July 19, 2001
A few potent companies drove the stock market to new heights of success over the past several years, say researchers. While many of those companies have collapsed, others have survived.
Small companies are driving the stock market:
- All of the increased shareholder value of the past few years was created by 5 to 10 percent of the companies in each industry.
- Small companies created 65 times as much value relative to their size.
- Thus researchers conclude that neither company size nor industry matter to value creation.
Based on the experience of these companies, the key to creating value is to focus on a very narrow market niche where a company is able to gain a dominant position. Take the mobile phone industry as an example:
- Of the 18 U.S. telecommunication companies that generate more than $10 billion or more in shareholder value, only two were incumbent companies.
- The 16 newcomers focused on dominating niche markets, such as JDS Uniphase with fiber-optic equipment manufacture and Juniper Networks in router manufacture.
Texas Instruments (TI) is also an example of niche domination. TI sold its defense business and closed several lines of semiconductors to focus on digital signal processing. This created no less than $40 billion for shareholders. Other examples of niche domination: Microsoft's Windows, Intel's microprocessors and Nokia's mobile phones.
Thus "size, scope, cost economies, and vertical integration are much less important than they used to be."
Source: "Atomizers in a Winner-Take-All Economy," Economic Intuition, Winter 2001; based on David Campbell and Ron Hulme, "The Winner-takes-all Economy," McKinsey Quarterly, Number 1, 2001.
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