I’m reading this book now titled The End of Competitive Advantage by Rita Gunther McGrath. The book is relevant to company stock picking. It describes the new environment that a lot of digital-first (information-first) and other companies find themselves in compared to old industries. The book gives frames of reference to think about the new environment and actionable steps to improve business strategies in this new environment.
An example, in contrast to Warren Buffet (who doesn’t invest in a lot of technology companies because he says he doesn’t understand them) is that Buffet has metrics described in Buffetology and other books on how to analyze the balance sheets and cash flow statements of different businesses and “to compare them to other businesses in the same industry”. The End of Competitive Advantage book defines a new term, “arena” with some criteria to frame competition boundaries in a world where Netflix, TiVo and iTunes show purchases are not in the same industry as the big network operators, but the new companies are hurting the old big network industry. So even though Netflix (on-demand movies technology company on many devices) is different from Network Television (a single living room device with static programming) they compete in the same arena. The book defines “arena” as a connection between a a certain group of customers and solutions/offers.
Another example is Borders was not in the same industry as iTunes but Borders CD music section and whole store doesn’t exist anymore. Borders industry competitors were Barnes and Noble and Books a Million, but they were in the same industry as iTunes and the whole book store industry mostly lost to iTunes.
So industry may not be the most relevant way to consider competitors. This matters in company stock picking because who you compare one balance sheet or cash flow against another matters so you know who the strong performers are and who the weak performers are.
The book also introduces the concept of businesses with transient competitive advantage being stronger than businesses with sustainable competitive advantages. An example is Kodak vs Fuji. Kodak is bankrupt and it defended its sustainable competitive advantage (chemical-based photo processing) until the industry became irrelevant. Fuji invested heavily in different waves and has transient competitive advantage as it rides the wave of digital photography, copiers, printing, etc…
There’s still quite a few sustainable competitive advantage companies in the world, like Coke. They have a brand and large capital investments that form a high barrier to entry, but Borders, Kodak, Blockbuster and others had sustainable competitive advantages and large capital expenditures as well until their industry became irrelevant and their large capital investments became rigid straight jackets preventing them from pivoting and riding a new wave.