An economic moat provides a company with a sustainable competitive advantage, allowing it to outperform rivals and maintain profitability over time. This advantage stems from barriers that prevent competitors from easily replicating the company’s success. For example, a strong brand moat (like Nike or Coca-Cola) fosters customer loyalty, enabling premium pricing and repeat business. Cost advantages (e.g., Walmart’s supply chain efficiency or Intel’s economies of scale) let companies offer lower prices while maintaining healthy margins. Network effects (seen in platforms like Facebook or Visa) make a service more valuable as more users join, creating a self-reinforcing cycle that competitors struggle to break. High switching costs (such as those in enterprise software like SAP) lock in customers, reducing the threat of substitutes. Regulatory or patent protections (e.g., pharmaceutical companies with exclusive drug rights) grant temporary monopolies.

By leveraging these moats, companies can fend off competition, sustain high returns on capital, and generate long-term shareholder value. Investors, particularly those following Warren Buffett’s approach, prioritise moat strength because it signals durable profits and reduced risk of disruption. Without a moat, businesses face constant price wars and margin erosion, making moats a key factor in evaluating a company’s long-term potential.