7 Ways to Build a Market-Dominating Business

Now, most founders think competitive advantages means having better features or superior technology, but that's seldom enough because anything worth copying will be copied. The companies that dominate markets don't win by being better. They win by making competition irrelevant with unfair advantages that cannot be easily copied or bought. Today, I'm going to show you seven sources of real unfair advantages that actually compound over time and help you how to identify which ones to get started with. So it's about a year ago and I'm reviewing a pitch deck from a founder and he gets to slide 12 competitive advantages. His list has things like first mover advantage, superior technology, a great team and better user experience. And I stop him right there. None of these things are unfair advantages. The founder goes, what do you mean we launched first? Isn't that an unfair advantage? That's when I start throwing out some big names. Google wasn't first, Facebook wasn't first, and neither was Apple or Microsoft. Being first means you have to make all the expensive mistakes yourself. And that's in many cases an unfair disadvantage. Here's the brutal truth. Most things founders call competitive advantages or unfair advantages aren't advantages at all in the first place. Being first, for example, is not an unfair advantage because competitors do catch up. Better features get copied. A smarter team that you might start with is one hard to prove and two can be hired away. Also, things like superior technology gets commoditized pretty quickly. Real competitive advantages are what I prefer. Unfair advantages are things that are ideally uneconomical for competitors to compete on. There are structural positions that compound over time and create big barriers to entry. Steve, our virtual reality founder I've introduced in past videos, learned this the hard way. He had been building a virtual reality platform for architects with a bunch of impressive features. Then the big CAD players entered his space with a thousand X his budget and similar sounding features. His technology advantage vaporized immediately and he needed to start thinking about a real mode. That's when his mentor, Mary, introduced him to the seven sources of power book and the framework that I built and showed him seven ways to then build real unfair advantages from that. So let's walk through the seven sources of power and how you can turn them into startup unfair advantages. Power number one is scale economies. This is where you are able to lower your unit costs over time as you grow larger. An obvious example here is Amazon and Walmart as their distribution network has grown over time. They start realizing lower and lower costs, which becomes an unfair advantage or their competitors. Power number two is network effects. This is where your product becomes more valuable as more people start using it. Think of products like Facebook, Slack or Zoom, for examples here. Power number three is counter positioning. This is where you introduce a new business model that incumbents can't adopt because it erodes their own business model. The classic example I love to use here is how Netflix introduced no late fees on DVDs, which Blockbuster didn't want to copy because late fees represented almost half of their revenue stream. Power number four, switching costs. This is where you make it expensive or painful for customers to leave, not because you necessarily lock them into licenses they can break out of, but because customers have invested so much in making your solution work for them that it would cost a lot more in time, money and emotional effort to switch to anything else. If you're an Apple or Android user, for instance, switching from one ecosystem to another is not as simple as just going to the store and buying a new phone. There's a lot more you have invested in in apps, integrations and time that go way beyond the core product itself. Power number five, branding. I like to define this as the emotional connection you make with customers that one, reduces price sensitivity and two, increases customer loyalty. Think of a powerful brand here that you like, maybe an Apple, Nike or something else, and that's branding at work for you. Power number six is a cornered resource. This is where you have exclusive access to critical resources that others cannot easily access. This is where things like exclusive content, trade secrets and in some cases, maybe even patents in certain industries could be a deterrent for the competition. And finally, power number seven is process power. These are embedded organizational capabilities that are so unique and culturally different that they are hard to copy, even when competitors try to do so. Some examples here are the Toyota production system, Disney and Pixar. Now, as Steve looked at this list, he started brainstorming something he could do for each one of these unfair advantage sources. And that's when Mary cuts him off. You can't build all seven at one, Steve. You have to pick just one that matches your product stage and business model and then go all in. This was still too abstract and high level for Steve. And so she elaborated a bit further. When you're going up against a Goliath like these CAD companies, you can't compete on breadth of features alone. You have to pick one or two delighter features that reinforce your unique value proposition. And what you pick should ideally also represent something that these incumbents would never want to do themselves, at least initially. They leave you alone, giving you time to build out your moat. With a little more coaching, they found the exact thing for Steve's idea. Most CAD products allow architects to build very complex models. But Steve's killer delighter feature wasn't about how complex, but rather how quickly architects could create virtual reality walkthroughs with just a few pictures they take from their mobile phone. The killer use case here was doing this right in front of a client during an initial project discovery meeting. When clients see their dream concepts come alive, it creates an emotional response and many decide on the spot to hire that architect. When Steve learned that these CAD companies were getting into the VR space, his first instinct, like many founders, was to build even more features, even more powerful features. But Mary advised him against that. She told him to lean in more into your unique value proposition by embracing even more simplicity and look for ways for speeding up proof of concept virtual reality walkthroughs to make that process even faster and more seamless. That's when he got the idea of building a reusable asset library of things like furniture and appliances that architects could use to quickly build up their models. Doing an empty house walkthrough during a demo is cool, but what if you could furnish that house instantly in the style and taste of the client? That would create an even bigger emotional delighter feature. And on the back of all of this, he decided to pick network effects as his unfair advantage and got to work. Instead of building just a VR creation tool, Steve redesigned his platform around a shared library where he incentivized every architect who created VR models to share it back into the platform. And in just a short amount of time, he had built another killer feature that architects couldn't live without and one that only compounded and got better over time, creating a bigger and bigger deterrent against switching to another competitor. Now, before his unfair advantage strategy, Steve was building powerful but generic features. Once the incumbents entered his market, he couldn't win on out building them on features or out competing them on price, but after gaining clarity on his unfair advantage strategy, Steve completely changed his focus to go to extremes on delivering his unique value proposition and differentiating on something the incumbents couldn't or wouldn't want to copy. And that's what gave him the time and space needed to secure his market position by building something different, better, and something that couldn't be easily copied or bought. Now in the next section, I'll share a three-step process for identifying your unfair advantage strategy. Step number one is business model assessment. Certain business models are naturally inclined towards a certain type of unfair advantage. Products, for instance, where sharing is a natural side effect are naturally inclined towards using things like network effects. Step number two is product stage assessment. Some unfair advantages like brand, for instance, require a lot more time and often a lot more resources to develop, and so you have to also take your product stage into account. If you're a startup, for instance, you may not be able to compete head to head with an incumbent on the same brand story, but you can start with a different unfair advantage like counter-positioning and still manage to stand out. And finally, step number three is going all in. Mode building takes time, patience, and discipline. This is why it's important to ideally align it with something different and contrarian that you're already doing, like coupling network effects with speed of VR walkthroughs in the case of Steve. When you do it this way, mode building becomes a side effect of product building and compounds naturally over time, like a flywheel, which is a killer combination. Now, if you want to dive deeper into formulating your real unfair advantage strategy, consider taking the defensibility stress test in my business model design challenge. It helps you identify which of the seven powers fits your business model and stage and how to build it out and test it systematically. You can find a link in the description below. And if you're new to business modeling, you should watch this video next. It makes the case for why you should treat your business model as the true product of a startup and how to systematically start doing that step by step by starting with highest risk and then tackling your business model systematically. Thanks for watching. And until next time, take care.