What’s your economic moat?

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12/09/2018

by gigCMO MD Mark F. Magnacca

Warren Buffett coined the term, and the rest of us have been searching for ours ever since, but when it comes to economic moats, are the softer variety becoming the dominant force?

To clarify, an economic moat is a “business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share,” and its significance is something that most mere mortals can only really see in hindsight.

What is an economic moat?

In a world where softer commodities such as a unique and inclusive corporate culture, like that at Google, unique leadership, and excellent management are as, if not more sought after than more tangible assets, what companies value to give them a competitive advantage has shifted.

Cost advantages are an obvious economic moat, and it goes without saying that cost advantages are still very much sought after in many organisations. Although, as throwaway culture gives way to a more sustainable world, stack it high and sell it cheap is no longer the Holy Grail it once was and other factors are gaining significance… even if Mike Ashley is becoming the new king of the high street as we type.

What is universally acknowledged, is that for most of us an economic moat is hard to identify when it is being created, and it is usually only some way down the line that it becomes apparent. This of course is what makes investors like Warren Buffett so incredibly clever; they seem to have a sixth sense for a competitive advantage before anyone else can see it.

Invest in soft economic moats

However, what business owners can do in order to try to give their own company an advantage is invest in the soft economic moats that create a positive and effective infrastructure within their organisation. In particular, this includes leadership.

In a climate where working culture is changing significantly, a topic we have discussed recently in our article about the benefits of moving away from legacy thinking, a new approach to leadership can differentiate an organisation as a desirable place to work, thus attracting the best recruits in the industry and supporting a business in delivering the best services or products in its field.

Rethinking your leadership strategy

Of course, we know that good leadership is a central pillar in a successful business, but the chemical make up of what that leadership looks like is also changing. Unlike the brutal world of World Cup football where heads roll as often as balls do, rethinking your leadership strategy doesn’t have to be about replacing one person with another, but rather acknowledging that even the best of leaders sometimes need external perspective.

This is where the opportunity to seek the advice of those who have the experience to understand the leadership perspective, and have the expertise to think creatively about the future, but have no competitive agenda, can be invaluable, as the team at gigCMO can attest, both as leaders themselves and as fractional, advisory directors. They could even help you create your own economic moat!