Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

Below is an excerpt of “a complete checklist of questions to guide the strategic analysis” published in the paper Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation, written by Michael J. Mauboussin and Dan Callahan.

Value Creation Checklist

• What stage of the competitive life cycle is the company in?
• Is the company currently earning a return above its cost of capital?
• Are returns on capital increasing, decreasing, or stable? Why?
• What is the trend in the company’s investment spending?

Lay of the Land

• What percentage of the industry does each player represent?
• What is each player’s level of profitability?
• What have the historical trends in market share been?
• How stable is the industry?
  • How stable is market share?
  • What do pricing trends look like?
• What class does the industry fall into—fragmented, emerging, mature, declining, international, network, or hypercompetitive?

The First Three of the Five Forces

• How much leverage do suppliers have?
• Can companies pass supplier increases to customers?
• Are there substitute products available?
• Are there switching costs?
• How much leverage do buyers have?
• How informed are the buyers?

Barriers to Entry

• What are the entry and exit rates like in the industry?
• What are the anticipated reactions of incumbents to new entrants?
• What is the reputation of incumbents?
• What is the level of asset specificity?
• What is the minimum efficient production scale?
• Is there excess capacity in the industry?
• Is there a way to differentiate the product?
• What is the anticipated payoff for a new entrant?
• Do incumbents have precommitment contracts?
• Do incumbents have licenses or patents?
• Are there learning curve benefits in the industry?

Rivalry

• Is there pricing coordination?
• What is the industry concentration?
• What is the size distribution of firms?
• How similar are the firms in incentives, corporate philosophy, and ownership structure?
• Is there demand variability?
• Are there high fixed costs?
• Is the industry growing?

Disruption and Disintegration

• Is the industry vulnerable to disruptive innovation?
• Do new innovations foster product improvements?
• Is the innovation progressing faster than the market’s needs?
  • Have established players passed the performance threshold?
  • Is the industry organized vertically, or has there been a shift to horizontal markets?

Firm Specific

• Does analysis of the value chain reveal what activities a company does differently than its its rivals?
• Does the firm have production advantages?
  • Is there instability in the business structure?
  • Is there complexity requiring know-how or coordination capabilities?
  • How quickly are the process costs changing?
• Does the firm have any patents, copyrights, trademarks, etc.?
• Are there economies of scale?
  • What does the firm’s distribution scale look like?
  • Are assets and revenue clustered geographically?
  • Are there purchasing advantages with size?
  • Are there economies of scope?
  • Are there diverse research profiles?
• Are there consumer advantages?
  • Is there habit or horizontal differentiation?
  • Do people prefer the product to competing products?
  • Are there lots of product attributes that customers weigh?
  • Can customers only assess the product through trial?
  • Is there customer lock-in? Are there high switching costs?
• Is the network radial or interactive?
• What is the source and longevity of added value?
• Are there external sources of added value (subsidies, tariffs, quotas, and competitive or environmental regulations)?

Firm Interaction—Competition and Coordination

• Does the industry include complementors?
• Is the value of the pie growing because of companies that are not competitors? Or, are new companies taking share from a pie with fixed value?

Brands

• Do customers want to “hire” the brand for the job to be done?
• Does the brand increase willingness to pay?
• Do customers have an emotional connection to the brand?
• Do customers trust the product because of the name?
• Does the brand imply social status?
• Can you reduce supplier operating cost with your name?

https://www.oldschoolvalue.com/blog/stock-analysis/measuring-moat-value-creation-checklist/