This week I read chapter 3 of Andy Grove's book "Only the Paranoid Survive," and I got some great insights about how to maneuver when the structure of an industry changes.
Grove talks about how the computer industry changed from a vertical structure in the 1980s to a horizontal structure in the mid-90s. In the vertical structure, computer companies created their own chips, hardware, operating system, software, and distribution channels.
As markets became more competitive, companies started to specialize, and instead of controlling the entire process from chip making to distribution, they focused on one part of the industry, such as chips, computer hardware, or application software.
In the vertical structure, computer companies fought to acquire customers and lock them into their ecosystem, because once the customer bought the company's computer, they needed the company's chips, hardware, operating system, applications, and software to operate the computer.
But in the new horizontal structure, companies specialized in one part of the industry, and they competed for market share and wide distribution of their products. Their strategy was to be the best in their category and get their products into every relevant customer's hands.
For example, Intel currently sells their x86 chips at competitive prices so they can gain market share against ARM and RISC-V designs. The more computer manufacturers use Intel's chips, the more other companies will make their products compatible with Intel. Since Intel has a large audience, companies that need to sell large quantities of their products will build on Intel's platform.
Capitalize on a Niche Audience
If a company decides to charge premium prices for their product, they will attract a smaller, niche audience. The insight I gained from looking at Grove's industry diagrams is that companies can sell niche products and still make a lot of money from their small audience if they're able to gain a foothold in the layers below or above their horizontal bar.
For example, Apple charges high prices for their computers, which gives them a small 8.1% of the PC market, but instead of just focusing on the PC market, Apple also makes money from the chip bar (M chips), the operating system bar (Mac OS locks people into Apple's ecosystem, which creates repeat customers), the application bar (Apple Music, cloud storage), and the sales and distribution bar (Apple retail stores and App Store).
The truth is, Apple has returned to the vertical structure that was popular in the 1980s.
Horizontal and Vertical Structures in Entertainment
I see content creators move up and down the horizontal bars of the media industry so they can extract maximum value from their small audience. Today, creators get paid for their talents by advertisers, social media platforms, and audience donations. But the money does not stop there. They also sell their own products, create mailing lists so they can have direct access to their customers, coach, open physical stores, and throw live events. With all the technological breakthroughs that we've experienced over the years, content creators today are creating a 1980s vertical stack for their business.
Important Rules of Competition
Grove had two rules for competition that stood out to me.
Rule #1: Don't Create a Product So Unique That It Isolates Customers
Companies need to be careful when they create products that are hard for competitors to copy. It is fine for the product to be proprietary, but it still needs to be compatible with other products on the market. It cannot be so unique that it isolates the customer from other people. For example, if a company creates a computer program, it should be compatible with both the hardware and software that are available on the market. If not, the customer will be the only one using the program and unable to communicate with people in their community. The difference in our product should empower customers, not isolate them.
This reminds me of Christianity. Jesus does not call Christians to live alone in the wilderness. He wants us to be godly, example-setting people in society.
"I do not ask that you take them out of the world,
but that you keep them from the evil one."
John 17:15 ESV
Rule #2: Take Advantage of the Change in an Industry's Structure
When changes happen in an industry, some of the ironclad rules of the past will get thrown out the window. As the new structure is being built, new rules are also being written, and those on the outside have an opportunity to be part of the new structure.
It's like having a security guard leave his post so he can get new instructions from his boss. While he's gone, people standing in line can enter the establishment with less resistance.
Conclusion
Chapter 3 gave me a deeper understanding of the strategies used by companies that pursue niche and wide markets. It also helped me understand the different ways that I can advance some of my businesses. Knowledge is powerful. Real powerful.
If you read Chapter 3 of Andy Grove's book and you want to discuss some of the gems you found, feel free to hit me up at ov@myinvestmentdreams.com.
Stay strong, stay blessed, and God willing, I will see you next week.
One day the Pharisees and Sadducees came to test Jesus, demanding that he show them a miraculous sign from heaven to prove his authority.
He replied, “You know the saying, ‘Red sky at night means fair weather tomorrow; red sky in the morning means foul weather all day.’ You know how to interpret the weather signs in the sky, but you don’t know how to interpret the signs of the times!
Matthew 16:1-3 NLT
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