By: Gerrit Smit
Some things seem so obvious they don’t need saying. Often, though, it is the simplest things that separate the best from the rest when it comes to investing, like a decent head start.
Take Amazon, for instance. One of the best examples of a current and future structural growth theme, it has all the big guns of the fourth industrial revolution – cloud computing, big data, internet of things, AI – front and centre of its plans for growth. But what makes it probably the hardest competitor in its markets is the fact that it has had such a substantial head start.
With almost a third of market share, Amazon is the world’s largest cloud computing business. Although competitors enter that arena all the time, the likes of Alibaba and IBM will have to work at their absolute fastest and most efficient to have any chance of catching up with Amazon’s profitability in Amazon Web Services (AWS).
The same is true of Intuitive Surgical. Intuitive is best known for its Da Vinci surgical systems, which facilitate minimally invasive surgery by means of a precision robot, which a surgeon controls with a joystick. They were the first movers in the drive towards new surgical techniques, limiting the incision size and reducing healing time, risk of pain and infection. Their head start in the market has proved critical in staying ahead of the competition.
Importantly, the barriers to entry for competitors in their industry are high. First, the surgeon-operators of the robots require a lot of training. Furthermore, the time it takes to prove surgical success and build trust among end users of the technology creates a wide ‘moat’ around the business which competitors struggle to jump. Then, critically, the firm has gathered a wealth of information from all its procedures over many years. This is something that sets it apart from newcomers and which it uses for further research and development and strategising. When you add in the macro trend towards more surgical procedures for an aging population, Intuitive’s position ahead of the pack looks set to endure.
Nike’s story is different. They have been around for a lot longer than both Amazon and Intuitive Surgical. Critically, though, they have been good at taking every opportunity to evolve. In particular, over the years they have been clever in the way they harness new technologies to grow and improve their businesses operationally, giving them a great advantage over the other players in the ultra-competitive sportswear market.
Google, itself a technology company, is another example. Arguably, the architect of all modern internet life – how we work, shop, consume media – the Google brand has become a verb used in everyday life. This is a rarity in business, illustrating its consumer first-choice characteristics. What started life as a search engine, pulled away from the crowd to establish its head start early on. Since then, Google has been characterised first by its ability to spot the next big thing and second by its agility to utilise and develop the opportunity. From key acquisitions, like YouTube and DoubleClick to product launches such as the Chrome browser, Android (Google Play) and the Google phone, every time Google reinvents itself, it locks in organic growth. Next stop, self-driving cars.
What all these companies have in common is entrepreneurship and innovation. Some innovators, like Intuitive Surgical, are the originators of ground-breaking technologies. They have to take their idea and establish themselves hard in their market to achieve their head start and hold off the competition. Others, like Nike, start with plenty of competition yet find a way to back the right innovations, invest their time and capital in them to evolve their business models and pull away from the pack. Once a business achieves a leadership position and wrests a dominant market share from its competitors, it is much easier to retain its lead in profitability than for others to catch up.
Gerrit Smit is Head of the Equity Management team at Stonehage Fleming
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