I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, Tesla versus Neo and why first mover advantages can kinda suck in technology sometimes. Now this podcast is really a continuation of podcast 58 which was introduction to tech innovation. Talked a little bit about Android and… Elon Musk and some McKinsey frameworks, things like that, just sort of laying out the language to start to talk about innovation because it’s obviously a super important subject. But you know, people talk about it in very fuzzy terms. You know, it’s surprisingly vague for such a big topic. Now I’m looking at this from just… the strategic point of view, how this factors into a business model, a game plan, and things like that. Not all the mechanics of how you actually do innovation, which is a whole other subject of which I am not an expert by any stretch. And I thought two companies that would be good to talk about were Tesla versus NIO, the two EV electric vehicle, autonomous vehicle companies, one from China, one from the US, which is really, I mean, they’re both in the tech innovation business. And a couple concepts that go along with this, particularly first mover advantage, which people generally think is a pretty awesome thing. It’s not true. Well, it is true, but like most things, it’s very good up into a point and then becomes not so good at a point. Everything has a limit, you know. Trees don’t grow to the sky. The best things only work within a range. I gave a previous talk on why network effects can suck sometimes. So it’s good to know both the idea and also what its limits are. Both of those things actually tend to be important. Okay, now for those of you who are subscribers, this is all gonna go under Learning Goal 32, which is Innovation, Adaptation, and Resilience as Competitive Strategy, which is a terrible name for a learning goal. It’s not good. But we are sort of reframing all the content and making it a lot more understandable, searchable, things like that, so you should be seeing that. But that’s where it goes, generally speaking, Learning Goal 32. Now for those of you who aren’t subscribers, you might consider doing that. Go over to jefftowson.com. You can sign up there for a 30-day free trial. We’re mostly focused in terms of the subscriptions, the emails, things like that on investment, tech investment in Asia, China, things like that. The last week has been me writing kind of a lot about Farfetch and why I think that’s kind of an interesting investment idea to take apart. So we’ll kind of do most of that on the email side and the podcasts are gonna stay more general. Okay, and in line with that, a quick disclaimer, nothing in this podcast is investment advice. The information and opinions expressed from me or any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate over time. Overall, investment is risky. Do your own research. This is not investment advice. Okay. On to the subject. Now there’s gonna be a little bit of theory in this, companies and sort of theory concepts, that’s usually how I balance these out. The ideas that I kinda want you to pay attention to is one, the idea of first mover advantage. People say this all the time. Nobody ever talks about first mover disadvantage. That’s actually really important. It’s like network effects. Everyone talks about network effects. No one ever talks about reverse network effects, which is basically the same thing going the other direction, which is bad. First mover can create really big disadvantages. We’re gonna talk a little bit about path dependency, resource-based competition, and then core competency. So sort of four ideas for today. Now, NIO versus Tesla. NIO’s an interesting company. For those of you who aren’t familiar, I mean, I think most everyone’s familiar with Tesla, obviously. You know, NIO was basically, at least at the beginning, pretty clear copy of Tesla. Tesla founded in 2002, 2003. He’s been at this for a long, long time. NIO started in 2014 in Shanghai by William Lee, who has a long history in auto, bit auto, Next.EV. He’s been very involved in auto for a long time. Pretty much copied the Tesla playbook in the sense that it’s going to be an autonomous vehicle, an electric vehicle. Probably not charging stations, more swappable batteries. Came out originally with a premium vehicle, high end price, get to scale, and then move down to lower and lower prices over time, which is pretty much the Tesla playbook, right? But they sort of ramped up pretty fast, raised a ridiculous amount of money from pretty much everyone who’s anyone in China investment wise. Tencent, Tomasac, Tomasac’s Singapore, Baidu, Sequoia, Lenovo, TPG, you know. All the big heavy hitters put a large amount of money into this company, launched it, for those of you who aren’t familiar with auto in China. I’m not an auto expert in China by any stretch, although I have followed it for a long, long time. You know, auto in China has traditionally followed city governments. So when GM, General Motors, and let’s say Volkswagen came to China, they came by joint venture, which was required at that time. Volkswagen very early on, mid to late 1980s, did a joint venture with SAIC, which is the state-owned entity associated with the Shanghai government to basically start building cars and the entire supply chain. So 50-50 JV Volkswagen SAIC. And then SAIC did a lot of other joint ventures with Bosch and auto supply companies. And they had to build out the whole thing. And they were ridiculously successful as an initiative because within 10, 15 years, 90 plus percent of all the auto parts being used in the supply chain for these cars were being produced locally. So they did actually create an entire supply chain for automobiles that didn’t exist. GM comes in about a decade after Volkswagen does another 50-50 joint venture with SAIC, and then you have sort of those two companies under that umbrella. They also sort of did their own standalone passenger vehicle. Now contrast that to say Fiat, which pretty much came in the same way, 50-50 joint venture, about the same time as GM, but they partnered with Nanjing. And Nanjing, obviously a much smaller city. You know, this is sort of top tier dance partners versus second tier dance partners, because you had to have a partnership. That didn’t go well at all, sort of crashed and burned famously. Eventually the whole thing got absorbed into SAIC, and then, you know, Fiat’s been floating around. Ford came in later, but there’s this long history of joint ventures between foreign automakers and these major municipal centers, Beijing, Shanghai, Guangzhou. and that was the model for a long time. Underneath that you saw sort of wholly owned Chinese companies, Great Wall, Geely, generally coming in at economy car level versus these joint ventures, which were more sedans, premium