Competition 101 and 102

Competition 101 and 102

Competition 101 - “Be better than the other guy.”

Competition 102 - Three General Competitive Strategies:

  • Cost Leadership - make your product less expensive - Think Toyota (focusing on manufacturing and supply chain management). Pricing power to raise gross margin.

  • Differentiation - make your product ‘special’ - Think Mercedes-Benz branding (focusing on user experience and brand). Pricing power to raise prices.

  • Focus - make your product particularly for one group of customers - Luxury Stretch Limousines (focusing on events companies and corporate car rental providers).

In my opinion, in order to be sustainably successful, we will need ALL THREE of these attributes. If you lose on one then you are vulnerable. Most companies go after one. I say that’s not enough. Current, I’d say LearningLeaders Academy is 30% Cost Leadership, 20% Differentiation, and 50% Focus. Eventually I see LearningLeaders Academy as 20% Cost Leadership, 30% Differentiation, and 50% Focus.

LearningLeaders as a portfolio of businesses will be more like 10% Cost Leadership, 60% Differentiation, and 30% Focus. (maybe the exact math may change, but you get the drift - I don’t want LL to be a cheap service in the marketplace, but rather an aspirational brand and a focused one. The Differentiation will eventually come from us being the only meaningful organization that specializes in communication coaching and leadership from students to schools to corporate executives, has specialized programs for all of them, and has them all integrated together with a digital product portfolio for optimal performance. I understand you’re still asking yourself the question... “So why are we keeping prices low then?”)

Let’s look at Amazon for a moment. They began with focus and cost leadership (only books and being among the lowest prices out there). Early on, they were differentiated to an extent, but really only because of their sole focus on books. Over time, they have been able to maintain their cost leadership through relentless focus on supply chain and distribution management - they continue to widen this gap versus competitors. Over time, they have further differentiated themselves from the competition due to many factors, but we can look at one product in particular, Amazon Prime, to prove this point.

A key differentiating factor is Amazon’s ability to get items to you faster and more reliability than anyone else, with a larger selection. Finally, focus. While Amazon started to focus on a small subset of customers, first within books and then gradually expanding to music and movies, it has slowly shifted and widened its focal lens to ever-increasing scopes. It can do this based on its previous successes.

Soon, Amazon will generate a larger share of profits through its enterprise cloud services than through its traditional retail business. Overall, I would say its long-term competitive advantage could best be summed up through one of its own leadership principles: "Customer Obsession. Leaders start with the customer and work backwards.”

I share this brief background of Amazon because I want to remind us of the simple idea that it’s not where you start out but where you end up that matters. We are focusing right now on a small subsection of what LearningLeaders will eventually become. That doesn’t mean it’s not important - far from it. This foundation, generating cashflow and credibility, is critical to our future and ongoing successes.

What Amazon did was start with one competitive advantage and move to another. They moved from Focus + Cost Leadership to Differentiation + Cost Leadership. And I think we can actually track a similar path, but for us it will be Cost Leadership + Focus to Differenti- ation + Focus. We’ll upscale our brand and reputation over time, which brings us to the importance of credibility, which I’ll touch on later. But first, cashflow.

Cashflow is critical because we need to keep funding this dream. The longer we wait be- fore taking investment the lower cost of capital becomes. As everyone here is a partner and thus an owner, that should be motivation enough to wait. Rough math here, but if we wait until the company is 2x the size before taking on investment, then your stake in the company is worth 2x. (Imagine the company grosses 20MM RMB this year. You own 1% of the company. In 2019, I expect us to gross ~38MM RMB. Your ownership jumps 80% in value along with the revenues. (Typically, young companies are valued at a multiple of revenue or earnings). While I don’t think that cashflow is exclusive to cost leadership companies (all things being equal, it’s better to charge more for the same service, right? Higher profits!) the challenge here in the long run is credibility, the second foundational component. I’d sacrifice cashflow for credibility any day. Long term, I believe cashflow is awesome - don’t get me wrong. But we’re going to get through through doubling-down on credibility in the short-term. Credibility now can get us cash later. But I don’t think the inverse is necessarily true!

