In his 2007 letter to Berkshire Hathaway shareholders, CEO Warren
Buffett, describes what type of businesses turn him on as an investor:
A truly great business must have an enduring “moat” that protects excellent returns on
invested capital. The dynamics of capitalism guarantee that competitors will
repeatedly assault any business “castle” that is earning high returns.
Therefore a formidable barrier such as a company being the low cost producer
(GEICO, Costco) or possessing a powerful worldwide brand (Coca-Cola, Gillette,
American Express) is essential for sustained success.
Buffett is credited as being the most successful investor of the
20th Century (a claim that seems pretty credible given that Berkshire
Hathaway’s Compounded Annual Gain between 1965-2011 was 19.8 percent compared
to the S&P 500’s 9.2 percent). So it is worth a few moments to contemplate
the implications of some of his investment practices.
Buffett takes the long view for his investments. He is looking
for a sustainable competitive advantage, not a quick win, and marketers would
do well to do the same. There is no substitute for a meaningful positioning
that the company can own for the long term. All too often I see new brands and
campaigns launched with an eye to making it big quick by tapping into a
transient fad or unsustainable claim. Often as not, it does not work, and when
it does the returns are temporary. As Buffett states:
A moat that must be continuously rebuilt will eventually be no moat at all. (2007)
Buffett understands that markets are dynamic. Gains are made and
then need to be held. A moat is a defensive structure not offensive. One of the
most important, but undervalued, roles of marketing is to help protect a
business, just as a moat protects a castle, by blunting competitive attacks and
encouraging existing buyers to remain loyal. If you can hold share in a growing
market you still make more money in the long run, and a loyal user base
provides a great platform for new sorties of your own.
He recognizes that there are two types of moat: the low cost
producer and the powerful brand. Of course, the two are not mutually exclusive.
GEICO and Costco are both strong brands but their marketing is designed to
encourage trial and generate volume. Coca-Cola and American Express are more
focused on justifying their price premium over the competition. Marketers need
to be very clear about which type of business they are trying to support
because they demand different approaches.
Buffett does not make his investments without doing significant
due diligence. Marketers need to do likewise. If you don’t understand your
brand’s true purpose in people’s lives, you are unlikely to get good returns
from your marketing investment. If you don’t test ideas and executions with the
target audience but work solely on gut feel, you risk wasting your investment.
And on a final note, although his comments applied to management
not marketing, Buffett suggests that good returns are “far more a function of
what business boat you get into than it is of how effectively you row.” The
success of a brand (and the marketing that supports it) is inherently bound up
with the success of the business. Put it another way, it is tough to build a
good moat when the castle is built on sand.
So what do you think of these principles? What other Buffett aphorisms might
marketers want to take note of? Please share your thoughts.
Contributed to Branding Strategy Insider by: Nigel Hollis, Chief Global Analyst Millward Brown
Sponsored by: The Brand Positioning Workshop
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