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Price Competition is the Principal Stock Value Destroyer (Part 1)

12 February 2008 - Features - Editor

Even rapid business growth has its downsides. Small stock investors are the most affected stakeholders of this aspect of financial planning, because employees, suppliers, bankers, regulators, and private equity can abandon ship well in time. Plateaus of growth and cyclical downturns are ubiquitous to business. Many elements of cost mount inexorably out of management control, but stock investors may feel nothing until it is too late! It is a convention to present voluntary retirement schemes, reductions in head-count, and consolidation moves in cost-saving light, but why allow such structures to develop in the first place? It is glamorous at some junctures to expand market share at the cost of gross operating margins, but they are almost never in the interests of loyal stock investors.

This article follows an earlier piece we have published on this web site entitled “Pricing Decisions and Stock Value”. Pricing is the single most effective prerogative of management in a free market economy. Sadly, many otherwise courageous executives make pusillanimous decisions when it comes to determining prices for goods and services under their charges. It pays to use every forum of interaction between stock investors and management teams to search for ways of protecting operating margins. Cost effectiveness is one route, but our focus in this article on declared and effective pricing in challenging business circumstances.

Permanent Stock Value Drivers of Pricing Prerogatives

Compare pharmaceuticals with electronics. We continue to buy proprietary prescription drugs though we are aware that older generics are available at fractional prices. However, even if we choose to adopt new electronic gadgets early, we do so knowing that this is an occasional and illogical extravagance. Pharmaceuticals and electronics share large numbers of consumers, but the pricing prerogatives of respective managements are exercised very differently. The electronic sector suffers from shorter life-cycles and more stock market volatility, compared to the drug industry, as a result. This is an example of pricing decisions working against inherent stock value.

German stock sectors are the most telling examples of management teams forsaking competition that hinges on price reductions. Some camera brands of the early 20th century have virtually disappeared as a result: while Japanese executives and global consumers may celebrate, stock investors from Germany may have benefited more than their Japanese peers, by moving to more profitable pastures. There are no financial benefits for stock investors if an enterprise hangs on to customers at any cost! Most companies that compete on the pricing pivot effectively reject opportunity costs incurred by their stock investors. Low interest rate regimes in liquid fund flow environments distort economic value addition and proportional return imperatives for stock investing.

Price Competition is the Principal Stock Value Destroyer (Part 2)

 


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