“Zero To One” by Peter Thiel

1a. Peter Thiel is known for his contrarian views on many commonly accepted concepts. One of the objects of constant criticism is competition. This is how compares capitalism and competition, highlighting the advantages of the former and the disadvantages of the latter. To begin with, Thiel points out that competition strives to keep the prices down while the primary goal of capitalism is to generate profits. This can be explained in the following manner: as more and more companies compete, some of them decide to focus on cost leadership, thus driving the prices down to the minimum. The customers will surely benefit from it, but the companies will suffer a rather narrow profit margin. Contrary to that, this will not happen in the framework of capitalism in the absence of competition. The author insists that if there is no objective need to keep the prices low, then they can be maintained at the desired level and the companies will always enjoy high profits.

Another line of criticism focuses on the size of the enterprises. Thiel notes that when companies compete with each other, then they are not able to reach a big size due to the fact that the market can be divided between a handful of players. In addition to that, small enterprises who were able to secure a certain share of the market will be acquired by their larger counterparts, but this merging and acquisition will inevitably stop since all small players will be eliminated and the market will be divided between the major players that will not be willing to give their shape. This will result in the stalemate of development. Contrary to that, in the absence of competition, a company may growth as long as it reaches the limits of its potential, possibly becoming a monopoly.

The third point of criticism that Thiel mentions focuses on the use of profits. He insists that companies that compete with other companies are under constant pressure to protect their share and attract new customers. That is why they re-invest the profits immediately. This leads to a relatively short cycle and does not allow companies to perform proper research and development. On the other hand, if a company is a monopoly or it stays away from the competition, it will enjoy high profits that can be invested in research and development without any serious financial damage to the organization. Moreover, even if the research process will be costly, it will be covered by the future profits. So, the absence of competition encourages companies to invest more in their development freeing them from the constant pressure.

In spite of the fact that Thiel’s views seem to be quite convincing, I cannot fully agree with them. First of all, I do not think that competition eliminates the profits, as he put it. Technically speaking, the companies still enjoy profits; so, Thiel is not right here. I would better say that competition eliminates excessive profits or wide profit margins. It is true that it may be rather difficult to keep profit margins wide under intensive competition. So, I suppose that Thiel may have exaggerated the negative impact of competition. Another point that I would like to mention is that for some strange reason, the author does not use the concept of competitive advantage. I believe that his analysis would be more accurate if he used this notion to understand the basics of the competition better.

1b. According to Peter Thiel, companies should strive to become monopolies. This is a rather controversial statement given the fact that it is generally agreed that monopolies have a negative impact on the economic system. Thiel insists that in order to become a monopoly, a company should be able to achieve the following. First of all, it has to use technology that is ten times better than the existing one. In other words, it should operate on a higher level of efficiency, making sure all the competitors are not able to keep up with its performance. In addition to that, it may also be helpful to use technology that cannot be replicated. Consider the example of Google: its search engine has been revolutionary and even today no one was able to create anything similar.

The next element that Thiel describes focuses on the effect of the network. He states that while a single breakthrough technology may not change the world or grant a company the status of monopoly, the more people use it, the more it will become popular and influential. As a result, with each new person joining this network, technology will improve its image and seem more attractive to others. Consider the development of Facebook: at early stages, people had to be invited to use it and it was yet another service that an Internet user was familiar with; its effectiveness was limited due to the fact that really few people used it. However, today there is no need to invite people to join Facebook because it has been integrated into lives of many people. As a result, the effectiveness of it increases because a person could reach others easily.

The third point that Thiel makes about monopolies deals with the benefits that economies of scale bring. He insists that as soon as a company reaches a certain level of production, it is able to enjoy wide profit margins due to the fact it will cost less to produce a single unit. Therefore, this money may be invested in research and development which will improve the efficiency of the production, even more, making profit margin even larger. That is why it is logical for every company to become a monopoly since it leads to higher profits and constant improvement. What is even more important is that economy of scale provides an organization with a lot of flexibility in terms of volume of production as additional units can be created without placing any significant burden on the company.

Finally, Thiel explores the importance of branding when it comes to becoming a monopoly. He points out that branding is much more than a certain image that appears on the product: it is an image that is associated with the company and it is responsible for awareness. So, if a company enjoys strong branding, then it will be able to increase the awareness of the customers and encourage them to buy more. Consider the example of Apple: its hit devices such as iPhones and iPads are so easily recognizable that whenever a person uses them in public, other are exposed to this brand and are encouraged to consider buying it. This could only be achieved if branding is strong enough. For example, devices by Samsung or Microsoft do not enjoy the same effect.