SUV. And there’s always been a bit of a fight between are the wholly owned Chinese companies gonna move up market from economy vehicles? Or are the joint ventures gonna move down market from premium and sedan? And it looks like the joint venture companies are generally winning that fight overall. But it’s kind of a moving situation. Okay, now against that, we start to see, so anyways, the point of that was, look, this is very much a partnership with government. There are certain sectors that you play in China that you can do sort of independent, private company, you’re in the beer business, whatever. even if it’s state-owned like yinjing beijing yinjing beer uh… china resources snow even those which are technically state-owned they’re commercial entities so the state-owned designation doesn’t necessarily mean anything what matters is does the role of the state matter does the state take an active role beyond just a regulator and in automobiles that is absolutely the case they are very concerned with creating domestic companies that can compete in automobiles. In other sectors not so much. Okay so against that when you see a company like NIO jump up and sort of try and claim the mantle, there’s a couple companies like this, of China’s first wholly-owned autonomous electric vehicle. You’ve got to understand even though this is a private company this is very much the state has a lot of interest in this. and you would expect the capital to flow quite liberally through various mechanisms to get in there. So you can’t view this as a purely private, or let me rephrase that, you can’t view this as a purely private endeavor. The company can be private, but there are a lot of other objectives here coming from the state at the local level, regional level, and domestic level. Okay, so not surprising to see all this capital flowing into the company at all. public pretty quick so you can you can pull their 10k off the new york stock exchange is pretty interesting uh… lots of rounds of funding uh… lots of losses and they’re basically doing if you know a build out and this is a huge endeavor you gotta build the cars you gotta get the software you gotta get the autonomous driving uh… systems running you need to build the batteries you need to build service stations all over the country that can repair these things you need to sell them There is the question of is there gonna be charging stations like Tesla’s doing, which would be another thing you have to build. Or you’re gonna swap out the batteries, which appears to be their approach. Multiple models that they’ve launched out. I mean the EP9, the EC6, the ES6, the ES8. The names are not terribly exciting. New models on the way, ES3, ET5, blah blah blah. Sedan, sedan, SUV, minivan. roadster sports car, I mean the full suite of cars. And overall when you look at the sales, to date cumulatively, 50,000 more or less. Compare that to Tesla, sales to date cumulatively, about a million. So this raises the idea of, okay, first mover advantage, seems like a good thing, seems like Tesla got out there first. Tesla is now selling in China. There’s a couple competitors happening in China. Obviously there’s NIO, there’s XPeng. I’ve never really known how to pronounce that one. X-P-E-N-G. Tesla is there. I mean, there’s a couple, but this is the one people watch. Also, is the fact that they are behind Tesla a disadvantage or like the Tesla has the first mover advantage or is that actually an advantage? That’s kind of the question today. First murder advantage versus disadvantage. And auto sales and EV sales in China are kind of, you know, they’re really important at all of this because China’s the auto market everyone’s watching. I mean, it surpassed the U.S. in total car sales back in about 2010, depending on what you’re counting as a vehicle. You know, China’s up at the 20 million, $22 million, 22 million, you know, cars per year sold. U.S. closer to 16, 17, something like that. But then when you look at growth, when you look at all the people in China, all the people moving into the middle class, disproportionately the growth is gonna be from there, and in particular for electric vehicles. So there’s a reason why Tesla’s in China. Everyone knows this is gonna be a must-have market for electric vehicles, probably. So kind of a must-win scenario. Electric vehicles are very small. couple million in China right now. So even though those numbers I set up 50,000, you know, they’re small, but the whole market’s pretty small right now, EV, but it’s gonna be big. Now I’m not gonna go through the financials for NIO because they’re basically lots and lots of spending, lots and lots of losses. The whole thing hinges on getting these cars to work, which is a huge challenge, and then getting adoption and sales. And if that line starts to go up, all the financials will look good. If that line doesn’t go up, it’s red ink as far as the eye can see. Now reading the 10K of Tesla is, it’s just one of the most fun things ever to do. It’s such an interesting company. And within this topic of first mover advantages and disadvantages, take a look at the risk section of Tesla’s 10K. Like I don’t know how Elon Musk sleeps at night. Reading this. Like it’s just one risk after the next. I couldn’t sleep at night if I had one or two of these. And the list goes on for pages and pages. And they’ve got so much debt and other things. Like if any of these risks happen, you know, this is a high risk business or at least approach. Now, if the sales go up, then the whole thing looks amazing. But you know, it reminds me of someone like walking between two skyscrapers on a tightrope. and just hoping no wins happen. You know, one slip and you’re off. So what it looks like, hey, I’ll read you some of the risks. Like this is from a 10K from about a year and a half ago. Okay, risks, delays or complications in the design manufacturing launch production of new models. With the model three, the timing and the costs. No experience in big volume manufacturing. Most suppliers are single source. Mass market adoption of electric vehicles may not happen. Depends on perception. It depends on the limited range of the vehicles. It depends on regulation. It depends on gas prices. It depends on the availability of charging stations. Next page of risk. The gigafactory. That could experience delays, battery cell production. could have problems. Any of these things could have defects. The manufacturing cost targets may not be met. They are highly dependent on a small number, 3-4 products. Batteries do tend to catch on fire from time to time. By the way, none of these are exact quotes from the 10k. This is my own sort of interpretation, my opinion. The cost and availability of lithium, which is used in the batteries, competition both by new technology companies as well as the big existing automakers, the cost of opening all these physical stores, charging stations and service stations, the risks of vehicle financing, the company has some degree of dependence on government regulations, union activity, product recalls, the risks of leasing and resale guarantees, warranties. cyber attacks on the software, unauthorized control of the vehicles, the debt of the company, the cost to upgrade the manufacturing facilities. I mean, it’s really an impressive list of things that could go wrong. The scope of what Tesla is doing is amazing. I mean, it is, as he has said many times, this is the first… attempt to launch a new auto company in the US in 60 years. It’s a massive endeavor. So does Tesla have a first mover advantage or do they have a host of first mover disadvantages they’re struggling to overcome and maybe the best strategy is not to be number one it’s to be number two. I’ll take you through some of the theory on that. So how to think about first mover. And first mover in technology, here’s the first point, first mover in technology is very different than first mover in other things. Product companies, service companies, even basic software companies. I mean, most mobile apps are pretty basic software. A first mover in a more tech intensive business is a different thing. So we’re really talking about, you know, serious innovation here and how that relates to first mover. Now in the previous podcast, I cited a bunch of stuff from an NYU professor named Melissa Schilling, who is really, I mean, she does technology management courses, she writes textbooks on this stuff, very, very good thinker about this stuff. A lot of the theory I’m gonna give you is from her and to Alessio de Gates from McKinsey. So I don’t want to take credit for that. This is not my thinking, some of it is, but. a lot of it’s McKinsey and Professor Schilling. All right, what are the advantage, oh here’s the four ideas just to recap. First mover, advantages and disadvantages. Path dependency, resource-based competition, core competency. All right, what are the advantages? If you’re in a tech field, Neo, Tesla, Intel, any of these things where, you know, it’s a lot more than just building an app. What are the first mover advantages? Okay, now I generally put first mover as a serious advantage in certain ways and then there are some soft advantages. The one I tend to put first on my list is it’s what I call a temporary supply demand imbalance. Look, if you’re out ahead of everybody and you get there first, you get a window of time where the demand is probably larger than the supply and you can premium price. And that’s a nice scenario. It doesn’t last forever, but while it does last, it’s a pretty serious advantage. So I call that the sort of temporary supply, demand and balance. That could be you’re a beer company like Carlsberg and you get out to Kunming first, which they did. And for a while you were one of the few premium beer companies there and you did quite well. And sometimes it takes. companies quite a while to come and catch up. So that imbalance can last for quite a while sometimes. We saw this in the US a couple years ago with hedge funds. We’re doing this in pharmaceuticals where they would, they would find some, you know, generic drug that was off patent, but one person had the facility or the license for it. And they would buy it up and then goose the prices way up. Sometimes obscenely high. you know, a thousand percent price increase, and everyone would scream and yell, and then other companies would jump in and start creating the same drug, because it was off patent, but it would often take a year or two before those companies could get up to production. So they had a window of time where they made a killing. And it’s a pretty despicable behavior overall, but you do see that happen from time to time. Okay, if you get there first in a technology, especially a difficult one, and I think Tesla has this right now, There’s going to be a period of time where the demand could be higher than the supply because people can’t do it yet. It takes them time. That can get you some degree of pricing power, extra profits. I always look for this in companies. I think it’s a pretty attractive scenario. I think it’s a big advantage. I don’t think it lasts too long, but that’s okay. You know, a lot of stuff doesn’t last very long. Doesn’t mean it’s not good. Okay. So that’s sort of a first big serious advantage if you’re a first mover in technology. A second one is one I talked about in the previous podcast, 58, which was the increasing returns to scale of technology that when you get there first in technology, usually the performance does increase. I spoke about two different S-curves. One is the S-curve of performance of a new technology and the other is the S-curve of adoption and these things are different, although people get them confused a lot. When you introduce a new technology. usually the performance increases with your experience. And it follows an S-curve. It goes flat for a while, then it starts to accelerate, then it flattens out at the maximum performance possible with this particular technology. So if you get there first, often you will be able to deliver superior performance versus others. Now they will catch up, but that is actually kind of an important thing we see in tech. A more powerful version of this is what I talked about with Android was sometimes you’re competing in innovation at the component level. I can make better batteries for the smartphone. And another times you’re competing for the architecture. And often one or two companies will win the fight to become the dominant design. You know, Android and iOS are the dominant design for the smartphone system. Once the dominant design is established, then everyone competes at the component level. So if you win that race and you get there first and you become the dominant design, the market can collapse to you and that’s just the way it is. That’s pretty powerful. Intel had that, Android has that, the smartphone, iOS has that. Anyway, so that’s a big advantage for getting there first in tech. A more simple one, switching costs. If you’re creating ERP systems and you get there first and you sign up 20 companies to your ERP system and lock them in, you’ve pretty much closed the door to everyone else. So get there first, get people hooked on your system, and then even if someone comes along, those switching costs are gonna sort of keep them out to some degree. That’s a pretty great one. The example that Professor Schilling gave was the keyboard. Did he say QWERTY? Q-W-E-R-T-Y, you know how the keys are laid out in English on a keyboard. That is in no way the most efficient way to type. In fact, it’s pretty ridiculous the way the keys are laid out and where the