A business process that competitors have difficulty challenging such as manufacturer that consistently achieves higher quality at a lower price. Indeed, an economic moat, just like the medieval fortress original, keeps competitors out by raising barriers that lessen threats and make take-overs more difficult. As discussed in the lemonade stand example, a cost advantage that competitors cannot replicate can be a very effective economic moat. Fundamental analysis is a method of measuring a stock's intrinsic value. A wide economic moat is a type of sustainable competitive advantage that makes it difficult for a business' rivals to erode its market share.

From an investor's view, it is ideal to invest in growing companies just as they begin to reap the benefits of a wide and sustainable economic moat. Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry, either forcing the competitor to leave the industry or at least impeding its growth. Conceptualized and named by Warren Buffett, an economic moat is a distinct advantage a company has over its competitors which allows it to protect its market share and profitability. With the passage of time, they are likely to see an erosion to their bottom line as competitors eat away at their market share. Once an Autodesk customer starts using its software, he is unlikely to switch, allowing Autodesk to charge premium prices for its products. Unsystematic risk is unique to a specific company or industry and can be reduced through diversification. The reason being for any business, the biggest threat is competition. It … Your low prices lead to an increase in the number of customers buying lemonade from you (and not from your competitors). Pharmaceutical companies earn high profits due to patented drugs after spending billions on research and development. You realize that if you buy your lemons in bulk once a week instead of every morning, you can reduce your expenses by 30%, allowing you to undercut the prices of competing lemonade stands. Switching costs is another type of economic moat, which make it very time-consuming and expensive for consumers to switch products or brands.

However, it probably wouldn't take very long for your competitors to notice your method and employ it themselves. Which is why a business that intends to remain dominant has to establish an economic moat. The most obvious financial characteristics that companies with a wide economic moat have is that they usually generate large amounts of free cash flow and have a track record of strong returns. In the dictionary, a moat means a deep and broad dug that surrounds and protects a castle. The term economic moat, popularized by Warren Buffett, refers to a business' ability to maintain competitive advantages over its competitors in order to … As you can see, a company's economic moat represents a The longer a company can harvest profits, the greater the benefits for itself and its shareholders. This is important not only to the company's bottom line but also to potential investors seeking to maximize their portfolios by including companies that will maintain their performance edge. Investopedia uses cookies to provide you with a great user experience. A narrow economic moat is a competitive advantage that one company enjoys over competing firms operating in the same or similar type of industry. By using Investopedia, you accept our Intangible assets refer to the patents, brands and licenses that allow a company to protect its production process and charge premium prices. In a broader sense, it can be used to describe something in the company’s business that serves as a protective barrier. Essentially, the wider the economic moat, the larger and more sustainable the competitive advantage of a firm. mutuelle regie par le code de la mutualite et soumise au livre ii - siren n° 780 508 081 The offers that appear in this table are from partnerships from which Investopedia receives compensation.

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