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Has a strong brand, patent and other unique resources and capabilities with the price only a handful of companies, most of the production is very strong alternative to ordinary commodities, industry competition, only to accept the market price. As Warren Buffett said: time certainly will not be easy.
If the industry is the economy, all firms sell very well, but often the speed of expansion of production capacity far exceeds the growth in market demand, once the decline in market demand, production capacity was not immediately fall, when all companies can only cut prices. When the market price dropped below its cost, the high cost of enterprises that face closure, the higher the cost, die sooner. In this highly competitive industry, the last to survive, and survive the long term the only way to reduce costs.
Buffett knows the brutal cost competition, because he had two profound lessons of failure:
The first lesson is the cost competition drove him to close the Berkshire mills.
1965 å¹´ Buffett bought Berkshire, when the company is a textile factory, mainly producing the lining of suits. Buffett said: .
If you wear a men's suit, it is likely that we produce the Hathaway brand lining.
Sears department store named us > We very much appreciate them.
But the problem is that even if we just want to raise prices a half cents per yard, they do not agree, the reason is very simple: no one ever walked into a men's shop to buy to use the specified Hathaway brand lined suits to do.
customers who do not read the lining of the production.
1985, Buffett Berkshire barely 20 years after the textile business, had to close the business, because labor costs are too high: coming from foreign competition, the wages of workers in those countries and the United States only a small part of the minimum wage.
Second lesson is that cost competitiveness continued loss forced Dexter Shoes.
1993 Buffett bought 475 million cost of the famous American luxury brand shoe Dexter, the brand that the company's competitiveness against Asia and the Pacific to the cost of shoe competition, and he wrong.
management skills, ability and dedication and so on, Dexter management compared favorably with other companies.
However, most of our shoes are produced by the United States, while U.S. manufacturers compete with foreign manufacturers has become very difficult .
1999 in the U.S. 1.3 billion pairs of shoes consumption, about 93% of the imported product, very cheap labor abroad, is a decisive factor.
2001 å¹´ indemnities and Buffett had to admit: / p> At that time I think Dexter should be able to continue to successfully cope with international competition, the results that I completely wrong to judge.
Buffett has learned, but also experience. The most successful example is the GEICO car insurance company.
More competitive insurance industry, one product is particularly easy to copy, and second, (...) , there is no limit product supply, so the cost of the most important competition is the competition. the insurance company to sales agents, commissions paid to agents usually account for 15% of premium income. GEICO auto insurance industry in the development of government employees in these life skills focus on prudent, safe drivers, but also directly by postal mail to buy insurance, direct costs are much lower than the consignment, it can dramatically lower prices to attract more customers, and the old Customer re-insurance rate is also high. other insurance companies have been reluctant to give up because the agency at the expense of existing distribution channels, market share, can not imitate GEICO, therefore, GEICO to long-term cost advantage: companies due to limited sales channel structure, (...) , flexible operation, GEIGO has been positioning itself as a company to keep operating costs low.
GEIGO operate according to their orientation, not only to create extraordinary customer value, (...) , but also for his extraordinary returns earned.
1986 å¹´ GEICO Buffett in the annual report of the world's best performance of the insurance company of the most important reason is cost advantages: much better records of the company's business.
GEICO most important factor in the success lies in its ability to minimize operating costs, which makes it all the auto insurance companies and other than as stand out.
1986 GEICO's underwriting of expenses and loss adjustment expenses to premiums ratio is only 23.5%, many large insurance companies consolidated expense ratio higher than the GEICO to 15%.
Buffett's lessons and experiences to remember, ability to raise prices if the company does not, then we must look at the company operating costs are lower than the industry average.