Sustainable Competitive Advantages: Definition, Types, & Examples
Sustainable
competitive advantages are required for a company to thrive in today's
global environment. Value investors search for companies that are
bargains. In order to avoid purchasing a value trap one of the factors we search for is sustainable competitive advantages.
Without
one or more sustainable competitive advantages a company may not be
able to recover from whatever caused the stock to become a bargain. We
only want to buy the stocks of companies that are real value
investments, not value traps. In other words, we want to buy stocks trading below their intrinsic value and will grow cash flow for shareholders.
Definition: Sustainable Competitive Advantages
Sustainable
competitive advantages are company assets, attributes, or abilities
that are difficult to duplicate or exceed; and provide a superior or
favorable long term position over competitors.
Types and Examples of Sustainable Competitive Advantages
Low Cost Provider/ Low pricing
Economies
of scale and efficient operations can help a company keep competition
out by being the low cost provider. Being the low cost provider can be a
significant barrier to entry. In addition, low pricing done
consistently can build brand loyalty be a huge competitive advantage
(i.e. Wal-Mart).
Market or Pricing Power
A
company that has the ability to increase prices without losing market
share is said to have pricing power. Companies that have pricing power
are usually taking advantage of high barriers to entry or have earned
the dominant position in their market.
(i.e. Nestle, BAT ....)
Powerful Brands
It
takes a large investment in time and money to build a brand. It takes
very little to destroy it. A good brand is invaluable because it causes
customers to prefer the brand over competitors. Being the market leader
and having a great corporate reputation can be part of a powerful brand
and a competitive advantage.
(i.e. Nestle, Dutch Lady, Guinness, Carlsberg, Padini ...)
Strategic assets
Patents,
trademarks, copy rights, domain names, and long term contracts would be
examples of strategic assets that provide sustainable competitive
advantages. Companies with excellent research and development might have
valuable strategic assets.
(i.e. CBIP)
Barriers To Entry
Cost
advantages of an existing company over a new company is the most common
barrier to entry. High investment costs (i.e. new factories) and
government regulations are common impediments
to companies trying to enter new markets. High barriers to entry
sometimes create monopolies or near monopolies (i.e. utility companies).
(i.e. Tenaga, Digi, Maxis, Astro)
Adapting Product Line
A
product that never changes is ripe for competition. A product line that
can evolve allows for improved or complementary follow up products that
keeps customers coming back for the “new” and improved version (i.e.
Apple iPhone) and possibly some accessories to go with it.
Product Differentiation
A
unique product or service builds customer loyalty and is less likely to
lose market share to a competitor than an advantage based on cost. The
quality, number of models, flexibility in ordering (i.e. custom orders),
and customer service are all aspects that can positively differentiate a
product or service.
Strong Balance Sheet / Cash
Companies
with low debt and/or lots of cash have the flexibility to make
opportune investments and never have a problem with access to working
capital, liquidity, or solvency. The balance sheet is the foundation of the company.
Outstanding Management / People
There
is always the intangible of outstanding management. This is hard to
quantify, but there are winners and losers. Winners seem to make the
right decisions at the right time. Winners somehow motivate and get the
most out of their employees, particularly when facing challenges.
Management that has been successful for a number of years is a
competitive advantage.
(i.e. Public Bank)
(i.e. Public Bank)
Value Investing and Sustainable Competitive Advantages
Companies
with one sustainable competitive advantage might be successful. Finding
companies with multiple sustainable competitive advantages will greatly
improve the chances you have found a real value stock.
Can you think of any sustainable competitive advantages I may have missed?
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