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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