Purpose
Explain why great companies build structural advantages that protect their profits, create long-term durability, and prevent competitors from copying their success. Moats are the barriers that separate temporary success from enduring greatness.
Core Principle
Moats = Structural Advantages That Protect a Company’s Ability to Create and Capture Value
A company without a moat competes on price.
A company with a moat earns above-average returns for decades.
Moats turn business success into business longevity.
What This Driver Means
A moat is any structural, durable advantage that:
makes the product harder to copy
makes the customer harder to win away
makes competitors less effective
increases switching costs
scales better than alternatives
keeps margins high
strengthens with time
Moats protect profits the way castles protect kingdoms.
The Six Major Types of Moats
1. Network Effects
The product becomes more valuable as more people use it.
Examples:
Visa
LinkedIn
Facebook
Airbnb
Strength: self-reinforcing growth loop competitors cannot replicate.
2. Switching Costs
It becomes costly, risky, or inconvenient for customers to switch.
Examples:
enterprise software (Adobe, SAP)
cloud platforms (AWS, Azure)
financial systems
Strength: the product becomes “sticky,” increasing long-term revenue.
3. Brand Power
Customers trust, prefer, or identify with the brand.
Examples:
Strength: emotional loyalty creates pricing power and repeat purchase behavior.
4. Scale Economies
Bigger companies can produce at lower cost.
Examples:
Strength: lower costs → lower prices → more customers → even lower costs.
5. Data Advantages
The company improves as it collects more data.
Examples:
Strength: better data → better product → more users → more data.
6. Vertical Integration
Owning multiple steps of the value chain.
Examples:
Strength: control, efficiency, quality, and margin enhancement.
Why Moats Matter
Moats enable companies to:
Without moats, profits get competed away.
How Moats Are Built
Moats develop through:
Moats are rarely built quickly — they emerge through consistency.
Why Moats Become Stronger Over Time
Moats benefit from compounding:
brands strengthen with reputation
networks expand with usage
data sets grow with scale
switching costs increase as organizations embed systems
vertically integrated operations become more efficient
Great companies become harder to compete with every year.
Examples of Moat-Driven Greatness
Google — Network + Data Moat
Search dominance reinforced by trillions of data points.
Visa — Network Effects + Scale
Billions of transaction endpoints and global merchant acceptance.
Standard Oil — Vertical Integration + Scale
Controlled supply, distribution, and pricing.
Moats explain why these companies were able to dominate for long periods, even in competitive markets.
Why This Driver Matters
Moats affect:
A company can be good without a moat — but it cannot be great without one.
Why This Comes After Culture, People & Leadership
The sequence continues:
Identify the problem
Build the superior product
Choose the right model
Ensure strong unit economics
Scale through distribution
Deliver reliably at scale
Build a culture that sustains excellence
Create moats that protect success
Culture helps you execute.
Moats help you defend what you’ve built.
The next driver will show how strategy directs all of these components.
