Erosion of Companies’ Moats

JC Project Freedom Erosion of Moat

It is becoming more difficult to find companies which can remain resilience in decades as we are in a turbulent era where technologies are disrupting traditional business at an exponential rate than a decade ago. As businesses become more globalized and economies opening up, high profit margin will attract competition. This is why highly profitable business will revert back to the mean.

Barriers of entry or moat of any industry or company have never been so fragile. Capital for the last decade has been easily accessible to seek good returns. We shall see a new age when capital is more difficult to be raised. Companies lose its competitiveness over time as strategies are replicated, lose their distinctiveness and capability to produce above-average returns. Strategies are exhausted as markets hit a saturation point.

We need to ask the following:

  • Is a company’s strategy losing its competitive advantage?
  • Is the company’s strategy making an impact to the industry in a superior way?
  • Is the competitive advantage truly unique?
  • Is the financial performance becoming average?
  • Is key performance indicators slowing down?
  • Is growth rate slowing?
  • Is the market hitting saturation point?
  • Are customers getting fickle minded?
  • Are customers’ bargaining power increasing?
  • Is the company’s bottom line been forced to return to customers in terms of prices reduction or improvement in quality of products?

When one strategy is decaying, we need to check whether company is adjusting its strategies to meet emerging challenges and trends.

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