8 traits of a great business - part two
Edward Crossin
Award winner | Marketing communications leader | Mentor | AMEC Member Lab Leader | Digital data connoisseur | Solutions creator | Uber rating 4.8
What are the ingredients that are consistent in building and sustaining a quality business? In the second part of this series, we continue to examine the individual components and the competitive advantage these components serve.
This article summarises the first of a two part podcast series published in April 2022 by the team behind?Motley Fool Money. Read part one here. Hosts for the podcast are?Andrew Page, founder and Managing Director of Strawman and?Scott Phillips, Chief Investment Officer at Motley Fool in Australia.
Full acknowledgement and appreciation of the content of this article is given to this informative podcast series.
#9 Organic demand
A business that it is always on, always meeting the continuous demand for its products or services is in a strong position of organic demand.
Altium is a software company that provides businesses their own printed circuit boards (PCP). A product that is known within its market as as best in breed, Altium doesn't have to bang on doors and outwardly market the product. Instead, through its organic demand competitive advantage, the demand is knocking on Altium's door.
Metaphorically not too far away from the adage "build it and they will come," Transurban's paid motorways and infrastructure is a business that doesn't need to externally create its own demand. Transurban's benefit is clear: use our roads and you can save time. As population grows, the assumption that the organic demand and growth for Transurban's services will increase, thereby increasing this strength.
#10 Growth
Growth is an oxygen that enables a business to thrive. The market tends to undervalue and underestimate the value of compound growth,
Some of the great businesses like Amazon have grown significantly over twenty-five years.
The caveat to growth is, beware you don't grow yourself broke. There are many examples of tech businesses whose topline is growing significantly, while simultaneously their losses are increasing. If more money needs to be invested in sales, marketing and fixed costs to underpin growth, this is a dynamic that is not sustainable.
Cash is like oxygen. A business with little oxygen, which does not generate positive cashflow is trouble brewing.
Over the last several months, many publicly traded companies have exhibited these qualities and have been found out with inflated valuations and stock prices.
An example of a business which has demonstrated exceptional year-on-year sales growth is Dubber, which sells a cloud based call recording software. Dubber's topline looks strong, but it is losing more money today than they ever have before.
The chase for market share and land grab by Uber and other ride share companies was a classic growth pursuit case study. With the land grab pursuit at aggressive speeds, the early days of these companies are marked by losses, and now with market share, the time is now to pivot for profit.
#11 Conscious capitalism
Companies that take a broader perspective of what makes companies great, beyond the pursuit of delivering shareholder returns, tend to outperform others that do not.
The vision driving conscious capitalism describes that every business will operate with a sense of higher purpose, integrating the interests of all stakeholders, developing and elevating conscious leaders, and creating a conscious culture.
“Don’t be evil” was at the top of Google's code of conduct for over a decade, seeing the company through its exponential rise from startup to tech giant.
In this Washington Post article, Facebook has faced backlash due to its business model which profits from a haven for hate, as described by some ex-employees.
One of the competitive advantages of positive corporate citizenship is that the values become a talent magnet for job candidates who want to work at the company. Not only in attracting talent, but also the benefits that stem from high employee retention and the company's people actively wanting to be there.
Melanie Perkins and Cliff Obrecht, co-founders of design platform Canva, personify this approach. Canva is renowned for its philanthropic culture, and have pledged to give away most of their fortune to help address some of the world's biggest challenges.
Canva founders Cliff Obrecht, Melanie Perkins and Cameron Adams. Image credit - smartcompany.com.au
#12 Total addressable market (TAM)
This theory describes that the bigger a market a business enters gives rise to the size of the growth potential. It’s the most amount of revenue a business can possibly generate by selling their product or service in a specific market.
A business that sells a hydration product like water will have a larger TAM than a business that sells left handed four finger gloves.
With a population over 1.4 billion, the size of China's TAM is attractive. However, the number of Australian businesses who have successfully cracked this market is sparse.
Sports performance technology company Catapult, is an example of a business with a large TAM. With over 10,000 elite sporting organisations in the world, Catapult has 20% of this market and is five times larger than its next competitor.
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Elite sports clubs and athletes use Catapult to measure player performance through wearable technology. Image credit - Catapult
#13 Capital expenditure
This factor points to the requirement of a business to be able to run its business and grow with or without capital expenditure.
Generally, the lower the capital expenditure to start and run a business, the lower the competitive advantage. The barriers to entry are low and businesses can enter the market with lower capital investment.
A car company like Toyota with the size and scale of its manufacturing plants heightens its industry barriers to entry because of the capital investment required. Toyota's capital expenditure, therefore, becomes a competitive advantage because it deters other car manufacturers from entering the market.
Return on capital expenditure spend is a KPI to watch.
Australian software company Objective Corporation has demonstrated favourable capital expenditure characteristics because the business grew its topline with only modest increases in capital expenditure.
#14 Optionality
Having the opportunity to move into different markets by offering different products or services demonstrates the optionality of a business.
Amazon originated as an online bookstore, and through the power of its brand and large customer base, has grown its optionality by diversifying its service offering into streaming, cloud computing and artificial intelligence.
On the Australian market, Washington H. Soul Pattinson and Company Limited (WHSP) is in the business of investing, and diversifies its portfolio across health, mining and technology.
#15 Management
The ability to deliver a spectacular success or spectacular failure is generally underpinned by the people within the company. Underpinning the people are the managers and leaders of a business.
An example of top leadership is ARB, which is Australia’s largest manufacturer and distributor of 4×4 accessories, exporting to over 100 countries internationally. Originating in the 1970s, ARB's founder Tony Brown continues to be a leader with the business today.
ARB, a leadership success story. From left to right: Roger Brown, John Van Den Eynden and Tony Brown. Image credit: whichcar.com.au
#16 Capital allocation
In addition to establishing an effective culture, positively impactful capital allocation is an equally essential skill the leaders of a business must exemplify.
How does a CEO balance the short term pressure of answering to shareholders versus building a long term sustainable business? Capital is not infinite. So effective decisions need to be executed. Does a business invest heavily in research and development, while reducing sales and marketing investment? Or is the better decision paying overs to attract and retain talent? These are the pressures and decisions that are part of capital allocation.
Pro Medicus and Wesfarmers are examples of companies that have effectively invested in areas that drive growth. Another example is Corporate Traveller, which has continued to deliver growth through its capital allocation via acquisitions.
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The views expressed in this article are my own and are not connected to my employer.
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