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5 Competitive Forces or 5 Moats?

August 10, 2012

http://online.wsj.com/article/SB10001424052702304199804577477012223693628.html

An article in the WSJ on Aug 2, 2012 caught my attention. The popular mainline media have been enamored with Mr. Buffett so much they credit him for someone else’s work. Namely the work of M E Porter, a professor from the Harvard Business School. Dr. Porter’s work led him to developing the concept of the 5 Competitive Forces, Competitive Advantage, Value Chain, Creating Shared Value (a very controversial body of work) among many others. No less than four books and numerous papers are credited to Dr. Porter and his work focused on strategy and competition. While not taking exception to the use of the 5 Competitive Forces or the Moats to define exceptional performers, someone should call out WSJ for crediting it to a man who is in a smaller tax bracket than his secretary and can’t seem to shut up about it.

WSJ defines the 5 Moats as:                             Porter’s 5 Competitive Forces:

1. The Network Effect                                          Threat of Substitution

2. Incentives to embrace competing product          Intensity of Rivalry

3. Control of a limited market                                Threat of New Entrants

4. Proprietary brands, patents and licenses            Bargaining Power of Suppliers

5. Pricing                                                            Bargaining Power of Buyers

A wide moat or a competitive advantage which affords greater profitability is a valuable concept. There are many examples of this today from the largest global competitors to the smallest mom and pop store. There are only a few mutual funds who use this analysis as part of their formal investment evaluation process. Morningstar created a Wide Moat Focus Index in 2007.

It is important to remember, no moat or castle positions remain impenetrable. And evidently neither is the proper credit for a life’s work.

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From → business, Strategy

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