The Case for Monopolies

Why do some businesses succeed and others fail? That’s a question that business school gurus have tried to answer for decades. There’s what could called the “Michael Porter School,” which believes that success is dependent on management-oriented variables like service, quality and efficiency.
Milind Lele, a professor at the University of Chicago Graduate School of Business, says those variables are really an effect not a cause. He claims that the real key to success is becoming a monopoly. In his new book, Monopoly Rules, Lele challenges the common wisdom of how companies like Dell, Starbucks and Wal-Mart rose to prominence. He says that these companies became monopolies by finding an undiscovered niche in—or in between—an existin industry

Spotting a monopoly, Lele argues, often requires challenging the core beliefs of an industry. For example, while most car rental companies assumed that “people rent cars when they travel”, Enterprise executives realised that “people also rent cars when their vehicle is being repaired”. They set up a system to deliver cars to customers at home, tapping a market untouched by Hertz and Avis.
In addition, those seeking a monopoly should consider a combination of emerging consumer needs, inertia at existing companies and new technological possibilities in seeking out potential monopolies. Companies, he says, should study markets adjacent to their own, asking themselves whether they might be ripe for colonisation. Once a monopoly has been clearly identified, he says, companies should move quickly to establish their position.

On my Buy List, one of my favorite monopoly-like stocks is Fair Isaac (FIC). The company dominates the credit-scoring industry. Each year, Fair Isaac has been able to deliver steadily rising sales and earnings, with high profit margins. The company really doesn’t have any competition. Last year, Fair Isaac’s gross profit margin was over 64%. However, Lele points out that all monopolies will fade after time.

Posted by on October 4th, 2005 at 1:34 pm


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