Chapter 7: Production Advantages Lost, Part 3

All products become toasters in the end

Part 2: http://wp.me/p1PgpH-tC

Part 3: Explain the statement, “No matter how complex and unique products seem at the start, in the long run they are all toasters.”

Though they differ from one to another in functional and design features, one toaster is pretty much like another. But with no barriers to entry here, it is unreasonable to assume that any manufacturer is earning an exceptional return on its toaster assets.

How different is a complicated and expensive piece of network equipment—a router, smart hub, or Lan switch—from a toaster? Initially very different, but ultimately, not so different at all. The success of Cisco in its original business attracted new entrants, most of whom could not put a dent in Cisco’s performance without extensive technical and maintenance support. They were not sophisticated enough to mix and match communication equipment the way families do with household appliances.  Also, the need to develop successive new generations of software and hardware makes fixed costs a permanently large part of total costs, and they are a source of economies of scale. (In contrast, in CD manufacturing, plant, and equipment were a once-and-for-all expense. Economies of scale topped at a two million discs per year plant.) All these factors created competitive advantages for Cisco, and put up barriers to entry in its enterprise-class business.

But it seems clear that those advantages diminish over time. Equipment becomes more reliable and easier to use. Support and service costs decline. Compatibility across company product lines increases as equipment functions become standardized. Research and development costs decline as product lines mature. Customers become more confident in their use of equipment and more willing to try new, lower cost suppliers. Some of these changes have already affected Cisco. The trends identified above will ultimately eliminate Cisco’s competitive advantages entirely.

Technological change can be the enemy of the investor.

Our next study will be Chapter 8 in Competition Demystified.

Leave a Reply

Your email address will not be published. Required fields are marked *