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. Great post, been waiting for this one. thanks!

    Will delve into your sources, It seems it’s well worth the time.

  2. I am not sure the Morningstar has built a moat, and to the extent he has, many of the factors he listed as “comeptitive advantages” don’t stand that test according to Greenwaldian analysis.

    So, I feel safe in making the comment that, while it’s good to think about moats, my guess is most businesses, including those with moats, were not started by people looking to build a moat. Certain businesses just lend themselves to moats and the people who got into them got in by “chance”, not because they were looking for a moat-biz.

    Aside from the guy who wanted to start a business building actual moats around people’s property.

  3. I agree with you. An entrepreneur is often driven to solve a problem or fill a need. Then through luck, skill, and discipline perhaps competitive advantages are built. Yes, certain businesses lend themselves to moats. I have a greater chance of building a franchise making rum–turn a commodity, sugar, into a branded product–in a tropical country than bike repair.

    I would have to look at Morningstar’s stability and level of returns to see if the company had a franchise. I would start there.

  4. Discover several ways to build an Economic Moat. This book is finally on Amazon.com !
    Moats : The Competitive Advantages Of Buffett And Munger Businesses
    http://www.amazon.com/dp/1105422860

    This may be the best business book that describes the competitive advantages of profitable businesses. MOATS describes the nature of 70 selected businesses purchased by Buffett and Munger for Berkshire Hathaway Inc. MOATS is a very useful resource for investors, managers, students of business. Since its subject matter has proven success, MOATS may become a useful practical text in businesses schools around the world. MOATS also looks at the sustainability of these competitive advantages in each of the 70 chapters.

    The author extends a special thanks to Professor Phani Tej Adidam, Ph.D. Chair of the Department of Marketing and Management and Director of the CBA International Initiatives at University of Nebraska at Omaha. Thanks are extended to Richard Konrad, CFA, Dr. Maulik Suthar, and Scott Thompson, MBA for sharing their thoughts, analysis, and feedback. The 70 Businesses covered in MOATS:

