Frequently investors look for "good markets" when seeking a place to put money to work. On the flip side, frequently management that is performing poorly will blame their weak results on a "bad market." Listening to this, it would be easy to conclude that if you want to make money you need to be in "good" markets, while avoiding "bad" ones. And that begs the question, what’s a good or bad market?
When Tom Monaghan entered the home-delivered pizza business with Domino’s restaurants were growing at less than 3 percent a year, the competition was largely cut throat small pizzerias with no entry barriers, and there was a huge, dominant, branded player in pizza restaurants named Pizza Hut which was owned by PepsiCo and had enormous resources. Was that a good or bad market? Tom Monaghan became a billionaire competing there.
When Sir Richard Branson launched Virgin Atlantic his prime competitor, British Airways, had 90% market share and was losing money. The only other competitor was Freddie Laker, and he had just gone bust. Were airlines a good or bad market? Sir Richard made more than a billion dollars from Virgin Atlantic.
Now, Virgin America is launching service (see article here.) United has just emerged from protracted bankruptcy, while Delta and Northwest are on the brink. All the major national airlines (except Southwest) are claiming that fuel and labor costs are so high they can’t re-invest to upgrade their aging fleets. Meanwhile they are laying off workers, cutting customer services and on-time performance is declining as they struggle to fly planes. So is Sir Richard crazy? Are U.S. airlines a good or bad market?
Rupert Murdoch of News Corp. fame has just paid an enormous premium to purchase Dow Jones & Company (read article here). But investors have been bailing out of newspapers for 6 years. Knight-Ridder busted itself up selling its assets. Tribune Company is going private to try and cut additional costs. Subscriptions and advertising revenues have declined for 4 years as customers have left for internet news in droves. Is Murdoch crazy? Are newspapers a good or bad market?
Success in business is not about "good" or "bad" markets. Success requires understanding how to compete in the future. When customers have a demand, but old Success Formulas produce poor results it indicates an opportunity to make money. Just not using the old Success Formula. Virgin America will not be like United or American. It has a new approach to customers, and therefore it has a plan to operate a different Success Formula and make money. Likewise, News Corp intends to radically change the Wall Street Journal, including putting a lot more emphasis toward the on-line editions. If Murdoch successfully Disrupts Dow Jones, and invests in White Space to create a new Success Formula, he has a tremendous opportunity to make money. People want to fly in North America, and people want to read business news on this continent as well. The problem is that the existing management teams are so Locked-in to their Success Formulas that they accept lousy results as they do the same things day after day. These new competitors don’t need a "good market", they just need to apply new Success Formulas to these old markets.
The myth is that growing markets offer an easier place to compete. That growth creates more resources is true, but growth also attracts a lot more competitors. When you find a gold nugget, within minutes you’ll be surrounded by hundreds of additional prospectors. While the gold may be more available in that part of the stream, those trying to grab it are far more plentiful as well. No matter what the growth rate, high or not, returns go to those businesses that develop new Success Formulas which overcome market Challenges. And that is what we’re seeing at Virgin and News Corp. The leaders of these companies are not afraid of any market. And they have shown they can make money by building new Success Formulas that reap profits while Locked-in competitors stall and fail.