Business Strategy Investing

Competition Demystified: A Radically Simplified Approach to Business Strategy (Summary)

by Bruce Greenwald and Judd Kahn

Why did Walmart conquer rural America town by town instead of immediately attacking Kmart in the big cities? Because true, sustainable profit doesn't come from being 'better' or growing faster—it comes from building a fortress in a small market where no one can challenge you, and only then expanding. Most business strategy is a glamorous distraction from this simple, brutal reality.

Competitive Advantage is a Fortress, Not a Race

Forget being better, faster, or having a superior culture. Sustainable profitability comes from structural barriers that prevent competitors from entering your market. Without them, any success you have will be competed away.

For decades, local newspapers were fantastically profitable not because they had the best journalists, but because they had an unassailable local moat. The high fixed costs of a printing press and distribution network meant it was impossible for a second newspaper to enter the market and survive.

There Are Only Three Real Moats

Greenwald argues that all sustainable competitive advantages boil down to just three sources: 1) Supply advantages (accessing inputs cheaper than rivals), 2) Demand advantages (customer captivity due to habit or high switching costs), and 3) Economies of scale.

Microsoft Windows has a powerful demand-side advantage. Even if a rival OS is technically superior, the high switching costs for billions of users—who would have to relearn systems and repurchase software—make the Windows moat nearly impenetrable.

Operational Excellence is a Trap

Striving to be the 'best-run' company is not a strategy. Any operational improvement, from a superior manufacturing process to a better marketing campaign, can and will be copied by determined rivals, eroding any temporary profit advantage.

In the 1980s, the entire U.S. auto industry scrambled to copy Toyota's revolutionary 'Just-in-Time' manufacturing system. Once they did, the advantage was neutralized. The gains went to consumers as better, cheaper cars, not to the companies as sustainable profits.

Growth is the Enemy of Value (in Competitive Markets)

Chasing growth in a market without barriers to entry is a sure way to destroy shareholder value. It attracts more competition and requires massive capital investment for fleeting returns.

The airline industry is a perfect example. Despite massive growth in air travel over decades, the industry as a whole has been notoriously unprofitable. Intense competition, low barriers to entry, and high fixed costs mean that any profits are immediately competed away through price wars.

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