The Moat Your defense of fat profits

The moat Definition: Moat is the long term structural competitive advantage. Function: Moat is the defense of your attractive business from current and future rivals.

Sources of Moats Switching cost. How hard is it for customers to switch to rivals of this company? – Microsoft, Facebook – Basic cell phones – iPhone and smart phones in general – PCs, TV – Online broker, banking accounts – Amazon and online shopping – Retail: WMT, Target, BBY

Sources of Moats Network effect: – The more people use the services/products, the more valuable it is for every user Windows, MS office, instant message AT&T, unlimited in network Ebay: buyers need more sellers, and sellers need more buyers Smart phone: Apps – No network effects Restaurants

Sources of Moats Brand and other intangible assets – Brand that charges premium for same services/products – Patent – Regulation – Exclusive rights – Scarce Natural resources Mine, oil

Sources of Moats Cost advantage – Volume leader: HP, Netflix, WMT – Better technology – Better process: Dell – Cheaper labor

Measurements of moats Will the company be there for another two decades? If yes, it has a moat. If the company stops innovation for five years, can it maintain its competitive edge? If yes, it has a wide moat

Eroding moats: Moat can go away Disruptive technology – Nokia, Rimm – INTC, MSFT Cost advantage can be matched – Dell