Strategy and defensibility
There’s an English proverb: An Englishman’s home is his castle. And what it means is this: that his home is a place where he can do as he pleases, and exclude anyone he pleases. And across the world, humankind have built castles, literal and metaphoric, ever since we figured out how to make them stay up. We want to protect what we consider to be ours.
Those early castles were motte and bailey, a stone keep on a raised mound or motte, inside an enclosed courtyard – the bailey – and often surrounded by a protective ditch or moat. The wider the moat, the harder it would be for a would-be attacker to get anywhere close to the keep. From the inside, it was possible to see your enemy coming, and the three layers of protection (the ditch, then the openness of the courtyard, and finally the keep) made it highly defensible.
When we think about strategy, this idea of defensibility is critical. If we invest in building a new product or service, or entering a new market, we want to have some reasonable confidence that we will reap the benefits for some time. Ideally, as well as providing benefits now, this new thing of ours would act as a stepping stone to future opportunities too. Like the Englishman in his castle, we want to do as we please in this new area – and importantly, we want to exclude others. So we want to make our investment and our market presence defensible.
But in a competitive market, when any player develops an offering which the market finds attractive, rivals will try to muscle in and steal market share. A lot of strategy looks at how to initiate a market presence, how to gain market share, but there is less written and executed in holding the gain once made. And it’s a challenge – the very fact that you have been successful is an encouragement to others, in that “if they can do it, so can we” sort of way.
Legend Warren Buffett, of Berkshire Hathaway, coined the term moat in terms of the economics of business. He described an economic moat as one which preserves and protects profits over time. Organisations which can create a wide ‘moat’ around their business activity will be better at creating value for themselves and their shareholders. And this metaphor of the moat is one of the cornerstones of Buffett’s investment approach, and in an interview in Fortune magazine in 1999, he commented that “the key to investing is …determining the competitive advantage of any given company and, above all, the durability of that advantage.” So a moat is a key part of defending your competitive advantage, but those rivals are still out there, and it’s a delaying tactic against the almost inevitable attack. Buffett goes further, and encourages his managers to engage in moat-widening, not just holding the ‘gap’ between the organisation and its competitors, but actively working to extend it, and so extending the duration of the competitive advantage. Not just as a one-off, but perpetually: “I ask the managers of our subsidiaries to unendingly focus on moat-widening opportunities.”
There are many ways to build or widen moats. Porter wrote about barriers to entry, making it hard for rivals to enter your market, or for other offerings to provide a valued substitute for yours. Treacy and Wiersema described value disciplines, through which an organisation can take and hold a pole position through product leadership, operational excellence or customer intimacy (and sometimes two of those). Strong capabilities in innovation mean that you can keep optimising or renewing your offering as others try to catch up. Keep widening that moat, and hold onto your castle.