My full-time job is to study and find great businesses for our clients to own and this really raises the obvious question: what exactly is a great business? Ask this question to a dozen investors, and you might get answers such as strong pricing power, market leadership, sticky and stable recurring revenues, scalable margins, high returns on capital and so on.
While these things may be true, what I’ve increasingly come to appreciate over time is that the difference between a truly great business and a “pretty good” business usually lies in the details. Broad industry trends and large-scale strategies are obviously important but are often less important than the day-to-day execution of product development, sales, and the performance of on-the-ground employees.
In today’s hyper-competitive business environment, examples abound of seemingly trivial business decisions having a huge impact on customer satisfaction and the bottom line. Here are several examples:
- Dunkin Donuts found that not requiring customers to input their credit card information into their mobile app led to a significant increase in customer participation;
- AMC Entertainment discovered that reserved seating at theaters led to a material increase in concession orders because movie-watchers don’t have to worry about rushing into the theatre to save their seat.
Add together hundreds of small business decisions and millions of daily customer interactions and they become very material over time to a company’s growth rate or customer churn. An investor can usually figure out which companies do a good job simply by observing the way they conduct business and whether the company can continually find ways to delight and surprise customers. Investors typically gloss over tweaks to products or marketing but being aware of these details can give you a sense of how well the company understands its customer base. How many people noticed in Amazon’s recent earnings release that Alexa is now available in Spanish for U.S. customers? While it might look trivial, this might be a game-changing feature for the 41 million Spanish-speakers in the U.S.
As a case study take Hyatt Hotels, a company that we own for some of our clients. The big picture that most investors are focused on is the company’s shift towards an asset-light model in which they manage more hotels but own fewer of them, as well as the over-all industry supply and demand of hotel rooms. Understanding these factors is certainly important for an investor in Hyatt’s stock. Yet, what will ultimately drive Hyatt’s market share and share growth in the long-term will be their attention to detail, which leads to delighting high-end business travellers, which will in turn convince them to stay loyal Hyatt customers. Through some of their recent decisions, we certainly believe that the management of Hyatt understands this and is laser-focused on the guest experience.
The key for management is not to micro-manage, but rather to set a culture that demands excellence while hiring the right team and giving each employee room and the incentives to perform at her or his best. Good CEOs understand this, which is why so many CEOs keep insisting that the company’s culture and its employees are the most important assets of the company. In “The Ride of a Lifetime”, Disney CEO Bob Iger described the dismantling of Disney’s Strategic Planning Group, a centralized decision-making group in Disney’s headquarters that had disempowered on-the-ground employees, as follows: “The windows had been thrown open and fresh air was suddenly moving through.” Mr. Iger clearly believed that Disney would not be what it is today without this critical move towards decentralization.
At Baskin Wealth Management, we try to invest in companies that not only have market leadership in growing fields and attractive financial economics, but also have strong corporate cultures, a strong track record of excellent innovation and execution, and management teams that deeply understand their customers and the operating environment. We think that this is likely to yield the best returns for our clients.