Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth With Commentary by David Clark

by David Clark

New technology can either damage an existing business or increase its profitability. The first question we should ask is: Will the new technology be a threat to the existing business model? Cars replaced buggies and horses. The telephone replaced the telegraph. Computers and printers replaced the typewriter. The next question is: Will the new technology enhance the business? Here the question gets a bit more complicated. Whether or not a company will benefit from a change in technology is dependent on the type of business it is. If you’re a commodity-type business, which sells a product or service that a number of other companies also supply, any technology breakthrough that will lower costs and improve margins will probably also be picked up by your competitors—which means you will lose any competitive edge the technology provides. But worse than that is when one of your competitors uses the cost savings the new technology provides to cut prices and increase its market share. As an example: New technology XY will deliver a 10% cost savings to our firm—which is a good thing. Our competitor also buys New Technology XY and achieves a 10% cost savings. Now both companies are ahead; both are saving 10%. But if our competitor wakes up one morning and decides to use that 10% cost savings to cut prices by 10% to add to his market share, we are going to have to also cut our prices by 10% or we are going to lose market share. So at the end of the day, in a commodity-type business w...