Second Order Effects Framework

A framework for identifying business opportunities by analyzing the cascading effects of major changes or events, focusing on second and third-order consequences.

Core Concept

• First order effects are direct impacts (e.g., coronavirus → shelter in place)
• Second order effects are subsequent consequences of first order effects
• Third order effects follow from second order effects
• Biggest business opportunities often lie in second and third order effects

Historical Example: Highway System

• First Order: Highway system built for military purposes
• Second Order Effects:
  • Walmart's retail expansion along highways
  • Faster car travel
  • Retail system development around exits
  • Connected retail infrastructure

COVID-19 Example Chain

1. First Order: Shelter in place
2. Second Order Effects:
   • Changes in birth rates
   • Increased divorce rates
   • Growth in grocery delivery
3. Third Order Effects:
   • Mass hiring of delivery workers
   • New healthcare needs for gig workers
   • Drive-through business expansion

Business Strategy Application

• Start working on solutions before markets fully develop
• Look for rapidly growing markets that can be predicted
• Focus on opportunities in subsequent effects rather than immediate impacts
• Map out "if this, then that" scenarios
• Use prediction practice to develop better business intuition

Current Example: Drive-Through Business

• First Order: Movie theaters struggling
• Second Order:
  • Rise of drive-in theaters
  • Expansion of drive-through coffee shops
  • Increased demand for minimal contact services
• Business Opportunity: Drive-through coffee franchises poised for expansion