The Premortem, or how foresight can also be 20:20

[Note: I shared this mental model with my email subscribers on Feb 5, 2017. If you want to receive a new mental model every week, join the club.]

Premortem

Or as more ancient stoics said, “Premeditatio malorum”. Or “premeditation of evils”.

 

What it is:

We’ve all heard of the postmortem in business. When something goes wrong, all the decision-makers get together to diagnose what happened. And learn how to prevent it from happening again.

In theory, at least.

What really happens though, is an advertisement for hindsight bias. Everyone suddenly remembers how they “always knew it wouldn’t work”.

As Amos Tversky said, “The writing may have been on the wall all along. The question is: was the ink invisible?”

A premortem asks the same question as a postmortem, but before you embark on your endeavor. “It’s two years from today, and our plan has been implemented. But it’s been a disaster. What went wrong?”

Explicitly going through such a thought experiment can help avoid the overconfidence and groupthink that team decisions can suffer from. We all love “playing the devil’s advocate” – here’s an executive license (and order) to do so!

Examples of premortems / thought experiments:

Here are a few examples of thought experiments to try.

1 Year from Now:

  • We haven’t hit product-market fit yet. We took too long to launch our initial product. What features could we have left out?
  • Half our customers didn’t renew their contracts. Why? What went wrong?

 

3 Years from Now:

  • Our startup has just shut down. We just couldn’t hit a growth trajectory. What are the reasons for this failure?

 

Rules to follow:

  1. When you’re making a big decision, make sure you think about what could go wrong. And protect against it. Don’t only think about what happens when the plan works – you’ll fall prey to the focusing illusion.
  2. Every few months, revisit and repeat the premortem. Have you covered for the main risks? Have any new risks opened up?

Further Reading:

 

Linked to: Focusing Illusion, Hindsight Bias

Filed Under: Decision-making

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The focusing illusion, or why “it’s not really as important as you think it is”

[Note: I shared this mental model with my email subscribers on Jan 29, 2017. If you want to receive a new mental model every week, join the club.]

Focusing Illusion Quote

What it is:

Have you been subjected to this nifty party trick? A person at the party claims to be able to read your psychology from manipulating your hand.

He presses your thumb backward, and says, “Hmm, you look like you’re often stubborn.” You’re surprised – it is true!

Later, you cross paths again. This time, he presses the thumb back and says, “You’re a surprisingly flexible person.” And that seems true too. You can think of several instances when you demonstrated surprising flexibility.

 

So which is it? Probably neither. You, my friend, have been subjected to the focusing illusion.

Just like the respondents to a question, “Are you adventurous?” in a research study. 97% said “yes”.

When you think of or focus on something, your subconscious assumes it’s important. After all, why would you think about it otherwise?

It’s recursive logic, with a healthy dollop of confirmation bias.

You focus on it, therefore it’s worth focusing on.

 

Examples in business (and elsewhere):

What you focus on seems important.

  • When you’re fundraising, it seems like make-or-break for your startup. But it isn’t. Money from customers, not investors, will drive success for you. If you’re building something useful, you’ll find a way.
  • You commit a silly mistake at work on Friday evening, and then you’re in torment all weekend. But your boss – he barely notices it on Monday morning. It wasn’t that important after all.
  • “There’s no such thing as bad publicity.” Fading movie stars crave it – at least it gives them presumed importance in the public’s eyes.

What you focus on seems true.

  • The positive test: In deciding whether a possibility is correct, we look for hits rather than misses. Just like the adventurous respondents in the survey above, we can be flexible or stubborn. It depends on the question. This kind of one-sided question (e.g., asking only whether you’re dissatisfied about a situation), is called a positive test. Beware when you hear such a question – maybe your counterpart wants to send you down a specific line of thought.
  • Medical students and their diseases: It’s common for medical students to feel they’ve contracted the latest disease they’ve heard about. They read that pneumonia produces pain in a particular place, concentrate attention on it, and get alarmed at the slightest sensation. This is so common, there’s an aphorism for it in medicine:

“When you hear hoofbeats, think of horses, not zebras.”

