Mental Models #3 | Fundamentally Different
Mental Models #3 | Fundamentally Different
Creating A Business That Is Incrementally Better Is Rarely Enough To Succeed
Our series on mental models continues with Part #3. If you haven’t read the first two, here are the links:
Mental Models #1 - The need for a lattice of mental models, Charlie Munger
Mental Models #2 - Commercial democratization as a mental model
Mental Models #3 - this post
Mental Models #4 - Ideas have no value
Mental Models #5 - coming soon
Mental Models #6 - coming soon
There are more to follow in the weeks ahead. Don’t miss them, sign up and we’ll send them directly into your inbox:
Have you ever wondered why some businesses flourish while others seem destined to fail? In his book ‘Zero to One’, Peter Thiel advises against diving into the highly commoditized restaurant industry. It’s an arena where intense competition and a plethora of dining options make it challenging for any single establishment to truly stand out. Thiel argues that many new restaurant owners mistakenly think they can differentiate themselves by serving better dishes or offering a unique dining experience. However, these slight differences seldom establish a sustainable competitive advantage. A new restaurant might initially attract crowds with its novelty, but soon another opens, drawing attention away from diners who crave the latest thing. Ultimately, restaurants often find themselves competing on price, which results in low profit margins and makes it difficult to generate significant returns. They become so focused on daily survival that long-term planning and innovation fall by the wayside.
So, how can we apply this insight to broader investment strategies?
Although "thinking outside the box" may sound cliché, it holds a crucial lesson: being successful isn’t about being incrementally better than the competition, it’s about being fundamentally different. This approach, known as counter-positioning, is a key concept in Hamilton Helmer's book ‘7 Powers’, and it has driven the growth of some of today's most successful companies.
Counter-positioning doesn’t involve offering a marginally improved version of an existing product or service. Instead, it entails creating a business model that’s radically different from the incumbent's, making it difficult, or sometimes impossible, for them to replicate.
A classic example of counter-positioning is Netflix’s disruption of Blockbuster in the late 1990s. Blockbuster was a dominant player in video rentals, with thousands of brick-and-mortar stores. Its business relied heavily on late fees, generating millions in revenue.
Netflix initially launched its assault on the industry with a mail-order DVD rental service that eliminated late fees entirely. Its model was fundamentally different from Blockbuster’s and strategically put Blockbuster in a position where it couldn’t easily adapt without jeopardizing its lucrative revenue stream.
Netflix later pivoted away from mail-order and towards streaming when broadband internet became more common. By the time Blockbuster responded, Netflix had already cemented its position as a streaming giant. Blockbuster declared bankruptcy in 2010, while Netflix evolved into a global entertainment powerhouse.
Similarly, Amazon Web Services (AWS) disrupted traditional on-premises data storage providers like Oracle by introducing a pay-as-you-go model for cloud services. While Oracle focused on selling costly hardware and software for data centers via fixed price long term contracts that were prohibitively expensive for many small and medium sized companies, AWS made enterprise-level computing accessible to businesses of all sizes without significant upfront investment (this ties in with the prior mental model discussed, democratization of good and services). Oracle recognized the threat but was unable to pivot without harming its high-margin legacy business. By the time it fully embraced cloud computing, AWS had already cemented its market leadership.
Other companies like Airbnb and Uber have also employed counter-positioning. Airbnb disrupted the hotel industry by allowing individuals to rent out their homes, enabling the company to scale without significant property investment. Uber transformed the taxi industry with a ride-sharing model that bypassed costly taxi licenses and offered dynamic pricing, reshaping the transportation sector.
By embracing fundamentally different approaches, companies can establish new market categories and become leaders. Identifying pain points, leveraging new technologies, and innovating solutions create business models that are hard for incumbents to copy.
However, disruptors must continuously evolve to avoid being disrupted themselves. They need to be ready to reinvent their business and even disrupt their own model if necessary. For example, Uber has built a strong network of drivers and customers, but the emergence of robotaxis poses a significant threat to its traditional model.
Anticipating this challenge, Uber initially pursued its own autonomous vehicle development but pivoted in 2020, selling its Advanced Technologies Group to Aurora Innovation while retaining an equity stake. Uber's strategy has since shifted toward positioning itself as a platform that integrates various robotaxi services rather than competing directly in autonomous vehicle technology. This approach allows Uber to remain relevant in the changing transportation landscape by leveraging its existing network and customer base.
By partnering with multiple autonomous vehicle companies, Uber is hedging its bets on which technologies or companies will dominate the robotaxi space. It plans to expand its collaborations with Waymo, offering driverless robotaxis in Austin and Atlanta by 2025, and with Cruise, General Motors' self-driving subsidiary, to bring Cruise's robotaxis to the Uber app in the same year. The partnership with Cruise makes strategic sense, given that GM is not primarily a technology company, making Uber's platform a complementary fit. In contrast, Waymo, as part of Alphabet (Google's parent company), has deep expertise in software and controls the Android ecosystem (72% of all smart phones), so does it really need Uber? Perhaps it will eventually acquire Uber - who knows? What do do know is that Khosrowshahi has evidenced a willingness to adapt and collaborate which is a prerequisite of surviving. He has also expressed openness to partnering with Tesla, stating he would "love" to have Tesla's robotaxis on the Uber platform, but to date Elon Musk has shown little or no interest, so this is yet another potential threat to Uber.
Ultimately, companies need to either deliver something fundamentally different or anticipate the arrival of new solutions and position themselves to benefit from the shift. It’s all about delivering additional value to the consumer and being strategically positioned to capture some of the value being created.
Ultimately, too many businesses are built around what the owner wants to provide rather than addressing customer needs. Returning to the restaurant analogy, how many people have opened a restaurant due to a desire to be a restauranter without considering if the market actually needs or wants yet another restaurant?
In contrast, Jeff Bezos launched AWS, not out of personal interest in cloud computing, but because he saw a customer need. He understood that enabling his customers to offload infrastructure management to AWS, smaller and medium sized enterprises (SMEs) would free up resource to focus more on product development and innovation. Some of the other companies mentioned in this post, including Netflix, Uber and Airbnb capitalized on the AWS offering when they were start-ups and used it as a launchpad to success. Today, AWS isn’t just about SMEs, it also serves the large and mega cap businesses.
Bezos consistently emphasized that his business was customer-centric. Every decision he made began with considering the customer's needs and then working backward from there. This approach extended beyond AWS to other segments of Amazon. Instead of requiring people to visit a store, he leveraged e-commerce to bring the store directly to them. The Kindle e-reader aimed to make books more affordable, accessible, and convenient to carry. Ultimately, it was always about prioritizing the customer’s needs.
So the next time you are looking to invest in a business, apply this mental model and ask yourself: Is this company offering something fundamentally different which will provide it with an enduring competitive edge, or is it merely aiming to be incrementally better and so likely to struggle over the long term?
If you are interested in learning about other golden threads running through the fabric of every successful business, I recommend reading ‘Fabric of Success’.
