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Why I think investors need to focus on businesses with the best products

There seems to be a lot of disruption going on in the world these days.

In banking, retailing, supermarkets, virtually every sector, the incumbents are under attack from online competition and international competition.

To truly stand out and keep growing in this type of environment a business needs to have a great product and/or price. If you don’t have a good offering then a customer will quickly realise it and tell their friends (and the whole of social media).

With wage growth being quite limited these days and the internet giving more power for comparing, people are going to focus harder on finding the best value for their money that they can. Unless a business stands out for great value I think a business will generate mediocre returns.

Take Xero Limited (ASX: XRO). It’s not the cheapest product on the market, but I think it offers the best value because all of the efficiency & automation tools which are so useful and easy to use. It’s a great product at a very affordable price.

Meanwhile, Reject Shop Ltd (ASX: TRS) is having a tough time winning over customers, despite the current climate being the perfect time for a bargain store to win market share.

Wesfarmers Ltd’s (ASX: WES) Bunnings has a great reputation because it has a wide product range and cheap prices and good service. I’m not sure many other Australian retailers can hit all three of those standards whilst also growing profit for shareholders.

Foolish takeaway

Do most of the businesses you own have high-quality products or services? I think over time people will move towards the better products and ignore the poorer ones. I’m trying to keep that in mind for my investing strategy going forwards.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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