Question

2. Warren Buffet argues that sustainable competitive advantage is most important factor in determining long term company profitability. Chapter 10 discusses why this is so difficult to achieve. Discuss the three strategies for maintaining profitability. Do business owners have unlimited ability to make changes in their particular market or are they constrained? If so, by what, how or by whom?

Please write 2-3 paragraphs, Thank you,

Answer 1

Competitive advantage has to have all of these four things to make it sustainable:

1. It has to be valuable

2. Rare

3. Costly to imitate

4. Non-substitutable

One of the most sustainable advantages in businesses are people:
If you have a great staff, they are creating value for your business. They would also be rare. Bill Gates would be rare, you'd have little chance finding someone 'exactly' like him. It would also be very costly for someone to try and replicate their competitor's staff. A competitor also couldn't substitute with a different type of team because then it wouldn't be the same, therefore, they would be sustainable.

Corporate culture would also be sustainable because it's pretty much impossible to replicate subconscious values.

In some cases, it really depends on the business and what their advantage is as to whether it would be sustainable.

For instance, I would say De Beers has had a sustainable competitive advantage in the diamond industry primarily because of their monopoly in the market. In the past, they had control of both distribution and mines with 85% market share. Therefore, it would have been very difficult and costly for someone to jump in.

However, times are changing and they have been losing their monopoly (sustainable advantage) due to a series of events. The market for diamonds had always been set in price by De Beers. They have controlled supply and demand by making diamonds seem rare, when in reality they are not scarce. Now that they are losing control, prices have been starting to match supply and demand.

Since diamonds aren't rare, you can see how that would mean that the product is not sustainable. Anyone can sell diamonds, but not everyone can create the powerful control that De Beers has had since the diamond rush. Now that they've found diamonds in Russia, Australia, and Canada, for example, it has been difficult for De Beers to keep that control and their market share has dropped to 65%.

All in all, I would assume that De Beers had one of the most powerful monopolies in the world because they had a few sustainable advantages:

1. They set very high barriers for entry

2. Their brand is very powerful

3. Strong balance sheet/ cash (they had a lot of money that gave them flexibility to make investments)

4. Market and Pricing Power

        - They could increase prices without losing market share
        - They owned 85% of the market
5. Strategic assets
        - Their ownership of distribution and mines

Other examples of sustainable advantage include:

1. Low Cost Provider/ Low Pricing
        - Can be achieved through economies of scale. This makes it difficult for competitors to match the low prices (ex: Wal-Mart).

2. Adapting Product Lines
        - Products that continuously evolve, many tech companies could fit in this category (ex: Apple)