  • If 2016’s Brexit and US presidential campaigns have taught us anything, it’s this: Say anything often enough, and people will think it’s true.

What you focus on seems causal.

  • Offer people a lot of money to do something, and they’ll do it for free. The listener automatically assumes the task is very important to you. (That’s why you’re willing to pay so much!). Try this the next time you’re trying to jump ahead in line.
  • The most visible action is assumed to be causal: When a company misses its projections, newspapers attribute it to a recent government announcement. Or a tepid product launch to a bad ad campaign.

 

Rules to follow:

How do we save ourselves from the focusing illusion?

  1. Don’t make big decisions in the heat of the moment. It’s quite likely you’re overestimating the importance of a couple of factors. Calm down, sleep on it, and make the decision later.
  2. Beware of one-sided questions. It’s quite likely that your counterpart is priming you towards an answer they prefer.
  3. Whenever you’re making a big decision, do a premortemMake sure to think about what could go wrong, and protect against it.
  4. In summary, remember Kahneman’s adage: Nothing is as important as you think it is when you’re thinking about it.

Further Reading:

 

Linked to: Confirmation Bias, Availability Heuristic

Filed Under: Psychology & Human Behavior

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WARNING: Too much focus can constrain your startup

Successful entrepreneurs, investors and strategy experts all extol the virtues of focus. I have as well, as a strategy consultant, then a founder, a writer, and now as a seed stage investor at OperatorVC.

If you focus on a small segment, you can own it, dominate it.

So the conventional wisdom goes.

But there are times when focus can constrain a startup from achieving its potential. When you become a big fish in a small pond, while there are gloriously large oceans just around the corner.

How do you know which is which? How do you know when to focus, and when to extend?

Perils_of_focus

This came up in a conversation with Ankesh Kothari, a fellow entrepreneur and seed investor. He highlighted how a lot of startups focus too narrowly on a small market, and never expand. And we often see the opposite at OperatorVC. Startups trying to solve problems across a broad swathe of consumers from the outset. “Microsoft Office products that solve everyone’s problems”, as I call them here.

Here’s what’s interesting: neither of these is always the right answer.

Sometimes, you have to focus on a specific consumer segment. Make sure you solve a need deeply. At other times, you need to expand your horizons.

If you focus too acutely, you’ll never become a $100 million company.

This is not intuitive. You can’t be deep in the weeds one moment, and flying at 20,000 feet the next.

Great founders can alternate between these two opposite behaviors well. And legendary founders plan for this in advance.

Exhibit A: Elon Musk’s Master Plan for Tesla.

Before Tesla started, Musk anticipated when he would focus. And when he would extend lower in the price pyramid. And he wrote it all in a badass blog post, for all the world to see.

So how can you be more like Elon Musk?

At its very basic, it’s three simple steps:

  1. Start with extreme focus. Focus on a narrow segment. Serve that segment’s needs so completely that you build a monopoly in it. Focus on a city, community, or neighborhood, and then OWN it
  2. Then, expand into an adjacent segment
  3. Repeat steps 1 and 2.

 

Several great startup successes have done exactly this:

  • Facebook: Started with a student listing, just for Harvard. Once Zuckerberg found product-market fit there, he then expanded to other universities. And then the rest of the world.
  • Uber: Started as a premium limo service. Only for select customers, only in San Francisco. Today, there’s a good chance you’re reading this sitting in an Uber.
  • In the 70s, two Harvard geeks built a simple Basic interpreter for the Altair, a decidedly non-popular microcomputer. How would that ever grow big? It did. You might have heard of Microsoft.
  • Oracle has done this scores of times, sometimes even pivoting at scale to a new, much larger market.

 

Now, I know what you’re saying. Hindsight is 20:20.

Is this just one of those clichés that you retrofit to success stories? Or is there actually a lesson here for people just starting out?

 

Is it even possible to be more like Elon Musk?

The Chasm model of product adoption is a great framework to know when to focus, and when to extend.

