GoPro and Polaroid have a lot in common. Yet, their respective successes were build on different competitive advantages. Learn how success factors of a business have changed over time as a result of industry transformation and what this means for decision makers and investors.
Identifying a promising company today is one thing. Assessing whether this business will be successful in the future, however is another thing.
Many businesses look attractive today. Pundits, media outlets as well as other prophets are not shy to praise them. Yet, are you sure that five years from now the company will still look attractive? Industry transformation can change the stakes quickly, and even for people who have first-hand industry knowledge it is not always easy to foresee change. In 2000, a Blockbuster Video executive laughed at the offer to buy Netflix at $ 50 million. In 1997 Apple stock traded at $ 17 a share. Back then, Michael Dell was asked what he would do with Apple. He said that he would shut the company down and give the money back to the shareholders. Industries and businesses change over time. This is why industry analysis is more demanding than providing the weather forecast for the Caribbean.
“So that means I should only invest in companies, which are protected through a wide economic moat?”, you ask. Great question, which brings us to the next and crucial point. Investors like to point out economic moats. Yet there is a problem with them. At a certain point of time economic moats may appear to offer long-term protection for a company. In the long run though, even they may be subject to change. Some past moats don’t sustain, and new ones emerge. Many kinds of competitive advantage have become more and more temporary over the past years and barriers to entry have declined, as we will discuss in more detail later. Such developments lead to a constant transformation of industries, which in turn makes predicting change even more important.
Yet, predicting change is among the toughest challenge for decision makers and investors. The development of a business depends on many factors and we don’t have crystal balls.
While we may not be able to develop visionary powers, there are a few ways in which we can enhance our analysis tool belt and our ability to foresee change and successfully master industry transformation.
image credits: Roberto Caucino, Shutterstock