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Companies with Advantage of Scale
What is it that makes a company be able to have this advantage of scale in the first place? In most cases this has to do with getting to a certain place before everyone else and backing this up with very good marketing, product improvement, servicing, and on some occasions, advertising in order to keep the customers content and make them want to come back to get more. This usually sets up an environment in which new clients or customers will go to the head in the field since that leader has set up such a good status of performance that nobody is expected to put done a buyer negatively for choosing this specific company.
In the pharmaceutical industry it is said that when a really worthwhile and good new drug has been created that the company that get in first is the company that will then hold sixty percent of the market, and in this way it allows the company by far to make the mass of the profits. If there is another company that then introduces a competitive version of the same product might get around twenty five percent of the market and will make some moderate profits. If another two or three companies then decide to introduce a competitive version of the same product might obtain around ten to fifteen percent of the market and will only earn scanty profits. Any other entrants will in most cases discover they are in a very bad position. A trend that is set up in order to substitute generic for trade names might or might not mess up these ratios, and in any case it cannot be said that there is a precise formula that can be applied to other industries, however, the idea behind them should always be kept in mind of the investor when he is in the process of appraising which are the companies that have more of an obvious advantage as far as profitability is concerned and which ones don’t have that.
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