The Importance of Competetive Advantage for Investors

It's not always enough to have a great business, you need to have an edge on the competition. Competitive advantage describes an element of a business that allows it to outperform others, leading to greater sales, better margins, or higher customer retention. 

Borders had a great business once, but with the rise of the internet, they lost their competitive advantage to Amazon. 

Blockbuster Video was a huge money maker for half a century, but they failed to predict the rise of video streaming and were overtaken by Netflix. 

Competitive advantage protects businesses from being swallowed up by others and can come in many forms. 

Brand names and trademarks are one of the strongest forms of competitive advantage. Someone could create a better tasting cola tomorrow, but they wouldn't be able to topple Coca-Cola. 

When people want to search for information on the internet, they say they'll "Google it." That's pretty incredible brand strength. 

Competitive advantage can come in the form of patents. Companies like Facebook and Microsoft own patents on the technology they use to create their products and services. 

When looking for a good investment, always look for a sustainable competitive advantage. There are hundreds of new startups emerging everyday with new technologies or new approaches that can threaten even the biggest companies. 

Worse still, companies like Amazon can enter into your market with all the brand recognition and funding they need to wipe out a smaller competitor. In twenty years Amazon has gone from selling books, to electronics, to groceries and now to web services. 

If you think they might go after the business you're interested in, maybe think again.

TL;DR

• Competitive advantage is an element that allows a business to outperform others. 
• Many businesses fail to innovate and lose their competitive advantage. 
• Beware of businesses that may become a target for giant competitors like Amazon.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.