Buffett has a famous moat theory: once a company occupies a market, it should think about how to prevent competitors from entering to carve up and seize that market, ensuring its continued vitality. It needs to build an advantage that rivals can't easily imitate and a business strategy that is easy to defend and hard to attack, to prevent outsiders from coming in and plundering wealth that belongs to you.
From an economic perspective, Buffett identified four elements: cost advantage, network effects, intangible assets, and switching costs.
Advantages include cost-lowering factors such as exclusive resources, economies of scale, convenient transportation, geographic proximity, and operational efficiency. The 2.5-yuan cola lowers costs through economies of scale. Highly recommended.
Network effects mainly refer to the effects generated by a user community: the more people use something, the more people join in, building a user ecosystem and creating a virtuous cycle. Examples include a certain chat app and the social gaming platform built around it.
Intangible assets include brand value, technology patents, special operating licenses, and so on—in other words, products and services that others cannot provide but I can.
Switching costs, also called conversion costs, are the many hassles and other costs users face after becoming accustomed to and dependent on a product. Leaving it can cost them time, require them to adapt to a new product, and so on. For example, there are the playlists you painstakingly saved in music apps that keep losing music rights, changing your phone number, and having to unlink verification from countless apps.
Simply put, the four elements of a moat are: I’m affordable; everyone uses it; I can provide what you want, while finding it elsewhere takes effort. You don’t need all four elements—being exceptional in just one can also create a sufficiently strong competitive barrier.
Also, even after you’ve built a moat, you can’t rest easy. Your advantage can be surpassed, and your competitors are studying it too. So how do you maintain your moat? If others don’t have it, you do; if they have it, you do it better; if they do it better, you do it differently. That means continuing to learn, grow, and iterate based on your strengths. Doing it differently sets you apart from the competition. Doesn’t that bring you back to a position where you have something others don’t? If they follow suit and do the same thing, do it better than they do. That’s doing it better when others have it. And the cycle continues.