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Persistent Winning and Losing

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This chapter is from the book

Chapter 1: Persistent Winning and Losing

Many companies perform better than their competitors for short periods of time, but few are able to sustain competitive advantage over a long period.1 Saks, for instance, provided investors with a return of 28 percent in 2003, but its average annual return over 1993 to 2003 was just 3 percent. Similarly, Supervalu’s stock rocketed up 78 percent in 2003, but over 1993 to 2003, it earned just 8 percent per year.

Natural parity is the condition that prevails in most industries. Dow Chemical, Du Pont, and Rohm & Haas, for example, delivered virtually the same average annual return to investors—between 10 and 12 percent—from 1993 to 2003. Kroger’s 14 percent average annual return to investors from 1993 to 2003 was little different from Safeway’s 15 percent.

Dominant winners and losers are rare. Companies that consistently achieve sustained competitive advantage and disadvantage are outliers. Any firm can have a few good years, but for it to continue in its winning ways is difficult.

Hitting the mark means being a dynasty, not just having a few good years. Sustained competitive advantage (SCA) is "long-term profitability" or "above average performance in the long run."2 It is long-term return on invested capital better than your competitors. In contrast, sustained competitive disadvantage (SCD) is long-term return on invested capital that is poorer than your competitors.

From 1992 to 2002, only about 3 percent of the 1,000 largest U.S. corporations consistently and significantly outperformed their industry’s average stock market performance, and about 6 percent did the opposite. Table 1.1 lists companies that meet these criteria. Figure 1.1 shows how an investor would have fared had the investor put money into firms that hit the mark as opposed to those that missed it. (Chapter 2, "Companies That Hit and Missed the Mark," explains in more detail how these companies were chosen.) Surprisingly, the high performers were not regularly cited in popular business books or the media as exemplars. They often operated under the radar, and their stories have not been told until now.

Figure 1.1

Figure 1.1 1992 to 2002 average earnings from investing in big winners as opposed to investing in big losers, assuming an initial investment of $10,000.

Table 1.1 Sustained Competitive Advantage and Disadvantage, 1992 to 20026*

9 Comparisons

18 Companies

5-Year Average Annual Market Return (%)

Sectors

Advantage

Amphenol

34.0

Technology

Disadvantage

LSI Logic

3.4

 

Advantage

SPX

28.8

Manufacturing/appliance

Disadvantage

Snap-On

1.7

 

Advantage

FiServ

31.2

Software

Disadvantage

Parametric

–21.2

 

Advantage

Dreyers

22.4

Food

Disadvantage

Campbell Soup

–2.8

 

Advantage

Forest Labs

58.5

Drugs/chemicals

Disadvantage

IMC Global

–18.7

 

Advantage

Ball

23.9

Manufacturing/industrial

Disadvantage

Goodyear

–11.5

 

Advantage

Brown & Brown

48.7

Financial

Disadvantage

Safeco

–1.0

 

Advantage

Family Dollar

36.1

Retail

Disadvantage

Gap

9.8

 

Advantage

Activision

24.1

Entertainment/toys

Disadvantage

Hasbro

–0.1

 


In this book, I take a close look at these companies. I examine what they did to be big winners and losers. I compare the big winners and big losers and uncover the traits that led to their success and failure.

A Sweet Spot

Winners had four qualities that led to their success. First, they were in a "sweet spot." This is a position that is so unique that they had virtually no competition.3 Winners occupied a space that few other firms occupy. If you are in this position, you are better able to control the classic five industry forces—suppliers, competitors, customers, new entrants, and substitutes—that impact the success of your business.4 If your company is in such a position, it is essentially a category of one, or nearly so. If your company remains as such for a considerable period, it is better able to achieve sustained competitive advantage. It offers customers something rare, hard to imitate, valuable, and nonsubstitutable.5 It gives them something of great value that few other firms provide.

The claim that is sometimes made is that just four good spots are worth occupying. (See Figure 1.2.) A company can be a (i) narrow or (ii) broad cost leader or a (iii) narrow or (iv) broad differentiator. The conventional wisdom has been to occupy one of these four positions and avoid the middle. The middle is supposed to be a compromised position, where a firm’s products or services are in no way distinct.

Figure 1.2

Figure 1.2 Four generic strategies.

But many companies today have moved to the middle. The position they occupy is one of best value. They combine low cost and differentiation in attractive, value-for-the-money packages. Among the examples of firms that have moved in this direction, Toyota is still one of the best. It sells inexpensive cars like the Corolla that don’t have the maintenance and safety problems of earlier U.S. counterparts, such as the Corvair and Pinto. Along with other Japanese manufacturers, Toyota has demonstrated that inexpensive cars can be built well, be safe to drive, and last for years. Similarly IKEA, the Swedish retailer, has a business model based on the concept of "democratic design"—furniture that is not only inexpensive but also attractive, high quality, and extremely functional.

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