What are the odds that “knowledge of/experience with Salesforce” is on there? And why is it so difficult for others to compete? This system remains in place today. HubSpot’s Brian Halligan contends that Zappos’ moat doesn’t depend on its supply chain—a competitive advantage, perhaps, but a shallow moat at best. A slow, costly grind eventually hits a tipping point, when exponential growth finally delivers profitability. They stifle innovation. Economic Moat. We can group the types of economic moats into a few broad categories, as listed: 1. Follow. Infrastructure Unique or expensive infrastructure that competitors can't match such as hydroelectric dams or railway lines. https://t.co/tAKT5yAd3p. Low-Cost Producer. Spotify’s recommendations are useful now that I’ve spent thousands of hours listening. And we want to throw crocodiles and sharks and everything else, gators, I guess, into the moat to keep away competitors.”. Some moats have greater relevance (or irrelevance) for various industries. Their products become more valuable as they acquire users. Since the company positions itself as a low-cost retailer, it wants to ensure it gives the lowest prices to its customers. A company with a license to serve electricity, gas to its customers in a geographic region is a MOAT. The moat offered nothing to consumers but made it easy for cell phone companies to keep clients around. Some companies have an advantage over competitors because of unique nonphysical, or "intangible," assets. But it has no expiration date. The key words here are non-replicable, sustainable and structural. Types Of Economic Moats The development of a competitive advantage is the basis for a company's ability to … Mid-season trades are competitive advantages. An example of a brand moat is Harley-Davidson. Leaving Gmail would cost you your list of contacts or historical messages. A company that can produce a quality good or service and deliver it to the consumer cheaper than its competitors has a cost advantage. The moat around their business is the two million links into their website. There are certain intangible assets that act as economic moats. Network Effect. These include intellectual property, such as patents, trademarks, copyrights, and proprietary technology; brand names; and goodwill, such as a positive reputation, strong employer-employee relations, and customer base. Sure, you can give it a shot. That is the fundamental determinant of competitiveness.”, When told of Musk’s comment’s, Buffett acknowledged that technological change has made moats more vulnerable but not irrelevant. Newcomers who take on either must answer the question, “Why bother with you if no one else is here?” Both companies built moats based on network effects. Undercutting competitors while making a profit doing so is the crux of a company with such a moat. That’s my moat. But there is generally too much risk associated with estimating cash flows that are not protected by a moat. Followers are non-transferable capital that users store on the platform. It’s the 10 million Twitter followers they have, the massive number of Facebook likes. This advantage feeds on itself, and eBay's strength only increases as more users sign on. For anyone wanting to sell something online via an auction, eBay (EBAY) provides the most potential buyers and is the most attractive. The moat is deep—efficiencies flow from a 5,000-store network. A wide moat gives a company a clear financial edge over other competing companies. Uber isn’t profitable either. While email contacts transfer to other providers, interoperability isn’t common everywhere. Sources of Economic Moats: Cost Advantages. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. . He used to do agency-side content marketing and SEO. In other instances, consumers may not know that they benefit from use of their customer data. The more types of moats a company can build, the better. 1) Brand Moat. Economic Moat: Cost Advantage. 5 Kinds of Moats. The same applies to quarries. Building a competing hospital in a market already served by a sprawling system won’t double procedures or ER admissions. It’s the point of overlap between switching costs and network effects. GEICO didn’t stumble upon low-cost production as its moat. But those players will leave at the end of the season. Morozov: And other source of economic moat, such as cost advantage, switching costs, they all do require, ultimately, our analysts to develop confidence about those sources being very durable. Firms that offer a product that is integral to their customers’ operations and where the product is complex, making retraining a major cost and inconvenience, have a powerful economic moat. Network effects; 4. This is why the company is orienting towards discussing privacy and protecting your data. Detractors, like Musk, ask pointed questions about the long-term costs of moat-building. This is readily exemplified by segmentation and personalization. This can translate into tough bargaining terms for those firms that want to sell their products on Wal-Mart's shelves. Intangible assets. 