Companies That Stay Ahead of the Competition

The source of a firm's competitive advantage (aka "economic moat") impacts long-term performance

Paul A. Larson 14 June, 2012 | 3:48PM
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Identifying long-term competitive advantages, or economic moats, has been at the core of our equity research methodology for years. We recently completed a study focusing on the sources of a company's moat for all of the names in our equity coverage universe. As part of this study, we explicitly identified the source(s) of competitive advantage for every company with a narrow- or wide-moat rating and detailed how each of these companies sources their moat from one or more the following five categories:

- intangible assets
- cost advantage
- switching costs
- network effect
- efficient scale.

We found some rather striking differences in groups defined by the source of competitive advantage.

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About Author

Paul A. Larson  Paul Larson is an equities strategist with Morningstar and editor of Morningstar StockInvestor, which seeks to purchase shares of quality companies at a discount to their intrinsic values. StockInvestor features two market-beating portfolios: the Tortoise and the Hare. Paul joined Morningstar in 2002, and he was the lead writer and editor for Morningstar's educational series of stock-investing books. Click here for a free issue of StockInvestor.