The Importance of Competition in Business

Competition in business is a common phenomenon where a majority of business people are granted the freedom to participate in trade. Economists argue that competition is of an advantage as it orients business firms with customer satisfaction rather than profit-making exclusively. Competition is however supposed to be healthy, and the trading platform should be uniform where no party is more advantaged than the other. Due to competition, business firms are forced to established better products leading to higher customer satisfaction. It can, therefore, be argued that competition is the instigator of innovation as it forces business to find better forms of carrying out business at reduced costs with the intention of gaining competitive advantage. Peter Thiel, a capitalist, and a successful business person, however, has a contrary opinion to the various scholars who argue that competition is good in business. Thiel believes that competition is not generally suitable for societies, individuals, groups, and enterprises (Thiel, & Masters, 2014).

According to Peter Thiel, Competition is for losers. In his book, from zero to one“ he praises monopolies as the business strategy with the capacity and ability to shape the future. It is wrong to view monopoly as a bad thing as some of the most successful technology sectors in the world today including Google, Facebook among others are successful yet they have been operating in a monopolistic market for a long time. From the parameters of qualities of a great business entity, scholars state factors like high-quality products, good working environments, great customer service, and SMART goals among others. From the economist’s point of view, competition is not regarded as a feature in defining the success of a business. What is required in business is not the competition but ”creative monopolies” (Thiel, & Masters, 2014). Competition is a notion that pervades the society and distorts the way people think. It makes people see opportunities where there is none and distract them from real opportunities. Thiel, therefore, advice business persons to view competition as a negative aspect in building monopolies in business.

The reason why competition is thought to be a perfect way to iron the weaknesses in business transactions is that organizations practice destructive monopoly. People view monopolies as greedy cartels whose only objective is to immerse wealth through manipulation of prices. However, a business organization in monopolistic markets do not force prices on people but offer quality products to the market such that customers pay for more from their own will. Thiel refers the phenomenon as ”proprietary technology” (Thiel, & Masters, 2014). Creative monopolies use the high profits available to them to drive innovation leading to the development of quality products to the market. In a competitive environment, profits are smaller limiting businesses to the innovative function. According to Thiel, entrepreneurs should aim at creating effective monopolies by doing things that have never been done before instead of copying the already existing ideas to remain competitive.

I do not agree with Thiel’s opinion of competition. Monopoly is not the sole path to profits. In the contemporary business world, a lot of businesses operating in the freely competitive market has proven to be more innovative than the monopolies. A majority of the organizations in the world that make high profits are not monopolies. Without competition, organizations do not have to worry about a business takeover by a competitor. Since the customers lack an alternative, monopolies end up exploiting them by charging them more than optimum for products. Thus there are few or no endeavors to improve the quality of products limiting innovativeness in monopolistic industries. Competition is the major factor that motivates business to go an extra mile to be better at products and service delivery in the efforts of gaining competitive advantage.

b) Companies Should Strive to become Monopolies

Perfect competition according to most economists is the ideal state in any given market. The state achieves market equilibrium when demand by the customer is satisfied (Thiel, & Masters, 2014). One of the outstanding features of perfect competition is that there exist different sellers of a particular commodity. The products in a perfect competition market are homogenous. Since there is a free market entry, new businesses are established to take advantage of any demand that may exist. In return, every business secures a small portion of the entire market leading to reduced profits per business organization. Flooding of sellers leads to prices of the commodities going down further reducing the profit margin. When the prices go too low, some of the businesses close down out of making losses. After some businesses close down, supply reduces leading to price increment which again attracts other investors forming an endless cycle of the business establishment. In the long run, no business organization makes economic profits (Thiel, & Masters, 2014).

According to Peter Thiel, companies should strive to be monopolies because monopolistic markets are not controlled by the forces of supply and demand but the companies own their market. As such, they set their prices that guarantee profitability. For businesses to evade loss-making, the only solution is to be monopolistic (Thiel, & Masters, 2014). Due to lack of competition in monopoly, a company has the freedom to produce at the price and quantity that maximize profits. Google is an example of an organization that by offering products that no other person in the market can provide has developed to a monopoly. Even though there exist other organizations that provide search services like Yahoo and Microsoft among others, Google has proven to be too good at what it does thus displace possible substitutes in the market.

