The essence of competitive strategy: build a moat


Strategy in business is about focusing on the actions and responses of competitors.

That is what Professor Bruce Greenwald says in his book Competition Demystified. Bruce Greenwald teaches at Columbia Business School and is perhaps the leading academic authority on value investing, the method followed by Warren Buffett and outlined by Benjamin Graham.

The core concept of competitive strategy is based on Michael Porter’s theory that Five Forces tell you how attractive a sector is for business. These are Suppliers, Buyers, Competitors, Substitutes and Potential entrants.

The Five Forces framework makes it easy for business people to spend a lot of time looking at their markets and making plans.

The book says that executives make the mistake of thinking that any plan to get new customers, cut costs or do something that takes time and money is a strategy.

Instead, a strategy should be thought of as only those plans that focus specifically on the actions and responses of competitors.

Why is this important?

It’s because the price at which you sell something tends to head towards cost in a commodity market. If what you do can be done by anyone else, the market price of that thing you do will quickly fall to the cost of doing it, making your margin zero.

The more exposed you are to competition, the easier it is for someone else to start what you do, the fewer the buyers for your service – the more quickly your margin will drop.

The way to maintain a high margin is to focus on how you can create and protect an advantage for your business. As Warren Buffet would say, what is your moat? What is the thing that surrounds and protects your business from competitors who want to take your market share.

Strategy is all about making the playing field less level by doing something your competitors cannot. As a result, strategy is all about your competition – where are they playing, what are they doing, and where should you put your efforts so that you can make it harder for them to replicate what you have and do?

If you can’t protect yourself, then the only thing to do is to be as efficient as possible. Forget the competition and focus on reducing your costs.

If you can, then focus on creating a moat.

The same strategic process applies to individuals. If anyone can do what you can do, your wages will stay low as you can be replaced easily.

If what you do is unique and hard to replicate, you will be more valuable and be paid more.

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