Hello GirdleyWorld! Two quick housekeeping notes:
- We’re moving our send time to Saturday morning, so you can read it with your breakfast. I recommend having Chili’s leftovers like I do.
- Starting today, this newsletter will be coming from media@girdley.com. If this popped up in a weird folder, move it back to your primary inbox on Gmail or add me to your “Contacts” on Apple Mail. We’re doing this because I’ve brought on help to produce this newsletter. While I’m still writing it (love), I have help on production and follow-through (don’t love).
Now back to business...
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I’m old, so I like to tell stories more and more each year.
Here's a quick story, then I'll teach you the seven types of moats that exist in business.
(Plus my recommendation for one of the best business books of all time.)
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Moats to float your boat
Last summer, we went up to a lake in New Hampshire. We rented a pontoon boat from the marina. It's a tiny little place - basically just a convenience store and a gas pump - and it's the only marina on the lake.
The only place to buy gas. Or rent a boat. Or get ice cream.
This place is a mini-monopoly for any boat on that lake. Any competition would be up against:
- regulations (permits, environmental stuff)
- geography (gotta find a spot to build another marina)
- branding (this has probably been the go-to launch for decades)
- a literal moat. Or a lake, at least.
In this case, geography is a defensive moat for this little marina. They can raise prices because they know your other option is to drive 10 minutes away to another option – in your car.
Gas is $6? Pay up. Gas is $8? Pay up and say thank you.
Great businesses do two things with moats:
- They know about the concept in general
- They know what their moats are for their business
Then they lean into them.
Let’s take care of part 1 now without you needing to open a textbook!
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The 7 Types of moats in business
A business can protect its advantages in lots of ways. But they all fall into one of these seven categories:
1. Scale Economies
A business in which cost per unit declines as production volume increases.
Example: Wal-Mart
Because they are bigger than anyone else, they get buying power. So can offer cheaper prices than competitors.
2. Counter-Positioning
Adopt a business model that existing competitors can’t replicate.
Example: Southwest Airlines
While others operate major hubs, they do point-to-point routing meaning higher utilization rates of planes and incumbents can’t compete on cost.
3. Network Effects
A business gets more valuable as it gets more users.
Example: Ebay
Each time a buyer or seller is added to the Ebay platform, it gets more useful. Until, eventually, it makes zero sense to list or go to buy anywhere else and competing is impossible!
4. Switching Costs
The cost of switching to an alternative for additional purchases is much higher than potential savings.
Example: IBM
They invented room-sized computers called Mainframes 60 years ago. The market is over $2bn/yr and is still used by 88% of US banks.
5. Brand
The attribution of higher value to an objectively identical offering based on historic info about the seller.
Example: Louis Vuitton
Their bags are no better than competitors. But they have a brand that people will pay $15k+ for a simple bag!
6. Cornered Resource
Preferential access to a unique asset that can independently enhance value.
Example: Disney
They own the rights to some intellectual property: Star Wars. Nobody else can make stories or sell merch for it.
7. Process Power
Embedded company organization and activity sets enabling lower costs and/or superior product.
Example: Toyota
For decades, they produced more reliable and cheaper cars than competitors via a superior culture of continual improvement.
I didn't make these 7 moats up, they come from my all-time favorite book on the subject, 7 Powers - The Foundations of Business Strategy, by Hamilton Helmer . If you haven't read it, you should. It's one of the best business books of all time!
Got questions about this? Hit reply and let me know! I read everything that comes in.
Michael
