Competitive Advantage

Question 1

What is better than having one competitive advantage?

Answer 1

Having more than one. The more you have the stronger the moat.

Question 2

What are the big 5 numbers that point to a competitive advantage?

Answer 2

1) BVPS growth
2) EPS growth
3) ROIC - level and consistency
4) Sales growth
5) FCF/OCF growth

Question 3

Give examples of competitive advantages being damaged by technological disruption…

Answer 3

1) Cable TV hurt by streaming co’s - NFLX
2) Retail by AMZN & internet
3) Music stores by Itunes/ Spotify

Question 4

Why is BVPS so important to Buffett?

Answer 4

It shows whether shareholders get to keep the excess cash generation or if it is being spent on capex AND
tracks intrinsic value closely (2004 shareholder letter)

Question 5

What is the ROIC Calculation?

Answer 5

ROIC = NOPAT / (Equity + Debt)
NOPAT = NPAT + Interest + Depreciation

Question 6

Why are networks / ecosystems / platforms so important?

Answer 6

Because they tend to create a winner takes all environment that is near impossible to compete with.

Think yahoo.

Question 7

What is the relationship between companies with competitive advantages and their capital intensity?

Answer 7

Co’s with wide moats are able to retain a significant amount of their surplus capital and don’t need to consume the surplus with capital spending.

Question 8

What does Warren Buffett believe are the two keys to investing?

Why?

Answer 8

Having a competitive advantage and making sure that the competitive advantage is durable.

If you have a competitive advantage, it allows you to earn monopoly-like profits and if there is durability, it means that you will be able to maintain your competitive advantage.

Question 9

What does Warren believe is the key to earnings power?

Why is that thing important to the economics of the product or service?

What two things also reinforces the XXXXX of the competitive advantage?

Answer 9

True earnings power is generated from the durability of the competitive advantage.

Durability is important to the economics because it means a company doesn’t have to spend significant sums to protect its competitive advantage. Hersheys and Pizza Hut dont need to spend huge sums to protect their competitive advantage but Intel has to keep recreating its product continually.

A repetitive need for that good or service (used up fast or wears out quickly) strengthens the durability of a competitive advantage. Think Fast food, toiletry, personal care, household companies. Advertisers. tax preparers, cleaning services, Security Services, and pest control. Lawn care, maid service, credit card companies (charge merchant for every transaction), uniform rental, doorway entrance mats, information businesses (dun and bradstreet, Morningstar, IHS) that make once sell over and over. .

A huge distribution network also strengthens the durability.

Question 10

What are the two main attributes of competitive advantage?

Answer 10

cost and differentiation.

Question 11

Describe the attributes of a cost competitive advantage?

Answer 11

1) lower labor costs,
2) higher levels of productivity,
3) access to lower cost raw materials, or
4) economies of scale through high-volume production.WMT, COST, AMZN

Question 12

What are the 12 attributes of differentiation competitive advantage?

Answer 12

1) Performance; 2) Quality; 3) Lower maintenance; 4) Niche; 5) Brand; 6) Uniqueness; 7) Availability 8) Distribution 9) Network; 10) Innovation 11) Switching 13) Toll - Drug patents, Advertising access consumer, toll roads, credit card co’s,

Question 13

Give examples of performance competitive advantage…

Answer 13

functionality (what it does), usability (how easy to use),

Functionality i think of Dyson and its multiple attachments

Usability I think of Apple iPhone/Ipad or Google Search.

Question 14

Examples of Brand Intangible assets

Answer 14

Brand is linked to trust and factors that give the consumer confidence or occupies mind space. Consumer food, toiletry & household product companies have many brands that are top of consumer minds.

You have to buy the brand name product from the sole producer and no one else.

Consumers associate taste to certain fast food companies. To get a Big Mac I have to go to McD’s or Hersheys for chocolate. All with many repeat visits.

For the best family entertainment -Disney. WJS, FT, Bloomberg content is only available thru them.

Question 15

Give examples of product or service unquiness?

Answer 15

HOG sound/feel
Apple ease of use
FB friends sharing network
TWTR info sharing network
MTCH dating profile network

Question 16

Give Examples of Network benefits?

Answer 16

Network is also called ecosystem. If you choose another product or service you lose lots of benefits or that network or ecosystem.

I have to use Whatsapp because thats what everyone uses for messaging. I could be on friendster but most ppl use FB.

Question 17

Why is innovation important to a competitive advantage?

Answer 17

Research and Development talks to both innovation and a companies adaptability to a changing environment. The higher the Research and Development potentially the greater the ability to make the competitive advantage more durable.

Question 18

How does switching cost impact a competitive advantage?

Answer 18

The product or service is so integrated into your life that by changing you lose more than just that product or service. I could change to Samsung but I would lose iTunes, apps that are only on IOS, and the sharing across all of my devices.

I can use Google sheets but I have all this LT built up knowledge about Excel functions and useability.

Question 19

Give an example of toll bridge competitive advantage?

Answer 19

If I want to search the internet, the best one is Google. If I want to spend overseas, I use my credit card. If I am an advertiser, and I want to target a specific audience, FB is key.