Don’t just survive, dominate
While most of us will have ‘new-normal’, ‘unprecedented times’ pandemic catch phrase fatigue, the reality is that times are indeed very tough for businesses. But instead of adopting a head-above-water mentality business leaders need to transcend the daily grind for survival by achieving the only thing that enables this – market dominance.
According to Tim Vieyra from Comotion Business Solutions, while this may seem overwhelming; it’s the difference between a winning and losing company. “And just looking at the value your company creates isn’t enough. Your business could generate a lot of value for stakeholders, but it doesn’t retain any of this value itself,” says Vieyra.
He refers to the work by market dominance specialist Peter Thiel, who is also co-founder of PayPal, Palantir Technologies, and Founders Fund, and the first outside investor in Facebook, where Thiel says that ‘creating value isn’t enough – you also need to capture some of the value you create’.
“Thiel explains this perfectly by way of example: ‘This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined.
‘The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly, Luckily, Thiel has identified four key ingredients – or measurements – to assess whether your business is capable of achieving market dominance,” adds Vieyra.
Simply put, there are four measurements to look for: Proprietary Technology, Network Effects, Economies of Scale and The Brand.
Proprietary technology is the heart, but not all, of the innovation that sets a company apart. Thiel suggests that the company’s technology must enable the company to perform an essential aspect of the offering at least ten times better than the alternative.
For example, When Amazon.com came along, it offered a book selection 10x larger than that of a traditional bookstore or library. The Amazon Kindle continues the trend by offering a package that greatly improves the book buying and reading experience.
“These are illustrated in an offering’s ability to appeal to a small market strongly, but gain strength as more people use/buy the offering,” says Vieyra. Thiel uses his experience at PayPal as an example. When the technology was focused on the disperse market of Palm Pilot users, it never got very far. However, it was an early success on eBay, which was a far more dense community.
Economies of scale
Profitable businesses should be able to build the flattening of fixed cost at growth into its design. Companies should be able to grow without increases in their fixed and overhead costs. An example would be companies like Google, Facebook, Instagram and twitter, we can keep on adding users without it affecting their fixed costs.
“A brand is essentially a promise from a company on its ability to deliver a product or service,” says Vieyra. He adds that for a brand to be valuable, the promise must be articulately unique when compared against the market alternatives.
“Businesses can build value through various paths, but a company on route to own the majority of its defined market will noticeably display all of these four characteristics,” concludes Vieyra.