Thursday, August 15, 2013

Find Your Sustainable Competitive Advantage

“In business, I look for economic castles protected byunbreachable ‘moats’.”

Warren Buffett

Famed investor Warren Buffett is known to favor companies with a 'natural moat', a built in protection that gives companies some protection against competition.  Economists call this a sustainable competitive advantage.  The idea is simple, find what you do well, better than anyone else - that is your competitive advantage.  But you need more.  It isn't enough to have a competitive advantage - you need a sustainable competitive advantage.  If someone can start up a new business tomorrow, delivering the same product and service as your company, you don't have a sustainable competitive advantage. 

Sustainable competitive advantages come from many sources.  In some industries, larger companies benefit from economies of scale making it hard for smaller companies to enter. Other advantages are created through access to supplies or raw materials.  This can occur naturally from the physical location of a company or access many be driven by relationships - familiarity with a particular country, etc.  Intellectual benefits occur when a company has a particular patent or copyright that others cannot duplicate.  

On an individual level an example of an intellectual benefit combined with relationships would be the economist Larry Summers, a leading contender to be next chairman of the Federal Reserve.   Obviously a very smart individual, Summers has honed his personal competitive advantage through a career of challenging positions and a myriad of political contacts.  Of course, competitive advantages in politics are often unsustainable, and it is not assured that Summers will be chosen for the Fed post.  Nevertheless, the comparative advantage will serve him well in multiple pursuits and the intellectual capital and connections are indeed sustainable.

In developing business (and personal) strategy, look for situations where barriers of entry exist, or create a sustainable advantage by differentiating your product in ways that are hard to reproduce.  Soft drinks are a good example.  Coke and Pepsi are trademarks that are known throughout the world.  Other soft drink companies come and go - but none have risen to the level of Coke and Pepsi.  Those two brands are the go-to soft drinks of the world.  

This doesn't mean that companies with well established brand names are immune from competition.  Just think of Kodak.  A dramatic catalyst  can easily change the fortunes of a company - or an industry. For Kodak it was technology.  Other catalysts include regulatory shifts, demographic changes, political events, and changes in consumer tastes.  Which brings us back to Coke and Pepsi.  Noticing a shift away from colas, Coke has broadened its product line to include drinks like Dasani water, Powerade and Minute Maid and non-drink products like Dannon that can still benefit from the company's distribution and promotional expertise.  Excellent companies adapt to keep the competitive advantage sustainable.  

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