MONEY

What Big Business Profits Mean to You

Historically high profits may mean that big corporations aren't seeing start-ups develop into real competition. And that's good news for you.
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If you're in business, you probably pore through the Wall Street Journal, Financial Times, Economist, or the like, following how the macro economy is doing. And you probably pay attention to profitability of large companies. It would stand to reason that when large corporations are bringing in lots of money, the economy is doing well--and your company can as well.

And that's true, only for a less obvious reason than you might immediately think. As the Wall Street Journal recently noted, there is a dark side to hefty corporate earnings for small businesses.

The reason for the sustained high levels of corporate earnings is two-fold: companies are tight on capital spending and a decreasingly smaller portion of revenue goes to worker salaries, wages, and benefits. Neither of those factors is surprising. But the key question the Journal asked is why historically high profit margins haven't fallen to competitive factors?

One big possibility: little competition on the rise.

Since the recession, things have been moribund. In 2011--the last year for which there is data available--35 percent of firms operating in the U.S. were five years old or less, according to the Commerce Department. That compared with 40 percent in 2007.

Meanwhile, despite the well-publicized successes of a number of Silicon Valley companies, start-up activity remains muted. The Labor Department's establishment birthrate, a proxy for the pace of new-business formation, last year matched the record low it plumbed in 2009.

Lending has continued to be tight for small businesses, in part because large companies have snapped up a lot of available capital to maintain their cash reserves. With fewer start-ups, big companies don't need to invest as much.

That, however, is the very point that is a good sign for entrepreneurs.

When companies in your industry are decreasing investment and innovation, they make themselves increasingly vulnerable to radical innovation. Instead of focusing on doing the same old thing that big companies do only on a smaller scale, push to find new approaches to business.

As investors and analysts become accustomed to high margins, corporate managers will be less willing to spend on technologies and approaches outside of the tried, true, and profitable. That makes them even more vulnerable to the Innovator's Dilemma and disruption. Eventually, that's great news for you.

Last updated: Oct 29, 2013

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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