Term
Moat
A sustainable competitive advantage that protects a business from competitors — analogous to a castle moat. Warren Buffett popularized the term in investing; the same concept applies to product strategy.
A moat is a structural reason a business can sustain above-average returns over long periods despite competition. The metaphor is Warren Buffett's: a great business is a castle whose moat keeps invaders out.
Categories of moat
The most-cited taxonomy (originally from Michael Mauboussin and others):
- Network effects — each new user makes the product more valuable to existing users (Facebook, Uber)
- Switching costs — leaving the product is painful or expensive (enterprise software, banking)
- Cost advantages — structurally lower production cost (Walmart, BYD)
- Brand / intangibles — customers pay more for the same thing (Coca-Cola, Hermès)
- Scale advantages — economies of scale that smaller competitors can't match (Amazon logistics)
- Regulatory — license or permission that competitors can't easily acquire (utilities, defense)
Why it matters for strategy
A market with no moat is a market where returns drift toward zero — the airlines case studied in Porter's Five Forces. A market where one player has a deep moat is one where that player's pricing power compounds over years.
Strategic implications:
- For investors: pay attention to whether moats are widening or eroding
- For incumbents: spend on the moat-strengthening activities, not the moat-evidence activities (don't just claim a moat in your pitch deck)
- For new entrants: pick markets where the incumbent's moat is weak or where you can build a new kind of moat the incumbent can't replicate
Related
- Porter's Five Forces — the framework for diagnosing whether an industry's structure permits moats
- SWOT — moats show up in the Strengths quadrant when they're real