The firm is defined by its contracts and relationships. Added value is created by its success in putting these contracts and relationships together, so it is the quality and distinctiveness of these contracts that promote added value. The distinctiveness is at least as important as the goodness. The reason is that in an efficient market there are few opportunities to make good contracts.
The term efficient market is most frequently used in financial markets.1 An efficient market is simply one in which there are no bargains, because what is to be known about the item being sold is already reflected in its price. The advice, ' Buy Glaxo shares because Glaxo is a well-managed company with outstanding products', is worthless, even if it is a type of advice that is often given, because these facts about Glaxo are well known and fully incorporated in the value of its securities.
In broader business terms, the more general implications of market efficiency are much the same. Opportunities that are available to everyone will not be profitable for everyone or perhaps anyone; what other people can equally see and do is unlikely to be a sustained source of added value. So the question that every firm must ask of an apparently profitable opportunity is, 'Why will we be better at doing that than other people?' That is not a justification for the conservative executive we have all met who disparages every new proposal on the grounds that what is worth doing will already have been done. Often the question, 'Why will we be better at doing that than other people?' will have a clear and affirmative answer, and it is typically those firms that can give that answer and act on it that are successful.
The efficient market hypothesis denies that there is such a thing as an objectively attractive or unattractive industry, or more precisely denies____________________