4 Types Of Economic Moat & Choices That Lead Towards Building Them In The Business

Warren Buffet famously coined the term economic moat which refers to the ability of your business to protect long term profits and marketshare

Not every business is able to build a moat, yet this is the most important task of an entrepreneur to ensure that the resources their businesses are following a strategy that deliver long term return not just a short term profit. In this article I will share with you 4 major sources of building moat.

The biggest takeaway for you is that moat is hidden in your strategic choices.

Now, let’s dive in.

Cost Advantage:

Cost advantage is about competing on the basis of your cost, such that you are delivering value with high quality at low price.

The common everyday example of is IKEA. With their highly appealing furniture, packaged and produced at affordable price they are a global phenomenon for consumers who are looking for affordable furnishing and easy mobility. Strategic choices that builds them:

1. Low cost procurement
2. Simplistic design
3. Automated production
4. Value focused delivery channel
5. Low overheads

Lock-In Advantage:

Lock-in advantage is about increasing the cost of switching. It comes into play when you are at a unique interest of value creation.

The common example is Intel the chip maker, which is not only a chip maker but also a platform. Being at the intersect of computer manufacturer, chip producers and a branded consumer it has formulated solid moat by:

1. Next-gen innovation
2. Defining standards of production
3. Brand preference with end users
4. Developing partner producers
5. Category solutions

Niche Domination

Niche domination is about being a the dominated option in a narrow yet global market.

The best example of these are companies like Tobasco which are a global dominant player in chilly cause sub-category. How have they reached here:

1. Relentless focus
2. Unbeatable standard
3. Global sales network

Brand Advantage:

Brand Advantage is realized through brand equity in the market based on recognition and preference.

The best example is perhaps Coca-Cola with it’s global brand equity that’s worth upwards USD 20 Billion, this is achieved through:

1. Consumer focus
2. Market share
3. Agile distribution system
4. Channel engagement

The economic moat is built through strategic choices while running your flywheel with right people as Jim Collins puts it. The best way to start thinking in that direction is to think about these two questions:

1. Who will market favour in the long run?
2. What choices do I need to make to align my business for long term moat?

This post was created with Typeshare