The first criterion for an eternal investment is the presence of a durable competitive advantage. This means other companies are not able to compete with the company in its markets. But there a critical second two aspect of this feature. An impregnable competitive advantage by itself is not enough to confer everlasting earnings growth. A second critical facet of this feature is that management consistently anticipates or reacts to changes in the market or competitive landscape by finding profitable ways of extending the company’s competitive advantage into new markets that are tangibly related to its current markets. As technology evolves to change markets and create new markets, the company adapts to meet new demands. Otherwise, other so called “disruptive” companies will meet the demands of those new markets. in some cases, new technology can abruptly threaten a company’s product with obsolescence. Then, the company must either change its business to adapt to the new market, change to serving a market related to its original product, or fold. The cash built up through its current strong franchise, and expertise in serving the current market, should give the company a head start in adapting to change. But in order to execute this, management must maintain a culture which detects looming changes, proactively develops new initiatives and enforces profitability. Indeed, it is management culture that establishes dominance in different, evolving markets over the history of a long lived, “eternal company”. The continuation of a company’s competitive advantage into the future is not guaranteed, but shaped by management culture.
One might say that no competitive advantage is truly eternal. The foreseeable future inevitably gives way unforeseen innovations. Competing companies use these to erode the formerly dominant company’s market share. Undoubtedly this does occur, and recently there is much talk of “disruptive innovation”. In many cases the problem may be more that management of company A does not efficiently enable utilization of novel tools to maintain its domination. Or, does not imaginatively envision how the new tools can be used to extend its markets. This might apply to Microsoft in the years between 2000 and 2014, when it seemed to focus more on maximizing profit from the windows, office, server franchise, rather than expanding into new markets for its software afforded by digital readers and mobile phones. In fact, arguably Microsoft’s own management which impaired its revenue growth, as much as the strength of Apple or Google. In other words, it is not that android or iOS phones have destroyed the market for Microsoft Office products, far from it. Rather, they have created a large new market for mobile computing, a market related to Microsoft’s market for its productivity software. And Microsoft has failed to extend its dominance into this new, related market. In 2014, in a vigorous departure by new CEO Nadella, Microsoft began making a concerted attempt to forge into the market for mobile productivity software, for example by releasing Office for iOS and Android. More interestingly, work on this software had begun under the previous CEO Balmer. But more interestingly still, the strategy of creating Microsoft applications for other companies’ platforms had been heavily utilized in earlier Microsoft history, so it was actually part of the engineering and management culture.