‘The Star Principle’
Richard Koch is different from other authors in the field of business. Usually the authors are successful business people or successful consultants, but not both.
When I first read Koch in the mid-1990s, he was just a consultant and author. Today he is a millionaire. His latest book “The Star Principle: How It Can Make You Rich” is about how he became a millionaire and in it, he explains the principle and strategy behind his financial success. Koch has no original contribution to the business world, instead he always takes a well-known concept and demonstrates how to use it, as he did in his famous “80/20 Principle,” where he took the Pareto principle and showed how we could we use it in our own lives. In “The Star Principle,” he does the same, taking the famous Boston Consulting Group’s (BCG) Portfolio Diagram and showing us how we can use it in our own lives. Moreover, he explains how we can become rich and he is serious about that.
According to the BCG Portfolio Diagram, there are four types of companies: cash cows, dogs, question marks and stars. Cash cows are companies with high market shares generating cash in excess of the amount needed to maintain the business. Their growth rate is slow. Dogs are the companies that generate barely enough cash to maintain the business market share. These companies are the followers in low-growth markets. Question marks are rapidly growing companies and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. Stars are the leaders in high-growth markets. They provide increasingly high returns. They are not as big as cash cows; however, they are much more profitable. Koch focuses mainly on the stars. He sees them as a major key to wealth. “What determines your success?” Koch asks, and from personal experience, answers, saying: “It’s not the ability, it’s not the hard work and it’s not people. To be successful, you should start a star business or be associated with a star business.” A star business is the leader in its market niche and that market niche is growing fast, at a rate of at least 10 percent a year.
To be the leader simply means being bigger than any other firm in the niche. The size is measured by revenue. What is a niche? A niche is a separate market. It must have different customers, different products or services and a different way of doing business than the main market or other niches.
By the way, any star business is a small part of the main market at the beginning; however, it grows much faster than the main players, so if you invest in one star business, it means you will have a greater return in a short period of time. If that company can protect its position, it will continue to provide higher profits in following years. This process provides compound returns.
Koch invested his 1 million pounds in star businesses and in time these investments provided him with more than 100 million pounds.
He insists that it is best to invest in star businesses. You may think you don’t have any money and this is just nonsense. However, Koch insists that even if you have no money and you cannot invest in a star business, you can work for one. Any fast-growing stars can pay better salaries than mature cash cows. Besides it is easier to find an opportunity to be successful and get promoted in stars, because they are smaller businesses than the cash cows. Koch provides many interesting examples, from Google to Facebook, from his own investments to other people’s investments, helping you understand which business is a star and which is a dead star.