Chasm Model

At the trivial level, we all know this. Tech enthusiasts and early adopters will use your product first. The mass market (the Early Majority or “Pragmatists”) will gradually start using it later.

But the Chasm Model offers two new insights:

  1. There’s a “chasm” between the early adopters and the mass market (the early majority). It’s very hard to make that leap, and many startups die trying.
  2. Unlike the early adopters, the early majority aren’t interested in your tech. They are interested in its application to their most important needs.

And therein lies the way.

 

When to focus

Focus when you’re crossing the chasm.

Focus on a single narrow niche within the mass market. Understand that niche and its most important needs. Create an application of your technology tailored to that segment’s needs. Find product-market fit, and cement your place there. Own that niche.

  • Tesla first focused on the luxury segment. It built a perfect car. So good it broke the Consumer Reports rating system. Oh, and it was electric too.
  • Let’s take an example we’ve seen at OperatorVC. Say you’re building an AI based system to help people recover from illnesses. Don’t start coding algorithms for all the million diseases that are possible. Don’t even start with the 100 most prevalent diseases. Start with one disease. Just ONE.

 

When to extend

Extend once you own that first segment.

Select the next niche(s) in the mass market that you want to own. Again, design applications of your technology for those segments.

And REPEAT.

  • This is exactly what Tesla is doing now, working its way down the price segments.
  • Once the healthcare bot is perfect for that one disease, it’ll be much easier to expand to the next disease. And the next hundred.

So, when you’re starting off, make sure you focus on a segment you can really own. But also be ready to extend later, so you can own the market.

Niche to win, baby. But then parlay.


PS. Focus is really a superpower. See how focus can be a competitive advantage.

PPS. Read Crossing the Chasm. Few books have a higher wisdom / word ratio.

[A version of this article appeared in Yourstory on Oct 10, 2016]

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What I Learned from Reading 6,000+ Articles in the Last 52 Weeks

One year ago, I started the Sunday Reads newsletter. It’s a short email that goes out once every week (on Sunday, obviously), with “the best articles on business, strategy, entrepreneurship, and everything in between.”

Every week, I share the best articles I read that week. Sometimes they’re organized around a theme. Sometimes not. But there they are, without fail, in your inbox every Sunday.

I realized just last week that over the year, I had shared 600+ articles through that weekly email. And often, I read at least ten times as many articles during the week, to choose these best 10-12 articles.

What have I learned from these 6,000+ articles? Have they made me better at what I do?

No trees were harmed in the making of this post

No trees were harmed in the making of this post

A part of me answers almost immediately – yes, for sure! But how exactly have they helped? Can I tease out the key lessons I’ve learned from the articles? Or is it just a vague sense of achievement and hope – surely I haven’t wasted those hours?


So, over the last 7 days, I went back to those 52 emails. And pulled out the key learnings and principles that I’ve actually tried to use in my life.

Two caveats before we go on:

First, this is a long post. I’ve tried to summarize the key concepts I’ve learned, and it turns out 6,000 articles means a ton of learnings!

Second, I’ve included (several) links for further reading. Every paragraph is a rabbit hole. So, first read through the whole thing without clicking through on any link. Then, come back. Feel free to dive as deep as you want, on the subjects that interest you.

 

1. Goals don’t work. Use systems instead.

This was not a new lesson for me. But across article after article, book after book, this got reinforced. No matter the field, what seems to work is understanding the basic principles and following them. That’s it.

Success is not about choosing an ambitious goal and stretching to reach it. Whether in running your business or trying to win arguments with your spouse, hard work won’t cut it. Instead, you understand the basics, try a lot of different things, learn what works, and iterate or double down.

If you do it right, then no matter whether you succeed or fail in one specific endeavor, you’ll always come out ahead. You’ll always learn something that’ll be useful next time.

This sounds a little hackneyed at this high level, I know. But as you’ll see, it permeates all the other lessons below.

Further reading: Goals vs. Systems. I’ve read this a few times before, but I was still blown away by the simplicity when I read it just now. If you like this, you’ll love Scott Adams’ book.

