The Star Principle in Business Activities

The Star Principle in Business Activities

In business, we are constantly searching for simple, fundamental, elegant, and streamlined principles—principles that can help individuals build great new companies and, in turn, make humanity and society richer and more vibrant.

Principles are valuable because, if they are powerful enough, they allow us to achieve much more with much less effort and avoid costly mistakes. In science and business alike, there are indeed such principles. Yet while most scientists are deeply familiar with the elegant principles of their fields, only a small number of businesspeople use principles to guide their daily work. Most tend to rely instead on a shallower layer: methods. But as the 19th-century philosopher Ralph Waldo Emerson said, “There are many methods, but few principles. The person who grasps principles can successfully choose his own methods. The person who keeps trying methods, ignoring principles, is sure to have trouble.”

By this standard, a principle must possess overwhelming power—so much so that ordinary people like you and me can, with only a small amount of shared human understanding, create extraordinary results in a reliable and tangible way simply by following the principle carefully, rather than relying on individual brilliance.

A principle can tell you what kind of business you can start or work in. If you act in line with the principle, that venture is far more likely to succeed. If someone asks, “What is the most effective principle in business?” one likely answer is the Star Principle. This is another way of interpreting the Boston Consulting Group’s famous Boston Matrix, also known as the growth-share matrix. In the Boston Matrix, every business can be classified into one of four categories:

• Star — the largest company in a high-growth market.
• Question Mark — a company that is not the largest in a high-growth market.
• Cash Cow — the largest company in a low-growth market.
• Dog — a company that is not the largest in a low-growth market.

The Star Principle says this: the best businesses are Stars—that is, they are the leading companies in rapidly growing markets (specifically, markets sustaining at least 10% annual growth for several consecutive years). Stars are extraordinarily valuable because they can grow exponentially while remaining profitable and maintaining steady cash flow.

Star businesses make up only about 1% to 2% of all companies, yet they generate more cash than the entire product lifecycle as a whole (because some non-star businesses consume more cash than they produce). For this reason, Star businesses are the primary source of profits for entrepreneurs, venture capitalists, and other investors.

It is possible to build a brand-new Star business by creating an entirely new business category from scratch, or by redefining a subset of an existing market as a new category and displacing the early market leader. But there is also a problem. The Star Principle can tell you whether an existing company is already a Star, but it does not tell you how to create a Star company in the first place, nor how to replace the current leader in a high-growth market and become the Star yourself.

And that is the question the Star Principle leaves for us to think about.