The Valuable, Rare, and Difficult to Imitate Test for Finding the Perfect Stock

Jay Barney was a business professor at the University of Utah. No one really knew who he was except for his students.

But one day things changed.

He published a research paper called “Firm Resources and Sustained Competitive Advantage.” The paper explained how someone could identify if a company had a sustainable competitive advantage by asking themselves three simple questions:

• Does the company do something valuable for consumers?

• Is it rare to find a business that can provide value in this way for consumers?

• And is it difficult for a competitor to imitate its business model?

The business world fell all over those three questions. Barney went on to become the most-cited professor at his university, and he even became one of “the most-cited strategic management

scholars in the world,” according to the Lassonde Entrepreneurship Institute. Today, his three questions are taught at every business school (Harvard, Yale, and Wharton) to students who want to know how to identify a company with a competitive advantage.

Let’s walk through each of Barney’s prongs.

First, a company has to do something that’s valuable. The company has to create a product or service that’s valuable to the marketplace. In other words, do customers find its products and

services valuable?”

Second, it has do something that is rare. There can’t be many other companies offering the product or service at the same level of quality and price.

Third, it has do something that is difficult to imitate. The competition shouldn’t be able to copy what the company’s ability to deliver a superior product or service. Amazon is an example of a company that does something valuable, rare, and difficult to imitate.

First, Amazon does something more valuable than the competition. It offers free 2-day shipping, low prices, and a vast selection of consumer products. Those are all things that the

customer finds valuable.

Second, Amazon does something that’s rare. It’s not common to find a company that can offer the same level of customer experience as Amazon. If anything, there isn’t a single company

that offers as wide of a selection, as low prices, and as fast shipping as Amazon, not to mention the user-friendliness of its return policies.

Third, Amazon does something that’s difficult to imitate. It’s almost impossible for a competitor to replicate Amazon’s customer experience. It’s almost impossible for anyone to offer free 2-day shipping at prices as cheap on as wide of a selection of products as Amazon does. So, it’s difficult to imitate its value proposition.

An example of a company that doesn’t have a true competitive advantage is perhaps ExxonMobil.

ExxonMobil passes the first prong of the “valuable, rare, and difficult to imitate” test. In other words, it does do something valuable. It extracts and sells oil at a low price to consumers.

However, ExxonMobil doesn’t pass the second and third prongs of the test.

First, it doesn’t do something that’s rare. There are lots companies that can extract oil in the same way that ExxonMobil does. Just to name a few: Chevron, ConocoPhillips, and Royal Dutch Shell.

Secondly, it doesn’t do something that’s difficult to imitate. Anyone can extract oil the way ExxonMobil does.

Since ExxonMobil didn’t pass all three prongs, we can’t say it’s too good to compete with.

Investors would be wise to approach with caution. It might be a great company. But does it really have an edge over its competition that can’t be surmounted?