The concept of Economic Moats originates from an article by one of the greatest venture capitalists of all time, Warren Buffett, published in the American business magazine Fortune in 1999:
Economic moats remain tied to investment: the more comprehensive the moat, the higher the return on investment. But the implications of applying the concept of “economic moats” are much more extensive – both for large companies and for small ones.
An effective moat doesn’t need an Amazon distribution network or Microsoft’s market monopolization strategy. A moat project may be much more straightforward, but it still has a similar goal: achieving sustainable, critical business advantage.
Moat mining does not follow a universal formula. But all moated businesses share some common characteristics. Having understood which ones, you, in turn, will be able to answer the question: “What are the most likely opportunities for building a competitive advantageEconomic Moat for my company?”
What is the difference between a moat and a competitive advantage?
Moats are a type of competitive advantage. They are more durable than other competitive advantages, Buffett suggests.
A straightforward can find analogy in the world of baseball. A mid-season deal with a player in the final year of his contract could provide a short-term improvement to the squad, with a third starting pitcher or extra slugger needed to get the club into the playoffs. But such a player will inevitably leave at the end of the season.
A robust system of farm clubs (teams that are backups for the primary group of clubs), on the contrary, pays off longer, but year after year, it fosters new talents, contracts with which are concluded for many years.
The short-term benefits are helpful but should not be confused with Economic Moat creation.
- Dig a wide moat. Wide moats depend on several factors. For example, for Salesforce, this is brand awareness and complete integration with Google Analytics 360. Sales reps are more likely to be familiar with Salesforce products because it is the most widely used CRM that reduces the cost of hiring additional employees for client companies.
- Dig a deep ditch. But it is limited by the scope of one characteristic. For example, OJSC Russian Railways and its subsidiaries have a deep moat because they own the main railway lines in the country. To compete on an independent basis, an aspiring market entrant would have to build his rail network.
However, not all entrepreneurs consider the use of moats to be a good idea.
Warren Buffett, Elon Musk and the candy fight
A year ago, Buffett and Elon Musk “had a fight over candy.” The feud began when Musk was asked about Tesla’s decision to make its fast charger network available to other automakers (for a fee). Why would Tesla allow others to use its network as a moat protecting it from competitors in the electric vehicle industry?
“I think ditches suck,” Musk replied. “It’s cute as a kind of quirky, rudimentary way. If your only defense against invading attacking armies is a moat, then you won’t last long. The main thing is the pace of innovation. This is the fundamental determinant of competitiveness. “
When Buffett found out about Musk’s comment, he admitted that technological changes made the ditches more vulnerable but not useless. “In some areas, Elon can turn things upside down,” Buffett said about Economic Moat. “But I don’t think he wants to beat us over candy.”
Buffett’s holding company, Berkshire Hathaway, owns – among other things – the chocolate and confectionery retail company See’s Candies. Buffett believes the company has an almost impenetrable moat, mainly based on its brand. Musk was unimpressed with the response and attacked Buffett sarcastically via his Twitter:
Musk believes that the moats are primarily imaginary – as well as inert. They stifle innovation. They can delay the death of the company, but they will make this sad event inevitable.
You can create a moat that vigilantly guards your advantage without expanding it. Or you can build another – one that gets deeper and broader as you innovate Economic Moat. To a large extent, the result depends on the type of moat and how it is used.
Building moats in the 21st century
Technological innovation is the destroyer of the existing order. This is why Musk is convinced that the “classic” ditches no longer matter. But technology is also creating new types of ditches.
Brian Halligan of Hubspot argues that the moat of the online store Zappos does not depend on its value chain – it is only a competitive advantage, perhaps at best a shallow moat. Instead, he states that the company has built a digital moat:
“The reason we are not bringing a company to market that will compete with Zappos is not [its value chain]. The moat around their business is two million links to their site like Economic Moat. And how can we achieve this result? They have 10 million Twitter followers and a huge number of Facebook likes. You cannot wake up overnight with all of this. “
Note: Zappos had 2.5 million Twitter followers as of April 2019.
The main idea behind Halligan’s “sketch” is the value of inbound marketing. Inbound marketing can build a brand. But it is also expanding the moat in other ways – through hard-won backlinks and engaging social media followers.
That is, through organic search — it is a powerful moat. Increased competition in organic search and social media has deepened interest in the moat among new entrants.
Within inbound marketing, there are parallels with both Buffett’s more conservative approach and Musk’s accessibility to all Economic Moat. Should I link the site to other web resources through subscribing links? Do you make every effort to discourage users from clicking outside of your landing page, even if those inbound links serve the interests of your visitors?
Should be the guiding principle: fear or ambition?
Select a random job description for candidates for the Sales Representative position. “Salesforce knowledge / experience required” item? Implementing software — a moat of network effects — can protect a business from newcomers with Economic Moat.
Proficiency in standard marketing technology tools is becoming a prerequisite (or preferred skill) for many jobs. At Conversion XL, the current set of tools for marketing operations includes:
You can learn to use any software. This is not the deepest moat. But the dominant position of specific tools pushes specialists to study these particular products, which, in turn, strengthens the part of the demanded software on the market.
This is an interesting argument for the proliferation of Freemium versions of SaaS products. The freemium version can educate thousands of users on using the product, making it easier for companies to create a paid version to find ready-to-go employees.
Likewise, widespread adoption of Freemium versions can motivate companies to use compatible software to develop integration Economic Moat solutions. Not surprisingly, the most popular products – whether Freemium or not – encourage collaborating companies to make early and influential integrations. These integrations can be very lucrative – as in the case of Salesforce’s partnership with Google Analytics 360.
Facebook built its moat using customer data. The company does this in a way that primarily benefits itself and, accordingly, advertisers. But customer data doesn’t always work against the user.
For example, someone doesn’t want to switch from one streaming music provider to another. The Spotify recommendations have become helpful to the user now that he has spent thousands of hours listening to music.
To create a moat – not just competitive advantage every strategy must answer two questions:
- Are these efforts creating a sustainable, meaningful competitive advantage of Economic Moat?
- Does this competitive advantage also benefit consumers?
Focusing on building a moat is unlikely to inspire new strategies. But this approach will adjust your focus on finding the apparent competitive advantage to exploit and underscore the urgent need to create multiple sustainable benefits of Moat. This could mean, for example, an increase in advertising spend for a branding campaign, even though a sales focus could increase quarterly profits one-time.
“For business owners, I only have one piece of advice,” Buffett says. – It is necessary to widen the moat. And put crocodiles, sharks, and alligators in it to keep out competitors. “
Critics of this approach, such as Musk, ask awkward questions about creating a moat’s long-term costs. Moats should serve the interests of consumers. They should encourage, not suppress, innovation. Technology has transformed ditches forever, making them narrower and shallower.
But no Economic Moat, however wide or deep, can protect a company from a pernicious sense of complacency.