Product Fitness for Winners
Industries are complex adaptive systems. They have a life cycle and go from zenith to nadir in predictable stages: emergence, growth, maturity, and decline. Notice how products across industries get commoditized over time. Two signals clearly mark the end of an industry: product innovation is no longer profitable and the social and economic contributions of that industry flatten out. Common industry life-cycle case studies in MBA textbooks include personal computing in the 1980s, e-commerce in the early 1990s, or cloud computing platforms in the early 2000s.
If you are a data-driven investor, with enough determination you can place your prospect investment on the industry/product life-cycle curve. I’ve called out in the chart ☟ a few noteworthy signals that are characteristic of each life-cycle stage. For example, products in emerging stages are high risk/high reward, the company cannot be run by anyone but the original founders with a conviction, and the business strategy is laser-focused on long roadmaps for market share. In contrast, products in growth stages are medium risk/high reward, company management transitions from entrepreneurial to professional, and the business strategy is centered around excellent marketing.
Fitness landscapes are the crystal ball commonly used in evolutionary biology to visualize the relationship between genotypes and reproductive success (aka species survival). In a business context, fitness landscapes help us understand the evolution of an industry by studying the past and by projecting into the future. We can look at the past and infer how businesses survived through the complex market environments. Alternatively, we can look at the forces shaping and changing existing ecosystems and predict which business models are likely to evolve and fit the new dynamics.
Products in turbulent markets survive based on how quickly they adapt to shifting market dynamics. The fitness of a product, or its ability to adapt, accurately correlates with financial success. When products adapt, they create room for new value channels to emerge in the form of technological innovation, operational efficiency or customer excellence. It goes without saying that a product loses market share when it gets outperformed in one or more of these channels. Some notable examples of companies that excelled by speeding in the value lane opened up by lagging competition:
Apple: product innovation ♔ when people think about Apple they talk about brand, sleek aesthetics, lifestyle. These are all differentiators on top of the product's critical trait: functionality. Using Apple products feels natural, intuitive, transparent. The excellent product experience comes from a design obsession with human-computer interfaces and it creates the foundation for all other superlative traits of the brand.
Amazon: operational efficiency ♔ here's an example of a company that took the boring out of the ordinary. Shipping used to be an attractive industry in the 1800's. Well that was until Jeff Bezos took an interest in shipping your books with light-speed efficiencies. Amazon took what it knew best (operational efficiency) and successfully replicated the pattern across other industries: cloud computing, groceries, drug distribution. For strategic reasons (time to market, risk mitigation), Amazon expanded through M&A in industries in growth or mature stages.
Zappos: customer excellence ♔ it goes without saying Zappos is a poster child for customer excellence, they even call it out in the company mission statement "Empower Your Employees to Wow Your Customers". Zappos chose well from the beginning which customer segment it will target (not the Nordstrom crowds) and which experience they will streamline (not beauty products). They made a plan and worked the plan to perfection.
History Repeats Itself - Examples of Strategic Blindness
The Italian coffee industry - globally dominant in its sector - completely failed to see how the coffee shop market would experience an exponential growth spurt and that it would be dominated by an American firm from Seattle. Their strategic blindness: Starbucks sells lifestyle poured in a coffee cup.
Black Swans - Examples of Strategic Dexterity
Ford didn’t add more horses to the carriage but added mechanical speed. Equinox predicted the consumer transition to digital before everyone became an overnight personal trainer on YouTube. Being the trend setter that they are, Equinox released the Variis health and fitness app to meet fitness fanatics in their homes. Microsoft transitioned focus from on-device software (Windows) to cloud compute and server-less software applications.
Experience is the best teacher and my experience in the healthcare/financial services sectors taught me a thing about business frameworks: they do not accommodate for the obvious outliers. A common fallacy of product life-cycle frameworks: an industry at its peak is dynamic and fast moving. In reality, innovation is slow and adoption of new technology is gradual rather than transformative. This observation is even more common in sectors that have long development cycles, external regulation, high barriers to new entrants, or enterprise customers who are slow to innovate.
Today’s business model can only evolve with the acquisition of new, competitive capabilities. A superior position depends on acquiring capabilities faster/better/broader than other firms playing in the same market. Another important component in a firm’s evolution is the governance strategy. In other words, what capabilities will the firm develop in-house, which it will assimilate by acquisition, what partnerships it will establish with external entities. After all, business is all about game theory.
