Is your advantage superior and sustainable? By advantage, we're going to turn our attention to competitive advantage. And that's the third element that we're going to be examining within our opportunity identification discussion. So building competitive advantage really begins with thinking about customer validation and having a customer validated perspective on the problem and your planned solution. It gives you a target for where to invest the time and the resources to build that venture. And it helps you to really think about how to be competitive which requires consideration of two elements. The degree of your advantage, and the sustainability of that advantage. So, by degree, what we're discussing here are are there better features, and not a little better, but a lot better features, that you can bring to the market? Are there things that aren't necessarily more in number? A competitor has five features, it doesn't necessarily mean that you need those five, plus five more. It means that you need perhaps the right five, the right seven. Per our discussion on value innovation, maybe there are one or two things out there that customers don't really value. That you can remove those and reinvest those resources. And the doing a few new things, or amplifying some existing things, they really do matter to customers. But we want to be better, and we want to be a lot better. We may be able to be cheaper. We may be able to derive value in the marketplace by offering a similar product to what's out there. Maybe the exact same product in many ways but we have some secret sauce, some new approach that makes our offering cheaper. And not just cheaper so competitors can lower prices, and then we lower prices, and then they lower prices, and then we go out of business if they're bigger than us and we can't compete that way. But what we mean by lower prices, and substantially lower prices in a sustainable way, is there's something different about our operations. So, in this case, think of something like your home movie experience. What you were doing in a DVD rental movie market a few years ago. Many of us when to Blockbuster or our local video rental place, chose our movie, paid for our movie, left, went home, came back a day or two later, and returned that movie. Well, we haven't done that lately with Blockbuster, since they've gone out of business, but what really came along that most of us went to, was a company called Netflix. And you may know Netflix now as a streaming service. You may know Netflix now as a Internet-based service. But in its beginning, it was mail order. And for our older students, you may remember the mail order version of Netflix that was the original. And what that allowed us to do was to go online, choose the same movies that we may have chosen from that Blockbuster, but they would come to us via the mail. And sure, we may have to wait a few days for that to arrive, but they were cheaper and they were always in stock, more or less. And few of us had to watch the movie that day. So the fact that we had to wait a couple of days, you could argue was worse than the Blockbuster experience. But for many of us, we would rather wait a few days on mail order than go to the store, maybe the movie was in, maybe it wasn't, watch it, and then travel back to the store and return it. We would rather wait and we would perceive waiting as being worth it for the time and/or money that we saved. So what we see with that is that Blockbuster eventually came into trying to do somethings with mail order, and trying to do something online. But, one, they were a little bit late for the party at that point. And two, they still board the expense of the the face-to-face bricks and mortar operations that they were still running. So, sure they could try and copy a Netflix or copy a Redbox and do the vending machine model, but that did not necessarily replace all of the expenses that they were already incurring. And that based on multi-year lease agreements, they may have already been on the hook for it, even if they wanted to close the stores. So what we see with that is where there is opportunity to bring a degree of improvement by lowering price. And if it's accompanied by some operational advantages, or supply chain advantages, or manufacturing advantages, that's where you can add real value. You may also add real value in the marketplace and have a significant degree of advantage if you can be rare. Meaning that you can bring something to the market that competitors either can't do, or they can reasonably do, the way that you do it. We also want to talk about the sustainability of your advantage. With sustainability what we're talking about here is, how difficult is it for somebody to copy what you're doing? What's the likelihood of that? How easily can a competitor come along and observe what you're doing, learn from you, see your success in the marketplace and decide that they want to apply their resources or their know how or their relationship to try and replicate your success? Or maybe it's that next startup. It's that startup that came after Netflix, that saw their success, that tried to replicate what they were doing. Well, in that context, you want to think about, as you enter the market, are there things that you can do to make your product difficult to copy? Now, maybe it's the intellectual property, maybe it's the patents and things of that you can develop. Or, it may be building that strong brand that resonates, that really takes hold in the marketplace. And maybe relationships that you can develop. It may be exclusivity agreements that you can sign with people that are selling your product or supplying you with parts of that product. There are variety of different ways that you can work to build some entry barrier that makes it difficult for those to come later and compete against you. We also want to think about sources of competitive advantage. There's degree and there's sustainability. And then the application of that is in some way influenced by, how are you going to derive that advantage in the first place? One is specialization. What we see with specialization is an opportunity to be not like everyone else. I see a lot of students today with concepts around subscription boxes. And what I mean by that, if you are familiar with NatureBox, if you're familiar with the Dollar Shave Club, these are models by which you as an individual will go online, you'll pay a fixed fee per month. Maybe $20, maybe $40 per month, and you get an automatic mailing. Typically, monthly, with a box of product that you have signed up for. You subscribe to that product. What it means for the individuals that are providing that product is that it's a great revenue model. That if they can get a customer to check the box