On the picture: Moat at Caerlaverock Castle, Dumfries, and Galloway, Scotland (Wikipedia)
By Randy Videen, Certified SCORE Mentor
Does your business have any sustainable moats? If so, how might you increase their size? If not, how might you build some? (Sustainability is of key importance. The more endurable the moat, the greater the value.)
Business moats are sustainable competitive advantages. They help your business generate profits, protect your business during downturns and should help you grow your business profitably. Businesses without moats often find increased sales unrewarding. A permanent increase in profits without moats is difficult if not impossible.
Below are some examples of business moats:
- Superior product performance – May include better product design or performance, consistent performance or flavor, ease of use.
- Superior customer service – Including faster and or better delivery of products and or services, friendlier customer service.
- Lower cost of production – Your business must have sustainable cost advantages which are not easily replicated by your competitors. A patentable process or design may lead to a long-term cost advantage. Costs reduced by capital expenditures which your business’s competitors will also eventually deploy are only temporary. The successful investor Warren Buffett likened large investments in capital in a low margin business to standing on your toes in a theatre. Soon everyone (meaning your competitors) is standing on their toes and yet no one, other than the company selling you the equipment has gained any advantage.
- Customer loyalty – Often developed through a combination of factors. And often includes a business employing customer representatives who are friendly, courteous and helpful.
- Stickiness – Aside from customer loyalty what criteria in your business model might make it difficult for customers to leave you and or pleasurable and easy to stick with you? What actions might you take to adhere customers to your business? Is it simple and easy for customers to order from you? Are most orders free from errors? Would it be difficult for your competitors to replicate your business model, level of service and quality of production?
- Marketing – A business’s ability to reach potential customers more effectively and or efficiently. Many industries correctly spend substantial time and effort developing a marketing plan which enhances their business’s image, increases product awareness and sales. In the new modern day world of electronic marketing, it is essential that you understand what drives customers to your electronic message.
If it were simple and easy to build moats, more businesses would have them. In addition to effort strategy almost always key to building sustainable moats. Some of the keys to developing and maintaining moats are;
- Recognizing Changes in the Marketplace – It can often be difficult to recognize changes in the marketplace and customer needs in the marketplace. Employees closest to the customers are often best situated to recognize the change.
- Communication – How will you know when customers are dissatisfied? Does your business provide a simple and easy method for customers to communicate with your employees? And likewise are employees encouraged or incentivized to communicate with management? Is management too insulated or overburdened to be attentive to information which is delivered?
- Flexibility – From the ground up your business must be flexible when necessary. This does not mean satisfying every customer whim. It does mean adjusting or even eliminating products or services when the needs of your customers are changing.
Many competitive advantages are best when identified through a business plan. It is imperative that you understand any competitive advantages your present or future competition has, who your customers are and what their needs are.
SCORE mentors are trained to help guide you through the process of developing or enhancing a business plan whether you plan to start or improve your business. Greater Phoenix SCORE has over 70 mentors most of whom have decades of valuable business experience.
Randy is one of out newest SCORE mentors. He’s a private investor: independent study and investments in various businesses and industries including manufacturing, chemicals, plastics, distribution, services, retail, insurance, beverage, cable television and construction.
He’s been responsible for multi-managerial and operational functions for this restaurant grossing $1M in annual sales volume and employing 40. Developed a productive team which included numerous long-term employees. Employed a profit sharing plan assist in reward and motivate employees. Negotiated contracts, insurance coverage, leases. Maintained extremely low workmen’s compensation and insurance claims. Eventually delegated the majority of duties to a dedicated, successful management team. Click here to schedule a free appointment with Randy or another SCORE mentor