Power Laws in The Auto Industry

There has been a lot of talk over the past several years about the changing nature of unexpected events. In the past, it was believed that most occurrences followed a normal distribution, height is a good example, it’s rare that a person is very tall or very short. A lot of research on stock market returns, catastrophic events, and even business operation has pointed instead to a business environment ruled by power laws.

John Hagel, of Edge Perspectives, has a great explanation of power laws. Common examples of power laws include the distribution of income in the US, the 80/20 rule, the occurrence of earth quakes, and I think dealership group sales. Despite seemingly complex behavior, power laws are created by a few, simple rules:

  • Survival of the fittest: Companies like Penske Auto Group, Autonation, or Carmax that have better access to money and personnel will continue to grow and take an even greater share of car sales.
  • Preferential Linking: Dealerships with high quality service, or that deliver a good experience, will continue to get referrals as friends tell each other about the experience.
  • Growth & Age: Older companies, that have been in business longer, will have more sales than the new companies that enter the market. As those old companies continue to grow they will continue to pull past new entrants.

The Internet, though, offers an equalizing element for dealerships. Previously, a new, or small, dealership would be unable to compete with older, better funded dealerships for customers. The recent rise of Autotrader, eBay, and SEO allows these companies to compete on a more equal footing.

In fact, a company that makes better use of the Internet can quickly outsell larger, more established dealerships, especially because successful SEO is based less on financial capital and more on human capital. A motivated individual can provide significant benefit to a dealership by learning the newest tools and how to successfully implement them.

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