The Erosion of Business Moats: How to Protect Your Competitive Advantage

An office building surrounded by a moat

Our team has spent years trying to understand, build, and strengthen a business moat around OTM while helping our clients do the same.

Also known as an “economic moat,” the term refers to a business’s ability to build and maintain a competitive advantage that is difficult for others to replicate or overcome.

And while there are a lot of ways companies can go about building a moat, many of the traditional business moats have begun to erode – creating not only risk, but also opportunity (for those who are willing to put in the work).

What is a Business Moat
Named after the surrounding body of water that was used to protect medieval castles, a business moat is a barrier to entry in the form of competitive advantages that allow a business to earn high returns on capital and grow earnings at a high rate over time.

For example, Coca-Cola’s secret formula is a strong business moat because it is proprietary and competitors cannot replicate it.

For a business moat to be sustainable, it needs to be difficult or even impossible for others in the same industry or sector to replicate or overcome. Otherwise, new competitors will continue to emerge, encroaching on your market share and limiting your ability to drive price.

The Erosion of Traditional Business Moats Due to Globalization and Technology 
Two primary factors driving erosion for traditional business moats are globalization and technology.

Globalization and increasingly advanced and accessible technology have lowered the overall barriers to entry for businesses, increasing competition in many industries. As talent becomes global and technology becomes prevalent, businesses that have built their moats on a foundation of scarcity and access are seeing those moats crumble.

people working together
How to Protect Your Competitive Advantage
While it’s becoming increasingly difficult to establish competitive advantages in today’s world, there are still ways to establish strong, sustainable business moats:

  • Take the time and spend the resources to understand your customers deeply so that you can identify what trends are affecting their buying decisions and what impact those trends will have on their preferences over time
  • Create, invest in, and protect your intangible assets including patents, brand recognition, and intellectual property
  • Focus on your core competencies and rely on your strengths, not the competition’s weaknesses or mistakes
  • Understand the threats facing your business including who else competes with you, how big their market share is, and how they are delivering their services (and at what price)
  • Consider whether there are any changes in technology that could threaten either the availability or value of what people want from you and your business

And finally, be a leader, not a follower.
Don’t try to be everything to everyone. Focus on what you do best and do it better than anyone else, and then keep doing it over time so that customers come back again and again.

The erosion of moats is a real threat to businesses, but it doesn’t mean we should give up. There are ways to protect your business from its competitive advantage, and even identify opportunities for growth as a result of the changes in the market.

The key is knowing how your business works so that you can anticipate changes before they happen – or better yet, predict the changes before anyone else does.

Need help understanding and building your business moat?
The OTM Path to Growth® process includes a number of collaborative exercises that can help you build and maintain a competitive advantage that is difficult for others to replicate or overcome. Contact OTM today to learn more about our process.