If we select a random CEO or CFO from around the globe, there is a high probability that we will hear a statement mentioning competitive advantages. However, great gurus such as Charlie Munger (Trades, Portfolio), Bruce Greenwald and Warren Buffett (Trades, Portfolio) have laid out quick and simple ways to identify true competitive advantages, which eliminates the vast majority of what companies claim to have.
In his book Competition Demystified, Bruce Greenwald mentions the following: "There are really only a few types of genuine competitive advantages. Competitive advantages may be due to superior production technology and/or privileged access to resources (supply advantages). They may be due to customer preference (demand advantages), or they may be combinations of economies of scale with some level of customer preference (the interaction of supply-and-demand advantages) Measured by potency and durability, production advantages are the weakest barrier to entry; economies of scale, when combined with some customer captivity, are the strongest."
"In addition, there are also advantages emanating from governmental interventions, such as licenses, tariffs and quotas, authorized monopolies, patents, direct subsidies, and various kinds of regulation."
Warren Buffett (Trades, Portfolio), in his 1991 letter to Shareholders, laid out the principles of franchise value, or in other words, a business castle protected by a moat.
"An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or
