In many instances we have different ideas about what makes a company good. Could it be the products? What about customer service? Or is that hilarious ad that comes on with the happy music? Beyond all of these factors, there are key elements that underline successful businesses, regardless of their industries or size. Let’s look into what these could be.
What is the problem being solved?
Profitability is based on the market problem that is being solved. For instance, a bottled water company will receive stronger profits in the summer than in the spring because the lack of bottled water is a greater problem in the summer than in spring. The intensity and size of the market problem being solved sets the background for size and volume of profits a company will receive from it’s activities. Further, a company that is the only solver of a particular market problem will receive monopoly power over the market while those that are “dime a dozen” may end up fighting over tiny profits.
What’s the secret sauce?
The more unique a company is in solving market problem is the stronger it’s profits will be, especially if this unique quality is hard to replicate. For this reason, it’s commonly stated that “people buy difference” because uniqueness is translated into power. Further, a company doesn’t always have to solve new problems but can resort to solving the same problem in a new way. A unique solution can even change the entire industry. For example when BMW released the X6 crossover vehicle, it received mixed reactions from the critics and experts. Mercedes, the first company to successfully use the modern combustion engine went as far as saying that the vehicle was impractical and ugly. By the time the second generation of the X6 was refined and ready for the market, Mercedes created the GLE coupe, an X6 substitute because they couldn’t stand to fall behind and miss out on sales. Today, the originally “ugly and strange” design has quite a common presence on the roads across different regions. BMW’s secret sauce is always about innovating and creating a new lane in their industry through engineering, technology and design. Another example is KFC’s secret recipe. Many persons that line up to have KFC every Friday can cook friend chicken themselves but there is something about the recipe that makes it addictive which is why it’s profits have remained strong for many years.
How is the management team?
The performance of a company is directly linked to the decisions of it’s management team. Choices on hiring talent, financing, marketing plans, pricing and so on are the things that separate bad companies from the good and the good companies from those that are great. When Steve Jobs left Apple Inc, the company lost it’s direction and became tagged as a failing “has been”. CEOs matter as their job is to create attractive returns for shareholders specifically through meeting the targets set by the board of directors. Some are good, some are great and some are merely the founder’s relative so it helps to know your CEO.
Are there long term prospects?
A good company is typically not classified as a “fly by night” project. In this era, each day brings something new to hype about but it is wise to allow the management team to work out the bugs in their products and to pass through the natural troubleshooting phases that come with new technology. Allow the tides of time to wash out fads as they collapse as sharply as they rise and at a point that is fairly unpredictable, which makes taking a stake in them closer to gambling than investing.
Finally, do you understand the business?
Invest in businesses that you understand. If you don’t understand how the company makes money, then you can’t gauge if management is making a blunder or if a CEO hiding something from the public. One doesn’t have to be a Harvard MBA to understand how a business makes money because the simpler the business model is, the better it is for everyone. When firms have structures that are too complicated, management might not know where to start fixing when trouble strikes. Spend some time to know the business and how it creates value for investors and society as whole.