A Business Moat Can Form in a Flash or Take Decades

The time it takes to build a lasting edge around a business "depends very much on the industry," Warren Buffett, the longtime investor and head of Berkshire Hathaway, explained. An economic moat is his term for a sustainable competitive advantage, an edge that lasts and keeps rivals from catching up, and it sometimes develops very quickly.

Software is the fast case. Buffett pointed to Microsoft and its operating system, the basic software that runs a computer. That was a relatively quick build, he said, because the industry "was exploding and things were changing very fast."

Cartoon movies worked the same way. After early hits beginning with Snow White, Walt Disney, the animation pioneer, built a lead fast. Buffett said "it became Disney and nobody else in that field for quite a while." It took Disney a while to fully cash in on the lead, but the advantage itself formed fairly quickly.

Candy is the slow case. See's Candy, the California chain known for its shops selling boxes of chocolates, started in 1921. There was no way to build a recognizable advantage in anything shorter than decades, Buffett said. The company opened one shop at a time, unknown at first and then known to a few, and boxed chocolates were something people may have purchased a time or two each year for holidays. Buffett said you were not going to "embed yourself in the minds of Californians in one or two or five years," even with an outstanding box of chocolates.

Walmart is a middle case. Walmart, the discount store chain, expanded remarkably fast, Buffett said. But even Walmart took small towns first and progressed along, refining its techniques as it went.

The lesson: the faster an industry changes, the faster a lead can form; the less often people buy, the slower it forms. When shoppers buy only around holidays, a company has to win customers one store at a time.