Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.



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Trees and Markets by Victor Niederhoffer

As a positive suggestion, may I point out that there are many beautiful trees that we have all seen that are perfectly adapted to their niches, with trunks and branches leaning into the sun, branches at just the right height to capture the maximum of sunlight and prevent other competitors from getting their food, leaves just the right shape to maximize the production and longevity of the food they produce, bark with the right amount of toxins to balance growth versus disease resistance, and shape the perfect balance between growth to the sun, difficulty of lifting water, and wind resistance, as well as a thousand other adaptations. Are there not companies that fill their niches as beautifully as these and can they be predicted and profited from their fulfillment of their magnificent roles as we do from seeing the tree?

How to Succeed in Business by Filling a Treelike Niche by Steve Ellison

I believe there are, and they can be predicted. A characteristic of both evolution and economic advancement is increasing specialization. Increasing specialization can clearly be seen in the technology industry. In the 1960s and 1970s, IBM made computers and their associated memory, operating systems, disk drives, tape drives, printers, etc. As innovation enabled the market for computers to grow exponentially, it became feasible for companies to specialize in a particular niche, and today we have Intel, Microsoft, EMC, Cisco, et al.

Niches can always be divided into sub-niches. The path to superior profits in technology has been well documented in books such as Crossing the Chasm. Successful startups generally focus on a very specific niche that is poorly served by the big companies. The startups provide superior products that add value, and "early adopter" customers are willing to pay for the added value. If over time the product can have wide applicability and be produced more efficiently, it may become an industry standard, at which point the hardboiled, skeptical big company CIOs are finally persuaded to buy. Even if that does not happen, however, it is extremely difficult to displace the company in its own niche for a long time. PeopleSoft, for example, has tried to become an enterprise applications company, with decidedly mixed results, but still dominates its original niche of human resources applications.

Ask yourself, what in a specific industry adds the most value? A company specializing in only the number-one-value-adding aspect of the industry is a good bet to succeed against competitors who must spend resources (in many cases, the majority of their resources) performing the lower-value activities that the specialist eschews. Intel, Microsoft, EMC, and Cisco all did this, and there is now precious little profit remaining for the makers of computers.

Linden Doerr responds:

The 9/7/04 NY Times Science section has a lead article on mushrooms (log/pass: speclist/speclist).

The obscurity of ... crust fungi belies its crucial role in the forest ecosystem and the planet's carbon cycle. Corticoids release the carbon locked up in trees by turning wood into soil. Without them, the earth's forests would be piled high with dead trees. Wood is a mixture of cellulose and lignin, a natural polymer. Bacteria and insects, a forest's major soil producers, have a hard time getting around the lignin. Only a fungus produces the enzymes capable of breaking it down.