Investing Classroom: Competitive positioning

Stocks lesson 2.4: Further tips for thinking like an analyst and assessing a company's com

Morningstar 27.11.2009

In the previous lesson, we reviewed the different types of defences (economic moats) and offered examples of wide-moat firms. Understanding moats, and determining whether or not a firm has a moat is a tricky process. In this lesson we'll examine the mental model that underpins our moat framework and explore some of the nuances of wide moats, narrow moats, and deep moats.

Porter’s five forces
Michael E. Porter's Competitive Strategy, originally published in 1980, is a definitive work on industry competition. In the book, the Harvard professor provides a framework for understanding competitor behaviour and a firm's strategic positioning in its industry. Much of Porter's framework should be familiar as it underpins our thinking about economic moats.

In essence, Porter provided a framework of five forces that can be used to understand an industry's structure. Since firms strive for competitive advantage, the first four forces at work help to assess the fifth, an industry's level of rivalry:

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