jness look like? For Warren erect bus ‘vice chair- rtner Charlie Munger, a thaway,Inc,, it looks a lot like imagine going backin me to ‘Cebrgia, and trying to invent from Seal an Solis beverage that would make ser family, and all of your friends rich. You Jom peverage would be nonalcoholic to ensure widespread appeal among both young and old vite Tt would be cold rather than hot so as to pro- af ae from climatic effects. It must be ordered by name—a trademarked name. Nobody gets rich Selingeasy-t0-imitate generic products. It must gen- ‘rate alot of repeat business through what psychol- ogists call conditioned reflexes. To get the desired postive conditioned reflex, you will want to make it weet, rather than bitter, with no after-taste. Without any aftertaste, consumers will be able to drink as ‘much of your product as they like. By adding sugar to make your beverage sweet, it gains food value in addition toa postive stimulant. To get extra-powerful combinatorial effects, you may want to add caffeine asan additional stimulant, Both sugar and caffeine work by combining them, you get more than a double effect, you get what Munger calls a “Lollapalooza” effect. Additional combinatorial effects could be walzed if you design the product to appear exotic. Coffe is another popular product, so making your erage dark in color seems like a safe bet. By idaing carbonation, a little fizz.can be added to your *everage’s appearance and its appeal. To keep the lollapalooza effects coming, you will with ne 2C¥ertise, If people associate your beverage with hay _ coe eg ts they vil tend to seach fort when- Alay, asin “Alves Cone eee eee (it that At poring events eee Gola?) Make it available pulsar concerts the beach, and at theme cose your product iy Erne PeePle have fun. Customers tend to ein OtiBht, upbeat colors that Caodher comings with festive occasions aging would be a meee Red and white pack- ‘isomers assets yo oe Als make sure that erage with festive occa t does @ P vet and HS Pa of Berkshire Hat Coca-Cola. To see why, See Ch 3 les T. Munger“ "8 "How Do You Get Worldly Wisdom?” sions. Well-timed advertising and price promotions tan help in this regard—annual price promotions fied to the Fourth of July holiday, for example, would bea good idea. ‘To ensure enormous profits, rate of retum on invested capital must both be high. To ensure a high rate of return on sales, the price charged must be substantially above unit costs. Because con- sumers tend to be least price sensitive for moderately priced items, you would like to have a modest “price point,” say roughly $1 to $2 per serving, This is a big problem for most beverages because water is a key ingredient, and water is very expensive to ship long distances, To get around this cost-of-delivery difficulty, you will not want to sell the beverage itself, but a key ingredient, like syrup, to local bottlers. By selling syrup to independent bottlers, your company can also better safeguard its “secret ingredients.” This also avoids the problem of having to invest a substantial amount in bottling plants, machinery, delivery trucks, and so on. ‘This minimizes capital requirements and boosts the rate of return on invested capital. Moreover, if you cor- rectly price the key syrup ingredient, you can ensure that the enormous profits generated by carefully devel- oped lollapalooza effects accrue to your company, and not to the bottlers. Of course; you want to offer inde- pendent bottlers the potential for highly satisfactory profits in order to provide the necessary incentive for them to push your product. You not only want to ““leave something on the table” for the bottlers in terms of the bottlers’ profit potential, but they in tum must also be encouraged to “leave something on the table” for restaurant and other customers. This means that you must demand that bottlers deliver a consistently they ae 10 main thr aluable facie ll valuable i your beverage in the loa tea ee you had indeed gone back to Georgia, and followed all of these suggestions pea would have created what youand I know as The Ceca. Cola Comy coo Fi 'pany. To be sure, there would have been sur- prises along the way. Take widespread refti forexample. Early on, Coca-Cola managements the ygement saw the profit margins and the Outstanding In ‘standing Investor Digest, December 29, 1997, 24-31, Scanned with CamScannerRERP Re n— Coca-Cola ls a Wond! ferful Business + 360477005" mT :z001 | 2002 | 2003 2004 2005 — " oa ae) 28 eH Siete ay 62] 12) EL ann] neo) 218 “Ciena pe 2 io) et as tm] im 2B Eamoga pea 30 tel tay an man LBL RL ata pe ep a eT ae] am ent at ln a at RRR AR] | acten” tematee i ry ar) a) AT dey cea A Ss) ON 29) 21 | | ok wel teal SP totes ey ah | ee | ss sea | Zi @ IRS eae Se es | eee ana a | ee ame a |e acer Care enniasen [SSR BLUE Ly tgene wae soy ae] ST Genet (Siem, -araT Gar] One| | | Ss uta soe | eno] so] si | 97 mark ussacien ret Sig rmon [mk OR [HE PITTS (Ee EG ince \nmumamngms ony eset [ue weyers ane [ame em (zm | es] 2a \ a aa awe, aie] y aare | ror WoT Si si repeat Bae eanl del nel ane| ue] ese 213] tot Lape 1 Sao | Sous awe ve one | sae [ves | 8 | 1 00 | 5, SE eat = se eee ee ae rae tts aioe aes [228 | ON FORE Ren cn CT \ new | ‘340% | 360m | 35.0% Return on Sh. 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It enjoys large and growing profits, and requires practically no tangible capital investment, Almost its entite value is derived from brand equity derived from generations of adver- tising and carefully nurtured positive Lollapalooza effects. On an overall basis, it is easy to see why Buffett and Munger regard Coca-Cola as a “perfect” business A. One of the most important skills to learn in man- agerial economics is the ability to identify a good business. Discuss at least four characteristics of a good business, B. Identify and talk about at least four companies that you regard as having the characteristics listed here. C. Suppose you bought common stock in each of the four companies identified here. Three years from now, how would you know if your analysis was correct? What would convince you that your analysis was wrong? Scanned with CamScanner