Profit Power Economics

Profit Power Economics

In her book de Kuijker writes that one of the bedrocks of economics is the “efficient market theory” that posits  that abundant information should help markets become more efficient so that supply and demand will be in perfect balance, prices will be set at the right levels, and extraordinary profit will no longer be possible. That day of perfect information has come thanks to the Internet and all the other contemporary advances in connectivity, but she argues that transparency is reshaping patterns of market behavior that will not lead to efficiency, but will enable extraordinary profit and predictability.

A new “transparent economy” has begun with a new set of rules and vast implications for business argues de Kuijper,  a Harvard trained economist, strategist and seasoned executive, in Profit Power Economics.

Why? Because transparency dramatically accelerates the human instinct to consume and invest in herds, and herd mentality does not operate by efficiency, “the wisdom of crowds” or “tipping points” but instead attracts active, interdependent consumers to hubs that operate under different predictable “powerlaws” It’s imperative that businesses, analysts, and investors  understand these new market dynamics to identify tomorrow’s “profit power” pattern and reshape their competitive strategy and business model in response.

To succeed in the “transparent” economy ushered in by the Internet, businesses will need to:

•   Establish dominance over business partners who are at once allies and competitors. For example, Estee Lauder’s profit margins are being squeezed not from other cosmetics competitors, but due to price pressure from large chains like Macy’s, their leading distributor. Being best is not enough.

•    Prepare for competition  from new unlikely sources outside their industry.  For example, Google is now faced with competition from Microsoft with its Bing search engine.

•   Redesign their business models. Owning and producing almost everything that goes into your product worked for companies like General Motors in yesterday’s economy. Instead, the business model for the 21st century will be focused companies that work with others to maximize profit for all participants. They won’t be cooperatives but fierce competitors held together by power (Pepsi and bottlers). These relationships will replace what we think of as industries or companies today.

•   Navigate inefficient markets and novel dynamics to attract demand and manage risk.

The author argues there will be a strong focus on pockets of profit along the industry supply chain as opposed to normal competition for market share. She stresses the point that information and transformation costs going down will lead to new types of competition.

I'll being posting more on this book in the future as there are a lot of new ideas in it concerning the new economy and "the internet of things."

Resources

Profit Power Economics

Mia de Kuijper