Summary: The Star Principle by Richard Koch

Whether you want to start a business, invest in one or find a great one to work for, how do you know whether a business idea is good enough? Most business books are infuriatingly vague on the subject – but The Star Principle is specific, easy to understand, and makes intuitive sense.

I’ll summarise the main concept here, but if you find the idea compelling you should definitely read the book. Unlike most business books, which pad themselves out by endlessly repeating examples of the same thing, The Star Principle is full of actionable step-by-step advice.

The idea

A business needs to meet two criteria to be a Star business:

1. It operates in a high-growth market (at least 10% growth per year)
2. It’s the leader in that market

The logic for these criteria is simple:

• A market leader should be able to charge higher prices (because customers prefer it) and have lower costs (because it can spread fixed costs over a larger output), and therefore be more profitable.
• The growing market will then make the company big as well as profitable.

Only about 5% of start-ups meet the criteria to be Stars.

1: Market leadership

Leadership is defined as having higher revenue than any other company in its niche.

A great way to be the leader in a niche is to create your own and get a head-start – but it must be a genuine niche.

What qualifies as a niche?

A niche is only separate from the main market if:

• The customers are different
• The products or services are different
• The way of doing business is different
• The ranking of competitors is different

For example, sports cars are a niche market within the category of cars. The customers are richer, the products are markedly different, and the market leaders aren’t the same companies that lead the market in cars overall.

“Red cars” are not a valid niche: none of the above are different, so selling more red cars than anyone else doesn’t make you a market leader!

2: A fast-growing market

The niche must be growing at 10% per year and continue doing so, on average, for the next five years – preferably much longer.

You obviously can’t tell, but recent results and trends are an indicator. For example, Betfair was growing at 30% per month when Koch invested. Clearly (disasters aside) it was going to grow at more than 10% per year for a long time even if it slowed down a lot.

Starting a Star business: It’s all about the idea

Star ventures usually create their own market, so they’re the “born leader”. When coming up with business ideas, there are two criteria to meet:

1. There must be a gap in the market.
2. There must be a market in the gap (it must be large enough to support at least one profitable business)

Most business ideas won’t meet these criteria, so you can forget them.

The majority of brilliant business successes are the result of being in the right place at the right time: anyone with that idea could have made a reasonable success of it. That’s why repeat successes in business are so rare.

Any business that imitates another won’t be a Star. It will start out way behind the market leader, without any of the advantages the leader has – and won’t catch up unless the leader hugely slips up.

Seven steps to creating a star business

1. Divide the market. Segment off a niche of the main market that will be just yours.
2. Select a high-growth niche.
3. Target your customers’ preferences. They must be different from those of the main market in a clearly identifiable way.
4. Define the benefits of the new niche.
5. Make sure the new niche can be more profitable than the main market.
6. Name the niche you plan to lead (e.g. Betfair and the “betting exchange”)
7. Name the brand in a way that complements the category name (“Betfair” reflected the unique aspect of the category in the way an imitator, “Flutter”, didn’t).

Conclusion

The book goes into great detail about how to execute each of these steps – complete with plenty of examples from Koch’s own investments and other well-known companies.

You’ll have to read the book for that. My aim here is to summarise the idea, not the entire book.

The key concept to take away is that you need to identify the right idea – an idea that has Star potential – whether you’re starting a business, investing in a business, or choosing a business to work in.

Only 5% of businesses are Stars, which means you can ditch 19 of every 20 ideas you have or companies you look at. This makes company/idea selection sound like hard work, which it is – but if you spend time on correctly identifying a Star, everything that follows is dramatically easier.

This reminds me of “the focusing question” from Gary Keller’s The One Thing:

What’s the ONE Thing I can do such that by doing it everything else will be easier or unnecessary?

The One Thing

In this case, the answer is “identify a Star”. And by giving clear criteria for what a Star is and a checklist of the steps you need to follow, The Star Principle makes it seem possible – and fun.