What is Economic Moat? Economic Moats, also known as Moat , Vietnamese name is Economic moat (some people also call it economic moat ), this term is used to refer to a company that possesses a distinct competitive advantage over its competitors. to help them maintain their market share and preserve profits in the market economy.
What is the meaning of Economic Moats?
What is MOAT?
What is Moat? The full name is the Economic Moat, this concept refers to a company with a competitive advantage different from competitors and maintain its market share in the economic market freedom .
Literally translated, you imagine your business is doing business in a market A, your business provides them services from A - Z and users are in a market A. The A school in which you do business is a fortress. Economic Moats (Economic Moats) are wormholes that surround your business fortress for two purposes: Preventing enemies from attacking (competitors taking market share in market A) and Preventing people in the area. stronghold leaves the fortress (customers leave the market, service, or product you are providing).
Typical examples of Economic Moat are technology companies such as Google, Microsoft or Apple, they have a certain market share, separate technology platforms, are independent and cannot be copied from competitors. compete, thereby creating an ecosystem of its own.
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What is the way to create an Economic Moat?
Economic Moat is classified into the following 5 groups:
- Network effect
- Scale – Low cost production
- Invisible treasure
- Conversion cost
- Different business model
1. What is NETWORK EFFECT?
Network of participants
It is no different from the internet or the telephone network, the more people involved, the easier it is to use and access the problem participants want, which brings more value to the participants, and the network is becoming more and more complete. more valuable.
What is the network of the economic moat?
You will call someone easily, if few people join the network then it is not good and you cannot call the person you want (remember the days of using landlines). Similarly, the internet is also a network.
Social networks like Facebook, Twitter, Reddit are also such networks, the value will increase when more people join the network, even if your account only has regular contact with around 100 people out there.
Data
It's like Google, Uber, Mobile World, Ladaza, Tiki. The more people participate in the search, the more data accumulates on Google, as a loop attracts more and more participants, in addition, the amount of data that Google collects also includes personal data via Gmail…etc. So does Uber. This amount of data is the number of vehicles, the number of customers, the more participants, the easier it is to use Uber. Mobile World, Ladaza, Tiki too, this data is customer data, products sold on it.
The more participants, the more stimulating to buy and sell, the more optimal.
Protection moat: Users do not want to leave the wide network to use another network because of less value. Typically, the social network Lotus or Vietnamta that Vietnam developed to replace Facebook was officially killed by domestic users because they could not build a large ecosystem like the way Facebook did. No user who wants to leave a platform where they make friends across 5 continents to use a system which only the new Vietnam use (bathing, then of course prefer to jump into the pond in the village), before me .zing.vn is Vietnam's first social network that collapsed when Facebook landed in Vietnam.
2. SCALE – What is LOW COST PRODUCTION?
Imagine this, two businesses A & B produce the same handbag and sell it for the same price of 10 VND, if A has a production line of 2000 pieces a year while B can only produce 1000 pieces a year. years and assume the same cost of $8. So each bag has a profit of 2 VND… The cash flow of dn A will be 2000 * 2 = 4000 VND, the cash flow of dn B will be 1000 * 2 = 2000 VND.
In reality it happens completely different…because of the large scale of A, it imports a lot of raw materials and of course the import price will be cheaper than B, and because the cash flow of A is larger than that of B, the enterprise A will have a lot of money to invest in improving the work. technology, productivity, marketing… and then to increase production of 500 bags/year will cost less than B, while B cannot produce 500 more bags at half the production scale. in a year of B unless B makes a big investment in the production line….
From there, it can be seen that Large scale has the advantage of low production costs. That means more profits. We will see it in Walmart, Netflix, HPG, VNM MWG, VCS…
Low fixed cost base, it will benefit greatly from scale. That's why tech companies try to scale and grow quickly, not because size but because being big is the best way to protect their bottom line.
However, if you produce a proprietary product, which is the business trend for the next decade, nothing better, because the right to set the price of the product.
Protection: When competitors want to compete on costs by increasing their scale, it is also difficult, because your company already has a large scale, low production costs, and strong cash flow to invest in research to improve quality. quality user experience, increased productivity, marketing…. For that reason, Vietnam cannot develop a search platform like Google, although with the IT level of Vietnamese engineers, it is "excessive" to do.
3. WHAT IS INTANGIBLE ASSETS?
Intangible assets are a "trump card" when you want to build an economic moat, this property includes: brand value, patents, trends and consumer behavior.
The intangible assets of a business build an Economic Moats
For example: Apple, Cocacola, Mobile World, Dr. Thanh, Ladaza,…. These companies have created a brand ingrained in user behavior and when it comes to names, everyone knows.
Protective moat: Significant time and uncertainty.
Today Position and brand can be shaken by the endless, unlimited cyberspace of the internet, the distribution cost is close to zero, it's also a new way to build a brand faster than the traditional way.
4. What is the CONVERT COST?
It's like I want to stop using Facebook if I can, but when I use Twitter I won't have friends even though Twitter is so much better. This is called the cost of switching when it is not worth anything when moving away from the existing platform or like Word, Excel, PowerPoint, Adobe... All of these office software are provided by companies for free. costs for universities and students to be trained to use it proficiently, so when businesses want to switch to another even better product, it is very difficult, because it takes time and training costs, but others still get used to the old usage, they don't want to switch to the new one.
Microsoft makes its platform free for students to use for the sake of building a solid Economic Moat in the future
Or like Netflix, they charge a very low monthly fee, that's why users don't want to switch to something else, because they don't get as much value, as many movies as Netflix, even if the competition wants to apply the model. This model like Netflix is also difficult to do because at this time, if compared to capital, of course strong cash flow will allow Netflix to improve the quality experience more.
Defense moat: The issue of switching costs isn't huge for one person, but for a business that scales to thousands of users on a given platform, switching means thousands of hours of lost productivity.
Sometimes the conversion cost is not high, but the old usage cost is too low and the use value is great. Or competitors have to pay customers in exchange for them to give up familiar things to use their products. However, converting the majority is not possible.
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5. WHAT IS THE DIFFERENT BUSINESS MODEL?
Think of Netflix, Apple, Tesla with different business models.
Tesla built its own distribution system without going through an agent – controlled sales, increased cash flow from direct sales and its services, Tesla also built lots of free charging stations fees to attract more people to use their cars.
Defense moat: Old rivals like Toyota, GM, it is difficult to imitate the model because it will require a huge amount of investment money, as well as a lot of time, and it is this that will break any company. intend to compete directly.
