It is interesting how the source of competitive advantage for consumer facing companies has evolved over the decades. Well, what is durable competitive advantage? In short, competitive advantage is a trait of a company that enables it to sustain and grow the business, have pricing power, and makes it difficult for customers to switch to a competitor or substitute product or service.
Industrial Era
In the industrial era, companies that owned the means of production or built a large distribution network had the competitive advantage over others. It took a lot of up front capital to build those factories and sustain a large distribution system. Once a company had the dominant position, for any new company it was a big hurdle in terms of amount of capital and time needed to replicate the infrastructure to compete with the existing player. Large manufacturers like Ford and GM reaped the benefit of owning the means of production. Legendary investors of that era, e.g., Benjamin Graham, focused more on what assets the firm owns rather than the earning power of the firm.
Mass Marketing (TV and Radio) Era
Around the 60s, the popularity of television programming and advertising gave rise to brand as a source of competitive advantage. If you had a good product, with the use of television and radio advertising, it became possible to reach a large number of potential customers, which was difficult in the pre-TV era. Once the brand is established, it was difficult for any new firm to compete with the entrenched players with significant brand awareness and goodwill in the mind of the customers. Companies like P&G used this power of brand to build enormous product empires. However, just like in the industrial era, building a formidable brand still required a large amount of capital to advertise on TV and build a large distribution network. Though Warren Buffett is the most famous disciple of Benjamin Graham, Buffett seems to understand the value of brand as competitive advantage which was not a factor in Graham’s investments. Buffett’s investments in Coca Cola and American Express seems to be partly driven by the power of those brands (and, of course, the cheap price at which he was able to buy those stocks.)
Internet Era
In addition to the usual disintermediation of typical physical stores, the internet era has created a new source of competitive advantage for companies from network effect. Communication is no longer one way (from the advertisers in TV to consumers watching TV). On internet, people want to hang around the places where lot of other people hang around. Whether its reading product reviews, reviewing products and services, just social networking for fun, or watching videos, any company that builds a successful network of users attains a level of stickiness to their user base and this stickiness increases as the network grows. It is no longer only about how the company sends the message to the consumers via advertising; what consumers/users of your product say to each other about your firm, product, or service has become an important factor in the success of your company.
So, the concept of durable competitive advantage seems like an oxymoron for the new companies in the internet era. Competitive advantage exists in a context of the industry dynamics and business-consumer framework which changes over time. Unless the company operates in a consumer staples industry (e.g., cereals, toothpaste, etc), competitive advantage is an ever evolving phenomenon.