YourCircleofCompetence 107Coca-Cola in Atlanta, Kimberly-Clark in Dallas, an dJohnson Con-
trols in Milwaukee.
How do the companies which seem a natural fit for your circle
of competence relate to less obvious ones that fit just as well? If you
are in retail, what about apparel companies such as Gucci, Polo
Ralph Lauren, an dHe`rmes International? Up-and-comers such as
Kenneth Cole? Sports fans may enjoy learning more about Nike;
musicians, Steinway. The examples pour out if you identify the sector
your business or interests are in an dcomb through lists of compa-
nies in that sector publishe dby all the major investment banking
firms an davailable on many reputable Web sites.
To sharpen your boundaries after you’ve identified one or a few
companies an din dustries you know something about, evaluate
whether a particular company qualifies for admission by asking your-
self a series of commonsense questions about that business. If you
can answer them, the company probably qualifies; if you can’t, pick
another one that stands a better chance and ask the same questions.
Here are the key questions.
What products does the company sell or services does it provide?
There is a big difference between razors (Gillette) and computer
chips (Intel) and cruises (Carnival). Do you understand these prod-
ucts an dhow they are use d?
Does the company make products that people need? Razors and
chips almost certainly, but that’s less true of luxury goods such as
cruise vacations. Will these products probably be needed for the
indefinite future? There are big differences between toothpaste
(Colgate-Palmolive), paper (Mead), and pet rocks (who made
them?). Big differences can arise between today’s needs and tomor-
row’s (razors can become obsolete with an explosion of electrolysis
or laser removal, an dcomputer chips may be displace dby chemical-
driven substitutes now in the research stage).
How distinctive is the company’s product compared to possible
substitutes for it? The difference between Coke and Pepsi may be
slight, but do consumers think it matters? Product differentiation in
the beverage industry, as in many other consumer product busi-
nesses, can be remarkably successful.
Aske danother way, how likely is it that this company can raise
prices on its products without losing unit volume in sales? Carnival
might be able to do that with its cruises more easily than Mead can
with its paper. The ability to raise prices without hurting sales is
called economic goodwill. Some companies get more of it by distin-