letters are. But that was the first mover and everyone got used to typing that way and even when better designs for keyboards came out, nobody switched. Switching costs. Okay, two other big advantages you can see with FirstMover is network effects and learning effects. Now these are specific to certain companies. If you’re in a business that has network effects, platform business model, Facebook, things like that, and you are the first mover, that’s a big deal. It can collapse the market to one or two players very quickly because of the network effect. More people use this, therefore the product or service is inherently better. And then learning effects will be the same one. Okay, what are the advantages of FirstMover? The big five in my view, temporary supply demand imbalance, increasing returns to scale, switching costs, network effects, learning effects. That’s kind of my short list. Now there are some softer advantages if you get there first. I think you can see Tesla has some of these. Definitely Tesla has a bunch of the ones I just mentioned. They do have the temporary supply demand imbalance. They definitely have returns to scale. uh… switching costs not as much network effects and kind of in some of their software that’s more of a software thing than a car thing and i think they have learning effects in terms of autonomous vehicles but there are softer advantages here’s three of them brand loyalty all of these are in the show notes by the way brand loyalty When you ask someone about autonomous vehicles or electric vehicles, everybody thinks Tesla. They have become popular. People love them. They really like that car. So if you get there first, even if it’s not a tech company, you can get some brand loyalty going depending on what you’re selling. So even when the competitors enter, people don’t switch. Technological leadership is another one. your company becomes synonymous with this technology. Tesla to a large degree is synonymous with the idea of an electric vehicle. I mean we aren’t calling all electric vehicles Teslas yet, but you know you do see that in some companies the you know the tech becomes named after the first company. Now one of the more important things and I think Steve Jobs was very very good at this is when you’re the tech leader you create the iPod, you create the iPad, you create the smartphone, you get to sort of shape how consumers see the products and what these products should have. What is the appropriate pricing? What features should be standard? What are the characteristics of an iPod or an iPad? Well, Steve Jobs pretty much set those in consumers’ brains and everyone who came after that pretty much had to mimic. his pricing structure, what it can do, how it behaves. And he did that throughout his whole career. He did that with the Mac early on, he did it with the Apple II. He was very good at sort of shaping consumer expectations about consumer electronics. That’s pretty good. Other aspects of tech leadership, oftentimes you just get a bunch of patents. You’re ahead of everybody on the tech side, you start patenting everything you’re doing. Now maybe they can copy it, but they got to pay you probably. Last one and this is from Professor Schilling, which I’m don’t know if I buy this one, but you can preempt scarce assets and technology. You know, if you’re a cable company or you’re a mobile company and you get there first and then you buy the spectrum licenses. Well, once you have those scarce assets, it’s hard for someone else to get in because there isn’t an unlimited amount of spectrum. and the government tends to have auctions and you get those and you’ve got it. If you lay the cables in the road, it’s pretty hard for people to come in later and do the same thing, so sometimes you can get that sort of thing. So there’s some soft advantages, brand loyalty, technological leadership, and scarce assets and technology. Overall, I’ve given you about seven advantages to being a first mover in the tech world. And I think if we look at a lot of the leaders, Intel, Tesla, things like that, pretty much a lot of the stuff Steve Jobs did. We can see quite a few of them on that list. Okay, let’s talk about the disadvantages, because this is the stuff I think people don’t talk about very much. If you’re a first mover in a tech field, innovation intensive field, what are the big disadvantages? There’s a ton of them. I mean, it’s a daunting list. It’s like that Tesla risk list. First one, failure rate. Failure rate is super high. I mean, it’s really difficult to invent new stuff. There’s this idea of, do you wanna be the technology pioneer or do you wanna be the early market leader? And you always wanna be the early market leader. You don’t wanna be the person who invented it. You wanna be the person who took it to market first and got it, you know. Steve Jobs, you know, he went to Xerox PARC famously, saw what they had invented. They were the tech leaders, not him. and they saw the graphical user interface and the mouse and all of that stuff they had. And then he took it to market. That’s the position you really wanna be in. You know, inventing new tech is really hard. One, it’s difficult and two, it’s super expensive. I mean, the R&D expenses are massive. And if you’re the first mover, the tech pioneer, you are bearing the brunt of this expense. All the successful work, okay, you had to pay for that, but you had to pay for all the unsuccessful work, all the unsuccessful projects, everything that failed. You know, the second mover, the fast follower, doesn’t have to pay for any of that unsuccessful stuff. Now they have to sort of do the R&D on the successful product, but right off the bat, they eliminate all the failures in terms of a cost. You come up with this R&D to develop something new, then you gotta figure out all the production processes to make it. I mean, it’s not just the product. How are we gonna make it at scale? That’s what the Tesla 10K is talking about. It’s all the manufacturing problems and how to create all that. What if you’re gonna have complimentary goods? You know, what if it’s an iPhone? You gotta get people to make apps. Well, the first, now there’s a bunch of apps on the phone. But when the iPhone first launched, there weren’t any other apps. So you have to kind of pay for those sometimes too and Apple did that. I mean, a lot of the first apps on the iPhone, they had to develop those in-house. So you’ve got the cost of the R&D for your successful project, you’ve got the cost of R&D for all your unsuccessful projects, you’ve got the cost of production, ramping that up to scale, you’ve got the cost of all the complimentary goods, you’ve probably gotta launch those in-house early on. And the failure rate’s super high, so it’s super expensive and it’s super risky. That doesn’t sound awesome