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Original article
Comparative Advantage with Technology - How to Measure Moats
Key takeaway
- For entrepreneurs: Understanding and measuring your company's moat is crucial for creating sustainable value and avoiding the pitfall of being just a digital version of a legacy business.
- For investors: Rigorous analysis of a company's potential to change industry cost structures is essential to determine if it has a meaningful and sustainable competitive advantage.
Summary
Rick Zullo's article "Comparative Advantage with Technology - How to Measure Moats" discusses the importance of determining the scope and sustainability of technology's impact on a company's economic performance. It outlines methods for measuring a company's competitive advantage or "moat" in the context of AI-enabled services and digital solutions. The article distinguishes between "disruptors" and "enablers," provides frameworks for analyzing their economic leverage, and emphasizes the importance of understanding industry cost structures and competitive dynamics.
Insights
- The distinction between "disruptors" and "enablers" is crucial in understanding how companies establish economic leverage.
- Measuring moats involves analyzing how technology changes the cost structure of an industry.
- Companies can be evaluated based on their initial state and post-disruption potential.
- Value stick analysis is useful for understanding how "enablers" impact various stakeholders in a value chain.
- The concept of "moat trajectory" is important for early-stage startups that haven't yet demonstrated a full moat.
- The "first point of moat" is a key hypothesis to prove after establishing a business's wedge and flywheel.
Implications
- Entrepreneurs need to focus on creating real value rather than just providing a digital facade for existing solutions.
- Investors should be wary of companies that are merely digital versions of legacy businesses without substantial competitive advantages.
- Understanding industry cost structures is critical for both disruptors and enablers to assess their potential impact.
- Companies should strive to create consumer surplus and/or increase profits for stakeholders to establish a strong moat.