Falling Profit Margins


More availability of information leads to more competition. More Competition leads to lower profit margins.

Higher profit margins will only be possible in businesses with limited competition. The dominant way to legally limit competition is through innovation and protecting intellectual property rights.

Innovators will be rewarded more and more over time.

Over time, information becomes more and more available and interpretable. In this environment, people are able to demand fair compensation with a better and better understanding of what fair is. People will have to be compensated more and more closely to the value of their work. As this happens, profit margins will fall toward the pure value of synergy, however it is defined, and equity valuations will reflect these changes. Whenever employers refuse to meet the demanded minimum compensation for employees, the employee suddenly becomes competition. The economy will transition toward a large number of smaller economic players rather than the small number of large currently dominant players. Existing job roles become commoditized over time as large numbers of players compete profit margins away. The only way to substantially and positively differentiate your profit margins is to do something that is not yet commoditized; in other words, to innovate. The only way to maintain your differentiated position is to protect your existing innovations through patents and secrecy and continue to innovate.

Implications:

  1. In valuing your stock positions in companies, consider how easy it may be to enter their market in the future. Also consider their profit margins with the knowledge that there tends to be a profit squeeze as competition increases.
  2. Record your thoughts if you think that they may be unique and potentially valuable. Nobody else can patent something if you thought of it and recorded it properly first.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s