Sunday, February 19, 2012

Competition Demystified: Chapter 1

The author of the excellent book for beginners, Value Investing: From Graham to Buffett..., is back, this time with a book about how to understand and analyze competitive advantages. Investors interested in better understanding what gives a company a competitive advantage must give this book a read.

The authors start by defining strategy. The word strategy is often evoked to describe long-term plans companies devise in order to make money. But the authors argue that not all such planning is strategic. It is only strategic if external responses by competitors are taken into account. If only internal actions are considered, the authors argue that an action is tactical.

For this reason, companies operating in industries where barriers to entry are low can't really come up with viable strategies. There are too many competitor actions to take into account. As such, companies can only focus their efforts internally on becoming as efficient as they can, as this is the only path to success in such industries.

The authors believe Porter's Five Forces was a useful framework, but they believe giving equal weighting to all forces makes analysis complicated. So they have prioritized the forces, with the single most important force being barriers to entry. Once the extent of that force has been determined for an industry, one can better understand how the other forces interact with competitive advantages.
strategy (takes competitor actions into account) vs tactics (internal)

1 comment:

Anonymous said...

one of the best books i read on competitive advantages along with Pat Dorsey book the little book that builds wealth.