If you are focused on buying stocks which pay a dividend, unless the company has a monopoly and from an operation point of view the company is well run, then it will have multiple small competitors. Most of them will not challenge the company but some can and you need to be aware of what is happening in the marketplace. Recently Merge Gupta-Sunderji founder of Turning Managers into Leaders wrote an opinion piece in the newspaper titled How to spot warning signs of disruptive innovations.
When a young company outperforms an industry titan it is called disruptive innovation. The company often introduces new products or services to gain advantage over established competitors. If the new company is successful, the new company can replace the old one.
The issue for investors is no matter how much you “love” the established company, once the new one takes hold it is game over. The time can be still months away but the new company has gained traction that any efforts to reverse the tide is futile.
The signs needed to nip or see the potential threats:
Identify Potential Disruptions – Ensure the SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis is correct. LISTEN to your customers when your customers tell you their pain pints and who is stepping into relieving the ache. (It is easier to start with are there any little concerns you have with the company? listen and then ask about big ones). Companies that are addressing your customers’ complaints are the ones that pull ahead to disrupt your business. How does the company listen to complaints?
Determine Your Competitive Advantage – How does the company make profits? Why is better than the others?
Evaluate Your Disruptors’ Barriers – Look beyond the present. What barriers does your competitors have to go over to wipe out your existing differentiators?
Momentum – are customers there because they are used to status quo? Remember status quo can change.
Tech Implementation – will changes in the use of technology change your customers. As the world moves to the connectivity of everything how does that change your business.
Ecosystem– can the business environment shift?
New Technology – what has to be invented for disruption to occur?
Business Model – is the competitor following your business model or a different one?
Linking to dividend paying stocks, these are the companies that can be disrupted because they are profitable. The issue for you is to ensure you know how your company makes its profits and how secure they are. What has to change and how likely will it change while you own the stock. Many companies have a monopoly or monopoly like environment and that has worked very well for the companies. Will it continue and why would it continue?
There are more questions than answers, till the next time – to raising questions.