Seeking Competitive Advantages
When seeking the most compelling companies in which to invest, be sure to look for competitive advantages. A business that has an edge, ideally sustainable, is far less vulnerable to existing rivals or new competitors stealing market share from it. Here are some examples of competitive advantages:
• Strong brands: A strong brand can give a company pricing power, enabling it to raise prices without losing too much business. It can also draw customers. For example, many
consumers view shoes by Nike or Vans as preferable to other brands.
• Bargaining power: When a company is large, others will want to do business with it and may be willing to
make concessions for that. Walmart, for example, can get favorable treatment from would-be suppliers.
• Low production costs: If two companies make the same thing, but one can make it less expensively, that company has an edge.
• Switching costs: If a company can get customers entrenched in its offerings, it can be hard for them to switch to a rival. If you’ve had a Gmail account for many years, for example, you’ll likely be reluctant to change email providers.
• Network effect: With a network effect, a company’s offering gets
stronger when more people use it. For example, an online marketplace with the most buyers will attract the most sellers — and vice versa.
• Intellectual property: Ideas and processes that can be legally protected by copyrights or patents give companies a leg up. A company
might also have proprietary technology, such as effective algorithms, that helps it outperform its peers.
• Differentiation: If you can distinguish your product from others by something other than price, such as quality or design, you may be able to charge more for it.
• Ecosystem: Connected offerings can be powerful. If you already have an iPhone and a MacBook, you might prefer to buy an Apple Watch over a different wearable because you’re entrenched in Apple’s ecosystem.
Some of the best-performing companies have multiple competitive
advantages.