0:12
We've talked about economies of scale that's an aspect of size,
it's not the only way to use size are being big to leverage your position.
But it's an important source of competitor advantage.
For many manufacturing firms, this is a big source of advantages,
being bigger gives you lower cost.
So if you're an automotive company, scale is important.
If you're an airline, being large gives you advantages, gives you cost advantage.
Scale of operation can make you more efficient and can lower your unit cost.
As your scale goes up, your cost per unit may go down,
that's a big source of advantage for many large firms.
In addition to size mattering in scale, economies of scale.
There's also the economies of networks or
what economists might call a network externality or network effect.
In the information business, this was described as Metcalfe's Law.
And Metcalfe observed that many products or services
follow an interesting characteristic that the value of the product or
service is based on the number of interconnections between users.
And the number of the interconnections, the number of people you know,
who you could connect with, increases the square of the number of users.
So if you know one person with a fax machine,
there's two users, you've got one connection.
If you know two people with a fax machine, you could fax to both of those,
that's double now.
If you know a 100 people with a fax machine, and they know you, then 100
times 100 is 100, I mean if you know 10 people then you got 100 interconnections.
So the idea is as the square of the user base grows,
the value of the service grows.
And this is why Facebook is so hard to dislodge,
because it's worth a lot, because it's common.
Twitter is worth a lot because people use it.
WeChat and WhatsApp are valuable because people use them.
Airbnb is valuable because people use them.
If you start a small one, you face this network effect,
that you may be a better service, but you're not the standard.
And you're not what most people want to use,
because most people want to go to Airbnb because other people are on Airbnb.
2:59
We talked about a couple kinds of access like access to resources.
Resources might be something as simple as the right of way,
the right to go under a road, the right to go along a field for a power line.
You could take that access and use it for
a fiber optics cable as well as electricity distribution.
In China, one of the major competitors or major valuable resources for
building Internet businesses was the access to the railroads,
which gave you access to lay cables at low costs,
which meant fiber optics, which meant a telecommunications network.
So that right of way became valuable, or land, property,
land grants can be very valuable.
Governments often will grant land in favor for something.
So you make it permission or rights to do things in development,
and that can be a significant source of advantage.
Infrastructure may give you an advantage.
For example, it is much more valuable to have
a solder electricity firm if you're close to a high power voltage line.
If you're not, it may cost you a lot to get there,
to get the electricity to where you're trying to distribute it.
Oil in the Dakotas may cost more to get down to Southern Texas for
refining, than it does to get it out of the ground.
So having infrastructure to support you is important.
Having low cost extraction of resources, having oil that's easy
to get out of the ground maybe a source of access that is valuable.
These are all access of one sort or another that can give you an advantage.
4:53
We also value access to customers.
And we can create that by having strong brands or
network externalities that can effectively lock in customers and
make them less price sensitive, less willing to switch.
We may be able to create customer switching cost by making
it hard to recreate or redo what we've doing.
You've got an investment in infrastructure, and so
it's hard to switch from one airplane engine to another.
Because you got all the spare parts inventory, the training of people,
the knowledge of how to work with a particular airplane engine.
And to go to a different supplier, that's hard.
You may have commitment to contracts, you bought a phone, you committed to a two or
three year contract, and switching is going to be expensive.
So that means the company has you locked in, and they may have a very strong
access to you as a customer for an extended period of time.
5:55
Knowing something that others don't also can create a competitive advantage.
So knowledge can be a source of advantage, trade secrets can be valuable,
some things are hard to learn, so AI is valuable.
And having those skills and resources in your firm whether your Google or
IBM or others, this can give you an advantage.
But the downside is, people can walk and they take that knowledge in their head.
So you have to pay them well, and so it may well be an advantage for
the person to have world class knowledge in an area.
But it's a little harder for a company to keep that and not have to pay well for it.
6:41
You may have institutional knowledge, but
much of your knowledge you have walks away when people leave.
So you have to be careful and
try to create a culture where people don't want to leave.
Or find ways to get them committed,
like lock in with equity price that vests over time, etc.
So these are different ways to gain advantage.
These are ways to think of resource, to build a fortress,
to protect your business.
Theodore Henry King CLARKAssociate Professor
