Famous advice, tried on real businesses.

Last mover advantage

Peter Thiel (Stanford lecture; notes by Blake Masters) — CS183: Startup, Class 4 notes essay, 'The Last Mover Advantage' (later chapter 5 of Zero to One) (talk, 2012)

Peter Thiel: Co-founded PayPal and Palantir; Facebook's first outside investor.

Getting into a market first matters less than being the company that makes the last decisive improvement in it, after which it becomes very hard for anyone else to get in and the leader keeps the profits for years.

When it applies: You already lead a niche and are deciding whether to deepen a lasting advantage there or race into new territory.

Argues against: First-mover advantages (and disadvantages)

7 Powers: value comes only from a lasting edge

Hamilton Helmer — 7 Powers: The Foundations of Business Strategy (book, 2016)

Hamilton Helmer: Strategy adviser and investor who taught strategy at Stanford; wrote 7 Powers.

A business stays valuable only if it has 'Power': a condition that lets it keep earning more than competitors because they cannot remove the advantage. Helmer names seven sources (scale economies, network economies, counter-positioning, switching costs, branding, a cornered resource, process power) and argues each can only be built at particular stages of a company's life, after something worth protecting has been invented.

When it applies: You have something that works and need to decide which durable advantage to build before copycats arrive.

Counter-positioning: a model the incumbent can't copy without harm

Hamilton Helmer — 7 Powers: The Foundations of Business Strategy (book, 2016)

Hamilton Helmer: Strategy adviser and investor who taught strategy at Stanford; wrote 7 Powers.

A newcomer can win by adopting a better business model that the established leader could copy but sensibly won't, because doing so would eat into the leader's current profits. The leader's reluctance, not secrecy or patents, is what protects the newcomer.

When it applies: A profitable incumbent relies on something customers dislike (fees, bundles, per-seat pricing, an expensive sales channel) that a newcomer could simply leave out.

Pick cost leadership or differentiation; avoid the middle

Michael E. Porter — Competitive Strategy: Techniques for Analyzing Industries and Competitors (book, 1980)

Michael E. Porter: Harvard Business School professor whose ideas on competition shaped modern business strategy.

A firm outperforms its industry either by running at lower cost than rivals or by offering something distinctive enough to command a higher price, across the whole market or within one focused segment. Trying to be everything to everyone tends to leave a firm with neither advantage.

When it applies: You are setting your price and feature level against competitors and are tempted to be a little cheaper and a little better at the same time.

Argues against: Blue Ocean Strategy: make the competition irrelevant

Strategic inflection points (Only the Paranoid Survive)

Andrew S. Grove — Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career (book, 1996)

Andrew S. Grove: Led Intel as it became the world's biggest chipmaker; Time's 1997 Man of the Year.

Every so often a shift in technology, competition or regulation changes the basic rules of an industry. Leaders who notice it early and change course can come out stronger; those who keep running the old playbook get overtaken, so staying alert to such shifts is a core part of the job.

When it applies: Something in your market, such as a new tool, a new kind of rival or a rule change, is making your current way of operating noticeably less effective.

Argues against: Look for an enduring economic moat

Look for an enduring economic moat

Warren E. Buffett — Letter to Berkshire Hathaway shareholders (2007 annual report) (letter, 2008)

Warren E. Buffett: Investor who built Berkshire Hathaway into one of the world's most valuable companies.

“A truly great business must have an enduring “moat” that protects excellent returns on invested capital.”

High profits attract competitors, so a business is only truly great if it has a lasting barrier that keeps them out, such as being the lowest-cost producer or owning a powerful brand. A barrier that has to be rebuilt constantly, or that depends on one star person, does not count.

When it applies: You are judging whether a profitable business can stay profitable once others notice it.

Argues against: Strategic inflection points (Only the Paranoid Survive)

First-mover advantages (and disadvantages)

Marvin B. Lieberman and David B. Montgomery — First-Mover Advantages (Strategic Management Journal, vol. 9) (paper, 1988)

Marvin B. Lieberman: UCLA strategy professor who studies when being first to market pays.

Entering a market first can pay off through a lead in technology and know-how, by locking up scarce resources early, and through customers' costs of switching away later. But late entrants can copy the pioneer cheaply, wait for the market and technology to settle, and exploit a pioneer that becomes set in its ways, so being first is not automatically an advantage.

When it applies: You are deciding whether to rush into a new niche now or wait and learn from whoever goes first.

Argues against: Last mover advantage

The Network Effects Manual (NFX's map of network effect types)

NFX (The NFX Team) — The Network Effects Manual: 16 Different Network Effects (and counting) (essay, 2021)

NFX: Venture firm started by serial founders, known for its research on network effects.

“Network effects are the #1 way to create defensibility in the digital world.”

Network effects are not one thing: NFX sorts them into sixteen kinds (direct, two-sided, data, and social ones such as belief and bandwagon effects, among others) that differ a lot in strength. Work out which kind your product really has and design around the strongest one open to you, rather than assuming any network effect will protect you.

When it applies: Judging whether growth will make a product harder to copy, and which kind of network effect to design for.

Embrace, extend, extinguish

U.S. District Court for the District of Columbia (Judge Thomas Penfield Jackson), United States v. Microsoft — United States v. Microsoft Corp.: Court's Findings of Fact (paper, 1999)

U.S. v. Microsoft court: The federal court that found Microsoft illegally kept its Windows monopoly.

“incompatibility was the intended result of Microsoft's efforts.”

A dominant platform adopts an open standard its users want, adds its own features that only work on its platform, and steers developers toward them until the open, portable version loses its point. The court found Microsoft did this with Java to keep applications tied to Windows.

When it applies: A firm controls a platform that many others build on, and an open standard threatens to make that platform interchangeable.

Contested. Antitrust liability: on appeal (2001) the court held that building a faster, incompatible version was not unlawful in itself, but misleading developers about Windows-only features and exclusive contracts with software makers were illegal monopoly maintenance. It also burns developer trust and invites regulators.