Building a moat is the difference between having fun with business, vs eating glass all day, every day, for years. This is how moats are actually built.
Moats are easy to identify post hoc, but as the moat is being built, there are probably signs the moat will be increasingly probable to emerge, if it ultimately emerges. Cornered Resource and/or Counter Positioning (Origination stage of Power Progression) will have already been established. So the Takeoff stage presumably becomes the signpost stage.
Identifying when it’s more probable than not a moat will emerge, before most others do, is obviously a valuable skill. In other words, sense the prospect of immense value creation before it’s happening.
Obvious signposts and leading indicators (not exhaustive):
the earlier stages of increasing market share (measured by growth rate > industry growth rate, looking at competitor revenue if available, etc.)
pricing power
increasing ROIC
exclusive relationships won (e.g., customer or supplier, arguably a cornered resource but doesn’t have to be), and
weakly positioned competitors (who cannot challenge or overtake you as first mover).
It would also be interesting, in a lifelong practice of reading cases, to look at the duration of the Origination + Takeoff periods for companies who have established moats and moved to the Stability stage. Hellmer says that Takeoff ends when growth rates taper below 30-40% (anecdotal, not empirical). I’m not satisfied with this yardstick nor the actual range chosen. I wouldn’t be surprised to see Takeoff periods extend beyond 10 years in some markets. The Intel/microprocessor Takeoff period he says was 8 years, and that was in a highly-innovative tech market.
On a much longer list of the signposts of moat building, page 67+ in the below.
article_measuringthemoat.pdf (1.9 MB)
I think one thing that I didn’t emphasise enough in this piece is the ‘dealing with uncertainty’ bit of it.
I linked to my older piece How to Run Smart Experiments When You Just Don’t Know but I wish I’d incorporate some of the ideas there into this piece. Certainly the process is identical:
The short version is that entrepreneurs take action to generate answers to four questions:
- What are the further actions?
- What are the possible outcomes?
- What is the value of each outcome relative to the others?
- What causal relationships exist?
Or, another way of thinking about this is that folks who are good at high uncertainty execution are more skilled at making sense of the splatter pattern after they’ve thrown something at the wall.
In other words, their skill doesn’t come from good experiment design! Their skill comes from the sensemaking they do after they’ve taken action to generate some information.
If you think about it, the vast majority of examples I give follow the same pattern: the businessperson does something, or something happens to them, it generates information (and the information here is actually constructed only because they have a frame that a) wants to seek out a moat, and b) knows the various forms moats have taken in the past thanks to exposure to cases), and then folks realise that a possible outcome — or a possible set of further actions — could lead them to a moat. And then they execute on it.
It doesn’t take genius to build a moat. It just takes a prepared mind.