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The 40 most common strategies for profit

  • Asset based. Invent, create or acquire a desirable asset
  • Network based. Let the commercial eco-system around you drive your business forward
  • Speed based. Do things generally faster than the competition, or be first with something new, or buy and sell when the timing is just right
  • Customer relationship based. Instead of selling products, think about the client and sell them what they really need: solutions.
  • Cost based. Find a way to produce cheaper than your competition.
  • Financial timing based. Actively time investment around business cycles, sentiment fluctuations, etc.
  • Financial arbitrage based. Utilize differences in the value or yield of two investment objects or asset classes.
  • Active financial based. As you invest, involve yourself actively in the underlying asset and enhance them.

Let’s start with asset based strategies. I have noted eight different ones that primarily aim to create or own a critical asset:

  • Mining and farming spans two very different business sectors, but it represent a single core business model, which is to find and extract natural resources.
  • Brand-building is one of the most fascinating strategies in marketing. Even though brands are in a sense virtual, they can be amazingly powerful.
  • Disruptive invention can occur everywhere, but they are most frequent in IT and biotech, and increasingly also in alternative energy.
  • Build-to-be-bought is not unusual among startups. The idea is that large companies tend to be formidable marketing machines, but notoriously slow at innovating. Small companies can then innovate for them and subsequently be bought. This has been particularly important in IT and biotech.
  • Blockbuster is about creating an asset that will have massive sales for a while. Mass media and pharmaceutical products are prime examples, but most industries can have them.
  • Asset enhancing is to reuse the same asset again and again in different permutations.
  • Profit multiplier is particularly important in digital media where, for instance, you may make a movie and then launch DVD versions, CDs with the soundtrack, toys, T-shirts, games, books, computers games, etc. The software industry evidently also tries to extend their assets by releasing patches, add-ons, new major releases, etc.
  • Luxury approach is completely different from other strategies. There are also possibilities here to convert products that have previously been regarded as commodities to at least premium standard and perhaps luxury. This has been done with bear, bread, coffee, soap and many other everyday objects as well as services.

Let’s move on to the so-called network-based models, which are particularly relevant for the digital economy. The so-called network effects are particularly powerful in IT. What they mean is the ability to increase the value of a product or service as more and more people use it. It is, for instance, far more interesting to have a telephone or Internet connection if there are many other users connected. It markets are also characterized by extreme importance of so-called “eco-systems” of compatible software from other providers. Imagine using an operating system on your computer that no one else used. It would be, well, useless. So the network effects are not only relevant for end-users, buit also for complimentary suppliers. IT also differ from most other markets by its minimal marginal costs. It is expensive to develop software, chips or digital services, but almost all the expense tend to be fixed; the marginal costs can be almost zero. This invites strategies that encourage very high volume at very low prices, or with free core service. The result of these phenomena is that three different strategies are common in information technology/digital media:

  • Community-building strategy is about deliberately building a community of users/buyers who connect to each other and perhaps provide feedback to the supplier
  • Platform- and standard creating is what Microsoft did so well: their product became the platform that others built on. Microsoft and others have also managed to make some of their products de facto standards.
  • Digital exchange is also a platform, but it is not so much software that is central here, it is the ability for users to connect. It is, in other world, a sort of network effect. E-Bay and NASDAQ are examples.

Speerd is often crucial in business. This applies in IT, but also in many other sectors. There are two strategies for this:

  • First-mover advantage may be advantageous in almost any market, but mostly so in those with network effects such as IT. Speed is evidently also vital for everyone working in a patent-focused business such as biotech.
  • Organized for speed is to enable an organization to become first mover repeatedly. Business people use the term “marketing mix” to describe the combination of “Products”, “Price”, “Promotion” and “Place” that a company deploys. This is called “the four Ps of marketing”. However, in a business where being quick is vital, you really needs a fifth “P” which can stand for “Pace”.

Peter Drucker, the famous management guru, once said that “the purpose of business is to create and keep a customer.” There are ten distinct strategies for pleasing clients that can create great profits:

  • Wholesale to retail strategy is one of the biggest single sources of wealth in business. The retailer utilize the differences between wholesale and retail prices, but the key skill set involved is managing clients relationships and all that goes with it, from sales to financing, marketing and supply logistics.
  • Secondary sales model is about charging little or nothing for the first or primary product and then making the money on what may come after.
  • Mass customarization is based on the idea that each customer should have a tailor made solution, but that this should be fully automated. This is almost entirely done over the Internet. It includes 1) involving the customer in the production and design process, 2) using IT to manage the relationships from customer to suppliers, and 3) enabling the customer to generate more information about their own preferences through interaction with the company and other customers. The marketing expert Alvin Toffler coined the term “prosumer” to describe the how a consumer thereby contributes to the production process. This, by the way, is not only efficient, but also emotionally evolving – people love it, and it creates strong customer loyalty.
  • A Central aggregator may be an Internet portal, a television network, or a digital exchange combining services from multiple partners. Once the aggregator grows, it tends to attract more contributors, since it has the critical mass – in digital media: “eye-balls”. The model can become very successful, if the content is not only created by third parties, but delivered for free, which is the case with Internet sites such as Google, Facebook, YouTube, etc. The money is then typically made on advertising.
  • A Solutions provider is a company which analyse what the client really needs and assemble from any source. This is often called an “open architecture”, and is frequently used by IT companies such as IBM, as well as by many banks.
  • Niche dominator is where you more carefully select a part of the market and dominate that.
  • A Price differentiator finds ways to sell the same product at different prices to different people, depending on what they are willing to pay.
  • Converting to service means that instead of just selling a product, you sell continuous delivery, upgrades, service etc. as a service. Software-as-a-service is a good example.
  • Converting to sharing means a business model, where several people share the same asset, as in cloud computing, time sharing, etc.
  • Converting to digital is a broad category that involves changing from physical to electronic. Classical examples are downloading of music to digital players instead of sales of CDs, or download of movies and books. A shopping experience can evidently also be digitized and in fact anything involving decision making, instructions and confirmations (e-tickets, for instance).

