In the old days, a castle was protected by a channel of water, called a moat. The wider the moat, the more difficult it was for enemies to invade the castle. This analogy was coined in the business world by world renown investor, Warren Buffet. A business that has one or more competitive advantages over its competition is said to have an economic moat. The more competitive advantages, the wider the moat.
The competitive advantages that create an economic moat include:
Low cost producer – companies that can figure out want to provide a product or service at a relatively low cost have an advantage because they can undercut their competition on price. One of many examples include Dell Computer. Because its large size allows it to negotiate product costs and its sales distribution system allows it to sell personal computers more efficiently than competitors who use resellers to distribute their products.
Network effect – companies that produce a product or service that increases in demand as more and more of the product or service is sold. eBay is an example of network effect because the platform they’ve created is almost impossible for another company to duplicate.
Intangible assets – companies that use intellectual property, such as patents, to develop unique product and it is the intellectual property that prevents a competitor from duplicating the product. Another intangible asset is a strong brand name, such as Coca Cola and Gillette.
Now that you know some of the major features that make up an economic moat, it’s your turn to identify what features your company has over your competitors. The more of the features described above, the wider your economic moat. Do you have a moat? If so, how wide is it? If not, what can you do to create an economic moat for your business?