The Star Principle by Richard Koch

Summary

  1. What is a star venture? It has two qualities. One, it operates in a high-growth market. Two, it is the leader in that market.

Key Takeaways

  1. The answer is not to work or invest in the great majority of ventures. The key is to select the ventures that are likely to succeed anyway. Without superhuman people. Without perfect balance between the skills of the people. Without blood, toil, tears and sweat.Without the need to keep chopping and changing before the correct formula emerges. The useful answer is not ‘people, people, people’. The really potent, consistently successful answer is ‘positioning, positioning, positioning’.
  2. There is another clue as to whether or not a niche market is viable, and it is simply this: is the niche highly profitable? Does it generate a lot of cash? Leadership in a niche is not valuable unless, sooner or later, the niche is very profitable and gushes out cash.
  3. A leading firm should have higher prices, or lower costs, than a similar business that is a follower. Why higher prices? Because the customers prefer the product. Why lower costs? Because the firm can spread its fixed costs over a much greater volume of business than competitors can.
  4. About 1 in 20 start-ups is a star. So stars are rare. But they are not so rare that, with a bit of patience and careful thought, you can’t discover one – or create one yourself. If you look intelligently for a star, you will find it.
  5. My own experience is that, as I have made more money and started more successful ventures, the less I have worked. Hard work is either a red herring, or negatively correlated with success.
  6. A cash cow can be turned into a star when the concept of the product category is transformed – David’s vision of personal organisers as upscale fashion accessories reinvented the whole market.
  7. A star that is fast losing market share, or an ex-star that has lost it, may be an attractive prospect.
  8. It’s not as unusual as you might expect to find a hole in the market – even a market as big and profitable as gin. Seek a hole and sooner or later you will find one.
  9. Ecologists know that two species of animal that try to exist in exactly the same way become deadly enemies. If two species compete head-on for food, only one of them can win. The other species must change either the food it seeks or the way it hunts for it. If it does neither, the weaker species will die out. It is the same with business, except the time to extinction is compressed. Any business that imitates another slavishly will not be successful. The numbers are against it. It will be competing in the same market as the market leader. It will be smaller. It will have less appeal to customers. It will be less profitable and usually loss-making. It will have to do something different, or die.
  10. Imitation, even of a highly profitable and savvy player, won’t lead to a star business. There are only two exceptions. One is geography – a player may be imitated in a new country or region where it is not present, and sometimes the advantage of being first and the differences in the local market’s preferences can lead the imitator to a star position that can be defended even against the business imitated. The other exception is where the follower has more money or a much better approach than the originator. 
  11. There are seven steps necessary for creating a star venture.The seven steps give you an easy template for devising your star.
    1. Divide the market.
    2. Select a high-growth niche.
    3. Target your customers.
    4. Define the benefits of the new niche.
    5. Ensure profitable variation.
    6. Name the niche you plan to lead.
    7. Name the brand in a way that complements the category name. Make the name short, memorable, easy to recognise, appealing to the target market and associated with the niche.
  12. Many great innovations simultaneously divide markets and combine the attributes of two previously unrelated markets.
  13. Start with the markets you and your friends know. How could you turn them upside down, inside out, to create a new category? Here are 32 useful triggers. Some of them are opposites, using one extreme or another to create a new niche. Go against the conventional wisdom of the main market. Many of these triggers are related or similar, but they are included just in case they prompt an idea that otherwise might not occur to you. Don’t be overwhelmed by the list – it’s there to help, not to hold you up. If you can’t relate to a prompt, pass swiftly on to the next.
    1. YOUR IDEAL PRODUCT DOESN’T EXIST
    2. UPMARKET/DOWNMARKET
    3. AFFORDABLE LUXURIES
    4. MARKET VERSUS NICHE
    5. BIGGER PRODUCT VERSUS SMALLER PRODUCT
    6. EMOTIONAL VERSUS FUNCTIONAL – Emotion is warm and expensive. Function is no-nonsense, rational, inexpensive, stripped down to the essentials. Can you create a new niche by going ‘emotional’ in a market that is mainly ‘functional’?
    7. HEALTHIER VERSUS TEMPTING
    8. SAFE VERSUS RACY
    9. CONVENIENCE VERSUS PURITY
    10. SAVING TIME VERSUS EXTENDING TIME
    11. FIXED VERSUS MOBILE
    12. UNISEX VERSUS SINGLE SEX
    13. MASCULINE VERSUS FEMININE
    14. GO GAY
    15. GO GREY – Education: universities for those aged 50-plus?
    16. LOW VERSUS HIGH SERVICE, AND DIFFERENTSERVICE
    17. DIY VERSUS PROFESSIONAL SERVICE
    18. PERSONALISED VERSUS UNTAILORED
    19. BUNDLED VERSUS FOCUS AND SUBTRACTION – Focus is by far the best way to create a new star venture.
    20. EXPERT VERSUS INEXPERT USERS
    21. CENTRALISED VERSUS DECENTRALISED USE
    22. TOTAL COST VERSUS INITIAL PRICE
