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In tonight's Port Report, Tom reiterated a point from the Rule Book about scoring monopoly status for a company. He advocates averaging the scores against competitors when there are more than one competitor to consider. I think this is a mistake, because it can give an inaccurate portrait of the position of a company within its industry.

As we saw in the example with Gap, there was a fairly wide range in Gap's monopoly score against just two companies. ANF left Gap with only a 6, while Gap scored a 12 against The Limited. So Gap gets a slightly higher score because of the weaker competition from Limited than if we had measured it only against ANF.

The point I want to make is that depending on which companies you choose to compare, and how many competitors you employ in the comparison, you can shift the score around and make a company look better than if you compared it only to its strongest competitor. Given that it can take only a single strong competitor to knock a reigning RM from its King of the Hill status, taking only the lowest score is most likely to be an accurate picture of the company's monopoly power.

Although some industries can produce several RM's, I think you will find that it is not due to their monopoly status, but to the fact that they all have high margins, loads of cash, low flows, etc. If we were to compare PFE, MRK, SGP, & JNJ for instance, how would they come out as monopolies? My intuition is that they wouldn't fare so well against one another. Averaging might then be warranted in a case like this, but because all the companies are so close to one another, there will be less variation in the Monopoly Status scores each yields in a comparison, and the average will be much closer to any single comparison. So, as a general rule, I think taking the score against the single strongest competitor is the way to go.

-TH
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