Factors Affecting Competitive Advantage
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Factors Affecting Competitive Advantage

How to identify the characteristics of best company? What are the factors that affecting competitive advantages of a company?

Hi everyone, welcome to Phase # 4 - Understand the "People behind a company, and why it is crucially important?"

Congratulations for making it half way through the lessons. In this lesson, we are going to discuss about factors affecting competitive advantage of company, characteristics of good managers or signs of good manager, level 5 leadership's quality, level 5 leadership and characteristics.

If You Don’t Know Jewelry, Know Your Jeweler

"...when I buy a business, I am usually buying the manager with them, because I don't know how to run the business. So when someone comes along that wants to sell their business, I have to look at them in the eye and I have to decide whether they love the money or love the business. It ’ s okay to love the money, but they have to love the business." — Warren Buffett

Factors Affecting Competitive Advantage of Company

Brand! (some call it "moat")

Then, what decides "Brand"? The answer is quite straight forward - Level 5 Leaders (by Jim Collins)

Let's take a look at how factors that decide the BRAND of a company.

Level-5 Leadership = Humility + Will -- Level 5 leaders are a study in duality: modest and willful, humble and fearless. In investment term, a level-5 leaders, are those leaders that never like to show off his/her wealth for personal's desires. They are highly hardworking and capable but always bow low. Never sacrifice company's benefits for his/her own good. Highly courage and used to make boldest decisions...but petty in smallest details.

Never lose faith -- Always stay focused towards his/her wildest dream. No matter how many times he/she failed.

Simplicity -- They used to keep "things" simple. For instant, a level-5 leader possesses the ability of simplifying complicated and confusing factors into KEY factors that weigh the most in leading the company from good to great.

Lead by example -- They "walk their talks" and persist self-discipline.

Rational -- Level-5 leaders are rational.

High integrity -- They are highly candid with shareholders and DARE to admit their mistakes. Be fearful when a manager is trumpeting his/her so-called "visions", even though there's NOTHING been done or not even an action is being taken.

Never follow the crowd -- Even under tremendous pressure (from their competitors), a great management leader would always know what he's/she's doing.

Signs of Good Manager

What's the signs of good manager?

If you have come across the book "The Warren Buffett Way" by R.G Hagstrom, there are only THREE signs.

  1. Is the manager or management rational?
  2. Is the manager or management candid with shareholders?
  3. Does the manager or the management resist the institutional imperative or follow the herd?

Rational - A rational manager is able to allocate the capital, cash flow and/or retained earnings to increase the shareholders' value.

Candid - A good manager will report their companies’ financial performance fully and genuinely, admit mistakes and candid with shareholders. Hence, the managers are able to communicate the performance of their company without hiding behind Generally Accepted Accounting Principles (GAAP).

Resist - What is behind the institutional imperative that drives so many businesses? Human nature. Most managers are unwilling to look foolish and expose their company to an embarrassing quarterly loss when other “lemming” companies are still able to produce quarterly gains, even though they assuredly are heading into the sea. Shifting direction is never easy. It is often easier to follow other companies down the same path toward failure than to alter the direction of the company. [Source: The Warren Buffett Way]

Level 5 Leadership and Characteristics

"You can accomplish anything in life, provided that you do not mind who gets the credit." - Harry S. Truman

  1. A Compelling Modesty - Level-5 leaders talk about the company and the contributions of other executives as long as we'd like but would deflect discussion about their own contributions.
  2. (Level-5 Leaders) ...do what must be done - It is very important to grasp that Level 5 leadership is not just about humility and modesty. It is equally about brutal resolve, an almost detached determination to do whatever needs to be done to make the company great.
  3. Level 5 leaders are a study in duality - modest and willful, humble and fearless. Never let his ego get in the way of his primary ambition for the larger cause of an enduring great nation.
  4. Ambition for the Company - Setting Up Successors for Success
  5. The Window and the Mirror - A level-5 leader look out the window to apportion credit to factors outside themselves when things go well. At the same time, they look in the mirror to apportion responsibility, never blaming bad luck when things go poorly.

Conclusion

In this session of sharing, we have learned that:

  • 7-Factors that affecting competitive advantage of a great company
  • 3-Signs of good manager
  • 5-characteristics of level-5 leadership

All the above (three) keys are the ultimate factors which a value investor should always bear in mind and look for. Without any one of the above keys, a fair company with great discounted market price is NOT worth to invest. Vice versa, a GREAT company which consist of all the key factors above is worth to invest even with a fair price.

Hope you guys enjoying this article, and...

[Stay tuned to my next phase of training...(Phase # 5) – Practice made perfect. Let’s take actions! ]

If you ever need any feedback or support regarding with the investing know-how and brainstorming discussion, I would be more than happy to connect. Simply leave your comments below and make sure you visit my site regularly as I am always updating it with lots of "A-ha" ideas and information that I come across that I know you will find interesting.

Cheers!

Posted by Mike.


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