Warren Buffett and Disruptive innovation

From time to time I turn to Warren Buffett and always come out refreshed. I find his letters to shareholders piercing and at the same time a sheer joy to read. In every letter, Warren delves deeper into one or more his favorite topics such as inflation & tax (1980), acquisition behaviour (1981) etc. In his 2007 letter, Warren goes into length to explain what he believes is “truly great business”

According to Warren, A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

What is a “moat”? Warren explains later in this report, moat is a metaphor for the superiorities businesses possess that make life difficult for their competitors.

And what does “enduring” involve? Warren likes cost-leaders like Walmart and world-wide brand leaders like Coca-cola whose “moat” may last several decades.

Warren elaborates on what “enduring moat” precludes: Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s creative destruction is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Classic example of this is Motorola. During 2004-2005, Motorola’s RAZR was synonymous with “innovation”. Ed Zander was the “innovation” hero. If you look at market share numbers, a drop by 2% or 3% may seem harmless for a giant like Motorola. But looks like it is enough for it to go into tailspin. Even after pumping in several billion dollars, it could not bring out another “disruptive innovation”.

It is interesting to see that something like “disruptive innovation” is cool from a technologist’s and strategist's perspective and the same thing is totally “uncool” from wise investor like Buffett’s perspective. Buffett is right, society needs all kinds of people.