How Systems, Culture, and Loyalty Enable Compounding
Why companies that are better at solving stakeholder problems are best positioned to delight patient shareholders.
Earlier this week, several ideas clicked together.
I was listening to David Senra’s profile of Brad Jacobs on the Founders podcast. Around the 15-minute mark, David shares a story about one of Jacobs’ mentors telling him plainly that business is a “series of problems.”
Usually, I would have just filed that framework away in my brain. However, I have concurrently been teaching my students about compounding and reading The Loyalty Effect by Frederick Reichheld.
Suddenly, something dawned on me.
The companies that have successfully compounded their fundamental growth over long periods have continually confronted and solved complex problems. Not every problem was solved successfully, but enough to maintain the positive momentum that enables compounding.
In other words, companies can only produce high and sustained rates of compounding if they can routinely solve problems well.
The next logical question is, “How does a company best solve problems?”
There are three primary ways:
Implementing efficient and repeatable systems is one of the shared characteristics of successful industrial companies. Think about Danaher Business Systems or the Honeywell Operating System. Whether it’s based on Kaizen, Six Sigma, or something else, companies with established systems for addressing problems are prepared for the next challenge.
The phrase “corporate culture” can be eye-roll-inducing, but at its best, culture is a set of shared beliefs that generate intrinsic motivation and pride in the job. Whether Costco, Old Dominion Freight Lines, or Tractor Supply, virtuous cultures create imperceptible daily value to customers that adds up over time.
In turn, companies that are efficient at solving problems earn the loyalty of their stakeholders. This loyalty dynamic gives companies more time to solve problems, as much as traditional moat sources like network effects or switching costs do. Amazon and Netflix, for example, are empowered to try new things because of their loyal subscriber bases.
A company with established systems, a customer-focused culture, and loyal stakeholders will solve problems more effectively than one with no system or a destructive culture with low morale.
Consequently, the former has the potential to compound earnings and cash flow per share; the latter does not. It should be clear which type of company you want to own if you hope to compound your wealth alongside a business.
Stay patient, stay focused.
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At the time of publication, Todd and/or his family owned shares of Costco, Amazon, and Tractor Supply.
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