Measuring the Moat Assessing the Magnitude and Sustainability of Value Creation Table of Contents Executive Summary . 3 Introduction . 4 Competitive Lifecycle. 4 Economic Moats . 7 What Dictates a Companys Destiny . 8 Industry Analysis . 10 Lay of the Land . 11 Industry Map . 11 Profit Pool . 13 Industry Stability . 15 Industry Classification. 17 Industry Structure . 18 Five Forces . 18 Entry and Exit . 19 Competitive Rivalry . 25 Disruption and Disintegration . 27 Firm Specific Analysis . 32 A Framework for Added-Value Analysis . 32 Value Chain . 33 Sources of Added Value . 34 Production Advantages . 34 Consumer Advantages . 38 Government . 41 Firm Interaction Competition and Cooperation . 42 Brands . 46 Management Skill and Luck . 48 Buffett on Moats . 51 Appendix A: Value Creation Checklist . 52 Appendix B: Profit Pool Analysis for Health Care . 54 References . 63 Executive Summary Sustainable value creation has two dimensionshow much economic profit a company earns and how long it can earn excess returns. Both dimensions are of prime interest to investors and corporate executives. Sustainable value creation as the result solely of managerial skill is rare. Competitive forces drive returns toward the cost of capital. Investors should be careful about how much they pay for future value creation. Warren Buffett consistently emphasizes that he wants to buy businesses with prospects for sustainable value creation. He suggests that buying a business is like buying a castle surrounded by a moat and that he wants the moat to be deep and wide to fend off all competition. Economic moats are almost never stable. Because of competition, they are getting a little bit wider or narrower every day. This report develops a systematic framework to determine the size of a companys moat. Companies and investors use competitive strategy analysis for two very different purposes. Companies tr