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Views from the Prairie

November 12

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.

Concentrated Creativity

There have been some interesting studies in how human beings react to having too much choice. When people are faced with a wall of different options, they often walk away not taking any of the options.

The same is true with being creative. When too much freedom is given to the creative person, they rarely are able to find the muse and produce anything.

There are two common results to having too much creative freedom. One is to not generate any thing. We see time after time where a writer gets an advance for a book and never finishes it. We see student after student never finishing a degree once they got the class work done and all they had to do was the dissertation. The other result is to put "everything" into the effort. In software, we see that in the "second system syndrome" where the system is so loaded with features that it no longer works or is really slow. We see that in reports that get moved from committee to committee where each committee feels the need to load up the report with more stuff.

In most cases, impressive creativity happens where there are strong constraints. The creative effort needed to write Haiku or specific poetry forms is far more than that needed to write free form poetry. A short work is far harder to write than a long one but has more impact. Two people spoke at Gettysburg that day, one for an hour, one for a few minutes. We remember the short one.

When a work has to fit into a specific format (such as a brochure) or has to fit a specific word count, the creative effort is far more than when there are no such restrictions. Yet, such added effort often results in a far better product. Thinking more about the results yields better results.

Risky World

In the aftermath of hurricane Sandy, stories are coming out about all the failures that happened. It wasn't just hospitals that were affected. One data center had to use a manual bucket brigade to get diesel fuel to the generators as the pumps were under water. Toilets in one building were controlled by the computers in another - that were down for lack of power.


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