to me. And that’s just the part you’re doing in-house. What about the stuff you’re not doing in-house? You may manufacture certain things in-house, but you’ve gotta get the supply for those processes. So maybe you need lithium, maybe you need batteries, maybe you need Panasonic to make your screens for the inside of your car. Okay, those supplier issues, you’re probably gonna have to pay for those as well, because the supplier, well, you’re gonna have to work with the suppliers. It’s gonna take time, because those things probably don’t exist either. and then you get the supply, you do all your manufacturing, you do all that, and then you go down to market. Well, the distributors probably don’t exist either. The distribution channels aren’t there yet either, so maybe you have to open stores, which Tesla’s doing. Maybe you have to open all those service centers because if a car breaks down, nobody else can fix them yet. So supplier side, in-house, manufacturing, R&D, distribution, if your first mover, You’re probably paying or at least having to work to get all of that developed. And you can really see that in what Tesla is doing right now. Let’s say you get all of that done. Okay. Then you have the adoption problem. You finally got your cars done. You got to get consumers to adopt these things or customers to adopt these things. Well, they got to become aware of it. If it’s a new product, they probably don’t know much about it. It helps if you’re famous, but That’s not usually the case. So you’ve got a consumer awareness issue. You’ve got to educate people on what this thing is. That takes a ton of time and money. And if you’re a first mover, you’ve got to do all of that. Now, if you’re a second mover, you didn’t have to do any of that. You probably let the other person do that. By the time you get to the market, consumers are already aware of what’s going on. They already understand the product. They’ve been educated. The distribution channels probably exist. The suppliers have probably ramped up. You know, that path looks a lot nicer to me. People sort of like to throw stones at Huawei because Huawei was a famous fast follower. All these base stations and products, from their founding in 1988-ish, up until about 2011 or 12, they were mostly a tech fast follower. They let Ericsson and Nokia and these other companies develop everything. sort of convinced the market and then they just came out and made cheaper and eventually better ones and they get criticized for this. I’m like dude that sounds like a really smart strategy to me. I’d far rather be the fast follower in technology. Now their challenges, they’re becoming the leader and this is kind of what I’ve talked to them about was you know how you gonna transition to being leader because that’s a much more difficult position. It’s like when you’re running the race. And there’s always the sprinter who’s out front, who’s bearing the wind in their face, and you just wanna sort of get in their glide path off their right shoulder and sort of draft behind them. I always like to be the person that’s drafting. Another big advantage is enabling technologies. If you’re in tech, you’re probably not doing a standalone product. You’re probably dependent on components. You’re probably dependent on the architecture. A lot of those things may not be ready. They may not be in place yet. When we talk about Pinduoduo, what jumps out at me about Pinduoduo is how they nailed the timing. And all the enabling technologies were already in place when they launched. Like if you’re Pinduoduo and you wanna start selling cheap stuff through group buying on WeChat, the logistics of China was already in place by the time they launched. So was WeChat paid? So was WeChat, so was the ability to go direct to manufacturers, all of those things had just fallen into place a couple years before. So all that kind of enabling tech was there. If you’re doing automobiles, you need the service centers, you need gas, you need roads. If you’re doing computers, you need software. If you’re doing cameras, you need film. You know, there’s a lot of sort of complimentary tech and infrastructure that has to be in place. And if you’ve got If you’re a first mover, there’s probably not a lot of that there. Cars actually did a little better than most tech because back in the 1920s when this all came out, roads already existed because of horses and a lot of farmers already sold gasoline. So kind of the gas stations and roads were already there. But there was a lot of other tech that had to be. Now let’s say you managed to get through all of that. And I find that list pretty daunting. You go to market and your biggest problem then is it’s not clear what consumers want or customers want. The product requirements, what the customers are gonna use this thing for, you’re probably flying blind at that point. So it is super easy to go to a market with the wrong features and the wrong price. you can’t pull them and say, what are you gonna use this for? They probably don’t know yet. It’s not until it’s out in the market that this is gonna kind of reveal itself. And the examples that Professor Schilling mentioned, which I thought were quite good, was this idea of when e-commerce began, everyone thought music and video were gonna be a big part of e-commerce, that when you went online, you need to have all the tech that could show videos on the screen and music. And that’s, so there’s a lot of effort went into that. Turns out consumers didn’t care about that in the slightest. You know, people were wrong. The counter example is like the Sony PlayStation. When that was launched, it was kind of considered ridiculous that you could play DVDs and CDs on your Sony PlayStation. It’s like, well, why would you do that? This is for video games. Turns out consumers really liked it. because it gave them one less device they had to put in their living room. So one of the biggest disadvantages the first mover have is the customer preferences haven’t really revealed themselves. They haven’t evolved and become stabilized and accepted. There’s a lot of sort of chaos and churn and experimentation at that first thing. Now, if you’re second, you’re coming into a market where the market is, it’s not only clear, but you can design from day one a market you already understand. So you may very well have a product that is far better suited to the market than the first mover. So here’s a list, this is from Professor Schilling’s textbook, of sort of famous tech inventions, the first mover versus the sort of notable follower and then who won. So let’s say the first video camera, the 8mm video camera, first mover was Kodak. Who won? Sony, follower. Well, and some others, but basically the followers won. Instant camera, who invented first mover Polaroid? Who was the