STEP 10
DEFINE CORE
IN THIS STEP, YOU WILL:
Explain why your business can provide customers with a solution that other businesses cannot nearly as well.
You need to figure out something that you do that will make you better than anyone else at producing a solution for your customers. This will be the new venture's eventual crown jewels.
So far, you have focused almost exclusively on meeting the needs of a well-defined target customer. Now you will start looking to the future by determining what about your business makes you special, what your “secret sauce” is.
The Core is something that allows you to deliver the benefits your customers value with much greater effectiveness than any other competitor. You are looking for that single thing that will make it very difficult for the next company that tries to do what you do. It could be a very small part of the overall solution, but without it, you don't have nearly as valuable a solution. What is it that you do better than anyone else?
The Core also provides a certain level of protection, ensuring that you don't go through the hard work to create a new market or product category only to see someone else come in and reap the rewards with a similar business of their own. What is it that your product does that your competitors can't duplicate, or cannot duplicate easily? That is your Core.
A FEW EXAMPLES OF CORE
Determining your core is a very situation-specific exercise. It requires great thought and there may be multiple options for a Core. Rather than prescribe how to determine your Core, I will give you some examples from categories that could inspire (or become) your Core.
Network Effect: If this is your Core, you become the standard by achieving so much critical mass in the marketplace that it does not make sense for potential customers to use another product. The value to the user of this product falls under Metcalfe's Law, which essentially says that the value of the network to any individual on that network is exponentially related to the number of users on the network. The company with the most users is the most valuable; hence it is logical for new users to choose that network. As a result, the network becomes even more powerful; it is a positive feedback loop. Examples of businesses that achieved this are eBay (for both buyers and sellers), LinkedIn, Facebook, and Google for Advertisers. MySpace may have had some advantage from a network effect initially, but the company failed to recognize it and did not leverage it as its Core, which helps to explain why Facebook was able to rapidly gain market share to the detriment of MySpace. Today Facebook has achieved network effects and an almost unassailable position in the marketplace.
Customer Service: By establishing processes and culture that focus on excelling at customer service, this potential core allows you to retain customers at a very high rate as compared to competitors, and thereby avoid costly churn. It will also allow you to attract and obtain customers in a much more efficient way than others in the market, as your customers are thrilled with their experience with you and become salespeople for you by creating positive word of mouth. This core requires an incredibly strong commitment from the entire organization and a fanatical focus to execute a high level of customer satisfaction in a consistent fashion. It often involves extraordinary measures that are hard for others to follow, such as “no questions asked refunds” or other costly policies. Visible examples of this are Zappos, Warby Parker, Nordstrom, Commerce Bank, and at times in its history, IBM. This strategy is difficult to execute such that a competitor is unable to copy and negate your core, but when it works (and it does from the various examples I have just given you), it can be very effective.
Lowest Cost: Another Core you may pursue is to develop the skills, relationships, processes, volumes, financial overhead, and culture to outcompete anyone else in the market on cost and become the long-term low-cost player. This has been a successful Core for Walmart and it is also part of the strategy behind many Asian companies, especially with Chinese companies that have recently entered the clean energy sector. It may be facilitated by achieving economies of scale. Often it is not a Core, but rather an entry strategy for companies who then choose to compete on something else. For example, Honda entered the U.S. market as a low-cost provider of weed whackers, scooters, motorcycles, lawnmowers, and cars; but, eventually they no longer were the low-cost option. In fact, their Core was the capability to build great motors, and the low cost was just a way to get into a new market.
User Experience: There are a multitude of new strategies that have evolved into potential Core strengths and a common one now is user experience (UX). This seems to have been embraced by the market (or at least a significant part of it), which is a major contributor to the recent uptick in entrepreneurial activity and success in New York City, where there is a lot of design and fashion talent available to address this challenge. The strategy here would be to become the best at developing and continually improving the UX through the company's emphasis on it. One company's (Gemvara) relentless focus on this from the CEO on down has resulted in recruiting top talent, prioritization in operational reviews, and a culture where every employee knows that the bar is very high for this area and nothing less than excellence will be accepted. Clearly this has been Apple's Core as it produces products that leverage the company's capabilities and commitment to an insanely great user experience.
These are just a few examples of defining a Core. The key is that the Core be clearly defined, and your founding team aligned so that the Core is what the business will continually work to develop, and will always put first when planning and executing any strategy. The Core is your business's last defense against the competition.
