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A Consultant's View

Prairie Trail Software, Inc. ............................................................. November 2012

Business Moats

Warren Buffet says that he wants to find companies that have a "moat" where they have multiple competitive advantages. But what happens when a business is protected by a moat? The answer isn't always what you would expect.

Moats were essential parts of any castle. The moat prevented sappers from digging under the walls and bringing them down. The moat prevented waves of attacks with ladders from climbing over the walls. Yet, today, we can find many castles in Europe with abandoned moats and no castle built after the 1600's has a moat.

The technology of battles changed and made moats irrelevant.

A "moat" in the business sense is the combination of those practices of change and adaptation that allow the business to keep moving forward as the business climate around it changes. It is the way that the company keeps its customers as its offerings change. It is the way that it people continually are attracted to it even as the workers move on.

Many people think that a company is the product it produces or the service it provides and not the people. This leads to assuming that the product or service is the moat and leads to why a business "moat" fails.

When a company thinks that the product or service is a moat and the company is very profitable, the end result is two fold: the company stagnates and stops offering new product ideas, and customers tend to rebel against that company by looking for substitute ways of meeting the needs that the company was meeting. An extreme example happened prior the American Revolution where the East India Company had the monopoly on importing tea into the Colonies. People started drinking coffee as a protest against that monopoly.

The main way that business moats are breached is through a change of technology. With castles, it was the adoption of gun powder and cannons that made the moat irrelevant. When Steve Jobs came back to Apple, the first thing he did was to cut the company back to what they could make profitably. The next step was to wait for the next opportunity. He knew that technology would change and make irrelevant the moats that his competitors had. Today, Microsoft is facing one of the biggest challenges in its history with the changes that Apple fostered.

Similarly, Google is trying to create a moat around its search engine by giving away a number of other technologies. While this give away is good for short term, the challenge is always how to keep corporate interest in things being given away. Look at how Internet Explorer was dynamic until there were no more competitors. Then it stagnated for a few years till competitors arose to handle the consumer needs that it was not addressing.

In short, once inside a moat, businesses tend to relax instead of working hard to build the better future.