 

2. Growth Mindset vs. Fixed Mindset

There are two types of people – those with a fixed mindset, and those with a growth mindset.

If you have a fixed mindset, you think you are at the peak of your skills. You’re the best artist, manager, husband, wife, etc. you can be.

If, on the other hand, you have a growth mindset, then you strongly believe you can grow and improve at whatever you do. Whether in your personal life (you can always become a better husband. OK, that hit too close to home), or in your professional career. There’s always room for improvement.

Your mindset determines how successful you are to a surprising extent. People with growth mindsets are more willing to try new things, learn new skills, and take risks. And those who take risks, get the rewards. Fortune favors the brave, etc.

Further Reading: You can read Carol Dweck’s book Mindset, which outlines the research on the subject. Or read Maria Popova’s review of the book.

 

3. Deliberate Practice

Let’s say you have a growth mindset. Is that enough to grow and improve your skills over time?

If the goals vs. systems argument tells us anything, it’s that just believing you can improve at something isn’t enough. So, what’s the system for this?

Practice. Not just doing something for 10,000 hours. Deliberate practice. Working at the edge of your abilities, getting immediate feedback (succeeding / failing), learning, and trying again. That’s what builds skills.

If you want to learn business, start a side-business. At every stage – idea generation, building your first product, selling it to your first customer – you’ll fail the first few times. And you’ll learn immensely.

If you want to improve your writing skills, start a blog. It takes 2 minutes on Medium. Write every day, and ask your friends and colleagues for feedback. Rinse, repeat.

Further Reading: Cal Newport’s book on the subject is excellent. This article from his blog is a good summary of the six traits of deliberate practice.


 

These were the three most important learnings for me from my last year of reading.

  1. Take a systems approach to all your endeavors
  2. There’s always room to become better at what you do
  3. The “system” to become better is deliberate practice

Everything else stems from these key principles. They form the foundation for the rest of the learnings. Get these right, and everything else falls into place. How’s that for a system?

 

As I continued plowing through the articles, I saw that a lot of them were organized around skills essential to succeed in the workplace today. Communication, structured thinking and problem solving, creativity, and focus (especially focus), to name a few.

How do we build these skills?

Learnings from Reading_02

4. How to learn anything

Communication, structured thinking, etc. are critical skills. But there’s one skill that’s a precursor to all this – the ability to pick up new skills quickly.

As Scott Adams says in his book, every new skill you learn doubles your chances of success. To take a simple example – an MBA who knows to code is far more valuable than just an MBA. And if this person also understands, say, cinematography, then the unique opportunities available are far more lucrative.

So, you need to continually build new skills throughout your career, to take advantage of new opportunities. And ideally, you’ll build skills that are themselves useful across a diverse set of sectors (system approach again).

OK, you’re sold. Learning how to learn is key (it’s also the secret moral of Kung Fu Panda, but that’s another story).

But how do you learn? You could join a course at your local university, or hire a teacher online, and do your 10,000 hours.

Or, you could use the Pareto principle to identify the 20% of concepts that have 80% of the importance, and quickly learn and practice those.

Further Reading: The Ultimate Guide to Learning Anything Faster

 

5. How to become smarter

Don’t you want to be that guy, who always sees through to the crux of an issue? Who understands the real problem, which no one else can see? Who always sees the way out of an unresolvable predicament?

I certainly want to be that guy.

Turns out, this is a learnable skill.

a. Don’t be stupid

Charlie Munger, Warren Buffett’s partner-in-crime, once said, “The best way to be smart is to not be stupid”.

We are not rational beings, as economists would have us believe. Not by a long shot. As I’ve written before, we’re not only not rational, we’re also irrational in consistent and repeatable ways.

We’re subject to several cognitive biases, which predictably warp our judgement.

Anchoring is one example of a pervasive bias. The first number thrown in a negotiation becomes an unconscious anchor to the rest of the bargaining. That’s why both parties fight to shout out the first bid.

Availability bias is another one. We overestimate the probability of an event if we can remember vivid instances of it. We pay more for earthquake insurance than for calamity insurance (even though the latter includes earthquakes!), we overestimate the possibility of winning the lottery if our neighbor just won it last week, and so on.

