By Tristan Van Iersel.
In the area of globalization, most of entrepreneurs are taking things that work somewhere and making them work everywhere. It is easier to copy a model than creating something totally new. By doing so, entrepreneurs enter in a “perfect competition” market and thereby may jeopardize their long-term position.
In this article, firstly, we will explain why Economists’ ideal state doesn’t fit for businesses. Secondly, we will enlighten the unique characteristics that your start-up shall have. Finally, we will present the “Thiel & Masters’ 7-question framework” and the “4-step monopoly plan” that will support you to drive your company to success.
Why Economists’ Ideal State is Wrong for Businesses
As we all learnt during our undergraduate cursus, the economists have coined two models that are in opposition: perfect competition and monopoly.
Perfect competition is considered the ideal state in economy. Is it really the case? Let’s have a closer look. By definition, a perfectly competitive market achieves equilibrium when producer supply meets consumer demand. In this case, each firm in the market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines (price taker). As the barriers to entry are low, new firms will enter the market, increase supply that drives prices down, and eliminates the profits. Even some of those firms will suffer losses, and fill for bankruptcy protection. Under perfect competition, as the firm is focused on today’s margins for survival purpose, it can’t plan for the future. Therefore, in perfect competition, no company makes an economic profit in the long-run.
In opposition, as monopoly, the firm owns its market, so it can set its own price (price maker). Since there is no competition, it produces at the quantity and price combination that maximizes its profits. Because it shall generate cash flows in the future through its monopoly, the firm is not under pressure for survival and it can afford to think about things other than making money. Then a monopoly can make long-term plans and finance its ambitious research projects in the aim to innovate.
As we saw above, economists describe perfect competition as an ideal/equilibrium state because that is easy to model, not because it represents the best for businesses. Indeed, for a firm, equilibrium means stasis which implies death for the business. Competition is an ideology that distorts our view. We focus on competition and we trap ourselves within it. But more we compete, less we gain.
To be successful, companies must do something others cannot, each must build a monopoly by solving a unique problem.
Your Start-Up must be Unique
In the aim to create a monopoly, you must make your start-up unique based on some combination of the following characteristics:
Proprietary Technology: it is the competitive advantage that your company may have because it makes your product difficult or impossible to replicate. You could invent something completely new or you could radically improve an existing solution.
Network Effect: it makes a product more useful as more people use it. Network effect can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
Economies of Scale: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
Branding: Creating a strong brand is a powerful way to claim a monopoly.
Technology, network effect, economies of scale and branding in some combination will give a competitive advantage to your start-up; but to get them to work, you need to choose your market carefully.
Drive your Startup to Success
Peter Thiel and Blake Masters in their book Zero to One (2014) provide the 7-question framework that every entrepreneur must answer before starting any business:
The Engineering question: Can you create breakthrough technology instead of incremental improvements?
The Timing question: Is now the right time to start your particular business?
The Monopoly question: Are you starting with a big share of a small market?
The People question: Do you have the right team?
The Distribution question: Do you have a way to not just create but deliver your product?
The Durability question: Will your market position be defensible 10 and 20 years into the future?
The Secret question: Have you identified a unique opportunity that others don’t see?
As entrepreneurs you must be able to address each of those questions. If you don’t have good answers to one of those, you may restate your business plan to avoid failure in the near future.
Start-ups such as PayPal, e-bay, Tesla and Google got the 7-question framework right and so their success was intrusive. Furthermore, if we look closely at those successful start-ups, we will see that they share the following path that we will coin the “4-step monopoly plan”:
Build strong foundation
Bad decisions at the beginning are difficult to correct after they are made. It is important that the founding members, in addition to their technical abilities and complementary skills, share same interests and values to work together otherwise it might create irreconcilable conflicts in the future.
Define a clear long-term plan
Every start-up must have a clear vision of where they want to be in the future. Long-term planning is often undervalued by our indefinite short-term world but it is the most important factor to reach success.
Find a niche market and dominate it
Every start-up should start with a very small niche market. The reason is simple: it’s easier to dominate a small market than a large one. Facebook started to provide its services to Harvard University before to spread to other universities and then the entire world.
Small doesn’t mean non-existent. The perfect target market for a start-up is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse.
Scale up
Once you dominate your niche market, you should expand into related and slightly broader markets. Indeed, if your company has been well designed at the inception (refer define a clear long-term plan), it should have the potential for great scale during the growth period. One of the key is to have defined a strong distribution plan by which your sales team can move the product to a wide audience.
The “7-question framework” and the “4-step monopoly plan” combined with your start-up’s unique characteristics will assist you to escape competition and dominate your market.
Conclusion
No one can predict the future exactly, but we know two things: it’s going to be different, and it must be rooted in today’s world. We hope for a future of progress. That progress can take one of two forms: copying things or doing new things. Copying means entering into perfect competition market and fighting on daily basis for survival.
In opposition, doing new things means innovating and creating a new market that will help you to escape competition and give you access to a monopolistic position. Nevertheless, even a monopoly is only a great business if it can endure in the future (generating cash flows). The “Thiel & Masters’ 7-question framework” and the “4-step monopoly plan” for start-ups are tools that every entrepreneur must use to improve the likelihood of success.
Article written by Tristan Van Iersel
