Importance of Natural Resources

What turns some companies into “superstars”?

(soft music) – So the concept of the
economic superstar originated in a paper written by the late
Chicago economist Sherwin Rosen. In this paper, Rosen identified
the economic conditions that give rise to superstars: first, the ability to
reach a very wide audience, and second, the uniqueness
of the product or service. The five superstars that almost all of us are familiar with today are Alphabet, parent company of Google; Apple; Amazon; Facebook; and Microsoft. Together, these five superstars earned $810 billion last year, and had an economic value
in excess of $4 trillion. The archetype superstar is Google, which was established in 1998 to organize the world’s information. At the turn of the century, Google had no revenues and no
established business model, but fast-forward 18 years
and 700 acquisitions later, Google has $810 billion in revenue. So in almost every industry, a small number of companies is capturing the lion’s share of profits. According to a recent study by the McKinsey Global Institute, the top 10 percent of all firms worldwide with revenues in excess of $1 billion, earned 80 percent of all the profits earned. The middle 60 percent of firms earned close to zero economic profits, and among the bottom 10 percent, on average each firm
lost about $1.5 billion over a three-year period. Undoubtedly, chance events
have played a significant role in the success of many companies, but chance is not the
only thing that separates superstar companies from the rest. Dominance in information
technology and data analytics has allowed superstar companies to acquire the killer combination of scale and scope, serving a variety of products to millions, maybe even billions of consumers. So in order to understand the evolution of
businesses and industries, it’s useful to refer to an idea that first emerged in ecology. The fitness landscape model, introduced by the
geneticist Sewall Wright, asks this question: What is fitness a function of? How do attributes of a
species influence its fitness? Think of fitness as reproductive capacity, or survival. Let’s take a simple example. Supposing, for instance,
we consider a gazelle, and we take one of its attributes: the size of its legs. Imagine that on the horizontal axis of a two-dimensional figure, we measure the thickness
of a gazelle’s legs, and on the vertical axis, we measure its fitness. If a gazelle’s legs are
so thin, or very thin, it will not survive. If they’re excessively thick, it will not survive. In fact, as its legs
get thicker from zero, its survival increases, and beyond some point,
it begins to decrease. So we think of this, or evolutionary scientists think of this, as a Mount Fuji–like figure. Of course a gazelle’s ability to survive depends more than just on
the thickness of its legs. It depends on its other attributes: the size of its body,
the size of its head, the sharpness of its teeth, and so on. So Sewall Wright postulated that in fact, the fitness landscape is not
a Mount Fuji–like figure, but more like a rugged landscape, a mountain range, because all of these attributes
interact with each other. In a very influential paper, Daniel Leventhal postulated
that the fitness-landscape model could actually explain the
evolution of industries. He argues in his paper
that industries evolve not only because of population
levels’ selection effects, but because of adaptation by firms. So think of market value
as a proxy for fitness, and think of the variety of attributes that a company possesses— from its choice of product, service, markets it serves, its management
style, its organization. All of these attributes
interact with each other to produce a certain fitness level. Of course, the firm’s fitness level depends not just on what it does, but on what others do, and
other features of the ecosystem. So what the rugged landscape means is that firms within a given industry will adopt very different
strategies and tactics. So in any given industry, you will find companies
pursuing different approaches, different methods, different
organization systems. So if you look at, for instance, Federal Express and UPS, you will see that they have very different organizational methods, because they’ve had different histories. The rugged-landscape
model basically says that where you start off from matters, and because we have a very
partial view of the landscape, in any given industry, firms have very different
approaches to solving a problem. So there is another complication. The rugged landscape keeps shifting. It keeps shifting because
firms are changing their strategies and tactics. The environment itself is changing. The economic system is changing. A firm might find itself on
top of the highest peak today and find itself on a
smaller peak tomorrow. This is exactly what happened
to Research In Motion, the maker of the BlackBerry. In 2007, BlackBerry’s
market share was 44 percent. The iPhone was introduced into the market, but no one expected the iPhone
to replace the BlackBerry. That’s exactly what happened. Failure in the rugged-landscape model occurs in one of two ways: the inability to climb a hill, or climbing the wrong hill. Why is it that firms
fail to climb the hill? Because they lack the competencies; they lack the management systems; they lack the routines; they lack the organizational cultures. Nicholas Bloom and his coauthors have shown in a series of papers that best practices in management are not widely followed, not even in countries
like the United States, whose average management
scores are quite high. Let’s talk about the
second kind of failure: climbing the wrong hill. The best example of this is Sears, which filed for bankruptcy in 2018. Sears’s failure can be traced
to a series of bad decisions going back 50 years or so. In the late 1970s, its CEOs decided that the future for Sears
was not in retailing but in financial services. So it committed itself big
time to financial services. It acquired Coldwell
Banker, Dean Witter Reynolds, and many others. It was during this time
that other competitors like Wal-Mart and Target were beginning to grow their business. All during the 1980s, the financial-services
business of Sears struggled, and it was only in the
1990s that Sears leaders committed to divesting its
financial-services business, but by then it was too late. The other competitors had raced far ahead. Ultimately, superstar
companies are succeeding today because they have discovered the art and science of
bottom-up innovation: lots of experimentation,
a tolerance for failure, and the application of leverage when the forces are with them. So there are four things to bear in mind as you lead your organization
through the terrain ahead: First, listening and engaging with a very wide variety
of models and opinions. Second, being ready to change your mind. Third, being very opportunistic in the way you make decisions. And finally, doubling down on what works.

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