Mental Models & Product #3: Circle of Competence
I had a wonderful conversation this morning with a fellow Product Manager that I met in the Toronto Product community (hey Tom) about the importance of “finding your brand” and figuring out where we fit in as individuals within the product space.
Re-reading the excellent book compiled by Eric Jorgenson, there was a huge emphasis on “productizing yourself” — it has been something that has been on my mind on figuring out how I can “scale” my skillset and figuring out what I can uniquely provide.
How Warren Buffett avoids failure.
The concept of Circle of Competence has been used by Warren Buffett (one of the world’s richest people and one of the most successful investors in the world) over the years. This is a mental model to avoid problems and to win big. According to his 1996 shareholder letter, he summarizes:
What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence . The size of that circle is not very important; knowing its boundaries, however, is vital.
This is usually a reference to limiting where to make financial investments based on knowing where the boundaries of one’s own knowledge. This would help investors only operate in areas they knew best, therefore increasing their success rates by improving their focus and their “subject matter expertise”.
Charlie Munger took this concept a step further by using the Circle of Competence to identify where we should devote our limited time in life to achieve the most success. This is focused on identifying our own competitive advantage by playing in the areas based on our strengths and staying within those boundaries.
Circle of Competence and staying within.
Each of us, through experience or study, has built up useful knowledge on certain areas of the world. Some areas are understood by most of us, while some areas require a lot more specialty to evaluate. — Shane Parrish
Similar to the quote above from Shane’s blog, within our circle of competence lies skills that we have mastered throughout our careers or lives. In the smaller circle lives the specialized skills we own that give us an edge. We are essentially the experts in those skills that no one can compete directly with. This could be based on our career like having specific knowledge about the e-commerce space, or easily organizing large amounts of information into succinct frameworks. This could also be based on our life skills like the ability to form deep connections with people easily, or how to always make a great casserole.
Naval Ravikant also has a similar concept called “specific knowledge” — this is specific knowledge pertaining to our innate talents, our genuine curiosity, and our passions, based on the knowledge we care about. Identifying our circle of competence isn’t about starting from ground zero and trying to choose which specific knowledge we have, but instead, it is about evaluating what we are already good at (what we already have) and making an effort to build on top of it. It is about leaning into our already “defined” skillset and building traction around that.
Beyond that smaller circle lies all the things we think we know. This is a dangerous circle to be in because this will mean we are navigating in our blind spots and competing against those that can easily excel. Similar to the article I wrote about First Principles Thinking, it’s about leveraging on the “collections” we already know and are good at, and digging deeper into their fundamentals. By being able to understand our blind spots and gauge when we’re outside our circle, we can focus on the 20% that will provide the most impact (a reference to Pareto Principle) and become more effective in making grand decisions.
As Munger said, “It is really important to stay within your circle of competence. If you are not sure what the boundaries of that circle are for you, then you do not have real mastery of your field.”
The important takeaway here is that it is not about the size of our circle of competence but to know what those boundaries are.
So how can we grow?
Sticking within our circle of competence does not mean that we are not growing or expanding it. It is about learning something useful within your circle of competence incrementally and challenging what you know with new information.
I’m not pretending to be a subject matter expert on mental models nor would I try to be one. Shane Parrish does a WAY better job at this than I ever can. However, something that I’m passionate about and naturally good at is finding ways to take existing concepts and apply them to processes/products to spark innovation. I am also really good at researching new information and consolidating them into easy-to-understand content. Beyond that, I have and always will be interested in scaling products and understanding customer behaviour (even when I was not in a product role). By understanding my circle of competence, I have started “chipping away at the edges” by becoming a better product thinker and forming frameworks based on others’ circle of competence to foster better ways of working.
It is natural for us to get distracted by the “shiny bright objects” outside our circle and want to step outside of those boundaries. It is important though to recognize when we are straying from our known discipline. It is also equally important to widen our circle of competence, but only slowly and over time so that we’re not throwing ourselves outside of those spots.
