Durable Competitive Advantage

Durable Competitive Advantage exist when a company has "essential income"; revenue coming from the sale of products or services that are essential to people's daily lives. A company may also have a Durable Competitive Advantage if they provide products or services that are essential for other companies and businesses to function. The key is to sell a superior product or service that customers need over and over again.

A company with a Durable Competitive Advantage has one or more of the following characteristics:

  • Sell a product or a service that is a basic necessity
  • Is in an industry with very little competition
  • Sell a unique product that doesn't change much
  • Provides a unique service that's difficult to replicate
  • Is the low-cost buyer and seller of products the public constantly needs
  • Spends very little or none at all on Research and Development

 

Characteristics of a Company with a Durable Competitive Advantage
Sell a product or service that is a basic necessity. Is in an industry with very little competition
Sell a unique product that doesn't change much Provides a unique service that's difficult to replicate
Is the low-cost buyer and seller of products the public constantly needs Spends very little or none at all on Research and Development

 

A competitive advantage places a company in a superior business position. But having one isn't enough. A company's competitive advantage must also last forever to make its stock a viable investment. Hence, its competitive advantage must have durability to withstand a severe recession, changes in the industry or political environment, and just about anything bad that could happen. What is crucial to a company's durability is a repeating need for its product or service.

According to Warren Buffett a company with a Durable Competitive Advantage is a cash cow. Meaning its earnings power and business model is so great that its stock is an investment with very little risk. It is stable, just like bonds.

A company's Durable Competitive Advantage will show in its financial statements. When doing research for a potential investment an analysis of the company's financial statements needs to be made.

 

Examples of Companies with a Durable Competitive Advantage

The Coca-Cola Company

  • They are in the beverage business. Having something to drink is a necessity for a meal.
  • The taste of Coke is unique and the product hasn't changed much in decades. It is still the same beverage as it was 100 years ago.
  • The Coca-Cola Company is also the largest beverage provider in the world. They have a strong hold on the beverage industry; their competitors are unable to compete.
  • It doesn't spend anything on research and development.
Durable Competitive Advantage Characteristics of Coca-Cola
Sell a product or service that is a basic necessity Is in an industry with very little competition
Sell a unique product that doesn't change much Provides a unique service that's difficult to replicate
Is the low-cost buyer and seller of products the public constantly needs Spends very little or none at all on Research and Development

 

H&R Block

  • Everyone has to pay taxes year after year since the middle ages.
  • Tax preparation hasn't changed much.
  • They have many locations all over the United States. A feature its competitors doesn't have, which also makes their service unique.
  • They are the largest tax preparation service in the country. They have competitors but none them are a threat to their business.
  • H&R Block is not a tech company, they do not need to spend anything on Research and Development.
Durable Competitive Advantage Characteristics of H&R Block
Sell a product or service that is a basic necessity Is in an industry with very little competition
Sell a unique product that doesn't change much Provides a unique service that's difficult to replicate
Is the low-cost buyer and seller of products the public constantly needs Spends very little or none at all on Research and Development

 

Wal-Mart

  • They are the low-cost buyer and seller of many products the public constantly needs.
  • Wal-Mart sells food, beverage, toiletries, medication, etc., things that are essential to our daily lives.
  • They don't spend anything on Research & Development.
Durable Competitive Advantage Characteristics of Wal-Mart
Sell a product or service that is a basic necessity Is in an industry with very little competition
Sell a unique product that doesn't change much
Provides a unique service that's difficult to replicate
Is the low-cost buyer and seller of products the public constantly needs Spends very little or none at all on research and development

 

IBM

  • IBM is one of the largest provider of Information Technology products and services. There are only a few competitors in this industry.
  • Information Technology products and services are essential for companies and businesses to function.
  • Since most of their business is providing services, they don't have to spend too much on Research and Development.
Durable Competitive Advantage Characteristics of IBM
Sell a product or service that is a basic necessity Is in an industry with very little competition
Sell a unique product that doesn't change much
Provides a unique service that's difficult to replicate
Is the low-cost buyer and seller of products the public constantly needs
Spends very little or none at all on research and development

 

Wells Fargo

  • Well Fargo provides banking and financial products and services. This is a business that doesn't change at all.
  • Access to cash, payments, and loans are things that are essential to people's daily lives as well as essential for businesses to function.
  • There are only 5 large banks in the United Stated and Wells Fargo is the largest.
  • They don't need to spend anything on Research and Development.
Durable Competitive Advantage Characteristics of Wells Fargo
Sell a product or service that is a basic necessity Is in an industry with very little competition
Sell a unique product that doesn't change much Provides a unique service that's difficult to replicate
Is the low-cost buyer and seller of products the public constantly needs
Spends very little or none at all on research and development

 

Examples of Companies without a Durable Competitive Advantage

Yahoo

  • They have plenty of competition in the Internet Ad business.
  • Their product isn't unique.
  • It needs to spend plenty of money on research and development to come out with the next big thing. Otherwise, they could become extinct.

Ford Motors

  • They are in an industry with plenty of competitors.
  • Car models change every 4 to 5 years. They have to spend money on manufactoring equipment every time they come out with a new model.

Best Buy

  • They are in an industry with plenty of competitors.
  • Electronics are expensive items that people don't buy every month.

 

My Financial Analysis of Stocks

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