As we said in "How good is the moat surrounding your castle" a good most is much more than water in a trench. A good moat has many enhancements to stop people who learn to swim - like crocodiles.

So lets discuss what some of those "Moat Enhancements" are:

Intellectual Property

  • Brands & Trademarks e.g. Cocoa Cola
  • Patents
  • Trade Secrets
  • Business Model Innovation
  • Technology
  • Licenses

Scale

  • Network Effects
  • Lower Costs
  • Leverage of Technology

Stickiness

  • Switching Costs
  • Monopolies
  • Geography

Culture

  • High Performing Teams
  • Focus on Customer Satisfaction
  • Focus on Adding Value for Customers

A more traditional way of thinking about possible moats is illustrated in this diagram of Porter's Five Forces posted on Twitter by Andrew Kuhn from Focused Compounding (if you do not listen to their podcasts - you should)

Source: @FocusCompund (Focused Compounding)

But nothing stays the same forever and in today's economy, when we are looking for moats, we also need to think of ways become uniquely good at adding value for the customer. The internet has made the customer very powerful and given them tools to seek out the products/services they value most - like a bridge over some of the more traditional moats.

The large tech companies have outperformed the market because they have built moats like:

  • Network Effect - who would want to be the only person on Facebook
  • Delivering Value to the Customer - Do your own research of Google for free
  • Economies of Scale - Their sheer volume of users has moved them so far down the cost scale it is difficult for competitors to catch up
  • Branding - Do you Google something or AltaVista it?

Predicting which companies will be successful in building moats - is a very high risk business. It is easier and lower risk to identify companies that have been successful in building a most and making a judgement as to if they are likely to be able to maintain that moat for the next 20 or 30 years.

Will they be able to add more "Moat Enhancement" devices like crocodiles to make it even more difficult for competitors to cross. Did they learn lessons from th last competitors they successfully warded off?