4. Is the company able to sell its products and services better than average?
Few companies have products or services that are so good that they do not require excellent selling. Selling is one of the basic functions of a business. Repeated transactions with old and satisfied customers are the first sign of success. Fisher believes that investors do not appreciate the relative effectiveness of the sales organization enough. This is due to the difficulties of measuring this issue as easily as the effectiveness of many other business functions.
The marketing and sales organization must be constantly aware of the changing desires of customers. This way, the company can offer products that customers want right now. Some marketing organizations create desires for customers that they are not aware of. They create markets with product developers that did not exist before. Simply observing customer desires is not enough; the organization must also communicate the benefits of the products it sells in a way that customers understand.
All of this must be done in the most cost-effective way possible. Company management must constantly measure and manage the process. Sales can suffer in three ways if management is inadequate. 1. Sales volumes may fall short of potential. 2. Costs increase beyond what is possible, reducing profits and 3. Profitability of certain product groups decreases when some products do not reach their full potential.
It is easy to find evidence of the relative effectiveness of the sales organization from sources outside the company. Both competitors and customers know the answers. The effectiveness of the sales organization is at least as important as production and product development. Many successful companies develop their sales organization by continuously training their personnel in the sales organization. The importance of sales is constantly increasing today, because customers have more information about the products sold than in the past.
5. Does the company have a sufficient profit margin?
An increase in sales is of no use if it does not increase the company's profits. The first task of an investor is to examine the profit margin, i.e. how many cents the company makes in profit for every euro. A profit margin of 2-3 percent higher than the next best competitor will give an investor a great return. Company margins vary within and between business sectors. The issue needs to be studied over a longer period than a year. Margins should be examined over at least one business cycle. Margins in a business sector almost always change with the cycle.
A company must be either more cost-effective than other players or at least as efficient as other companies in all its most important products. It must also show investors that it will be so in the future. This is reflected in profit margins when the company is compared to competitors.
Almost all companies increase their margins when the industry is booming. Less high-quality companies increase their profit margins relatively more during the cycle than high-quality ones. The margins of weak companies fall much more as the brilliance of the business sector fades after the peak of the cycle. An investor will not make the greatest returns in the long run by investing in weaker companies. Fisher says the only reason to invest in companies with lower profit margins is clear evidence that the situation is changing. The cycle cannot be the cause of the change. The company must either improve its efficiency or introduce new products to the market.
In the case of older and larger companies, the greatest returns come to the investor when the company's profit margin is among the highest in its industry. There is one exception to this. Sometimes these companies reduce their margins to accelerate their growth by using their profits to increase product development and sales more than usual. Investors need to find out what is going on when margins are falling and not just take the company's word for it. Investors should avoid these companies unless they can be sure that the falling margins are temporary and intentional.
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