Retaining your ability to make money? Causal ambiguity’s the answer

Whenever people hear that I am a professor at a business school, the reply I most often receive is “oh, so you teach people how to make money…?” And I usually nod while I display a weak smile and abide in silence.

Some time ago though, I was teaching in New York, at Columbia University’s business school, and took a taxi from JFK airport. The driver, starting a polite chat, said “what do you do?” “I am a professor at a business school” “so you teach people how to make money”, “yeah (sigh), I teach people how to make money”…

But then, the guy continued, “so, what’s the answer?”…. That was a minor credibility crisis, right there on the spot…

I don’t remember what I said, but I remember thinking later what I should have said. It is about “creating value” (and selling it for more than it cost you to create) but also about “retaining value” (namely, why wouldn’t anyone else be able to come in and do exactly the same thing – driving the price down till you can only sell it for what it cost you in the first place)?

And, of all business plans and proposals I get to see, people usually think a lot about the first bit; “how to create value”. They talk about their unique value proposition, and why customers will love it, buy it, scream for it, and so on.

But they often forget about the second bit; why would YOU be able to do it, or at least do it better or cheaper than anyone else? What do you have or own that enables you to retain the value-adding ability, which protects you from immediate imitation by competitors?

For a start-up, that’s often tricky. You don’t have anything yet, so what could you possibly have or do that others couldn’t do too? The trick is that you don’t have to have it now, but you do need it a year or two from now, when you’re starting to have a real business.

Thus, the thing that makes you “difficult to imitate” does not necessarily have to be a patent, brandname, unique location, etc. It could also be found in other sources; something that you build up over time. Over the years, I have found that one of the most powerful sources – of being difficult to imitate – is a rather mundane thing… The firm’s competitive advantage is difficult to imitate because the firm itself doesn’t quite know what they do to make them so good at it…

We call this “causal ambiguity”. It may sound silly but is surprisingly common. Firms for example see that they have a much lower cost base than their competitors, or they see that their sales force is much more effective than theirs, or they manage to have a much lower error rate in their production process, but they don’t quite know why…

Causal ambiguity makes it difficult to exactly put your finger on what it is you do that makes you so much better than your competitors. Yet, don’t worry about it: it’s nice! When you yourself don’t even know what it is you do, it will be rather difficult for your rivals to copy it and do the same…!