The company developing economic moat in technologies usually requires a skimming pricing strategy which makes it difficult for the company to enter the market. A company with a moat is desirable to investors. Examples of businesses with intangibles include Pfizer, a pharmaceutical company with a roster of patented drugs; Nikewith its (generally) positive reputation for quality and relevance; and Chipotle with its commitment to “naturally r… Using Facebook as an example, as more and more people use it, they abandon older or less attractive platforms to join Facebook due to peer or environmental pressure. Over the years we've spent a lot of time thinking about and working on business valuation across a broad range of transactions. Morozov: And other source of economic moat, such as cost advantage, switching costs, they all do require, ultimately, our analysts to develop confidence about those sources being very durable. A company can also create an economic moat if the switching cost for the customers is too high. Get world-class financial training with CFI’s online certified financial analyst training programFMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari ! The Network Effect is a phenomenon where present users of a product or service benefit in some way when the product or service is adopted by additional users. Economic moat describes a company’s competitive advantage derived as a result of various business tactics that allow it to earn above-average profits for a sustainable period of time. Brand value is especially important for companies that have commodified products. There are certain intangible assets that act as economic moats. The company has more than 250,000 people working at 175 fulfillment centers around the world. I first thought of Walmart Inc (NYSE:WMT) as a good cost advantage moat example, but we’re looking for Canadian examples so instead, let’s look at Canadian National Railway Co. A railway might surprise you as a cost advantage example, but when you start to think about the cheapest way to transport goods across land, you realize that they are the cheapest option by a mile. Two things that investors generally care about are the magnitude of return in excess of the cost of capitalCost of CapitalCost of capital is the minimum rate of return that a business must earn before generating value. Acts as quality control measure and improves consistency. Where a company develops some unique features or qualities in its products and/or services, there is a constant threat that the competitors would copy, hence it requires a very strong security procedure to make it safe from competitors. The term “economic moat” refers to a long-term competitive advantageCompetitive AdvantageA competitive advantage is an attribute that enables a company to outperform its competitors. Research and Development (R&D) is a process by which a company obtains new knowledge and uses it to improve existing products and introduce new ones to its operations. Some of the reasons a company might have an economic moat are more difficult to identify. The best example of a company with switching costs as the economic moat is Microsoft Office (especially MS Excel). After registering the patent rights, the competitors of the company cannot copy its methods to make duplicate products in the market. A patent. The wider, the better. The concept of the economic moat comes from Warren Buffett, an American businessman and one of the most successful investors in the world. Competitive advantages allow a company to achieve that a company holds that protects its position in the marketplace. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. That protects its position in the internet age, brand identity has a... Helping them in gaining loyal customer base both strong and sustainable sells some eatables products in internet... About fixed income from the following articles –, Copyright © 2020 or brands another product or.. Reliable economic moat comes from Warren Buffett, an American businessman and one the., the competitive advantage involves huge costs which makes the products and services quite expensive for the developing! Depending on the industry, an American businessman and one of the company the! 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