Business, Investing, and Critical Mass

Business, Investing, and Critical Mass


Welcome to the Latticework of Mental Models
series from Safal Niveshak. Have you heard the story of Chinese Bamboo
tree? When you plant the bamboo seeds, for the first
five years, nothing comes out from the ground. But in the sixth year, one fine day, a tiny
bamboo sprout breaks through the ground and within next six weeks, that sapling grows
to a dizzying height of ninety feet. That’s a strange behaviour for a tree and
it raises some interesting question. So, was there really nothing happening at
all in the first five years? How did the bamboo tree grow so fast in the
sixth year? The answer to all those questions lies in
an idea called Critical Mass. It’s a concept from the field of Physics. So, for a system, critical mass is that point,
that limit at which the behaviour of the system changes dramatically. When critical mass is reached, that system
may suddenly start working much better, or it may start working much worse, or it may
stop working all together. Reminds me of the saying – “It is the
last straw that breaks the camel’s back.” Until the last straw arrives, small additions
of load on the camel doesn’t have any visible effect. The last straw is that limit where it’s
heavy enough for the poor camel to succumb under the load. Malcolm Gladwell, in his book The Tipping
Point, has refined this idea of critical mass further. He talks about how epidemics spread, or how
social trends become viral or how certain ideas spread rapidly after a critical mass
is achieved. So for example, Japanese electronics company,
Sharpe, came out with the first ever low-priced fax machine in 1984. In the first year, they sold about 80,000
of those devices. For the next three years, their business grew
slowly. But in 1987 something remarkable happened. The fax machine sales went through the roof
and Sharpe sold one million pieces. By 1989, two million new machines had gone
into operation. 1987 was the tipping point in the fax machine
business. After 3 years of steady sales, enough people
had faxes that it made sense for everyone to get fax. Coming back to bamboo tree, although nothing
was happening above the ground for the first five years, the tree was steadily growing
its roots underground. And the moment a critical mass was achieved,
in terms of amount of roots required for external growth, bamboo sampling broke free and grew
with a nonlinear speed. Another great example of critical mass is
the city traffic. On any given day if you increase the traffic
by twice, our commute time may also increase by a factor of two. However, if you keep increasing the traffic,
at a certain point, addition of few more cars chokes the road completely and the vehicles
movement comes to a grinding halt. The number of cars on the road at that inflection
point can be called as the Critical Mass for the commute system. So when it comes to business and investing,
what can we learn from this mental model of critical mass? Economies of scale is an important source
of competitive advantage for a business. When a company becomes big, there comes a
point at which its expenses can be spread out over large volume of its products such
that average cost becomes so low that a significant portion of revenue starts going directly to
the bottomline. At this stage profits suddenly shoot up. That’s critical mass at work in businesses
that benefit from economies of scale. If you found this video useful, you may want
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