A Reader’s Question: How to Build a Competitive Advantage?

What To Wear For An IRS Audit

A man was called in for an audit by the IRS. So, he asked his accountant for advice on what to wear. “Wear your worst clothing and an old pair of shoes. Let them think you are a pauper,” the accountant replied.

Then he asked his lawyer the same question, but got the opposite advice:”Don’t let them intimidate you. Wear your best suit and an expensive tie.”

Confused, the man went to his Minister, told him of the conflicting advice, and asked him what he should do.

“Let me tell you a story,” replied the Minister. “A woman, about to be married, asked her mother what to wear on her wedding night. ‘Wear a heavy, long, flannel nightgown that goes right up to your neck and wool socks.’ But when she asked her best friend, she got conflicting advice: ‘ Wear your most sexy negligee, with a V neck right down to your navel.'”

The man protested: “But Reverend, what does all this have to do with my problem with the IRS?”

“It doesn’t matter what you wear; you’re going to get screwed.

A Reader’S Question: How to start a business that will develop a moat?

From Arden—his question:

Regarding “real life” businesses- a lot of time when I drive by a vacant shop, I think a lot about what kind of business I would start there, usually the results I reach seem too risky for me. What are some businesses can a guy start, that will have even the most basic moat? Is it even possible? As a businessman, I would love to know your view.

Dear Arden:

Most likely, you would need to start a low-capital-intensive service business, so your chances of creating a competitive advantage would come through either regional economies of scale or niche product economies of scale with customer captivity. The odds are against you, but you must at least operate in a focused and operationally efficient way. Also, don’t confuse an arbitrage profit with a competitive advantage like I did when I started a tariff-switching business in Brazil. Fast growth with high profits don’t indicate a competitive advantage.

I would read all about competitive advantages by reading:

Competition Demystified: http://www.amazon.com/Competition-Demystified-Radically-Simplified-Approach/dp/1591841801/ref=sr_1_1?ie=UTF8&qid=1330361257&sr=8-1

Strategic Logic: http://www.amazon.com/Strategic-Logic-J-Carlos-Jarillo/dp/1403912599/ref=sr_1_1?s=books&ie=UTF8&qid=1330362742&sr=1-1

Then review this post and the video (link in the post) here: http://wp.me/p1PgpH-1N

Economics of Strategy: http://www.amazon.com/Economics-Strategy-David-Besanko/dp/0470373601/ref=sr_1_1?s=books&ie=UTF8&qid=1330361290&sr=1-1

Good Strategy, Bad Strategy: http://www.amazon.com/Good-Strategy-Bad-Difference-Matters/dp/0307886239/ref=sr_1_5?s=books&ie=UTF8&qid=1330362844&sr=1-5

I humbly suggest reading about the Pampered Chef by Doris Christopher. The company, The Pampered Chef, was purchased in 2004 for about $900 million by Buffett. Mrs. Christopher at the age of 35 started the company with a $3,000 loan—the only money ever put into the company! The company uses a multi-level sales organization to put on kitchen shows with proprietary cooking utensils (similar to a Tupperware Party). She built a business from scratch into a world-class organization. (Warren Buffett in the preface).

Additional readings:  

Billion dollar Lessons: http://www.amazon.com/Billion-Dollar-Lessons-Inexcusable-Business/dp/B003156BE0/ref=sr_1_1?s=books&ie=UTF8&qid=1330362800&sr=1-1

Competitive Strategy (Porter): http://www.amazon.com/Competitive-Strategy-Techniques-Industries-Competitors/dp/0684841487/ref=sr_1_1?s=books&ie=UTF8&qid=1330361326&sr=1-1

Co-Opetition:  http://www.amazon.com/Co-Opetition-Revolution-Combines-Competition-Cooperation/dp/0385479506/ref=sr_1_4?s=books&ie=UTF8&qid=1330361407&sr=1-4

Modern Competitive Analysis: http://www.amazon.com/Modern-Competitive-Analysis-Sharon-Oster/dp/019511941X/ref=sr_1_1?s=books&ie=UTF8&qid=1330361426&sr=1-1

Little Book that Builds Wealth (on Moats):http://www.amazon.com/Little-Book-That-Builds-Wealth/dp/047022651X/ref=sr_1_1?s=books&ie=UTF8&qid=1330361453&sr=1-1

Morningstar’s Five Rules for Successful Stock Picking: http://www.amazon.com/Five-Rules-Successful-Stock-Investing/dp/0471686174/ref=pd_sim_b_1

Essays of Warren Buffett    http://www.amazon.com/Essays-Warren-Buffett-Lessons-Corporate/dp/0966446127/ref=sr_1_1?s=books&ie=UTF8&qid=1330365582&sr=1-1

Joe Mansueto of Morningstar Discusses Moats

Here is what Joe Mansueto, the founder of Morningstar, said about building a business with a moat: “When I started Morningstar in 1984, my goal was to help individuals invest in mutual funds. Back then a few financial publications carried performance data, and that was about it. By providing institutional-quality information at affordable prices, I thought we could meet a growing need.

But I also had another goal. I wanted to build a business with an “economic moat.” Warren Buffett coined this term, which refers to the sustainable advantages that protect a company against competitors—the way a moat protects a castle. I discovered Buffett in the early 1980s and studied Berkshire Hathaway’s annual reports. There Buffett explains the moat concept, and I thought I could this insight to help build a business. Economic moats made so much sense to me that the concept is the foundation for our company and for our stock analysis.

…Why spend time, money and energy only to watch competitors take away our customers?

I wanted Morningstar’s economic moat to include a trusted brand, large financial database, proprietary analytics, a sizable and knowledgeable analyst staff, and a large and loyal customer vase.

Let me know if you start a business.  You will, at least, have a head start on building an advantage.

11 responses to “A Reader’s Question: How to Build a Competitive Advantage?

  1. Pingback: Links of interest – Whopper Investments | Whopper Investments

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