Why You Need To Know What An Economic Moat Is by Ben

Have you ever heard of an economic moat? We have this term in our language thanks to Warren Buffett, one of the world's most famous (and richest) investors. He took the idea from the way a moat protects a castle. The moat provides a barrier between the castle and the land around it, so no one and nothing can get in easily.

But how does this compare to an economic moat?

The term in this context refers to the advantages a business enjoys over its closest competitors. These advantages are economic and competitive in nature. The best example of an economic moat enjoyed by a company is if that company has a particular method or mode of doing business that cannot be replicated by its competitors.

For example, let's say you and I both sell business cards independently of each other. I have found a supplier who will give me the basic stock for half the price we are both currently buying it for. This means I can knock down my prices, which in turn will probably give me a competitive advantage and form the economic moat that will separate me from you.

The chances are however that you will work out what I am doing eventually and go to the same supplier. This will get rid of my economic moat and we will be back in direct competition again.

A good example of an economic moat that cannot easily be broken down concerns Kentucky Fried Chicken. KFC has a secret recipe that no one knows, except for a select few within the company. This recipe is for the coating that goes on its chicken.

Every other competing company has its own recipe for a similar coating - but it is not the same and it never will be, because KFC's recipe is protected. This recipe provides it with an economic moat that keeps it ahead of all the other fried chicken places in the world. When you think of buying fried chicken, the chances are you think of KFC. This is the power of the economic moat in action.

If you have a business of your own you need to think about how you can create your own economic moat. It is more powerful than you might realize, and once you have a good one it will give you the edge over your competition.

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