In Search of the Perfect Business
Finding the perfect business or industry is far from simple. Many of yesterdays so called winners are todays dogs. Here is a list of some of the technology ones.
AOL, Yahoo, and Myspace. All of these companies were once profitable companies. Broadband killed AOL which they were not prepared for. Google beat out Yahoo as the number one search engine and Myspace has been replaced by Facebook.
There is also Friendster. Does anyone remember Friendster? Friendster was one of the first social networks that was growing rapidly. Now it is the butt of jokes on theonion.com, Internet Archaeologists Find Ruins Of ‘Friendster’ Civilization.
It doesn’t seem unlikely that another company may replace Facebook and Google. This is one reason why technology companies can be so risky.
Also, the decline in these businesses is significant. For example, how many people use Yahoo for their search and email vs Google? Most people have moved to Google.
With non-technical businesses, changes are not typically as significant. For example, if a new cigarette company comes to the market, some people may switch, but the shift will probably not be as great as with the tech companies where the majority of people will eventually switch over.
Another example, soda sales have been falling in the United States, but the decline is in the single digits each year and the decline is being offset by other beverages sales increases such as water sales.
Tech companies are not this fortunate to have time to prepare for shifting trends. When people started moving from Myspace to Facebook or from Yahoo to Google it happened very quickly.
Some so called, non tech companies really behave like tech companies. For example, car manufacturers sell a product that is based on style, performance and features. There is a great deal of technology and expensive equipment behind every vehicle made. In some cases the end result is new technology while in other cases it is evolutionary.
A car manufacturer must make use of and possibly develop their own technology in order to stay competitive or they will cease to exist as a companies. Car manufacturers cannot continue to make the same thing over and over every year but have to change a product routinely which means spending money on R&D.
Making the wrong decisions can lead to disastrous results as we have seen with GM and Chrysler. Such a business model is not one that is favorable for investment because of the high risks.
Companies that produce the same product over and over with little change are ones that are easier to understand and have the potential for lower risks. Food or cigarette companies produce the same thing over and over with little change to the product. The customer may purchase these products over and over based on an acquired taste for the product and may do this so frequently that they may not shop around as much for alternatives or may be willing to pay more for such products. Large ticket items that are purchased less frequently such as cars or appliances tend to be more researched and are more subject to price comparisons as a result.
Frequently purchased consumer staples, are less likely to have large sale declines as less frequently purchased items such as appliances, cars, furniture, etc. Less frequently purchased items may be avoided entirely in some cases of economic distress.
One thing around tech companies is that they rarely meet the test of being purchased frequently. A new camera, TV, computer, of software are typically purchased once every year or so vs once a month or once a week.
Even the most stable software products, MS Windows, MS Office, Adobe Photoshop, Dreamweaver, Creative Suite, do not meet this test. These are some of the most popular consumer and business software programs, but many consumers may choose to not upgrade to newer versions of these programs if the current versions meet their needs.
These companies must continuously work to improve their products so that customers feel inclined to upgrade, otherwise customers will continue using the older versions. Many customers of Windows are still using Windows XP because Vista and 7 may not have enough new features to justify the time and money to upgrade. Adobe faces similar problems.
Other businesses that are seemingly simple, are subject to changes similar to tech companies. Clothing manufacturers are typically dependent on styles that change from year to year. Coming out with the wrong style of clothing can mean losses, while coming out with the right style may mean competing with the numerous other companies selling a similar style.
Fruit of the Loom, purchased by Berkshire Hathaway in 2002, primarily known for producing mens underwear, is one company that does not have to worry about fashion trends. Undergarments such as mens underwear and socks are generally pretty much style-free. Probably the biggest change for companies in this industry was the introduction of color to underwear and a push to selling boxer shorts in addition to briefs. This is hardly much of a change, as the styles of the clothing tend to stay the same year after year.
This type of business is one that is most desirable. The most desirable businesses tend to be ones that you would not want to tell to a woman in a bar. ”I’m in the sock manufacturing business” is not going to raise any eyebrows but it is one that may prove to be a good investment over the long term.
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