The Signal #23: Competitive Advantage

We’ve been lax in posting our newsletter to this website. Below is #23, on immigration and competitive advantage.

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Friends,

The story of business is the story of the search for competitive advantage, preferably sustainable competitive advantage. To Michael Porter, competitive advantage meant either cost advantage or differentiation. Morningstar talks about economic moats. These refer to the same underlying concept – how to differentiate from the competition, preferably for a long time, by either making things more cheaply than the rest, or by making things that the other guys can’t make.

The IT sector shows how hard sustained excellence is, particularly in markets with rapid upgrade cycles like PCs and phones. BlackBerry was part of the toppling of Motorola and SonyEricsson, yet was toppled within years by Android and Apple. Dell, which disrupted the PC industry through its supply chain excellence, saw its advantage whittled away over time.  Information Rules (which Jon uses in his Haas classes) is full of examples like Excite@Home and Pointcast, and spends much ink on the Wintel duopoly, itself later weakened by the secular shift to mobile. Being great for a long time is hard, and this is what makes the achievements of IBM and GE so worthy of respect.

Information Rules, A16Z and others talk about network effects. Essentially this means the more people who use a service, the more valuable it is, and the more valuable it is, the more people use it. Some call this Metcalfe’s Law. The Internet is an example of this. It’s intuitive once you think about it, but it puts a name to a valuable, valuable sentiment in business – when you know there’s electricity, you can build an appliance; when you know there’s a microwave, you can sell microwave food; when you know there’s an iPhone, you can develop an app. (Graphic from Jon’s class materials below, originally sourced from the NYT.)

Screen Shot 2017-02-13 at 12.04.23.png

Silicon Valley itself is an example of positive network effects – people come because other smart people are here, doing interesting things; the more smart people come, the more interesting things we can do, and therefore more people come, and capital flocks to where these people are. Companies embody this too – people flock to companies because other smart people work there. But this is fragile. You see this with the ebb and flow of “It” companies – when they lose that mantle, talent starts to leave, and once they leave, the cycle accelerates.

Which brings us to the hot topic of immigration.

The chart below shows the share of the immigrants in California, San Francisco, Silicon Valley and the US as a whole.  (Source data here.)

Silicon Valley & Immigrants.png

Related – it’s been well reported that over 40% of Fortune 500 companies were founded by first-generation immigrants or their children. And that Steve Jobs, whose father was from Syria, wouldn’t be able to immigrate to the US if the recent executive order on immigration was enforced. This is called throwing the baby out with the bathwater.

The chart below shows birth rates and foreign born populations in the US, UK, Germany, China, Japan, South Korea, Indonesia and Brazil. (Data via the World Bank. Data is from 2014, i.e., before Germany absorbed immigrants from Syria en masse.)

NationalComparison - birth rate & immigration.png

These are sorted by population growth rate.  Which economies would you put your long-term bets on?

We would argue that robust immigration is America’s most sustainable competitive advantage – the fact that bright, motivated people who would probably do just fine in their home countries want to move here is the most precious thing we have.  And messing with this could have long-term, dangerous ripple effects on our economy. For network effects can be positive and negative.

– Team Blue Field

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