How The Star Principle Can Make You Rich

This post contains my personal notes from the book ” The Star Priniciple” by Richard Koch. This is a wonderful book for employees, entrepreneurs and investors.

Whether you want to start a firm or not, whether or not you have savings to invest, a star business can make your life much sweeter, richer in every way. -Richard Koch

What is a star business?

A star business is one that has two qualities:

  • It operates in a high-growth market niche ( growing at least 10% per year).
  • It is the leader in that market.

What determines your success?

Contrary to what people think, the determining factor is not the following, although they are all important:

  • Ability
  • Hard work
  • Right mix of people
  • People you select as partners and early employees

The determining factor is to select a venture that will succeed anyway, even without all of the above. It is the positioning of your business so that your business is a star business. You do have to validate that the business is a star business, you have to launch it yourselves or find it somewhere else. This needs hard work, experimentation, research and care but does not need exceptional intelligence or creativity, just normal average skills.

What does leadership in the market niche mean?

  • To be the leader in the market niche means that it is bigger in the niche than any other firm. We measure bigger by sales value( also known as revenues or turnover).
  • For a niche to be a separate market, it must have different customers, different products or services and a different way of doing business from the main market or other market niches.
  • The ranking of competitors is different in a valid market niche – the leader in the niche is different from the leader in the main market.
  • The niche is valuable only if it is profitable. The niche leader should be very profitable and cash positive.

What does high growth of the market niche mean?

  • High growth of the market niche means that the niche must be growing at least 10% a year, on average, over the next five years, and preferably for decades.
  • Growth is important because of the power of compound interest.
  • We are talking about future growth and a good guide to future growth is past growth and the trend in past growth.
  • We are talking about the growth of niche, not the venture, although that is important also.

What makes a star business so attractive?

It is the combination of niche leadership and high niche growth. A leading firm has higher prices or lower costs than others and this is what makes it highly profitable and valuable.

What are the pitfalls of a star business?

The main pitfall is to lose leadership in the niche. Then it can lose a lot of value.

How rare are stars?

  • 1 in 4 new ventures is a niche leader.
  • 1 in 5 niches grow at the rate required for a star.
  • So 1 in 20 start-ups is a star.

How can businesses be classified?

Classification of businesses and what to do with them

 

What is the power of the star idea?

Most businesses which have made people rich are star businesses. Google, Amazon, Netscape, e-bay, Yahoo, Skype, Microsoft, Amgen, Genentech, Intel, US Steel, Ford, Coca-Cola, McDonalds, Walmart, Dubai, etc are/were all stars.

Stars are a very small amount of the whole universe of businesses, but they make the most of the money. Why it is so is not clear but that is how it is. They are the place where the universe creates good fortune and great wealth. They are the place to invest and the place to work.

Who should be involved with stars in their life?

Everyone. If you want to work, aim to work in a star business. If you want to be a founder or entrepreneur, start a star business. If you want to invest, invest in a star business.

What are the two conditions needed to create a viable niche?

  • There must be a gap in the market.
  • There must be a profitable market in the gap.

What are the key things to remember about the creation of star businesses?

  • The positioning of the business is more important than the person running it. Make sure you position a new business or venture as a star business.
  • Realise that success comes from creating a star firm.
  • Determine to start a star venture.

What are two different types of star businesses?

  • Born stars
  • Stars that achieve stardom or have stardom thrust upon them

What are some things to remember about how to change a business into a star?

  • Cash cows can be turned into stars if you can transform the concept of the product category.
  • Product concepts evolve and you have to accept the new definition of the product category according to the market and beat the rivals at their own game.
  • A star that is losing market share fast, or an ex-star that has lost it, may be an attractive prospect, if it can be turned around.
  • PR is only as good as the reality behind it. To recover leadership, you have to prove that you are different, and the difference has to appeal.
  • You can find holes even in big markets- you have to seek it and you will find it.
  • You have to be the first to change and differentiate. Timing is everything.
  • To be really successful you have to be a star business – not just number one in a niche, but first in a fast-growth niche. Any business that slavishly imitates another business will ultimately die. There are two exceptions to this: the imitation happens in a new country or region, or the follower has more money or a much better approach than the originator.
  • It is very hard for someone inside the market to innovate fundamentally. The best innovators usually come from outside the mainstream market.
  • The successful innovator’s religion is being different: doing things that customers like and are not expensive to do and not doing things that are expensive yet don’t have much customer appeal.
  • Experiment enough but listen to what the market is telling you.
  • If there is life, there is cash and the willingness to do something different, there is hope to create a star business even if you do not have one now.

What are the seven steps for creating a star venture?

