Alpha Erosion

Alpha in business is the condition of being the first to market with a product. Alpha erosion is the condition where an advantage enjoyed by the first into a market is gradually reduced by competitors who, having seen the success, emulate it.

Many alpha advantages disappear entirely because the original innovator did not fully consider how the erosion occurs and what to do about it.

The nature of new

Half a century ago an experienced manager made the suggestion, somewhat insensitively, that a pioneer was a guy with an arrow in his belly. His vision was you don’t have to be first, you just have to be the first to be right.

If you are looking for product lines that will provide long term return on invested capital at rates above your cost of capital, that is a sensible way to look at things.

Being right means

  1. Building a near flawless product. Most new offerings are flawed and remain that way long enough for competitors to gain a foothold.
  2. Build the product for a price that the market market is willing to pay. Flawless is not inexpensive, but the costs can be minimized.
  3. Most defects are designed in. Simplify design.
  4. Understand market size and how the learning curve will affect costs to produce, service, and advertise.

The key to thinking about it

New ideas are useful, but near valueless unless they can be implemented in such a way as to gain and keep market share. The conventional wisdom is a new idea and $1.79 will get you a cup of coffee.

New ideas are like finding a significant mineral body. Maybe gold, or copper, or even oil. The material is the least of your problems. Financing, licensing, building, hiring the people, finding or building transportation, refining, unions maybe, and a dozen more. Those are the problems. It takes considerable skill and a lot of money to pull it off successully.

Implementation is always the hard part. If you are relying solely on being first you will disappear.

Did Microsoft invent operating systems? No. Did WordPerfect have a 50% market share? Yes. Who remembers Lotus 123? It had close to a 100% market share. There were others before them even. Implementing is the thing that matters. Evolving an ever improving, more price friendly solution to a common problem,creates long term wealth.

Being first is an ego thing. It seldom pays off over the long term.

The takeaway

An idea will not make you wealthy.

Implementing is demanding work.

Invention followed by smart implementing, followed by revisions for improvement and delivery, might let you succeed.

Success is not an accident like inventing something. It is a process that transfers the idea into product people want to buy for a price you can afford to accept.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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