May

23

C. Stuart HoustonIn Models of Adaptive Behavior, Houston and McNamara discuss the state of an organism and how that might affect its behavior. The state is characterized by a set of variables.

An overfed bird is less likely to engage in risk to feed. Its state is overfed and one can predict it will spend less time feeding when hawks are around. Companies like the Sage's are overfed, and by their own admission not feeding. It can't find food because it has no incentive to search when its state is overfed. It doesn't engage in research, as it has plenty of food. It's old, and doesn't seek partners, and won't reproduce. It relies on pecking order and crowing like an old rooster.

A company with no earnings is hungry, lean and will take risks, engage in research, and searches for new niches, new partners. A young company seeks partners and more capital.

Steve Ellison writes:

Geoffrey Moore wrote the book on this topic for the technology sector. It's called "Crossing the Chasm". There is a "chasm" between the needs of early adopters of a new technology product who love new technology for its own sake and the mainstream market of conservative information systems managers who want others to be the guinea pigs for a product before bringing it into their own organizations.

The companies that successfully make the transition from serving the relatively small number of early adopters to gaining significant market share in the mainstream market generally start by customizing their products for a specific niche market. Ideally, customers in the target niche should be currently served only by general-purpose offerings from large companies. By customizing its product, the upstart company can offer a product that is five to 10 times better for the target niche. Thus the company can dominate the niche, while staying under the radar of the large companies, who perceive only scattered customer defections. The niche gives the company a highly profitable customer base from which it can expand to a larger market.

Here is an example of how I might use Mr. Moore's ideas. Looking at this week's Value Line, I see five stocks with Timeliness ranks of one or two in a technology-related industry. I instantly recognize company A as the leading company in the industry with a larger market capitalization than all the others combined. I research the other four companies. I find that company E operates exclusively in a niche within the industry. In this niche, company E has the leading market share, 30%, well ahead of company A's 18% share in this niche. Thus company E appears to be a potential chasm-crosser, a potential high grower for years to come. Companies B, C, and D each operate in one or more niches, but none is a niche market leader, so I am not as interested in them.


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