According to a tweet from Musk, “What matters is the pace of innovation, access to resources, and raw materials.” But is this all that matters for company survival?
Elon Musk is correct in that the pace of innovation provides the strongest moat. The speed allows companies to stay ahead of their competition and provide the greatest value. However, it is not the only moat that can give a company a competitive advantage; brand equity can provide a strong moat.
Does the pace of innovation matter for company survival?
How quickly a company can come up with new ideas and create new products and services from these ideas that are of value is crucial if they want to stay in business. If all companies were state-owned and only one player in each industry, there would be no incentive for that company to improve continually. However, in a capitalist society where competition is fierce and several businesses are waiting to take any opportunity to gain market share, companies must stay ahead to survive. This is great for the consumer. However, the pace does differ between industries; compare how much innovation there has been in the railroad industry in the past 50 years vs. software. Railroad infrastructure is capital intensive, has high maintenance costs, and with BNSF and Union Pacific owning more than 50%, there is not much incentive to innovate. Compared to the software industry, which is capital light, has low distribution costs, and updates can be sent out daily, the low barrier to entry creates fierce competition.
Does access to resources matter for company survival?
A company may come up with the best idea in the world, but without the resources to make it come to fruition, it is meaningless. Without the resources to make ideas a reality, they just remain ideas. A company’s most valuable resource is its employees; they do all the leg work to make concepts a reality. If a company is very innovative but struggles to attract the right talent, it may limit its ability to innovate at a speed conducive to success. The company also needs access to finances to be able to fund the R&D and production of products and services. Without it, there is no way the company can scale.
Does access to raw materials matter for company survival?
Even if a company has the best idea in the world, has attracted the most incredible talent, and is exceptionally well funded, they still need access to resources. A great example is Tesla’s limitations in scaling up battery production due to there not being enough available lithium. They are an incredibly innovative company with some of the best talents in the world. Still, its access to lithium is the only limiting factor stopping them from scaling up to a worldwide renewable energy supply.
Is Elon Musk right about the pace of innovation?
The pace of innovation is not the only form of competitive advantage a company can have. Take Coca-Cola, for example; they have a secret formula for coke that no other company can accurately imitate. This company information has made it into the company it is today. Also, their brand is one of the most recognizable brands in the world. Consumers associate its logo with products they enjoy and know it has an excellent reputation for releasing new products. If you were to remove the Tesla brand from Tesla, it would very likely damage their sales and reputation. I think what Musk is saying is that pace of innovation is the strongest moat a company can have. However, there are less powerful but still significant forms of competitive advantages.
