How to Determine Whether an Industry Has Potential? - Huxiu.com#
#Omnivore
Highlights#
Transaction Costs, a concept called Network Density ⤴️ ^d699547a
With the increase in network density, super nodes are created; with further increase in network density, super nodes are eliminated. ⤴️ ^c2ffad3d
The direction of business development is to increase network density and reduce transaction costs. ⤴️ ^50052f7b
This is the essence of the entire article and the truth of business.
How to Determine Whether an Industry Has Potential?#
This article introduces how to determine whether an industry has potential by analyzing transaction costs and network density to evaluate the direction of business development. The article points out that the direction of business development is to increase network density and reduce transaction costs. When choosing an industry, it is necessary to consider its ability to increase network density and reduce transaction costs.
• 💡 The direction of business development is to increase network density and reduce transaction costs.
• 💡 All great business opportunities are hidden in clues that increase network density and reduce transaction costs.
• 💡 Choosing a promising industry is more important than working hard. Only by following the direction of business development can you achieve greater success.
I often get asked:
Mr. Run, does the industry I am in have potential?
How do I determine whether an industry has potential?
What kind of industry has a brighter future?
When choosing an industry, everyone will encounter this question.
Choice is the first wisdom of life.
Choosing a growing industry is the only way for individuals to succeed and achieve great success.
If you choose a declining industry, no matter how strong your personal abilities are, you cannot resist the surging waves of the times.
Choice is greater than effort.
Only by choosing the right direction and making full efforts can you achieve more with less.
So today, I want to talk to you about how to choose an industry.
How do we determine whether an industry has potential?
I
The development of business is never random, but has a general direction.
An industry that follows the direction of business development is an industry with potential.
As a business consultant, almost half of the questions I encounter are:
Mr. Run, does what I do have potential?
I often say, actually you are asking the wrong question. You should ask:
Do I have a place in that destined bright future?
What does that mean?
Business doesn't care about your direction. But you must care about the direction of business.
So what exactly is the direction of business?
Business has two directional indicators.
One is ==transaction costs==, and the other is ==network density==.
Let's talk about transaction costs first.
What are transaction costs?
Business is not about production, but about exchange.
Business exists because of exchange. And as long as there is exchange, we must overcome "information asymmetry" and "lack of credit transmission".
Transaction costs are the costs of overcoming "information asymmetry" and "lack of credit transmission".
What is information asymmetry?
Information asymmetry means that I know something that you don't know.
The rice from my hometown is especially delicious. If you come to my house as a guest and taste it, would you like to buy it?
Sure, I can sell it to you for 20 yuan per kilogram.
But what about my purchase price? It's 5 yuan per kilogram.
You don't know where else you can buy it, so you can only buy it from me.
So even though 20 yuan per kilogram is quite expensive, you have to accept it.
At this point, I actually helped you overcome the problem of "information asymmetry".
With me, you discovered that there is such delicious rice in the world!
So the 15 yuan price difference I earned is the transaction cost of helping you overcome "information asymmetry".
With the advent of the Internet, "information symmetry" has become much easier.
You can search online and find the same rice, directly supplied from the place of origin, for only 10 yuan per kilogram.
You no longer need to buy it from me.
Through the Internet, you can buy directly from my hometown.
At this point, the Internet further helps you overcome "information asymmetry".
The transaction cost is reduced to 5 yuan.
So what is lack of credit transmission?
Lack of credit transmission means that the farther away someone is from me, the less I trust them.
If you buy rice from me for 20 yuan per kilogram.
If you search online, you can find the same rice for only 10 yuan per kilogram.
But then you hesitate.
"Although it's cheaper online, I don't know the person selling the rice. What if I pay and the seller doesn't deliver?"
"Forget it, I'll buy it from my friend instead. It's more expensive, but at least I won't be cheated."
Because of "lack of credit transmission", you can only buy from me.
At this point, the transaction cost is 15 yuan.
Later, with the advent of Alipay.
You pay the money, and the money is held by Alipay. After you receive the goods, Alipay will transfer the money to the seller.
At this point, you dare to buy things online.
The transaction cost becomes 5 yuan.
Because it partially solves the problem of lack of credit transmission, it reduces the transaction cost.
So you see, the progress of business is actually about constantly overcoming "information asymmetry" and "lack of credit transmission" to reduce transaction costs.
II
Now, let's talk about another directional indicator of business: network density.
What is network density?
Network density = Actual number of connected transaction nodes / Possible number of connections.
What does that mean?
Let me give you an example.
If I live in a primitive society, my father is a hunter, I am a hunter, and my son is also a hunter.
Our family has been hunters for generations, relying on the mountains for food, and we have no contact with the outside world.
So we will never know that there is another family in this world that has been fishermen for generations, relying on water for food.
They will never taste the wild rabbits we catch, and we will never taste the fish they catch.
We are all isolated transaction nodes without any connections to the outside world.
As shown in the figure, if there are a total of 17 transaction nodes. All transaction nodes are connected to each other, so the maximum possible number of connections is 136.
However, because the actual number of connected transaction nodes is 0, our network density is 0.
