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Five types of ditches (and examples of each)

There are five types of ditches:

  1. Low-cost production (cost advantage)
  2. High migration cost
  3. Network Effects
  4. Intangible assets
  5. Effective scaling.

Some ditches are of great relevance (or irrelevance) for various industries.

  1. Low-cost manufacturing (cost advantages in general)

The bottom line types of ditches:

 If you are in the commodity sector, be ruthless about keeping costs down. The lower you put them, the deeper your moat will be.

If you can do something cheaper. Then you can also sell that product/service for less. Buffett uses the GEICO insurance company (another Berkshire Hathaway acquisition). As an example when discussing the low-yield ditch. GEICO did not come up with the idea of ​​a low-cost service as an economic moat on its own types of ditche. Although this approach was essential for their market:

“Most people would assume that [auto insurance] costs about the same for all companie. Or things are at least close to that. So I should be the one to suggest cheaper options. This is my moat. Since my expenses are lower than the other’s. I put a couple of sharks into the moat. “

Low-cost manufacturing

When it comes to low-cost manufacturing. Examples often focus on product manufacturing and supply chain management. American scientist and lecturer at the John Anderson School of M Richard Rumelt. In the book “Good Strategy, Bad Strategy. What is the Difference and Why It Matters” (Good Strategy Bad Strategy: The Difference and Why It Matters talks about his favorite (and recurring) discussions. With his students about what made Walmart  

Walmart is thriving as a low-cost manufacturer. But how did he create this moat?. The answer is not to cut costs associated with scale, like buying in bulk. The secret, Rumelt explains, is to run Walmart stores like a chain.

The company limits cost through management. And distribution structures that serve multiple stores in the same geographic region.

The chain of stores allows Walmart to cap stock levels. At any particular store and share management costs. The moat is profound because the savings come from a network of 5,000 stores. 

High cost of moving

The bottom line:

 Customer data should improve user experience, not complicate care.

More than any other moat, the cost of moving to competitors often benefits companies rather than consumers.

Until 2004, when the FCC rolled out wireless local number portability. Cellular service providers kept customers abusing the high cost of switching to another mobile operator. The moat didn’t offer customers anything. But it made it easier for cell phone companies. To keep customers in their sphere of influence.

switching costs

More recently, switching costs have been focused on data ditches. The decision to move the company from the Basecamp project management tool. To a similar-purpose program from Trello is fraught. With losing the accumulated body of knowledge over the years. Leaving Gmail will cost you your contact list or message history. (You can export them, but there is still overhead.)

While can share email contacts with other service providers. Interoperability is not ubiquitous in other high-tech industries. Many companies actively discourage the introduction of interoperability. Its absence is a moat for them. This observation is especially true in the healthcare industry. Where electronic medical record (EMR) providers know how to make their data appear correctly on other systems that a customer might migrate to.

EMR vendor companies have created moats based on lack of compatibility: the average hospital has 16 vendors of disparate EMR systems used in affiliated healthcare practices. 75% of hospitals deal with more than 10 disparate outpatient providers, and only 2% of hospitals have a single provider of EMRs.

  The interoperability limitation protects the existing system and creates fertile ground for expansion. If an EMR vendor releases an add-on product types of ditche. Its interoperability within its design makes it attractive to existing customers. This is the very creation of the moat that Musk is complaining about.

Social media has its switching costs. Twitter and Instagram are powerful platforms for building a personal brand. Subscribers are non-transferable capital that users hold on the forum.

Abandoning them or taking the time to build subscribers on a new network – any of these solutions will come at a cost.

These costs create inertia that keeps users on the existing network and slows down the growth of new social platforms. At this point, transition costs and network effects intersect.

Network effects

The bottom line: 

They have a positive effect on expanding market share – especially on software adoption.

Uber and eBay have something in common: they were new on the market, claimed responsibility for the two possible answers to the question: “Why bother you if the market no one else?” (And competing products pale in comparison.)

It will take hundreds of drivers to launch a new taxi service in the city before the startup’s waiting time can compete with Uber. It took years to develop eBay’s selection systems. Whether products (for buyers) or potential buyers (for sellers).

A business model that requires powerful network effects is a long-term game. Slow, costly grinding ultimately leads to a tipping point where exponential growth finally begins to drive profitability. 

To create a network effect with types of ditches. The rate of cost growth must remain constant as the increase in the number of users accelerates.