HOW TO DEFINE YOUR CORE
Of all the steps thus far, defining your Core is more inward-looking and less research-based than the others. You will rely on this internal introspection, combined with external data gathering and analysis. While the process may seem broad and general at first, your end definition of your Core should be concrete and specific.
Defining your Core is not easy. It cannot stay an abstract intellectual exercise, but must integrate many different considerations (what the customer wants, what assets you have, what you really like to do, what others outside your company can do, and what the personal and financial goals of the owners are). At the same time, it must be done efficiently (i.e., not take too long) and very specifically such that you arrive at an answer you are highly confident is accurate. You cannot be changing your Core like other elements in this process; it has to remain fixed over time, once you lock in on it. If you change it, you do so at your peril as you will often lose whatever advantages you have built. That being said, it does happen that Cores change as you learn more about your market, your customers, and your own company assets. Google is a great example—they thought their Core was the technological excellence of their search engine algorithm, but in the end, it was their ability to embrace a new business model around keyword-based text ads in search, and to achieve network effects before anyone else.
WHAT ABOUT INTELLECTUAL PROPERTY? OR CULTURE?
One common starting point when determining your Core is to conclude it is your intellectual property. Its effectiveness as a Core depends heavily on your industry. In the medical industry, especially the biotech industry, patents are incredibly important in ensuring success of a product or a new company. In other industries, there may be some value, but often patents are insufficient for ensuring business success. They tend to be static and markets are dynamic. Capability is generally better than a patent—but it is best to have both for sure. For instance, teams with high levels of capability in an area will continually produce innovative goods, over time overwhelming a company that is built around one or a small number of patents (except in such specific cases as biotech).
Some companies find an advantage in the marketplace by creating a process and culture that innovates incredibly fast. They stay close to the customer and then use strong product management and agile development to translate their initial head start into a sustained and growing advantage as time goes on. However, this strategy is difficult to sustain as a unique Core as your organization scales, because as smaller companies enter the market and begin competing, they will have advantages that allow them to be nimble as well, perhaps surpassing your pace of innovation, once your business is large. Most companies wisely do not rely solely on their speed of innovation as their Core, but rather use it as a motivator and a moat around the castle before they finally settle on a Core. To put it simply, all businesses should aim to innovate quickly, regardless of their definition of Core; but, few businesses will find lasting success in rapid innovation without something else as a Core.
CORE IS DIFFERENT THAN COMPETITIVE POSITION
Your customers very likely will not see your Core as the reason they buy from you. They will instead look at your Competitive Position, which you will map in Step 11. Your Core will drive your ability to deliver certain benefits to the customer, which has to translate into value for the customer (based on the customer's top priorities), which then leads to a better Competitive Position. The Core is how you are building a capability to differentiate yourself from your competitors, and it cannot be easily replicated by others. It is the most concentrated way to gain differentiation from your current and potential competitors so you can really focus your small amount of resources to gain maximum value for your new venture.
FIRST-MOVER ADVANTAGE IS NOT A CORE
One of the most overused and incorrect terms used when defining a Core is “first-mover advantage.” The term refers to a company being successful solely by being the first in the market. However, most companies that are first to market end up losing the market to a later entrant who outperforms the first company, so first-mover advantage by itself cannot translate into a sustainable Core and could be seen as a disadvantage. First-mover advantage can help a company with a well-defined Core, but it cannot win the market by simply by being first; this must be translated into something else like locking in key customers, achieving positive networking effects for your company, recruiting the best talent in a certain area, and so on.
LOCKING UP SUPPLIERS IS TYPICALLY NOT A CORE
One way to gain a competitive advantage is to anticipate the key elements of your solution and lock in vendors on an exclusive or a functionally exclusive arrangement. You can generally request exclusivity in return for meeting agreed-upon milestones and minimum order quantities, especially if the supplier sells its product to a much different market than yours, or if you are buying large volumes from a relatively small supplier. Apple has employed this strategy effectively, using it to maintain high profit margins that give the company lots of resources and flexibility, but its Core is actually maintaining a culture of perfection and transcending past mental models, both made possible by the late Steve Jobs.
