Markets exhibit the Pareto principle in that most of the advantages accrue to a small number of players—mostly number one. These advantages include growing faster, network effects, recruiting the best people, expanding to new opportunities quickly and most of the 7 Powers.
That’s why it makes sense for businesses to aim to be the market leader or create a new market. That’s also why startups tend to use high-variance strategies (being number one is basically a tournament) rather than more incremental ones.
See also:
- No one notices this happening and it seems giant companies appear over night because compounding benefits occur at the end
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In business strategy you’ll often hear a competitive advantage described as a moat, but most moats are more like a long bridge. The moat is the thing that prevents others from easily replicating another business. A long bridge takes a time build and is effectively a moat if it’s impractical to catch up or simply makes it a schlep.
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There are two common elements of economic superstars. First, there is a close connection between personal reward and size of the market. Second, there is a tendency for market size and reward to be skewed to the most talented people in the field.
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The Elephant Graph Shows Globalization Was Great for Everyone but the Middle Class
The Growth incidence curve from 1988 to 2008, also known as the Elephant Graph, shows the income growth by percentile of global income distribution. It shows two things: global inequality has declined and the middle class (80th and 90th percentile of global income) stagnated.
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When coming up with goals for your business, it’s a disservice to adjust it down to make everyone—employees, investors, yourself—feel better. There are important goals like staying alive, raising your next round, or seizing the opportunity that are the cold reality of markets that you can only temporarily avoid. While showing progress is important, it’s easy to normalize mediocrity if you’re not careful which is much worse for the company than having to tell your investors you are not meeting the goal.