follower? Kodak. Okay, Polaroid did pretty well actually, they kind of were the winner. Microsoft, who was the first mover? Intel, for sure. Who came later? AMD. Okay, Intel kind of won. Personal computer operating system, first mover, Digital Research. Fast follower, notable follower, Microsoft. We all know who won that. Smartphone, first mover, IBM. Who won that? Apple, Android, Nokia, things like that. First social networking site, 60degrees.com. Who won? Facebook. A spreadsheet, anyone remember VisitCalc? That was first mover. Lotus Excel Win. First video game console, Magnavox. Who won? Atari, Nintendo, Sony. web browser, the mosaic, I actually remember the mosaic. I just, when I was at Stanford, the mosaic had just come out. It was when the web just emerged. And I remember thinking, like, that’s a cool name for a company, mosaic. Anyways, who won? Netscape, Microsoft. Word processing, MicroPro, they were first mover. WordPerfect, MS Word 1, and so on and so on. I mean, it’s, so I guess my question for you. Would you rather be Tesla or NIO? I mean, when I first presented it, it was like, oh, Tesla’s awesome, NIO’s way behind. I don’t know, maybe NIO on the ground in China with all the big resources and support in what will likely be the largest market, maybe they’re the best positioned in this situation. Now, factors that impact timing. This is not really my area. Venture capitalists are awesome at this. Like, you know, their standard mantra I always hear from them is the factor that matters most is timing. It’s not management, it’s not market size. Number one is always timing that determines returns. Couple of things I thought were interesting in timing. When do the customer needs become known? And when does the tech become sufficiently developed? Because you’ve got to kind of hit both of those at the same time. Do you know the customer preferences? If you don’t, I would tend to think you would want to wait. What is the state of the enabling or required technology or infrastructure? If it’s not in place, probably better to go later because that’s going to be kind of a big hurdle to get that going. What is the risk of a competitor jumping in after you? Are there major players on the horizon? Now, if you’re Tesla, even though you have all those disadvantages I just said, unclear customer preferences, enabling technologies totally underdeveloped, but you know you have GM, Toyota, and all of these major players that are gonna come after this space. So in that case, it’s like, look. We can’t go slow, we have to get as far ahead as we can while we can, they have the capital, they have a lot of scale, they have customers. So you have to think about sort of the threat of competitive entry. Does your industry exhibit increasing returns to scale? Does it have that big payoff where our cars are significantly better because we’ve been doing this five years longer than you? It looks like with self-driving that is in fact the case that the Teslas are way ahead in self-driving because their tech is further down the field. And there are network effects involved in the AI to drive cars. The more people that drive Teslas, the smarter the whole system is getting. We call that a data network effect or a learning advantage. How big are your resources? If you’re a big, well-capitalized company with deep pockets, okay, you can afford to go early. I mean, it’s one of your big strengths. You could spend years going after this. Hallway’s able to do that now. They can expend a lot of resources knowing that this tech is gonna be ready in five to eight years, and smaller firms can’t do that. And then there’s the Steve Jobs or now the Elon Musk effect. Does your rep… Does your reputation reduce the uncertainty with customers? Are you able to shape customer preferences and sort of take away a lot of those problems just by sort of force of personality? When Steve Jobs said, these are the features we’re going to have, we don’t do market studies, customers just kind of said, okay, if Steve likes it, it’s okay. When Elon Musk says our cars are going to work, that wipes out a lot of the uncertainty. on the customer side and on the supplier side and on the distributor side and all these other partners you have to convince that go along with you. If it’s a major presence like that they are probably more willing to say okay we’ll go with you. All right I think that’s most of what I wanted to sort of bring up about sort of the advantages and disadvantages of being first mover. There’s quite a bit there. I mean there’s a lot of factors. I mean I’ll put the list in the show notes and on the web page so you can kind of you know. I think you just have to run the checklist. I mean that’s beyond what I can remember off the top of my head, so I just keep lists and I run them. Now there’s two other ideas I want to touch on briefly which I think are related and kind of important. The first is path dependency. this is kind of an interesting strategy idea that like what you’re able to do depends on where you are and what you’ve done previously you know the technology you can create it doesn’t happen in a one-off it’s it depends on the path you’ve taken so the fact that steve jobs built the operating system at next computers that’s what he basically put into the max when he went back to apple and it’s a large part to why they sort of bought next was to get that operating system. And then he launched the iPod. Well the iPod sort of became to some degree the guts of the iPhone and the iPad and one lets you do the next. And the App Store emerged and iTunes evolved and the operating system emerged. And now they’ve gotten all the way to the point where they’re making their own semiconductors. which was a long, long path to get to that point. So you kind of have to look at Apple as this really 20 year journey of development with each stage building off the previous stage. So this whole innovation question to a large degree is path dependent. And I think you can see this on things like Alibaba. You can definitely see it in Tesla. So this static view. of innovation and competition is not really that true too much. When I talk about competitive advantages, I’m largely talking about a snapshot in time that you have switching costs versus competitor X. But that is kind of a static view. You have to kind of look at the development over time that got you to that point. So anyways, that’s kind of an important thing to think about. The related idea, which is a whole field of thought, is what they call resource-based competition. The resource view of competition. I like to talk about competition in terms of competitive advantage. I can do things you can’t do. I am capable of doing activities within a value chain that a competitor cannot do as well at the same price, at the same pricing, whatever, at the