This site has an extensive list of such biases.

How do you avoid these biases? Here’s the thing – you can’t.

Since these operate at a subliminal level, just knowing them won’t prevent them. Next time someone makes the first offer in a negotiation, you’ll predictably bargain around that.

Instead, counteract these in your decision-making by using a two-track thinking process.

  • First, make a decision rationally (to the best of your abilities)
  • Then, try and recognize the biases you’re subject to, and adjust accordingly

Do this again and again, and you’ll soon become a natural. At not being stupid.

b. Develop a latticework of mental models

This idea also comes from Charlie Munger.

There are several different frameworks that help us understand the world. Understanding and building a repository of these frameworks in our heads can help us become much faster at comprehending the forces at play around us.

For example, knowing about the concept of virtuous cycles can help us understand the remarkable success of Uber. Understanding the power of incentives can help us predict that what gets measured will get managed. Or that what doesn’t get measured, won’t even exist.

Shane Parrish explains the concept of mental models well in this Introduction. He also shares some models from his toolkit.

c. Read actively.

Don’t just read – read actively. Make sure you’re internalizing what you read.

That’s the Buffett formula to get smarter, this time.

 

d. Keep a commonplace notebook

Whenever you read anything interesting or insightful, or see a surprising pattern, put it down in a notebook.

Over time, this will become a repository of the smartest things you’ve read. A surprisingly easy place to go back to whenever you need inspiration, or a way out of a thorny problem.

Here’s how to keep a commonplace notebook, and here’s why you should keep one. This is my commonplace notebook, and I love it!

 

6. How to become creative

Turns out creativity is a learnable skill too! Here’s how you become an Idea Machine.

[Aside: if you want to learn how to have great startup ideas, read this guide. But be warned, you’ll sometimes come up with ideas that seem to have a lot of potential, but are actually bad. Here’s how to recognize bad ideas that look good.]

 

7. How to communicate better

Learnings from Reading_03

a. How to write better

Just two rules: (1) Never use passive voice; and (2) Keep it simple. Don’t use two words where one will do. Don’t use a long sentence where two shorter ones will do. That’s it. Nothing more.

Further Reading: The day you became a better writer. And if you need help, check out the Hemingway app.

 

b. How to argue better

Before you even begin to argue:

(1) First, understand whether your opponent’s opinion is changeable at all. Ask: “What specific data points, if true, would convince you to change your mind?” If nothing will, you might as well not waste your time arguing. [Aside: yes, the similarity to the scientific method is not incidental].

(2) Then, as Daniel Dennett says here, first restate your opponent’s view so clearly and succinctly that they wish they could have put it that way themselves.

(3) Then, call out the specific areas on which you agree with your opponent, and what you’ve learnt from their view.

Then, and only then, should you say even one word of criticism.

 

How do you argue after that? Using the Ten Golden Rules of Argument.

And yes, remember Miller’s Law. “To understand what another person is saying, you must assume that it is true and try to imagine what it could be true of.”

Before you say some statement is wrong or silly, first challenge yourself to think of a scenario where that statement actually makes sense. [The same principle applies for criticizing political decisions, competitors’ moves, etc.]

 

Finally, be happy to be proven wrong, like Darwin. Remember, you only learn when you lose arguments.

c. How to give feedback better

There’s no playbook here.

Actually there is one – sandwich your feedback between two appreciative comments. It’s also known as The Shit Sandwich, and no, it doesn’t work. People see it coming a mile away. You start by saying “Your emails are always so well formatted”, and the opposite person immediately thinks, “God! How have I screwed up now?”

Instead, be authentic.

And come from the right place. Remember, you’re giving feedback so that the person succeeds going forward. And give constructive feedback frequently – don’t wait for review cycles, or the end of the week, etc.

That’s how you give feedback.

Further Reading: Making yourself a CEO, by Ben Horowitz. And Roger Fisher on How to Provide Feedback.

 

d. How to negotiate better

Nothing I say here will be as valuable as reading this excellent summary of Roger Fisher’s book, Getting to Yes.

