Trade Secret Explanations

If you want the best for your team’s business, then you’re looking for competitive advantages. They should all sum up to better service and value to customers.

In most discussions, competitive advantages are seen as physical assets, essentially property rights. This view is incomplete and in a critical way. In this article, I will show you two things.

1. You will understand why the greatest competitive advantage is trade secret explanations.
2. You will understand why explanations are a unique kind of physical object in which no one can have property rights. But you can still keep them secret, and you will learn how.

There are many ways to learn how to succeed and make innovative products, but the best approach–all at once–costs nothing to gain and can be lost at any moment. And yet, those who use it earlier on, as long as they keep going, will be ahead of competitors who started later–and certainly those who never use it.

Read on.

• The Greatest Competitive Advantages Are Trade Secret Explanations
• Profitable Business Assets Do Not Exist Until People Make Them
• All Products Encode Prescriptions
• Explanations of the Market Make Products and Other Business Actions
• How to Put Moats Around Your Profitable Explanations
• Intellectual Property Law Does Not and Cannot Protect Explanations
• Trade Secrets are Common and Awesome
• You Could Lose Your Fundamental Competitive Advantage at Any Moment
• Defend Against Reverse Engineering with Greater Understanding
• Take an Informative Detour Into Evolutionary Selection
• Start Small with Your Unique Position and Grow it

The Greatest Competitive Advantages Are Trade Secret Explanations

We’ll dig into the trade secret side of things in a second. The point there for you is exclusivity, the ability to draw profits out from useful knowledge that your competitors don’t have. But when is commercial knowledge profitable in the first place?

The example of Warren Buffet will help us here. He spends a lot of time mulling over company materials, figuring out whose moats are so grand that any idiot could defend them. He focuses on physical assets. The man is brilliant and hard-working, I have no criticism of him. I only want to observe that he focuses on the results of creative business processes.

Whatever the right ‘who did what’ balance of credit that is reflected in any particular balance sheet, the ambition, passion, and talent of owners and employees can pay off in many different areas: From engineering and design, or marketing and sales, to finance, legal, and customer success.

Profitable Business Assets Do Not Exist Until People Make Them

Profitable physical assets are almost never just found, especially in the modern era when we control our environment more and more than just react to it. Revenue-generating company assets are made–people put them into the world.

Even a natural resource like oil that is found in the ground is extracted, processed, distributed, labeled, and used with other products like cars. Progress involves people using a unique ability they have, creative intelligence, to make and trade products, and use them or spend the money earned from sales.

It is the creative intelligence of people that makes products and gets them to market. Trial and error is part of it. But theories are too. Both are necessary. Neither is more important than the other. Creative intelligence produces theories and experiments. The most important kind of theory that makes profits happen is this: Explanations.

Explanations are “why?”-style theories and they are what creativity creates first. They are also called understanding and first principles. Any founder and innovator first comes up with a potential “why?” and from this they create tests or experiments. In an iterative process of causal speculation and experiment, explanations and tests, a bedrock understanding comes about (eventually).

Circling back to the question I posed at the beginning of this section, we now know when commercial knowledge is useful. Something you know (that your competitors don’t) is useful–reliably, not by luck–when it stands on truth. More precisely, a “should”-structured business idea (like internal pricing guidelines) has to stand on a true “why”-structured business idea (like a customer persona).

If an idea is useful, it is useful because of a true explanation. Let’s call “should”-style ideas this: Prescriptions. They have a utility value, which is a continuum from 0 to some maximum digit, say 100. An explanation on the other hand has a binary value, 0 or 1, true or false.

All Products Encode Prescriptions

It’s time to talk more in depth about deals and uses, transactions involving products and services. Put briefly, they are physical equivalents of “should”-style ideas. Every product has a utility value to each buyer or user. The value can be negative or positive, and varies even among the individuals clustered in a seller’s customer persona brief.

Any asset, including digital ones like pillar posts with a long internet shelf life, encodes a “should”-style idea. Circling back to an earlier example, a customer persona brief is a company asset with a utility value across many employees in different departments, from engineering to sales. The utility value that each employee gains may differ. For example, the product marketing team may gain the most utility out of all departments.

To the customer, there is no direct value to the customer persona brief that applies to them. The explanations inside the brief about the customer lead to pricing guidelines and other tactics that yield payoffs for the customer and the seller. The brief includes explanations, but is itself a prescription for the seller’s employees.

A seller makes a customer persona brief or hires a third party to make one when, and only when, decision-makers have come up with a driving explanation involving two elements. One, that customer persona briefs are good tools. Two, an understanding of what needs to be in the brief to make it a good tool for employees.

