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”
Last month, I wrote about the telltale signs of a doomed strategy. Today I want to write about the foundation of creating a successful strategy that builds sustainable competitive advantage.
As I’ve mentioned in previous posts, A.G. Lafley and Roger Martin do a great job in Playing to Win of showing the common factors that demonstrate a winning strategy. Continue reading “How to create a winning strategy”
While it is extremely difficult to create a great strategy that generates sustainable competitive advantage, it is not very hard to craft a flawed strategy. It is more difficult now than ever to build a great business. As A.G. Lafley and Roger Martin write in Playing to Win the new normal is volatile, uncertain, complex and ambiguous. Given this environment, having a sound strategy is critical. I plan on writing next month on the key elements of a sound strategy but more pressing is analyzing your existing strategy to see if it is flawed. In Playing to Win, the authors point out the six most common strategy traps.
- The do-it-all strategy. Companies fall into this trap when they fail to make choices, instead they consider all initiatives as priorities. While this is sometimes a problem for struggling companies who feel they do not have the luxury to reject any initiatives, it is actually a greater problem for companies that have multiple great opportunities. It is harder to say no to a great opportunity than focus on the least of all evils. But if you do not focus, you are not likely to make the most of any of your opportunities and build sustainable competitive advantage. Lafley and Martin point out that strategy is always a choice, so you should not abdicate this decision.
- The Don Quixote strategy. With this trap, you attack competitive “walled cities,” taking on your strongest competitors first. Given that your competitors are also smart and trying to build sustainable competitive advantage, your chances for success are minimized if you are focusing on fighting the strongest. Part of strategy is deciding who to compete against.
- The Waterloo strategy. Much like the do-it-all strategy, this trap entails starting wars on multiple fronts with multiple competitors at the same time. No company can do everything well, and trying to compete on so many fronts will leave you weaker everywhere.
- The something for everyone strategy. In this trap, you try to capture all consumer or channel or geographic or category segments simultaneously. The problem is, to create real value for your customers, you need to know them intimately and not worry about the others.
- The dreams-that-never-come-true strategy. With this approach, you create high-level aspirations and mission statements that never get translated into concrete where to compete and how to compete choices, core capabilities or management systems. The authors point out that with this trap aspirations are not strategy.
- The program-of-the-month strategy. This is another trap I have seen all too often. With this trap, a company chooses generic industry strategies, in which all competitors are chasing the same customers, geographies and segments the same way. It is a classic red ocean approach, and you have little chance of doing better than everyone else (despite how smart you think you are). The more your choices look like those of your competitor, the less likely you are to win. Continue reading “Is your strategy unsound?”
I was recently reading Playing to Win by A.G. Lafley and Roger Martin and realized that acquisitions and new initiatives only work when they build on your company’s existing skills. This insight sheds light on why some many acquisitions or extensions in the game industry fail. In order to win (to use the authors’ language), or what I would describe as building sustainable competitive advantage, the book shows you need to build systems that support winning. If an acquisition or new initiative requires different systems, however, being part of a company that wins in its space a different way can doom your efforts. This insight is crucial when considering an acquisition (either as a buyer or seller) or pursuing a new business unit.
You need competitive advantage
One of the themes of this blog, and my conversations with almost everyone, is that you need to have unique, sustainable competitive advantages if you are going to succeed. There are a lot of smart people, there are a lot of people who have raised investment, and if you think factors like these are going to make your company a success you probably need to start thinking about the next company you want to start because you will fail. Very rarely does a strategy of trying to be smarter than your competitor actually work. It is an arrogance that I have seen lead to the waste of millions of dollars of investment and years of sweat equity. Instead, great businesses are built by creating processes, technologies and other unique and non-replicable systems that make your product or services more valuable to customers (or cheaper) than your competitors. Continue reading “Why acquisitions and new business initiatives often fail”