Some investors may confuse differentiation products with a durable competitive advantage. They assume that the production and fixed costs could be distributed among different kinds of products, thus could sell their product lower than competitors. Well, is it true? Starting from this, we are going to develop some competitive advantage analysis of differentiation.
Competitive Advantage analysis of differentiation is our misunderstanding moat episode, another example is https://investingdeck.com/intangible-asset-analysis-misunderstanding-moat/
In This Issue
Samsung and Xiaomi
Competitive Advantage Analysis of Product Differentiation.
Under the intense competition, large smartphone vendors like Samsung embrace economies of scope strategy. That is, to offer specific products for specific customers (read: price range). The Korean Giant smartphone varies from Galaxy J series cost around $100 to more than $2000 price tag for Galaxy ultra, the most expensive is Galaxy Fold series with cost more than $4,000. Samsung has every product for every customer.
The idea is simple, to catch more buyers in every economic and interest layer, pursue quantity, and hopefully spread the cost on that diversified product. It is similar to economies of scale but with a more specific target. Investopedia calls it economies of scope.
Samsung’s strategy footprint was also adopted by rather giant smartphones Xiaomi. The Chinese have a wide range of products from the Redmi A series to Mi 11T Pro, it also develops and sells Mi Mix – a mirror-like smartphone, beauty. Google it for the prices.
Unfortunately, new entrants keep coming and pose serious challenges for the incumbent. Having a massive variety of products doesn’t discourage challengers to come and come. A newcomer like Infinix, Techno, Itel, Pipo flood the heavily saturated market with also has old power that refuses to extinct like Nokia and Motorola,
Differentiating simply does not solve the core problem in the smartphone battlefield. Why? Because making a smartphone is not difficult as making medicine or vaccine. Just buy a processor or SOC from Qualcomm, Mediatek or Dimensity, or even Helio. Assemble it, develop some UI or skins. Then, boom, you get your smartphone. Yeah, not that simple but you get the point. No legal barrier, everything is just like an open book (Maybe due to the open-source nature of Android)
Same with a laptop, manufacturers like Dell, HP, Lenovo, could collect material, components from motherboard maker MSI, ASUS, Samsung, memories from Seagate, Kingston, then integrate them into one product. Simply too many players, too low barrier. The auto industry falls in the same trap.
Human Could Try: Branding, Cadillac, Xiaomi
Competitive Advantage Analysis of Branding.
Intense competition (read: low barrier to entry) somehow force every player within the industry. Besides offering customers a wide range of products – aka differentiation – some vendors try to become stand out from the crowd by associating them with some characteristics or properties. Throwback in the glorious days of US auto, Cadillac is mentioned as the most durable car in the country. At that time, the US was more associated as an industrial hub rather than a tech or financial hub like now.
But it turns out like a tiny wall against a tsunami. Car outside the US flooding the nation, steal market share. Some of you may be never heard about Cadillac and its well-known durability – some of us may be more familiar with Ferrari or Lamborghini right now as the elite, racing supercar. Also, some people may more recognize Tesla – a supercomputer that takes the form of a beautiful vehicle – than any other brand.
What do we say? We’re just saying that branding effort from the company isn’t enough.
And it is not only about cars.
No matter Xiaomi associate itself with the best money-to-value product, some new player like Infinix keep eroding its market share. The laptop and computer industry experience the same circumstances, no matter good is Dell, HP, Lenovo, they can’t prevent the flood from newcomers.
It is battle royal.
We say once again, branding isn’t enough. Never.
The Answer for Low Barrier
Competitive Advantage Analysis of Efficiency
Now we have learned that differentiation and even branding give an only elusive competitive advantage. Both of those efforts give no satisfactory answer on fierce competition. From investing perspective, we encourage investors not to put their big chunk in this kind of business.
Still, it doesn’t mean that all companies we mention have no chance to retain its customer. Some of them embrace specific strategies to combat harsh circumstances.
The Answer of Low Barrier: Ecosystem Control
Competitive Advantage Analysis of Differentiation for Apple.
Apple has a good answer for fierce competition: ecosystem control that could lock customers within. As everyone knows, Apple products compete in smartphone and tab – cruel competition, laptop – also cruel competition. Apple iPhone uses its own OS that is empowered by its in-house chip, making UI smooth and at the same time, preventing customers use other brands for Apple devices.
As you can see here, Apple needs no worry to keep raising its iPhone price tag to maintain its profitability.
Investors often confuse certain advantage characteristics with an economic moat. One of them is the company’s capability to offer more diversified products for the customer than competitors. As long as it does not prevent newcomers to enter the game and steal the market share, it can be treated as a durable competitive advantage.