Have you ever had to decide between investing in two similar companies, but couldn’t decide which one was the better investment? After studying the fundamentals, financials, and quality of management of each company, there is still not a clear choice. If you’ve ever found yourself in this situation, you’re not alone. Many people face this challenge. So how do you ultimately choose which company to invest in?

To make the decision clearer, it is important to research not only the fundamentals and characteristics of individual companies, but also to study the competitive landscape that surrounds them. Taking the time to understand how a company is competitively positioned can give you an edge over those who overlook this important facet of investment research. Simply put, companies that have sustainably superior capabilities, products, or resources compared to their competitors can generally be considered to have a competitive advantage.

Now that we have a basic understanding of the concept, let’s briefly go over some of the types of things that can give a company a sustainable competitive advantage.

The Low Cost Advantage

One type of competitive advantage is the low cost advantage. Wal-Mart is a great example of this. Wal-Mart can buy inventory in such large quantities that it can get the products it sells cheaper than any other retailers, and therefore can sell its products for the lowest price compared to its competitors.

It will be extremely difficult for another retailer to copy Wal-mart’s strategy and try to sell products at a lower price. This is because Wal-Mart can get a lower price because it buys so much product from its suppliers. In fact, because of its purchasing power, Wal-Mart is notorious for being able to not only pay the lowest price for its merchandise, but also dictate other product requirements to its suppliers.

The Product or Technology Advantage

A company can also have a competitive advantage based on technology or products. This usually happens when the company is able to develop a patent or develop a technology that is extremely difficult to imitate. Let’s say, for example, that in the future a drug company develops and patents a drug that cures cancer. You can see how this company would have a significant competitive advantage over other companies that sell cancer treatments that don’t actually cure cancer.

The Competency Advantage

Another way that a company can gain a competitive advantage is to develop a unique competency, like the ability to generate good managers or a unique process efficiency that is difficult to imitate. A good example of this is GE, who has a management training program that has a track record of producing high-quality managers who have in turn helped to consistently produce profits over time for the company.

In Conclusion

So, now you understand some of the major types of competitive advantages. But why is it important to understand competitive advantage anyway? It’s simple – companies that have a sustainable competitive advantage are generally much more likely to be profitable over time than those who don’t. Therefore, learning how to identify and invest in companies with a sustainable competitive advantage can help you to become a more successful investor.

Dan Cappel is an experienced investor and is dedicated to helping other investors learn how to research stocks. You can use the free tools he offers at his website, http://www.smartstockresearch.com, to create and personalize your very own investing strategy. No one else offers tools like this online. Sign up today for a FREE account and begin researching stocks like the pros!

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