What makes some businesses stronger than others?
Photo source: Morguefile
Business analysts look for “moats”—competitive advantages that one company has over another, even when they’re in the same industry. Like the way brand-loyalty supports iconic consumer companies like Coke or Colgate. But those kinds of moats are rare. Usually, a smart product or business idea gets copied and commoditized. Those won’t give you a sustainable advantage.
But there are some things that the competition isn’t always willing to do. Strategies or habits that—once adopted—make a firm able to adapt to new circumstances and develop new opportunities.
The most important is the ability to connect with customers. At the end of the day, the customers own the business. Coke or Pepsi or Microsoft or Pfizer wouldn’t exist if no one bought their products. And empathizing with folks who use—and struggle with—the products every day gives you market intelligence that doesn’t always show up in surveys. How many times do you think Delta’s CEO has been bumped from a flight or had his bags lost?
Just as important is the ability to try new things—and abandon them when they don’t work. The world is changing, but we don’t always know which way it’s going. So we have to experiment: like Amazon’s Fire phone or Google’s glasses. Jeff Bezos notes, if you double the number of experiments you try every year, you’ll double your inventiveness. Seeing product development as a set of scouting expeditions means you’ll always have a portfolio of new initiatives—a “skunk works”—where many fail. But failure just means there’s a different path to success.
Finally, there’s patience. Rewards sit on a spectrum: small, transient wins in the short run; big, revolutionary changes in the long run. Vanguard started the first indexed mutual fund in 1976 with $11 million. The company now has over $1 trillion in assets under management. For years, indexing was called a fad, a marketing gimmick, even un-American. But by being patient, Vanguard has fundamentally changed the money management industry. Waiting longer gives you time to correct initial errors, and to get past the chaos and randomness that characterize the initial phase of any new project.
It’s not enough to be smarter than the competition or to work harder. The world is full of smart, hard-working people, and what used to be called intelligence is now automated. But firms that understand what their customers struggle with and search for innovative solutions will have a powerful advantage. That’s not a moat. It’s a runway.
Source: US Navy
Douglas R. Tengdin, CFA
Chief Investment Officer