To invest successfully, one must understand how businesses work, and how businesses stack up against their competitors in their industry. To achieve the lion’s share of the profits within an industry or sector, motor vehicles, for example, a company must create and maintain a competitive advantage.
A competitive advantage is just that — a competitive advantage over your competition; a reason that customers will choose one product over another. It is a moat that ensures the success of your company across time, take Apple for example. Firstly, I’ll tell you what Apple’s competitive advantage is not: it is not the cost of their products, because windows computers are far cheaper on average; Apple derives the vast majority of its competitive advantage from its brand recognition, product differentiation, and its sticky ecosystem — sticky referring to the company’s ability to keep people locked, or incentivised to stay (through switching costs and effort to switch products), in their ecosystem.
The The main factors for competitive advantage that you want to look for are in 1) differentiation, 2) technology (sometimes more specifically, algorithms), 3) intangible assets, and lastly 4) operating efficiencies.
How does this product differ from others available on the mark? What is different or unique. Take Tesla, for example, it is not only the cheaper car in its market segment (luxury vehicles), but it is faster, safer, more stylish, and has a futuristic brand perception.
Take Spotify for example, its algorithm ‘The Echo Nest’ worked incredibly well in the beginning to relate songs, and to create a hyperlinked and related audio database to increase the user experience. Nowadays, however, YouTube Music and Apple Music are strong competitors, so its relying primarily on its brand recognition, and sticky environment, that is, the switching costs (the effort of transferring all your songs to another platform) are high. Therefore Spotify users of the past generally remain, and the primary function for customer acquisition is word of mouth, and through the privatisation of particular podcasts — The Joe Rogan Experience, for example.
Technology can come in the form of Tesla’s giant panel press, so big it can cast the entire body of the automotive in one piece — unheard of in the industry. Tesla is developing the capacity for autonomous driving in its vehicles, that is, the ability for the car to drive itself unmanned, and carry the same amount of passengers, or one more (no driver) with respect to a future autonomous taxi/ride hailing network. In order to successfully develop autonomous driving capability in all Tesla vehicles (powered by artificial intelligence).
Every Tesla vehicle for many years has had sensors installed (more recently visual sensors, and removing the legacy (old) sensors), and has been collecting billions of miles of road driving data, with respect to what’s occurring on the road, and how the driver does or doesn’t react, training the artificial intelligence application for Tesla. None of Tesla’s competitors (Waymo for example) has the data that Tesla does, and therefore Tesla has a technology competitive advantage, at least with respect to autonomous driving (a multi-trillion-dollar opportunity).
Intangible assets are the aspects of a company that providing benefits to the company that are intangible. This includes but is not limited to: human resources, culture, brand recognition, trademarks, contracts with big customers etc. Nike’s brand recognition is a perfect example of an intangible asset driving to company’s competitive advantage.
A company with superior business processes can derive significant cost savings. A business process is an activity, usually a set of steps that one or more people inside or outside a company take to achieve a goal. Signing a customer up to a rewards program, for example; similarly, Tesla choosing to manufacture the chassis in one piece rather than in many pieces, welding them, adding more time and structural weakness to the process and chassis. Operating efficiencies are evident in Tesla’s ability to get stuff done — a function of their logic and outcome-focused culture; emotions take a back seat and logic and production drive the train. At Tesla it is about what works, not politics and opinion — hard physics first principles thinking.
A competitive advantage is critical to the dominance of a company within a particular industry or market segment. Competitive advantages can show up in many ways, including product differentiation, technology, intangible assets, and operating efficiencies.