How do you identify opportunities?
Opportunities come from change in the environment. Imagine that you are living in the stone age. You’re part of a tribe of 50 hunter gatherers. Nothing ever changed during your lifetime. You wandered around your territory, you hunted animals, you looked for roots and berries. That would be about it. What possible opportunities would there be, outside of finding sources of food? Not a lot. Nothing much ever changed for thousands and thousands of years.
Change creates opportunities because it creates friction. We are fortunate to live in an era of massive constant change. We’re familiar with the term “creative destruction.” It’s indicative of the fact that change creates massive amounts of friction. Friction creates opportunity.
Therefore, if you’re in an industry that hasn’t had a lot of change, or friction, then the probability of finding huge opportunities is lower. For example, if I were in farming or the flour milling business, there has been some technological change, but compared to cloud-based computing, the probability of finding a trillion-dollar opportunity in farming wheat is lower. That’s why sectors with less opportunity have lower gravity and attract less capital.
The more friction you find, the greater the opportunity to replace it with value. Most people don’t look for sources of friction widely enough and don’t see change coming. You can do this even in supposedly low growth sectors. People miss sources of opportunity because they take a myopic view of their opportunity environment. Big successful incumbent players in slow moving industries are more likely to do this.
Imagine if you ran a utility, a power company. You might think that change is slow in the industry. But if you take a more expansive view of your environment, you’d surely notice that global warming is a domain change that is influencing your industry. It appears to be a threat. How could you turn it into an opportunity? It’s creating increasing friction because more and more people are saying “coal is dirty, nuclear is dangerous.” How can you turn this friction into opportunity? Where is the opportunity? You need to find it, or you will face gradual irrelevance.
Unfortunately, most companies actively resist turning friction into opportunity. For example, a company like General Motors has all the infrastructure and the brains and balance sheet to succeed in the electric car market, but it took a complete outsider like Elon Musk to come in starting with a clean slate and harvest opportunities.
Why does that happen? Imagine if you had invested $50 billion into making and selling cars a certain way. You’re not going to be very open minded about making them some other way, unless your life is on the line. Businesses invest a lot of money into existing business models and are extremely reluctant to radically change those models even if the boat is leaking and they’re bailing out furiously and obviously sinking. This happens to companies of all sizes. If they’re already invested so much time and money into something, it’s hard for them to benefit from change, even when irrelevance is like a tiger drooling in their face.