In a video on Yahoo Finance called “A Crash Course on Competitive Advantage“, the hosts of this Motley Fool Video describe insights from Michael Porter, a professor at Harvard Business School. Porter defines competitive advantage as a function of either:
- providing comparable buyer value more efficiently than competitors (low cost), or,
- performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price (differentiation).
Either of these strategies help companies maintain an advantage over competitors and, generally, provide a wider profit margin.
Warren Buffett, the chairman and CEO of Berkshire Hathaway has long said that a “durable competitive advantage” is the single most important trait of companies that generate market-beating returns. Buffet offers that companies with a durable competitive advantage in effect create an “economic moat” meaning companies have a sustainable advantage that they can maintain over the long term.
A company with a durable competitive advantage can expect a higher return on equity, an advantage to the owners. This can also translate into lower prices which negatively impact competitors that can ill afford seeing prices being driven lower.
If you don’t have a competitive advantage, your days are numbered. It’s important to develop and maintain a competitive advantage and educate your customers and prospects about how they are advantaged doing business with you.
Thought for the week:
“The word Islam means peace. The word Muslim means one who surrenders to God. But, the press makes us seem like haters.” — Muhammad Ali
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