    23. FIRST PLACE VERSUS THIRD PLACE
    24. SECOND PLACE VERSUS THIRD PLACE
    25. OWNED VERSUS RENTED VERSUS FRACTIONALLY OWNED
    26. NARROWED EXPERTISE VERSUS ADDED EXPERTISE
    27. ORCHESTRATING A SUPPLIER ALLIANCE
    28. ONLINE VERSUS OFFLINE, OR A DIFFERENT DISTRIBUTION CHANNEL
    29. ENTREPRENEURIAL JUDO – This is a different kind of prompt, courtesy of the management guru Peter Drucker. The idea is to catch the leading players in a market off balance by turning their strength into a weakness.
    30. GO GREEN
    31. IDEAS FROM OTHER INDUSTRIES – Identify an industry that has a peculiar practice that somehow seems to work well. Could you adapt the practice to a completely different context?
    32. IDEAS FROM OTHER PLACES
  14. We cannot create a new star without creating a new category. The new niche must be oriented towards the target customers and must offer a sharply different basket of benefits from the main market. The more the benefits of the new category vary clearly and substantially from the existing market, the greater the chance that the new venture will fly. There are three ways of varying the benefits:
    1. increasing one or more benefits of the product in the main market to a marked degree;
    2. creating one or more new benefits that do not currently exist in the main market; and
    3. subtracting benefits that exist in the main market.
  15. To launch a star venture successfully, three conditions must apply.
    1. Your target customers want something different from the main market.
    2. You understand what it is that they want and can provide it with a new product category.
    3. The new category can be supplied profitably, because you can charge more for it, and/or because you can subtract elements of the main market product that are expensive to provide, so that the new category has lower costs than the main market.
  16. Make things happen reliably, consistently, economically. Make the venture a machine.
  17. The delivery formula has been cracked when all the following events always happen.
    1. Products are delivered to the same high standard, on time, every time.
    2. This year’s product is measurably better than last year’s.
    3. This year’s product costs at least 5 per cent less to make than last year’s.
    4. Volumes can be doubled within a year without panic or loss of quality.
    5. Work is delegated to the lowest-level person who is fully competent to do it.
    6. Everyone increases his or her skill level significantly each year and works better and faster.
    7. The workplace exudes calm, order and discipline.
    8. Standards and procedures are written down, clear, unambiguous – and observed!
    9. Logos, colours and designs are attractive and consistent.
    10. Budgets are always met or exceeded.
    11. Cash is always higher than planned.
    12. The firm is a machine – smooth-running, reliable, relentless, self-maintaining and self-improving.
    13. Nobody is indispensable. If the best people leave, the firm rolls on regardless. New leaders come to the fore.
  18. The way to maximise your chance of take-off is to form four small teams – each comprising a founder and two other employees – charged with masterminding each element of take-off: customer attraction; the commercial formula for fat margins; delivery; and innovation.
  19. At least 90 per cent or more of a star’s value over the long haul derives from its growth. For businesses that grow for a very long time, such as McDonald’s and Coca-Cola, the number is over 99 per cent. Nearly everyone hugely underestimates the growth potential of stars. Typically, the growth potential is underrated not by 100 or 200 per cent but by 1,000 per cent or 10,000 per cent.
  20. Almost all founders of star businesses underestimate their growth potential and value. Two action implications: never sell a star business (while it remains a star); and demand much faster growth.
  21. The nub here is that you should generally ‘outsource’ as much of your operations as possible, retaining only the few things that you do uniquely well. In particular, get other people to make things for you. Since you probably won’t be investing in factories, offices or other physical cash sinks, what’s left is expense investment – the costs of your people, plus external marketing. The joy of stars is that they take modest investment to get to cash break even. Thereafter, investment can be funded out of the star’s own cash flow.
  22. Be willing to accept lower profits to build a dominant market position. As long as you remain cash-positive, short-term profits are totally irrelevant to the long-term value of the business. Build by far the best product and service in your niche, moving further away ahead of would-be rivals.
  23. The trouble with founders who remain executives is that it is very difficult to shift them, even when they are palpably acting in the interests of the managers rather than the owners.
  24. Growth is everything. Star ventures should grow at least 20-50 per cent each year in their first decade. This rate of advance is so far beyond most people’s experience that enormous effort is required to impose ‘unreasonable expectations’.
  25. Profits also rise because of the market growth, but profits should rise faster than sales. In a normal market, profitability is constrained by competition. In a star market, profitability is constrained only by what customers will pay.
  26. Only puny secrets need protection. Big discoveries are protected by public incredulity. Marshall McLuhan

What I got out of it

  1. Niche that is growing 10%+ each year, leader in that market