Gradually, humans began to gather and settle, and small villages began to form.
The few households in the small villages started to have connections. Connections brought the possibility of transactions, and thus, division of labor appeared in the villages. Men farmed and women weaved, each person did what they were good at, and then they traded with each other. This is the "subsistence economy".
What is the network density of the subsistence economy?
As shown in the figure, the actual number of connected transaction nodes is 7.
So the network density on the graph is 7/136=5.1%.
Business evolved from primitive society to subsistence economy, and the network density increased.
Then, with further improvement in connection efficiency, long interconnected lines appeared.
What if someone from a distant place wants to buy cloth from you, who is thousands of miles away?
Because it is too far, you don't have a direct connection. At this time, you need one or more intermediate nodes.
The intermediate nodes buy cloth from you, not to make clothes for themselves, but simply to sell at a higher price.
Because of their existence, a single exchange is split into many transactions, connected end to end, just like a relay race.
This is the "linear business". As shown in the figure.
This graph represents the network density of the linear business civilization, which is 17/136=12.5%, much higher than the 5.1% of the subsistence economy.
The Silk Road is the most typical example of linear business.
In modern society, a product goes from the brand manufacturer to the provincial distributor, then from the provincial distributor to the city distributor, then from the city distributor to the small shop near your home, and finally from the small shop to your hands. This is a typical linear business.
Linear business is the first true evolution of business.
Because of it, a group of people appeared in the world who are neither producers nor consumers: businessmen.
Then, connection efficiency continued to improve. When more and more "transaction lines" crisscrossed, some transaction nodes became "super nodes" due to natural geographical advantages, policy advantages, and technological advantages.
For example, Rome. You must have heard the saying "All roads lead to Rome".
For example, Wuhan. You must have heard of Wuhan's reputation as the "thoroughfare of nine provinces".
These continuously strengthening "super nodes" brought business civilization to the next era: the "centralized business civilization".
As shown in the figure, the network density of this centralized business civilization is 24/136=17.6%.
In modern society, platforms like Taobao and JD.com are the most typical super nodes.
With them, you no longer need to buy things step by step from the brand manufacturer to the provincial distributor, and so on. Instead, you can directly purchase goods from the brand manufacturer through these super nodes.
As connections evolve and network density increases, business civilization becomes more developed.
Will the centralized business civilization be the ultimate form of business civilization?
No.
As long as network density continues to increase, the evolution of business civilization will not stop.
In recent years, when people buy things online, they mostly do it through super nodes like Taobao and JD.com.
Now, with the rise of livestreaming sales, many people are starting to buy through various hosts such as Li Jiaqi, Viya, Luo Yonghao, Liu Tao, and so on.
Because of the existence of these hosts, network density further increases.
==With the increase in network density, super nodes are created; with further increase in network density, super nodes are eliminated.==
This is similar to the situation where every household didn't have a television in the past, and if your family had one, you became the super node for your neighbors.
Later, when every household had a television, everyone started watching TV at home, and the super node was eliminated.
Therefore, we will transition from the "centralized business civilization" to the "decentralized business civilization".
What is the network density in this "decentralized business civilization" graph?
It is 33/136=24.3%.
If, due to technological advancements, connection efficiency continues to increase, and the network density eventually reaches 100%, meaning that all nodes are connected to each other, what will happen?
This is theoretically possible, but practically very difficult.
We call this potentially unattainable business civilization the "fully connected business civilization".
What kind of technology can make the "fully connected business civilization" a reality?
Perhaps it is the Internet of Things, or blockchain, or brain-computer interface, or major advancements in biotechnology and genetic technology.
Once full connectivity is achieved, scenes from science fiction movies may occur, where all humans share one brain, and what I know, you also know. There will be no more information asymmetry, and no more lack of credit transmission.
The transaction costs of the entire world may approach the theoretical minimum.
This is the entire evolution history of business that we see by following the clue of "network density".
And now, we are in the process of transitioning from the "centralized business civilization" to the "decentralized business civilization".
III
Therefore, ==the direction of business development is to increase network density and reduce transaction costs==.
With increasing network density, there are more ways to find someone. In the past, I only had one way to find him, but now I have a hundred ways.
With decreasing transaction costs, in the past, I had to spend 1000 yuan to find him, but now I only need to spend 100 yuan.
Network density, transaction costs.
Understanding these two concepts, you will find that all great business opportunities are actually hidden in these two clues.
Now, let's go back to the initial question:
How do we determine whether an industry has potential?
It depends on whether the industry can increase network density and reduce transaction costs.
Final Words
The development of business is never random, but has a general direction.
An industry that follows the direction of business development is an industry with potential.
So what is the direction of business development?
It is to increase network density and reduce transaction costs.
All great business opportunities are actually hidden in these two clues.
Even if it is difficult to discover great business opportunities, you can at least use these two clues to determine whether an industry has potential.
Choice is greater than effort.
This is not to say that effort is not important. Effort is the foundation.
But what is more important than effort is choosing an industry with greater prospects.
Only by following the trend can you achieve great success.
You need to make sure that your choice matches your efforts.