 

In addition to all these, there’s one more important tenet to interpersonal communication. Always respond positively when someone says something to you. Negative / sarcastic reactions, or even no reaction at all, can be very damaging to relationships, as this article from Farnam Street recounts.

 

8. How to focus

Learnings from Sunday Reads_04

This is an important one. Between emailing all day, getting pings on Whatsapp, and checking what’s new on Twitter, it’s a wonder we get any work done.

Even as I type this, my hand continually reaches out to check my phone. Maybe there’s a new message since I last checked 2 minutes ago?

As this article from the NYT argues, focus is a critical skill. And it’s incredibly hard in this age of digital distraction. But as Cal Newport shows in his book Deep Work, it can be learned.

How do we learn it? By practicing it:

  1. First, use the Pareto principle. Take your to-do list, and remove the 80% of tasks that are unimportant.
  2. Then, use Parkinson’s Law (“work expands / contracts to fill the time available to it”). Give yourself slightly less time than needed for each of the 20% important tasks. This will force you to focus – if you get distracted, you won’t be able to finish in the given time.
  3. Of course, you’ll have to do the less important tasks at some point. For this, use a shallow work checklist that you tick things off when taking a break from the important tasks.

 

9. How to become a better manager

Read this FAQ from Henry Ward, CEO of eShares. Enough said.

 

10. How to get lucky

The last and final lesson I learned, and arguably the most important one. Building all those skills is great – it sets you up for success. But getting all the firewood together in one pile is not enough. Something has to light the fire. And luck is that matchstick.

Analogies apart (you can tell they’re my weak spot), you can acquire all the skills you want and work as hard as you can. But to win really big, you also need Lady Luck to favor you. And luck can be as capricious as they come.

But, like everything else above, you can engineer luck as well. You can expose yourself to positive luck, while limiting the downside from negative luck.

In the words of Nassim Taleb, you can be antifragile.

How do you do that?

a. Employ a barbell strategy – maintain a portfolio of low-risk / low-reward and high-risk / high-reward strategies.

Keep your day job, and try and build a side-business on the weekends. Quit your job only after the startup starts to scale. Even Craigslist was built in Craig’s spare time.

[Extra marks if you build your side business in a Power Law market. In such markets, if you do win, you’ll win huge.]

 

b. Build a strong network of ‘weak’ links – the best opportunities are at the edges of the status quo in every field. If you know people at the cutting edge in every industry, you’ll be better placed to spot and capitalize on big opportunities. Spend time with A+ people from other industries. [Note: This is also evidently the no. 1 predictor of career success].

 

c. Develop an “abundance mindset”. Look around and notice things. Be open to serendipity.

Nat Eliason has written a great primer on getting exposure to positive luck. You can also read this excellent book.


 

That’s it. Those were the lessons I learned from the 6,000+ articles I read in the last 52 weeks.

Oh, and I also learned that we’re living in a simulation. Probably. Quantum theory certainly seems to suggest so. Elon Musk thinks so. So do Scott Adams, Nick Bostrom, and a host of other tech leaders.

Oh well – hope someone’s writing a subroutine to guarantee success if we learn all these skills!

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Sometimes, good old focus can be a competitive advantage.

We constantly read about companies that have created barriers to entry – through technology, intellectual property, large-scale manufacturing, or sometimes even by throwing a ton of money at a problem. For startups, this barrier to entry is a constant refrain, especially in conversations with potential investors – “What’s your barrier to entry? What asset are you building that’s hard to replicate?”. And this is a hard question with no easy answers, especially for a young company that’s not building a high-tech, proprietary product – a bigger competitor with deeper pockets could appear at the ramparts anytime, and replicate exactly what you’re doing.

But what if just focus on a particular user segment could help you develop a competitive advantage? What if expending all efforts to serve a particular market niche or user segment could help you unearth a resilient barrier to entry?