  1. Divide the market in your baby niche and the existing market.
  2. Select a high-growth niche. Estimate future growth in the possible niche.
  3. Target your customers’ preferences, which must be clearly identifiable and different in profile from the customer needs in the main market.
  4. Define the benefits of the new niche. This specifies the benefits the new category provides over and above the existing products in the main market.
  5. Ensure profitable variation. Establish why the new niche can be more profitable than the main market.
  6. Name the niche you plan to lead. Unless you define your niche carefully, you cannot have a clear idea of who are your niche competitors. Your profitability will be determined by whether you remain the niche leader and by how much and not by your share of the total market. Ensure your formula is difficult to copy. Make it difficult to understand the key differences behind your profits and growth and do not reveal them or boast about them. Increase the depth and reach of your formula and its difference from the others so that you become different from the main market and more distinctive than any competitors.
  7. Name the brand in a way that complements the category name and is easy to recognise, appeals to the target market and associated with the niche.

What are some of triggers you could use to create your star idea or niche?

  • Your ideal product doesn’t exist. Is there a product or service you really want that is not available.
  • Upmarket/downmarket: Could you create a luxury segment, affordable indulgence or high-end version of something cheap.
  • Affordable luxuries: Higher ticket versions of affordable indulgences.
  • Mass market versus niche: Create a genuine mass market where there is only a small select market for the rich.
  • Bigger product versus smaller product: New niches can be created by going bigger or smaller.
  • Emotional versus functional: Emotional is warm and expensive. Functional is no-nonsense, rational, inexpensive, stripped down to the essentials.
  • Healthier versus tempting.
  • Safe versus racy.
  • Convenience versus purity and authenticity.
  • Saving time versus extending time.
  • Fixed versus mobile.
  • Unisex versus single sex.
  • Target gay people.
  • Target grey people( over 50s and 60s)
  • Low versus high service and different service
  • DIY versus professional service
  • Personalised versus untailored
  • Bundled versus focus and subtraction
  • Expert versus inexpert users
  • Centralised versus decentralised use
  • Total cost versus initial price
  • First place(home) vs second place( work) vs third place( place to relax and meet people)
  • Owned versus rented vs fractionally owned
  • Narrowed expertise versus added expertise
  • Orchestrating a supplier alliance
  • Online vs offline, or a different distribution channel
  • Entrepreneurial judo( turning the strength of leading players into a weakness)
  • Going green
  • Ideas from other industries
  • Ideas from other places

What things you should consider when considering a high growth niche?

  • What is the potential growth rate and how long will it last?
  • How large is the market share that your niche will substitute into?
  • How much of that market you could hope to gain ultimately?
  • How clear is the definition of the target customers and how confident are you that they will prefer your new niche to the existing market?
  • How compelling are the benefits of the new product to the target customers, compared with what they enjoy at the moment?
  • How profitable will leadership in the new niche be? Why is the variation caused by the new category profitable? How much more profitable will leadership in the new niche be, relative to leadership in the existing market?

What are the key things in targeting your customers?

You need to clear who your target customers are. The narrow the target customer focus, the easier it is to market the service, and to be confident that the new niche will work.

How you should define the benefits of the new niche?

There are three ways:

  • Increasing one or more benefits of the product in the main market to a marked degree.
  • Creating one or more benefits that do not currently exist in the main market
  • Subtracting benefits that exist in the main market
  • Look at the criteria of customers in order of importance in the main market.
  • Look at the criteria of customers in your target niche in order of importance.
  • If they are different or reverse to each other, then you have a good chance of succeeding.
  • You could make a graph with criteria in the x-axis and the order of importance in the y-axis and make a chart to visualise things

What are the three conditions to launch a star venture successfully?

  • Your target customers want something different from the main market.
  • You understand what it is that they want and can provide it with a new product category.
  • The new category can be supplied profitably, because you can charge more for it, and/or because you can subtract the elements of the main market that are expensive to provide, so that the new category has lower costs than the main market.

You can work this backwards also: think of what you can supply that is different from the main market and then think which target customers you could supply and whether that would be profitable.

How to ensure profitable variation?

  • Same price as the market but less costs.
  • Same costs as the market but higher value and therefore higher price.

A new niche is worth creating only if it will be more profitable than the existing market.

What are the characteristics of a good niche name?

A good niche name is

  • short
  • easy to understand
  • describes the niche
  • unique
  • used by all competitors to describe the niche

How to name the new brand?

The name should be

  • very short( two syllables or one)
  • sound nice
  • punchy
  • memorable
  • easy to say
  • unique and original
  • resonate with the niche

How to identify fake stars?

  • The new category is no sufficiently different from the main market.
  • It does not have it own enthusiastic customers.
  • It is not growing very much.
  • It is not profitable.

How to make a star business take off?

There are four formulas to translate the star idea into a business formula that works in practice.

