John Kay has been described as "the most important business analyst in Britain, bar none". He is well known for his incisive and entertaining columns in the Financial Times , his regular audio and TV broadcasts, and is much in demand as a speaker and consultant.
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Myth - 'Profits are higher in fast growing industries.'
They're not, because everyone else knows they are fast growing. Returns are often higher in unfashionable activities, like tobacco . Best are industries that grow faster than expected - whether expectations are high or low.
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Myth - 'Most industries are concentrating around a few global companies.'
Some are, some aren't. The overall trend of concentration has been down over the last twenty years - even in automobiles.
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Myth - 'A company can get the middleman's profit by vertical integration.'
But it will have to pay for it - you don't save the highwayman's toll by buying his business. Vertical integration pays only when a company can use it to extend its market power, or take control of assets that are specific to its business.
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Myth - 'Diversification increases the quality of business earnings.'
Sorry, but a company's shareholders can diversify more cheaply than it can. Brokerage commissions are a lot less than takeover premiums.
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Myth - 'New technologies increase profits.'
If new technologies are generally applicable , then competition means that the benefits will go to consumers. Not just most of them, all of them. New technology has always been better news for customers than shareholders.
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Look at industry specifics, not assertions about trends.
Few generalisations about industry structure stand up. You need to understand the specific nature of competitive advantage in each industry.
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Competitive advantages come from distinctive capabilities.
The only way to make profits above the cost of capital in the long run is to do something others can't - and still can't after they see the benefits to the company that can.
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Myth - 'First mover advantages are key - the early bird catches the worm.'
Not often, in business. There are very few industries in which being first is the basis of a sustained distinctive capability. How many of us have Ampex video recorders ?
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Myth - 'Market share is key to profitability.'
High market share is associated with higher profitability. But that doesn't mean higher market share causes higher profitability. Sustainable competitive advantage is the source - the only source - of both higher market share and higher profitability.
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Beware financial engineering.
Over the long run, the only place shareholder value can come from us cash generated by operating businesses.