In her book, Creating Competitive Advantage, author Jaynie Smith writes: "In my research with middle-market companies, I found only two CEOs out of 1,000 who could clearly name their companies' competitive advantages. The other 99.8 percent could offer only vague, imprecise generalities."
This is bad news because, as Smith notes, "Ignoring [competitive advantages] can be an expensive and even fatal mistake."
If you're a CEO running a company -- whether it's a small start-up or a major Fortune 500 giant -- your success will ultimately boil down to creating and sustaining a competitive advantage that allows you to consistently outpace your competitors. But simply having a competitive advantage may not be terribly useful to you if you don't know what your competitive advantage is and how to make the most of it.
But it's not just CEOs who should be laser-focused on competitive advantage. Some of the most successful long-term investors are those who put emphasis on finding companies with strong competitive moats. Don't take it from me. I recently highlighted the fact that Warren Buffett has said that competitive advantage is "the key to investing."
Motley Fool co-founder David Gardner has a yen for competitive advantage as well, which has helped him pick out market-crushing companies like Amazon.com for the Motley Fool Stock Advisor service early on.
You know when they know
As Foolish investors, we're ready to rock and roll when it comes to digging in and doing research. However, if we're on the same page as Jaynie Smith, then the best companies are those where we don't have to work very hard to figure out what they do best. Why's that? Because companies that know why they're great can find a way to tell us in a clear, concise, obvious way.
Let's take a closer look at a few companies that do that well.
When it comes to competitive advantage, Coca-Cola has it in spades. To be sure, it has tough competitors like PepsiCo
Why? Coca-Cola knows exactly why and it tells investors in the very first paragraph of the very first section of its 2010 10-K filing: "Along with Coca-Cola, which is recognized as the world's most valuable brand, we own and market four of the world's top five nonalcoholic sparkling beverage brands, including Diet Coke, Fanta and Sprite."
Automobile safety products manufacturer Autoliv smacks potential investors in the face with this very powerful single line: "Statistically there were almost two seatbelts and 1.2 airbags from Autoliv in every vehicle produced globally [in 2010]."
Think about that for a moment from the perspective of Autoliv customers General Motors or Ford
With that in mind, if you're an automaker, does it make sense to choose this as your place to try and cut costs and go with the second-place supplier?
Pioneering an entire product category by creating a patented product that represents a big step forward for your industry is another great way to put distance between you and your competition. Case in point: Intuitive's da Vinci surgical system delivers value to its customers that's not easily duplicated. Or, as the company puts it, "By placing computer-enhanced technology between the surgeon and the patient, we believe that the da Vinci Surgical System enables surgeons to deliver higher value minimally invasive surgical procedures to their patients."
A competitive advantage doesn't have to be just one single thing. And when you're ExxonMobil trying to keep a leadership position in the cutthroat global energy industry, your cannon had better have more than one shell. Here's why the company thinks it'll be able to stay one up on its competition: "ExxonMobil, with its resource base, financial strength, disciplined investment approach and technology portfolio, is well-positioned to participate in substantial investments to develop new energy supplies."
The warehouse champ hasn't made it into my portfolio because I've stubbornly thought that the shares are too expensive. But the reason that it's hard for me not to add it to my portfolio, and likely also the reason that investors keep the shares at a lofty valuation, is that the company does what it does exceptionally well and knows it. In what is probably the best competitive advantage summation that I found, Costco wrote in its last 10-K: "We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters."
Though the five companies above are great examples of companies with strong competitive advantages, they are far from the only ones that are well positioned against their competitors. My fellow Fools have picked out -- and bought shares of -- five more companies that they think will maintain their edge and outperform over the long term. You can get a free copy of their special report by clicking here.
Fool contributor Matt Koppenheffer owns shares of Autoliv, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Ford Motor, Coca-Cola, Costco Wholesale, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Ford Motor, General Motors, Autoliv, PepsiCo, Coca-Cola, Costco Wholesale, Intuitive Surgical, and Amazon.com. Motley Fool newsletter services have recommended creating a bear put ladder position in Autoliv and creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.