Why do competitive advantages die?
Companies end up gaining prominence over significant periods of time, only if they have some kind of competitive advantage (Or as Warren Buffett like to call it, a moat). These are very hard to identify, even harder to grow in scale and near impossible to sustain over generations. Only a handful of successful companies are able to do it over a sustained period of time
Competitive advantages die to a number of reasons. A few of them are:
– Inability to understand and adapt to the changing market trends
– Difficulties in hiring at scale
– Poor financial decisions taken at periodic intervals
– Newer entrants which better understand customer preferences
– Regulatory changes which adversely affect a business
– Fraud or blatant mismanagement
Let’s better understand this with a few examples from India:
1. Videocon: Videocon was once a leading consumer electronics company in India that had significant market share in the television and home appliances segment. However, the company failed to keep up with changing consumer preferences and the shift towards smart and connected devices. As a result, Videocon’s market share collapsed, and the company had to sell its business to pay off its loans.
2. Kingfisher Airlines: Kingfisher Airlines was a premium airline that offered high-quality services to its customers. However, the company’s aggressive expansion strategy and failure to manage its finances led to a decline in its competitive advantage and the founder, Vijay Mallya, unable to repay its creditors (willfully). The company eventually had to shut down its operations due to mounting debts.
3. Hindustan Motors: Hindustan Motors was once the leading car manufacturer in India with its iconic Ambassador car. However, the company failed to innovate and modernize its product offerings, and as a result, it lost its competitive advantage. Today, Hindustan Motors is no longer in the car manufacturing business. The Ambassador is one of those cars that only provides nostalgia when seen on the roads, and unfortunately, nothing more.
4. Café Coffee Day: Café Coffee Day was one of the leading coffee chains in India and had a significant market share in the organized coffee retail segment. However, the company’s aggressive expansion, inefficient operations, and mounting debt along with the entry of Starbucks in India, led to a decline in its competitive advantage. The company had to sell a large stake to reduce its debt burden and sustain operations.
*“If you don’t have a competitive advantage, don’t compete” *– Jack Welch
To conclude, these are some examples which highlight the importance of staying agile, innovative, and adapting to changing market conditions to sustain a competitive advantage. Companies that fail to do so are at risk of losing their hard-earned market share and eventually becoming forgotten in the market. Competitive advantage is what keeps them relevant!