Tldr: The ‘moat' metaphor as popularized by Warren Buffett, has been distorted and misused within business and investing discourse. This misuse has clouded strategic thinking and shifted focus away from creating and delivering value to customers.
From Buffet’s 2007 shareholder letter1:
"A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns.”
Some have since interpreted this as ‘imprison your customers, and force them to use our inferior product so you can hike prices over time’. This has led to forgetting why businesses actually exist: to deliver customer value.
This approach deviates from Peter Drucker's foundational insight, “the purpose of business is to create and keep a customer”. But also, the word ‘keep’ has sufficient semantic ambiguity that can be stretched: are customers cherished guests (Costco), or prisoners (SAP)?
Buffett originally used the moat metaphor to describe a company's unique capabilities that set it apart from competitors. While he acknowledged that regulatory protections and natural monopolies can contribute to a company's moat, the emphasis was on intangible assets, especially Process Power, i.e. specialize to build an accumulating advantage over competitors.
From Buffet’s 1993 shareholder letter:
“The might of their [Coke, Gillette] brand names, the attributes of their products, and the strength of their distribution systems give them an enormous competitive advantage, setting up a protective moat around their economic castles. The average company, in contrast, does battle daily without any such means of protection. As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: Competition may prove hazardous to human wealth.”
Yet, the path of least resistance for some has been to forge moats through consolidation (roll-ups), proprietary standards, and lobbying i.e. creating conditions that might secure pricing power without necessarily enhancing the product or service offered to customers.
How did this misapplication happen?
One possible factor is Michael Porter's ideas of competitive advantage2. His theories have been a cornerstone of modern business education since he first wrote about Competitive Forces and Competitive Strategy in 1979. Porter’s ideas focus on avoiding competition and figuring out how to secure excess profits erecting structural barriers without really describing how to make better products or deliver better services.
So is there a better metaphor for a business?
A conquering army?
A sailing crew?
An organism in an ecosystem?
An orchestra?
None of the above! A business remains uniquely a business, there is no rule mandating the use of another abstraction.
You can simply stop using metaphors, mental models, and analogies as crutches for the harder work of genuine sense-making. Reality has a surprising amount of detail, nuance, and exceptions. The more you observe and understand these before squeezing yourself into a cognitive corset (how’s that for a metaphor) the better your decisions and outcomes will be3.
From his acquisition of Berkshire Hathaway in 1965 to 1981 Buffett outperformed the S&P by 21% per year. Since he first used the words “market share” in an annual letter in 1981, his outperformance over the S&P 500 dropped to 7% (the usual caveats on size limiting opportunities, value factor underperforming, etc. etc.)
I will write about the lack of empirical evidence for Porter’s ideas and the causes of the demise of the Monitor Group, the management consultancy he co-founded, in a separate post.
Charlie Munger and Buffet use mental models as a small subset of the tools they have at their disposal; they don’t end their analysis with mental models which is what seems to happen with other Mental Model bros.