1. Customer attraction formula: This formula is a reliable way of  getting ever increasing volumes of profitable business. This has two parts:

  • the difference about the new product and category that is attractive to the target customers in terms of value that is offered
  • an organised process of PR and selling that enables sales to take off, so that there is a consistent and attractive message going to customers and potential customers, resulting in prolonged sales growth; until there is a consistent sales growth above 10% per year( and ideally much higher in the early years), take-off is not secure. For good PR, you must craft a general storyline and then adapt it to the individual journalist.

2. Commercial formula: the way to lock in fat margins. To do this you have to experiment with whether people will still buy when the price is increased. You also look at the relative cost position( how much it costs your competitor at each stage). If you can increase price or lower costs that competitors you will have a higher profit margin and this is what will make you successful.

3. Delivery formula: the way to forge a machine delivering ever-increasing quantities of consistent and high-quality product. The delivery formula has been cracked when all the following things always happen:

  • Products are delivered to the same high standard, on time, every time.
  • This year’s product is measurably better than last year’s.
  • This year’s product costs at least 5% less to make than last year’s.
  • Volumes can be doubled within a year without panic or loss of quality.
  • Work is delegated to the lowest-level person who is fully competent to do it.
  • Everyone increases skill levels significantly each year and works better and faster.
  • The workplace exudes calm, order and discipline.
  • Standards and procedures are written down, clear, unambiguous and observed.
  • Logos, colours and designs are attractive and consistent.
  • Budgets are always met or exceeded.
  • Cash is always higher than planned.
  • The firm is a machine – smooth-running, reliable, relentless, self-maintaining and self-improving.
  • Nobody is indispensable. If the best people leave, the firm rolls on regardless. New leaders come to the fore.

4. The innovation formula: Innovation means that you move further and further, higher and deeper, wider and stronger in the direction you pioneered in the first place. There are three golden rules of innovation:

  • Innovation is best based on what you already do best and most distinctively. Innovation is powerful when it suits the new category you have invented rather than the main market.
  • Effective innovation makes it impossible for competitors to catch up.
  • The best innovation reinforces and extends profitable variation and makes your business more profitable.

If your business is not currently a star, can you evolve into a star?

Some questions to ask are:

Are you ” Number Two” in a high-growth market – BCG’s ‘question mark’ position?  Then, there is a possibility that you can become number one, if you are really better than the leader, the leader makes a blunder and you do something different to become number 1. The best test is practical – whether your market share is continuing to increase and edge closer to the leader.

Are you the niche leader but the market isn’t growing fast? Then in most cases you have quit the business, unless you find a way so that the market grows fast.

What are the four linked steps to evolve into a star?

  • Analyse your process of creating a star and see where you may have gone wrong.
  • Change your product.
  • Change the character and culture of your firm.
  • Change your target customer base.

Your product, your DNA, your target customers comprise the ‘migration trinity’. You have to do things:

  • move away from your competitors’ products, DNA, and customer groups.
  • move your new products, DNA and customers ever closer together.

How to make your star grow faster?

  • Raise the target growth rate.
  • Expand geographically.
  • Innovate by giving new value.
  • Innovate by giving new products.
  • Innovate by creating new channels.
  • Innovate by creating new customers.
  • Only do acquisitions that are small and close to the existing market.

How you should not grow your star venture?

  • Diversification
  • Unrelated acquisitions
  • Moving outside your core function or customer group
  • Introducing unrelated products

How to reinvest in your star business?

Initially you need a modest investment. But subsequently, the investment can be funded out of the star’s own cash flow. The things that make a star successful and valuable are difference, innovation and growth; but the greatest of these is growth.

What are the things to remember when hiring people for a star business?

  • Hire people who have worked in very fast-growth firms, preferably in a star venture.
  • Hire people who match the venture’s DNA and will fit it.
  • Control the recruitment process yourself and involve a large number of colleagues in each decision.
  • Hire recruits who would be in the top 10% of existing employees.

People who work in star businesses should remember that growth is everything. Star ventures should grow at least 20-50% each year in their first decade. This may seem unreasonable but is required for success.

What are the four attributes of a star business that makes it immensely valuable?

  • It operates in a high growth market, so over a long period, it will grow its sales immensely.
  • It is the market leader, and therefore profitable, either because of low costs or high prices( because it is popular) or both.
  • It has ever increasing profits, because its profitability is constrained only by what customers will pay.
  • Its growth can be financed out of cash flow and owners equity is not diluted.

Nearly every firm that multiplies its value does so  because it is a star business. If you have a threat from a rival, find a way to reverse that dynamic and go clear again. You can merge with them but in the long run, your salvation requires enormous sustained innovation and being able to deliver superb value to your core customers. If the problem is falling market growth, try to increase the market growth again or sell the business.

You can read a summary written at the end of the book by Richard Koch here: The Star Principle-Summary.

 

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