Saturday, 31 January 2015

Understanding an economic castle

Castle and Moat

The main objective of a business is to make a return on the invested capital. That return on capital can be measured in cash in the bank or some other social good, but either way, there must be some benefit to be had that contributes to the bottom line and impact the intended target audience of the business. 

A competitive advantage is what the business must strive for to continue it's merry way into profit land and stay in that profit zone. Bruce Greenwald provides a very good understanding of what a competitive advantage ought to look like in his book Competition Demystified.To successfully do this, the business must design a castle from which to perform its business activities and protect its business space with a moat to survive. The taller the walls of the castle, and the wider the moat around the castle, the greater the likelihood of the business surviving will be in the long run.

When buying a business you must consider the economic moat of the castle of that business before you invest your capital.

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