Secret forrmula

Last week we had a big discussion in my “Introduction to Entrepreneurship” class. As I review students’ proposals I found that all of them were focusing on software products and most were mobile apps so I gave a lecture about another “secret formula.”

I told them: “A few weeks ago, I shared with you about the “Secret formula” but that is not the only one because there is another “Secret Formula” do you want to learn?

The whole class laughed out loud as they thought I was joking. Most of my students were familiar with the Secret Formula # 1: “Solve the problem that a lot of people need and give them the reason to pay a lot of money for it.” So they all laughed and asked: “Is there another secret formula?” I told them: “Yes, there is a secret formula # 2” and we will learn it today. A student said: “How many “Secret formula are there? Is it real?” I said: “Of course and this formula was also invented by Bill Gates and perfected by Steve Jobs.” The whole class laughed, but they seemed very interested.

I explained: “For many years, the software product was the focus of many startups. Students hope to build a product that can disrupt the market and make a lot of money. However, if you look closely into the most successful companies today such as Google, Amazon, Uber, and AirBnb, they do not focus on developing products because they know something that many people do not know. That is another “secret formula” that we will learn today.”

The whole class seemed excited. I explained: “In this competitive market, the product is no longer the key factor but the platform. The ability to use a platform to capture the market is the secret formula # 2. A platform should be open to allow others to build their products on it, and the more people use it, the more customers you will have. Having more customers means you can control the market and eliminate other competitors. And that is the secret formula # 2 that many successful technology companies are using today.”

“This formula was invented by Bill Gates many years ago when he created MS-DOS and Window operating system as an open platform system where other software companies could build their products on it. The more products built on top of Windows; the more customers have to buy Windows, and it made Microsoft became the most powerful software company. Of course, Bill Gates became the richest people on earth. The success of Microsoft is based on the secret formula, and that was how it destroyed Apple at that time. Although very successful in the beginning Apple computer was a closed system with its own operating system, and its own hardware and software. Since no one can write software or build hardware for Apple, the company only had limited number of applications. Over time, Microsoft, and the PC industry with thousands of applications eventually captured the market and destroyed Apple.”

“The person who really understand Microsoft’s “Secret formula” was Steve Jobs. A few years earlier he was fired by people that he trust. Staying at home, he saw his beloved company was pushed to the brink of bankruptcy because of this “secret formula”. When Steve Jobs was invited back to rescue Apple, he immediately focused on developing open platforms where others can build or put their products in them. He knew that he could not compete with Microsoft on a personal computer so he took this “secret formula” to another domain: The MP3 iPods and the iPhones. The results were The iPhone App Store and iTunes for software apps and music. By allowing app developers to build their products on Apple iPhone, and music companies to sell their music via iTunes, Apple had many users and customers. Of course, if they want their mobile apps and music, they must buy Apple iPhone or iPods. Today there are over two million mobile apps in iPhone App Store and over 20 million songs in iTunes. However, Steve Jobs maintained control the hardware of the iPhone to compete with Nokia, Samsung, Motorola, Sony Ericsson. Because the iPhone had a lot of mobile apps and music that people want, more people were buying Apple. Over time, Apple was able to capture the market and destroyed Nokia, Motorola, Sony Ericsson. By understanding the power of platform over the product, Apple sets the new rule and dominates the market until today.”

As an entrepreneur, you can focus on building software products, but if you can think strategically about what should you do to be more successful, you must learn the secret # 2: “Platform as the key factor” from Masters Bill Gates and Steve Jobs. The whole class laughed out loud, may clap their hands because they have learned another “secret formula” that they can use.

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University
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