Throughout the world business history, some enterprises have experienced ups and downs for a long time, but more enterprises are like a flash in the pan. Why can the former stand through the industry cycle? Warren Buffett’s answer is: a great enterprise must have a great moat.
In his 2007 letter to shareholders, There is such a wonderful exposition about the moat: “A truly great enterprise must have a strong and lasting ‘moat’ to protect the enterprise from enjoying high return on investment. The capitalist economic mechanism itself doomed those enterprises’ castles’ that can earn high return on investment to be attacked by competitors again and again. If an enterprise wants to continue to succeed, it must have competition that frightens its competitors The fortress is crucial… There are too many enterprises that are as brilliant as the ‘Roman Torch’, but their moat turns out to be just a decoration. “
In the classic book of Columbia Business School, Professor Bruce Buffett takes a deep look at the value of the city as a source of competition, and helps readers form a useful view of the city like moat of Columbia Business School.
the real source of competitive advantage
As the pioneer of competitive advantage theory, Michael Porter proposed the “five forces” model. He believes that there are five forces that determine the scale and degree of competition in the industry, namely the competitiveness of existing competitors, the threat of potential entrants, the substitution ability of substitutes, the bargaining power of suppliers and the bargaining power of buyers. At the same time, Porter believes that the competitive advantage of enterprises has two basic forms: low cost and differentiation. “The significance of an enterprise’s advantages or disadvantages ultimately depends on the extent to which the enterprise makes a difference in relative cost and differentiation… Extraordinary profitability can only come from low cost and high pricing in differentiation logically.”
Green Beijing Worldia Diamond Tools Co.Ltd(688028) critically inherits Porter’s theory in competitive advantage. On the one hand, green Beijing Worldia Diamond Tools Co.Ltd(688028) believes that there are only three real competitive advantages – supply side competitive advantage (competitive cost), demand side competitive advantage (customer locking) and economies of scale based on customer locking. On the other hand, green Beijing Worldia Diamond Tools Co.Ltd(688028) believes that the threat of potential entrants in the “Porter five forces” is very important. The level of entry barriers directly determines the competition degree and competition pattern of the industry. In the industry without entry barriers, the value promotion of incumbent enterprises can only hope to improve operation efficiency.
For a long time, both differentiation and the brand formed by differentiation have been regarded by investors as the source of competitive advantage. Even fledgling business students have been warned that the first step in developing any reliable strategy is to differentiate their products from their competitors. From the perspective of the evolution of China’s consumer service industry, with the basic popularization of mandatory consumption and the end of channel sinking, as an efficient retail and distribution model, the growth rate of Gmv of e-commerce also began to slow down. Coupled with the participation of “shaking up” and other large flow platforms, the logic of the whole industry began to change from the past demand growth, channel sinking and efficiency improvement, Gradually turn to the innovation and differentiation of product supply.
Even so, Green’s Beijing Worldia Diamond Tools Co.Ltd(688028) division still touches the essence of business better. Because what really plays a decisive role in enterprise competition is the locking of enterprise products and services to customers and the resulting entry barriers, rather than differentiation itself. Enterprises lacking entry barriers are difficult to get rid of the endless high competition through differentiation, and can only be forced into a strange circle of competition, differentiation, re competition and re differentiation. Just like many enterprises in the fields of automobile, household appliances, retail, aviation, catering and so on, they continue to launch so-called differentiated products and services to seize the market, but the industry pattern of long-term scuffle has explained everything.
dilemma of high-end ready-made tea:
a bright “Roman flame”
The most difficult part of enterprise strategy is how to establish a unique competitive advantage in the uncertainty of long-term competition; In essence, the “moat” theory is to judge whether enterprises have barriers that can cross cyclical fluctuations, so as to bring relatively certain return on investment. Therefore, when more and more capital began to rush into the new consumption track and generously valued many well-known online Red brands, we should know that new consumption that seems promising is not always a good business with great investment attraction – high-end ready-made tea is a typical case.
From 2015 to 2020, the total scale of China’s current tea market increased from 42.2 billion yuan to 113.6 billion yuan, with a compound growth rate of 21.9%. Among them, the growth rate of high-end ready-made tea has exceeded the average market level, and the compound growth rate of sales scale in the same period is as high as 75.8%, far exceeding the compound growth rate of 21.2% of middle-end ready-made tea and 16.4% of low-end ready-made tea.
However, with high growth rate of high-end ready-made tea, its entry barrier is not a deep trench. From the perspective of production process, the current tea is simpler and easier to learn than traditional catering. There is no technical threshold for the processing ratio of raw materials and the packaging process of finished products. The whole industry has a competitive advantage, only brand strength. However, as mentioned above, the brand itself cannot form a moat. With the highly developed social media in the Internet era and the acceleration of brand communication, the entry threshold of new entrants has been greatly weakened.
Although incumbent enterprises actively launch new products and try to create product differentiation, they have to admit that consumers have no obvious psychological distinction between high-end on-site tea drinks with a unit price of more than 20 yuan and middle-end on-site tea drinks with a unit price of 15-20 yuan. Moreover, with the younger generation of consumers becoming more and more difficult to please, the innovation of high-end ready-made tea is becoming more and more difficult, and the life cycle of popular products is becoming shorter and shorter. Even if the incumbent enterprises successfully launch popular new products and advertise themselves differently through marketing and other means, the low technical threshold and the prevalent industry practice of plagiarism will eventually lead to the fate of homogenization.
Unfortunately, when the whole industry falls into extreme “Involution” in order to meet the picky demands of consumers, incumbent enterprises still do not have the advantage of customer locking. In competitive advantage, there are three reasons for customer locking – habit, switching cost and search cost. However, the low addiction of existing tea is not enough to ensure re purchase, and the convertible cost and search cost are almost zero, which makes it difficult for consumers who like the new and hate the old to maintain their loyalty to a brand. When consumers swing back and forth among multiple brands and think about which brand to “lucky” today, the balance of discourse power has tilted.
At this time, Green’s advice may be particularly meaningful: “when there is no competitive advantage in the market, it is best for enterprises to forget their dreams related to strategy and vision and strive to operate as efficiently as possible.” However, in an industry without entry barriers, efficient enterprises can only obtain a normal return on invested capital at most.
