This is the third part ‘Competition Sutra’ series. This series is an attempt to distill the core learnings of Bruce Greenwald’s seminal book “Competition Demystified”
Sources of Supply Advantages- Proprietary Technology or Lower Cost Structure
In the long run, everything is a toaster
Lower cost structures can flow either because of lower input costs or more possibly because of proprietary technology.
Proprietary Technology for starters can be either product patent or process patent. In the modern day, post TRIPS signing in 2005 by India, process patent has been phased away. However product patent still exists and is used very thoroughly in pharmaceutical business.
The possibilities of patent infringement can make cost of entry for a competitor extraordinarily high. As a result, competitors shy away.
But there can still exist “process patents” in the modern world- albeit in a different form.
In industries which have a complicated process cycle, being long time in business can facilitate learning and experience of the best practices of production. This prevents any new competitor from replicating it easily.
However both of these sources can be rendered moot by a very fast changing technological landscape. If the landscape undergoes shifts every 10-15 years, then any such advantage withers away.
Additionally, until unless innovations (product or process) are created in house it poses no significant barrier to entry. Any third party creation of such innovations lead to creation of entry of barriers for the third party and not the firms to which it serves.
Because the outsiders can always supply the innovations to the incumbent as well as the competitor. Think of Warren Buffet’s decision to shut down Berkshire’s textile business when a consultant came knocking in with technology upgrades.
Similarly, access to cheap capital and cheap labour are largely illusory advantages. Subsidy cant make a bad business look good, it only hides the cost of capital. Similarly, cheap labour leads to eventually costlier labour in this world of globalization.
But can we ask, if fast changing technological landscape leads to withering away of advantages, can we conclude just the opposite for slow changing landscapes?
In such a case, the competitors will eventually learn the nitty gritties of running the business and thus catch up with the incumbents. It is evident in the radio business. Radio business was initially a very high profit business due to very few competitors knowing the manufacturing process. But in the long run, radio lost the mystery and turned out to have the same esoteric nature as a toaster.
In the long run, everything is a toaster.