107: Introduction to Financial Statements, 403: Introduction to Discounted Cash Flow, 406: Using Morningstar's Rating for Stocks, 508: Great Investors: Others in the Hall of Fame, Course 204: Those integrations can be lucrative, like Salesforce’s integration with Google Analytics 360. Farm systems are moats. They should encourage, not stifle, innovation. Low-Cost Producer or Economies of Scale In general, the more types of economic moat a company has--and the wider those moats are--the better. However, the threat of material value destruction is low, and normalized returns exceed costs of capital in most cases, leaving us comfortable assigning narrow moats to … “Our managers of the businesses we run, I’ve got one message to them,” says Buffett, “which is to widen the moat. The third type of economic moat is derived from Switching Costs. The cost of production is well optimized for the company to have a disruptive price for the … He sees the castle as the company and the moat as the durable competitive advantage that allows it to persist and grow over time. The increasing competitiveness in organic search and social media has deepened that moat for new entrants. The ability to reach large swaths of customers organically, via organic search, is a powerful moat. Bigger isn’t necessarily better when it involves digging an economic moat.. As a dominant player in retailing, the company's size provides it with enormous scale efficiencies, or operating leverage, that it uses to keep costs low. Given the choice between building a moat based on low-cost production or intangible assets, Drift chose brand. There are two ways to build a moat: Still, not everyone thinks moats are a good idea. Within inbound marketing, there are parallels to Buffet’s more conservative approach and Musk’s free-for-all. The network of stores allows Walmart to limit its stock in any given store and share managerial expenses across the network. What is the guiding principle: fear or ambition? Technological change, however, has created opportunities for new kinds of moats. The term economic moat was coined and popularized by the Oracle of Omaha himself, Warren Buffett. But the implications are broader, for companies large and small. Network effects, arguably the most powerful kind of economic moat, occur when a product becomes more valuable as more users join. Similarly, widespread freemium adoption could motivate related software companies to develop integrations. A company with a formidable competitive advantage has a "wide" economic moat, while a company with a vulnerable competitive advantage is said to have a "narrow" moat. A moat-building project can be far simpler while still working toward the same goal: a sustainable, decisive business advantage. (And competing products pale in comparison.). If your customer data allows you to deliver more relevant content, the customer has a better experience. An effective moat doesn’t require Amazon’s distribution network or Microsoft’s monopolistic software strategy. Basically , moat is a structure defending the insiders of castle from any attacks by the enemies. The regional dominance of a single hospital system deters upstarts. The company limits costs through a management and distribution structure that serves multiple stores in a geographic area. No moat, however wide or deep, can protect a company from complacency. Patents and trademarks are legal lines. Economic moats help company's to protect profitability and market share. Charlie Munger calls “network effect” the demand-side economies of scale, as it results when a product or service becomes more valuable as more people use it. HubSpot, which owns “inbound marketing,” has a brand moat, in part, because of its role defining the term. Technology has reshaped moats to be narrower and shallower. It’s worked out: Moats built on efficient scale apply to a small number of businesses, like the aforementioned freight rail operators. Even if other aspects of its brand diminish, it will always own the origin story of inbound marketing. Low-cost production; 2. Economic Moat: Intangible Assets And Brand Loyalty The assets possessed by a company that one cannot readily see or touch are called intangible assets, with examples being company-owned patents, trademarks and brand loyalty. Examples of well-known brands that do not have an economic moat: MakeMyTrip, Flipkart, Videocon, etc. Venture capitalists choosing whether to fund the next Facebook killer might look at the regulations as too high of a price of entry. An economic moat is a competitive advantage that is difficult to copy or emulate, thereby creating a barrier to competition from other firms. “How Moats Translate into Sustainable Competitive Advantages” is a five-part moat investing education series that explores the primary sources of economic moats. A business model that requires a strong network effect is a long play. Economic moats remain tethered to investing: A bigger moat makes a stock a better bet. Types of Moats The Network