ECONOMIC MOATS

ROADMAP : ERODING MOATS FINDING MOATS MOATS by SECTORS & ITS EXPLANATION. EXERCISE
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Finding Moats
It is easier to create a COMPETITVE ADVANTAGE in some industries than it is in others. The fourth best company in a structurally attractive industry may very well have a wider moat than the best company in a brutally competitive industry.

Moats by Sector
SECTOR NARROW MOATS(%) WIDE MOATS(%) ALL MOATS(%)

Software

49

58

Hardware
Media Telecommunications Health Care Services Consumers Services Business Services Financial Services

26
69 59 31 32 36 54

5
14 0 11 7 13 14

31
83 59 42 39 49 68

Consumer Goods
Industrial Materials Energy Utilities

32
31 55 80
3

14
3 6 1

46
34 61 81

Explanation :
Morningstars Sector wise Moats :Software and Hardware Integration Capital needed intensive Moat- SWITCHING COSTS of customers. Telecommunication and Healthcare Moat- Regulatory Structure + Not attractive to competitors.
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Media

Only main key players.

Threat- Technological disruptions. Moat- Diversity and control of distribution channels. Restaurants and Retailers Moat- Low Switching Costs. Energy Only in hands of few. Moat- Transportation and Regulations.

The Moats Process

STEP 1 YES N O STEP 2 YES STEP 3

YES N O
NO ECONOMIC MOAT

N O
NO ECONOMIC MOAT

S H O R T NARROW MOAT

L O N G WIDE MOAT

OPTIONS
How strong is the companys Competitive Advantage? IS it likely to last a long time or a relatively short time? Has the firm historically generated solid Returns on Capital? Does the firm have one or more of the Competitive Advantage listed below? Is the firms future likely to be different than its past? High Switching Costs and Low Cost Production; Network Economics and Intangible Assets.
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The Moats Process

STEP 1 Has the firm historically generated solid Returns On Capital? N O Is the firms future likely to be different than its past? N O NO ECONOMIC MOAT YES STEP 2 Does the firm have 1 or more of the Competitive Advantages listed below? High Switching Costs Low Cost Productio n N O NO ECONOMIC MOAT
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STEP 3 YES How strong is the companys Competitive Advantage? Is it likely to last long time or a short time? S H O R T NARROW MOAT

YES

Network Economic s Intangible Assets

L O N G WIDE MOAT

THANK YOU !!