value
Business Type Changes The Drivers
The rule
Physical, service, and knowledge businesses run on different rules. So the same driver can turn from friend to foe as you move across them.
Where it flips
Sorting firms into neat 'physical / service / knowledge' boxes can hide the mixed ones, like a maker with a software layer. Then you use the wrong yardstick. The fix is to treat the boxes as a starting lens, then look at the real cash workings of that one company.
A steel plant, a courier network, and a software firm do not follow the same rules. One grows only by pouring in capital. One grows on people and process. One can add a customer at almost no extra cost. So heavy reinvestment is a burden for the factory, but a growth engine for the software platform. And margin means something different in each. Before you judge whether a driver is good or bad, you must know which kind of business you are looking at.
A worked example
Arjun praises 'reinvest everything' for both a cement maker and a software firm. Then he sees the cement plant's heavy spending crushes free cash, while the software firm's light spending compounds nicely. [illustrative]
How to spot it
- ·spending that builds value vs spending that just keeps the lights on
- ·the same ratio praised in one sector, feared in another
- ·mixed firms that sit between two business types
Michael Mauboussin & Alfred Rappaport · Expectations Investing