Why high profits may precede failure

Business is about profits – creating wealth through profitable transactions.

How true this is. Nobody goes into business without the objective of making money, and the more the better.

The problem with business is that, unfortunately, the better it is the more people want it, much like great food or a good movie.

Top movies are top because they offer something that many people want, be it entertainment or information. The fact is, the matrix thinking seed of ‘widespread-ness’ kicks in once something is good to have. In the case of business this is money or, to put it properly, profits.

The facts are simple with few notable exceptions. Any business that delivers high profits will attract competitors all wanting a share of the action and, of course, the profits.

The facts speak for themselves

Convenience stores – where once there were few, now there are thousands.

There’s now a fish and chip shop located in every strip shopping centre, alongside coffee shops, once rarely seen but now without doubt the most dominant business in all strip shopping centres and perhaps even major shopping malls. The list goes on.

Anything that is seen to be in high demand will attract competition. And as competitors enter the market, profits will be eroded until they approach bank interest rates. Then there is a market shake out and only a few survive.

There are a few exceptions to this general rule of popularity-driven saturation and they are in a unique position. They include businesses protected by high levels of regulation that therefore provide huge barriers to entry. Banks typically fall into this category. Then there are businesses whose offering is protected by intellectual property rights such as patents or copyright, or those businesses, for want of a better word, that are confined to the specially gifted, such as singers, entertainers or sports stars.

Some industries try to create or maintain a monopoly by restricting supply. Commodity suppliers or industry regulators are a classic example. In the past, the taxi industry was similarly regulated, but upcoming changes may see that monopoly situation serious diluted, much to the chagrin of present licence holders.

However, in the main, unless you have some unique skill or offering you can be sure profit-hungry competitors will enter your market so long as there are profits to be made.

So what’s the solution?

There are two possible ways to overcome the above scenario. One is to enter the business in the growth cycle and exit long before saturation occurs. The other is to innovate or keep moving your customers and offering to an ever better place, thus leaving your competitors in your wake.

The latter is the one I advocate and can be simple and fool-proof if done correctly. Once again, the catch cry of today is of course ‘innovate or perish’.