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Why Competitive Advantages Die

Morgan Housel

6-8 minutes

“No one has to tell you you’ve come to the right place. The look
of merchandising authority is complete and unmistakable.’’

That’s how the New York Times described Sears in 1983.

'‘In the markets we enter, we’ll be dominant,” said its head of

retail. Few doubted it.

After dominating American retail over the previous century,

Sears in 1983 was pushing into banking. Few doubted it would
win there, too. “On a scale of 10, not to be flip about it, I’ve got
us at about 10.5,” its chairman told the Times.

That wasn’t hyperbole. Sears was the largest retailer in the

world housed in the tallest building in the world spreading its
operational expertise into new businesses. Its catalog was the
Amazon of its day.

Then everything fell apart.

Sears made more profit in 1954 than its market cap is worth
today.

There’s one story about what Sears did wrong, which is well
known.

There’s another story about how common these declines are.

More than 40% of all public companies go on to lose effectively

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all their value.

The only thing harder than gaining a competitive edge is not

losing that advantage when you have one. That’s as true for
careers and investment strategies as it is for business. And
since people are naturally optimistic, there’s a tendency to put
more thought into finding an edge than not losing it once you
find one.

Competition and incompetence are usually blamed when a

competitive advantage dies. But here are other factors I’ve seen
pull winners off the podium.

“Being right is the enemy of staying right because it leads

you to forget the way the world works.” – Jason Zweig.
Buddhism has a concept called beginner’s mind, which is an
active openness to trying new things and studying new ideas,
unburdened by past preconceptions, like a beginner would.
Knowing you have a competitive advantage is often the enemy
of beginner’s mind, because doing well reduces the incentive to
explore other ideas, especially when those ideas conflict with
your proven strategy. Which is dangerous. Being locked into a
single view is fatal in an economy where reversion to the mean
and competition constantly dismantles old strategies.

Maintaining financial success takes precedence over traits

that were vital to building the initial idea. Nothing to lose is a
wonderful thing to have. You focus all your energy on building
something great. Having a quarterly dividend to maintain is what
happens after you build something great. But it can come at the
expense of what made you successful in the first place.
Deutsche Bank once asked large companies how they prioritize
cash flow in a crunch. I’ll let them explain:

After cutting deferrable investment, firms would borrow money

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to pay the dividend, as long as they do not lose their credit

rating. Next, they would sell assets at fair value and cut
strategic investment. Only if all these actions are insufficient,
would they resort to a dividend cut.

They cut strategic investment to maintain the dividend. This is

Christmas to scrappy newcomers.

Mistaking a temporary trend for a competitive advantage.

Serendipity often masquerades as skill. Take monetary policy.
The top three investing skills are patience, temperament, and
having your career coincide with a 30-year uninterrupted decline
in interest rates. Or sales: Orange County circa 2006 convinced
many subprime mortgage companies that they had a leg up on
traditional lenders. Sure, exploit opportunity when the wind is at
your back. But don’t be surprised when an outgoing tide reveals
the limits of sustained individual greatness.

Scaling a product requires scaling HR, which is

monstrously complex and usually unrelated to your
original skill. Designing a device or discovering an investment
strategy is a million miles separated from managing 500 or
1,000 people. Managing one-hundred thousand people is a
different universe. Even when responsibilities are delegated,
creating a culture that promotes trust, creativity, and growth is
likely a totally different skill than was required to build your
product in the first place.

The decline of paranoia that made you successful to begin

with. I like the idea that systems are better than goals, because
once you reach a goal you tend to stop doing the thing that
made achieving the goal possible. “I’m going to work out every
day” is better than “I’m going to lose 10 pounds” because once
you lose 10 pounds you’ll probably stop working out. Same

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thing happens when a successful business or career hits a big

goal. Paranoia is a trait newcomers use to combat how deeply
the odds are stacked against them. But it tends to die once a
goal is hit. Few things sap the paranoiac drive to do better than
stable cash flow and high profit margins. Michael Moritz of
Sequoia was once asked why his firm had thrived for 40 years.
“We’ve always been afraid of going out of business,” was his
answer. That is an exceedingly rare response in a world where
most people step back, see all they’ve achieved, and assume
they can breathe a sigh of relief.

Reputational momentum is vicious and unforgiving on the

way down. The more successful you are the more people want
to be associated with you – which is great. But that’s equally
powerful in reverse. Someone early in their career can screw up
and recover quickly, moving onto the next company. A
successful person or company has each flaw blared across the
news, saturating the gossip channels of their network. Lehman
Brothers’ 2008 struggles made front-page national news; a
small community bank could have been at its wits end with
hardly a soul aware. Sears fits this bucket: Everyone is aware
how strained it is, so no one – customers, employees, investors,
vendors – wants to be associated with it.

Brands are hard to build and even harder to span across

generations. You can do everything right and still fail because
customers don’t want to be associated with products of their
parents’ generation. Morgan Stanley could make the
indisputably best robo advisor in the world and millennials would
still prefer Betterment. That’s how Charles Schwab blossomed
in the 1980s and 1990s; with a brand baby boomers felt was
theirs, not their parents’. One of my goals as a writer is to bow
out the moment I realize I’m too old to understand how the

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game is played anymore. Companies, with indefinite time

horizons, have to keep trying. A few of them pull it off; more
often it’s painful to watch.

More on this topic:

Sustainable Sources of Competitive Advantage

Getting Rich vs. Staying Rich

The Unsolvable Puzzle

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