A Business Edge Won Quickly Can Vanish Quickly
Buffett contrasted a trusted business name that vanished fast with a chewing gum brand that is hard to dislodge.
Warren Buffett, the investor who runs Berkshire Hathaway, had just been making the optimistic case. Asked at a 2002 shareholder meeting how long it takes a company to build a lasting edge over rivals, he said it can sometimes happen fast. In animated movies, he argued, Walt Disney pulled ahead fairly quickly, in his words, "after Snow White and a few more," and for a long while it was Disney and nobody else.
Then came the caution.
Buffett said there are many models that create a lasting advantage, but some advantages can be lost very fast. His warning was that "you have to worry about them losing it quickly too" when the advantage was gained quickly.
His contrast was Arthur Andersen with Wrigley's gum. Arthur Andersen had been, in Buffett's words, "a very good name in America not very long ago," and it lost that standing fast. It would be harder, Buffett said, "to lose the good name of Wrigley's gum," the chewing gum brand, than the good name of Arthur Andersen.
Buffett said habit helps explain why some names stick. His general point was that shoppers experiment a lot with some kinds of products but tend to stay loyal once they are happy with others, like their usual gum or candy bar, so the leaders in those aisles change little.
On fast-changing industries, he added that "when an industry is in flux," many people expect to be among those who survive and prosper, but few actually do.
Questions people ask
What happened to Arthur Andersen?
Arthur Andersen was one of America's largest accounting firms. After it was found to have shredded documents tied to the Enron fraud, clients fled, the firm was convicted in 2002, and the conviction was later overturned by the Supreme Court, but the business had already collapsed.
Why is a gum brand so hard to knock off?
Wrigley's built its name over decades by selling a cheap product people buy often and repurchase from habit. Buffett's point was that once shoppers are happy with a gum, candy bar, or soft drink, they rarely switch, so the leader changes very little from year to year.