What’s Protecting Your Castle?
A little competition is a healthy thing. But it can be costly and disastrous without a moat to protect “the castle.” As a business owner, you’re already aware that it takes a strong competitive advantage to survive in today’s ever-evolving market. But are you clear on what differentiates your business from the competition? Are you poised for long-term growth? How you handle competition can be a direct link to the success or failure of your company.
When evaluating the strength of a business, Warren Buffet, Charlie Munger and other top investors look for a company that has a healthy moat (one that is both wide and deep best protects a business from its competition). The term economic moat, coined and popularized by Warren Buffett, refers to a business’ ability to maintain its competitive advantages in order to protect its long-term profits and market share from competing firms. A competitive advantage allows a company to provide a product or service similar to those offered by its competitors, while at the same time, outperforming them in profits.
6 Basic Types of Moats
In his podcast, Invested, hedge fund manager and NY Times best-selling author, Phil Town, describes the six basic types of moats a company can have: Brand, Price, Secrets, Toll, Switching, and Networking. A company positioned for future growth must have at least one of these moats but companies that have a combination of these advantages are more deeply protected which helps them grow and maintain market share faster than their competition. Here’s a brief description and examples for each basic type of moat:
- Brand moat – Has a widely recognizable and highly prized product reputation (ie. Coke, Starbucks, Walt Disney)
- Price moat – Offers low and competitive pricing on same or similar product goods (ie. Walmart, Costco, Aldi)
- Secrets moat – Carries the advantage of proprietary patents and trade secrets (ie. Apple, Tesla, Lockheed Martin)
- Toll Bridge moat – Carries the advantage of being a monopoly, a sole provider of a viable product or service and the lack of any close substitutes for consumers to choose from (ie. Power and utility companies, U.S. Railroad)
- Switching moat – Makes it difficult or inconvenient for consumers to switch to another product or service (ie. Apple, Microsoft, IBM)
- Networking moat – Carries the advantage of having a huge subscriber base or network of users that makes it more alluring to new customers (ie. Google, Facebook, Amazon)
Though not on Phil’s list, I would make the argument that there is also a Convenience moat as today’s time-starved consumers are frequently looking for ways to get goods and services more quickly and easily – this would explain the race for omnichannel integration and the proliferation of BOPUS (buy online and pickup in store) retail programs, as well as expedited shipping options online. Consumers know what they want and often shop for convenience, even if it means they must pay a little more – it’s well worth the time they get back in their day to spend with their families. According to CNBC, 49% of Americans tried BOPUS for the first time during the holiday season in 2015 indicating a growing trend.
With the right competitive advantages, small businesses can enter the market with a splash and wake the sleeping giants. While growing your market share takes time, a healthy moat will protect you for the long haul so you have time to build your business and surprise the competition.
What’s Your Moat?
Maybe you know your moat advantage and what differentiates your business from your competitors. Or, maybe you need to reevaluate your answer to this because of recent changes in the market. If you’re not quite sure, specifically define this through a competitor analysis. There’s no need to live in awe of your competition, nor should you fear them, but you must find out who they are and what attracts current and potential customers to them. Assessing your competitors openly and honestly will play a key role in helping you develop your moat.
If you need help getting started, here’s an example competitive advantage worksheet used by the Small Business Administration to assist business owners in differentiating themselves from their competitors. Consider the following questions in your analysis:
- Define Yourself:
- Is my product or service unique, and if so, why?
- Is the way I operate my business unique?
- Do I service a niche market? Are there other markets that could benefit from my product or service?
- Are my employees a key asset that sets us apart from our competitors?
- Define Your Competitors:
- What are their strengths?
- What are their weaknesses?
- What are their capabilities?
- Who is their customer base?
- What are their revenues?
- Are their profit margins growing?
- What are their promotional and marketing strategies?
- What are their current offerings?
- What are their future goals?
Remember, winning companies aren’t successful by accident. A closer look usually reveals that most have zeroed in on their target markets and are laser-focused on a unique approach to meet their customers’ needs, values and expectations. Though no company has the advantage of a crystal ball, successful companies have built a wide and deep moat around them that protects them from the competition.
What other types of moats provide a competitive advantage? Leave your thoughts on this topic in the comments.
Wishing you happiness and success!