The Four Sources of Corporate Profits (A Tellusant Quick Read)

Why are some companies profitable? It is fundamental question and yet few executives have good answers.Richard Makadok's brilliant paper on the topic, "The Four Theories of Profit and their Joint Effects" from 2011, explains where profits stem from.The view among many academics is that there are four sources of profits:1. Competitive advantage: Companies can systematically transform inputs in a more productive fashion than competitors, thus generating sustainable profits. E.g., Amazon, Emirates, Apple, IKEA, Facebook2. Reduced rivalry: In some industries, competitors choose not to compete on price (legally) because low prices is not what customers value the most. E.g. professional services, health care, artisan spirits3. Information asymmetry: Some companies have an information advantage over customers, generating profits without having a competitive advantage. E.g., used car dealers (see Ackerlof's Nobel Prize), stock brokers, asset managers4. Commitment timing. Companies can enter a new market at the right time and have a first, second or late mover advantage. E.g., Juul (1st), Amazon (1st), Google (late)These profit sources interact, and when companies combine them they earn superior profits.