Effect Economic Moat. It’s why Musk believes moats are irrelevant. To a large degree, brand power creates demand for those chips and secures their placement on store shelves. b) Intangible Assets: Regulatory Licenses Regulatory licenses can create a strong moat as new players cannot enter the market without Musk, by making his fast chargers available to others and open-sourcing Tesla’s patents, has intentionally filled a potential moat. Similarly, a company having a license to do a specific type of business can be considered a MOAT as well. GEICO’s moat was spotted by Buffett and then exploited further once it … Some “intangible” assets are more defined than others. There are several types of moats that companies can build for themselves. “I think moats are lame,” Musk responded. That cost creates inertia that keeps users on an existing network and slows the growth of new ones. Or you can build one that gets deeper and wider as you innovate. There are various different by which a company can create an economic moat in the market that will allow it to gain the significant level of advantage over the competitors where some of the ways include cost advantage moat, intangible assets moat, high switching costs moat, size advantage moat, and the soft moat, etc. In other words, businesses with economic moats have sustainability. Software adoption—a moat of network effect—can protect a business from newcomers. The Different Types Of Economic Moats. Leaving—or splitting time to pursue fans on a new network—comes at a cost. Social networks have their own switching costs. Short-term advantages are useful, but they shouldn’t be mistaken for moat-building. There are certain intangible assets that act as economic moats. The feud started when Musk was asked about Tesla’s decision to make its network of fast chargers accessible to other automakers (for a fee). This post is not a dry feature-by-feature comparison, nor does it include a winner-take-all verdict.…, A/B testing tools like Optimizely or VWO make testing easy, and that's about it. In Richard Rumelt’s Good Strategy Bad Strategy: The Difference and Why It Matters, he recounts a favorite (and recurring) discussion with his students: What makes Walmart successful? Not surprisingly, the most popular products—freemium or not—earn early and powerful integrations. A startup taxi service needs hundreds of drivers in a city before wait times can compete with Uber. They may delay company death, but they also make that death inevitable. .] “It’s nice, sort of quaint, in a vestigial way. In the United States, the consolidation of health-care systems is a model for efficient scale moats: a rash of regional acquisitions. Lifestyle is a huge area for brand building and Harley is brilliant at it. Management expertise or structure. Some moats have greater relevance (or irrelevance) for various industries. Mass retail stocks rally in June He notes that there are four types of economic moats : lowcost provider, high customer switching costs, intangible assets and … Musk wasn’t impressed: Then I’m going to build a moat & fill it w candy. Many shopping malls have a strong economic moat because they "control" the geographic region around them. The search for high-quality starts with wide-moat stocks. An economic moat acts as a barrier-to-entry for competing firms aspiring to capture market share, and it protects the long-term viability of a company. Several prominent business-focused investors have spent years identifying and describing the different types of economic moats a company can build to protect its business. Network Effect. Meanwhile, for buyers, eBay has the widest selection. For those familiar with the concept, it can be a refresher. These companies have competitive advantages, but they are eroding due to a shifting industry landscape. Companies aim to create high switching costs in order to "lock in" customers. Profitability can be sorted out later, as was the case with WhatsApp. Consumers will pay more for a bag of Frito-Lay chips than for a bag of generic chips. A moat in cost is a competitive advantage a firm can strive to achieve. Companies that can deliver their goods or services at a low cost, typically due to economies of scale, have a distinct competitive advantage because they can undercut their rivals on price. It could prevent them from ever rising to become a true alternative to Facebook. Additionally, because the surgeon would have to be trained to use a new, competing product, he or she would also have to contend with lost time and money resulting from not performing as many surgical procedures. But demand won’t scale. The network effect is one of the most powerful competitive advantages, and it is also one of the easiest to spot. Common components of martech stacks become prerequisites (or, at least, preferred skill sets) for many positions, our current marketing operations role included: Our current stack: Customer.io, Intercom, Hull.io, WordPress, Heap, Hubspot Sales, Mailshake, Clearbit, Unbounce, Google Analytics, Google Tag Manager, Metorik. According to Chang, economic moat can be defined as the non-replicable, sustainable and structural competitive advantages and franchise power. Southwest Airlines taken advantage of this kind of economic moat in early years. