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Diamonds In The Dust

Sources Of Competitive Advantages

  • Where do competitive advantages arise from?
  • What are the sources from which a firm derives and sustains its edge over competition, allowing it to sustainably generate RoCEs higher than its peers? 

Bruce Greenwald and Judd Kahn, in their book Competition Demystified, said that there are three kinds of genuine competitive advantages.


  • Supply: Strictly cost advantages that allow a company to produce and deliver its products or services more cheaply than its competitors.
  • Demand: Access to market demand that competitors cannot match.
  • Economies of scale: If cost per unit declines as volume increases, then even with the same basic technology, an incumbent firm operating at a large scale will enjoy lower costs than its competitors.

Beyond these three primary sources, Greenwald and Kahn point out that government protection or superior access to information could also be a competitive advantage for a business.
But what are the sources of such competitive advantages that allow the firm to demonstrate high pricing power around either supply/demand/economies of scale?

The business guru who has answered this question most clearly is Sir John Kay. Sir John’s IBAS framework includes four broad sources of competitive advantages—Innovation, Brand, Architecture and Strategic Assets. Here are some examples of Indian firms with competitive advantages across these four categories.



Asian Paints, HDFC Bank and Garware Technical Fibers are great examples of firms repeatedly excelling as the first mover, thinking differently and being several steps ahead of the competition.


Asian Paints: Given the voluminous nature of the Indian paint sector’s product, its low margins for dealers, the seasonality of demand and a large number of stock-keeping units (SKUs), innovation in supply chain management is a key differentiator and a critical success factor in the industry. Asian Paints has a track record of running the most efficient supply chain network in India, making three to four deliveries every day to more than 70,000 dealers in over 600 cities. This ensures high inventory turns for a dealer, for whom the thin margins from a voluminous product are a key challenge in earning a reasonable return on capital. Some of the initiatives that Asian Paints has taken to strengthen its supply chain include being the first company to (a) use mainframes in the early 1970s to forecast demand for better inventory management; (b) start branch billing on computers in the late 1970s; (c) import a colour computer in 1979, which helped reduce tinting time from five or six days down to four hours; and (d) use a global positioning system (GPS) for tracking movement of trucks carrying finished goods in the channel (implemented between 2010 and 2015).


HDFC Bank: One feature that distinguishes HDFC Bank from its competitors is the management’s ability to use technology in the broadest sense of the word—including hardware, software systems, and processes—to create a unique offering. 


In the late 1990s and for much of the noughties, ICICI Bank was often the bank to develop the most stylish of technology-driven banking products (e.g., it was the first to provide internet banking and the first to introduce mobile ATMs). However, HDFC Bank’s strength rests not so much in the uniqueness of its technologies but in how it has lined up technology in a clever process flow that other banks did not envisage.


In the mid-and late 1990s, when most banks opted for Infosys’s technology platform, HDFC Bank chose Iflex’s Microbanker. This proved to be a masterstroke, as the bank’s management had sensed that real-time online banking was the future. 


Microbanker subsequently allowed HDFC Bank to garner large quantities of low-cost deposits by providing payment solutions to capital market players. HDFC Bank pulled in all the players of the capital markets in the supply chain— buyers, sellers, brokers and exchanges—and got them into an automated settlement system. It offered a solution to both brokers and exchanges. If brokers had an account with HDFC Bank, exchanges could see in real-time whether brokers had the money to settle pay-outs and, if there was a shortfall, there was enough time before the actual settlement to ask the broker to meet this shortfall. Such reduced settlement risk for exchanges drove all significant exchanges to sign up with HDFC Bank. The incentive for brokers to sign up with HDFC Bank was that pay-in money was credited immediately to the broker’s account, reducing his working capital requirement. This led all the brokers to open their accounts with HDFC Bank for settlements.


Moreover, since brokers needed bank guarantees for exchanges, the bank also provided credit lines to these brokers. So the bank earned a free float on money kept by brokers for their settlement; it also earned fees by providing credit lines to brokers. Starting with the NSE in 1998, the bank became a clearing bank for all major exchanges by FY2000. Eight hundred brokers and most custodians used HDFC Bank’s services by FY2000.


The bank had captured 80% of the market share in the settlement business by the mid-noughties. Buoyed by the success of its capital markets initiative, HDFC Bank implemented similar initiatives in retail banking. This created the foundation of its formidable low-cost deposits platform.



A firm’s ability to create and sustain strong brand recall requires dealing with challenges around the changing definition of aspirational consumption in every category over time. Hence, the brand recall of category leaders need to evolve according to price points, type and mode of branding initiatives, and product characteristics.


There have been several instances of brands that were once significantly dominant in India in their respective product categories but saw a reduction in their market share with a dilution in their aspirational value. These brands once had an allure because customers desired or aspired to own and use them. Some key examples include brands like Titan in watches (2005–12), VIP Frenchie (1995– 2005) in men’s innerwear, and Bata in footwear (2000–10). This loss of aspirational value is a big risk for any brand. On the other hand, firms such as Page Industries (brand: Jockey) and HDFC Asset Management Company (HDFC AMC) have overcome the challenges of brand dilution over the past twenty-five years.