Like intellectual property, locking up key suppliers is a good “outside the core moat” strategy to slow down your potential competitors and should be aggressively used when appropriate, but it is not your ultimate Core, just a trap along the way for those who might follow. It is a very valuable strategy to have multiple traps along the way to make it hard on your competitors; but, you should have only one Core. The Core is the Crown Jewel that is the final barrier through which the competitors should not be able to break through.
EXAMPLE
SENSABLE TECHNOLOGIES
When we thought about what the Core for SensAble would be, it seemed obvious to some. We had a unique hardware robotic device called the PHANToM, a device that was renowned for its clever design. In addition, we had an extremely fundamental patent for “force reflecting haptic interface” (U.S. patent #5,625,576) which was one of the most referenced patents of its time.1 We also had Thomas Massie, the driving intellect behind the technology, and a rising engineering star at MIT, fully invested in the company. Surely that was the Core, right?
However, when we stepped back and thought about our priorities as founders, we realized that we were looking to achieve a high level of success in a relatively short period of time. Co-founders Thomas and Rhonda Massie wanted to return to Kentucky in four to five years, and I wanted to do something big that could scale quickly and be of interest to venture capitalists, which would be a five-year timetable.
If our focus were intellectual property, we would become dependent on others, with an unpredictable time frame, and would need to become legal experts to ensure others did not ignore or circumvent our patents, which was not interesting to us and not aligned with our personal goals and passions. This was not an attractive scenario for us, and so while we aggressively pursued building our intellectual property portfolio with our IP lawyer Steve Bauer and MIT, it was one of the outside moats of our castle (as in the cartoon at the beginning of this step), not the crown jewels (Core) that we would protect in the centermost part of the castle.
If our focus were hardware, it would take a lot of time and money to achieve success, and hardware companies were not as attractive to investors as software companies. Robotics in particular was extremely out of favor during the mid-1990s. After some thinking, it became clear we should not be a robotics company at all. After all, our beachhead market was not about robotics, but about design. So as with intellectual property, we aggressively protected and developed our PHANToM hardware, even though it was an outside wall, not the Core.
We had been able to lock up the supply of a key component (the high-fidelity motors) that made our hardware far superior to what other companies were offering, presenting a substantial barrier to entry. But if market conditions had been right, our competitors would have found a way to produce the key component themselves. We instead defined our Core as revolving around software, which was more scalable and would be more valuable. In talking with Thomas, we realized the software behind the PHANToM was very complicated (the hand is truly faster than the eye—we had to achieve update rates of 1,000 frames per second to simulate touch as opposed to the 20–30 frames per second that displays visual images on televisions and movie screens). It was not just the interface software but also how we represented weight, shapes, texture, deformations, and many other physical properties of the objects we rendered for touching in the computer and then how they interacted with them. We ended up defining our Core as “the physics of three-dimensional touch.” This Core was to be embodied in a software engine that rendered 3D objects on the computer, not for visual representations, but for touching them.
With a formalized definition of our Core, we needed to translate it into a sustainable advantage that would grow over time. So we quickly identified the key people on our team who had the skills to support the Core. We then identified the people outside the company who were leaders in this field and moved quickly to build strong relationships with them and lock them in with us. We also identified the organizations and institutions where these people would be found (specific departments at MIT, Brown University, and Stanford University) and developed our visibility, reputation, and relationships there to recruit the best and the brightest future stars. This became a top priority of Thomas Massie as the CTO and he reviewed this at least quarterly in his technical strategy discussions. We made sure to have a strong skills development plan in this area and our incentive system reflected this as a priority with strong compensation and large stock option grants.
In this way, we determined a Core that would protect us and give us a huge competitive advantage as we successfully developed the market. It was certainly not obvious in the beginning, and the obvious answer would have been a far less optimal Core, so the extra attention paid to determining a Core was well worth the effort in the end. It paid dividends many times over going forward.
SUMMARY
Defining the Core is the first step where you spend a lot of time looking internally, in contrast to the strong customer focus of many of the other steps. The Core is what you have that your competitors do not, that you will protect over time above all else, and that you continually work over time to develop and enhance. Once you agree on a Core, it should not change without a great deal of thought; instead, you should continually make your Core stronger. If it changes often, this is a bad sign because it means you are likely not building it effectively. However, it can change as you discover what your customers value most and what you do best. Defining your Core is not easy and may seem abstract, but it is an essential step to maximize the value of your new business.