Credibility is our brand and the name of the game in the education industry, or any service/experience industry. Long term, credibility grants market share demand, in turn generating cashflows. Where does credibility come from? The value of the brand. Where does the value of the brand come from? What customers are willing to say about it. Do I think that high-priced companies can have great brands? Of course, they appear more exclusive and aspirational. I still feel what drives values of brands higher faster during growth phases of the business (as opposed to mature phases) is the notion of consumer surplus. Word of mouth marketing. Viral growth. These are reflections of consumer surplus.

I’ve written about consumer surplus above, but I’ll explain it a slightly different way here: there are two values delivered in every transaction. The value perceived by the consumer and the value captured by the supplier. Whatever the delta, or the gap, is between per- ceived and captured value is customer surplus. What consumer surplus generates is the feeling that the consumer got a ‘good deal.’ This generates goodwill and reciprocity.

In essence, what we are doing in every transaction here, by design, is leaving a little bit of money on the table. That little bit of money left on the table is less significant when you have just a few hundred clients, but more significant when you have a few thousand. And you really need those first few hundred to talk about your business to make it to those few thousand! More importantly what it does is create that sense of generosity and goodwill. This is not only where word-of-mouth comes from, but also where the story of LearningLeaders is going to develop from. The current parents and students who have been with us from the beginning still introduce us to their friends and family members - it’s those conversations that are so valuable.

So now the question, why is it important to have a larger number of students? Why don’t we simply have 300 well-trained students and charge their kids 3x? Won’t that be half the work and double the pay? Yes, and no. In the short-term, yes, it would be. And that would last for all of two years. But in the longer-term, an increasing number of students in the program is important. Why? Portfolio theory. The greater the denominator, the greater likelihood you are going to have statistical anomalies. This is the fundamental profit-generation engine of the venture capital world - statistical outliers that ‘return’ more than all the other investments put together are often dependent on the number of chances or risks you take. What this means for us is that one student winning a national championship brings more credibility to the program than 25 other students who make it to the quarter finals. I don’t necessarily love this from a pedagogical standpoint, but from a branding (credibility) standpoint it’s hard to argue with.

Championships require statistical anomalies in addition to superior training. And championships continue to drive credibility. Thus, a program with 1000 students is more likely to have freakishly good team of three students the a program with 300 students. Addition- ally, a larger program allows for coaches and team members to specialize more thoroughly in their designated and defined area of expertise. If a coach loves working with advanced students only, they can do that. If a coach loves working on the Capstone pro- gram, they can do that. Loves working with introductory students, they can do that too. With a smaller program (even what we are now), each coach does need to stretch them- selves to learn multiple courses and lesson plans - I love learning new things, but being able to focus a little more would provide greater quality of coaching and also greater satisfaction from coaches knowing that they’ve nailed it and are doing a great job. I thin that’s also been reflected in our Team Pulse surveys!

Does this mean that we need to focus all of our efforts in the Elite Classes? NO! We need to put great efforts there, yes, but almost more importantly is for us to double down on Public Speaking and Storytelling and Argument Foundations. These courses will generate the top students in the country in the next 3-5 years. If we don’t win the national championship next year, fine, that’s too bad.

I’m more concerned with a more systematic development of the program. Coming back to the long-term here. So, in summary: maximizing customer surplus will bring us long-term results. I feel that pricing in a generous way is critical component of that.

So, where does this leave us?

  • Customer surplus in the short term yields us credibility in the long term
  • Competitive success yields us credibility
  • Community development through word-of-mouth marketing yields us credibility
  • Communication within the community yields us credibility
  • Credibility in the short term yields both long-term cashflow benefits and long-term credibility benefits, thus perpetuating the flywheel and success cycle