Now, let’s move on to reducing costs. I think there are three popular ways:

  • The low cost business model is one, where focus is on cutting costs in order to be able to price below competition.
  • Critical scaling is a variation of the low cost business model, where you get so huge, that you can achieve bigger economies of scale than the competition.
  • Location arbitrage is where your production is located where costs are low, and sales where prices are high. This can be done through setting up subsidiaries or through outsourcing to others.

The three last groups of strategies are mainly or entirely financial. Let’s start with those that revolve around timing:

  • Business cycle timing is obvious here. Buy equities when there is blood on the street, buy commodities in a boom, etc.
  • Technical timing involves analysing financial market behaviour, typically through computer models, and use that as a timing tool
  • Vulture investing is about waiting for markets to collapse, and then pick up assets very cheaply. The best known form is so-called vulture funds, which typically buy bonds issued by companies that they think will go bankrupt. Once this happens they force a restructuring where equity owners lose everything (or almost everything) and bond owners take over and restructure and normally recapitalize the company.

Four other financial strategies utilize a spread in pricing between two objects:

  • Carry trading are widely (if not always successfully) used strategies, where you take a cheap loan to buy financial assets that generate higher yield that exceeds the interest rates of the loan. This could also be to borrow low interest rate currencies to buy ones with higher yield, or to take out bank loans to fund investments in corporate bonds.
  • Prime asset collecting is purchasing key assets such as art, unique property, etc. that may appreciate massively in price. It is essentially a form of carry trade sionmce it is assumed that the assets will appreciate faster than the interest rates on real or hypothetical financing of the purchases.
  • Relative value arbitrage is to buy one asset and sell short a related one that seems more expensive. It is typically done between two equities.
  • Event driven trading is typically triggered by mergers, takeovers, bankruptcies, and the issuance of securities. The strategies normally involve a bet on the outcome of a given possible or planned event and utilize relative mispricing between, e.g. the price of the selling company and the buying company before a planned merger.
  • Liquidity arbitrage involves borrowing liquid money at low interest rates to make less liquid investments. The core thinking here is that most people put a premium on being liquid and that illiquid investments therefore in the long term generate a higher yield. Private equity funds are prime examples.

My last group of predominantly financial strategies involve getting actively involved in the assets one invests in:

  • Venture capital is funding provided to private companies with perceived large growth potential. It is typically provided by private equity companies (“VCs”) or individual “angel investors”, and they will almost always actively try to help the company they invest in through board memberships, informal advice, networking, etc.
  • Turnaround is the process of saving a suffering company, and people skilled at this (which is not easy) are at times called “turn-around artists”. The activity requires a very broad skill-set plus an intensity and speed that is rarely present in management of more stable enterprises.
  • Buy-out means taking a publicly listed company private. It be performed by senior businessmen backed by their own funding, but is often conducted by private equity companies. Such funds can do or fund buy-out of listed companies in order to restructure these and later sell them with a profit.
  • Activist investment is performed by public funds, either traditional mutual funds or hedge funds, which invest in listed companies and try to change them from within by obtaining board seats and possible mobilizing shareholder revolts.
  • Risk averaging is what commercial- and retail banks and insurance companies largely do. Banks borrow money cheaply and lend them out at higher rates while accepting some risk in each case. Insurance companies accept money for taking over people’s risk. A large part of the logic behind is that risk on average is overpriced, so that it pays to take over risk, if you can average it out. The institutions operating from this philosophy will often have statistical models that show if their risks are sufficiently none-correlated and if not then they will resell risk to others such as reinsurers.
  • Consolidation play where you merge a number of smaller companies to clear one large and efficient enough to be profitable and a leader in a meaningful space.

The 40 value strategies I have listed above are in my opinion what make society work. They are the pistons in the economic engines of society. There are others, of course, such as crime, corruption or becoming a dictator who steals from his people, but as for what is legal and morally correct, I think the 40 value strategies above cover almost all approaches to money making that have ever worked. It is hard to think of many business- or financial ventures that only utilize only one of these value strategies. Most I can think of, and every one that I have personally been involved in – involve a combination.