Thiel believes in capitalism but views it from a different angle from most of the economists. Capitalism advocates for the accumulation of capital. However, perfect competition creates competition forprofits. Since it is the objective of every business entity to make a profit, it is logical for companies to avoid similar products but rather develop differentiated products to earn more profits. Profitability help companies to build a capital base that is used in research and development that result in the establishment of new and improved products. Even in a perfectly competitive market, different businesses target gaining of competitive advantage through innovation. It is therefore essential for companies to acknowledge the value of monopoly.

I agree with Thiel’s statement that ”companies should strive to become monopolies.” Monopolies are more innovative than companies operating in perfect competition since monopolies are likely to make more profits. It is the objective of every business to avoid losses. However, the objective is jeopardized by perfect competition since the company does not have control over the quantity to be produced and the price for the products. Instead, the forces of supply and demand control the costs leading to loss-making in business. Companies should, therefore, hedge against the losses inflicted by the market conditions by striving to be monopolies. However, companies should not use restrictive measures to opponents to remain competitive but rather employ constructive monopoly.

Question 2

All the ideas and concepts that are famous and familiar to people today were once unsuspected and unknown (Thiel, & Masters, 2014). Even in the present world, some things are not yet discovered, but with human’s endeavor to unearth secrets, the aspects will one day be realized. However, there will never be a time when there will be no more secrets. In the business environment, the study of particular phenomena that result in certain discoveries are the ingredients of innovation. According to Thiel, there are two categories of secrets namely secrets about people and nature (Thiel, & Masters, 2014). One is expected to study aspects of the physical world that is yet to be discovered to find the truths behind natural secrets. Secrets about people are more common in business environments than natural secrets. The secrets about people relate to the aspects people don’t know about themselves or things that people don’t intend other parties to know about them.

There is always a better way of doing things only that the specifics are not known yet. Every company has secrets because innovation is not a onetime affair. Improvement can be made to processes and products until the end of times. As such, companies experience the secret of nature where humans are yet to discover things that would be useful to the company operations. Discovery of certain natural secrets are the primary sources of innovative products that result in the establishment of products that have never been discovered by anyone else leading to monopoly. For example, in the technology sector, biometrics is a recent technology that has improved the security sector in a significant way. However, the technology is not without limitations and scientists are on the verge of discovering a more sophisticated technology. The yet to be invented technology is a secret to the companies that deal with technology.

A majority of companies also have secrets that they do not intend their competitors, customers, and other stakeholders to know (Thiel, & Masters, 2014). A majority of businesses operate in perfect competition markets. The secrets could either relate to a company’s strengths or weaknesses. A majority of companies keep the secrets about their production processes to prevent competitors from copying their design as a way of creating monopolies. Every business organization shun away from competition and thus protecting valuable information that rivals in business can use against a given firm becomes a necessity. According to Thiel, a great company is a conspiracy to change; when you share your secret, the recipient becomes a fellow conspirator (Thiel, & Masters, 2014).

Secrets contribute to superlative performance in business in that a company can hedge against unhealthy competition. Being unique and providing unique products to the market calls for companies to do things differently from the rest. Keeping certain secrets by avoiding unauthorized access to confidential information discourages competitors from producing products similar to those of the company maintaining the secrets. For example, google servers are protected by a series of firewalls to prevent unauthorized persons from getting private information from Google to gain competitive advantage. Keeping secrets also denies rivals in business from taking advantage of a company’s weaknesses. When competitors learn the inadequacies of other enterprises, they exploit the opportunity as a counterattack.