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. Hi, I'm Peep Laja—founder of CXL. Competitors are unlikely to invest the time and energy necessary to compete in a niche market. The longer you will benefit from its profits. Facebook has built its moat with customer data. For example, it’s financially feasible to build a competing motor speedway in Indianapolis. The data required comes…. If you can make it for less, you can sell it for less. determining the competitive advantage of any given company and, above all, the durability of that advantage. There are many factors you should consider when choosing those best-of-breed businesses that have great growth potential and are capable of generating substantial profits for you over the years. Probably the best book I've ever read on the subject is Pat Dorsey's The Little Book That Builds Wealth. Indeed, an economic moat, just like the medieval fortress original, keeps competitors out by raising barriers that lessen threats and make take-overs more difficult. “Morningstar’s ratings for economic moat […] capture how likely a company is to keep competitors at bay for an extended period. The network effect is a powerful moat. And you reap the rewards of greater engagement. Acts as quality control measure and improves consistency. If your only defense against invading armies is a moat, you will not last long. Licences or Patents . As an economic moat, such a situation is nirvana. These include intellectual property, such as patents, trademarks, copyrights, and proprietary technology; brand names; and goodwill, such as a positive reputation, strong employer-employee relations, and customer base. Examples of businesses with intangibles include Pfizer, a pharmaceutical company with a roster of patented drugs; Nikewith its (generally) positive reputation for quality and relevance; and Chipotle with its commitment to “naturally r… As a result, Wal-Mart is able to offer prices that competitors have a difficult time matching--one reason why you don't see too many Kmarts around anymore. High Switching Costs. exclusive integrations with Google Analytics 360, depend on limited demand and geographic dominance, our current marketing operations role included, How to Analyze Your A/B Test Results with Google Analytics, 5 Analytics Questions You Should Always Ask, Why You Shouldn't Trust the Conversion Rate in Google Analytics, Website Information Architecture: How to Optimize for UX. . So now that we know the sources of economic moats, are there ways to test for them in practice? Aggregator and platform type businesses especially seek to create network effects. Constine isn’t the only one with that opinion: Facebook *wants* privacy regulations to entrench its monopoly power. This term appears in many forms but we suggest a definition similar to that proposed by Joel Greenblatt: A brand moat is a lifestyle moat. The crux of Halligan’s pitch is the value of inbound marketing. If an EMR provider rolls out a complementary product, its interoperability within their system makes it a tempting choice for current clients. Start up costs. “Elon may turn things upside down in some areas,” but, Buffett suggested, “I don’t think he’d want to take us on in candy.”. Create a brand-owned term. Scale allows Wal-Mart to do its own purchasing more efficiently since it has roughly 5,000 large stores worldwide, and it gives the company tremendous bargaining power with its suppliers. You can build a moat that jealously guards an advantage without extending it. One final thought about economic moats: It is possible for some companies to have more than one type of moat. They had what I call share of mind [. The company's investment in advertising and marketing distinguishes its products on store shelves and allows PepsiCo to command premium prices. It was essential for their market: Most people will assume the service is fairly identical among [car insurance] companies, or close enough, so they’re going to do it on cost, so I gotta be the low-cost producer. Cost advantage. Switching costs are another type of economic moat, which makes it very time-consuming and expensive for consumers to switch products or brands. As Buffett suggests, they’re more durable than other competitive advantages. More than any other moat, switching costs often serve companies, not consumers. If you picture a typical company as a castle that is constantly under attack by its enemies, or competitors, you’ll have a better understanding of just how important an economic moat is in helping a business to thrive and survive in the marketplace. Cynical moat-digging campaign may mean, for the network-based moat: MakeMyTrip, Flipkart, Videocon,.. Switching costs are another type of business cash flows without an economic,... 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