Got Competency?

By Mohamed Mounir - September 22, 2012 | Tickers: AAPL, KO, GOOG, GRPN, WMT | 0 Comments

• Email
• Print

When deciding on an investment, Warren Buffet, considered to be the greatest investor of all time, would always look for what he described as “economic castles protected by unbreachable moats."  These "business moats" he was referring to protect a business from competition by creating barriers that rivals find impossible to overcome allowing the company to withstand any external pressures and helping it to achieve growth year after year. So how do we find a business with a wide moat, well we should assess the business's  core competencies 

A core competency is

• A source of competitive advantage that adds to the consumer's benefit
• Difficult to imitate
• Has applications in a wide variety of markets

Those That Got it

1) Google (NASDAQ: GOOG):  Information Management, Product Performance, Super Fast Speed, Simplicity, and a Great User Experience

Sergey Brin and Larry Page were not impressed with search engines at the time. They were incredibly slow, their results were terrible, and their homepage was horrendous. Even when you typed their names in the search bar they might not have been able to find themselves. They also showed paid advertisements as top search results with no distinction between paid and organic results which was a terrible thing for users.

They came up with Google, a new Search Engine that used the number and relevance of websites linking to the page or "PageRank" to display and rank search results. They also refused to bog their homepage with ads that slowed performance or to misleadingly show advertisements as organic search results. Google later discovered how to make money with Adwords and the rest is history. AdWords helped to solve the age old problem of "I know that half of my advertising is working, but I don't know which half."

Google is ingrained into people's minds as the defacto search engine, so when another tech giant like Microsoft tried to copy Google's search technology and even its characteristics (look at Bing's homepage) their results were mediocre at best.

Google after debuting on the stock Market in 2004 was certainly no Facebook and has returned over 600% to its shareholders ever since the IPO. 

2) Apple (NASDAQ: AAPL): Product development and Engineering

Apple is a company like no other when it comes to developing new products dating back to Apple 1 released in 1984.  Apple's iPhone introduced in 2007 is one of the best selling products in the world and generates Billions of dollars in profits. Apple had also tremendous success with the iPod, Macbooks, and the iPad.

USAF General Norman Shwartz when commenting on the problems faced with the oxygen valves on the F-22 said that "imperfection was part of the business", but he also remarked  "Apple may be the only one that has been successful in engineering near-perfect products." Whoa Maybe Lockheed Martin can learn a thing or two

Apple doesn't have a core competency in manufacturing or assembly and it makes sense for it to outsource these activities to companies like Sharp, Toshiba, FoxConn, and even Samsung its largest competitor who supplies 40% of the components of the iPhone. Apple may outsource all of its manufacturing, but sure enough it has very strong Global Supply Chain Management abilities in place, keeping costs down and timely delivery of output up.

Apple is the World's largest corporation with a Market Cap of over $600 Billion, not bad for a company that almost went Bankrupt in the 90s.

3) Coca-Cola (NYSE: KO): Brand Management and Excellent Pull & Push Marketing  

Coca-Cola has one of the most valuable brands in the world valued at $74.3 Billion

When designing any consumer touch point Coca-Cola follows four principles 1) Bold Simplicity 2) Real authenticity 3) The Power of Red and 4) A "Familiar" yet "Surprising" Nature

Below is  diagram of the Consumer Based Brand Equity Pyramid and a nice example of a fictional space agency:

Brand resonance or the intensity of a customer's psychological bond with the brand is at the top of the Brand Equity Pyramid.  Coca-Cola is most definitely at the top as its brand resonates very strongly with customers and provides Coca-Cola with powerful brand equity

Consider the Launch of  New Coke in 1985. When Coca Cola launched the sweeter tasting New Coke to compete with Pepsi, it created a national uproar due to the strong emotional attachment consumers had to Coca-Cola. There were angry letters, formal protests, and even lawsuit threats to force the retention of "the Real Thing" Coca-Cola quickly returned "Classic Coke" a few weeks later. 

Coca-Cola is one of the oldest companies in the stock market dating back to the 19th century, it is part of the Dow Jones Industrial Average, and is Warren Buffet's largest Investment ever since the late 1980s.

4) Wal-Mart (NYSE: WMT): Inventory Management and Product Breadth

Wal-Mart operates a sales and inventory warehouse that captures data on every item for every customer, every store, every day, and refreshes it every hour. Wal-Mart's excellent Inventory management allows it to have a very low cost structure and be the king of  Every Day Low Pricing (EDLP), charging a constant low price with little or no price promotions on a whole variety of products.

When Jeff Bezos was building his online retailing empire in the late 90s he hired executives from Wal-Mart which was known for its computerized distribution centers. Wal-Mart quickly sued Amazon, accusing it poaching former executives to steal trade secrets. The case was settled out of court with the employees agreeing to restrictions with their new employer.

Wal-Mart has returned over 500,000% since its post IPO low in 1975!!!!! 

And Those That Don't

So when it comes to Groupon (NASDAQ: GRPN) what are the company's core competencies. What does it do better than everyone else? What gives it the edge over the hundreds of clone sites popping up around the world? Now I have never used Groupon, so if anyone thinks there is something special about Groupon that distinguishes it from the rest of the pack (and that pack is pretty big), I would love to hear it.

Going Global?

Recently, Rajen Ruparell, the company's vice president of global sales, stated the company is looking to create more international deals.

OK, for discussion's sake let's assume that Groupon  is interested in creating deals in Egypt. Here in Egypt we don't have Groupon, but we have many clones like it such as this and this and that.

Now, hypothetically speaking if Groupon were to enter the Egyptian market, would it be able to compete with these sites who have the first mover advantage, know the local marketing condition better than Groupon, have special relations with their merchants (of course if the merchants aren't already pissed off from the customers they bring), and some of which have very good financial backing.

I say the chances are slim at best.

If Groupon were to enter the Egyptian Market it would probably try to acquire one of the more established clones and re-brand it as Groupon Egypt such at did in Russia or Japan and other countries, but do you think that going on a string of acquisitions of similar companies at a very early stage of a company's life is sustainable. Have you ever heard of Google having to acquire other internet search companies in the early 2000s. When Barnes & Noble launched its website in 1996 did Jeff Bezos flinch? Was Facebook's growth strategy acquiring Hi5, MySpace or, Feindster in 2007. These companies just arrived on the scenes with game changing propositions and no one was able to compete. That's why they were successful and are worth billions of dollars. 

Combine Groupon's weaknesses with bad management and you got yourself one bad apple.  Not only did management not have the foresight to sell their very tough to scale, impossible to differentiate business to Google, whom I believe was only interested in the company to improve it's search capabilities, for $6 billion dollars when they had the chance, but the company tried to pull a fast one on investors by misreporting their revenues shortly after going public and where stopped in their tracks by the SEC.  

Foolish Bottom line

For Investing success you should always look for businesses with strong core competencies that give it an edge over the competition and a wide business moat such as Coca Cola and Apple and avoid companies that lack core competencies and have no business moats such as I believe is the case with Groupon.

• Email
• Print
• Feedback