Building the next Apple - What matters for long-term growth potential
Why it's important for companies to operate in large industries, have multiple growth vectors, and provide real, differentiated value to their customers
We expect even our head portfolio companies to sustain 5-10% revenue growth on average over the long-term, while optionality companies typically grow at >20% p.a.
To enable this, these companies must:
Operate in an industry with large revenue potential (e.g. lots of customers, high prices, or both)
Compound customer-level growth via multi-product growth and pricing power
Provide real, differentiated value to their customers which is the key enabler - the reason people will continue to buy current and new products
Big important industries
TAM is a commonly used metric, equating to a company’s maximum possible revenue if it had 100% market share. This can be better defined as 100% share of the future expected size of the market for the company’s current products / services.
Understanding the possible future market, rather than what it currently is, is one of the key factors in determining revenue capacity for companies that are creating new industries or expanding previous boundaries.
When the iPhone was first released in 2007, 122 million smartphones were sold globally at an average price of ~$100. By improving user value, Apple and fast followers like Samsung expanded both the market’s volume and the average price point, driving a >15x increase in TAM.
When Tesla released the Model S in 2012, the market for electric vehicles was a niche area only inhabited by hobbyists, and less than 1% of global vehicle sales were electric. As a result of technological improvements, particularly safer and longer-lasting batteries, electric vehicles have grown to c.20% of new car sales today.
Product / feature expansion
The ability of a company to leverage its initial product or products to drive further growth is one of the most important traits separating the good from the great.
A company’s first product provides an entry point, which the best companies then use to embed themselves into a customer’s life - solving more problems and creating more customer value.
By leveraging the iPhone, Apple expanded its share of consumer wallets through the app store, accessories like AirPods, and complimentary products like iPads. Apple’s ecosystem also created an unfair advantage over companies competing in any of these standalone areas.
Product expansion provides the opportunity to acquire customers who weren’t interested in the first product(s) - increasing the size of the customer base and expanding the TAM.
Tesla’s first product, the Model S, was an expensive sports car that targeted a small audience. Subsequent Models X, Y, and 3 expanded the company’s reach into different automobile market segments and attracted customers who weren’t interested in the S.
Pricing power
Aside from product range and feature expansion, pricing is the other key opportunity for growth.
The ability of a company to increase pricing year after year is a powerful driver of profitability. However, this requires a company to produce a product its competitors cannot sustainably replicate. To do this, a company must provide real, differentiated customer value.
Give the customers what they want
The ability of a company to provide customers with value is the lynchpin that drives both TAM and revenue expansion opportunities.
The value that customers receive determines why they are willing to buy a product and how much they are willing to pay.
Companies can provide their customers with value in numerous ways, with some of the main ones being:
Price: Consumers want a bargain. Walmart, Amazon, McDonald’s, and Coca-Cola offer better prices than other options.
Convenience: Easier is better, and removing friction provides value. Uber means you no longer have to call a taxi and wait an unknown amount of time for it to arrive. Coca-Cola makes its products available everywhere.
Brand: Some companies make customers feel like they’re “part of the club” - connected to the brand, its values, and a community of like-minded people. You’re an “Apple person”, and you would never dream of owning a Samsung.
User experience: Sometimes, the little things matter the most, whether it’s extra legroom on a flight or an intuitive website. Companies like Apple and Amazon centre their design and philosophy around ensuring customers enjoy using their products and services.
Quality: There’s often no substitute for high-quality design and materials. Companies like Rolls-Royce are valued for their elegance and engineering excellence.
Importantly, companies must provide differentiated value that can’t be copied by their competitors.
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed. - Warren Buffet.
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