I must admit that Thiel showed the notion of monopoly from a completely new perspective for me. I did believe that they were quite negative, but I am ready to change my opinion. However, I cannot fully agree with his view because of several reasons. First of all, I think that Thiel’s view on monopolies is too optimistic. On the one hand, there are some clear advantages that companies will enjoy, but he seems to be forgetting about all negative aspects that are associated with this form. Furthermore, Thiel also does not seem to be concerned about the structure of other markets: according to him, it is beneficial that every segment is ruled by a monopoly. However, this is likely to put the entire economic system in the stalemate due to the high amount of control that each monopolistic organization will have in its segment.

2. In his book, Thiel often states that successful companies have secrets. This statement should be properly interpreted based on various points that the author makes. First of all, he makes a distinction between conventions, secrets, and mysteries. The first are easy to acquire and do not require any effort from a company. However, they do not have any particular benefits that are associated with them. On the other hand, mysteries are impossible to acquire, but they seem to be associated with a lot of benefits that a company can only dream of. Secrets are what is in the middle: they are had to acquire and they bring some benefit to the company. So, in the broadest sense secrets are not associated with cheating or deception of any kind: they represent new ways that a company mastered that are different from the conventional ones.

The next aspect that should be mentioned here is how the secrets are acquired. Thiel points out that many companies and people are discouraged from the exploration of their possibility due the following paradox: if everything about something is already known, then there is no need to explore it; however, this is not true in the case of a geography. Indeed, though it is impossible to discover new lands today, the study of geography is not discontinued. The key point here is that secrets often lie in the area where no one is looking. Consider the rapid success of Facebook: it emerged when the interest towards social media was minimal. Being the pioneers of this form of communication, Facebook quickly attracted numerous people. However, today it is virtually impossible to launch a new social network: consider the failure of Google+.

According to Thiel secrets can be particularly helpful as they have a direct positive impact on the performance of a company. To begin with, they might be seen as the prerequisite for becoming a monopoly which is the ultimate goal of any enterprise in Thiel’s view. Indeed, a secret will be able to grant technology which is ten times better than the one that the competitors are using. So, it is the right strategic move for a company to look for secrets.   Another point that should be mentioned with this regard is that secrets also contribute to securing a sustainable advantage. In other words, it is not particularly useful to acquire a technology that will be superior in the short-term perspective. A company should think about how it will secure its dominance in the next 10 or 15 years as well.

Finally, the major benefit of discovering a secret is closely connected to the name of the book. “Zero to one” and “one to n” are two major concepts that Thiel introduces while analyzing the available patterns of progress. The first is what he calls “vertical progress”. It is the situation when a company is able to ascend to a higher level of performance leaving all the competitors behind. Think about Apple II: this was a revolutionary device since it showed that computers can be personal. This shows that the company discovered a secret and used it effectively to get to the next level of performance. “One to n” is how Thiel describes “horizontal progress”. The latter is the pattern of development when a company is not able to introduce anything new, but copies the existing solutions. Consider the development of cellphone industry in the middle of the 2000s: Nokia was a successful company that supplied a large number of phones on the market and was considered to be quite innovative; however, all the models that it developed were fundamentally similar to each other and differed only in the number of functions that they had.

3a. Peter Thiel is also known for developing a matrix of four outlooks that can describe future performance. The first is definite pessimistic. It combines the idea that the future can be shaped in a particular way, but future itself will be quite negative in many ways. The author uses China as an example of such outlook: the Chinese companies believe that they are able to shape the future development of the market by introducing new products (for example, Lenovo), but they acknowledge that fact that they will not be able to take the advantage of the existing state of affairs for long as it will change and the Chinese companies will have to adjust to new conditions, just like they did before.

Indefinite pessimistic outlooks shares some similarities with the one which was discussed before, but is dramatically different in one particular aspect: the enterprises accept the limit of their power and acknowledge the fact that they are not able to shape the future of the market. As a result, they prepare for the worst-case scenario, not knowing that it will look like exactly, but being certain that it will be negative. Consider the example of the European companies in various segments of the market. On the on hand, they know that they are not leaders of the industry. That is why they expect to follow other companies. On the other hand, they also expect significant changes in the future and are ready to adapt to the new conditions, accepting the risk that some will be put out of business.

Definite optimistic is the third outlook that is identified by Peter Thiel. As one can see, it introduces the new concept of optimism which is manifested in the following way: the companies believe that the future holds positive outcomes of them. When combined with the idea that the future can be shaped to a large extent, this outlook occurs. Consider the performance of many American companies in the middle of the previous century. For example, at that time cars that were not fueled efficiently were quite popular among the Americans. The latter were not interested in saving many on gas because it was quite inexpensive. So, the automotive companies produced their cars believing that the future of the market will be shaped by them and there will be no disruptive changes that would adjust the status quo. However, high oil prices changed all that.

