Complete Definition
A moat (inspired by castle defenses) refers to sustainable competitive advantages that protect your business from competitors. Warren Buffett popularized the term for businesses with durable advantages.
Types of Moats
Network Effects
Product becomes more valuable as more people use it. Examples: Facebook, Uber, Airbnb
Switching Costs
Cost/effort to switch to a competitor. Examples: Salesforce, SAP, banking
Cost Advantages
Ability to operate at lower costs than competitors. Examples: Walmart, Amazon
Intangible Assets
Brands, patents, regulatory licenses. Examples: Coca-Cola, pharmaceutical patents
Economies of Scale
Cost advantages from size. Examples: AWS, Netflix content
Efficient Scale
Natural monopoly dynamics. Examples: Utilities, some B2B markets
Building Moats
1. Start with product excellence 2. Focus on customer love 3. Invest in compounding advantages 4. Think long-term 5. Reinforce advantages over time
Moat Durability
- Some moats erode (technology changes) - Others strengthen (network effects) - Regular assessment needed - Competition constantly attacks moats