The moat is the sustainable , competitive advantage that protects a company and allows it to earn high profits and shield its market share thus staying ahead of its rivals over a prolonged period.
The companies with wide economic moats are not only able to survive over long periods but also consistently earn high profits. It also offer better revenue visibility and ceratainity of future cash flows.
How moats are created
1) Cost Advantage : Successful companies often make products that are similar to those of competitors. What gives them the edge is lower cost of production that allows them to price their products better or enjoy better margins. These could be due to economies of scale , cheaper sourcing of raw material or backward integration and lower variable costs.
2) Switching costs: Some companies make products that makes it difficult for customers to switch allegiance to a competitors products.
3) Brand power : Sustainable moats are created when the company builds a strong brand and products with superior brand identity.
4) Technological Advantage : The tech edge can pave the way for competitive advantage.
5) Entry Barriers : Sometimes companies operate in an environment with strong entry barrier for others. They can remove competition with exclusive licenses and patents or if they operate in a highly regulated arena.
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