same cost structure. Okay. Those activities are a reflection of the resources I have assembled. It’s like the other side of the coin. Before I can offer you a pair of glasses cheaper than a competitor because I have economies of scale in my factory, I had to actually build the factory. The resources, the balance sheet, tangible and intangible assets, that resource view is what gives me the ability to do activities. that we would then call a competitive advantage. So resources and competitive advantage are sort of two sides to the same coin. Okay. But resources also sort of develop along a path. So I put these things in the same bucket in my brain of path dependency and this resource-based view of competition. There’s a lot of big thinkers that talk about resource-based competition and. the idea that it’s something that happens over time. So you build resources, that gets you a competitive advantage. And the question is, can someone replicate your resources and therefore have your same abilities? For those of you who do my valuation class, this is reproduction value. We talk about what it would take to reproduce all the brand loyalty Coca-Cola has built up over 30, 50 years. That would be a resource view of, critical intangible assets. Some resources are pretty easy to think about. Okay, you have a factory, how much would it cost me to replicate a factory and then sort of eat the losses while I get up to scale in terms of volume? I could put a number on that. Some resources, it’s not about the cost, it’s about the difficulty. This is one of my standard questions when I look at companies is, what is the cost and or difficulty? of a well-run competitor replicating your resources. Cost, I’d have to build a factory, that would cost me money, and then I would have to operate at losses until my volume matches yours. That would be a cost, I can get that number. But other resources, you can’t put a number on it. It’s more about the difficulty of replicating it. The words you’ll hear tossed around here are the one I just mentioned, path-dependent resources, where you don’t have to just replicate. what Steve Jobs or Apple is doing this year, you have to replicate the whole path by which the resources were created. There’s a time aspect that’s actually kind of hard to replicate. I probably can’t replicate the brand value within people’s brains of Coca-Cola by spending in one year. I would actually have to replicate the time and years that it took to build that. So there’s almost like a time constraint or a time requirement that makes that very difficult to replicate and throwing money at it ain’t going to do it. Some resources, you’ll hear this phrase a lot, tacit resources. Tacit meaning it’s hard to actually write down and explain the resource. You know, if we have a lot of expertise in semiconductors, semiconductor companies like Intel, AMD, they have tacit resources, which is it’s not like you can just write it down how to make semiconductors. It’s such an advanced level of knowledge. that is in people’s brains, you can’t write it down and say, here’s the playbook. That kind of advanced knowledge, other types of intangible resources that are hard to sort of codify, we would call those tacit resources. Those are pretty important. It’s one of the reasons people have such a hard time competing and going up against that knowledge base is almost impossible to replicate quickly. Although China’s doing its best right now by hiring tons of people from those companies. Another one, socially complex resources, when the knowledge arises through sort of complex interactions with lots and lots of people. That’s kind of a difficult one. The one I like is what they call causally ambiguous. These are not my terms, these are Professor Schilling’s terms, by the way, but. Well, they’re not her terms, but they’re pretty commonly used. Um, things like talent. You can’t throw money at a band and get you to, or sting or whoever your favorite is. It’s, it’s hard to say how that talent and ability to write songs comes around. There’s the resource, which is the person, but there’s sort of the link between the person and the outcome, the song, the talent. Why can Pixar make movies that everyone loves? It’s very difficult to understand that. And really it’s impossible to replicate it. So what does Disney do? Well, they bought Pixar and then they bought Marvel and then they bought, you know, talent would go in that. So there’s a bunch of these things where if you take the resource-based view of competition and strategy. You have to think about it over time. You have to think about the path. You have to think about things you can easily replicate, like a factory where it’s a matter of money, not easily replicate, but it’s a matter of cost versus a matter of difficulty. Anyways, this is one of my sort of standard approaches to assessing competitive strength and valuation, actually, is I take a resource view. What would be the cost and or difficulty replicating this set of assets and abilities. Okay, last idea for today, just a quick mention to round out the sort of strategy discussion is core competency. Consultants use this term a lot, management consultants talk about core competency. What does it take to replicate the activities of a company? Maybe it’s not the asset view, maybe it’s not the activities view, maybe it’s just sort of the… skill of the company that cuts across everything. Sony was very good at miniaturizing things. They could make Walkman, they could make gaming companies, they could make watches. Their core competency was miniaturization. And then they were able to sort of use that into lots and lots of products. And usually a core competency like that, it’s not one thing, it’s usually like you’re good at five or six different technologies and then you’re able to put them together in a way that results in I can miniaturize things and you can’t. I had a professor at business school used to talk about this all the time. Like you don’t wanna be better at one thing. You wanna be better at two to three things because that’s what becomes impossible to replicate. What is Amazon really, really good at doing? They’re good at building logistics infrastructure. They’re good at building software and they’re good at the user interface. Those are three different types of skills and to a large degree technology and they’re very good at all three and then they’re able to harmonize all three into one core competency, which we would call e-commerce. They’re great at e-commerce and they can use that skill in lots of things. They could sell products. They could sell services. They could sell videos. But you know, it’s sort of multiple technologies all coming together. When I look at ByteDance, this is what I see of ByteDance. I see a company whose core competency is building