What are the essential components of a business’s foundation? Can you easily change your business model later on after it grows?
When you’re developing the foundation of a business model, Hamilton Helmer recommends that you focus on two strategies: carving out your niche and securing exclusive assets. It’s important to implement these two strategies at this early stage because they’ll become increasingly difficult to adjust once your business begins to grow.
Let’s look at the two most important things you need to do when starting a business.
Building the Foundation of Your Business
Using these two strategies is essential for the foundation of a business. Helmer explains that, with growth, increased operational demands and market pressures will leave you with less flexibility to adapt and differentiate your business model or to acquire key assets, causing you to miss out on their advantages.
(Shortform note: Nassim Nicholas Taleb (Fooled by Randomness) suggests that increased operational demands and market pressures aren’t the only factors that make it difficult to carve out a niche or secure exclusive assets once a business grows. He explains that we tend to be driven by decisions we’ve already made unless we consciously choose otherwise. This psychological tendency, known as “path dependence,” can lead businesses to stick with initial strategies even when better opportunities arise. In other words, if a company initially provides generic offerings using readily available resources, path dependence makes it psychologically harder to pivot toward specialized niches and exclusive assets later down the line.)
Strategy #1: Carve Out Your Niche
To carve out your niche, develop an innovative business model that provides more customer value than what’s already on the market. This will differentiate your business from established competitors, attract customers underserved by current market options, and allow you to charge higher prices for your products and services.
An added advantage is that established companies will struggle to compete with your business model, providing you space to thrive free of competitive pressures. Helmer explains that established competitors often struggle to challenge innovative business models for four reasons:
- They underestimate potential threats due to confidence in the ongoing success of their existing business models. For example, imagine your company introduces plant-based meat substitutes into the market. Established meat producers, believing that consumer demand for meat will remain steady, assume your offering won’t impact them.
- They resist making changes that render their existing products and services obsolete. For example, established meat producers may fear that attempts to compete with your offer will increase consumer demand for plant-based substitutes, thereby reducing demand for their existing meat products.
- They prioritize short-term profits over investing in long-term advantages. For example, despite growing consumer demand for plant-based substitutes, established meat producers may cling to methods that proved profitable in the past, opting to invest in improving their meat products instead of adapting their infrastructure for plant-based production.
- They suffer from internal dynamics that impede their ability to adapt to evolving market conditions. For example, bureaucratic production approval processes, coupled with reward systems focused on short-term sales targets, could prevent established meat producers from adapting production lines to include plant-based substitutes.
Strategy #2: Secure Exclusive Resources
To secure exclusive resources, acquire assets or capabilities that provide unique leverage in the market before competitors recognize their full value. The unique leverage of these resources is that they allow you to offer superior products or services, operate more efficiently, or control critical aspects of production. Helmer explains that securing such resources early on insulates your business from competition because such resources are often:
- Scarce—for example, a rare mineral used in manufacturing allows you to monopolize the market for that resource.
- Legally protected—for example, a patented technology provides a legal safeguard against replication.
- Rooted in specific expertise—for example, a unique algorithm developed by in-house experts creates a large knowledge gap that competitors can’t bridge.
- Based on exclusive relationships—for example, a contractual agreement with a single supplier for a critical component restricts competitors’ access to that component.
How to Secure Exclusive Resources
According to Helmer, the following three methods will help you secure resources with unique leverage:
1) Catalog your resources: Identify all tangible and intangible resources available to you—such as raw materials, technological equipment, specialized knowledge, company culture, and unique partnerships—that competitors may lack access to. For example, in addition to acquiring a manufacturing facility, cultivate a team of food scientists with expertise in plant-based meat formulation.
2) Maximize your resource value: Find ways to monetize and leverage your resources to extract multiple benefits. For example, leverage your proprietary technology across multiple product lines to reduce costs and enhance your ability to offer superior products.
3) Maintain and develop your resources: Make incremental improvements that enhance the effectiveness of your resources to sustain their competitive edge. For example, consistently refine your proprietary plant protein extraction process to improve operational efficiency and product quality.