Barrier to Entry

I read a book called ‘Good Strategy Bad Strategy’ last year and was struck by how insightful it was. I’ve revisited my notes from the book at least twice now, each time capturing a new nuance. It’s a must read for students of strategy, advisors on strategy, and practitioners. Having been all three (in that order, oddly enough), this is right up my alley.

The book had many great ideas on sources of power for companies – what gives a company lasting supremacy in its market. One idea that stayed with me was of single-minded focus – how focus on a particular type of user can be a sustainable source of power or competitive advantage. How would this work? Let’s dig in – this feels like another 1800 word post.

 

Any company’s business model has 9 different parts, as below:

Business Model

Source: Strategyzer.com

The author, Richard Rumelt, points out that to focus on a specific user segment, you need to make coordinated changes across multiple or all parts of your business model. Thus, your final offering to the customer is a sum of many moving parts that have all been finely configured – a sum that, as the cliché goes, is more than its parts. Applying such focus takes incredible coordination of policies, which, along with their interlocking and overlapping effects, can then confer unassailable advantages and make you a hard act to follow.

 

I know this seems very philosophical (a little like bad strategic advice!), so let’s look at a few examples to illustrate this better:

1. IKEA

IKEA

Rumelt uses the example of IKEA to illustrate this concept. IKEA is a furniture retailer that sells ready-to-assemble furniture. It targets do-it-yourself or DIY users, who love the feeling of putting something together. It has been hugely successful across multiple countries, but 70 years since its founding, no credible competitor has appeared or lasted. That’s sustainable competitive advantage!

IKEA has no secret sauce in terms of patented technologies for furniture, greater marketing strength, etc. The source of IKEA’s lasting advantage is, instead, the coordination between the different elements of its business model to serve its target segment. For a competitor to challenge IKEA, they don’t just have to sell ready-to-assemble furniture – they’ll have to change their whole business model.

  1. They’ll have to design new types of furniture;
  2. They’ll have to start carrying larger inventory;
  3. They’ll have to create their own, branded stores; and
  4. They’ll have to change their selling models.

Thus, copying IKEA is not a simple matter. IKEA’s policies are so different from the norm in the furniture industry that any competitor would have to replicate ALL of them to meaningfully compete for the same user segment. Adopting one or two of these policies and implementing them, even perfectly, would be useless – it would add huge expenses without providing any real competition.

2. Apple

Apple

Apple is another example. Over the years, Apple has targeted its products at premium customers who want a superior experience – well-designed products that just work. They’re not interested in the most technologically advanced products with the most bells and whistles – they want products that do their job simply and well. Oh, and there’s snob value too.

Apple has made several interdependent decisions to target this group:

  1. Complete ownership of the product: Take the iPhone. Unlike its closest competitor, Android, Apple controls the entire product – the OS, the hardware, user interface, etc. This allows it to deliver a very coordinated and quality user experience.
  2. Complete ownership of computer ecosystem: Moreover, Apple coordinates the experience across all its products. The Apple ecosystem can satisfy all your computing needs – desktop, laptop, tablet, phone and music player. All of these products follow the same design language, and work together seamlessly – they sync with each other very easily, without any need to fiddle with system settings.
  3. Branded retail stores with a luxury experience
  4. Marketing mainly to premium customers who don’t mind spending more – this not only raises product revenue, but also increases the long tail of revenue from app store downloads, music downloads via iTunes, etc.

The reason Apple’s position in the market is unassailable is that a competitor can’t just copy one or two things to start selling to the same group of customers. The competitor would have to copy everything, a formidable task even for very nimble companies. And copying sequentially won’t work – you can’t begin to deliver the Apple or IKEA value proposition without copying everything from the outset, in a coordinated manner. Which is why, even though Android and its partner OEMs have copied a lot of product design elements from Apple (in fact, the first Samsung Galaxy S was an iPhone in all but name), they haven’t been able to displace Apple from its position as the proprietor of all things cool.

Thus, the business models of IKEA and Apple are like a chain – multiple independent elements interlock to engineer a truly durable value proposition. As for a competitor, the flipside of a chain-linked model applies – your proposition is only as strong as your weakest link. Focusing on strengthening just one or two aspects of your model won’t increase your ability to compete even one bit – you need to strengthen everything, all at once.

