In our Business Insight for Bankers course we emphasise the importance of a business having a sustainable competitive advantage and, more importantly, that a lending banker needs to understand what that advantage is and determine whether it is, in fact, sustainable and one that will enable the business to generate future cash flow to repay debt.
We also say that a competitive advantage based on a lower price is usually not sustainable in the long run and an interesting story from India underlines our view.
In 2009 Tata launched the world’s cheapest car, the Nano, into one of the fastest-growing vehicle markets in the world, India. The Indian population that, until that time, used overcrowded public transport and bicycles to get around. It seemed a no-brainer that the rapidly expanding and increasingly aspirational middle-class would jump at the chance of owning a car instead.
However, the reality is very different and, in fact, the price of the car has been its downfall. It turns out that this aspirational middle class wouldn’t be seen dead in a car that everyone knows is a poor-man’s vehicle and, instead, they prefer to spend a little more to get a car with better specifications which may be new or which may even be second-hand. It seems that, actually, not owning a Tata Nano was good thing socially.
Tata have tried everything from free warranties, low-price servicing, more colours and better interiors but nothing shifts the negative image that the average Indian consumer has of the car.
So, beware of companies that compete on price alone. They can do that for a while but Porter’s 5-Forces Model tells you that it can’t last.