Economic Moat or Grave For Your Business?

Don't sink your company in the moat

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An economic moat isn't just a shield; it's also a tight leash. It guards you from the outside but can also hold you back from within.

The siege of Candia

The siege of Candia (now Heraklion, Crete) was a military conflict in which Ottoman forces besieged the Venetian-ruled capital city of the Kingdom of Candia.

It lasted from 1648 to 1669, or 21 years, and was the second-longest siege in history. 

Candia castle was surrounded by a moat, which made it difficult for Ottoman troops to take over the city. However, the moat and thick walls that protected the castle also hindered the fortress defenders' maneuverability, sealing its fate. 

On 27 September 1669, Captain General Francesco Morosini, the commander of Venetian forces, surrendered to Ahmed Köprülü, the Grand Vizier of the Ottoman Empire.

The defender of Candia couldn't choose the battlefield. But business leaders can be more flexible. 

In business, building an economic moat can bring a short-term advantage. But in the long run, it may turn from the advantage into the hurdle. 

Economic moat 

Warren Buffet, the great investor, coined the term' economic moat' and popularized it. 

According to Investopedia, an economic moat "refers to a business's ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders." 

However, having surrounded ourselves with a moat, we shouldn't get trapped within it.

Companies build various types of economic moats:

– Cost advantages. Companies find ways to keep costs low and offer low prices to customers. It helps them defend their market shares against competitors. 

– High switching cost. Businesses make switching to alternative products difficult, which prevents customers from leaving for competitors. 

– Brand. Some organizations invest in customer loyalty to their brands. 

– Patents or licenses. Legal norms may limit the competition in a market. 

This is not an exhaustive list, but you get the point. 

As with every business concept, this idea has its drawbacks. 

The moat shouldn't become a grave for our organization.

Words matter

Blockbuster, Nokia, Sears, Kodak, and General Motors surrounded themselves with moats such as big brands, unique technologies, and economies of scale, but that didn't save them. 

Southwest Airlines, the textbook example of leveraging cost advantage, is losing its market position in the US as legacy carriers begin to copy some elements of its business model.

Words have power. 

If I tell you this hamburger is 80 percent lean as opposed to 20 percent fat, then I am communicating the same thing. But studies show that people perceive the 80 percent lean hamburger as much healthier than the 20 percent fat option.

Our world is what we believe in. 

When we use terms like 'competitive advantage' or 'economic moat,' it affects our mindset – and that of our team. 

The word 'competitive' makes us think too much about competitors and too little about customers. 

But competitors don't pay us for our products, customers do. 

When Microsoft, Amazon, Facebook, and Tesla emerged, they had few competitors, which allowed them to concentrate on consumers and users. 

The Cambridge Dictionary defines 'advantage' as "a good feature that makes something better than similar things." 

But if customers compare us with others, we're in trouble. Our strategic goal should be to create unique solutions that are difficult to compare with the others. 

Thinking about building an 'economic moat' shifts our brain into a defensive mindset.

Like the defenders of Candia, we're starting to consider how to fend off the enemy and fortify our walls.

We try to keep and reinforce our competitive advantage until it's too late. 

"What can kill us?" 

When I work with companies on their strategies, I ask the teams to answer the question: "What can kill us? What product, solution, or technology, even imaginable, can deliver so much value to our customers that they'll forget about us?"

And it isn't just a question we can play with for an hour, just for fun. 

I ask them to find such solutions and create a plausible scenario where these products win and retain our customers. 

No matter how deep our moat is, it won't protect us for good. 

Tesla managed to create unique value for customers, but according to recent data, it's losing its uniqueness day by day. 

Facebook was not just a social platform, it was the social platform at one time. New user generations don't even know it exists. 

The best approach to competition is not to wait for competitors to kill your product but to do it yourself by offering a better solution.

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Read also: Seeking Product-Market Fit? Lost Before the Game Began.

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