“But where the titans of twentieth century industry could build competitive advantage in a number of ways — owning intellectual property, building a brand, deriving scale cost advantages, and the network effect, for example — most young companies today can only afford the last option. The nature of interface-driven innovation is that many of the old competitive advantages don’t work. The byproduct of the massive investment required to building cars and turbines was an increasing market dominance with each sale. Each closed deal spread the fixed costs of protecting patents, building a brand, and manufacturing equipment, thereby making it harder for new entrants to compete.
But today, consumer web startups have no such advantages. They must quickly create habitual users and build a network effect before their competitors do; it’s their only hope. Software production doesn’t offer scale cost advantages, the patent system is a mess startups can’t afford to navigate, and spending on branding prematurely is foolish. Only after a network effect business has secured its place in users’ everyday lives does it make sense to build its brand through advertising. Twitter’s recent foray into television commercials promoting its NASCAR partnership is a good example.
Though we’re living through an age when new insights about user behavior abound, the methods for building a long-term business advantage has narrowed. The kind of secrets that build big businesses today must support a plan to build a network effect business. Without a network effect strategy, secrets don’t stay valuable for long.
Here’s the gist:
– A secret is at the core of every big innovation.
– Entrepreneurs should focus on discovering secrets about human behavior, which are cheap to discover but can have a massive impact.
– Behavioral secrets are plentiful whenever major changes in interface occur.
– For startups, secrets need to quickly turn behavioral insights into network effects to sustain competitive advantage.”