Elon Musk has become one of the richest entrepreneurs on the planet. He didn’t get there by pure luck or happenstance, but rather through a shrewd determination to think big, act decisively, and exploit X-Factors.
What is an X-Factor?
An X-Factor is the edge that underpins strategic activities and blocks competitors from trying to imitate your organization. It addresses a huge, established industry choke point. Significant value in and valuation of a business happens when you gain control of the choke point.
Musk Exploited X-Factors
The key is identifying the potential X-Factor that others lack the awareness or ability to identify. It may start with small incremental improvements but over time could result in a 7-10X advantage in crucial areas like patents, resources, cost savings, customer experience, or talent.
So how has Elon Musk won so consistently? Controlling industry constraints.
For example, let’s look at Tesla. The electric car industry is competitive, so Musk focused on controlling the batteries - the key constraint in scaling up electric vehicles. In January of this year, he invested another $3.6 billion into his Nevada battery plant. In April, he announced a battery factory being built in Shanghai. His South Australia battery array has already saved Australians over $116 million.
He also built Tesla's 12,000+ Supercharger network, fighting to be the standard for electric vehicle charging. Recently, Tesla has even licensed this network to Ford.
In the example of SpaceX, Musk pioneered reusable rockets, removing a huge cost constraint in space travel. SpaceX can launch payloads into space for 1/10th the cost of NASA, with 30 times lower cost overruns.
At Tesla and SpaceX, Musk teaches his team how to utilize an index to identify 10X opportunities and an algorithm to challenge base assumptions. As a result, the SpaceX team reduced the cost of a rocket from $2 million to $200,000 - a 10X advantage.
The Index and Algorithm
He called the index the “idiot index.” It is the ratio of the total cost of a component to the cost of its raw materials. Something with a high idiot index—say, a component that cost $1,000 when the aluminum that composed it cost only $100—is likely to have a design that was too complex or a manufacturing process that was too inefficient. As Musk put it, “If the ratio is high, you’re an idiot.”
Musk taught his team the following five step process he called “The Algorithm” to help them take action.
The key is not to think incrementally, but rather transformatively.
In other examples, the right questions centered around the resources that companies could lock up and own. When John D. Rockefeller’s Standard Oil boomed, Rockefeller had made an effort to control the barrels that oil was shipped in. Going one step further, Rockefeller even set out to control the iron rings that kept the barrels bound together.
In 1997, Blockbuster CEO, John Antioco, cut a groundbreaking deal with Hollywood studios in which Blockbuster would buy thousands of copies of popular films for $6 apiece plus a 40% share of the rental. This became Blockbuster’s X-Factor. Up-front costs that were more than ten times lower than those of its smaller rivals. Not surprisingly 2,500 video shops, about 10% of the total in the U.S., went out of business during the same period. Blockbuster kept growing and at one time had over 8,000 stores and became the most popular video rental store,until it was taken out by another X-Factor created by Netflix that transformed the customer experience.
Obsess over the right questions
When seeking a 10X competitive advantage, it is important not to jump straight to solutions. Too often, we become focused on finding the "right" answers without first determining if we are even asking the right questions. To truly gain an exponential edge, you must obsess over identifying the core questions that will unlock transformative insights for your business. As Albert Einstein said, "If I had an hour to solve a problem, I'd spend 55 minutes thinking about the problem and 5 minutes thinking about solutions."
When you obsess over the right questions, the answers have a curious way of revealing themselves in due time. So start questioning today!
Where can you get a 10X cost advantage?
Is there new technology or a novel process that could dramatically reduce your costs compared to rivals? Don't just chip away at costs, completely rethink how parts of your business work. Uber's app gave them a huge cost advantage over taxis. Airbnb doesn't pay for real estate like hotels. Find your 10X cost advantage.
With the right X-Factors, your team can build an unassailable moat and rapidly scale up your business while competitors wonder what hit them. The first step is asking the right questions to unlock transformative growth.