A Microeconomic Model for Achieving and Sustaining Supernormal Returns

The objective of this paper is to demonstrate that, counter to conventional wisdom, supernormal returns can be maintained by a firm in perpetuity. Supernormal returns are shown to result from Shannon Information Transmissions of variety and profit from the market which are Received by the company, and encoded with minimum Entropy to Create new offerings, Generate profits, and Destroy unprofitable offerings, in lead times c acceptable to the customer. The ratio of the Information Received by the company, to the company’s Lead Time is derived as Information Velocity. A company which transforms Information into offerings with lead time c is operating at Breakthrough Information Velocity. At this velocity, large quanta of cost are eliminated, large quanta of revenue growth are realized, and supernormal returns result. The company is thus engaged in “creative destruction at the pace and scale of the market” which is the condition for sustaining supernormal returns (Foster and Kaplan 2001). The resulting quantitative Model provides management with an unambiguous set of ordered initiatives for achieving and sustaining supernormal returns. So long as equilibrium Breakthrough Information Velocity is maintained, supernormal returns will also be sustained.