Whenever a company develops a useful product or service, rival businesses routinely profit by producing a similar–if not better—product or service. In a perfectly competitive market, rivals will eventually eat up any excess profits through imitation and price erosion. In other words, competition makes it difficult for most firms to generate strong growth and profits over an extended period of time since any advantage is always at risk of imitation.
Warren Buffet coined the term “economic moat” to describe a company that can keep rival businesses from simply mimicking its success. The strength and sustainability of a company’s economic moat is inseparable from its long-term ability to maintain customers and profit margins. Morningstar recently studied “wide moat” companies and found that the category of intellectual property creates the widest moat:
And what we found is companies that benefit from the intangible assets actually have the best returns on capital by a fairly wide margin relative to the other sources of moat.
In addition to maintaining customers and profit margins, companies with economic moats create value for themselves and their shareholders when it comes time to sell the business. Investors routinely pay a premium to purchase a business with established competitive advantages.
At least initially, every business offers something that makes it unique. At Venjuris, we can show you how to build or widen the moat around the unique aspects of your business. Building brand recognition by selecting and registering strong trademarks creates a moat because customers will seek out your brand of widget, not just the lowest price widget. Likewise, protecting your creative work-product and the know-how you have developed over time through our jointly selected combination of trade secret, copyright, patent, trademark and contract protection widens your moat by creating liability risk for potential imitators.
By recognizing the value of building your economic moat, you can guide your company toward both short term success and long-term value. Contact us to get started.