In Michael Porter’s groundbreaking book, Competitive Strategy (1980), he identified five forces that drive industry competition: Substitutes, Suppliers, Buyers, Competitors, and Potential Entrants. While each force impacts how you create competitive strategy, we found that one is more important than the others: Potential Entrants. The reason is that if you can build barriers to entry that are impenetrable by other companies, then you can easily defend your position with customers, suppliers, and investors.

Similar to Warren Buffett and many others, we call these barriers to entry moats. Similar to castles of the past, you must build moats around your customers so rivals cannot take them away. When you hear the term moat referenced today by investors and consultants, they are almost certainly referring to an economic moat. This means you can see the moat in their financials, where the company is often enjoying revenue growth, steady ROIC (return-on-invested-capital) and predictable earnings.

At wRatings, our moats are customer moats. The precursor to every economic moat is a customer moat. The way executives generate a moat for their company is straight-forward: You must meet customer expectations better than your rivals. While tracking your rival’s performance through traditional metrics like Net Promoter Score® (NPS) and customer satisfaction is beneficial, it is not enough to win, keep and grow customers over the long-term. You must understand what customers expect. That’s why your #1 competitor is not any rival company, but what your customers expect.

Our competitive rankings measure your company’s ability to meet customer expectations. The smaller those gaps, the higher you rank. Do the rankings actually work? Absolutely. In January 2015, one of our hedge fund clients built a portfolio of the top 25 companies from our competitive rankings of 200+ companies. Using quarterly adjustments, this portfolio continually out-performs the S&P 500, Russell 1000 and Russell 2500. You can see those results here.

When you build moats to improve your competitive rankings, customers will choose you over rivals and revenue growth will follow. The goal is an economic moat; The path is a customer moat.

Moats are how you win championships in the business world. In fact, we borrow our tagline directly from that athletic desire to win. Let’s Go For The W™ together.