Economic moat, undeniably, is a vital trick where business could protect long-term profit. Continuing the previous article in the definition of economic moat, this article focuses on the case samples and tricks. Business should be cautious, economic moat can be developed from a qualitative perspective, but it does not mean that it does not have concrete tricks. So, let’s get into the point: how to create an economic moat?
Business has its own key to success.
So, let’s explore some potential moats for business. Thus, let’s begin the first strategy of economic moat. The first is cost advantage. Just like in the previous article there is this common way in conquering the market by having competitive advantage. This is basically one of the economic moats, but it will not stay longer. Competitiveness in pricing has been booming endlessly. But it does not mean that this strategy is pointless. A business must think about pricing breakthroughs if they want to profit more than the competitors.
The second is creating a high switching cost. It is a great thing to be the best company among the rest of your competitors. When you own a brand you can create a switching cost. Switching costs is one of the ways for a company to prevent customers from moving to another brand. There is sometimes an additional charge if the customers move from another brand. That is the reason why the name is switching cost. It is the cost that customers must pay when they move to other brands. In other words, you should create a difficult, unique, or perfect product so that you have a little competition. Then, you can apply high switching costs to boost the profit.
The third is intangibles.
By definition, an intangible asset is an asset that is not in the form of a concrete asset. So, intangible assets include brand recognition, goodwill, intellectual property, patent, trademarks, copyright, and the like. In economic terms, tangible assets are the opposite of intangible assets. So, tangible assets here are like vehicles, equipment, land, and etc. In other words, businesses can actually inquire about intangible assets. Therefore, intangible assets could be indefinite like brand name. This kind of asset does not appear in the company’s balance sheet.
Intangible assets could be one of the most valuable economic moat. Economic moat in intangible assets could boost profit from premium charges. This is because intangible assets include items like patent and brand recognition. The stronger a business’s brand recognition, the stronger they could charge premiums in their products over competitors.
The fourth is soft moats.
Some companies have their own unique strategy in building economic moat. Sometimes, it is even harder to identify which strategy they are using. The epitome of soft moats could occur in the unique corporate culture like exceptional management. A way of leading the company and corporate environment could also contribute to the prolonged economic success. In other words, soft moats are a strategy for a company to create a healthier working environment. Most small firms could grow well depending on how the leaders lead.
This is the reason why it is actually hard to identify what kind of leadership strategies a company has. But the effect could be seen when the business soars. This is actually a positive point for investors to learn. They could even have the confidence in investing in a business by seeing its soft moats. Although the company they are investing in is small, they could grasp the correct leadership the leader applied in the company.
Finally, price competition and intangible assets could contribute to long-term profits. Although business’s ups and downs remain during the competition. But one strategy like soft moats, could contribute to long-term profit more potential than other strategies. Investors could see a business growing from who the people are in the boat.
The Economies of Scale in Moat
Economies of scale is one of the economic moat achievements. The economies of scale is a condition when a company reaps cost advantages when the production is performing well. Companies could create this condition by increasing production and having some efforts to strategize the lower cost. Therefore, when a company finally achieves economies of scale, it could charge the product lower in the marketplace. Lower cost could exactly attract buyers and undercut competitors.
Things to Ask While Building Economic Moat
When a company considers managing a long-term profit and economic moat, it must ask a few questions for evaluation. For example, what kind of sources could generate a company’s revenue. From all the sources of revenue, which one generates more income? It is also vital for a company to know who their competitors are and how to stand out from them? Even the question of what kind of industrial sector best suited the company, is also important. In order to create the best economic moat, a business should note well the key points of their SWOT. Therefore, these kinds of questions could help the business focus on creating the best economic moat fortress.
Apple for instance has created some economic moats to shield their long-term profits. Moreover, the thing that is very obvious is that Apple always attempts to launch a product that has existed before. The epitomes are iPod, iPad, as well as iPhone. They own the original idea and version. This is the reason why no wonder the company finally leverage its marketing strategy, design, as well as unique interface.
