Um, doesn't thin margins mean generally mean the industry is mature and most things have been tried? I guess if you hold constant the "degree of difficult" for innovation, then large revenue make an industry "ripe for innovation". But this applies just as well to Apple, right? A 1% increase in efficiency in a $100 billion industry nets the same profits, regardless of the existing margins. Or am I misunderstanding?
A thin margin is a little like being highly leveraged.
Spacely Sprockets buys sprockets at about $9.50 and sells them at $10.
Cogswell Cogs makes cogs from scratch for $5 and sells them at $10.
If these companies are "the same size" meaning they generate roughly the same profit, then SS is selling 10x the volume of CC. If they can both cut costs by 10%, then SS's profit almost triples, while CC's only increases by 20%.
This cuts the other way too -- if you are operating at thin margins, a small change can push you into unprofitable. If you have fat margins, your profits just decline.
Thanks, this was the only reply I got that gave me a decent explanation. I guess it all boils down to defining business size by the amount of profits rather than by revenue or assets. The article's claim, then, is contingent on the cost of a single unit of innovation being set by this size metric and not the others. I'd say this is a very non-obvious assumption, but at least I now understand the claim.
Can anyone give an argument for why the cost to reduce costs by 1% should be a function of profits rather than of revenue or assets?
Do they seek low-margin businesses? My take was that they looked for industries where they could comfortably price lower than anybody else. Case in point: tablets. Traditionally a fairly high margin business (on a unit basis), and Amazon comes in at a price that is only feasible because of the Prime play.
I think it's that they go after low margin industries in situations where they know that they can use their scale to undercut the existing businesses. Since the margins are so low the existing businesses do not have many options to compete or different ways to add value. Combine this with the fact that Amazon operates on a long horizon and is willing to take losses on certain investments as they scale over time and eventually dominate that market by pushing the margins even lower.
Then there's other things like Prime play which may justify them going after low margins in the tablet industry, but there's other good android tablets in that price range.
I think what you're thinking about w/ prime and tablets is their general approach with complimentary products.
For example they're developing original content. This isn't just to profit off content, it's also from the realization that physical books and movies are becoming less imporant and that digital copies are becoming more and more prevalent. This lowers the cost of the goods & reduces the amount Amazon earns by charging a % of the sales. So it makes sense for Amazon to just outright own and distrubute the content too.
But this also compliments other Amazon businesses. If people are watching TV through Amazon then Amazon has more opportunities to advertise their products to individuals. I doubt Amazon plans on loosing money on original content, so it's not a loss leader, but the fact that it boosts the value of their tablets, prime service (which significantly increases the amount people spend at Amazon per year), advertising etc. means that they are willing to accept much lower margins on content production than traditional studios and perhaps even Netflix.
Some businesses are fundamentally high-margin, and some are low-margin. It mostly depends on the amount of raw materials involved.
For example, Microsoft (software) is a high-margin business. Their cost of raw materials is low, so 77% of revenues goes to pay for R&D, other expenses, and then profit.
Apple is a lower, but still a high-margin business with healthy 37% of revenues remaining after paying for the cost of materials and assembly. Apple can charge significantly more for their devices than they pay in raw material costs. But it may change, so Apple investors are generally watching its gross margins. For example, last year Apple's margin was 47%, i.e. it declined quite a bit since then.
Amazon (as any retailer) is a low-margin business. They move a lot of products, but 89% of the revenue goes to pay for those product. So only 11% of the total revenue is available for R&D costs and profit.
"Most things have been tried" <-- but the idea is that 'new things to try' are popping up all the time. My read on the article is that low margins show things have been optimized already, so new things that further optimize it will be welcome (to some players).
Problem with "new things to try" in construction is that many of them require significant investment in physical infrastructure or research and development to meet (often justified) regulatory requirements. That doesn't fit well with low margins and high vulnerability to economic cycles.
Also many hands on productions aspects of construction (use laser cutters instead of circular saws to cut wood) are human life critical, and little money is spent on non-hands on aspects. Like the admittedly cool blueprint system being plugged. Or something like "replacing the HR and OSHA (dis)orientation class with something like coursera".
A pity the blueprint system being plugged is ipad / idevice centric. "Google Glass, show me blueprint 84Q..."
A low margin business means that your competition will have extreme difficulty lowering their prices.
However, it's very rare for there to be fundamental, physical limits to the internal cost of doing business. Which means that if you can do that better (through manufacturing improvements, supply-chain improvements, what-have-you) then you can undercut your competition only slightly while reaping significant profits.
And, because your competition is running on such low margins they can't easily compete with you. So, from a pure price perspective, you either get to retain your higher profit margin while being price competitive or you simply eat the majority of the market before it has a chance to settle to a lower price-point, which is win-win.
It does, however, mean that you need to put in a lot of hard work.
Um, doesn't thin margins mean generally mean the industry is mature and most things have been tried?
