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Building an enduring business

How to create a company that lasts the ages

Warren Buffett and Charlie Munger are famous for building Berkshire Hathaway into an enormous and highly profitable investment vehicle. They have half a trillion dollars’ worth of assets, and the vast majority of their investments have been highly profitable. How do they choose their investments? Well, of course, they’re highly selective, very professional and super-smart.

One of the many things they look for is a ‘moat’ – one or competitive advantages that allow a company to dominate its particular niche. If the moat is wide and deep enough, the business can build its business with less fear of losing share to any competitors.

It’s a great metaphor, and it begs the question: what’s inside a moat? Of course, it’s a company, and to extend the metaphor, that company is a castle.

How do you build a company that endures? With only a modicum of post-rationalisation, I present the CASTLE acronym.

C is for Culture. All organisations have a culture, whether healthy or unhealthy. The culture emerges from the way that people actually behave, and the stories they tell. You could plot cultures on a number of axes, a few of the most important being individualistic vs collective, conservative vs radical and profit-led vs customer-led. One of the most important thing about a company culture is that it will spit out people and plans that don’t fit. Enduring businesses tend to have strong, definite cultures with their own language and lore. Ask about the organisation’s heroes (the boffin inventor, or the patient salesman, or the marketing wizard) and you get a strong clue as to the culture of the company.

 

A is for Ambition. Many organisations have some sort of goal. Often it’s a sales target. A sales target may be useful for operational purposes (we want to align our resources to meet our sales target, without too much wastage) but it’s a paltry form of ambition. The ambition I’m talking about is more of a cause. That might be massive (Google, organising the world’s information and making it accessible and useful; Pfizer, innovating therapies to improve lives) or it may be modest (my housepainter: give every customer a great paintjob!) Enduring businesses have ambitions which are closer to causes, and which transcend profit targets and even technologies.

 

S is for Strategy. A big word, that basically means: this is how we’ll play, this is where we’ll play and this is how we’ll win. Strategy is about making choices. Enduring businesses have obviously made the right choices in the past when they favoured (or stumbled over) big ideas, and pursued them relentlessly. They reject small ideas and complexity, unless it’s essential for competing, in which case they’ll learn to manage it rather than have it manage them.

 

T is for Tactics. There’s a big gap between strategy and tactics in many organisations – the problem of implementation. It boils down to: who will do what by when? Enduring businesses make this clear and joined up so that there is accountability.

 

L is for Learning. There’s a lot more data out there, but fewer people and less time to take it all in. There’s also less ‘permission to think’ among white collar jobs, as more processes, practices and policies are imposed from the centre. But learning happens at the edges. Companies that endure don’t just collect data. They allow people to change the business because they have formal and informal ways of learning from it.

 

E is for Economic model. Businesses, of course, are engines which are fuelled by money. Although I detest the narrow focus on shareholder value, it is unquestionably true that commercial organisations have to generate money in a sustainable way if they are to pursue their ambitions. Enduring businesses have a robust economic model which rewards their success and enables them to build a larger castle still.

 

In summary, an enduring business is one that…

  • Celebrates its heroes.
  • Commits to a cause.
  • Puts all its might behind a simple strategy.
  • Holds specific people accountable.
  • Allows the front line to change the company.
  • Builds a financial machine.
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