    Acme Brick Company, w Adam Ward
    American Express Co. (AXP), Dr. Maulik Suthar
    Applied Underwriters, w Adam Ward
    Ben Bridge Jeweler, w Beryl Chavez Li
    Benjamin Moore & Co., w Mr. Jack Wang CPA
    Berkshire Hathaway Group, w Brian Greising & Rick Mayhew
    Berkshire Hathaway Homestate Companies, w Beryl Chavez Li
    BoatU.S., w Peter Chen
    Borsheims Fine Jewelry, w Tariq Khan.
    Buffalo News, Bud Labitan & Peter Stein
    Burlington Northern Santa Fe Corp. w David Leoy.
    Business Wire, w Larry Harmych.
    BYD, w Kevin Walsh.
    Central States Indemnity Company, w Azalia Khousnoutdinova,
    Clayton Homes, w Erin Sestak.
    Coca Cola (KO) w Sebastian Jung,
    ConocoPhillips (COP), w Adam D. Studts, PE.
    CORT Business Services, w Erin Sestak.
    Costco Wholesale (COST), w Jubin Jacob, AUC-SOM
    CTB Inc., w Todd Sullivan.
    Fechheimer Brothers Company, w Ben Albaitis.
    FlightSafety, w Peter Stein
    Forest River, w Richard Konrad, CFA
    Fruit of the Loom®, Dr. Maulik Suthar
    Garan Incorporated, w Dr. Edwin Fuentes
    Gateway Underwriters Agency, assigned Daniel Rudewicz, CFA
    GEICO Auto Insurance w Florian Beil,
    General Re, w Raghu Dasari, & Theodor Tonca
    H.H. Brown Shoe Group, w Mervyn H. Teo
    Helzberg Diamonds, w Natalja Callahan
    HomeServices of America, w Sebastian Jung
    IBM, w Tim Bishop & Peter Stein
    International Dairy Queen, Inc., w Tariq Khan
    Iscar Metalworking Companies, w Kevin Walsh
    Johns Manville, w Manpreet Singh Saran
    Johnson & Johnson (JNJ), Beryl Chavez Li
    Jordan’s Furniture, w Zehao Sun.
    Justin Brands, Dr. Maulik Suthar
    Kraft Foods (KFT), w Andrea Tagart.
    Larson-Juhl, w Tim Bishop
    Lubrizol, w Scott Thompson, MBA.
    M&T Bank Corp (MTB), w Cliff Orr & Richard Konrad, CFA
    Marmon Holdings, Inc., w David Lau & Theodor Tonca
    McLane Company, Dr. Maulik Suthar,
    Medical Protective, w Michael Murillo
    MidAmerican Energy Holdings Company, w Dr. Maulik Suthar & Brian Bernardino, JD
    MiTek Inc. w Mr. Jack Wang CPA
    Moody’s (MCO), w Raghu Dasari
    National Indemnity Company, w Jen Iwanski & Rick Mayhew
    Nebraska Furniture Mart, w Julie Rosenbaugh, Theodor Tonca, & Shouryamoy Das
    NetJets®, w Christian Labitan
    PacifiCorp., w Beryl Chavez Li
    Precision Steel Warehouse, Inc., w Adam D. Studts, PE & J.T. Loudermilk, MBA
    Procter & Gamble (PG), w Beryl Chavez Li
    RC Willey Home Furnishings, w Azalia Khousnoutdinova
    Richline Group, Daniel Doyon
    Scott Fetzer Companies, Cliff Orr & Hoang Quoc Anh
    See’s Candies, w Jen Iwanski
    Shaw Industries, w Daniel Doyon & Richard Konrad, CFA
    Star Furniture, w Pamela A. Quintero, MBA
    The Pampered Chef® w Julie Rosenbaugh
    TTI, Inc., w Peter Chen
    United States Liability Insurance Group, w Stephen Chan & Colin Farrier
    US Bancorp (USB), w Richard Konrad, CFA
    USG Corp (USG), w Richard Konrad, CFA
    Wal-Mart (WMT) w Florian Beil
    Washington Post (WPO), w Andrea Tagart & Richard Konrad, CFA
    Wells Fargo (WFC), w Natalja Callahan.
    Wesco Financial Corporation, w Stephen Chan
    XTRA Corporation, Bud Labitan

    • OK, the above post is promotional and an ad for the book, but I let it through because I mentioned the the author and want people to be aware of another source on moats.
      But I have not read the it so I can’t vouch for the depth of analysis or clarity of thinking. Any readers who do read this work, let me know what you think.

      I have no affiliation with the author, no co-marketing, no kick back schemes, etc. I used to like the http://www.fool.com in its early days pre-2000, but now it is
      one big advertisement for their newsletters and funds. Perhaps the fool.com has too many mouths to feed.

  5. Mohammed Al-Alwan

    Hi John

    what do you think of such books on strategy : build to last or blue ocean strategy..etc

  6. I do not think the book, Built to Last is useful. Though Blue Strategy is in the Value Vault, I have not read it so I can’t comment. Ironically, the more popular the book, the less useful.

    I find Comp. Demyst or Strategic Logic by Jarillo much more rigorous and useful than Built to Last–those books are relatively unknown.

    If you can tell me what Built to Last has taught you, I would be glad to hear.
    When you ask management what is their competitive advantage (Do it at your next conference) I bet 90% will say Management! or “Our Culture.”

    As you know that is NOT a competitive advantage.

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

  8. Usually I don’t read article on blogs, but I would like to say that this write-up very pressured me to try and do it! Your writing taste has been amazed me. Thank you, very great article.

  9. Wonderful job!!! this website is extraordinary!!! i tried to download all the material you published online at onece, but there’s no way. can you try to make avaible the option to download all the files you publishe at once?

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