algorithms that do matching. And then they lever that into lots of different products. New site, that’s ToeTiao. Then they did it with short video, that’s Douyin TikTok. Now they’re doing longer video, that’s Shiguah. Then they’re going into education, then they’re going into casual gaming. but their core competency is all the same. Alibaba, their core competency to me is platform building. That’s what they’re incredibly good at. So this is just another way of looking at this whole scenario and I like to do all of these. I like to take the competitive advantage view, I like to take the resource view, I like to take the core competency view and between all these different sort of views of a small phenomenon like a company. I usually feel like I get pretty close to the truth. That’s my standard operating system for almost everything is to choose something small, an e-commerce company in Thailand, and then come at it with multiple mental models. And between all of them, I feel like I probably have captured the truth. Sometimes. Okay, I think that is it for today. And I guess the question, do you want to be Tesla or do you want to be Neo? Does the first mover position, is it overwhelmingly an advantage or is it better to be a fast follower? I kind of like the idea of being a fast follower. The part that gives me pause in regards to electric vehicles and autonomous vehicles that would not give me pause in telecommunications or e-commerce or any of that, is it appears that the increasing returns to scale. of these self-driving cars are significant and actually very, very difficult to replicate. If you have a good e-commerce site in the US and someone copies it in China, they’re going to figure it out pretty quick. And if you’re making base stations at Nokia, Huawei was able to figure that pretty quick. The advancing frontier of autonomous vehicles appears to really be moving quickly, far off into the distance. And it may be that… the first movers are going to end up winning everything. It’s not clear to me in this space like it would be in a lot of other sectors. It’s also not clear to me in semiconductors that anyone can ever catch the leaders in this space because the tech keeps advancing so fast. So there’s this question floating around China for the last year and a half of you know when are they going to close the gap with the semiconductor companies of the West and the answer may be never. it may be that that frontier just keeps moving so fast that it’s not possible to close it. We’ll see, but I have sort of the same thinking about autonomous vehicles. Anyways, that’s it. The big ideas for today, increasing returns to tech adoption and performance, first mover advantages and disadvantages, path dependency, resource-based competition, core capabilities. All that goes under learning goal 32, innovation, adaptation, and resilience as competitive strategy. I probably gotta re-write that one, that’s just like the worst title. As for me, I’m having a really great week. I mean, it’s just been a spectacularly good week. Not for any major reason, just a lot of, you know, sometimes life is really nice. It’s Christmas, I love Christmas. I love going down to the mall and they’re playing the holiday songs and I really enjoy that a lot. Even in Thailand, where it’s, you know, ridiculously hot, so the Christmas songs are a bit odd. But yeah, it’s been fantastic and teaching quite a bit in the last week at Sasson and at Siebes and great, great students, executives, MBAs, really good, all digital. So lots of interesting companies being looked at. And then in kind of a funny quirk, the undergraduates at Chulalongkorn, which is university in Bangkok, they have an innovation program where undergraduates can basically major in innovation and entrepreneurship. And so these are, you know, young hotshot students and this is what they’re studying. And I was advising six teams of undergrads. So that’s about 50 or 60 people. One of, I mean, it’s, it’s, it’s run by other people. I’m just sort of an advisor on the side, but we set them up with companies. So we had a bunch of students we took out to Huawei in Bangkok. another group that went to Lazada here in Bangkok. Phone calls with JD and Alibaba, new retail, and yeah, it was a pin duo duo. We got them on the phone. And it was fantastic. Like, it was really great. Well, one, the students showed up in their uniforms because undergrads at Chulalongkorn, they have to wear these uniforms, which are pretty charming, really. So everyone loved that. And they did their interviews and they did their research and I, we just had the presentations in the last week and they were great. They were really well done. Like some of them were like a couple of them were outstanding where, you know, they wrote 50 pages on new retail and they nailed it or they took apart Ali Baba and they took apart Lazada. And you know, to be that far ahead of the curve and just sort of understanding this stuff at age, what 19? That’s crazy. I mean, it’s really impressive where they are. So, and plus it’s just a lot of fun. Undergrads are just, they’re just a pleasure to sort of introduce around and very charming. And even the most hardened senior executives are always willing to sit down with them and talk. It’s kind of nice. So that was the last week. It was really just a good week. And then coming up in five days, Wonder Woman is hitting the theaters and the movie theaters are open here in Thailand. So I’m gonna go see that. I’m looking forward to that. I’ve been looking forward to it for six months because they kept delaying that movie because they didn’t want to release it during COVID. I think they’ve given in and they’re just going to dump their movies in theaters and online and take the loss. So that’s pretty much it for me. It’s going to be a great end of the year. And then hopefully I’ll be back on the ground in China first week of January, I hope. It’s a matter of sucking it up and whether I want to do the quarantine for two weeks there. And then… Quarantine two more weeks here. That’s a month and sitting in hotels, which I’ve talked to people who’ve done this and they actually said it’s not that bad You get like a huge amount done and you get in great shape because you just like exercise and work all the time We’ll see Okay, it was have a great week everybody. Stay safe If there’s any feedback you’d like to provide it would be much appreciated. Don’t hesitate to reach out I’m easy to reach on LinkedIn in particular For those of you who are not subscribed, please do so. You can go over to jefftowson.com and do that with a free 30 day trial. If you don’t want to do that, I would appreciate a review on iTunes. I gotta kinda get those numbers up a little bit. But otherwise, that’s it. I hope you’re doing well. I will talk to you next week.