No, it usually means it's a commodity business. Innovation can be a defensible competitive advantage. As mentioned in the article, because of operating leverage, a fairly small innovation can yield significant profit growth.
There's a long path-not-taken on housing. Most things in our society have gotten a lot cheaper per unit service in the past hundred years or so, including many entirely new categories of services. Housing has stubbornly resisted change, with the result that an ever-larger portion of our culture's capital is tied up in providing housing. And housing hasn't gotten any more useful, either.
http://hexayurt.com gives some notion of how radical that shift could be when it arises. Industrial panels (of whatever kind) directly into owner-build housing. Free Hardware. You may laugh, but half the world lives in cinderblock-and-tin-roof shacks and worse.
Nobody said the innovation had to start here, or look like what we do now.
Indeed, it actually seems like we've gone the other way. During the first half of the twentieth century, buying and living in Ikea-esque "Kit Houses" was actually not entirely unheard of. The Wikipeida page for Sears Catalog Homes [1] actually lists the price range as between "$12,590 and $55,390 in 2008 dollars," which certainly seems like it could be price competitive with other methods of new home construction, even taking into account costs like land, etc.
My grandfather did that in the 50s with my dad helping a little. You need to scale for sq footage, the average American house has increased from 1000 sq ft to something unaffordable recently. By sq foot its probably not so much of a deal.
Apparently it takes only a couple weeks for one man to build a house, but the labor involved in general contracting to get the subcontractors to do their thing exceeds the time spent swinging a hammer. He sub'd out to dig and pour the foundation, some electrical, gas, some plumbing...
For those of a certain generation it was how you proved to the employer that you could complete long complicated projects, basically the equivalent of completing your college degree (which was hard to complete during WWII)
This is still done on a regular-ish basis for large garden sheds and garages. Home Depot and others will dump a pile of wood at your location with some plans and bulk pack of nails and other hardware and a weekend or two later you'll have a garden shed.
The permitting and inspection process is more about revenue generation than safety.
> http://hexayurt.com gives some notion of how radical that shift could be when it arises.
That's interesting stuff, but all we really need to get the ball rolling is to remove the financial and regulatory speed bumps that prevent people from buying prefab homes. It's not like it is some kind of mystery how to reduce the cost of building a home...
EDIT: I was thinking more in terms of the way lending and building ordinances very strongly favor building a house on site vs. trucking it in, as opposed to the really... insightful... stuff you guys have mentioned.
It's not like it is some kind of mystery how to reduce the cost of building a home...
Agreed! Just remove all those pesky restrictions about fire safety, earthquake safety, tornado safety, electrical safety, and you can put that house up for real cheap :)
I'm not particularly bitter - I didn't like them when they were new, disliked them once the birds nibbled the rendered polystyrene off the exterior, and avoided them like the plague once we came to buying houses. What I am bitter at is the way the manufacturers of the systems that have failed have seemly got off completely freely from the disaster they have created.
>There's a long path-not-taken on housing. Most things in our society have gotten a lot cheaper per unit service in the past hundred years or so, including many entirely new categories of services. Housing has stubbornly resisted change, with the result that an ever-larger portion of our culture's capital is tied up in providing housing. And housing hasn't gotten any more useful, either.
Yeah... but a lot of that is we don't /want/ housing to get cheaper. Most voters will vote to keep housing more expensive.
Housing has gotten cheaper for the actual cost of constructing the house, but other things have eaten up what could've otherwise been consumer surplus.
A formula for disrupting Construction in the United States:
* Pre-fabricate everything
* Assemble onsite using non-union labor
* Move away from "Cost-Plus" pricing structures
Construction has Razor Thin Margins for a number of reasons, not the least of them being the incentives associated with Cost-Plus bidding. Non-Union labor and Pre-fab would literally upend the industry.
The problem, as with most mature industries, is policy-based and not technical in nature.
Construction is as ripe for Innovation as Medicine, and an equally difficult water to navigate.
On the way. Believe it or not my parents house was so old they built the cabinets and original doors onsite by hand! Back in the old days they literally dropped off a pile of raw wood, none of this prefab cabinets, prefab windows, prefab doors, etc. They even hand laid tile rather than using a fiberglass tub surround.
I saw a relatively small apartment building go up in Cambridge MA a couple years ago, built from prefab modules. I very much doubt the rent is lower than the site-built buildings down the street.
One-story modular houses in trailer parks have a stigma, perhaps for a reason. Can you think of any other type of modular construction that has a PR problem?
This is half plug and half relevant to the article, I like to think we're worth knowing about.
I work for Ekotrope[1], we're looking to make those margins bigger and help build green at the same time. Believe it or not, they're not mutually exclusive and we know how to make it happen.
I don't understand the focus on margins. While bigger margins would be nice, it seems like modular construction would have a more direct effect on turnover rather than margins. Maybe the term "profitability" would be more accurate.