Picking a paradigm shift
Barry Ritholtz discusses companies that truly shift the dial.
Thomas Kuhn, the American physicist and philosopher, is perhaps best known to the public for the phrase ‘‘paradigm shift.’’
His concept of non-linear evolution became so widely adopted by popular culture and business that today the phrase he coined has become a cliche.
That is a shame because, despite its well-worn status, it is still a very useful construct. Every so often, a business totally upends its industry and the phrase is wholly applicable.
Apple, Amazon.com, Alphabet (Google) and Uber Technologies certainly qualify. Other companies, such as Netflix, Tesla and WeWork, are doing the same.
Let’s consider a few of these companies. Perhaps we might discern a pattern that investors might find useful.
Apple: The world’s most valuable company – and my bet for first with a US$3 trillion (NZ$4.17b) market capitalisation – has revolutionised so many businesses that it is difficult to keep track.
Co-founder Steve Jobs remade entire industries -- creating the first successful digital music store; turning mobile phones into portable computers; and most recently smart watches, which seem to be devastating Swiss watch manufacturers.
The list of companies damaged by Apple is astonishing.
The only other company close to Apple in terms of this disruptive paradigm-shifting destruction is ...
Amazon: Delighting customers? Free delivery? Cloud computing? Rethinking retail? Logistical efficiencies? None of these are paradigm-shifting.
What really makes Amazon unique is its virtually unlimited access to capital at almost no cost.
This minimal cost of capital has allowed Amazon the disruptor to identify and exploit market inefficiencies that form the basis for other businesses’ profits.
This is what Amazon founder and chief executive officer Jeff Bezos meant when he said, ‘‘Your margin is my opportunity.’’
Despite only modest and not very consistent profits, Amazon is now the third-most valuable company, and is headed by the world’s wealthiest person.
Alphabet: Most people have the wrong idea about what makes Alphabet’s Google core search engine product such a gamechanger: Yes, Google’s search is good, better than most.
But what set Google apart was AdWords, its revolutionary method of automated search monetisation.In 2017, Alphabet’s revenue was more than US$100 billion; almost all of that came from advertising, the majority of which was AdWords.
It has had a devastating effect on traditional media companies and
advertising firms. Calling this a paradigm shift may be understating it. Uber: Perhaps the most interesting paradigm shift the past few years has been Uber’s ride-hailing app.
Consider what the company has accomplished in less than a decade.
Uber completes 10 million trips every day. That’s an astonishing statistic.
Whether it deserves to be the world’s most valuable closely held company is another question entirely.
Tesla: There is a counterargument that Tesla isn’t truly a paradigm-shifter. Yes, it sells cars direct to consumers, without the need for middlemen dealers, a fairly unique arrangement.
But its core product – an allelectric car with self-driving capabilities – is far from unique. What’s interesting is that Tesla has forced the rest of the automotive industry to go along with it.
The supreme art of war is to subdue the enemy without fighting, wrote Sun Tzu.
''The list of companies damaged by Apple is astonishing.''