In Peter Thiel’s hot book, Zero to One: Notes on Startups, or How to Build the Future, he makes many interesting observations (some I agree with, some I do not) but one in particular is particularly valuable. Thiel asserts that great companies are not great because they beat their competition, they are great because they do not have competition. Although he does not quote Blue Ocean Strategy, it is very consistent with their thesis and data that shows that companies that create new markets have much higher economic returns than those who come up with new strategies to defeat their competition.
Thiel’s point about the benefits of creating what he refers to as a monopoly, what I call a blue ocean opportunity, resonated with me as he use basic economics to prove the point. At its core, classical economics shows competition will drive out excess profits. That is why although Exxon makes a lot of money, they do not make a higher return on investment than another oil company. Whatever you are doing, somebody else will copy.
Thiel points out that, “Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.“ Instead he advocates building a virtual monopoly, a company so good at what it does that no other firm can offer a close substitute. Continue reading “It is about creating a monopoly, not winning”
I came across a great blog post by Brian Balfour, “What Blackjack Strategy Teaches us About Growth,” target=”_blank” that does a great job of illustrating the power of focusing your growth efforts rather than chasing diversification. Balfour, a co-founder of Viximo and former Entrepreneur in Residence at Trinity Ventures, draws parallels between the crux of good strategy in Blackjack, doubling down (double down on an 11, and sometimes on a 9 or 10 depending on what the dealer shows), and how it should be applied to your growth strategy.
In blackjack, you follow this rule rather than saving your resources for another hand and diversifying your risk. He explains the logic behind this strategy: With a 9, 10 or 11 you have data for that hand that it is “working.” Thus, you have a higher probability of optimizing your winnings by focusing more of your money on a hand that is working than diversifying on other hands that you do not have data on yet.
Application of Blackjack to growth
Balfour points out that many companies work hard to get a growth strategy or tactic to work. Once they get one working, the first instinct is to then find another channel to add to the mix. He argues to fight this instinct and learn from Blackjack: Double down before you diversify.
First, it is important to understand the driver for growth. Growth is a function of (probability of success, impact and resources required). This formula means growth occurs by balancing the probability of success for an AB test, the impact it has if successful and the resources required to implement. You then focus on opportunities that have high probability of success, high impact and low resources required.
Continue reading “Focus over diversification to accelerate growth”