|The money was there, all that latent power… something waiting to be born, something sleeping. He cradled the unformed dream in his hands and wondered who to give it to.
— Ben Fountain, Brief Encounters with Che Guevara
Sources of advantage are a major component of Step #3 of the “4 Steps to Develop a Strategy”. As I wrote there, “true sources of advantage are ones you can invest in and they become stronger over time. As you increase their value, you can then leverage them for more products, which further strengthens them.” In other words (with apologies to bank robbers), having bags of money is not by itself a source of advantage. Nor is having anything that is equivalent to bags of money, such as a gold mine, a competitive advantage. If you purchase a gold mine, it has the net present value of all likely future mining profits built into its price.
However, if you use money to invest in a gold mine you are uniquely qualified to run, then you have a source of advantage. It’s only a source of advantage if you are a natural owner of the asset.
Sources of advantage also must be something you are uniquely good at relative to competitors. And they must help you win customers.
What are the unique technologies, skills, or resources you have that allow you to help your customers accomplish something 2x, 3x, 5x, or 10x faster, cheaper, or better than they otherwise could? They are the reasons that your customers are buying from you and that’s where your advantage lies. If you can’t think of what your competitive advantage is, start with the fundamentals: why is anyone buying your product? Why are they paying you at all? Are they paying you more than an alternative solution? If so, why?
Note that, for a startup, you may have some of these already or you may simple have a plan to acquire them quickly and then build on them. The main source of advantage for a startup is the ability to see the world in a new way and innovate quickly, unencumbered with the responsibilities of running a corporate machine.
Established companies, for all the other sources of advantage they may have (e.g., a large number of customers), often also have an unhealthy arrogance. They can only see their own machine. They rarely listen to upstarts… Microsoft underestimated Google, Blockbuster underestimated Netflix, and Western Union underestimated the telephone, for example.
^^ = Common for startups
Tangible assets (can be traded or bought, potentially)
- Product or service model
- ^^ Unique data from your customers – and analytics built on it. He who owns the data owns the industry … Uber and Airbnb’s business model are simply to own the data about their markets and do not to own any physical assets (e.g., cars or hotels).
- ^^ A dedicated focus on a specific user segment / specific industry. If accounting customers in all industries are being served one accounting software powerhouse, starting a new company that focuses specifically on accountants in one industry—such as healthcare—is an advantage. Especially if the needs of that industry’s users differ from the average needs and are thus being over—or under-served by the entrenched powerhouse. And especially if unique knowledge is needed to build a product for and serve that segment of users—knowledge that the founding team have.
- ^^ Unique production and distribution model when entrenched competitors are locked into their old models, such as Dell’s approach of built-to-order and ship-direct-to-customer model when Lenovo and others were locked into building generic models and distributing through stores.
- Difficult-to-copy or patented product components, especially when they integrate complementary products / multiple parts of a user experience, such as Apple’s iPod look-and-feel and integration with iTunes. A unique technical achievement that powers a new product.
- Uniquely low costs to onboard and serve a new customer, such as TurboTax’s low cost to prepare tax returns for a new customer versus a local accountant who needs to spend an intro one-hour consultation to set up a customer.
- High switching costs, such as Facebook’s ability to lock users into a network of their friends or medical device manufacturers’ ability to lock in surgeons who need to be re-trained to use a new device.
- Being known and trusted for high quality on attributes that customers care about, such as Toyota’s long record of the low cost of maintenance.
- Access to your users. One difference between a two-year old company that has 500 users and a brand-new company with none is that the former has 500 people to guide them. Your users and buyers rarely have all the answers, but the ability to listen to their needs, challenges, and latent opportunities is an enormous advantage.
- Access to unique physical resources (for which you are the natural owner), such as a physical asset like an exclusive long-term lease on a gold mine or a long-term lease on a great restaurant location.
- Size and scale, but only if you can get lower marketing costs or higher purchasing power, such as a local company buying billboard space to drive sales to ten stores versus one store (lower marketing costs) or Amazon offering much larger book inventory than a local bookstore (thus earning higher purchasing power).
Intangible assets (cannot be traded)
- Product or service model
- ^^ A unique insight into what creates value for a buyer or user that the company makes so central to their product and culture such that every new product / new product feature decision is viewed in terms of whether it adheres to this insight. For example, in a software company where number of clicks to achieve a task in their product is the central rallying point, every new feature will be judged against this metric; this ultimately leads to a product so optimized against this feature that the company may come to represent the best-in-class ideal of this.
- ^^ A tightly-knit team with a culture of continuous innovation and hustle. In other words, a lean / agile / fast-product-feedback-loop mindset. Startups often have this; larger companies usually cannot. A strong and positive corporate culture, esprit de corps, and a pride in a company and its accomplishments are qualities that are so rare and powerful they deserve a spot at the top of this list.
- ^^ Access to the unique knowledge of your team, especially as it develops unique insights over time. Knowledge and experience of the buyers and users you are selling to is especially important. Also valuable are experience with similar products and business models (e.g., B2B SaaS).
- ^^ Ability to attract and retain top talent, such as top consulting firms can do. Part of this is a corporate competency in training and continual learning, which is increasingly valuable as employees move into new roles over time.
- Distribution or sales network / customer access, including partnerships, such as GE’s sales force that can take a new product idea into just about any company in the world quickly. One reason Amazon paid $1B for PillPack in 2018 was to get access to its pharmacy distribution rights it had established in all fifty states.
- Supplier partnerships, especially exclusive ones.
- Network effects at-scale, including products that have fast-product-feedback-loops built into the product. Like Facebook and Waze, when your product strategy makes every incremental user add new value to the product for all other users, you have a powerful source of advantage.
- Being a part of a disciplined market where the leaders don’t resort to price wars, such as real estate agents consistently charging 5% of house sale price. For most of my discussions on strategy, I propose building a new market, not joining existing ones. But even new markets will be ancillary to existing players. How well behaved are they? Well behaved markets are an amazing boon to their players. Peter Thiel, founder of PayPal, and an all-round powerhouse thought leader on startups has said, “corporate profits … are eliminated by competition.” Well, not necessarily. There are thousands of fund managers and investment advisors and most of them are very profitable. As important as the existence of competitors is how well-behaved those competitors are.
The strategist is always considering how to best leverage their sources of advantage
Steve Blank (who could be considered to be the godfather of the Lean Startup methodology) wrote about a process for finding strategic partners in his book, The Startup Owner’s Manual. While I like a lot of what he shares in the book, there is a sentence that should make a red flag go up in the mind of any strategist.
Explaining a way to organize a list of potential partners, he recommends creating a three-column table and to list each partner in a row. Each column would have a heading, he explains: “The headings are: ‘partner name’ …, ‘what they provide’, and ‘what we provide’. Don’t feel bad when the word money appears repeatedly in the third column. It’s fairly typical for startups, at least in their early days.” Now I think that’s a dangerous proposition.
When he says, “what we provide”, he is referring to what we (as a startup) can give to a larger potential partner, that they don’t already have. That’s another way of saying, “What are our unique sources of advantage?”
As mentioned earlier, money is not a source of competitive advantage, but even if it were, money cannot be your only differentiator.
Startups typically have a few sources of advantage, relative to larger companies: speed and agility of product design and launch, deep and focused skills in a particular technology, the sheen of a company fully invested in a new innovation that will catch the attention of potential customers, and a laser-focused team, for example.
Your sources of advantage are the strengths that you can offer to any potential strategic partner even in the earliest days of your development.