Strategy was one of my favorite classes in Stanford’s first-year MBA program. In general, the entrepreneurial-minded students in Stanford GSB (who are in majority), thinks the strategy class is highly impractical, and in real world, what matters most is the novelity of the core idea. Some people quote strategy professors contradicting themselves in some consequent classes (such as Formation of New Ventures) as these professors are said to be saying "Now, forget everything you learnt in general strategy classes". Students perceive this as a proof that first strategy class had no useful application, while, in fact, this is exactly how the application of strategic thinking works.

When you are starting a new company, your competitive advantage has to be a novel core idea, doing something in a different way that what companies before yours did. Your first competitive advantage is probably the product/market fit, the first-mover advantage, or a patent. No company gets founded on the basis of a strong talent management practice of unique culture. Yet, after the company operates for a while, the rise of the competitors render most of these competitive advantage items as obsolete (maybe except patents, where you have a monopoly). At that time, your company would better have some higher-order competitive advantages (extensive distribution network, loyal customer base, strong talent management or a congruent corporate culture that fits directly into your business model of providing low-cost or high-quality products/services). That is why, in the first stragegy classes where we analyze companies such as JetBlue or USA Today, competitive advantage discussions are mostly based on human factors and leadership, whereas in a Formation of New Ventures course where we evaluated start-up stages of Cisco and SUN Microsystems, we looked at the product/market fit of new product offerings and whether core ideas solve painful problems of a start-ups potential customers.

In summary, competitive advantages are extremely different for companies at different stages of their establishment. One usually overlooked competitive advantage, that is in fact the king of the others on my mind, is Experience. Simply, this is the set of information you accumulate over time operating your business. If you find a robust process to systemically use the information generated by your operations to improve your product offerings, you are said to have a sustainable competitive advantage, the most difficult and the most rewarding advantage a company can and should have. We don’t hear about it often, but when a company has it, it would be extremely harder for competitors to catch them in the marketplace.

One company that I think has such a systemic approach to using experience as the competitive advantage is Netflix. Let’s make the case shortly. Netflix exactly started with a novel core idea: subsciption-based DVD rentals via mail. The competitive advantage of the start-up phase was an extreme product/market fit. Customers had pains about late fees, limited selections in stores, and the need to drive-by (maybe some others as well). Netflix solution addressed most of these, creating a big competitive advantage by fitting its product to market needs. But then what? Blockbuster followed suit (and maybe some other regional players as well). So, as the competitors start doing the same what Netflix does, how can Netflix find a sustainable competitive advantage? It is, in my opinion, the experience.

Now read the following short piece from Download Squad, as an argument for Netflix’s systemic leverage of operational information. Netflix’s higher-order goal is to provide a superior customer experience, or let’s say value. Basically, customers would continue to be a subscriber for Netflix as long as they find good and enough number of movies to watch for the same fixed monthly fee. Otherwise, they might switch to a competitor or leave the market. How can Netflix continue to provide movies to fit the likes of the customers? That is how they leverage experience. On the basis of their huge customer data, they try to predict what customers would like more. That is not novel by itself, as almost all retailers do this. But don’t ingore the crucial point. Netflix is trying to push the envelope at this cutting edge of recommendation engines, not just implementing a recommendation engine suite offered by a specialty start-up. They are making their data available under the Netflix Prize, hoping to seize the most effective methods offered by its developer community. Probably, what Blockbuster is doing at the same front is paying hundred grand to a third-part recommendation systems builder to implement its standard software suite. If you think about Netflix’s customer base and its emphasized approach to customer experience, you will realize that the gap between Netflix and Blockbuster (leader and the follower) is actually widening over time. This is like a reverse death spiral for Netflix, as the more they leverage the experience they have, the lower the attrition will be and the higher the user acquisition will be, contributing to the accumulation of their operation information more, on which they will experiment further to improve user experience.

As every strategy piece has a limit to be exploited though (an analogy to Netflix can be Capital One’s analytics-based approach to credit card industry, and they realized a ceiling for the number of profitable customers they could acquire), Netflix’s experience-based strategy is bound by the mismatch in movie production rates (which is slower) and users’ movie consumption rate (which is higher). I believe that is why they are experimenting other well-known options in strategy literature (one example of which is diversifying with on-demand streams).