Lesson 8 of 12 · All lessons in this module
- Why analyse an industry, and the five steps
- Defining an industry and grouping companies
- Industry size and the character of its growth
- Top-down and bottom-up: sizing an industry, shares and HHI sensitivity
- Integrated case: concentration, competitive intensity and market-share trends
- Industry profitability: margins, ROIC and value creation
- Industry structure: Porter's Five ForcesVideo lesson
- Economic moats and lasting barriers to entry
- Supplier and customer power, vertical integration and rating the forces
- External influences: PESTLE analysis
- The innovation matrix and other PESTLE themes
- Integrated case: from an industry survey to a forecast
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 8 of 12 · 13 min
Economic moats and lasting barriers to entry
When the five forces are intense, industry ROIC drifts to the cost of capital; an economic moat, built from intangible assets, switching costs, network effects, cost advantages or efficient scale, lets an industry or a firm earn more than its cost of capital for longer.
In short
- Intense forces push returns toward the cost of capital, as in perfect competition where price equals marginal cost; weak forces allow high profitability.
- An economic moat is a long-lasting competitive advantage: the wider it is, the longer returns can stay above the cost of capital. A moat can protect a whole industry (an oligopoly) or just one or two firms.
- Five moat sources: intangible assets, switching costs, network effect, cost advantage, efficient scale.
- Patents and licences block entry for a finite period; proprietary technology protects only as long as rivals cannot replicate it.
- Government can prohibit entry (regulated utilities), raise it through compliance costs, subsidies to domestic firms or restrictive licensing.
- Incumbents respond to entrants by acquiring them or partnering with them (joint ventures).
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