Explanations of the Market Make Products and Other Business Actions

Circling over the timeline of our customer persona brief example, at every stage explanations matter a lot. A business or employee might ask questions like these.

• Why do we have so much customer churn?
• Why is our inbound conversion rate so low?

A good customer persona brief could turn the dial down on negative patterns, like churn, and turn the dial up in profitable places, like inbound conversions. Understanding customers is important and involves explanations about their incentives, how you should communicate to them, and more.

Good business explanations generate useful prescriptions and products. Prescriptions cannot. You cannot teach someone how to be an effective businessperson by just handing them a list of best practices. They may teach themselves by meditating on the list, but the step from the list to good business instincts and judgment is explanatory, it is causal, it is a creative leap from point A to point B.

We’ve covered the explanation side of this article, so let’s dig into trade secrets.

How to Put Moats Around Your Profitable Explanations

Knowledge is a competitive advantage under two conditions:

• One: If it’s a prescription, when it’s useful; if it’s an explanation, when it’s true.
• Two: When you know it and your competitors don’t.

Under these conditions you can extract profits from an abstract asset. But how do you moat off a competitively advantageous abstraction? There are 2 methods: Intellectual property law and trade secrets.

Intellectual property law breaks down to copyright, trademark, and patents. None apply to explanations, but trade secret status can be created and maintained for this fundamental competitive advantage. Let’s talk about IP law first.

Intellectual Property Law Does Not and Cannot Protect Explanations

Intellectual property law does not apply to explanations, your causal understandings of the market in which you operate. Notice that American judges do not try to keep your competitors from understanding why something you do, or sell, succeeds.

Judges try to keep your competitors from theft or improper use of something you have protected under the right legal procedures. But none of this has to do with objects inside of your competitors’ minds–judicial and legislative action is about what competitors do external to their minds, like hacking your WordPress site or picking a lock.

The examples I just gave are criminal of course, and criminal law has play in the joints with IP law. An intellectual property right would help you prevent a competitor from reproducing a patented drug, for example. But for purposes of this article we only need to focus on the difference between what is inside the mind and what is done outside of it.

Why is this so? It will continue to be this way, and here’s one good reason why. Even if a legislature or judge attempted to create an artificial entry barrier around explanatory knowledge, it would fail.

The reason is simple.

On the front-end, a statute or common law doctrine depends on good enforcement on the back-end. A law without teeth is not worth calling a law.

A judge in any particular case would have to compare an offender’s knowledge to the IP law right-holder. Meaning, if you put a marketplace understanding of your own under the protection of IP law (in our hypothetical world), the judge would have to understand what you do in order to know if the defendant does too. Therefore, enforcement of the law would require its violation. This is all very ridiculous I know and we’ll move on now. (But I do have a couple other points here that I may add into the article later.)

Trade Secrets are Common and Awesome

Information is protected as trade secrets far more often than under IP law. Here are 2 examples.

1. Lists of potentially interested buyers or a customer’s purchasing history with your firm.
2. The most efficient in-person or digital way to reach a particular reputable businessperson with a warm reception.

You could brainstorm more types of trade secrets. But the examples I gave are not the greatest kind of trade secrets. Explanations are. As discussed earlier, they are what comes first in any creative process. They generate business experiments, prescriptions, and products.

An easy set of examples involve all cloud operators. All cloud-based software sellers use automated operations to handle customers, even with enterprise. Amazon’s offers and Google’s search results are outputs of algorithms, but these algorithms are the outputs of changes in Amazon’s and Google’s understanding of online retail intent and search intent, respectively. If we’re talking about Amazon’s and Google’s fundamental competitive advantages over time, the question isn’t how these algorithms work, but why they work.

Search engine competitors try to reverse engineer Google’s results all the time, and with enough time if Google got lazy, these underdogs would succeed. Likewise online retailers who seek to steal Amazon’s share of digital shopping bags would do so if Amazon stopped trying to understand its customers (in the language of Bezos).

Here’s how Google and Amazon can keep winning, and alternatively, how rivals can beat them.

You Could Lose Your Fundamental Competitive Advantage at Any Moment

I’m going to show you why trade secret explanations are, all at once, equal opportunity and secretive. A market is, broadly defined, made of these players: Your firm, customers, competitors, suppliers, and regulators. Your in-house causal understanding of the market is, once improperly accessed, accurately copied, stored, and used. It does not care who accesses it. But they can also be kept from getting copied.

