The rule of Five ( Or Six). While chatting with a young entrepreneur I remembered something my son told me. As a software guy he had made the comparison between how  software packages ( Adobe and  Microsoft for example) worked and how vertical businesses worked. Once he learned the  basic five (or six) rules of the Adobe environment, it became easier to learn individual Adobe products . The same was true for  Microsoft products like Office. Of course the rules for Adobe were not always reflected in the rules for Microsoft.

He took the same view with him as he built businesses in various separate verticals like gaming, music, on line services and food . Once he learned the basic industry rules for success, it became easier for him to pick a business, measure his success and head off potential issues.   Eg. In food he said , a bakery faces having to throw out 30-60% of its fresh stock at the end of every day.  So it makes sense to also have products with a longer shelf life, eg add a patisserie, or a chocolate based business with a bakery since chocolate has a much longer shelf life.

For entrepreneurs I always ask them what are the rules of the vertical that they are working in?  How do successful companies smooth out the normal ups and downs in their business cycle?

Eg Lululemon founders learned the retail business through successfully operating Westbeach.  By cannily creating/nurturing a distinct vertical , yogawear ( or athleisure) , they built up momentum ( and a loyal following).  By using and driving fashion trends they were able to build a commanding market position.

On the other hand for Recon Instruments  rules cut both ways.  They could not create a commanding position through failing to understand early enough how eyewear/goggles was mostly a fashion industry, which their manufacturing partners relied on for annual sales growth.  Faced with growing  returns of unsold product  Recon had to pivot its business model.  This eventually lead to the successful technology sale to Intel.  But this involved a lot of hard work.

So what are the rules of success for your vertical?

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