Question 3

a) Characteristics of Entrepreneur Perspectives

The future is said to be unknown. However, entrepreneurs have two approaches of viewing it; either as uncertain or definite. When an entrepreneur treats it as absolute, it becomes easier to shape since it becomes possible to understand it in advice. However, if treated as uncertain, entrepreneurs often give up on trying to either understand or form it by thinking that it is ruled by randomness. The future can also be expected to be better or worse than the present. Pessimists fear the unknown while optimists welcome it. A combination of definite, indefinite, optimism and pessimism gives four entrepreneurial views about the future.

Indefinite Pessimism

An indefinite pessimist is a person who looks out into the possible challenges in future but has no idea of how to respond. The high rate of technological advancement is likely to impact nearly all business sectors. However, business persons under the indefinite pessimism notion do not know the best course of action to take. The available technology is likely to be a thing of the past in a short period exposing entrepreneurs to a dilemma. Business persons are faced with challenges but are uncertain of the best course of action. Instead of working towards developing new systems and products in anticipation for unfavorable conditions in the future, they wait hoping that things will get better. From a business perspective, waiting for things to happen is the only thing that people under the view are exposed to. In the meantime, normal life proceeds with no preparedness for the worst. The phenomenon is familiar to Christians who believe that through the power of God, things in life will always be better. Business employees and leaders believe that some things in business are bound to happen if they are meant to, and there is nothing that can be done to avoid it. People call it the inevitable or fate but according to Thiel, it is indefinite pessimism. A good example of an indefinite pessimist is an entrepreneur who continues operating a business in a country experiencing civil wars. Instead of closing down operations or installing a more improved security system, an entrepreneur proceeds with normal operations.

Definite Pessimism

The notion is based on the belief that the future is not uncertain and can be manipulated (Thiel, & Masters, 2014. Definite pessimism sees the future from a challenge point of view and advocates for preparedness for things that are just about to get worse. Unlike indefinite pessimists who have no idea of how to handle unfavorable future occurrence, definite pessimists are always ready to handle the challenges that come their way. In a business perspective, entrepreneurs operating under the definite optimism ideology can devise means and strategies to ensure survival in the future. Some of the strategies employed in hedging against an unfavorable future are by doing intensive research to ensure that the current trend is interpreted to predict the future. For example, the business world today is changing at a very fast rate owing to the technological advancements. A definite pessimist should, therefore, respond by ensuring that the right training is provided to equip the staff with the right skills to counter unfavorable conditions in the future. Training is one approach to ensuring preparedness of the entrepreneur in counteracting the uncertain future. Other approaches include product redesigning, investment in the right technology among others.

Definite Optimism

Definite optimists believe that the future is better than the present if planning and work are directed towards that end. The notion has been the focal point of the western world from the 17th

century. Business people, doctors, engineers, scientists among other professionals made the world a better place for human survival (Thiel, & Masters, 2014). The business class in the 19th century created more productive forces than all the earlier generations. Canalization of rivers, land clearing for cultivation, electric telegraphs, railways, steam navigation, application of chemistry to agriculture and industry machinery and subjection of the forces of nature to man were some of the significant contributions of humans in shaping the present day world. Entrepreneurs start operations without knowing what the future has in store for them but strongly believes that the future has answers to the problems that may arise. For example, during business startup, an entrepreneur prepares a business plan projecting the future that is yet to be experienced.

The customers to a given product are not available at the initial stages of the business, but an entrepreneur hopes that with time, the business will be flocking with customers. Since the business operations keep on changing with changes in legislation, business environments, customer tastes, and preferences among other factors, an entrepreneur believes that the changes that occur in the industry will solve themselves. For example, the capital required to upgrade the businesses operations will be available when the time comes. However, definite optimists concentrate on activities that will take advantage of the future through programs like product promotion, research, and development among others.

The present day is as a result of the visions and efforts of people who lived in the past. The inventions we have today are as a response to challenges that the people in the past faced and not just hoped for things to be better but also sought a long-lasting solution. For example, the Eurasian shipping traffic in Cape of Good Hope prompted the construction of the Suez Canal in 1869. The people of the time worked tirelessly towards providing a traffic solution an indication that they were optimistic that the Suez Canal project would solve the traffic problem and make the future better (Thiel, & Masters, 2014). In business enterprises, employees and leaders should hope for a better future and institute policies and structure that are necessary for the future business. In accounting, businesses operate under an ongoing concern which is a definite optimism ideology put in practice.

