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Commandment of Entry (COE): Feels like I'm missing something fundamental about it.

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Idea threads

Chris Sciora

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I'm trying to figure out how to explain COE to my kids when they raise the points below.

The concept of barrier to entry (BTE) is straightforward. MJ does a good job explaining it through metaphors and establishing that lower barriers to good opportunities inevitably lead to greater competition. The greater competition can only be overcome by being exceptional in that particular niche. He uses the example of the internet limousine lead generation company as an example where it was easier for him to be exceptional in a crowd of 12 competitors vs. thousands or hundreds of thousands of competitors. All accurate.

However, I'd argue that barriers to entry are only high for businesses that require large amounts of capital, are highly regulated, have professional licensing requirements or have legal, technical and/or intellectual hurdles. Launching satellites, building rockets, practicing medicine and distributing pharmaceuticals are all legitimate examples of high BTE. Those are also a tiny fraction of all businesses.

Everything else is low BTE including MJ's limousine lead gen company. Lead gen has been around for decades. All that's needed is a phone. It wasn't a high BTE that resulted in only twelve competitors. It was lack of awareness of the market opportunity. Pretty much every internet business has zero BTE. Signup for a WordPress site and start blogging. Same thing with becoming a YouTuber, eCommerce seller, Shopify merchant, Amazon affiliate, all of them. All that's needed is a pulse and an email address. Everyone literally starts on the same square.

Real world businesses aren't any different. We recently launched a home services company starting with lawn care. Anyone can start cutting lawns with a push mower and phone. Start a burger joint by going to the supermarket for ground beef and buying a grill from Home Depot. Get into fancy coffee drinks by hitting Costco for an espresso machine. Does that really mean you're competing with Five Guys? Or competing with Starbucks? That doesn't sound right.

I spent several weeks doing upfront work to research the market, interview local lawn care companies, pick target markets and marketing channels, develop a bid process, research equipment, arrange financing and a long list of other things. I suppose that's "exceptional" by definition since hardly anyone does it, but it feels more like "Well, that's how you start any business if you want to give it the best chance of future success." Which doesn't really sound exceptional. It just sounds effective. Unlike MJ's example of being a stellar poker player, anyone can implement the same steps. It doesn't create high BTE.

What I've been kicking around is the true BTE for most startups isn't what appears to be the BTE. Every lawn care guy struggles to grow past 30 - 40 customers because of the friction that comes with managing the existing accounts. Without systems in place to start, it's almost impossible to grow any larger. There's literally no time available to fix it after the fact. Your early success dooms you to future failure or more accurately sharply caps your growth potential.

The BTE for lawn care is pretty low. The BTE to building a highly successful lawn care business is extremely high. I'm having trouble putting that idea into bite size pieces for my kids. Both are lawn care businesses doing seemingly the same thing - cutting lawns. Same with the burger and coffee examples.

How would you explain the difference between low BTE and high BTE when both are selling and delivering identical services to the same customers in the same market? That's where I'm stuck.

@MJ DeMarco @biophase @fastlane_dad @Andy Black @ZCP @Antifragile @MitchC
 
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Antifragile

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TL;DR​

  1. Execution in itself is a huge BTE for most businesses, it is not just money or specialized knowledge.​

  2. Business is like a child, growing up it'll crawl, walk, run, drive, fly... Each step will have its challenges and to outside these are all BTE.​

  3. Justice Stewart was stuck on how to describe pornography, and Novak said to him, "Mr. Justice, you will know it when you see it." Same here, @Chris Sciora , you will know BTE when you see it. You are probably overthinking this.​

Long thought dump...​


What are high and low barriers to entry for a business?


The term "barriers to entry" refers to the challenges that a new business faces in entering a market. These challenges can be either high or low, depending on the specific industry.

For example, the real estate development industry typically has high barriers to entry. This is because the development process is capital intensive and requires a great deal of experience and expertise.

On the other hand, industries with low barriers to entry are typically much easier to enter. These industries often have less capital requirements and are less complex.

So, why do high barriers to entry exist?​


  • There are a few reasons. First, high barriers to entry protect incumbents from new competition. This is because it is very difficult for new businesses to overcome the challenges and successfully enter the market.
  • Second, high barriers to entry can also create economies of scale. This is because the fixed costs associated with entering the market are spread out over a larger number of units sold.
  • Third, high barriers to entry can allow businesses to charge higher prices. This is because there is less competition in the market, and businesses can use this to their advantage.

What are some examples of high barriers to entry?​


Some examples of industries with high barriers to entry include:

-Oil and gas exploration and production

-Pharmaceuticals

-Biotechnology

-Aerospace

-Defense

-Automotive manufacturing

These industries tend to be very capital intensive. And need significant experience and expertise to be successful.

