« Back to Glossary Index


The concept of the business moat is borrowed from medieval times to denote a protective barrier surrounding a castle, shielding it from external threats. At its core, a business moat represents a company’s unique advantage or barrier that sets it apart from competitors. For example, Southwest Airlines in the 1990s was so deeply ingrained in its company culture, in every employee, that no one could copy it, even though everyone knew how Southwest was doing it. If your competitors know your secret and yet still can’t copy it. That’s a moat. Four sources of economic moats: economies of scale and scope (Wal-Mart, P&G), network effect (Facebook, eBay, Mastercard, Visa, AmEx), IP rights (Disney, Nike, Genentech) and high customer switching costs (Paychex, Microsoft). These competitive advantages are durable because they are hard to replicate. Companies need to develop a moat or suffer from mediocrity.