The Competitive Advantage / Business FranchiseThere are some businesses that are better than others. Call it a business franchise or a competitive advantage if you will, but some firms will plainly be more profitable than others. Their economics are better. A great example of this comes from Richard Branson, long before he became a Sir. When asked how to become a millionaire, he replied, 'That's easy. First you become a billionaire and then you buy an airline.' To the best knowledge of your author, there has been only one consistently profitable airline for the last fifteen years or so, Quantas in Australia. Regular news stories about the woes of British Airways, Alitalia and almost every American carrier you care to name reinforce the point. There are other businesses which suffer in similar ways. Almost every textile company in the western world has had huge problems. They may have had the finest management in the world, but they were simply in the wrong industry. On the other hand, most big oil, gas, tobacco firms etc have done superbly. Every business has it's ups and downs and cyclical movements, but the more successful firms prosper. Former state utilities such as water, gas and electricity also do well. Whilst they are regulated, they generally have, or had, some sort of monopoly. This always helps profits! Legendary investor Philip Fisher first wrote of the business franchise. He viewed it as a protective moat which would protect it from competitors. It is an opinion which has been proven by Warren Buffett over decades of outperformance. Buffett has specifically targetted companies with a competitive advantage. These include Disney, Coca Cola, Gillette and many more. You could say that it has worked out well enough for him. There are factors to look out for which will suggest that a firm may have a business franchise. For example: Patents or copyrights Legal monopolies High class brand names Industry dominance or an established position of strength in a niche market A great example would be a toll bridge. If you want to pass, you have to pay and there is usually very little option for the traveller. This is truly a competitive advantage! There are very few in private hands, but Buffett has owned part of one in America for years. Do you want to improve your trading skills? Click here to watch a free online
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