Competitive Advantage- Part-5: Various types of competitive advantage
Dear long term investor, in Part-1,Part-2,Part-3 and Part-4 we describe:
What is competitive advantage?
Why competitive advantage matters in stock investing?
Finding Competitive Advantage.
A common source of competitive advantage
Now in this article we explain Various types of competitive advantage
Obtaining a cost advantage through industry consolidation
In large fragmented markets especially those that have become commoditized, you can often see business with low-cost advantages building market share.
The higher the market share, the more customer choice is limited, which gives the surviving dominant players an advantage.
Obtaining a cost advantage through a good location
Whenever a business has a geographic location that competitors are unable to easily duplicate, this can give a business cost advantage.
For example cement plants in certain areas of India benefit when housing and public construction increase demand locally for cement. Because it is difficult to build new cement plants and because of its weight, those cement plants are able to undercut the prices of most competitors.
The best kind of sustainable competitive advantage is structural
When customers have limited choice in the products or services they can use for extended period of time the competitive advantage is likely structural. A structural competitive advantage can be results of regulation a prime location or better distribution networks.
For example think about a prime piece of real estate in your community where there is easy access, visibility and location. This location typically will be able to charge higher rents to retailers because it is in a good area where more customers are likely to shop.
The best way to identity a structural competitive advantage is to view it from the prospective of customer choice. Does the customer have limited products or services to choose from or does the customer have much choice?
Structural advantages are typically the most sustainable advantage. For one thing the more a competitive advantage is based on structural characteristics the less the business depends on such factors as management execution.
To learn more about competitive advantage, read more articles.
- Part-1:Understand
- Part-2:Importance in Stock Investing
- Part-3: Finding competitive advantage
- Part-4:Common source
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock
