Indefensible (Competitive Position)
I’m fairly certain that just about every commercial diligence assignment conducted is going to include measurement of the asset's commercial strength relative to customer needs and expectations, and relative to perceptions of competitors and alternatives.
But there is a significant difference between measuring how an asset is currently performing, and truly understanding what underlies its prospect for continued, or improved, out-performance.
To that end, three questions are key:
- “What defensible advantage(s) does the company hold?”
- What enables the company to uniquely hold onto this advantage (so as new owners you can help protect it)?"
- “When these elements are stacked up, how formidable is the overall advantage?”
These are obvious questions that you would expect your diligence to answer.
But in our experience, there is a vast difference between taking a cursory look at these topics (while also addressing the long list of other items on the diligence agenda), and really pushing hard against these issues and the associated strategic analysis.
These are honestly tough questions to answer definitively – some of the hardest. The answer is always nuanced, and often more so qualitative than quantitative. But getting at this issue sooner rather than later can provide you with a valid and true “reason to believe” in the wisdom and skillset of management and/or in the value development plan.
There was a great article on Tesla that identified and summarized a collection of advantages that Tesla had put together at the time. In the article, the analyst argues it’s the sum collection of these capabilities, even more so than any single advantage, that provides the company with a strong “defensible position” in the electric automotive space today. Sadly, I’ve noticed over the past 10 years that focus on these three questions has declined in direct proportion to increased interest in growth assets and playing in growth markets - and it should not have.
Understanding the defensible competitive advantage can make you a wiser and more effective owner. The ultimate answers will say a lot about exit multiples and contribution to earnings, and they can inform your value creation plan in important and distinctive forms. This is true whether the asset is attached to underlying secular demand growth, or for an asset that is outperforming in a low growth environment.
And in cases where there is no known current advantage, all is not lost if the value creation plan includes developing genuine and valued advantages.
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