6.30Finding companies with competitive advantages (moats)
1What is it?
A moat is a lasting advantage that protects a company from competitors, like the water around a castle.
2Why does it exist?
Without a moat, high profits attract competitors who drive them down.
3Diagram
Brand
Customers pay more for trusted names (e.g. Aashirvaad, Asian Paints).
Network effects
More users make the service more valuable (e.g. telecom, exchanges).
Cost advantage
Scale lets it sell cheaper and still profit.
Switching costs
Painful for customers to leave (core banking software, IT services).
Licences / regulation
Hard for newcomers to enter (exchanges, depositories).
4Quick revision
- Moat = durable advantage.
- Types: brand, network, cost, switching, licences.
- Moats protect high ROCE.
5Knowledge check
Q1. What is a moat?Show answer
A lasting competitive advantage.
Q2. Give an example of a switching-cost moat.Show answer
Enterprise IT services or banking software that is hard to replace.
Q3. What shows a moat in numbers?Show answer
High ROCE/ROE and stable margins over many years.