Sometimes you may be lucky and/or smart enough to see a big commercial trend coming well ahead of the pack. It can be likened to being on a surfboard and seeing a sizeable wave coming: you then try and get into just the right position for when the wave arrives.
Sometimes the size of the impending wave can make you think that there you will make money just by being in the right place. However, if the opportunity is large and you’re really going to catch and ride it, there are two important high-level decisions worth making:
- What minimum scale do you need to build in order to capitalise on the opportunity? and
- Which part of the wave both offers profitable growth and the opportunity to build a protectable position?
Scale is important because if your surfboard is too small when the wave hits, you will either not be able to service the nascent market need well enough, or you will not be able to build a sustainable position. You then risk rapidly becoming irrelevant.
Finding the right area of the wave is important because a major opportunity will attract many new entrants and, unless the ability to compete requires highly-differentiated capabilities which only you have, you shouldn’t kid yourself about the extent of the barriers to entry.
As an example, I was involved in building a cross-border mergers & acquisitions business between India and the rest of the world in the early 2000s. We had predicted that Indian companies would start to make overseas acquisitions and that there would be a need for good quality advisory services. Our assumptions turned out to be true: an initial trickle of small overseas acquisitions by Indian buyers turned into a flood of deals (including Tata-Jaguar Land Rover, Tata-Corus). We executed some high profile deals early on and established a reputation for the quality of our execution.
Our buy-side-focused proposition was exactly right for the early stage of development of the market. But barriers to entry into this market for other advisory firms were low and our lack of scale became an issue once the bulk of the wave hit. Ultimately, our company reoriented into a more defendable niche within the growing India story, but we would have benefited from an earlier analysis of the relationship between minimum scale and sustainable value capture.