Trade secrets are lost in three ways: sloppiness, theft, and reverse engineering. I have nothing to add at this time to caution and security, but I have a contribution to anyone who wants to make reverse engineering more difficult.

So bear with me, and let’s talk about how to squirrel away your winter nuts from rapacious and envious competitors. They really suck, I agree completely.

Defend Against Reverse Engineering with Greater Understanding

Now here’s the point about reverse engineering: You make it harder for people to do it, even if they have part of the trade secret, when your in-house causal understanding runs deep. In short, the smarter your team is about the market, the harder it is for any entrant or competitor dialing up expansion to reverse engineer any successful action you have taken. Any action–as long as it came out of a deep causal understanding.

Observe that you could create an explanation-based moat to your trade secret knowledge out of thin air. As in, you don’t need to gain genius, but we’ll get to that. I’ll use Coca Cola as an example. There’s speculation Coke keeps parts of its formula separate, with no one person knowing the whole thing.

The famed and secret Coca Cola formula is a prescription, a design for soda bottles. But the connection between its use and the result is a matter of factory engineering and other forms of knowledge. Coca Cola needs a good causal understanding of machinery, suppliers, and other things to make its soda. The connection between the Coca Cola formula and other tools is explanatory.

Likewise, if Coca Cola does happen to keep parts of the formula separate, with no one person knowing the whole thing, then connecting one piece of it to another is also explanatory. The firm’s exclusivity over an extremely valuable trade secret here cannot be lost unless someone does some serious cognitive labor. (If we ignore theft and sloppiness.)

If you don’t even have part of the formula, you have to work backwards from the soda. This too involves explanations, and of course experiments. But there is a practically infinite number of ingredient combinations, making experiments–essentially luck from iteration itself–alone not enough. An explanation, a creative leap, is necessary. This is not a matter of procedure, it is an unpredictable outcome. If you told one of your employees, ‘go make me an innovative product’, they may do it, or they may not, but you’d be a fool to expect them to succeed.

Take an Informative Detour Into Evolutionary Selection

Consider that even a dust-kicking, ‘let’s see what happens’ experiment encodes knowledge, just a more primitive kind. When you hold a soda bottle in your hand, that is tactile ability. When you see a soda bottle, you use visual ability. When a subject drinks soda, they use taste ability. These abilities evolved under long spans of time, where some genetic combinations were selected out of the gene pool and persisted via survival and reproduction of gene vehicles (people today, for purposes of this article).

With genetics, the genetic tools we have–visual, tactile, and others–are encoded prescriptions, like products. They are selected for by physical causes, whereas in business analysis, you select experiments, actions, and products based on abstract causes. I.e., explanations.

In contrast, you read balance sheets and reports using your eyes, the utility of which is a physical relationship between a fleshy UX design (the underlying genetic program) and the environment.

Notice that the distance between a businessperson (or any actor) and solving a business problem or enjoying an opportunity depends. It depends on the businessperson and the problem or opportunity.

A dog is a better drug sniffer than a person, reverse engineering the scent of drugs to the source, say a drug mule at an airport. But a person is a better counterfeit purse-maker than a dog. Pretty much all purses can be reverse engineered, made, and sold–at legal risk with a significant market potential.

Similarly some businesspeople have better causal understanding of the market. They select better solutions. You want to be one of them. You do it by improving your causal understanding. Our detour into a more primitive kind of knowledge, genetics, is over. We’re back in the land of abstractions.

Start Small with Your Unique Position and Grow it

As someone selling a product, you have first-in-line access to unique information. Even in a highly competitive market you will end up knowing facts and details that others do not. These facts feed unique explanations, which in turn generate prescriptions, actions, and products that  your “competitors” cannot make or do.

As long as you and your team have the right attitude, this means you have a competitive advantage to grow your trade secret explanations. Read more in the sections below about mindsets and work culture.

An explanation is better the more it explains (completeness) and accurately so (precision). Explanations as we saw birth prescriptions, useful business actions like innovative products, through speculation and experiment. The better your marketplace understanding the more profitable your business actions.

In mirrored fashion, the more profitable the business action the more complexity it encodes. Any particular success may very well have been luck, but if it wasn’t, the author held causal understanding of the market. In either case you must–absent their sloppiness or your criminality–reverse engineer it. But to do that you’d have to create an equal or better understanding to the author’s own.

Your business actions encode the quality of the underlying explanations you have in house. A purse as I noted is easy to reverse engineer, but Google’s search algorithm is not. The difference is not arbitrary, it is based on the depth of the relevant explanation.