once, and enter their credit card number, they know that every month, until the customer cancels, they're going to have new product that they can expect. They're going to have new revenues they're going to generate each and every month forever, for every customer that comes on board. They can either build original product, kind of being able to forecast demand. They can either make agreements with their suppliers based on having this demand. They can develop a number of distribution agreements to bring products in. And we see this not only in food and shaving, but we see it in cosmetics, we see it in apparel, we see it in wine, we see it in educational products and craft products for kids. A recent article that I read, while, I thought there were perhaps 100 box companies out there, instead, informed me that there were almost 600 subscription box companies that are out there. So when I see a student comes along that wants to do the 601st company that does this, it doesn't really excite me. It's not something I necessarily see a great opportunity to build a competitive advantage. What does excite me is a company called Cratejoy. Cratejoy does not compete to try to be 601 in the subscription box market. Cratejoy is one of the few companies that has made the choice of, let's build the tool. Let's build the platform. Let's build the picks and the shovels that the gold miners need. So in that context, what Cratejoy does is they started a subscription e-commerce enabling business. They started a software company in the summer of 2013 that allowed individuals that want to be the subscription company, that want to be the provider of that subscription service, to use their software and use their platform to build out their site, to manage their inventory, to take care of their payments. And have a fully integrated service for a monthly fee, that all the 600 companies that are out there, and all the many hundreds to come, can use as their preferred software provider for the tool. That's something that makes a lot of sense to me. It started with two individuals, both with some technology expertise. They applied and were accepted into Y-Combinator in Austin. So they went into a summer program to really build out the concept. At approximately a year later, they raised $4 million in venture capital in September of 2014 to continue to build and scale and market that business. Again, not trying to be 601, but trying to specialize. Trying to do something that they saw an opportunity for, that really wasn't being done well yet. Localization is another opportunity to be competitively different and to build that competitive advantage. We see this in some cases in international markets where there's a domestic product that's doing well. And the example here would be Spotify in the US. That's serving up music, an all you can eat model, a fixed dollar value you pay per month, and you can stream music, and download music and things of that nature, for a fixed fee. But what we've seen abroad in Taiwan, is a competitor in KKBOX, that has differentiated from Spotify. They may have a lot of the popular music that Spotify has, but they further differentiated that by trying to sign local music labels. And entering some agreements and some exclusivity agreements that provide this company unique access and a unique stock. A unique catalog of content in music for their local market, to be able to anticipate, to be able to provide, to be able to serve Individuals in their home country in a bigger and better way than a Spotify could. So in that context, it's specialization to an extent, but even more so, it's a localization strategy. A third source of competitive advantage is the team itself. Now, if you're already successful, if you're Google, if you're Microsoft, you can already recruit great talent and great executives. But what I'm talking about here is, as the startup, as you're looking for your co-founders, as you're looking for your first or second employee, look for great people. Look for people that are excellent at what they do. And what you can expect is a greater likelihood of having excellent products and an excellent company if you start with an excellent team. So if I were to start an automotive company, an electric automotive company, I'd like to start with the CTO, a chief technologist, that had done great things before, that had built and scaled electric aircraft platform companies before. That understands electrics, that understands aerodynamics and understands how to build a competent technology team. Unlike a chief financial officer that knows numbers, that understands money, that understands the automotive industry. That had been the CFO of Ford of Southern Africa, which is a $3 billion operation in and out itself. Unlike a chief designer that knows design, that has won countless awards, that is demonstrated they can designed great product that people will buy in automotives. Perhaps the past director of design for Mazda's North American Design Center, one of the global centers of excellence for automotive design. Somebody that has design experience with General Motors and with Volkswagen. I'd like somebody that can build cars. I'd like somebody that has been a past production lead, with Lexus, Toyota, Volvo, and Renault. Someone that knows how to build 350 cars per year. I'd like somebody that understands how to buy things. Someone that understands supply chain. Somebody that was the chief purchasing officer for Sony Ericsson, that can operate at a global scale. And I want my company to be fun. I want my company to be somewhere that individuals can come and enjoy what they do, and enjoy their work, and enjoy the company culture that we can build. And what better place to recruit such a person than somebody that was the director of staffing operations for Google that was responsible from growing them from their early days up into 2009 where they had tens of thousands of employees? So, Tesla doesn't only build great cars, they build great teams. And they built a great team in the beginning that enable them and improve their success of building great cars and a great company. So in summary, we want to think about competitive advantage by two facets. The degree of the sustainability. Can we do something that is a lot better or a lot cheaper or a lot rarer than what's out there? Can we build something that's sustainable that's difficult to copy? And can we find sources of advantage, either independently or in combination, such as specialization, localization, building a great team, or other factors that are going to enable us to have success with our venture? And enable us to tee ourselves up where we can be sustainably advantageous with a significant degree of advantage when we introduce ourselves into the market?
