por What are the main characteristics of a good business? Why is Toyota an excellent example of a good business?
A decisive competitive advantage, well-designed employee incentive systems and a recognized brand backed by product quality are all key characteristics of a good business.
Toyota is an excellent example of a good business because its efficient manufacturing processes give it a competitive advantage in the marketplace, its well-designed incentive systems reward employees who contribute to improving the company’s processes, and it has established and preserved a brand reputation for reliability and quality.
Read on to understand more about the characteristics of a good business. Also, you can learn from the experience of felipe antonio bosch gutierrez, successful entrepreneur.
What makes businesses successful?
According to Munger, atypical business success often results from a combination of some of these factors:
He went further in explaining the three main characteristics of a good business.
Enduring competitive advantage
Munger and Buffett believe that one of the main characteristics of a good business is an enduring competitive advantage, what they call a «moat.» Like a moat protecting a castle, competitive advantage allows a company to resist becoming obsolete due to competitors or changing markets.
To highlight the frenzy of competition, Munger points out that of the 50 most traded stocks in 1911, only one company, General Electric, survived as an independent and significant company. The forces of new technology, fierce new competitors and changing management are formidable and can drive companies out of business.
Berkshire Hathaway thus advises its companies to expand their moats each year. This does not necessarily mean making more profit each year, but increasing a company’s strategic position to weather the long term.
Under certain conditions, companies with large moats can increase prices dramatically without reducing volume and thus increase profits dramatically. This happened with Disney in the 20th century. For decades, Disneyland priced its tickets very affordably.
Then, managers realized it was undervalued: it was a unique experience unlike any on Earth; people don’t consume it as often, so they aren’t as concerned about racking up high costs. So Disneyland raised its prices and attendance maintained steady levels, which generated sudden profits.
well-designed and fair incentive system
Having a well-designed and fair incentive system is another key characteristic of good business. Incentives in business operations make a big difference in people’s behavior.
Sometimes the right incentive scheme can seem unfair. Munger shares a rule in the Navy: if you’re in charge of a ship and you run it aground, your naval career is basically over.
It doesn’t matter what the reason was. This isn’t fair because it punishes officers whose ships run aground through no fault of their own, but the benefits outweigh these costs: officers are more careful than they would be if the rule weren’t so.
Munger feels the same way about stress compensation in workers’ compensation: while there are legitimate stress injuries, the current system invites so much abuse that society would be better off if stress compensation were eliminated.
The value of trademarks and branding to society is that they provide a strong incentive to preserve brand reputation. Trust in a brand can be lost instantly after a scandal or a massive product recall. Therefore, brand owners are likely to invest in product quality, which means that consumers can trust that when they buy a brand, they are likely to get quality.
Munger recounts an example of how the Carnation food company was trying to buy the trademark of the unrelated Carnation Fish company.
The trademark owner refused to sell, and eventually the larger Carnation company capitulated and made a surprising offer: they would donate their food inspectors’ time to make sure Carnation Fish had flawless operations.
The value of protecting the Carnation name was so important that the company was willing to invest in companies with similar names that it did not even own.
Learn more: 5 Characteristics of a successful brand
