We know from our history lessons that in medieval days, members of noble families often lived in castles. These fortresses were imposing in appearance and have stood for centuries – a testament to their design and construction. Castles were built over a 900-year timeframe which is truly amazing. These structures were protected by a wide range of defenses including various forms of artillery, arrows, boiling oil, tar and sewage, and there are even reports of diseased dead bodies being catapulted at assailants. Finally, deep wide ditches were dug around many castles and filled with water, requiring access via drawbridges. In fairy tales we heard about moats being home to alligators, crocodiles, and other horrible monsters though it is doubtful that in real life moats were populated in this fashion.
So, what is your moat? Strange question you ask? I have written several times in the past about how important it is that entrepreneurs differentiate themselves from their competitors. In 2007, Warren Buffet was speaking to a group of University of Florida MBA students and had this to say about differentiation.
“I don’t want a business that’s easy for competitors. I want a business with a moat around it. I want a very valuable castle in the middle. And then I want…the Duke who is in charge of that castle to be honest and hard-working and able. And then I want a big moat around the castle, and that moat can be various things.”
“The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance, so everybody’s going to have one auto insurance policy per car basically, or per driver. And…I can’t sell them twenty…but they have to buy one. What are they going to buy it on? They’re going to buy it based on service and cost. Most people will assume the service is fairly identical among companies, or close enough, so they’re going to do it on cost, so I gotta be the low cost producer. That’s my moat. To the extent my costs get further lower than the other guy, I’ve thrown a couple of sharks into the moat.”
Thinking about differentiation in terms of a moat is a slightly different perspective than I have had in the past. I have viewed differentiation proactively and as an opportunity to exploit. Buffet seems to be seeing it from a defensive standpoint – thus his moat analogy. Either way, we get to the same place. There must be a reason that people want to do business with us beyond our charm and good looks.
I am advocating for a combination of defense and offense with respect to differentiation. On the one hand, I am looking for products and services that have high barriers to entry. Perhaps this is due to substantial capital requirements; extremely complex aspects to the product or service; maybe it is a patent; or perhaps there is a vertically integrated process that is extremely difficult to replicate. All those factors become the moat. They make it hard for competitors to easily jump into our space and make inroads.
Now let’s play offense. Simply keeping our competition at bay does not ensure success or profitability. It is what we do inside the castle that really counts. We can sit on a throne, eat rich foods, and get fat (dumb and happy), or we can exploit the opportunity we have to function in an arena where competition may not be as intense. This might take the form of developing a premium product, or a marketing strategy that creates FOMO – the Fear of Missing Out. Maybe exploiting the opportunity looks like the streamlining of an internal process that produces even greater profits. The point is that with a moat in place we can take our endeavor to an even higher level than ever before.
Differentiating ourselves as entrepreneurs is essential to our success. Doing so with a dual strategy of building a moat and exploiting the opportunity allows us to play defense and offense at the same time.
This blog is being written in tandem with my book, “An Entrepreneur’s Words to Live By,” available on Amazon.com in paperback and Kindle (My Book), as well as being available in all of the other major eBook formats.