What are some examples of low barriers to entry?​


Some examples of industries with low barriers to entry include:

-Food and beverage

-Retail

-Clothing

-Technology

These industries tend to have lower capital requirements, and are generally less complex. They are often easier for new businesses to enter successfully.

What are the challenges of becoming a real estate developer?​


Real estate development is a capital intensive industry that requires a great deal of experience and expertise. The development process can be very complex.

Some of the challenges of becoming a real estate developer include:

-Access to capital

-Permitting and regulatory approvals

-Project management

-Construction

To be successful, developers must have a deep understanding of the market and the development process. They must also be able to navigate the challenges associated with each project.

But you mentioned lawn care and burger joints...​


Ray Kroc made MacDonalds into super company.

Ray Kroc was a visionary businessman who saw the potential of the McDonald's franchise model. He purchased the company from the McDonald brothers in 1961 and began to rapidly expand it. Under his leadership, McDonald's became one of the most successful companies in the world.

Kroc was a master marketer and knew how to appeal to customers. He also had a deep understanding of the restaurant business and was able to streamline operations. These two factors contributed to the success of McDonald's under his leadership.

Kroc was a tough negotiator and was able to get favorable terms from suppliers. He also invested heavily in advertising, which helped to drive sales.

Under Kroc's leadership, McDonald's became a global powerhouse. Today, it is one of the most recognizable brands in the world. Kroc's legacy continues to be felt at McDonald's, and his impact on the company is immeasurable. Thanks to his vision and leadership, McDonald's is the juggernaut it is today.

Was his barrier to entry low or high? I argue that it was high. McDonald's brothers didn't have what it took to make it. Ray Kroc was the barrier to entry - systems thinking, scaling, negotiations etc.

So no, you are not competing with a chain when you open a burger location. The BTE for creating a successful franchise is massive.
 

ZCP

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@Chris Sciora how old are the kids? rough ages ......
what were their questions and points raised?
are you doing a business with them now?
 

fastlane_dad

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@Antifragile covered many of the bases right on the money.

But what you are posing is more of a philosophical question and a thinking exercise. It’s all a matter of perspective and what your goals / visions are.

Yes – some barriers of entry are definitely unattainable for the ‘layman’, or require a LOT of perseverance, dedication, luck and genetics (never mind the resources involved as well) – creating a new pharmaceutical, launching into space, taking on Tesla or Microsoft or maybe sometimes even getting into the NBA or having a shot at being top dog CEO at a fortune 500 company.

Some require capital, others require manpower – sometimes to an extreme.

Barrier to entry is the culmination of a lot of factors, including the ones above and many many more.

To me I view barrier of entry to how successful am I trying to get in the land of the current ‘marketplace’ (and even success here can be defined in so many ways). So can we say that barrier of entry is answered and defined many times with an end-goal in mind? To make and sell one hamburger a day? Quite low (BOE) I'd say! But to systemize and sell your EXACT hamburger to millions of customers around the world - well now we have a real challenge on our hands!

Anyone can private label a ‘protein powder’ nowadays and list it on amazon. The question is what happens after – that’s where the barrier of entry kicks in! Todays landscape and marketplace and barrier to entry question and answers (to what even looks like an identical business on the outside) are VASTLY different then the same answers and questions a decade ago.

Ten years ago it might have been more ‘difficult’ to locate a protein powder manufacturer – but easier to break into the Amazon landscape.

Today you can summon virtually any product at the helm of your whims (even a custom one!) – but the barrier to entry will be overcoming massive competitors and potentially have enough bankroll to kickstart your product to some sales.

The challenging part here is sometimes you might not even know what these 'barrier of entries' are until you are in the helm of your business taking action. And just know that my barrier of entry might be vastly different then yours - for an identical business (i.e. I know more people, have more/less money, have been in this space for years, know where to source products, own a manufacturing plan, have a massive social media following, etc.)

How are you gonna take it (your new product) from zero sales to 10 a day to thousands of day of sales? And each step presents a new barrier to entry challenge that you might or not be able to overcome depending on your execution (and willingness) abilities. Can you ‘raise money’, hire and train a team, figure out how to market your specific product, innovate quick, shake hands or make cold calls?

The way I think about it --- In order to be successful in the FASTLANE economy you need to position yourself to align with enough barrier to entry to have a (somewhat) unique product, a novel way of marketing / distribution, and be cognizant of your abilities and pocket size --- but NOT so to the point of discouraging you completely from starting.
 