Chain

 

Let’s try and apply this mental model of a chain to a few other sectors. Are there other companies as well, which have used focused, chain-linked business models to derive competitive advantage?

3. Wal-mart: In the 60s and 70s, Sears and Kmart dominated retail. But they mainly served large towns or cities that could ‘support’ a large retailer. Wal-mart changed the game by creating large-format stores away from cities, allowing enormous spaces at lower costs. It positioned itself as a ‘discounter’, something other players avoided like the plague. And it was able to make money while offering deep discounts, through several interlocking innovations:

  1. Extremely wide product portfolio with deep discounts on some products, cross-subsidized by other high-margin products
  2. Cutting-edge technology to track customer purchase behavior, and tailor portfolio accordingly
  3. Agile supply chain, keeping its stores well-stocked with the right products very efficiently

Thus, several innovations, all focused on offering products at the lowest prices, gave Wal-mart lasting competitive advantage. By 2002, Wal-mart was the largest retailer in the world, and Kmart was bankrupt.

4. Dell: If you wanted to buy a desktop in the US in the 80s or 90s, your only options were to either buy a standard configuration through a retailer, or buy individual PC components to customize the machine yourself. Unless you built the PC yourself, you did not get much choice in the product or configuration you wanted. Dell saw an opportunity to change this by offering customized configurations, and thereby targeting the more technologically adept consumer.

Dell took a number of hard decisions to make this happen. It created an easy to use online / phone interface for users to configure computers of their choice. It delivered this promise through a mass customizing production process, and built a direct-to-customer distribution channel. None of these decisions were easy to replicate even singly, much less in lockstep. The result – a lucrative business model that stood unchallenged during the PC boom of the 90s.

 

OK, these are standard business school case studies. Let’s look at a few newer companies.

5. Innocent: The British healthy drinks / smoothies player has built a strong position in its home market. Innocent offers health-oriented users very fresh fruit-based drinks – their promise is, zero preservatives, only natural fruit. Offering this focused proposition means a number of business model decisions – sourcing the best fruits only, producing for short shelf life, faster cold chain logistics to get the product to retailer shelves very quickly, and so on. All separate decisions, coordinated to deliver user value. Competitors have found it very hard to replicate this – Pepsico, after years of trying to compete in this market, finally bought a smaller competitor to gain a toehold.

6. Zara: Zara has carved itself a preeminent position in the ‘fresh fashion’ space. Zara’s stores are always stocked with the latest trends – Zara gets clothes from design to outlets in 10-15 days flat. And it has done this by tailoring multiple parts of its operating model to accentuate this speed:

  1. Much larger design team than other apparel brands – its 200 designers ensure a steady flow of new designs, taking advantage of the latest trends and feedback from customers.
  2. While most apparel brands manufacture in China, Zara manufactures in Europe close to its main markets – this gives it a head-start of at least 1.5-2 months.
  3. Short production runs, with limited quantities – Zara doesn’t run more than one production cycle for most of its products. If a particularly striking outfit runs out at its stores, that’s it. You won’t see it again. From a user’s point of view, this drives a purchase decision faster. If you plan to come back tomorrow to buy a dress, it may not be there.

Putting these aspects together, other brands find it very difficult to catch up with Zara – all of these are major business model revamps that are difficult to pull off, whether alone or in coordination with each other.

 

These and several other successful companies show that focus and coordination can create a massive barrier to entry and lasting competitive advantage, keeping challengers at bay for years to come. It’s a telling reminder to businesses – you don’t need cutting-edge technology or a massive fund-raise, just good old-fashioned customer service will do!


What do you think? Are there any other consequences – positive or negative – of focusing your business model on a specific user segment? Would love to hear from you – mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.

PS. I’ve just started a newsletter called The Startup Weekly with Abhishek Agarwal, a close friend, curating the most interesting articles, case studies, etc. for startups that we come across every week. Would be a good addition to your inbox (so much for conquering it). Sign up here – first issue goes out this Saturday!

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