Competitive Advantages 101

When seeking long-term wealth builders for your portfolio, look for companies with sustainable competitive advantages such as these:

Strong brand: A brand name associated with high quality, for example, will attract customers more easily than a lesser-known brand.

Switching costs: It’s great when it’s hard for customers to switch to a different company. For example, once a customer has an iPhone, iPad and a Mac, the idea of switching out of the Apple ecosystem is daunting. Low production costs: Companies that can deliver their products or services for a lower cost have an edge and can be more profitable. They may be so large that they enjoy economies of scale, or perhaps they are based in a region with a low cost of labor. Bargaining power: Another edge is if a company has power over its suppliers or its buyers. Huge retailers such as Wal-Mart can be very demanding of suppliers, for example, while the small number of airplane manufacturers makes it hard for airlines to shop around for a better deal. Uniqueness: If a company’s offerings are seen as unique, that can help them retain pricing power. Brands matter less for things seen as commodities, too. It’s ideal when customers have few alternatives to turn to.

Inside information: Some companies may have information that rivals don’t. If a company has been operating profitably in another country, for example, it has an edge over other companies that might want to launch a business there.

Intellectual property: Ifa company has many patents and proprietary technology, that can be very valuable.

Scope: If a company offers a wide variety of products or services, its one-stop-shop nature can attract customers who won’t have to visit multiple venues. Target and similar chains, for example, offer everything from furniture to fruit.

Network effect: Companies with big networks can be powerful. Think of eBay, for example, which attracts sellers with how many buyers it has — and vice versa.