Finally, there is one last outlook that should be discussed. It is called “indefinite optimistic” by Peter Thiel. Obviously, it features the following premises: on the one hand, it suggests that companies are not able to shape the future with their actions and will have to adapt to the new condition, but, on the other hand, it is also suggested that the future does not hold anything bad for the companies. According to Thiel, this is exactly the kind of outlook that many modern American companies have. Consider the case of Google: this company looks into the future, knowing that the market will change and trying to keep up with the changed; however, it is certain that the changes will be new opportunities that the company will be able to take the advantage of.

3b. Not every outlook that was described by Thiel is suitable for start up. Given the peculiarities of each. One might suggest that indefinite optimistic is the one which will be the most beneficial for a person who would like to start a company. There are several reasons to that. First of all, one should take a look at the “indefinite” component. According to it, a company acknowledges that it cannot shape the future. This may be an advantage for a start up since it will rely on the future development of the market to provide actual challenges that should be taken into account. In other words, a start up should not be ready for everything: it should be read for what it will face in the future.

With this in mind, Facebook may be a wonderful example of a startup with the indefinite optimistic view. At the very dawn of it, there was no certainty that people will use social networks to communicate and share the information. That is why the founder of Facebook simply took a bold step forward and waited for the reaction of the people and the market. As more and more users created their accounts, they expressed specific needs and Facebook was eager to change according to these requests. This means that the service that we see today is quite different from what it looked like in the very beginning. However, there was no master plan that the company followed: it simply tried to meet the needs of the people without shaping its future development.

The second component of indefinite optimistic outlook focuses on the positive outcomes that the future holds for the company. This extremely important for a start up because it represents the goal that the founder are willing to achieve. It is obvious that people start businesses in order to become successful. That is why they believe in that, in the long run, their endeavor will be successful which is a rather optimistic point of view. Therefore, by default, those who launch start ups are optimistic about the future. In addition to that, one should also note that many young businesses are driven by the vision that their founders have. Vision is also something that deals with the future and presents it in a positive way. So, it becomes obvious that it is quite common for start ups to believe that the future holds something positive for them.

If one considers the example of Facebook which was mentioned before, one may try to recreate the vision that Zuckerberg had in the very beginning. He might have thought that his product which at least become yet another platform for communication that existed on the internet. At that point, many people used forums as their primary tool for communication with others; so, the founder of Facebook did not risk much as it did not want to disrupt the existing state of affairs, but simply added a new means of communication. However, it is also worth pointing out that Zuckerberg was also determined to make his product grow and, possibly, become the best in the niche. That is exactly what happened and this is a great example of an indefinite optimistic view.

3c. The framework that was developed by Peter Thiel is indeed quite interesting and insightful. Nevertheless, I find it to be too optimistic. The book that he wrote seems to paint the world of business in excessively bright colors, overlooking numerous failed companies that may have following similar guidelines. When one listens to what Thiel has to say, it seems that it is almost impossible to fail in business.

Another point that I would like to stress about this framework is that it goes against every commonly held believe about business; that is why it is considered to be contrarian. I do not think that this is necessarily a disadvantage, but it may be difficult to follow, especially if a person is accustomed to the conventional ways of doing business. This means that the use of Thiel’s work requires rejection of some fundamental principles that are known in the business world.

As for the advantages of it, I might point out that the framework in question is extremely encouraging. Just like I said before, Thiel paints a bright picture of business, advocating that everything is possible as long as one is able to achieve vertical progress through securing a secret. In spite of the fact that all elements that are mentioned in the framework are useful, they seem to be oversimplified to a certain extent. Consider the example of monopolies: the author clearly overlooked the disadvantages that they have. Nevertheless, this line of reasoning is something that entrepreneurs can relate to which makes the book quite popular among those who consider launching a start up. Furthermore, I must note that the ideas that Thiel defends are supported by evidence as well as his own personal experience. That is why I believe that the points that he makes are valid.

The framework in question makes sense to be for a number of reasons. First of all, it features elegant logical structure. Thiel does not say that success in business is a miracle, quite the opposite: he outlines the major factors that contribute to it and explores each of the factors separately. When I just started reading the book I was somewhat skeptical about his approach, but later I realized that there is strong logic involved. Secondly, the framework that Thiel developed has universal application. It is true that not every particular business will follow it, but the aspects that the author outlines can be found in every company and they may be used to explain its success of failure. That is why the framework is quite useful.

