Create a Business MoatAnalyzing Firms
A business moat creates an inability for competitors to compete against a firm. By dissuading others from competition, firms have time to build, market, advertise, and earn without worry. If a firm enters the market at a later time, they will be at a distinct disadvantage compared to the established firm.
If a firm can acquire the right to be the only provider in the local market, they force dependency for that area’s customer base. This right for exclusivity is gained via permit, regulation, patent, government lobbying, or law. In private sectors, this advantage is gained via a contract that bars a product’s retailers from selling products which compete with them or stops suppliers from providing similar materials to competitors. It appears in non-compete agreements for employees leaving the firm. The result is the same. Customers can only purchase a service from firms accessible it to them. When there is only one provider, they must deal with that firm to enjoy the services or market.
The business moat strategy does have issues. If the legal support is temporary, they may have a flood of competition when it expires. If this is the firm’s only advantage, they will suffer when the restriction preventing competition appears. They will have major issues if they have not made the industry difficult to enter in other ways or built a strong advantage.
A business moat can also be financial. If a competitor has to raise substantial funds in order to compete, the chances that the firm will face competition decreases drastically. If the product or service requires an initial investment beyond that which can feasibly be raised, the chances of new firms competing in the marketplace are slim.
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