‘Sustainable Competitive Web’ - The Case for Building a Web of Advantages -Part 1 by Sarvajeet D Chandra

 The word ‘Sustainable Competitive Advantage’ (SCA)  is an under-performer. It promises a lot and yet competitive advantages have rarely been sustainable in a capitalist market economy . The other commonly used synonym for SCA is a ‘moat’ . 

History shows, most moats have failed to protect those inside the fortress ( and its riches) from determined outsiders. The  Fortune 500 list was first published in 1955. In a sense it could be called a ‘Misfortune 500’ List since most of the companies who featured in the 1955 list have disappeared, with nearly 90% of them succumbing to bankruptcy, merger or acquisitions. Only one company from the list still carries the 1955 flag. General Motors (which was ranked number 1 in the 1955 list)  still survives and holds the 40th position in Fortune 500 list 2020. Featuring in Fortune 500 may  actually be a  lead indicator for a company’s downhill journey  since it may signal the topping out of the company’s fortunes or in some cases, the end of the beginning. 











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The Transient Competitive Advantage

The Misfortune 500 story is replicated  in most local markets around the world. Sensex, India’s benchmark index, was created in 1986. Many of the leading companies of that time that featured in the Sensex have vanished. Only a handful of companies like Reliance, Hindustan Unilever (then HLL), Nestle etc. continue to thrive. The rest have either disappeared or have become a faint shadow of their former selves.

The companies that grew big enough to be part of Fortune 500 or Sensex 30, started off by having a significant advantage, albeit a transient one.  Let’s call it TCA or Transient Competitive Advantage. They dominate their industry or category by solving a difficult problem or in other words, they did build some kind of a  moat. They grew  from  ‘good to great’ or ‘from a start-up to a decacorn’.  But over the long run, their moats fell apart, and the transient advantage evaporated in thin air. They failed to escape the downward pull of competition and in some cases the journey  from ‘great to irrelevant’ was rather quick.In many cases this fall was characterized by a lazy knight, who refused to widen the moat or who attacked other castles, in an effort to stem the rot. 

In the fast changing world, the churn in Fortune 500 is likely to be quicker with shorter business life-cycles. A lot of companies which started around the millennium have become  ‘a popcorn from a unicorn’ or  in a more serious vein from ‘the disruptor to the disrupted’.The billion dollar question is therefore that in such a fast changing world how does one build a sustainable business with long lasting advantages. In order to answer the question let us delve deeper into how companies create an ‘advantage’ in the first place. 

The Niche and the Challenger Attack

All profitable companies start off by identifying a niche. The niche may be geographical or product based.  The profitable company may focus on solving a unique problem or may deliver a superior value in the niche. By doing so it begins acquiring market share in the niche rapidly. The ‘competitive advantage’ looks sustainable.

In a small town of hundred thousand people, it is not viable to build another multiplex, if the existing one is doing well. The incumbent provided superior value and displaced the old single screen theatre. Similarly in a niche market of say 500 million rupees for cat food, the incumbent may have a turnover of 250  million  (which is 20% of fixed cost of say, 50 million). In this niche market  a challenger may enter and aim to take 10% share. The revenue will not be enough to cover the fixed costs of the challenger. The profit pool is not really large to support a lot of viable businesses. 

If the niche market does not grow meaningfully then the profitable incumbent may truly have a  a long run till he is not disrupted by change in technology/habits etc. So for argument’s sake  suppose the  OTTs became the preferred way of movie-watching or if  people found other ways to kill a weekend, then of course our multiplex owner in a small town will see a severe erosion in profitability. 

In quite a few cases though a niche market grows. Say the town becomes a million strong or the niche market becomes big i.e more people start keeping cats as pets or people start keeping multiple cats as pets . It is then that the advantage of an incumbent  is put to a serious ‘competitive’ test. The competitive dis-advantages for challenger reduces, as the fixed costs can be defrayed against a wider revenue base. The challenger is now likely to have free cash flows which he can invest in creating visible differentiation through R&D  or a perceptual one through advertising. If the market leader has to maintain a 50% market share, he has to invest in marketing and advertising. This erodes the profitability of the incumbent. 

In a large market, the ability of  a powerful incumbent to prevent entry by a newcomer is limited. In a world where cost of capital is zero or negative, one cannot establish effective barriers to entry based only on economies of scale. So at this stage the  profitability goes down significantly in the wake of intense competition and the competitive advantages which appeared ‘sustainable’ suddenly look transient. 

In such a situation, many leading companies often take the easy way out. They fight eroding profitability and growth by entering new industries and new markets. So instead of widening the moat, the knight goes out & tries to conquer other castles. The focus on core business is diluted. This dilution in focus means further loss of market share and this often takes the shape of a downward spiral. Instead what is needed in this stage of hyper competition, is that the market leaders focus on  improving their core business. They have to think hard on how they can further improve their operating efficiency and create additional sources of advantage(like ‘tastier’ cat food, a community of cat lovers, build a brand etc). 

Widening the Moat, Not Just Deepening It

Companies that are able to dominate an industry over a period of time remain focused on their core offering and develop additional sources of advantage. Through continued  focus they build  ‘a sustainable competitive web’ consisting of multiple advantages with varying degrees of potency . They recognize that specific advantages may erode over a period of time, and may not be sustainable. Hence they continue to work on developing many  other relevant sources of advantage.While the effect of these actions are imperceptible in the very short term and often the paranoia  seems unwarranted, in the long run the consequences are enormous. The paranoia of the knights spurs them to never rest and stop. 

They aspire to be the greatest athlete by trying to win the decathlon, and not just be the best javelin thrower. They keep on widening the moat, not just deepening it. 

Most of the long-lasting companies that have a sustainable competitive web appear to be strong on one or two specific attributes on superficial analysis. Often the advantage that appears the most potent one is not the only source of advantage. It is usually one of the many sources of advantage. While Salesforce appears like a company with a product advantage ( innovative on-demand software) , one tends to ignore other equally potent sources of advantage, for example the ecosystem or community that it has created. This fabulous ecosystem is a  community of two million who support each other, produce content, organize events (most notable being the annual Dreamforce conference attended by two hundred thousand acolytes). 

Pidilite, an Indian adhesive company is known for its obvious sources of advantages i.e. fabulous brands and deep distribution . But it has truly spun a sustainable competitive web with lesser known but equally potent advantages like its remarkable ability to build a loyal community of intermediaries like carpenters, masons etc. (who also act as change agents in introducing new categories to end-users). Also underestimated is its ability to deliver innovative products for specific use-cases (close to 200 variants of the flagship brand Fevicol) . Pidilite’s has perfected the emerging-markets dominance template (after iterations in India) and is fast growing in emerging markets like Kenya, Bangladesh etc. In these markets, conditions are ideal for spinning the web competitive advantages like it has in India. It studiously avoids entry into developed markets  since many of its sources of advantages in emerging markets are irrelevant in US, Europe etc. 

Long term wealth creating companies focus on building an increasingly complex competitive web over a long period of time. It therefore becomes easy for these companies to stave off competitors who often attack the most obvious sources of advantage.The competitors are not able to get a hang of myriad sources of advantages and the interlinkages between them. It also makes it easy for these leading companies to outflank existing competitors and  acquire market share from these one-trick ponies (i.e companies focusing on one source of advantage). 

The company with a sustainable competitive web becomes increasingly hard to beat with every passing day as the web  it is weaving becomes increasingly intricate and complex.