Page Industries: Page’s approach toward advertising has been unique on several fronts. Firstly, its advertising campaigns have consistently been high-impact affairs, like ‘Just Jockeying’ in FY2010–14 and ‘Jockey or Nothing’ launched in FY2015. Secondly, Page has placed significant emphasis on in-store advertising, to the extent that Jockey advertisements cover the bulk of in-store advertising space at most multi-brand outlets (MBOs). Thirdly, in a neat play on the world view of Indians, Page has made consistent use of Caucasian models in its advertisements and thus firmly entrenched its brand recall as an international brand. This unique approach in advertising has helped Jockey emerge as the only aspirational brand in the mid-premium innerwear segment over the past two decades.



Tata Consultancy Services (TCS) is a prime example of a ‘system of relationships within the firm’. In contrast to other leading Indian IT Services firms, all TCS CEOs are groomed internally and spend decades working within TCS before rising to the CEO role.


The fact that leadership changes in TCS are organic allows the firm to retain its most prominent clients for longer. As a result, TCS’s most significant clients are larger than other Indian IT services firms. For example, TCS’s implementation of a core banking platform for State Bank of India (SBI) in 2003–04 remains the largest such project implemented anywhere globally. Successful implementation of colossal projects has helped TCS become the only Indian IT services firm to consistently rank among the world’s three largest IT services firms by revenues since 2015.


Moreover, employees at TCS are aligned to organizational goals as part of a routine process. Unlike many IT companies that first-generation entrepreneurs started, TCS came from the Tata Group, and therefore institution and organization building was in their DNA. As a result, hiring and training practices are institutionalized, ensuring that employees are aligned to common goals. Every year, TCS trains or re-trains 2,00,000 employees. It is highly unlikely that any other firm in India trains even half as many people in a given year.And thirdly, TCS has standardized processes to a very large extent and captured their application development life cycle in an institutional knowledge base. This gives the firm the ability to have the largest scale of implementation among peers and in a much shorter time frame than others.


These processes result from collaboration and processes laid down by top management over the years.


Strategic Assets: 

The strategic assets of a firm could be around intellectual property (i.e., patents or proprietary know-how), licenses, or other such means of access to resources which are not easy for a competitor to replicate. Some examples from Indian companies include Page Industries’ relationship with Jockey International, GMM Pfaudler’s access to the R&D capabilities of Pfaudler, or Divi’s Laboratories’ thirty-year relationship with global pharma giants for their contract research and manufacturing services (CRAMS) business.


The relationship of Genomics, promoters of Page Industries, with Jockey International, USA, is Page’s biggest strategic asset. Jockey renewed its license with Page in 2010 for twenty-one years instead of five years, which was the earlier practice. Thus, until 2030, Page will remain Jockey’s exclusive franchise in India and the UAE. For Jockey USA, Page Industries is now its biggest franchisee. For Genomics, India remains a large market, growing in size (more consumers aspiring to buy Jockey products) and expanding in-depth (new segments like leggings for women and underwear for children). Accessing Jockey’s innovations in the US and bringing them to a steadily growing market like India is a formula that has worked since 1995 for Page and should continue in the foreseeable future.


GMM Pfaudler started as an Indian joint venture between Gujarat Machinery Manufacturers (GMM) and Pfaudler Inc. GMM’s promoters continue to run the company daily. Pfaudler Inc. is a 130- year-old multinational giant founded by the inventor of the process of glass-lining of steel. Glass-lined equipment is necessary for industries such as chemicals, pharmaceuticals and food and beverages, where the production process requires equipment with corrosion resistance or cleanliness properties. As manufacturing processes evolve, glass-lined vessels also have to evolve through significant R&D investments. Over its long history, Pfaudler Inc. has pioneered multiple other innovations in glass-lined vessels, reactors and related equipment, and it is today a global leader in the space. GMM has leveraged Pfaudler Inc.’s capabilities to establish a clear edge in India, and its access to Pfaudler’s product development pipeline enables GMM to maintain the technology leadership.


GMM has bolstered the technology edge with its manufacturing capabilities, building a production capacity that exceeds the aggregate of all other players in the industry.

GMM has also recently acquired the manufacturing facilities of De Dietrich Process and Systems, the other MNC operating in India’s glass-lined equipment sector, thus consolidating its market position even further.


This was followed by GMM acquiring its parent entity Pfaudler Inc., which makes GMM now the largest glass-lined equipment manufacturer globally. These strategic assets of technology access and manufacturing scale, combined with its long-standing customer relationships, have proven to be potent, driving healthy Roces for the company (five-year average, FY2016-20, of 26.6%).

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