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Chapter 1 Reflections

Definitions and Key Tenets

• Capital cycles (and the performance of individual companies/industries) are much more tied to the supply side equation rather than demand side.

  • These changes in supply side lead to dramatic shifts in profitability, pricing power and performance.

• Management capital allocation skills are critical to navigating capital cycles

• Capital cycles - which is sometimes ambiguous, refers to the amount of investment into the supply side (capex, inventory etc.) that would impact the overall level of competition and performance of an industry per the above.

Cod Fishing Industry

The first chapter on the cod fishing industry timelines the rise and fall of the cod fishing industry profits through advance in technology. In the early 16th century, cod was extremely prized for its high protein and pleasant texture. The cod fishing industry required Europeans to sail all the way to Newfoundland to catch cod for the Basque market in Spain. As time went on, fishing, processing and storage practices improved which led to massive increases in yield and supply to the market with subsequent over-fishing. This sucked the supernormal profits out of the previous parts of the supply chain (fishing, ports, processors etc.). Shifting the value to consumers ultimately.

Similiarities in current Software Cycles

Similar transfer of economic value dynamics have played out in technology cycles.Think about the winners in the internet revolution.. the layers of substantive economic profits were competed out of the telecom poles and wires which became more commodity assets, the producers of computer equipment had their margins compressed over time as greater capabilities came through (with things like memory chips and the like depleting to commodity values).

The different layers of the software stack also get commoditised over time. Think about email - which is now free - is that because excess profits flowed out or because someone kickstarted a loss leadership strategy to gain distribution? Possibly a bit of both? It became really cheap to deliver email services and also the dollar profits from email decoupled from the equivalent labor costs of delivering mail. An argument that technology never ties fully to labor cost for long.

Growth Durability

Article 1.8 discusses growth durability and how sources of durable growth can include barriers to entry, size of market opportunities and overall quality of management.

• Barrier to entry are obvious in that they help companies retain high efficiency rates in unit economics and accelerate effect of brand.

• Large market sizes help companies sustain large and increasing volume of sales over time. Particularly where the number of customers is high and there is a pricing model which is in-line with value delivered.