Strategic inflection points are a critical stage in the life of a company, industry, or personal life where a significant change in the competitive environment requires a fundamental change in business strategy. It is a turning point that can lead to either a new era of growth or the beginning of decline. Much like standing at a cross road in life, one path may lead to a better future.

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What are Inflection Points?

Investors may have heard phrases like “The industry is at an inflection point” or “The market is approaching an inflection point” or “The business is facing a strategic inflection point.” You may be wondering what they are talking about.

An inflection point is a term that describes an event causing a significant change or shift, leading to either a negative or positive outcome. In mathematics, inflection points are defined as the moment when a change occurs, causing either a concave upwards or a concave downwards.

Inflection points occur in all aspects of life, from relationships to health, and are noticeable in everyday situations. One of the most important observations of inflection points is their impact on business and the greater economy, which ultimately affects investing. A strategic inflection point, as introduced by Andy Grove in his book, “Only the Paranoid Survive,” is summarised as a critical stage in the life of a company where major changes occur, necessitating a fundamental shift in the business strategy.

The inflection point refers to any change in the direction of a trend that can impact markets, an industry, or the economy, often related directly to an event or action. Inflection points in business specifically can be strategised and intentionally caused. At other times the inflection point happened out of nowhere and was not planned. Both scenarios can cause dramatic shifts in the future of the business.

We will be focusing on Inflection Points in business primarily although they are important in markets and the greater economy.

How do Inflection Points impact a business?

Inflection points can significantly impact the future of a business in various ways. Unintentional inflection points that are not promptly addressed can lead to the decline of a business. When strategically addressed, they can generate tremendous growth and potential for a business.

Over the past few decades, we’ve witnessed entire industries disrupted, with many of them reaching an inflection point, missing it, and consequently experiencing decline. Consider DVD rental companies that were completely wiped out due to the inflection point caused by movie streaming.

The inflection points that e-commerce and door-to-door delivery brought about for brick-and-mortar stores are another example. Some inflection points are intentional, such as the transition or pivot into new lines of products and services. Others are responses to fundamental shifts in an industry, the economy, or the business environment.

Technological advancements, transitions to green energy, changes in communication methods, and evolving consumer preferences have presented numerous inflection points to overcome.

Below are a few characteristics of strategic inflection points:

• A significant change in the competitive environment.
• A fundamental shift in business strategy is necessary.
• This creates an opportunity for growth or a turning point toward decline.
• It is often unexpected, a surprise, and swift.
• Companies need to be highly adaptable and resilient to change.

If companies can adapt and take advantage of these crucial moments, they can propel themselves ahead of the competition. If they are not responsive or fail to recognise it, competitors might, and the business may not survive the change.

What are the causes of Inflection Points?

Various reasons can lead to an inflection point. It could be regulatory changes within an industry, such as a policy or law change. It’s often technological advancement, with the rapid changes in tech causing ongoing disruptions. It could also be a failure to adapt to changing consumer needs and releasing a product that doesn’t meet expectations.

Inflection points can be the result of a significant disruption to the existing market structure or business model, such as the rise of a new competitor or the emergence of a new technology.

Companies need to be prepared for change and evolve according to shifting circumstances. Transformation is a part of life, especially in business. If a company is not ready to transform and clings to outdated methods, it will not survive in the fast-paced, disruptive environment. The best outcome is when companies and leaders prepare for inflection points to stay ahead of the competition. Companies that fail to adapt have a shorter lifespan.

How do Inflection Points impact markets?

There are numerous examples of inflection points in markets and the economy that have resulted in a negative result. Think about “Black Swan” events that have caused markets to crash or have impacted the world’s economy. The Global Financial Crisis was years in the making as the financial system drew closer to the inflection point, which then resulted in a huge market crash.

The latest was Covid, the inflection point or more so a “Black Swan Event” that strained markets globally and impacted the economy in ways we are still feeling. Inflection Points don’t only impact individual businesses but entire sectors, economies, and society.

Economic events that are the result of inflection points can lead to downturns and recessions as a result of interest rate and inflationary issues. There are geopolitical events with changes in trade policies, conflicts, and global politics that can cause unexpected inflection points.

One of the most recent examples that can explain a geopolitical inflection point that caused an inflection point in an industry which created inflection points for individual businesses was the China and Australian trade dilemma.

When China and Australia were having some minor disputes, China banned the importation of Australian wine and raised its tariffs to extreme highs. There were a significant number of wineries that solely supplied to China. Think about this geopolitical inflection point that caused a major inflection point for a business that lost 100% of its income and was forced to find new markets to supply or die. An entire market was disrupted overnight.

Investors should understand how inflection points impact both markets and the economy to help look for opportunities when certain trends play out as well as risk mitigation to protect themselves during times of uncertainty.

Can investors spot Inflection Points?

Hunting for inflection points is not easy. However, it can be lucrative if you study inflection points as a whole and begin to spot these trends. By studying past trends, we can understand how companies adapted, innovated, and thrived as well as the ones that failed to evolve in time.

We can look at notable inflection points that impacted businesses and industries: taxi to ride-sharing, travel agencies to online booking, hotels to Airbnb, DVDs to movie streaming, retail to online shopping, fuel to electric vehicles, and observe the way disruption rippled through sectors.

There are two ways to analyse inflection points from an investment perspective. The first is industry and market inflections, and then individual businesses that face strategic inflection points. A business may be “crossing the chasm” and entering into a hyper growth stage, which can generate a lot of returns for investors.