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Chris Sciora

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Was his barrier to entry low or high? I argue that it was high. McDonald's brothers didn't have what it took to make it. Ray Kroc was the barrier to entry - systems thinking, scaling, negotiations etc.


So no, you are not competing with a chain when you open a burger location. The BTE for creating a successful franchise is massive.
Thx! I agree with you. The biz plan I laid out was for developing fifty locations over a five year period. More likely corporate owned/operated vs. franchise, but same difference. I actually used the pornography example with my wife earlier e.g. "I know what I mean, but can't figure out how to convey it to a teenager." I wasn't thinking in terms of the ability to scale in BTE terms.

Cutting lawns isn't the business. It's all the systems we've been wiring together upfront to grow the darn thing.
 

Chris Sciora

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@Chris Sciora how old are the kids? rough ages ......
what were their questions and points raised?
are you doing a business with them now?
Two girls 13YO and 10.5 YO. This particular business is the training grounds for both of them. We launched Two Dog Lawn Care about four weeks ago as a family business. It's a subsidiary of Two Dog Home Services along with property management down the road from now.

We're calling it Startup School. Similar to our homeschooling curriculum, but hands-on with actual revenue. The focus is mostly with my older daughter for the moment. She can easily manage the cloud based systems we've been wiring together along with most of the lawn care equipment. I'm just a little iffy about the riding mower right now. My younger daughter can help with marketing hand-outs, door hangers, yard signs, stuff like that. Plenty of time for her.

Although the younger is already drafting marketing collateral. I almost fell down laughing when she handed one to me last week. I picked home services / lawn care specifically because it's easy to for a kid to understand conceptually. It's also easy to contrast what we're executing vs. the vast majority of solo operators that are stuck in first gear. A big chunk of the Startup School curriculum right now is about marketing, cashflow and systems. It's been fun.

Her questions are limited to the topic at hand. The big picture is - well - too big picture right now. ;-)
 

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Chris Sciora

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The way I think about it --- In order to be successful in the FASTLANE economy you need to position yourself to align with enough barrier to entry to have a (somewhat) unique product, a novel way of marketing / distribution, and be cognizant of your abilities and pocket size --- but NOT so to the point of discouraging you completely from starting.
That's actually *really* helpful. The end goal matters quite a bit when it comes to evaluating BTE.

It's the difference between earning a dollar doing a job vs. building a sellable business in the same field.
 

MitchC

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Since I was tagged I’ll dump my thoughts out.

You can add barriers to entry, or build a moat as startups are now calling it, as you grow.

I started out dropshipping a generic product but once I built some money up in invested in a custom mould and branding. Now any competitor would need to invest in a mould to compete, and because I had branded products no one could steal all the review photos and videos I had because my logo was on the products. I’ve since built out a big range of products which had made my aov higher. So now someone would need to launch with a full range to compete. My site has also had $1000s spent on it to convert so they can’t just through up a crappy store and compete. 100s of reviews and review photos too.

For lawn care:
Better equipment so you can do bigger jobs and jobs faster which would mean you could charge prices the average company can’t compete with.

Branding. It’s hard to get your name known, if your name is everywhere thats hard and expensive to compete with.

Offering more services, if you offer more services you can charge more to acquire a client because you can charge those clients more.

SEO

Also you didn’t tag @Johnny boy who actually does lawn care
 

Chris Sciora

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Also you didn’t tag @Johnny boy who actually does lawn care
Yeah, I probably should have. It felt like tagging any more people was pushing the limit.

Not so much from the lawn care angle. That part doesn't really matter. More from the perspective that he started with basically a lawn mower and phone and built a pretty defendable niche that's an order of magnitude bigger than the typical lawn cutting business in only four years.

I really like the concept of the moat vs. barrier to entry. It better conveys that the barrier exists entirely because it was built by the king of the castle to protect their own position. Take your story. Anyone can still easily sell stuff online, but it will be a tough slog competing with you sitting in the castle behind the moat. The branding, reviews, product range and conversion rates make it tough to attack you, but easy to defend your position. It's a great analogy.
 
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Chris Sciora

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In the end, I decided the Commandment of Entry is incomplete as written. That's OK. It's a great book that runs 320 pages. I can disagree with three of them. Specifically the advice about avoiding businesses with a low barrier to entry unless you have plans to be exceptional ala the highly skilled poker player.

That advice knocks out too many opportunities for people that don't have the time, resources or knowledge initially to start in a less crowded field. They will never be the highly skilled poker player. It's better to get started on something easy and change tracks as needed vs. constantly searching for the ideal opportunity. Learning to compete and stand out in a crowded field is a tremendously valuable skill that will be helpful in every other business you start.

