Competitive Advantage Analysis
Determining the Existence of Competitive Advantage:
Market Share/Stability of Relative Market Position among Companies: Each player in the market can relatively maintain its market share.
High Capital/Profitability of Companies in the Segment: After-tax returns of 15-25% usually indicate the presence of competitive advantage, while after-tax returns of only 6-8% typically indicate a lack of competitive advantage.
Identifying the Sources of Competitive Advantage: Competitive advantage exhibits localization characteristics in both geographic location and product structure. Even the best-operated companies face technological and managerial competition (new competitors can acquire the same talent to compete with existing companies). Real competitive advantage stems from the interaction of one or more of the following types of competitive advantage:
Supply-side: Cost advantage
Experience is a major source of cost reduction in complex industries.
Cost advantage is related to the pace of technological change, and its lifespan is shorter in rapidly changing fields.
Demand-side: User stickiness triggered by habits, switching costs, etc., rather than product differentiation/branding.
Product differentiation is often overvalued, as evidenced by luxury car brands like Mercedes and Cadillac, whose products are favored by world leaders but still have average returns due to the absence of market barriers.
While consumer behavior related to brands may bring certain advantages, the brand itself is not a form of competitive advantage.
Habits can be classified based on different lifecycles: some may span generations (e.g., Heinz), some may last for most of a person's lifetime (e.g., Coca-Cola), and some may only persist for a period of time.
Economies of scale
It does not depend on the absolute size of the company but rather the scale difference between it and its competitors (in terms of market share, factory investments, or any area where fixed costs remain constant).
Most scale-based competitive advantages exist in local, segmented markets. The best approach is to establish dominance in the local market and expand outward into peripheral areas (e.g., Walmart).
If new entrants have equal access to customers, they can reach the scale of existing players. Therefore, to leverage economies of scale as a competitive advantage, it needs to be combined with user stickiness.
This advantage must be maintained by any means necessary because an increase in market share by competitors reduces a company's advantage. For example, if competitors add new features to their products, the company should quickly incorporate the same features.
Market growth is generally not favorable for scale-based competitive advantages since with market growth, fixed costs remain fixed, and the percentage of variable costs in total costs increases, reducing barriers to entry for competitors. Moreover, continuous market growth means the growth of new users without user stickiness, providing a scale foundation for competitors.
If an industry has high returns but none of the above competitive advantages exist, it is likely that favorable government intervention (licenses, subsidies, regulations, etc.) exists. If none of the above are present, market share and returns are likely to be only temporary or due to highly skilled management, which can be replicated by highly focused competitors.
Case Study: TravelSky Technology Limited (696.HK)
TravelSky Technology is a leading provider of information technology solutions for the Chinese aviation industry. In simple terms, TravelSky develops and maintains systems that enable passengers to book seats, purchase tickets, and board flights for Chinese airlines. Except for a few low-cost carriers, all Chinese airlines use TravelSky's software, giving it a market share of 95%. Its solutions are closely integrated with the operations of various airlines. TravelSky's solutions include reservation, passenger check-in, ticket allocation, and accounting systems. Each time a passenger books a flight with a Chinese airline, TravelSky earns RMB 5 for each domestic flight and up to $5 for each international flight. As the number of passengers for Chinese airlines increases, TravelSky's revenue and profits also grow.
Additionally, TravelSky is the only provider that offers integrated hardware and software solutions to airports and airlines in China. With the development of "smart airports" being a key focus area in China's 14th Five-Year Plan and China's plans to increase the number of airports from 238 in 2019 to 450 by 2035, this presents another long-term growth opportunity for TravelSky. Furthermore, TravelSky's business requires minimal additional capital to grow, as it does not need to invest in additional assets or sales. China has also expressed its long-term goal of becoming an aviation powerhouse and is actively strengthening airport and fleet construction, which will benefit TravelSky in the long run.
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