So you want to dig a moat?

Creating space between you and your competitors, requires a human-first approach.

Last week I talked about how leveraging diversity can create untold value for your product team. This week I want to dive into competitive advantage and the value of putting humans first to create moats—as I mentioned people can be the ‘soft drivers’—the unique make-up of your team, but having a deep understanding of your audience, is key.

‘Moats’—originally coined by the ‘Oracle of Omaha’, Warren Buffet are—similar to their medieval namesake—a way to protect any organization or product’s 'castle', a barrier of protection that puts ‘water’ (ideally filled with sharks!) between you and ensures you have a competitive advantage (i.e. maintain pricing power and better than average profit margins). OK. That’s a lot of inverted commas, time for one of my lousy sketches.

Let’s spend a minute looking at:

• Competitive advantage and why it matters

• Building moats

• How important understanding your audience/user/customer is in the context of this

Everybody is looking for a competitive advantage, but very few know how to convert short-term advantages into moats. As foundational strategist Michael Porter suggests, being different is more important than being better— specific points of difference in what you offer vs competitors, that create value for customers or your organization, can result in competitive advantages.

Competitive advantages are factors that allow any organization to provide goods or services similar to other organizations, but to do so more effectively. Examples of this would be supply chain (look at Apple's move to ARM which will dramatically cut the costs of its CPUs) or the route to market (look at AOL in the 90s).

The problem with competitive advantages though, is that over time you become a target and your competitors see your advantage, and try to replicate it.

How do you put distance between you, as a target and your competitors? How do you maintain your competitive advantage? Enter Moats.

There are a bunch of different kinds of moats.

• Cost Advantage (think of Apple’s move to it’s own ARM chips—they can manufacture and integrate for a fraction of the cost of Intel, realizing better margins)

• Switching Costs (think of games consoles, pay TV boxes, mobile phone app stores or even razorblades, when you’re invested in one ecosystem, it becomes harder over time to change)

• Intangibles/Soft Advantages (such as Nike’s or Patagonia’s brand, or the unique diverse experience and insight of your talent)

• Scale (just being a big hairy giant has advantages in itself)

• Network Effects (think of social networks like Instagram, where being on-board and committing your data, makes the platform ever more powerful, or Apple’s App store where more developers build on the platform as a result of the size of iOS’ install base)

• IP / Patents / Structural Moats (perhaps there are costly regulations that make it hard to enter your market, or you have patents which make it hard to enter, or access to some IP that others do not—for example Disney’s multiple universes)

I can see that each one of these is worthy of a post. All in good time.

Moats are important in the software space because of the low barriers to entry. With the advent of frameworks, cloud hosting and no-code building tools like Webflow and Bubble, it’s never been easier to build software and so meaningful competitors are becoming cheaper to build.

With that in mind, how do you go about building a moat?

Before all of this apparently analytical work you need to assemble diverse perspectives to work as a team to examine the problem from every angle and to ensure you are looking at the potential areas to build moats with the real people who build and use your product in mind..

As a team, talk about your product. Look at your audience, your entire market, operating ecosystem and value chain with objectivity. The great thing about moats is that they can create fantastic inertia—an organization that is thinking actively about how to be different, be better in the eyes of their customers and grow their competitive advantage is creating an inertia that can mean you’re playing offense more than defense.

• How can you leverage intangibles to create features that are hard to replicate?

  Do you have a unique, hard-to-replicate team? Does your brand have deep resonance with people in a way that takes years to build? Do you have a better understanding of your customers/users than your competitors?

• How can you measure insight that others can’t?

  Can you tool up your measurement systems in a way that allows you to see things that others can’t? Data? Insight? Do you have access to an audience that is willing to be more honest than others?

• How can you develop deeper investment in the product, emotionally, fiscally?

  Is there content that makes your product more emotive? Are there switching costs to moving away from your platform? Can your product be a ‘go-to’ at important life moments?

• How can you look at the way you develop and supply your product and make it more efficient?

  Do you have access to better supply, or the same supply at better terms than other products? Do you have proprietary AI that makes your product more insightful and efficient? Can you use economies of scale to push your revenue up whilst retaining stable costs?

• How can you make your path to market shorter, cheaper or more friction-free?

  Do you have access to a marketing channel, or a specific audience cohort that others don’t? Can you make it easier or faster to use your product? Can you create network effects that make your product more valuable as more people use it?

Let’s use the world’s biggest product-led organization as an example. Apple. When Steve Jobs left Apple in 1985, many believe that they lost the product maven who most deeply understood their consumers, the talisman of their success, and the human at the center of it all—Steve was a critical moat, and as their strategy unraveled, the organization eventually did too, until his return in 1997.

This is pretty hard to replicate. So where else can we see examples of approaches moats?

Quibi recently entered the market as a short-form video player with ‘Hollywood’ level production value and talent. Let’s set aside what I think they are doing wrong (hint: it’s about leveraging creator traction to create scale and network effects). They are built around what they perceive to be an IP moat. Who else has access to Hollywood-famous people but Jeffrey Katzenberg? Ultimately their audience will decide how much this matters.

Another example is the Amazon. Amazon is masterful at moat strategies, and putting the consumer first. One example is Amazon Marketplace. Amazon has famously disrupted the likes of eBay and independent players with its path to market. They already had a large portion of e-commerce attention, so converting that attention to also ‘warehouse’ independent retailers (and where they deemed it relevant, undercut them on price—yikes), has proven successful for them and helped them to drive scale. Moreover they’ve created entangled value by also layering in Amazon Prime, and their spectacular hardware strategy (sell the store as a sunk investment, then sell the products), which creates major switching costs. Consumers have really gone for Amazon’s mass market approach, and in value-add services like Prime Video and Music, there are hordes of consumers who consider Amazon ‘good enough’ not to have to pay for one of their competitors in their respective verticals.

In the dynamic era of technology-enabled business, it’s more important than ever to understand the mechanics of your industry and competitive set. But there is a lesson in here for every product: technology is part of the operations of your business, but ultimately your people will need to come together to discuss the problem you are solving with objectivity, and your audience or consumers will choose whether your product still stands ten years from now—teams that focus too much on technology and not enough on the human experience, lose sight of how to build a competitive advantage and fail to build moats.

Further reading:

Competitive Advantage by Michael E. Porter
Moats : The Competitive Advantages of Buffett and Munger Businesses by Bud Labitan

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Thanks this week to @sifter for his feedback which made this newsletter better.

In the spirit of learning I love to read comments, builds and things that will make these more useful—and would love to hear from you, feel free to drop comments below, or get in touch. Unlike most crap DJs I also take requests for what to spin next.