Post 19: Accelerating Competitive Advantage

I got to thinking this week about (most of) the Magnificent Seven and what makes them great. A few concepts come to light that challenge mainstream business beliefs. Many of these businesses have been able to drive sustained above market growth for decades AND periodically see accelerating revenue AND margin growth, absolutely crazy considering their sizes. That led to thoughts about what fundamentally makes these companies great. While the reasons differ for each business, it all (in my mind) fundamentally comes down to accelerating competitive advantage: Almost journal style, I’ll unpack what it means for me

Building a successful business is often less about the idea itself and more about execution (process discipline and execution of the roadmap). Key to consider is identifying or happening upon an industry or sector with what I like to call “accelerating competitive advantage”. Companies that thrive carve a unique niche or possess some inherent advantage that allows them to stay ahead of competitors. In fact, they don’t just stay ahead of competitors, they grow their gap relative to competitors. A unique example is a company like Amazon. As its investments in fulfilment (e.g., robotics) pay off, Amazon’s margins increase. As fulfilment speeds up, customers rely on them more, increasing their purchase velocity. As a result, Amazon may grow both faster, and more profitably than smaller, customer oriented e-commerce companies. Understanding accelerating competitive advantages and positioning yourself in a similarly accelerating niche can make all the difference.

Accelerating Competitive Advantage

Businesses should identify sectors with the potential for accelerating competitive advantages. These are often industries where barriers to entry are low today, but the long-term payoff is high. For a micro-scale example, consider entering an underdeveloped niche e.g., becoming the first dentist in a small but growing town can give your business a head start. Over time, as other dentists attempt to enter the market, your early entry and positive reviews fortify your position. Often such small markets cannot support multiple service providers, which may discourage new entrants or force bold competitors to shut down.

It’s not just about being early; it’s about accelerating your competitive advantage once you're in. For example, your unique insights into the town’s development could leave you best positioned to add new seats when the practice has grown sufficiently, providing a further buffer against incumbents. The data-driven insights from the business allow you to make optimized decisions that other competitors are unable to replicate.

Whether through technology, economies of scale, or strong brand loyalty, it’s important to find ways to stay ahead of competition. Flywheel effects, like Amazon's Prime membership, or Fastenal’s deepening relationships with its customers, shows how entrenched competitive advantages can drive sustained accretive growth. Finding the next wave of growth (e.g., AWS and robotics for Amazon) drives successive waves of innovation, further entrenching the competitive advantage.

What this means for you

An absolutely fair question, with a ridiculously simple answer: play in niches which have the potential for accelerating competitive advantages. Said differently, what do you need to believe for your dream scenario to play out. With a little luck, it may!

Keep building!