The concept of economic moats, popularised by legendary investor Warren Buffett, refers to the durable competitive advantages that enable companies to defend their market position and deliver superior returns over time. These moats can take many forms, including cost leadership, strong brand recognition, network effects, high switching costs, and proprietary technology. Companies with wide moats often enjoy sustained pricing power, customer loyalty, and the ability to generate consistent free cash flow.
However, no competitive advantage lasts forever. In today’s fast-changing business environment, even the most dominant players can find their moats under threat. Technological disruption, shifting consumer preferences, regulatory changes, and new competitors can all weaken what once seemed like an unassailable position. Many companies fail not because their core product becomes irrelevant, but because they overlook the early signs of decline.
This article explores five key early warning signs suggesting a company’s economic moat may deteriorate. Learning to recognise these signals can be especially useful for anyone interested in evaluating the long-term viability of a business.
1. Declining margins
Sustained decline in margins when compared to the industry averages is often one of the earliest and most visible signs that its competitive moat may be weakening. Shrinking margins typically indicate that rivals successfully challenge the firm’s pricing power, market position, or cost structure. This pressure often arises from increased competition, product commoditisation, or internal inefficiencies that allow others to offer similar value at lower prices.
As margins compress, the company may struggle to reinvest in innovation, talent, or customer relationships, which can accelerate its decline in market relevance. The warning becomes even more serious when a company’s margins drop below industry benchmarks while competitors maintain or improve their profitability. This divergence often points to market share losses, strategic misalignment, or an inability to adapt to changing conditions such as new technologies or evolving customer expectations. The pace of this decline can vary, with some companies experiencing a sharp deterioration over a few quarters, while others face a slower decline over several years, depending on industry dynamics and competitive intensity.
One notable example is Intel Corporation, which is undergoing one of the most significant and sustained profit margin contractions in the semiconductor industry’s history. Once a clear leader in profitability, Intel has seen its gross margins fall from 65.31% in 2010 to just 31.7 %, while operating margins have dropped from a healthy 22.4% in 2010 to a -20.6%. This sharp decline places the company well below industry peers, underscoring how even dominant players can quickly lose their edge if they fail to respond effectively to structural changes and competitive threats.
2. Declining ROIC
Return on invested capital (ROIC) is a critical metric for evaluating how effectively a company converts invested capital into profits. A declining ROIC over multiple quarters or years indicates deteriorating capital efficiency and potential moat weakness. When ROIC falls below the industry average or shows a persistent downward trend, the company struggles to generate adequate returns from its investments, which may indicate that its competitive advantages are no longer providing the expected economic benefits.
The implications of declining ROIC often extend beyond immediate financial performance, as this metric reflects fundamental issues with capital allocation, strategic decision-making, and the sustainability of competitive advantages. Companies experiencing ROIC deterioration often face challenges, including poor strategic investments, operational inefficiencies, or market conditions that no longer favour their business models.
IBM provides a prime example of ROIC decline, with the company’s ROIC falling from approximately 33% in 2015 to under 7% by 2025. However, IBM’s recent turnaround demonstrates how strategic reinvention can revive a faltering business. Under CEO Arvind Krishna, IBM has shifted its focus toward hybrid cloud and artificial intelligence, transforming its revenue mix and operational efficiency. As a result, although ROIC remains below historical levels, early signs of improvement suggest that IBM’s economic moat may be strengthening once again through a more sustainable and innovation-led business model.
3. Loss in market share
Market share losses represent one of the most visible and concerning indicators of a weakening economic moat, as they directly reflect a company’s inability to retain customers and defend its market position against competitive threats. When competitors begin gaining ground and capturing market share, it suggests that the company’s value proposition is no longer sufficiently differentiated or that external factors reshape customer preferences in ways that favour alternative solutions. The decline in market share often accelerates as customers become more willing to switch providers, particularly when switching costs are low and competitors offer superior value propositions
Blackberry’s dramatic market share collapse from over 50% of the U.S. market and 20% of the global smartphone market in 2008 to virtually 0% by 2016 exemplifies how quickly market dominance can evaporate when competitive moats weaken. The company’s failure to adapt to the smartphone revolution led by Apple’s iPhone and Google’s Android platform resulted in a catastrophic loss of market position. Similarly, Kodak’s market share in photography declined from a dominant position to near irrelevance as digital photography disrupted the traditional film-based business model.
4. Disruptive entrants
Disruptive entrants represent perhaps the most existential threat to established economic moats, as they often introduce entirely new approaches to serving customer needs that render traditional business models obsolete. These new competitors typically start by serving overlooked market segments or offering simpler, more convenient solutions that gradually improve until they can challenge mainstream market leaders. The disruptive innovation process often begins with products or services that appear inferior to existing solutions but offer advantages such as lower cost, greater accessibility, or novel functionality that appeals to previously underserved customers.
Netflix’s disruption of Blockbuster serves as a classic example of how new entrants can completely reshape industry dynamics and destroy established competitive moats Blockbuster’s extensive network of physical stores, once considered a formidable competitive advantage, became a liability when Netflix introduced mail-order DVD rentals and later streaming services that offered superior convenience and value to customers Despite having the opportunity to acquire Netflix for US$50 million in 2000, Blockbuster’s management failed to recognise the disruptive potential of the new business model, ultimately leading to the company’s bankruptcy in 2010.
The accelerating pace of digital transformation has created new opportunities for disruptive entrants across virtually every industry, as technology enables new business models that can challenge established competitive advantages. Similarly, Amazon’s e-commerce platform has fundamentally altered retail dynamics, forcing traditional retailers to adapt their business models or face extinction.
5. Product commoditization
Commoditisation happens when products or services lose their distinctiveness, becoming virtually identical in customers’ eyes. This shift triggers intense price competition, squeezing profit margins and undermining established competitive advantages. The process often starts when industry standards solidify around specific technologies, key patents expire, or production methods become more straightforward and widely adopted. These changes allow multiple rivals to offer comparable products that customers see as interchangeable.
As products become harder to differentiate and price comparisons grow easier, customers increasingly base their buying decisions primarily on cost. This forces companies to compete on price alone, rather than unique value or features. Over time, this relentless focus on price destroys the ability to charge premiums and erodes once-strong market positions.
The technology sector offers numerous examples of commoditisation. Products such as laptops, smartphones, and digital cameras have become increasingly similar across brands, with price often as the key differentiator. Companies that once commanded a premium for innovative features now face pressure as those innovations quickly become industry norms, diminishing their pricing power.
While commoditisation can threaten any industry, sectors like technology hardware, basic consumer goods, agricultural products, and standardised services are particularly vulnerable. These industries often involve products where inherent differences are minimal or easily replicated, and standardisation further reduces perceived distinctions between competitors.
The fifth perspective
The rapid fall of industry leaders like Kodak, BlackBerry, and Blockbuster highlights how quickly dominance can disappear when disruptive technologies reshape the market and management fails to respond. These examples make it clear that early warning signs often point to deeper strategic vulnerabilities. Ignoring these signals can lead to a swift and irreversible decline.
Turning around a weakening company rarely comes from minor adjustments. Successful recoveries usually require bold actions such as overhauling core operations, investing heavily in innovation, launching distinctive new products, developing fresh capabilities, or acquiring complementary businesses to regain strength. Companies that delay action or rely on temporary fixes without addressing fundamental problems often continue to decline and eventually fail.
This is why learning to recognise early signs of a deteriorating competitive position is an essential skill. For anyone assessing a company’s long-term outlook, spotting these red flags early can make the difference between identifying a future winner or holding onto a fading name.