The network effect is a powerful moat. Many venture capital-funded startups are deployed on its basis. The main goal is to attract users. The profitability of the project can be ascertained later, as happened in the case of WhatsApp.

WhatsApp focused on attracting user acceptance, and in 2014 Facebook bought the company without knowing how to monetize users. Zuckerberg believed that any platform with half a billion users had potential, even requiring a $ 19 billion fee.

In other words, Zuckerberg paid for the “network” moat: “Whatsapp is on its way to connecting 1 billion people. All services that have reached this milestone are incredibly valuable. “(By 2019, WhatsApp had 1.5 billion users, but it still wasn’t monetized.)

Intangible assets

Takeaway: A well-known brand may be the deepesttypes of ditches small companies can dig to protect themselves from industry giants.

“Intangible assets are patents and trademarks,” writes Alex Graham, a financial analyst. “And also hard-earned competitive advantages such as brand names and culture.”

Some “intangible” assets are more clearly defined than others. Patents and trademarks, for example, serve as legal distinctions.

These are regulations, which in some cases constitute a cynical ditch-digging campaign.  

“The level of regulation can stall young startups. This could prevent them from ever growing to become a genuine Facebook alternative. V 

Constine is not the only one to come to this conclusion:

“Facebook wants privacy regulations to secure its monopoly power. This is why the company is focused on discussing the privacy and protection of your data. Zuckerberg doesn’t want to talk about monopoly. Follow the money trail.”- Matt Stoller, a fellow at the Open Markets Institute and former senior political adviser and budget analyst on the US Senate Budget Committee.

By making his fast chargers available to others and making Tesla’s patents freely available, Musk deliberately filled a potential moat. This, in turn, has brought favorable publicity to the company – positive publicity that is digging a nearby brand-based ditch.

Compared to patents

Compared to patents, a brand is fragile – but it doesn’t have an “expiration date.” Digging a ditches around a brand is essentially no different from building a brand reputation. Buffett still mourns Kodak’s decision years ago to make Fuji a sponsor of the Olympic Games:

“Well, Kodak had all the trump cards back then: 30 years ago they owned everything. They had what I call “mind control” a small yellow box was all it took for anyone to say, “Kodak is the best.” It’s priceless. its allowed Fuji to come and start narrowing the moat in various ways. They let the Japanese go to the Olympics and take away that special aspect that only made Kodak fit for photographing the Olympics.”

Would you like to know one way how you can create a moat based on a brand?

Come up with a term that will be the property of the brand. Which owns the term inbound marketing. Types of ditches has a brand moat partly because of its involvement in defining what Inbound Marketing is. Even if the association with HubSpot diminishes in other aspects of the term. They will always be the owners of the “inbound marketing” origin story.

HubSpot has inspired copycats like Drift types of ditches. Who deliberately dreamed up their Conversational Marketing ahead of time to market. Choosing between a moat based on low-cost manufacturing and a ditch based on intangible assets, Drift decided to promote and strengthen its brand. This worked: 

The dark vertical bar on the chart is when Drift became fully committed to promoting the term “conversational marketing.” Brand awareness continues to grow. The development of the period was a lengthy iterative process (the letter Q on the horizontal axis represents a quarter, i.e., 3 months).

Also Read this:how to create economic moat

Effective scaling

The bottom line:

 If demand has firm boundaries types of ditche. Aim for geographic dominance.

Moats built on efficient scaling apply to a small number of businesses. Such as the rail mentioned above the operator. They also apply to private companies that have a monopoly in utilities. Such as electricity supply.

Effective scaling moats are subject to limited demand and geographic dominance. For example, in Indianapolis, it is financially possible to build a competing circuit. However, the market will not scale. The number of car racing fans or the number of competitions will not double just due to the presence of a second track. However, the economic calculations might work if you propose this project to a city without an autodrome.

Geography determining factor

When geography is the determining factor, scaling efficiency depends on mergers and acquisitions. In the United States, the model for effective scaling moats is the consolidation of health care systems: a series types of ditches of regional acquisitions.

The regional dominance of a unified hospital system is holding back newcomers to the industry. Building a competing hospital in a market already served by an extensive health care system is unlikely to double the number of patients requiring treatment or emergency hospitalizations.

Since, in most cases, they develop effective scaling moats in the distant past, they are the least relevant to modern business.

Technological changes, however, have created opportunities for new types of ditches.

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