Maxim #49
Find the racks
In the very early days of Carpedia, a client of ours, the CEO of a large trucking conglomerate, agreed to be an advisor for us. One of the first things he said was, “you guys know how to analyze problems but I’m not sure you really understand how a business makes money.” To prove his point, he asked us if we understood why his garment trucking division, where we had been working for a few months, was so profitable. We rambled a little about the productivity of the workers, routing options and location advantages. He listened and then told us, “No. It’s because of the racks.” He continued, “the racks in the trucks are a unique design and most importantly they are fully paid for. Those racks protect our margins and they make it difficult for others to enter the market. For any business, to understand how it makes money, you need to find the racks.”
This is the same thing as what investor Warren Buffet calls a “moat” and consultants like to call a “competitive advantage” (a somewhat over-used and often misunderstood term). Since our early lessons we have worked in many industries in many countries and on a number of different continents. It is never particularly easy to find a company’s “racks” (or competitive advantage). One reason is that advantages often vary by product and customer segments. It’s even more difficult to find an advantage that is truly sustainable over a period of time. We have, however, found a few basic questions that are helpful when thinking about whether or not a company has any genuine advantages over its competitors. These are the questions we first ask about a company when we are trying to find the racks:
- Does the company have truly superior products (for which customers pay a premium)?
- Are the company’s costs lower for a specific reason (patented process, proprietary sources, etc.)?
- Is it difficult for existing customers to switch to another company?
- Is it difficult for new competitors to enter the market?
Try it. Go through the questions and see if you really know what “the racks” are in your company.