By far, one of the best examples that illustrate the validity of points made by Thiel is the development of Apple Inc. This company embodies the idea of vertical progress: throughout its history, it supplied innovative products that changes the existing state of affairs in the technological world forever. While it may not be possible to make a scientific revolution every year, Apple is still responsible for many aspects of the contemporary digital world that we live in today: it made computers personal, music – ready for digital distribution, cell phones – highly functional and so on. There is no doubt that in the course of it Apple was relying on secrets that it discovered through research and development; they ultimately resulted in the popular products that brought a lot of revenue to the company. So, all major ideas that were expressed by Thiel can be applied to this company.

4a. All the questions that Thiel came up with may be useful for a non-trivial new venture. However, there are three which seem to be the most useful. The first is the engineering question. One would make no mistake, suggesting that a start up should involve some kind of a breakthrough technology if it wants to be successful. That is why this question is very useful as it allows the founder to check whether the most fundamental aspect of a start up is present. In addition to that, this is also useful to determining whether the new venture pursuits vertical progress or horizontal progress. It is generally advised that start up should aim for the former as otherwise they will not be able to secure a share of the market and will ultimately fail.

The second question that should be mentioned in particular is the timing question. By far, this may be the second most important question as it encourages the founder to examine the current conditions and determine whether they are suitable for the new nature. The perception of Facebook may have been different if it appeared at the end of the twenty-first century or several years ago. This means that introducing the product at the precisely right time may be the key to success. Furthermore, one might develop a broad perception of this question, arguing that it also encourages the entrepreneur to consider the future and the past. It is rather obvious that in order to gain a proper understanding of the existing state of affairs, a person should evaluate the past and made some reasonable predictions about the future.

Finally, the last question that should be mentioned is the people question. There are two aspects that should be highlighted about it. First of all, it is essential to determine whether the start up is headed by the right person. In the majority of the cases, it is advised that the founder should be a visionary since it will allow one to outline the future development of the company. While it may be possible that a successful new venture may not feature a visionary, it is obvious that the presence of one is an important aspect of its success. Secondly, the people question also help to determine whether the staff is right for the venture. It goes without saying that a start up involves some risks. That is why it is generally suggested that the people who participate in it should be ready to accept those risks and be devoted to the company.

4b. Some scholars noted that the list of the questions mentioned above lacks several important questions that the investors might ask. The first of such questions focuses on profitability and may be formulated in the following way: What is the profitability of a new venture? One might suggest that Thiel may have deliberately omitted this question in order to show that start ups and new ventures must not be fixed on profit. It is obvious that as soon as they are launched and are able to find their niche, they will start generating money; however, the key point is that the people should be devoted to the vision, not the paycheck. That is why the tools that are commonly used to evaluate new ventures such as NPV or ROI are not suitable for those who would like to achieve vertical progress.

All this leads to the understanding that conventional aspects that are often involved in thinking such as cash flow or profitability should be excluded from the mindset of a person who is interested in the new ventures. Thiel might suggest that these aspects are trivial and are to be seen as having secondary importance to the idea. Indeed, it may be rather difficult for a person to come up with a new groundbreaking concept while one simultaneously considers the possible costs of it. It is quite possible that Zuckerberg or Jobs were not interested in delivering the new technology at the lowest price: they wanted the new technology to be perfect, not cheap. That is why the question of profitability may be seen as a sort of distraction that prevents a person from pursuing the real goal for a new venture.

The second question that may be quite useful for the investors, yet is absent in the list that Thiel came up with focuses on the risks. There is no doubt that the investors are often interested in the high return on the money that they invest; so, they would like to know the risks that are associated with the project. The second question may be formulated as follows: What are the risks that are involved in the execution of the project? It is quite obvious that the answer to this question will tell a lot about the nature of the project and will determine whether the investors would like to participate or not. After all, they may lose their money; so, extra precautions should be in place to ensure that this is avoided.

While it is not completely certain why Thiel excluded this question from his list, it is obvious that he may have used the following logic. It is clear that every new venture is quite risky by its nature. That is why there is no need to be fixed on the possible losses since there will always be such possibility. As a result, the entrepreneurs should accept them by default. In addition to that, it is possible that Thiel may have overlooked this question because the inclusion of it would have discouraged the audience from starting a new business. Furthermore, it would contradict with the generally optimistic view that was painted in the book. Nevertheless, Thiel does not encourage the entrepreneur to forget about the risks all together as this might lead to negative consequences.

References

Thiel, P. A. (2014). Zero to one: notes on startups, or how to build the future. New York, NY:   Crown Business.