A number of years back I was able to apply the Harvard Methodology to a new and emerging industry. I found a company that was an early mover in a new industry, invested heavily in R&D was able to scale up products that were well accepted by consumers. The company’s name is Tesla Inc.

👉 When I attended Harvard University I had many excellent professors. One of my favorite professors at Harvard was Ph.D. economist Bob Wayland, who taught a course that he designed called Economics of Business. This class was based on economic concepts and how they can be practically applied to both your personal and business life.

👉 One of the important journal articles that we reviewed was called “Firm Survival and Evolution of the Oligopoly” by Stephen Kepler. This article spelled out clearly how to find and analyze companies and select those that would grow and prosper in the coming decades.

📌 The article applies the evolutionary approach to businesses. The basic economic concept was that companies that have an early start in an industry invest heavily in Research and Development (R&D.) This research increases productivity and enables the companies to lower costs and earn more money. As they earn more money, they can then invest more in R&D. At some point every company hits some type of hazard, however the companies with the lower cost and higher profits will be able to survive those hazards, unlike some of the later entries into an industry.

➡️ In order to prove his thesis, Kepler researched several industries including, automobile companies, tire companies and penicillin companies. What his research showed was that the early entries into the new industry who invested in R&D were the ones that were able to survive in the coming decades.

➡️ I found the most interesting to be the analysis of the automobile industry which started in 1895. By 1907 there were 82 companies operating in the automobile industry. That number eventually increased to an overall peak of 271 companies in 1909. However, in the Great Depression it was reduced to 30 and by 1966 only 10 were left.

➡️ This same concept can be applied to companies that started in the late 1990s such as Google, Facebook and Amazon. By applying the same concepts, you can see that many of the technology companies went by the wayside, but these companies still continue to dominate because they invest and spend wisely in R&D. The results of this R&D are clearly evident in their lower costs, profitability and better products than any of the new entrants.

➡️ These companies built what is called an “economic moat” by Warren Buffett. However, what Warren Buffett did not realize was mainly built by effectively using R&D and lowering cost. When you produce products or services at a lower cost, competition is unable to effectively compete because you can outspend them in any way you need to.

👉The other journal article that I found particularly interesting was “Uncertainty, Evolution and the Economic Theory” by Armen A. Alchian.

📌 Alchian applies theories of evolution to businesses. The essential concept is that success is based on results not motivation. For example, in 2019 many companies prepared budgets, projections and had detailed plans for 2020. However, once COVID-19 swept the globe, those plans became useless. Companies that prospered during this time did not do so because they had plans or contingencies; they were successful because they were lucky. Companies like Amazon who had a business model that relied mainly on people ordering products “from home” were able to thrive and grow in this new unforeseen environment.

👉 Some of the key concepts that can be applied from both of these articles:

➡️ Early movers in an industry who wisely invest in R&D will dominate or at least be one of the survivors in that industry when those companies are down to a few remaining players.

➡️ Companies that are profitable can invest more in R&D and lower their unit cost, sell more products or services at a lower cost and make higher profits. Companies with sales growth and profit growth over 30% per year are typically these types of businesses.

➡️ The business environment in a market economy operates the same as the natural environment. Companies that are successful in imitating successful strategies and combine that with innovation will have positive profits.

➡️ Successful companies are determined based on results not motivation.

✔️ Some of the concepts I have learned in this class can be seen in the earlier video that explains how to make over $5 million by simply investing in low-cost index funds that are in tax advantage vehicles:    • How to Become a Millionaire Through I...  

👉 For more information about business valuations, contact me below or visit our website: https://www.rabcpafirm.com/practices/...

Robert A. Bonavito, CPA
1812 Front St.
Scotch Plains, NJ 07076
908-322-7719