The declining cost of information will have enormous implications for investors, writes Mia de Kuijper in ‘Profit Power Economics: A new competitive strategy for creating sustainable wealth’ (www.landmarkonthenet.com).
She foresees that investors will be able as never before to construct portfolios of investment opportunities involving businesses that exactly match their desired profiles of cash flows and risk. “Perfect information enables many new kinds of investment opportunities and vehicles, and destroys many previous opportunities and strategies that were based on scarce information.”
The author is of the view that, in transparency, investors will find new prospects for growing value and returns in previously unthinkable places. An example she mentions is the possibility now to build a huge global company in a finely focused activity.
Generalities unsafe
A note of caution is that it will no longer be safe to rely on generalities about the performance of any given industry, because there can be ‘large differences in profitability among the new spate of focused companies, even those that pursue similar activities.’
De Kuijper’s advice to investors, therefore, is to drop diversification plans and forecasts based on industry-average profitability and trends, and horizontal-within-industry market share, and instead evaluate potential investments on a case-by-case basis.
She predicts that companies or products or services that trigger hub dynamics will have greatly enhanced potential to achieve dominance in horizontal market share, and to sustain a higher pricing structure even in the face of quality and price competition from rivals.
Gap is what counts
Fundamental investors can outsmart markets at large, the author avers. “For you, the route to success lies in correctly assessing the current as well as potential value of a company and then playing these valuations off against the available market prices.” And you will do best when the intrinsic value of an investment and its market price are not in sync.
It doesn’t matter whether an investment prospect is overpriced or underpriced relative to its intrinsic value, De Kuijper explains. “The gap is what counts. Depending on their view of the underlying value, investors can decide to buy or sell a prospect, for example, or to go long or go short on an investment or a security that is related to this investment.”
Power nodes
The commandment to maximise profits is to know your power nodes, the author declares. Power nodes are the sources of profit power, which is the single most effective tool for maximising value in the transparent economy, she adds.
“Profit power is economic clout – the ability of a company to hold on to the value it itself has created, as well as to extract a share of profits from its competitors, to create incremental value for itself and for its partners in business relationships, and to shape the risks it and others will take on.”
Being ‘the best’ does not guarantee that your company can hold on to its hard-earned gains; only profit power does that, De Kuijper counsels. The foremost rule to maximise profits is to stay focused, that is, to own only business with power nodes. “A focused company with a strong power node in the middle of a value chain, like Intel, may enjoy leverage over profits, while a company with a famous line of consumer products and a large market share in final packaged consumer goods, like Nestlé, may turn out to have little profit power relative to big chains of shops or providers of their ingredients.”
3-D fight
Fight fiercely in three dimensions, the author urges companies. For, competition is no longer one-dimensional, i.e., uniformly horizontal in the same sector or market; you need to battle vertically (in the same value chain), and horizontally across traditional industry boundaries.
“New competition is no longer over horizontal market share either; it is over risk-adjusted returns. In many cases, the key determinant of long-term value is now the ability to defend or extract returns from vertical competitors in the same value chain. The fierce 3-D rivalries that we are seeing increasingly will essentially be power node battles…”
Recommended ‘power’ read.
***
BookPeek.blogspot.com
