Businesses are built on a very simple principle, which is to provide value to the customer, and get paid for it. As long as the cost of providing the business is lower than what you get paid for, you’re bringing in the value for your business. To sustain you need enough people to pay you. Now if this is so simple why do such big corporations fail? Hours of meetings, bailout packages as well as the best brains can’t see the writing on the wall & just disappear overnight.
Nothing lives forever but there have been corporations which have enjoyed an extremely long monopolies over decades if not centuries. While internet has challenged the status-quo & shattered them to ground, few companies are still thriving. What differentiates the losers from winners?
It’s all about relevancy. How relevant are you to the eco-system? The moment, you’re not, you’re replaced. Lack of relevancy can be attributed to any reason but the most common is competitors outpacing the value you provide for the money. It’s almost impossible to find competitors on value for money proposition so thee best defense is to fit yourself in an ecosystem where they stop functioning without. Sole reason of their existence is you. They’re able to survive only because you’re breathing.
Now though it looks slightly dramatic, it’s fairly possible but hard though.
I came across a term called Network Effect. I was intrigued to look it up so I read few papers on this subject which clarified. Similar to the power of compounding. Network effect provides an unfair advantage to the common denominator.
Best and common example is Visa/MasterCard who have built a brand that other companies leverage to build their business. With every stake holder joining either of these they’re strengthening them even more making it almost impossible to break the monopoly. It’s hard for me to think of any other strong example than the credit card network.
There are firms which are staying relevant by providing a value which is hard to beat. Best example that comes to my mind is Amazon Web Services (AWS) which is used by majority of the fortune 500 companies whose billing them in millions per month. Now even though it may make economic sense for the client companies to build it economically, it doesn’t make business sense because of the low returns vs bandwidth required. It may be a very small cost in the grand scheme of things. Dropbox, Box, twitch, snapchat etc. have lot more worries & they know they can charge the premium required to justify outsourcing their core functionality.
Apple not producing their own hardware components or Samsung even remotely planning to build the processing chip. They know they’ll never be able to compete with the likes of Intel or qualcomm due to sheer volume they do. Adidas, I believe doesn’t own either of the manufacturing units, because they’re able to capture a higher value in selling the product.
Now the difference between Qualcomm & Mastercard is relevancy. Qualcomm has to stay relevant by providing the best chips throughout their dominance while Mastercard have reached a point where unless there is a massive blunder, they’re fairly difficult to be taken out of equation.
This enlightened me to the concept of Capturing value through building network effects. Uber, Airbnb, eBay, Amazon etc. have achieved similar level of dominance. People on both sides of the market are aware of the effectiveness due to supply. While many may disagree with the percentages charged by these platforms, it’s still cheaper to go through them over alternative methods.
Companies at times undersell & unable to capture the value purely due to their vulnerability to even exist in the market. Example would be where Apple captures almost 90% of the profits generated in the sale of it’s product. There are many items from developing countries which are bought for pennies and then rebranded to be sold for 50-60X because original producers don’t have the bandwidth.
So now the question is how to build this level of strength. While this is a billion-dollar question, answer is to be the common denominator in the ecosystem where you are the foundation. If you fall the industry falls. Be a network, be the lowest denominator & empower others to build on top of you. In the end once you achieved it, stay humble & don’t forget the basics. It took a small ice berg to sink the unsinkable Titanic.