Moat - What is it?
According to Warren Buffet a successful company is one which is having a "MOAT"
Companies that are performing well are constantly challenged by competitors but with a deep and wide "MOAT" these companies are able to sustain competition.
Porters 5 forces model
The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.
The state of competition in an industry is decided by five forces.
These are
- Threat of entry,
- Threat of substitution,
- Bargaining power of suppliers,
- Bargaining power of buyers; and
- Intensity of rivalry.
Application
- A successful company's strategy is aimed to best defend itself from such forces. Deep dive into each of these forces is required to determine the competitive strength of a company.
- A company which is able to score well on all these forces is able to consistently deliver good profits and growth. It is able to handle these forces much better than competition. Hence its stock is able to provide consistent returns to its shareholders.
- With time the status of companies keeps changing with respect to these five forces and hence a careful study goes a long way in determining whether the stock is attractive or not.
- Porter's analysis framework defines the important criteria to determine the stability of a corporation. High threat levels typically signal that future profits may deteriorate and vice versa.
For example, a hot firm in a growing industry might quickly become obsolete if barriers to entry are not present. Likewise, a company selling products for which there are numerous substitutes will not be able to exercise pricing power to improve its margins, and it may even lose market share to its competitors.
The qualitative measures introduced by Michael Porter in Porter's five-force framework allow investors to draw conclusions about a corporation that are not immediately apparent on the balance sheet but will have a material impact on future performance.
Although quantitative factors such as the price/earnings and debt/equity ratio are often the primary concerns for investors, qualitative criteria play an equal role in uncovering stocks that will provide long-term value.
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