“The trick in investing is watch pitch after pitch go by and wait for the one right in your sweet spot… and if there are people saying ‘swing you bum!’, you ignore.” — Warren Buffett
Within our circle of competence, we won’t have to worry about things outside that circle so that we can focus on defining that edge where we can easily win.
How does that relate to product thinking?
In the case of applying the circle of competence in investing, it is important to understand the businesses that one’s investing in. Investors need to know how a company makes money, how it spends its money, and what are the important factors that impact its operations in its industry. Investors don’t need to understand how a few or one type of business operates. Applying the circle of competence in product development is similar.
Within our circle of competence, this usually consists of understanding our product thoroughly and its moving parts. Taking a step back in an abstract example, most people are capable of understanding how a single restaurant operates.
- It operates based on the rented space, employees, food that we are serving, interior design.
- Business makes its money based on number of customers brought in.
- Set the cost charged to customers against cost to operate the restaurant.
This knowledge is within our circle of competence. Identifying our circle of competence would be to clearly understand what our product does, the value it brings to our customers, the value it brings to the business, the amount of effort (or $) associated with maintaining the product, and what are huge opportunities that come with the product. We also understand the intricacies of the product and the correlation to it within the business. This could even extend to the specific tech stack the product is built on, but being careful in getting to the specific line-by-line code (that’s when we should lean on our tech leads).
Just outside our circle of competence are the things we think we understand but we don’t. In the product world, that could mean how the tech stack of a vendor that our product is leveraging on, or a new “up and coming” trend that everyone is talking about (for example microchips or blockchain, unless your circle of competence is focused on microchips or blockchain of course). Before we start jumping onto the “trend bandwagon” and invest numerous resources into a possible win, it is important to recognize whether it is within our circle of competence and if we want to explore further, lean on other subject matter experts (collaboration with stakeholders) to advise whether the trend is worth an investment.
How do we identify when we are outside our circle of competence? Using the Einstein quote: “if you can’t explain it to a six-year-old, you don’t understand it yourself”, when we are outside our circle of competence, no matter how much we read about something, we would not thoroughly understand how it operates.
We need to start understanding what is within our circle of competencies’ boundaries and what isn’t. And that starts with knowing what exactly our product is. In smaller companies or teams, it can be easy to get a bloated portfolio that consists of various areas of the product that can not be summarized in a 5-second pitch. While it can be exciting in owning a breadth of focus, it can result in multiple “grey areas of ownership” within the product, and may resort to your portfolio becoming a “dumping ground”. That is dangerous because within those grey areas of ownership come blurred lines between what is within your circle of competence as a product manager, and what is beyond. By expecting to know everything (and how everything essentially operates), it can lead to distraction and a lack of vision.
By defining your product clearly (which is something that creates specific value for a group of people while generating revenue to serve a business goal), it will not only protect your organization, your team but most importantly, yourself. This will help maximize the identified product’s value and let us have a dedicated focus on achieving product success. On the other hand, if we do not have clarity on what our product is, and naturally, what is within our circle of competence, then it can cause distraction in prioritization, areas of improvement, and context switching for the team.
When thinking about your product, see if we can answer the following questions:
- How does my product work? What is the basic business model and how does it ladder up to the company’s vision? What are the key dependencies we need to keep in mind when making feature enhancements? What platform does it leverage on and what drives it?
- What drives my product’s growth? What are our top KPIs? How does it drive growth to the business?
- How does my product stand against competitors? Who are my product’s key competitors?
- What are the unit economics of my product? How much revenue does it make for the business and how much does it take to maintain it/fix bugs (attributing $ to effort on our teams)?
- Do I know I’m asking the right questions? Do I know that I honestly know my product?
If we can’t, or if we find that we are unable to sum up our answers to a couple of sentences per question, maybe we have too bloated of a portfolio and need to work closely with our leadership in ensuring that our product teams are focused.
“I can look at a thousand different companies but I don’t have to be right on every one of them. I can just pick the ball I want to hit.” — Warren Buffett
Instead of trying to play whack-a-mole in prioritizing new features, bugs, and paying tech debt, our circle of competence can help us be more effective and focused in hitting the home run for our businesses.
