Competitive Intelligence / Competitive Strategy, by Arik Johnson
by Arik Johnson

Investing With Intelligence -- Using Competitive Analysis to Pick Winners and Steer Clear of Losers When Investing

If you're wondering when the stock market is going to top out and tank on you, you're not alone. There are a lot of Americans enjoying a new level of wealth creation brought about by the run-up in the value of their investments over the past couple of years. In an economy fueled by expanding worker productivity brought about largely by advances in technology, global competitiveness and strong fiscal policy to yield explosive growth, low inflation and ever-increasing returns on personal investments, it's hard to find a better environment to begin investing, if you haven't already. Never before has the U.S. enjoyed the same level of entrepreneurship and opportunity - with many of us choosing to stay at work and invest our savings in companies we believe in, rather than jump ship and hang up our own shingle, as we did in such great numbers following the "Re-engineering" craze to "right-size" Corporate America in the early 1990's.

But, if you're at all like most Americans, you have been worried that the success of your investments won't last. You might be wondering if now's the time to cash-in your chips and get out? I promise, that gambling metaphor is purely stylistic… wink, wink. A lot of us aren't even "in" yet - worried that, the second they sink their hard-earned cash into a stock, the bubble will burst. Many observers have predicted a dramatic "correction" in the stock market coming that, in reality, has yet to materialize. In light of the skepticism surrounding the stock market, how do you go about picking investments that will consistently return value over the long term?

First understand that, investing is nothing new. Companies and individuals have been investing in other firms for centuries, all with the same goal - to provide themselves with competitive advantage and the ability to satisfy the needs and wants of their customers better than the other alternatives - their business rivals.

As a competitive intelligence analyst, many of my projects involve helping companies evaluate and select merger and acquisition candidates as well as strategic allies with whom they might share a common interest of mutual success. Fundamentally, there is little difference between a company buying part of or investing in another firm and individual investors doing the same with an online investment manager for $9.95 a trade. It's an entrepreneurial activity. But, the differences are worth noting - most significantly, the individual investor has very little relative influence over how the company will be managed moving forward from the date of the investment, unlike a strong corporate shareholder. Corporate cross-investment of capital is the fuel that drives the Internet-IPO frenzy that has produced some 500 Billionaires over just the past several years; none of whom were individual investors, mind you, but hey, most of us would take a paltry gain of a few-hundred-thousand any day if we can't get in on the IPO.

Here's an example. If you were a Netscape shareholder in the spring of 1998, when it was announced that AOL would be acquiring the company, you saw your stock go from the mid-30's to the upper-70's (AOL's went from $45 to the middle-90's during the same period) from the time of the announcement until the completion of the merger. The stock was swapped at a rate of 1.5 to 1 and the person who bought Netscape on the day of the announcement walked away with a five-fold return on their Netscape buy in much more valuable AOL stock.

The real question is, WHY? How did anyone know it was a good deal? What caused the market to bid up the stock, causing the creation of such profit for Netscape investors?

Looking at it from a competitive analysis perspective, Netscape actually offered very little in the way of competitive advantage for AOL - aside from its browser software (today lagging Microsoft's Internet Explorer 3-to-1 in installed base) and millions of Web site visitors each day. The only other advantage one could point to was the strategic position that now set AOL against Microsoft in a war for the future of cyberspace. But, despite the fact that analysts in the Internet industry looked sideways at the merger due to the fact that it now gave Microsoft an argument in its antitrust suit with the Department of Commerce, the possibility that AOL could take advantage of Netscape's page views and browser interface to threaten Microsoft hegemony in the operating system marketplace, was too valuable an idea to ignore. The possibilities were broad - perhaps AOL would become an "Internet device" company, producing appliances based on the Netscape Navigator browser and Java as the O/S; perhaps Netscape's server software could be leveraged for e-commerce? In the end, little actually materialized in the way of competitive advantage for AOL. And, lately, the judge in the Microsoft case found they were, indeed, a monopoly in the Operating System market, to the great pleasure of investors in rival OS platforms like Red Hat Linux.

Invest Like An Entrepreneur

When I first started my little company, one very old, very successful and very wise entrepreneur told me I should "buy stock in a company you like in a business you're interested in" instead of going into business for myself. I asked him why. He replied, "because that's what I would've done if I had it to do over again… it would've saved me millions of headaches". My point is, you're no less an entrepreneur investing than you are starting up your own company; if, you develop the right investment philosophy.

Which is a significant point - owning your own business comes with certain drawbacks - incredible amounts of effort unlike anything you've experienced in most jobs, very lean times in the beginning in terms of cash flow and no guarantee of success at any point along the way. Plus, a competitor can rise up and take over your market in a heartbeat - as many bricks-and-mortar market leaders are learning today. The set of advantages are usually what draws people to hang out a shingle of their own - control over one's own destiny, doing something you believe in, the challenge of making it on your own and looking back at your accomplishments from a higher point down the road and, of course, the chance to make a million… maybe.

Owning a piece of someone else's business has many of the same advantages - lacking many of the disadvantages… you're all smart enough to understand what those might be. So, is it really all that "entrepreneurial" to put capital into someone else's enterprise instead of your own? Sure it is! Have you ever heard of VC? Venture capital firms have built an industry out of taking shares in other peoples' bright ideas, putting them in touch with the others who can turn their business into a reality and making a mint in the process. Of course, that same process leads to losing on occasion as well. But, hey… win some, lose some… that's entrepreneurship.

The most important part of this equation is the ability to "pick and stick" with a winner. The idea of trading in and out of stocks that have a bad day is NOT an investment philosophy, even though you might make a few gains in the margins with each trade.

Winners, Losers and Why?

So, how do VCs go about picking a company to invest in? Keep in mind, the risks at that level of investing are far higher than the risks involved in post-IPO stocks you might sock your life's savings away into. But, then, VC's don't get in with the idea they're going to own that company forever - it's a different philosophy, based on the best "exit strategy" for the VC fund. They INTEND to short the stock when it IPO's and stick it to the investors mindless enough to buy it when it hits the public market. In a big way, it's a kind of "shell game" where it's "us" versus "them". But, for the VC, it's a high-risk, high-reward business.

For all of us regular investors, putting our own money into the market, picking a long-term investment all comes down to a principle central to competitive analysis known as "Winners, Losers and Why". For example, "as a result of the products and services this company is developing and introducing into the marketplace, who stands to win, who stands to lose and why?" From there, investors can decide who's got competitive advantage and, in many cases, even pick acquisition candidates before they happen with some degree of success.

Okay, so what's next? I'll be running this series of columns once each month to look at the advantages of using competitive analysis to evaluate personal investments. So send your thoughts and comments to

Arik R. Johnson is Managing Director of the Competitive Intelligence (CI) outsourcing & support bureau Aurora WDC. Learn more about Arik at his firm's Web site