We often look up to the world’s most successful investors to inspire us and try to glean some wisdom that we can apply to our own businesses.
When Warren Buffet invests in a business, he’s looking at more than growth or value investing but ownership and how safe those businesses are. What he’s looking at is their moat. The safety zone around the business that means he can keep his position for his favourite time period – forever.
The moat around your business is how big the gap is between you and competitors. How strong are the competitive forces and do you have a measly little stream or a great big moat with sharks to boot? You see that gap not only provides longevity but profitability. There are a few models to look at, a famous one of course is Porter’s Five Forces, here’s a recap.
Porter’s Five Forces
1. Threat of new entrants to the market. Have you ever wondered why there are only two major airplane manufacturers in the world? If the threat of new entrants for whatever reason is high, tick you have the first meter of moat protecting your business.
2. Threat of substitutes. I’m sure Coca Cola and Pepsi aren’t stoked about the millions of substitute products on the market now which means they have to constantly innovate.
3. Bargaining power of buyers. Thanks Amazon, you’ve made it super easy for people to find a bargain and the Internet makes it even easier for people to go elsewhere. What’s your value add and why would people be crazy not to do business with you?
4. Bargaining power of suppliers. With the world landscape changing dramatically (add post-Covid), for many there’s probably another rung on the step to bargaining with suppliers and for some, suppliers were shut down completely for a period of time. What is the back up plan?
I’m pretty sure you can wedge in other factors but if you have a solid footing with each of these forces you’ve got a pretty good moat. But what else? Yes, there’s more.
There’s more to building a moat around your business
Your finance director can help your business to find ways of reinforcing your moat, throwing in some sharks or crocodiles. There are ways to build up efficiencies of scale or create unique cost advantages. Looking at alternative revenue streams and protecting cash flow, switching costs. Depending on your business and industry, there’s a lot more to Porter’s Five Forces.
Probably not last and most certainly not least, your intangible assets can be a gold mine. Especially at a time like this with so much uncertainty in the world. Your intangible asset is your brand. How can you look after your existing customers better than ever, help them out during this crazy time, add more value than ever and build up equity and staying power in your brand?
Ask your finance director at your next management meeting how you can build a moat around your business.