Maintaining Competitive Advantages through Technology and Professional Development
This week will go down as a classic case study of what happens to a company when they lose their competitive advantage. To nobody’s surprise, Radio Shack was delisted and is preparing to shut down and an announcement was made that Office Depot is being taken over by Staples. We believe that both of these companies were too slow to adapt to new technology and were unable to maintain their competitive advantage of mass distribution. Neither of these investments would have met our criteria of investing more like a shark.
Their tombstone should be a lesson to all managers: Adapt to new technology and develop new leaders or suffer our fate.
We believe that businesses that are slow to adapt to new technologies and do not reinvest back in developing their employees will watch their competitive advantages erode slowly over time. Ten years ago each company had very talented managers and pristine balance sheets. What happened next can best be summarized in this Warren Buffett quote, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
The reputation of Radio Shack and Office Depot was lost because their management teams did not transition to the digital age. They lost what Buffett coined as “moat”. A company with a wide moat has one or more of the following advantages: brand name, pricing power, distribution, or cheaper access to natural resources. The best managers understand how critical it is to maintain and widen their competitive advantages or moat. Companies with a narrow moat typically have unfavorable downside protection and low visibility of future earnings.
We prefer to invest in businesses that reinvest into technology and talented employees in order to build the long-term success of the organization. The best leadership teams shape and exploit their respective company’s competitive advantages and continuously try to improve their teams’ personal development. Companies that invest in professional development and leadership training have a better chance of recognizing changing competitive advantages in a fast moving economy. Our portfolio comprises of stocks that are developing tomorrow’s leaders and are continuously striving to differentiate their competitive advantages from the competition.
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