Does Your Company Have a Moat?
Moats are often water filled ditches around castles and other fortified structures creating obstacles for would be attackers. Moats make it difficult for those wanting to siege the protected structure, both thwarting attacks from the ground and preventing the practice of mining, digging tunnels under the castle to cause it to collapse.
Like the castles of old, your company’s market share and profitability is under constant attack from competitive forces.
Michael Porter, author of Competitive Advantage and several other stellar books, developed something called, “Five Force Analysis”, which says companies face competition from five forces:
– Rivalry Among Existing Competitors
– Possible Entry from New Competitors
– Bargaining Power of Suppliers
– Bargaining Power of Buyers, and
– The Threat of Substitutes
An effective moat gives you a hedge of protection and even competitive advantage against these outside forces. Like the moats used to fortify a position, your business’s defense can come in all shapes and sizes, and will often depend upon your industry, business model and the weapons used by your competition.
When fending off other industry players, manufacturers of commodity products protect their market share and margins with economies of scale, a boutique retailer brand, or a technology company high switching costs for existing customers. Not allowing suppliers to get the upper-hand can be accomplished through tactics like supplier diversity and the ability to substitute inputs, and keeping buyers from pinching you is easier when you have diverse customer base and product differentiation.
Competitive advantages, like the “moats” mentioned here will not only protect your company’s profitability, but will also allow you to advance your market share and grow. Lastly, moats will increase the value of your hidden wallet, the equity value in your company. Bottom line, buyers pay significantly more for companies with a meaningful competitive advantage. If you want to understand how to protect your company’s position and take ground from others, consider reading Porter’s book “Competitive Advantage”, if you want the cliff-notes version, read Porter’s article in the Harvard Business Review here.