Ethan Berg worked for Michael Porter. This is how he analyzes Economic Moats with the Five Forces.

Ethan Berg is a management consultant turned investment partnership manager. He worked for six years at Michael Porter's Monitor Group.  Of course, Porter is best known for his Five Forces analysis. As a management consultant Berg brings a unique perspective, a certainly a different methodology to value investing. 

If you've ever worked with a management consultant, you know they have buzzwords and terminology that can be foreign to an investment manager. This interview is no different. "Assets and Activities", and "Activity Webs" are discussed at length. However, don't be deterred by this seeming foreign language, these are simply tools to gain a deeper understanding of Economic Moats. Listen below, and check out my notes further down the page.

This interview comes to us from the must-listen Value Investing Podcast by John Mihaljevic, CFA, author of The Manual of Ideas.  More about Berg from The Manual of Ideas:

Ethan Berg is the founder and chief investment officer of G4 Partnership, an investment partnership dedicated to the implementation of the investment discipline of Ben Graham, Warren Buffett and Seth Klarman. Prior to founding G4 Partnership in 2000, Ethan was a management consultant at Monitor Group for six years, including two years of working directly for Michael Porter.

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My Notes:

• Moats are "assets and activities" that give an edge.

• Management consultants dive deeper than typical investors, it is a function of time. While investors must look at several companies a day from the outside, consultants spend months inside one company.
  
• Porter has published several books but also many unpublished manuscripts. 
• Porter's firm used many different analysis, but best known is Five Forces. Also used nationwide analysis. Berg developed Advantage Curves analysis.

• They dove deep into customers relationship with companies and brands.
• Southwest Airlines (LUV) competitive advantage was based around one type of airplane. Bought airtran and eroded their competitive advantage. No longer one airplane type. Comprising Moats to grow is a difficult trade-off.
• For reference, here is a chart of Southwest's ROIC over time, the Airtran deal closed May of 2011.

• Activity system defined: Key activities that provide lower cost structure 
• Berg likes to read founder biographies, it gives him a sense of company culture.
• As a management consultant, he cold called people at a companies. Asking questions was very valuable, investors don't typically do this, spend more time with IR.
• What is strategy: Where and how do we compete? On what attributes do we win? 
• Steinway Piano: 90% market share of professional pianists for over 100 years.  Pianist talk about the "Voice" of a Steinway piano.
• Pianist have a emotional connection to the brand. The customer experience is built around supporting pianists in extraordinary ways.
• They have a single source of wood that is a competitive advantage.

• Note from Emory: I was recently a jazz show. Yamaha was the piano sponsor. Not to be outdone, Steinway provided the chairs.
• No pianos are given away. Even official Steinway pianists pay for their piano.
• Steinway sold to PE firm in 2013.  Berg cautions the existing factory, facilities, and people are the competitive advantage. If these were changed, all that remains is the brand.
• Compare Operation effectiveness vs competitive/strategic advantage:
• Operational effectiveness: tweaking existing operations for small gains. Strategic Advantage is doing something different than competitors. Steinway operates very different than other piano manufacturers.
• Google (GOOG): He generally doesn't invest in technology companies. Noticed Google because trading at 10x FCF. Had 70% market share in search. "Free options" on Android, G+, Google Wallet. These are all deepening the moat.

• At the time, Google was the preferred employer for talent. Microsoft was a second tier.
• Porter's Five Forces, can be helpful to managers inside of the company. "Activity systems" or "Activity Webs" are more useful for investors assessing strategy.
• Assessing competitive advantage internally can be very uncomfortable for companies.
• Can you price above competition? If not do you really have a competitive advantage?
• Merrimack Pharmaceuticals (MACK): Can pay below industry salaries because so attractive to top tier talent.
• Merrimack has a unique culture and operation structure that makes it very attractive . They do things differently. Cross functional teams organized by product, not by function.
• Like local business journal, as they provide anecdotal information about the companies.
• Read the HBS case studies if there is one on your company.
• Make a hypothesis about the company. Ten things. Then check your hypothesis against feedback from those familiar with the company such as employees, competitors, suppliers, customers, and management consultants.
• It all begins with the customer. AT&T was focused what they can do, not what the customer wants. They is a function of its long time monopoly status. Investors  often thing of what a company does, has, market share. However investors should focus on what customers want.
• The ideal company can deliver what the customers want and a strategically advantaged way.
• Costco (COST) may deliver what customers want in a less expensive and fundamentally different way.
• Five Forces is very applicable to assessing long term strategic advantage. What are the threat of new entrants? Will new technologies disrupt my long term competition advantages? For example he believes genetic testing does not have a long term competitive advantage.
• What sets of analyses are most applicable from Monitor management consulting to Investing? Who are the customers, what do they value, and how does the company deliver that value? Easier to do in pure play companies than conglomerates.
• Biggest mistake investors make when it comes to competitive advantage? The low bar they set for competitive advantage. Its not just taking market share or having a high ROE.