When looking at companies to invest in, it is vitally important to seek lasting competitive advantages that allow them to compete in the market in the long term. Pat Dorsey, formerly Morningstar's Chief Analyst and currently Chairman of Sanibel Captiva Investment Advisers and a columnist for Forbes magazine is one of the world's leading experts when it comes to analyzing competitive advantages of companies. In this article we will see the 4 types of competitive advantages that exist according to Pat Dorsey.
The 4 types of competitive advantages that exist according to Pat Dorsey
The 4 types of competitive advantages according to Pat Dorsey are the following:
Intangible assets: Intangible assets are both trademarks, patents or licenses. Basically, what they do is give companies the ability to set prices higher than their competition. For example, many consumers are willing to pay a higher price for Lacoste-brand polo shirts and sweaters than for white-label ones of equal quality.
Change cost: The competitive advantage of change costs occurs when the cost of changing a product or service is higher than the benefit that would be given by this change. In this way, customer loyalty is achieved, being able to charge a higher price. An example of this type of competitive advantage can be the one that Microsoft has had up to now, since the cost of changing the operating system, both for the costs of learning to use new programs and for making files compatible, was much higher than that of using another type of program.
Network effect: The network effect occurs when the value of a product or service increases as the number of users of that product or service increases. The classic example of this type of competitive advantage is credit cards, although a more current example is social networks, whose value increases the greater the number of users they have.
Cost advantages: The cost advantage is the classic competitive advantage, which usually derives from economies of scale, that is, the ability to produce at a lower cost because the unit cost of producing a greater number of goods or services usually be decreasing as the weight of fixed costs is reduced in the total cost. A good example of the competitive cost advantage is Amazon, which can sell at lower prices than its competition thanks to its large business volume.