It was 1985 when Harvard Business School Professor Michael Porter published Competitive Advantage, one of the most important business management books ever released. It was around seven years ago that curiosity finally got the better of me and I knocked off its 511 pages. Its underlying message left a lasting impression on me, my future business activities and everyday thinking… and it’s well worth sharing.
Put simply, if your business operates with a ‘competitive advantage’, (also known as ‘an edge’, or in stock market terminology, ‘a moat’) it allows you to provide a good or service at a higher level of quality to that of your competitors who operate in the same industry. Consequently, it also allows you to charge a premium for that good or service. Shareholders are then rewarded with above average returns, a higher rate than what the rest of the industry is achieving. If you can get your hands on such a business, or buy shares in one, then you’re well on your way.
A competitive advantage might come in the form of a particular intangible brand that delivers higher sales, such as Coca-Cola Amatil, which is listed on the Australian Stock Exchange. It can also come in the form of a special (and secret) ingredient that makes one karithopita taste so much better than the ones produced by the other zaxaroplastia down the road. Australian banks, especially the big four, have a clear competitive advantage domestically. International competitors have come and unsuccessfully tried to steal market share. We continue to give them our business, despite them charging us $2.50 just to check our balance at another bank’s ATM. Ludicrous stuff. However, as I tell clients, don’t get mad, get even and become a part owner.
As a retailer selling commodity products such as toasters, televisions and fridges, what differentiates them from other retailers mainly is price, with customer service also playing a small part. Inevitably though, everyone is selling the same product, resulting in retailers having to create their own edge. Two retailers that stick out are Woolworths and JB Hi-Fi. Both are listed on the Australian Stock Exchange and both have superior supply chain systems that encourages a ‘stack them high, watch them fly’ business model. Their sophisticated and well-oiled supply chains, allow them to source their commodity-like products cheaper from suppliers and sell them at cheaper prices, attracting customers and stealing market share.
This also applies to financial advice. Porter inspired me to think differently and try to differentiate myself from other equity advisers. This is why I wrote Premiership Portfolio, the first ever book to explain the stock market using AFL recruitment and list management analogies. The beauty of competitive advantage is that you don’t have to own a business or a brand to operate with one. Providing your employer with results that other employees struggle to achieve makes you irreplaceable, and hence, you’re remuneration will eventually be reflective of someone who operates with an edge. On the football field, if a player can provide a team with a contribution that no other player can, then they are likely to get a game each and every week ahead of everyone else. Ryan Crowley of Fremantle can disable the opposition’s best player like no other (ask Marc Murphy), and Isaac Smith provides Hawthorn with run and speed that no other player on the Hawks list, which is why he gets a game every week.
Each day we should strive to do our best, differentiate our service or product, and aim to create a competitive advantage for ourselves. And if you think your mum has the competitive edge when it comes to karithopites, you have yourself a part investor; then again, that would be a lot of mums.
* Sam Fimis is a private client adviser with Patersons Securities and author of Premiership Portfolio: 6 Step Guide to Succeeding in the Stock Market.