What Darwin tells us about the Superstar Economy
They are vast, endlessly resourceful and seemingly unstoppable. Yet even superstar companies are subject to the laws of evolution and only the fittest will survive. Here’s a lesson for 21st century investors from a 19th century botanist.
“As new species in the course of time are formed through natural selection, others will become rarer and rarer, and finally extinct. The forms which stand in closest competition with those undergoing modification and improvement will naturally suffer most.”
So wrote Charles Darwin in the Origin of Species, as he predicted extinction for those species that failed to adapt and fell prey to more advanced predators. The parallels with the dynamics of the Superstar Economy are striking. The superstar companies of our age face the same prospect; no matter how large, successful and resourceful they are, there is always someone younger, fitter, more agile and hungrier looking to take their place. This is economic Darwinism, the new law of the jungle when only the truly adaptable survive.
It can be a brutal world. In the year 2000, the biggest selling mobile phone manufacturers were Nokia, Motorola and Blackberry. Less than twenty years later, Nokia barely ranks among the top 10 having sold off its handset division to Microsoft in 2014, thus missing the take-off of the smartphone market and the others nowhere to be seen in the top listings. Even companies that at first glance appear to be at the cutting edge of technology can find themselves rapidly returning to the pack if they fail to innovate.
Adapt or decline
According to McKinsey, almost half of all superstar firms fall out of the top 10% in every business cycle. The fall can be a rapid one. One of the business success stories of the 1990s was Blockbuster Video, which once had over 9 000 stores. It now has just one. And the cycle continues; Blockbuster’s successor in this market, Netflix, the world’s biggest movie and entertainment streaming company, looks like facing a bruising next few years as well-financed competitors move in on its territory. Its survival will depend on its ability to evolve.
The impact of technology
There have always been ups and downs in the fortunes of businesses but the digital revolution has dramatically accelerated this phenomenon. Through the internet and the smartphone, consumers can search the market, research prices and compare brands with each other, in seconds. Only “best in class” products and services survive this scrutiny.
This has played into the hands of the superstar companies. They have the wealth and resources to invest heavily in research and development (R&D), to develop the products that then cost little to produce even when demand is high. Few can compete with them and they can squeeze out poorly-performing competitors.
The hunters become the hunted
In true Darwinian fashion, the disruptors are vulnerable to becoming the disrupted; not least from their fellow superstars who are not averse to stealing market share from each other. For example, the US tech giants are starting to face aggressive competition from state-backed Asian superstars in a development that is having a huge impact, not just on world commerce but on international relations.
The science of predicting the winners and losers is a perilous one. As Darwin warns us:
“A grain in the balance will determine which individual shall live and which shall die – which variety or species shall increase in number, and which shall decrease, or finally become extinct.”
For more insights on superstar firms and the implications for investors, visit Superstar Economy.
Disclosures
The above-mentioned securities are for illustrative purpose only, are not intended as solicitation of the purchase of such securities, and does not constitute any investment advice or recommendation.