I have a mental framework that groups businesses into three logical units. I call these orders.
First order businesses are the foundation of the economy. They satisfy the most basic of needs. These businesses include the agriculture, mining, and the textiles industries. They are very important as they free the majority of the population to create the higher order businesses. Through decades of operation, their logistics are highly efficient and often very complex. The growing global population creates true demand for first order goods meaning that top first order businesses are both very lucrative and secure.
Second order businesses satisfy the needs of first order and third order enterprises. Distribution, transportation, basic advertising, publication, and retail are second order businesses. The name of this game is efficiency. Most large corporations are second order businesses which target a non-essential demand and satisfy it as cheaply as possible for as many people as possible. Second order business are generally unnecessary but create economic efficiencies and thus very important for the expansion of capitalism. Innovative is often an apt description of a second order business’ model but very rarely will you hear this term used outside of a B-school class.
Third order businesses create their own demand. After the lower order businesses have supplied consumers and businesses with their needs as efficiently as possible, third order businesses target ultra-discretionary income. Creative marketing, fashion, entertainment, and are in this space. They rely heavily on marketing, creativity, and demand creation to become and remain profitable. These businesses are often high-risk/high-reward ventures because the initial demand is often unknown or speculative. The value of the goods or services produced by third order ventures is normally perceived rather than tangible. Third order businesses typically round-trip to zero as their market’s demand evaporates or they fall to second order status as they commodify.
