“a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defence against attack.” – dictionary definition of MOAT
“sustainable competitive advantage of a business that gives it edge over the others.” – an investor’s definition of MOAT
You may point out that both these are similar as competitive advantage of a business is that deep-wide ditch that protects it from the attack of the competition.
… and that advantage can be in the form of strong brand image, customer loyalty, extensive distribution, efficient production processes, access to resources, economies of scale or likewise.
Theoretically there is not much to dispute here. Except that we have conveniently ignored the most important word “sustainable”.
In my view, none of the above mentioned popular competitive advantages are sustainable ‘by default’.
- Established brand image and customer loyalty will not always ensure business. E.g., Hero Motors, Nokia, Blackberry
- Wide distribution will not ensure the highest growth rates for ever. E.g., large FMCG companies facing challenges from innovative start-up products
- Access to resources may not matter anymore due to the change in the technology. E.g., established ICE supply chain vs new EV requirements
The fact remains – having a competitive advantage is one thing and being able to sustain it is another.
Defending them is increasingly becoming challenging in today’s fast paced world of digitisation, social media and abundant private capital.
Result – breaking brand barriers is becoming possible, reaching customers directly is getting viable, selling products at losses and kill competition is getting normalised.
No management in their right mind can say “we don’t care because we have this, which is better than anyone else”.
Customer might retort back “I don’t care”.
So, if not these, what else can be an important MOAT of a business?
To me the way the management absorbs the information and events, processes it and reacts to it.
If I have to put it in one word, “FOCUS”
Focus to –
- protect reputation;
- remain competitive;
- avoid useless fights;
- think long term and not get unnerved with the short term;
- continue working towards stakeholders interests; and so on
All the above are easier said than done.
How frequently we come across established companies in their ego trip ignoring the emerging competition or changing consumer preferences? Remember Maruti ignoring the SUV segment for long? Or Hero taking customers for granted?
Then we come across companies who during good times expand too soon, too fast and too wide. Borosil Renewables announcing huge expansions and also international acquisitions.
We also get cases where Companies instead of returning cash to the shareholders prefer to acquire questionable assets. Cartrade going for OLX Autos is a recent case in point.
The fact remains – there are very selective companies who have laser sharp focus on what they are doing, how and why !
And to me that’s the real MOAT; and this is what protects them and also allows them to attack when required.
These businesses –
- rarely seem to be in a hurry
- are not averse to say no to investors demand to return money or expand
- work in a stealth mode on new launches
- are opportunistic but do not divert their energies towards temporary unrelated businesses
- never overpromise; but highlight all the cautions
- respect competition, customers and the regulators
- err on the side of caution while providing for contingencies
- value the changing preferences and technologies
- may not be the best innovators but are very quick adaptors
- know how to cut the noise and focus on what really matters
- openly accept their mistakes and underplay the positives
- are happy not being always in the limelight
Examples –
What Bajaj Finance has achieved over the years by remaining focused. It started from nothing and built one of the best NBFCs by remaining focused. I am hard pressed to find any other real competitive advantage that it has or had.
How Bharti Airtel survived the onslaught from Jio by remaining focused on the customer service. Compare that with what happened to Vodafone Idea.
Checkout AIA Engineering or Ajanta Pharma or Alkem Laboratories for some relatively lesser known examples about Companies with laser focus. Do give a listen to some of their quarterly management calls to relate yourself.
Please note that I am nowhere suggesting that Focused companies become automatically investible. Business and valuation dynamics do need to be right too.
However, in my experience Focus is that MOAT or the differentiating factor; an excellent filter.
If a business with focus is not investible today due to some reason, it may become so in future.
and unlike many other factors, Focus in general is integral to the culture of an organisation, therefore more permanent in nature. It mostly changes only when there is a signifiant overhaul in the ownership and/ or the management.
Isn’t that’s the kind of permanency that the word MOAT actually implies. Read the definition (at the beginning) again and you might agree !
Hope, you could relate with the above and found it worth thinking about. Will be glad to hear your views/ experiences in the comments section or feel free to write privately to nitin@inves4.com.
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