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Wednesday
May092012

The Wisdom of Creating a Moat

The Wisdom of Creating a Moat

Wikipedia defines the word moat to mean: a deep, broad ditch, either dry or filled with water, that surrounds a castle, other buildings in a town, historically to provide it with a preliminary line of defense.

But before you begin directing your minions to pick up shovels and turn on the garden hose, you might want to know that Warren Buffet is credited with coining the term “economic moat” - a much more useful concept - which he defined as the “competitive advantage one company has over another” (within the same business or industry). 

It stands to reason that the wider and deeper your (economic) moat, the better (stronger) competitor you are (all things being equal). And most of us can probably figure out the familiar form of moats companies use to defend their positions whether it be as the “Low Cost Producer” or “Market Innovator”, etc.

Pretty simple stuff.

But there are far more subtle ways to build a moat and some of those occur right under our noses. Take the lowly zipper for example. You might think the manufacturer of such a simple device could not possibly sustain a competitive advantage for long, but one company has managed to do that very thing.  They took a simple proven product and made it even better. 

How?

By making it more reliable, shipping all orders on time, cataloging a wide variety of product, sustaining a continuous process of product improvement, and by simply becoming the best zipper company in the world.  They “tailored” their company and its product to their primary customer’s needs (garment manufacturer’s) so well that despite hundreds of less expensive alternatives, the overwhelming majority of their customer’s wouldn’t even think of using another company. Period.

The company’s name is YKK and it currently manufactures 7 billion zippers each year  (that’s right, I used the “b” word); and more than half of all the zippers on the planet originated from their company.  Pretty impressive.

Kevin Meyer, no newcomer to manufacturing himself, talks more about the YKK story here on his blog, Evolving Excellence, and he points to a Slate article from Seth Stephenson that continues the theme.

What’s the company’s real secret?

Read the articles for yourself. Just understand that YKK has a simple guiding philosophy with an equally simple story.  Remember that I said “simple - not easy”.

I’ll leave you with a closing comment from the folks at Climateer Investing who first posted the story (and the links) on YKK:

If "You can't go wrong with ...." is the default position when your customers think of you, you have a wider moat than a thousand patents can create.”

What's that? I don't have to compete on price alone? It's actually possible to deliver a quality product and such exemplary service that my company can actually compete on operational excellence?

Wow! There's a sentiment to warm even the coldest salesman’s (or investor's ) heart.

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