Successful companies are built on sustainable competitive advantages. So as an investor it makes perfect sense in looking to companies with economic moats. That’s not to say that every company that does have a moat will be a bad investment. Just that investing in companies with a moat increases the odds of substantial profits from the investment. In the business world, these moats characterize sustainable competitive advantages that shield a company’s profits from marauding competitors.

• You can find companies with a network moat by looking for ones with a lot of users, high costs to switch to a competitor, and a big share of the market.
• Meanwhile, the moat for Duke Energy stems from regulation and scale economies.
• The brand power acts as a protective barrier, making it challenging for competitors to sway Apple’s loyal customers.

It got to the point where having an iPhone makes customers feel sophisticated. That’s the reason Apple continues to dominate the smartphone market even when there are better phones in the market, both in terms of technology and price. And if they can use the brand value to create customer loyalty, it’s an added benefit. In fact, brand loyalty can ensure dominant market share and consistent revenue. And with that recipe, Coca-Cola sold its soft drinks in every part of the world. And none of their competitors could imitate Coca-Cola’s success, since they didn’t know the recipe.

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Other companies like Apple Inc. (AAPL) and, at least until some missteps in recent years, Nike, Inc. (NKE) have been prime examples of companies with powerful brand moats. Contrary to popular myths, moats were not typically filled with dangerous creatures like crocodiles or piranhas—often, the supposed impregnability of a company’s defenses is just as mythic. In many cases, water moats were stagnant water, though some might be filled with debris, refuse, or dead animals. Focus strategy ideally tries to get businesses to aim at a few target markets rather than trying to target everyone. This strategy is often used for smaller businesses since they may not have the appropriate resources or ability to target everyone.

A company with an old and solid moat might have gotten used to succeeding without trying too hard. A few decades down the road, it might have lost the unique touch that made it successful in the first place. The decline of the once mighty General Electric, founded by Edison in 1892, is a good example. This is when a company or its product achieves dominance in its field to an extent that draws customers automatically. This can be non-tech companies as well, like for example, Disney or Nintendo’s intellectual property rights are unique and highly valuable. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.

Think about the wide and deep trenches surrounding the medieval castles. A moat can be a crucial factor in the future profitability of a company. It is vital to figure out if the moat is solid enough to affect your assessment of a stock’s value. For example, an electric company might operate a series of dams over a large river. The power will be cheap to produce, and no one else can build on the same river.

An example of an economic moat in action

The brand power acts as a protective barrier, making it challenging for competitors to sway Apple’s loyal customers. But if they don’t keep up with the times and make poor decisions, they can weaken their moats and lose their advantage. So it’s important to keep an eye on how companies are investing in their future. Qualcomm also licenses these technologies to other companies. And that has brought a huge source of revenue over the years.

• As a comprehensive continuation to this article, we’ll soon be releasing a book on Moats; how to identify a moat while it is being created, how to approach companies with an established moat, etc.
• Berkshire Hathaway’s long-term vision exemplifies the importance of leadership in fortifying a moat.
• Qualcomm’s licensing division reported over $5 billion in revenue in 2020.
• Some of the best investors (like Warren Buffett) have made a career specializing in identifying companies with strong moats and paying a relatively low price for them.
• A competitive advantage is essentially any factor that allows a company to provide a good or service that is like those offered by its competitors and outperform them in profits.

Know where to best invest your time and money to give you a higher ROI with our product marketing services. Economic moats seeks to address some of the criticisms of comparative advantage. Economic moats rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. For example, Buffett has invested in many future growth opportunities. Investments in BNSF, one of the leading railroads, give Berkshire a valuable asset. Additionally, he has invested in energy in a big way, creating Berkshire Energy.

The term comes from medieval castles that were defended by a deep moat, making the castle almost impossible to conquer. Some moats would be extra strong, for example very large and filled with water. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. During the early Middle Ages, a moat might not be filled with water. It was still a trench deep enough to render it difficult for attackers to breach the walls of a building.

The Durability of Economic Moats

Our goal at FinMasters is to make every aspect of your financial life easier. We offer expert-driven advice and resources to help you earn, save and grow your money. The network effect can work during the growth period, but also in reverse during a decline. Before Facebook, there was Myspace, before Google there was Yahoo, and they went from popular to forgotten very quickly. This is a more controversial moat because it can be synonymous with corruption and political risk.

What Is Apple’s Economic Moat?

With the rise of technology, in the last decade, economic moats have been created by leveraging different aspects of a business. And this in turn allowed Walmart to sell the products at a lower price than their competitors. Thus an economic moat was achieved through economies of scale.

This is a very subjective moat, but a very real moat as well. Steve Jobs or Elon Musk are the type of leaders that propelled their companies to a level no one could imagine at the time. Or maybe a company has gathered the best minds and the best sales team in their industry, and replicating these advantages would be very costly and slow. It can be a luxury brand, but also well-known consumer products like Coca-Cola.

He used it to describe a competitive advantage that allows a company to maintain its market position and defend itself against competition. A strong brand can be a big help because people will keep coming back to buy its products or services. And if it’s hard for new companies to break into the market, that’s a sign of a strong brand.

Nvidia’s proprietary technologies, such as its CUDA platform for parallel computing, give it a significant edge over competitors. These not only provide Nvidia with its technical lead but also lock in customers who are heavily dependent on its specialized software and hardware. A moat is a deep, broad ditch dug around a castle, fortification, building, or town, historically to provide it with a preliminary line of defence. In some places, moats evolved into more extensive water defences, including natural or artificial lakes, dams and sluices.

as a matter of fact any of the investment books published by Freeman Publications”

The quotes above signify economic moats as the ability to stay ahead of present or potential competition. Also, it provides the understanding that resources held by a firm and the business strategy will have a profound impact on generating economic moats. Value proposition is important when understanding economic moats. If the value proposition is effective, that is, if the value proposition offers clients better and greater value, it can produce an economic moat in either the product or service. The value proposition can increase customer expectations and choices. It served as a protective barrier around what is a moat castles and fortifications, filled with water to create an obstacle that made it difficult for attackers to approach the walls.