Zero to One is like a manifesto for Entrepreneurs. Do check it out! I discuss a concept here that was one of my key takeaways.
Value creation & value capturing are two independent metrics. Peter Thiel said an entrepreneur creates X amount of value and captures Y percentage of it, where X and Y are independent variables. Value capturing is a different ball game all together.
Consider the airline industry which has created a lot of value, but few companies can make a profit (low value capturing). Compare this to Google that is creating lesser value, but is keeping the profits (high value capturing). Google makes so much money, that it is worth more than 3 times the value of all American airlines combined.
Hence, Thiel recommends that If you want to keep the profit and progress, you should build a monopoly that has a very unique competitive advantage where rivals can’t enter. The four keys to building a monopoly are: proprietary technology, network effects, economies of scale and branding.
Personally, I think we can also consider a new entrant — data. It is difficult to build a better recommendation engine than Spotify now because they have tons of data which has trained their algorithms.
Thiel states that all companies that enjoy a durable monopoly type dominance of a market are different. They all solve a unique problem. All failed companies are the same. They failed to escape competition.
Warren Buffet also points to a similar concept when he famously said, “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.” In the olden days, a moat was a protective water barrier that kept attackers from a castle. In today’s business, a moat is the competitive advantage that serves as a protective barrier around the business to keep competitors (attackers) at bay.
This is what Buffet said :
“So we think in terms of that moat, and the ability to keep its width and its impossibility of being crossed, as the primary criterion of a great business. And we tell our managers we want the moat widened every year…. and we want to throw crocodiles and sharks and everything else, gators, I guess, into the moat to keep away competitors.“
— — — — — —
From the desk of Aditya Khanduri
About me (Why I started Polygyan)
