October 16, 2023
Moats, Systems & Business Model Innovation

Think of a business as a castle. To remain powerful, it needs wide, deep moats filled with obstacles to prevent competitors) from easily reaching it.

Recently reviewed an interesting 2-part blog post by Jerry Chen from Greylock Partners. The original New Moats Post, published back in 2017 – reintroduced me to the concept of Business Moats – made popular by Warren Buffet. The focus on 3 Key Systems of the Enterprise was relatively new to me, so I created a separate write up in this post).

Brief Overview of Moats in Business

Think of a business as a castle. For the castle to remain powerful and unchallenged, it needs wide, deep moats filled with water or other obstacles to prevent invaders (competitors) from easily reaching it. The wider and deeper the moat, the harder it is for competitors to challenge the castle's dominance. Similarly, in business, moats represent competitive advantages that keep rivals at bay.

Moats have been a prominent concept in business literature, especially in the realm of investing. The term was popularized by Warren Buffett - he used it to describe businesses that have sustainable competitive advantages. Below are the key examples Jerry outlined in his post.

Economies of Scale: Picture a factory that produces more goods at a lower cost per item as it scales up. In the business world, as companies grow, they can often produce services or products more efficiently, reducing costs and undercutting competitors.

Network Effects: Imagine a party. The more friends you invite, the more people want to come because everyone else is attending. In the digital realm, platforms like social media sites become more valuable as more people join, creating a snowball effect.

Deep Tech/IP/Trade Secrets: Think of a secret recipe. If only one restaurant knows how to make a particular dish, people will flock to it. In the tech world, having unique methods, patents, or technologies gives companies an edge.

High Switching Costs: Imagine having built a custom house tailored to your exact needs. Moving to a new house would be a hassle. Similarly, when businesses offer products deeply integrated into a client's processes, it becomes cumbersome for that client to switch to another product.

Brand and Customer Loyalty: Think of your favorite coffee shop where the barista knows your order. You'd likely pick it over a new coffee shop. In business, brands that build trust and offer consistent quality have loyal customers who return repeatedly, creating a strong competitive edge.

In essence, these "moats" or advantages ensure that a business can continue to succeed and fend off competitors, much like how a castle's moat protects it from invaders.

We’ve gone one step further, to seek out cited examples of moats in well-known companies.

Coca-Cola Moat: Brand and Customer Loyalty – Coke’s brand is one of the most recognized worldwide. Its distinctive taste, massive advertising budget, and distribution capability make it difficult for competitors to match its reach and loyalty.

Walmart: Moat: Economies of Scale - Walmart's massive scale allows it to negotiate lower prices from suppliers, which it can then pass on to consumers, making it tough for competitors to match its prices.

Apple: Moat: Brand, High Switching Costs, and Network Effects - Apple's ecosystem, including devices, software, and services, ensures that customers find high value in staying with Apple's suite of products. Additionally, its strong brand loyalty makes it resilient to competition.

Gillette / Procter & Gamble: Moat: Brand and High Switching Costs - Gillette has maintained a dominant market share in the razor market because of its strong brand and the high switching costs associated with changing razor brands.

Netflix Moat: Content Library and Network Effects - Netflix's vast and exclusive content library attracts a large user base, which in turn attracts more content creators, forming a positive feedback loop.

These are just a few examples, some organizations have multiple moats, the concept is widely applicable to several companies across various industries.

Which companies have built defensible business models based on establishing Business Moats around a System of Record, Systems of Engagement, or Intelligence?

System of Record:

Salesforce: One of the world's leading CRM platforms, Salesforce has positioned itself as the primary system of record for customer data for numerous enterprises.

Workday: Known for its human capital management (HCM) solutions, Workday acts as a system of record for employee data and has expanded into financial data.

SAP ERP: This global enterprise resource planning software has become the go-to system of record for many organizations' assets and financial operations.

ServiceNow: Provides service management software as a service. It specializes in IT services management (ITSM), IT operations management (ITOM), and IT business management (ITBM) and serves as a system of record for IT processes.

Oracle/NetSuite: Known for its relational database, Oracle has long been a system of record for countless businesses, storing critical business data. NetSuite by Oracle is an integrated cloud business software suite. It handles ERP/financials, CRM, and e-commerce functions, acting as a system of record for various businesses.

System of Engagement:

Slack: A collaboration tool that allows teams to communicate seamlessly, Slack serves as a system of engagement where businesses interact and collaborate.

Zoom: Especially after the onset of the COVID-19 pandemic, Zoom emerged as a primary tool for virtual meetings and webinars, positioning itself as a crucial system of engagement.

Microsoft Teams: Part of the Microsoft 365 suite, Teams integrates chat, video conferencing, and file storage, acting as a comprehensive system of engagement for businesses.

WhatsApp: With billions of users, WhatsApp is a primary communication tool globally, making it a significant system of engagement.

Instagram: As a social media platform centered around photo and video sharing, Instagram serves as a system of engagement for millions, from influencers to businesses.

Trello: Used for task and project management, Trello is a system of engagement where teams plan, track, and collaborate on tasks.

Shopify: An e-commerce platform that allows individuals and businesses to set up their own online stores. While it handles transaction data (System of Record aspects), its primary function is engaging customers through e-commerce experiences.

System of Intelligence:

Palantir: Specializing in big data analytics, Palantir's platforms like Palantir Gotham integrate, manage, secure, and analyze data, making them indispensable systems of intelligence for several government agencies and large corporations.

IBM Watson: IBM's AI-driven platform offers cognitive solutions across various sectors, from health to finance, turning data into actionable insights and serving as a system of intelligence.

Google Cloud's AI and Machine Learning services: These services provide businesses with tools and solutions to derive insights and value from their data, positioning Google's A.I services as a key System of Intelligence.

Tableau: A data visualization tool that allows businesses to understand and make decisions based on their data, positioning it as a system of intelligence.

Adobe Analytics: Part of Adobe's Marketing Cloud, this tool gives businesses insights into their customer's behaviors, making it a vital system of intelligence for marketers.

Elasticsearch: An open-source search and analytics engine, Elasticsearch helps businesses extract insights from large volumes of data in real-time, serving as a system of intelligence.

These companies, like the previous ones, have carved out their niches in the enterprise software landscape, leveraging technological advancements and addressing market needs to solidify their positions as essential tools in their respective categories. The key is identifying the specific competitive advantage and determining its sustainability over the long term.

Rotimi Olumide

Thought leader, speaker, multifaceted business leader with a successful track record that combines consumer & product marketing, strategic business planning, creative design and product management experience.

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