If you are a businessman, economic moat is your next step to shield you from failing the fierce competition. Warren Buffett, the legendary investor, is the one who springs up this term. By definition, it is the ability of a business to create a competitive benefit over competitors to protect the business longevity and market share. Moat is actually a literal term reflecting a castle building structure during medieval times. In the past, people built moats to protect the fortress, riches, and property from outsiders. In business, moat is the most desirable term to learn.
Some definitions of economic moat are actually similar to one another. It is the competitive advantage of a company to protect profit margins from competitors. When a business soars, a company should start to consider leveraging their profit into a longer term. So most people call economic moat as profit protection.
There are actually two types of economic moat.
The first type is narrow economic moat and the second type is wide economic moat. The narrow one reflects marginal competitive advantage over the rest of the market. But this type leads to short-lived profit. The second type, the wide economic moat could lead to further and more sustainable profit. It means that the second type of economic moat can bring your business into a longer profit.
If a company does not have this strategy, it will fall into a risk of losing market share from the competitors. This is because the business has no idea how to properly protect their competition advantage, profit, and market share. It is very important for a business to create a more defensible market share. This is because a company must have a strategy so that other companies cannot duplicate it. If a company’s method of survival is easy to duplicate, it is subject to vulnerability and disruptions.