If one were to compile a list of the most abused words in finance and investing, “differentiation” (or “being differentiated”) will certainly occupy a top place in that list. Most money managers tell clients that their investment processes are differentiated; most businesses claim their products or services are differentiated. It has now become unusual if a business does not sprinkle its client-facing talks with the word “differentiation.”
Wait… common sense tells us a business can only be run in a finite number of ways… if most players in a particular business claim themselves to be differentiated… That is an oxymoron!
I believe that in today’s context and for many industries, the word “differentiation” has lost its meaning. The notion of being differentiated seems to have born out of the previous time, not our time. In a time when an economy’s supply was limited and people’s choices were few, differentiation was indeed a big deal. In the late 1970s in China, most people rode bicycles of the same model (Tianjin Flying Pigeon) and wore clothes of the same color (black) — differentiation, like you driving a shiny Mercedes down Beijing’s Chang’an Avenue while everyone was riding dusty Tianjin Flying Pigeon bicycles, was a big deal. Today, however, the economy’s supply has vastly outstripped our ability to make choices, flooding us with hundreds of car models and millions of other consumer products; whether you are driving a Mercedes or an Audi (or other make and model) down Change’an Avenue, you are not going to get the same attention like you did back in the 1970s, if you get any attention at all. When there is too much supply (e.g. too many money managers, too many businesses operating in a particular space), differentiation no longer matters.
The availability of technology and resources, further catalyzed by their low prices, has dramatically reduced the entry barrier to most industries, making differentiation far less important and making a true moat more valuable than ever before. The other day I came across a resume which reads “(the candidate has) invented a crypto-currency under his name.” I was impressed at first, until a few hours later when I figured out that there are tons of websites and blogs devoted to allowing an average fellow to create a personal crypto-currency within 10 minutes — Aha! I can spend the next 10 minutes creating a currency called “Jackson-coin” and put the same line on my resume as well!
Unlike differentiation, however, a moat is going to matter more and more in our time.
So, what is a moat? In my opinion, a moat is the thing that allows a business to continuously win. A moat is an unfair advantage. It can last and it is hard to copy. It gives an enduring competitive advantage to a person, a business, a product and a process.
I see two types of moats:
- Type A – “Single asset”: something that you can do but most other people cannot for now and will not be able to for a while. For example, a company owns a patent that is necessary for a manufacturing process and that cannot be displaced by alternatives.
- Type B – “Synergy assets”: a list of things that others know how to do but only you can do them all at the same time. For example, a person who speaks and writes both Chinese and English like a native and understands the cultures of both the East and the West; an analyst who is fluent in computer programming (i.e., hard skills), prolific in writing and skillful in presentation (i.e., soft skills), all at the same time.
To me, differentiation increasingly sounds like an historic relic that has lost its relevance to our time. Today and going forward, both for personal development and when evaluating companies and businesses, moat is what matters.
Differentiation is not a moat.