Thousands of potential competitors all doing the same thing is fine. The critical part is understanding that's the case upfront and making plans to quickly build a competitive advantage which protects your business from other people who might try to copy your early success.

"Think different" as the Apple ad slogan used to say and start building a moat from Day 1.
 
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MJ DeMarco

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As someone said, you are overthinking it.

How would you explain the difference between low BTE and high BTE when both are selling and delivering identical services to the same customers in the same market? That's where I'm stuck.

Entry = A Process.

And "the process" is almost symbolic to execution.

So many people aren't interested in engaging in process, they want events.

Is starting your business an EVENT?

Think joining an MLM. Joining an affiliate program. Joining a dropshipping service. These things take a few minutes.

The longer it takes to "start" the business and get your first customer, the higher the barrier.

I don't view starting a lawncare company as a true low-barrier business because it still will take you several weeks to get started, at least on a playing field were you can acquire customers. That said, it is a "lower-barrier" business so competition will be above average, but much of that competition will be weak executionally, due to the low barrier.

The Control Commandment can be equally murky, because when it all comes down to it, none of us have control. Not even me.
 

NeoDialectic

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As others have mentioned, you are stumbling into issues because you are trying to define a concept that has more "you will know it when you see it" qualities than "if it meets these standards it is X". You start running into philosophical booby traps all over the place when you wade in these waters.

But hey, I love that! So here it goes.

Based on your complaints, I would say the best way for you to reconceptualize BTE is that it should be something that is not only immediate but ca be evolved over time. So instead of viewing it as something that defines a business generally, view it as a landmark to attain in the business that you strive for. So instead of simply asking "does this business have a high BTE". Ask "Does this business have the potential for me to put up significant BTE's". The highest BTE would be one that immediately comes with a large BTE and then it goes to the lowest possible value which is a business that will never have BTE. If your business doesn't start with a high BTE, a loose guiding principle could be "how can I make my business the least commoditized as possible".

So for your daughters......

bte.jpg
A. An example of this would be a something like some forms of affiliate marketing. It's not your product, the place your advertising is likely not yours, the method your using likely only works well because the competitors haven't caught on yet, etc...That isn't to say that you CAN'T ultimately raise BTE and make a good business out of affiliate marketing. Enough creativity and appetite and anything can be made good. But it would likely no longer be those forms of affiliate marketing (for example you springboard your experience into making an advertising agency)​
B. I would view things like simple real estate investment to fall under here. Very high capital investment required, but at the end of the day alot of people have alot of money. It's why real estate investment does give returns... But on average it doesn't do that well compared to other investments.​
C. Your lawn mowing business! Today you start with a mower in hand and a sparkle in your eye. Tomorrow you reinvest profits to buy bigger and faster lawn mowers. Now you can mow 3x as fast, so you can charge 1/3 as much for the same job as little timmy would have (small BTE addition). Then you start adding other upsells to your business, like trimming their trees at the same time, cleaning their gutters, power washing their driveways, etc... If needed you could charge less than the new guy and run your mowing portion at a loss, to kill your competition, and still profit as a business because of your other profits (Big BTE in a local market). Then when you have been doing it for 5 years and have always been on time and done a great job, you have a BRAND. Why would they pay $5 less and risk someone not showing up, when they know CHRIS will always show up for you. Then you expand your reach to neighboring areas and next thing you know you are in 8 states and your economies of scale give you ultimate BTE power.​
D. Leaning on the real estate example, this would be some kind of business venture that deals with real estate​

These examples are off the top of my head, so don't hold me to the exact categorization. Also, this is a square with 4 options for simplicities' sake, but the reality is its a gradient in all directions.
 
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Nicole

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There is a difference between work done locally, versus work done over a distance. When you start off mowing a lawn, you can personally mow the lawn yourself. You can know the specific individuals who are helping you mow the lawn. When you try to increase the size of the lawn care business, you have to take on the role of a person directing from afar without doing the work yourself. That means, your barrier to entry is your ability to hire strangers and anonymous people who you trust to do the job well, people you trust to understand the company's culture and agree to follow it. It's a different set of abilities. Mowing the lawn yourself requires you to know how to use your own physical arms and legs and your eyes to see, but knowing how to direct a large business, from afar, without knowing any of the anonymous faraway strangers who are working for you, commanding them to do just as good of a job as you would have done if you could do it yourself - that takes a different set of skills and abilities. You have to do certain kinds of things to control the corporate culture, the corporate rules and methods, in a large anonymous business. It becomes a barrier to entry when you have to switch over from doing one kind of skills that you're naturally good at, to some other kind of skills that you aren't naturally good at, or will never be good at, or something that you can do, but absolutely hate to do.
 

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