting segments according to their profit potential and the company’s ability to serve them in a proprietary way.
  • Investing resources to tailor product, service, marketing and distribution programs to match the needs of each target segment.
  • Measuring performance of each segment and adjusting the segmentation approach over time as market conditions change decision making throughout the organization.

Segmentation (4:30)

Michael Skok (Harvard i-Lab)
NOTE: this video will start and stop at the pre-assigned times 4:21-10:03

Take a Pomodoro Break


 

5. Last Mover Advantage

Economies of scale emerge when you have something with very high fixed costs and very low marginal costs, that’s typically a monopoly-like business. Now the critical thing here is that it’s not enough to have a monopoly for just a fleeting moment. The critical thing is to have one that lasts over an extended period of time (sustainable advantage). 

There has always existed the idea that you want to be the ‘First Mover’ and Thiel thinks in some ways a better way to frame this is to say, you want to be the ‘Last Mover’. By this he means, you want to be one of the last companies to survive in that category, because those are the companies that are really valid.

Another way to think about ‘Last Mover’ value is predicated on the principal that most of the value in these companies exists far into the future. If you did a discounted cash flow analysis of the business, you’ll account for all these profit streams with a growth rate, and you will find that the growth rate is much higher that the discount rate. Therefore, most value exists far into the future.   Growth is something you can measure in the here and now, because you can always track that very precisely. The question of whether a company will be around a decade from now, is actually what dominates this value equation, and that’s a much more qualitative sort of a thing.

There are, in Thiel’s mind, probably only two broad categories in the entire history of the last two hundred and fifty years where people actually came up with new things, and made money doing so.

Survival of Fittest: Peter Thiel (4:00)

NOTE: this video will start and stop at the pre-assigned times 18:41-22:47


6. Crossing the Chasm

Crossing the Chasm: was a marketing book (updated recently), by Geoffrey A. Moore that focused on the specifics of marketing high tech products during the early start up period. Moore explored and expanded of the diffusions of innovations model in the best-seller (1991). In that book, Moore argues that there is a chasm between the early adopters of a product (the technology enthusiasts and visionaries) and the early majority (the pragmatists). Moore believes visionaries and pragmatists have very different expectations, and he attempts to explore those differences and suggest techniques to successfully cross the “chasm,” including choosing a target market, understanding the whole product concept, positioning the product, building a marketing strategy, choosing the most appropriate distribution channel and pricing.

“Chasm crossing is not the end, but rather the beginning, of mainstream market development.”

How To Cross The Chasm:

  • Niche Market: To cross the chasm, you must target a specific niche market and dominate it from the beginning.
  • Word of Mouth: The number-one source of information that buyers use as reference in the high-tech buying process is word-of-mouth.
  • Whole Product: Until the whole product (basic requirements) is available, your company cannot have a claim to the mainstream market.
  • Positioning: Positioning is more about the mindset of the customer, than it is about yours.
  • Market Strategy: Each time you make the transition from one category to the next, be sure that you’ve changed your market strategy in a way that fits specific group of buyers.

  Moore says that five main segments are recognized: innovators, early adopters, early majority, late majority and laggards. According to Moore, the marketer should focus on one group of customers at a time, using each group as a base for marketing to the next group. The most difficult step is making the transition between visionaries (early adopters) and pragmatists (early majority). This is the chasm that he refers to. As a footnote, Moore emphasizes that:

‘Your own organization will be the most troublesome partner to handle’.

Crossing The Chasm (4:30)

Geoffrey Moore
NOTE: this video will start and stop at the pre-assigned times 1:34-6:48

7. Competition Is For Losers

One of those few categories is the vertically integrated complex monopoly. A good example of this was the Ford Motor Company. Yet another example was the vertically integrated oil companies, such as Standard Oil. What these vertically integrated monopolies typically required was very complex coordination (a lot of pieces to fit together in just the right way), and when you successfully assembled that, you created tremendous advantage. Today we live in a culture where it’s very hard to get people to buy into anything that’s super complicated, and which takes a very long time to build. Therefore it is hard to replicate these vertically integrated models.

Thiel feels that 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. The word ‘ape’, already in the time of Shakespeare, meant both primate and imitate. That reflects something in our human nature, in that we are deeply imitative (ape like and sheep like). This can be a very problematic challenge in that we need to be disciplined in order to overcome the tendency to be imitative.

The reason it is challenging is because there frequently exists the question of validation, which is reflected in our attempts to seek out things (markets and opportunities etc.) that lots of other people are going for.

It’s not that there’s any kind of ‘wisdom of crowds’ in this phenomenon. it is just that because lots of other people are trying to do something, it’s the best proof of that being valuable. Thiel feels that when lots of people are trying to chase the same thing, it is often just proof of insanity. Competition does make you better at whatever it is you’re competing at. Because you’re competing, you’re comparing yourself with the people around you. Thiel does not question or deny that, but it often comes at a tremendous price, because you stop asking some bigger questions about what’s truly important and truly valuable. Therefore, Thiel proposes that one should not always go through the tiny little door that everyone’s trying to rush through, rather one should go around the corner, and by doing so, go through the vast gate that nobody is entering.

Going Around The Corner: Peter Thiel (3:30)

NOTE: this video will start and stop at the pre-assigned times 0:55-5:24


Conclusion

  • One must be super sensitive to the powerful incentives which are distorting the nature of markets.
  • Strategy is essentially about competing to be unique.
  • The startup must go after small (niche) markets (markets so small that existing and potential competitors, don’t even consider that course of action to make any sense).
  • Would you rather: expand on success or contract on failure?
  • Your own organization will be the most troublesome partner to handle, when crossing the chasm.
  • ‘Last Mover’ value is predicated on the principal that most of the value in these companies exists far into the future.
  • Do not stop asking some bigger questions: What’s truly important, and valuable.

 

Slide Deck:

Competition

Recommended Reading:

NEXT Session 6/20: GROWTH

CONTENT: Scaling growth (Alex Schultz, VP Facebook), retention, maximize growth rate, the North Star concept, tactics and more.

LINK TO 6/20 BELOW

Presenter: Alex Schultz (VP of Growth, Facebook)