Warren Buffett on What Makes a Great Business

By Victor Cheng

When my wife attended Harvard Business School many years ago, Warren Buffett came on campus to speak to the students.

Although I probably wasn’t supposed to do this, I snuck into the auditorium to hear him speak. I wasn’t going to miss this for the world.

Now, here’s one really big lesson I learned that day.

If you ask Warren Buffet what he looks for in a business before he buys or invests in it, he routinely says: “A business with a durable competitive advantage that even a moron could run … because sooner or later a moron will end up running it.”

So everyone has heard of this competitive advantage thing. Everyone knows you’re supposed to have one. And it is precisely a competitive advantage that’s required if you want to crush your competition for the simple reason that it’s impossible to dominate without one.

You don’t expect to win a sprinting competition, unless you have a speed advantage.

You don’t expect to win a marathon, unless you have an endurance advantage.

You don’t expect to win a chess competition, unless you have a skill advantage.

To win, you need SOME kind of competitive advantage.

So clearly, this competitive advantage thing is important. We all know it. It’s common sense.

But knowing and doing are two entirely different things. Knowing is easy. Getting what you know done in the real world — well, that’s an entirely different matter.

So despite the fact that having a competitive advantage is important, I find so few businesses actually have an intentionally cultivated competitive advantage.

Those that do often take it for granted and aren’t even aware of the advantage.

Finally, even among those companies that are consciously aware of their competitive advantage, most never fully exploit it.

In short, possessing and then exploiting a competitive advantage is easily one of the most underutilized opportunities in many businesses of all sizes.

Let me give you an example.

I dropped off my car at the mechanic today, and in talking to the mechanics I asked them what kind of cars they personally like and drive. Their answers were: Toyotas and Subarus.

According to the guy I spoke to, they are very reliable. And because they are so reliable, they are easy and cheap to maintain. I guess from a mechanic’s standpoint, a cool car that doesn’t actually drive isn’t as good as one that’s bulletproof reliable.

Quite coincidentally, while waiting for the main guy to get off the phone, I was flipping through this week’s copy of The Week — one of my all-time favorite magazines. (It’s like cliff notes of 150 different newspapers across the world. Everything you need to know globally, in 30 minutes).

I saw an advertisement from Toyota for something new they are promoting called “Toyota Care.”

Basically when you buy a new Toyota, in addition to the usual warranties, Toyota will pay for ALL normal maintenance costs and 24-hour roadside service — for two years.

This is very smart for several reasons.

Most automakers are obsessed with selling CARS. But guess what? Consumers don’t really care about cars, we care about TRANSPORTATION … getting from point A to point B is the primary goal. How you get there is secondary, at least for most people.

Toyota has figured this out. They are basically selling you two years of extremely worry-free transportation … and oh yeah, to get it you gotta buy a Toyota car.

Toyota is selling the outcome, while others are selling the product.

The other reason this is smart for Toyota is because, factually speaking, Toyota cars do have fewer breakdowns than cars from others manufacturers (recent accelerator recalls aside).

Because of this competitive advantage, when Toyota offers free 24-hour roadside service, what does that actually cost Toyota?

Not much.

Certainly not as much compared to a manufacturer like Jaguar or Saab that routinely have the most problems of any manufacturer.

Toyota cars don’t break down that much, especially in the first two years, especially if you do the proactive maintenance on time — and who wouldn’t under this program, since it’s basically free?

So Toyota has taken a competitive advantage (reliable cars) and exploited it (two years free maintenance and roadside service). Others can copy the promotion, but can’t replicate the underlying profitable economics.

It reminds me of Domino’s Pizza in its heyday. The competitive advantage Domino’s had in 1973 was a network of 80 pizza delivery locations that were one or two stop lights closer to customers.

Domino’s exploited the structural difference in its company (versus its competitors) by offering “Hot Fresh Pizza Delivered to Your Door in 30 Minutes or Less Guaranteed … or It’s Free!”

AFTER Dominos exploited their competitive advantage, they skyrocketed to 1,500 locations in the same time it took to build the first 80. The founder of Domino’s then sold the whole company for $1 billion.

A competitive advantage is nice to have, but it doesn’t pay that well until you fully exploit it.

With that in mind, I have two questions for you today.

1) What is your company’s unique advantage in your marketplace?

2) Look at every product, every service, and every market segment you serve and explain what tangible, concrete and completely obvious customer benefit does your competitive advantage enable?

Toyota’s reliability edge enables selling two years of worry-free transportation.

Domino’s location proximity advantages enable 30-minute delivery guarantees.

What is YOUR company’s advantage, and what monster benefit does it enable for YOUR customers?

By the way, these are the kinds of provocative questions (and ultimately answers) that come up in the Extreme Market Differentiation workshops I lead for clients.

As a rule of thumb, if you have difficulty answering that last question, it’s possible your competitive advantage is being delivered to a market segment that doesn’t value it.

It often pays to consider going to market in a different way … in a way that plays to your company’s competitive advantage, and targets customers so that edge provides meaningful value.

In short, stop fighting wars you can’t win.

Conserve your resources to fight what I call the “winnable war” — one where your competitive advantage can be fully exploited by you and appreciated by your customers.

If that’s not what’s happening right now in your company, why not?

If it IS happening in your company, are you totally maxing out the opportunity? Are you taking a moderate level of differentiation, and making it an extreme point of differentiation? One that’s blatantly obvious to your market?

That’s my thought of the day …

Victor Cheng is a strategic advisor to CEOs of Inc 500 caliber companies. He has been featured as a business expert by the Fox Business Television Network, MSNBC, Time magazine, The Wall Street Journal, The Harvard Business Review, Fortune Small Business, SmartMoney, Forbes, Inc., and Entrepreneur magazine. Victor is a former McKinsey & Company consultant and has been a senior executive in several publicly owned technology companies. He’s a graduate of Stanford University with a degree in quantitative economics and is the author of four books, including The Recession-Proof Business: Lessons from the Greatest Recession Success Stories of All Time and Extreme Revenue Growth: Startup Secrets to Growing your Sales from $1 Million to $25 Million in Any Industry. Please visit Victor at his website.
Originally published: Aug 3, 2013

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