Indefinite Optimism

According to indefinite optimism, the future is always better than the present, but it is not sure how. It is thus impossible to plan because the future outcome is only predictable regarding positivity only. Indefinite optimism in business occurs where employees and management expect profits in future but do not know how to design it concretely. Instead of developing a new product, a business person rearrange the already invented ones. For example, in the banking industry, bankers made more profits by rearranging the capital structures already in existence (Thiel, & Masters, 2014). Squeezing efficiency from the already existing models is a prominent characteristic of indefinite optimism. In life, things are bound to get better with time, the technology of the last decade is different from the present technology, and there will be a different model in the next decade. Things become better every day even if it has nothing to do with our efforts or plans. Technological advancement tends to accelerate automatically. As a result, people grow up with a continued notion that the future will be better shadowing their abilities to make plans on how to manage the future.

b) The Best Outlook

Definite optimism is the best-suited outlook to establishing a startup with the potential to grow into a great enterprise. Unlike indefinite optimism that does not relate to planning for the future, definite optimists believe that they can make the future better. Planning is a crucial aspect of business growth and development where specific desirable results are as a result of careful planning in advance. In business, organization management should ensure continued improvement in processes for improved performance. For example, in the technology sector where google commands the highest percentage of the customer base, it is crucial for the organization to continue with inventing new incentives to customers. The current market situation should not deceive the management that the future will be like the present. Therefore, planning is an essential aspect of business associated with definite optimism. A plan helps in the development of monopolies as companies continuously find means of doing things in a better way as compared to everyone else in the market. Thiel relates monopolies with greatness in business. The outlook also prepares enterprises to discover natural secrets that make it possible for innovative endeavors to be possible.

c) The Opinion of Thiel’s Framework

Thiel’s framework for predicting the future of an enterprise is based on real-life illustrations making it sensible. Different businesses are based on different management ideologies. There are businesses build under the notion that the future is better or worse. The two perspectives play a significant role in ensuring the steps that need to be taken now for the sake of the future times. Optimism and pessimism can be regarded as either definite or indefinite. In the world today, organizations are still based on the four outlooks developed by Thiel. Optimism is more common than pessimism. If businesses expect failure in the future, the employees lack the motivation to fight through to the future. Management, therefore, has an obligation of prior planning to mitigate against losses in the future.

However, pessimism sometimes helps an organization in surviving harsh situations in times to come. The approach ensures that business persons identify possible areas of weaknesses in operations to mitigate against loss. In accounting, prudence principle is an example of definite pessimism where businesses do not off cast benefits. If the expected returns are projected to be high, accounting principles require a recording of a lower rate in the books of accounts. The most prepared companies for unforeseeable circumstances operate under definite pessimism.

Some businesses depend on pro-activeness in facing possible challenges in their organizations while others are reactive. In Thiel’s terms, the two perspectives are referred as definite and indefinite A majority of businesses do not take the initiative in planning with the intention of influencing the future. They believe that fate controls their tomorrow and thereby result in living in the present hoping that the future will be okay. If it is not, they wait until the uncertainties unveil and then act. Majority of the organizations that operate under the indefinite ideology whether optimists or pessimists are more likely to fail as compared to definite ideology oriented entities. Some threats in business can be counteracted, and thus management of organizations should be able to study the business environments to discover secrets vital to business success.

