Understand competitive advantages

Buffett searches for this particular quality in all his investments: It is not enough for companies to be market leaders; they need to have some advantages that put them far ahead of competition, whether in terms of economics of scale or brands or being the lowest cost producer or high switching costs or, of course, high entry barriers.

Buffett speaks
Think of Disney. Disney is selling Home Videos for $16.95 or $18.95 or whatever. All over the world-people, and we will speak particularly about mothers in this case, have something in their mind about Disney. Everyone in this room, when you say Disney, has something in their mind about Disney. When I say Universal Pictures, if I say 20th Century Fox, you don't have anything special in your mind. Now if I say Disney, you have something special in your mind. That is true around the world.

Now picture yourself with a couple of young kids, whom you want to put away for a couple of hours every day and get some peace of mind. You know if you get one video, they will watch it twenty times. So you go to the video store or wherever to buy the video. Are you going to sit there and premier ten different videos and watch them each for an hour and a half to decide which one your kid should watch? No. Let's say there is one there for $16.95 and the Disney one for $17.95 - you know if you take the Disney video that you are going to be OK. So you buy it. So you can get a little bit more money if you are Disney and you will sell a lot more videos. It makes it a wonderful business. It makes it very tough for the other guy.

How would you try to create a brand - Dreamworks is trying- that competes with Disney around the world and replaces the concept that people have in their minds about Disney with something that says, Universal Pictures? So a mother is going to walk in and pick out a Universal Pictures video in preference to a Disney. It is not going to happen.

Coca-Cola is associated with people being happy around the world. Now you give me - I don't care how much money - and tell me that I am going to do that with RC Cola around the world and have five billion people have a favorable image in their mind about RC Cola. You can't get it done. You can fool around; you can do what you want to do. You can have price discounts on weekends. But you are not going to touch it. That is what you want to have in a business. That is the moat.

Lecture at the University of Florida Business School, 1998