Something About Moats

The way in which corporations battle for market share is similar to the way in which civilizations of the past fought for land and protected their territory. Some members of the civilizations would venture out in an effort to expand reign while others would protect the fortress. If the resources of found civilizations were valuable, war would be waged in the form of a hostile takeover. If a civilization was sophisticated it had walls, weapons, and men trained for war. At some point it was determined that a moat could be used as an extra layer of defense. An additional form of resistance before the walls of the civilization could be reached. A barrier to entry. A moat is body of water that sits between the walls of a civilization and open land. In business, a moat is not water unless you’re in the business or extracting pure drinking water from a glacier in Antarctica. The fact that the water is from Antarctica May be difficult to compete with due to the resources needed to capture the water and transport it to market.

Corporate Moats

A moat is just a metaphor for something that protects your business from competitors. Businesses work hard to make profit, and that profit needs to be protected. Profit secures continued existence of a corporation just as resources are needed to feed a civilization. Competitors will try to take customers away from your company so that they can make a bigger profit. A competitor can be a company that already exists, or they can be newly formed entity. For existing competitors your company must find a way to differentiate your product or service in a way that provides more value to your customer.  This can take form of better quality, better service, or cheaper price. For a new entrant your company can make it extremely difficult for others to replicate. Startups are always looking for a weakness to exploit. Your company can protect its assets with patents and internal controls. See if you can find the recipe for Coca-Cola’s secret formula, or KFC’s proprietary blend of herbs and spices. Whether by law or strategic protection protocols your business can thwart the efforts of new entrants into your market. Your company can also use monetary investment as a deterrent for new entrants. This is why you do not see new airplane manufacturers popping up frequently. The amount of money that it takes to start competing with the incumbents may not turn out to be an investment with a positive return. It’s too risky given the amount of capital needed to compete.

Potato Chips

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Some corporations have built moats that are very challenging to surmount.  If you wanted to compete with Lay’s potato chips there are many obstacles to overcome before you can even get on a shelf.  Each state has different regulations on how food can be prepared and where it can be prepared.  These regulations must be followed closely to avoid costly problems in the future. Furthermore, the equipment needed to produce an ample volume of product at scale can be very expensive. Not only does is cost money to get your product on the shelf of a grocery store, but the buyer of product at a specific store needs to like your product and be willing to give you a chance.  Let’s say that you’ve finally gotten your product on the shelf.  You are now picking a fight with brands that are stronger than yours and have more resources at their disposal to push your product out of the market.  In a sense, it is like playing a game of No Limits Texas Holdem’ with the small stack.  You can still win, but surely it is a challenging road to victory. Lastly, if you’re entering the chip market it takes time to build relationships as FritoLay has done. Can you imagine how many contractual agreements have been signed to exclusively sell Lay’s potato chips.

Moats serve as an effective way to protect your business. While scaling your business it is important to understand how you can prevent competition from eating away at your business or even worse pushing your business out of the market.

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One comment

  1. Great article! Understanding and documenting the competitive analysis in a business plan is critical. Those businesses without a competitive advantage will face growth challenges against the multinational corporations. A moat is necessary for survival. Thanks for posting!

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