Question 4

When examining startups to determine whether they qualify for support from his venture capital company, Thiel raises and seeks to answer seven questions regarding the initiative (Thiel, & Masters, 2014). The first is an engineering question that seeks to discover whether the creation of new technology is possible rather than relying on continued improvements. The second question is related to timing where Thiel determines whether it is the right time for investment. The third question relates to the monopoly issue. Thiel identifies whether the startup is starting with a significant market share or not. The fourth question is related to whether the right people to carry out the enterprise’s operations are available. The fifth question relates to distribution. Making a product to Thiel is not enough, an enterprise should have a delivery system to supply the products to the target market. The sixth question that Thiel concerns himself with is the durability question. The market defensibility is vital, and a startup should be able to survive both in the long run and the short run. The last question in Thiel’s list is the secret question that seeks to determine whether a venture has a unique strength that is not applied by others in the industry (Thiel, & Masters, 2014).

a) Which of these questions apply to the full gamut of non-trivial new ventures needing investment dollars, from establishing a trendy restaurant to starting a computer security business to coming up with a truly innovative product that has the potential to move markets?

One of the significant questions that every startup must be anchored upon is the question of timing. Businesses should be started when there is actual demand or expected demand in a given market. The timing should be based on micro and macro environmental factors. A new business venture should be timed so as not to be the last to enter a given market. When demand is identified business enterprises seeking investment capital should ensure that the market is not already flooded by investors as it is likely to attract losses. Market share is a fundamental factor aspect that determines business performance. Business startups should, therefore, consider the starting market share. A small market share translates to a small number of customers and consequently a reduced rate of profitability (Thiel, & Masters, 2014).

Businesses require the right personnel both at the management level and at the operational level. The suitable staff should be equipped with the proper knowledge, skills, and experience in given operations to ensure high performance. Before starting up a business enterprise, it is critical that an entrepreneur develops a competent team of workers that have the prerequisite qualifications to achieve the goals and objectives of the franchise. Availability of the right team ensures that an organization functions are carried out in a smooth manner that guarantees success. Innovation is dependent on the workers quality, and thus, business startups should consider the availability of the competent and adequate employees before starting operations.

Durability question is another important question that startups should seek to answer. Business ventures should be based on an ongoing concern where the intention is to survive the market and grow in the long run. Whether a business is started to take advantage of a short-term market or to survive ten to twenty years or more is of critical significance in sourcing finance for investment (Thiel, & Masters, 2014). Availability of products to a business is not enough to drive sales that promote profitability. Therefore, in conjunction with the durability question, an investor should also consider the distribution question. Depending on the distribution of customers in the market, the investor should consider a suitable distribution channel to cover the market adequately.

b) Notable Questions Missing in Thiel’s List

Competition

Before gaining entry in to a new market, it is critical to understand the current structure of the current situation in a given industry. It is therefore important for startups to analyse the businesses already in operations to be able to predict the possible outcome of an investment. The more the number of participants, the more the likelihood of failure in business. Entrepreneurs seeking to start businesses should, therefore, ensure that the market is not industry. The investor can also use the information gathered in competitor analyses to develop new products and systems different from the competitors to gain competitive advantage. The question that investors with intentions of starting new enterprises are what is special about the products in the market to survive the competition.

Thiel did not include the competition question on his list probably because he believes that competition is not generally good for businesses. He would not advocate for a business startup that intends to compete with other already in existence. Rather, he would propose a business startup to be unique and strive to be monopolistic instead by developing products, services, and systems that do not match any other business in the market (Thiel, & Masters, 2014). Being a critique of competition in business, it would be ironical for Thiel to include it as a factor to consider because, in his ideal business model, the market should be monopolistic and not freely competitive.

The question of the market structure

The structure of the market that business operates on is of great significance. Economists argue that perfect competition is the ideal form of the market structure where investors are granted the freedom to carry out business in any industry without restrictions. When there are too many sellers of a given commodity or substitutes in the market, the prices are likely to be low leading to losses. However, an industry that is not yet ventured in to is uncertain and is likely to be riskier. Economists argue that the structure is the most ideal since it discourages business people to dictate the market prices. Thiel did not include the question of the market structure in his list because he believes that monopoly is the ideal structure. When a business is established, the fundamental principle according to Thiel is to develop products that do not match what other parties in the industry are offering to be monopolistic.

Reference

Thiel, P. A., & Masters, B. (2014). Zero to one: notes on startups, or how to build the future. Crown Pub.