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Identifying Sustainable Growth

Growth is generally coveted by investors. Most investors seek some type of growth—growth of markets, revenue growth, earnings growth, market share growth. However, an oft-neglected piece of analysis is the sustainability of such growth, which requires a deep look at a company’s strategic market position. To understand if a company is well-positioned for long-term leadership and growth within its industry, Riverbridge believes it is necessary to analyze a company’s strategic market position.

For starters, it is important to understand and clarify the difference between a company possessing a strategic market position versus a dominant market position. Broadly defined, a dominant market position is a company with either the largest or second largest market share. Companies with a strategic market position, however, look far beyond their current market share. These companies possess additional important components, such as a defendable market niche or the ability to transform an entire industry. While a transformational company may have a small market share, with the promise to revolutionize an entire industry, a company possessing a strategic market position must not be ignored in favor of those companies with a current dominant market position.

Riverbridge certainly has many portfolio investments that can lay claim to being the dominant player in their markets. However, possessing a dominant market share today does not ensure a future leadership position. History provides many lessons of market leaders failing. Think of Compaq, once the largest supplier of personal computers in the 1990s. Eastman Kodak was regarded as the undisputed leader in all things photography. Sears was the dominant retailer and Blockbuster dominated the home movie marketplace. While these companies once had a dominant market position, they lacked a strategic market position. Investing in companies simply possessing a dominant market position is insufficient if these companies are culturally ill-equipped to maintain such market leadership.

Riverbridge focuses on identifying portfolio companies strategically positioning themselves in their markets so their brands, products, or services have a clear differentiation among their peers, allowing for enduring growth and difficulty being displaced. The primary factor Riverbridge considers when assessing a corporation’s market positioning is endurance. Strategic market positions endure.

Companies competing primarily on price are vulnerable and likely do not operate within a defendable niche. Companies possessing strategic market positions are difficult to disrupt. They have something that is very difficult to replicate: earned trust. In many instances, these companies may not have the best product. However, they deliver a level of service that is almost impossible to match.

Additionally, companies possessing a strategic market position are able to earn and sustain a superior return on their capital. They are not forced to compete merely on price. As a result, they have tremendous pricing flexibility. During inflationary periods, it is especially important for companies to pass through rising input costs. Companies operating without a strategic market position will struggle to do so.

A strategic market position is essential for enduring growth. Enduring growth requires sales that are not solely dependent on selling a good or service at a lower price than a competitor. The insistence Riverbridge portfolio companies possess a strategic market position enables our team to have confidence our portfolio companies will not be easily displaced within their competitive marketplace. Strategic market positions are difficult to earn and an even bigger challenge for a competitor to displace. The challenge to find such companies is well worth the difficulty. This discipline deserves much credit for our investment track record over the past three decades.

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