Sometimes hindsight bias is the only way we go, “Oh yeah, I could’ve picked that.” Unlikely. When Covid hit, no one knew the impact. Very few thought, “Well, everyone is going to be working at home, ZOOM will be a great business because it’s a solution to a current need.” By the time it happened, everyone reacted the same way and pushed the valuation up.

It’s challenging to not only identify inflection points but also to take advantage of them and invest alongside them. A lot is riding on the successful outcome of the company adapting to the change. I think it’s best to start with understanding industries that are ripe for change: understanding business models, disruptive technology, or industries that are yet to face any major catalysts.

Look for significant changes in fundamental performance.

When it comes to a business, having an in-depth understanding of the underlying company is crucial. An inflection point may be caused by a product or service that has now been widely adopted by consumers. It can be a business that is playing to a growing theme or trend that is in the right time and place.

You are trying to look for signs of significant changes in the fundamentals of the business, and that isn’t easy. It’s not always about looking for growth or high-tech sectors. Inflection points can come in all shapes and sizes. It could be a turnaround actually starting to turn and as a result rerate significantly. It could be the result of optionality in a business that releases a new product or a segment of the business starts to dominate and develop. New markets such as an overseas expansion could significantly impact revenue and growth. If you notice a significant change in the fundamental performance of a business ask:

What has driven this change?

Looking for signs of significant changes can be tricky, but it’s not impossible. I’ve found a few in small-caps that signed new distribution agreements and contracts that catapulted the company forward. It can be companies that have been operating with negative profits finally crossing into profitability territory. The changing fundamentals of a business happen gradually over a long time. The inflection point, however, creates a significant change that rapidly accelerates the business.

Adapting to Negative Inflection Points.

On the other side of an upward trajectory of an inflection point is a negative trajectory. This can also be incredibly helpful to investors who understand inflection points and use them as a risk mitigation strategy. This could be done by changing investment strategies when the signs look negative or if the business you are invested in hits an inflection point and you no longer believe it can adapt and thrive.

The goal is to be prepared and to study and understand the likely outcomes and the impact of each. It can also be the catalyst for a successful investment in a business where you identify a risk, it is removed over time, and now presents a compelling opportunity.

You can look at markets and industries that are facing challenges and notice if an inflection point is about to happen or is already underway. For example, when the China and Australia trade agreement started to cause issues, intelligent investors removed funds early from a couple publicly listed wine companies that, as a result of the dispute, took significant losses and ultimately didn’t recover.

By understanding the impact of inflection points, you can navigate markets by evaluating the possibility of an upward trend or a downward trend. During COVID, the inflection point impacted entire industries; however, some investors were able to look at which businesses are likely to thrive and, as a result, be a positive recipient from the inflection point caused by the pandemic.

It’s not about timing markets or predicting the future, but understanding the impact that inflection points cause and how they ripple through markets either positively or negatively.

Inflection Point Investing requires patience.

The key takeaway from inflection point investing is to be patient and leave room for potential profits. The lead-up to an inflection point takes time, but the actual catalyst of the inflection point happens rapidly. If an opportunity is identified, the upward trend of the inflection point should offer significant potential gains. One effective way to minimise risk is to simply wait for the change to unfold and the response to play out.

There’s no need to rush and try to capture a few extra points by being early to the table. A genuine positive inflection point, not just a day-to-day challenge or change but a real strategic inflection point in a company’s life, has a decent runway. Unlike a decline, which can occur suddenly and more swiftly.

It’s important to look for signs that the inflection point is underway, which could manifest in various ways. These signs may include revenue acceleration, increasing multiples, expanding margins, growing momentum, and increased awareness of the business.

Patience is key, and once it’s believed that the business has adapted, responded, and capitalised on the inflection point, then action can be taken. This approach helps to reduce downside risk, as some businesses positively adapt to inflection points, but this impact may be short-lived.

Avoid the eagerness of being too early. There’s nothing worse than being too early to a great idea. This style of investing is grounded in thorough research, a deep understanding of business models, a strong awareness of the target company, all backed by a robust investment process. Investors need to be mindful of industry trends, drivers, and the factors that will shape the future of a business.

Studying and investing alongside inflection points can be very lucrative.

In Summary…

I believe the term is loosely used in the investment community and is often not warranted on a lot of ideas. A business may go through one or two inflection points in its lifetime, not a couple a year. Similar to the crossroads of life, they are rare pivotal moments that occur.

Leveraging inflection points is about using 2nd level thinking: understanding the economy, an industry or where the world is moving towards, and then looking at the companies that benefit from this. I try to run all ideas through this inflection point framework in my investment thesis.

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Skate to where the puck is going, not where it has been.

Wayne Gretzky

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Don’t get confused with forecasting the future and trying to guess the next move. No one can. However, after putting in the time to study and understand inflections, you develop an eye for spotting them even in their infancy.

Skating to where the puck is is about looking at the ripples of inflection points in markets, industries, and business and thinking about the result how it may trickle-down stream of that change. Then making investment decisions based on hard research and evidence.

If an industry is going through an inflection point, who are the benefactors and detractors of this? If the economy is going through an inflection point, what is the fallout and where is the opportunity? When a company faces a major strategic inflection point, does management have a track record of innovation, resilience, and adaptability? Are they financially strong to withstand or take advantage of the catalyst?

There are many ways to look at inflection points. You don’t need dozens of inflection points to do well, just a few well-thought-out and deeply researched moments you jumped at, and a bucket of luck.