The first is a high level of product differentiation. This is crucial
because if you are right that your new way of designing your
product is going to be loved by consumers, then either the
incumbents will copy you or new startups will follow you,
similar to what is happening to Casper.
In the case of Nest, we bet that Honeywell would have a hard
time figuring out how to build a Wi-Fi connected, batterypowered
supercomputer that connects to a cloud data science
service, does AI and machine learning on all the different
sensors built into the device, and makes intelligent decisions
about your home heating and cooling. We figured it would
take Honeywell about four years to copy Nest, and that’s
exactly what happened. It took about four years before
Honeywell had a product in the market similar to that of
Nest. Nest has already taken more than 50% of the smart
thermostat market.
A high amount of differentiation is critical, not just because
of the incumbents and challenger brands but also because of
Amazon. If you are going to sell your products through
Amazon — Amazon already has a significant number of
private label brands such as AmazonBasics — if you’re J. A.
Henckels and you sell cookware, and you’ve been selling it
through Walmart for a long time but traffic is in decline, you
are going to shift to selling on Amazon. Well, Amazon has
their own cookware lines, and guess who’s number one in
cookware on Amazon? It’s Amazon! You now compete with
the retailer, so there needs to be a high amount of product
differentiation for you to succeed.
Second, we look for zero-sum markets. These are markets
where, if you buy my product, you won’t buy my
competitor’s product. If you subscribe to Dollar Shave Club’s
razors, you will stop buying Gillette razors. We like this
because you tend to eat market share quickly, as opposed to
having to grow the market in order to demonstrate success.
Some examples of products that don’t fit this category are
apparel brands — Bonobos pants, or women’s intimate
apparel, or sock companies. They don’t fit our thesis because
if you buy Bonobos pants you can still buy Levi’s pants, and
you will never quite get the premium on the pain you are
putting on the incumbents.
The third criterion we look for is incumbents run by professional
CEOs, i.e., non-founder company leaders. This is true of
almost every legacy consumer products brand, not because
the founders got frustrated and left but because they died.
These brands have been around for fifty or a hundred years,
and when you have had a company that has been in the
market for a hundred years, you are on your third- or fourthor
fifth-generation CEO. Nothing against professional CEOs They are fantastic operators, and many of those companies
are run well. However, data shows they are super risk averse
and unlikely to self-cannibalize. Companies run by founders
— there was a Harvard Business School case study that
showed 2x or more innovation versus incumbents. We love
competing against professional CEOs. Founder-led
companies tend to be the most innovative and risk-taking.
Finally, we like products that improve over time. We look for
products that are different from the way products have been
built in the past. Products that observe data about their use
and perform some machine learning. The products are able
to either download software updates or change their usage
based on what they learn about a customer. This is different
from the way legacy consumer products are built — they are
constructed in a lab for a year or two, some focus groups are
bought in used to figure out if consumers will like it. They
name it, ship it to retailers, and the product enters the market.
Notes taken from the Manaul of ideas.
No comments:
Post a Comment