Disciplined Growth Investors: The Hallmarks of Operational Excellence
Benjamin Graham and the Power of Growth Stocks, Part 9 in a Series
(firmenpresse) - MINNEAPOLIS, MN -- (Marketwired) -- 07/02/13 -- "Operational excellence" -- it's the pinnacle of management acumen, perhaps the most important competitive advantage of all. If you hope to find the best growth stocks for the long-term, operational excellence should be at the top of your checklist, according to author Frederick Martin of Disciplined Growth Investors.
But what exactly is operational excellence? How do you define it? Or, more importantly for investors, how do you identify it? "The irony of great growth companies is that they do not obsess about being the biggest; rather they obsess about being the absolute best," Martin explains in his book "Benjamin Graham and the Power of Growth Stocks" (McGraw-Hill).
Operational excellence can be difficult to detect because it tends to be imbedded in the corporate culture. "Corporate culture is a near-ethereal aspect of a great growth company," says Martin, "and it does not lend itself to traditional financial or industrial analysis."
Instead of looking through balance sheets, you need to scan for clues within the company's operations. Martin identifies several important traits common among companies that have achieved operational excellence:
Great companies have a clear understanding of their strengths and capabilities. They make decisions based on long term growth rather than short term profits. And they maintain a laser-like focus on their core business. "They do not delude themselves into chasing growth chimeras that are beyond their core competencies," says Martin, "even when the market opportunity is substantial."
Operational excellence is not a destination, but an ongoing process of self-improvement. Great companies are constantly seeking new ways to increase efficiency and add value without driving up costs.
One helpful gauge of a company's operational excellence is how well it retains its best employees. If employees are given sufficient latitude in their jobs, they will be more likely to stick around and continue to contribute to the company's growth.
When you coach against the game, you're paying closer attention to your team's execution than you are to the scoreboard. "The best competition I have is against myself to become better," said legendary basketball coach John Wooden.
Companies with operational excellence have that same drive to coach against the game rather than comparing themselves to the competition. "This standard is higher than an industry standard," explains Martin, "because the goal of great companies (or teams) is not simply to be better than average -- the goal is to be the best by a wide margin."
"There is no limit to what a man can achieve provided he doesn't care who gets the credit," claimed long-time Coca-Cola CEO Bob Woodruff.
Great companies have great leaders who know how to motivate their staff and management to achieve great things.
As important as it is to a company's success, operational excellence can only get a business model so far. To achieve lasting growth, a company also needs a "tidal waves of opportunity" to spur its growth. The more opportunity in the market, the greater a company's potential for growth. "The mathematical advantages of big markets are glaringly obvious," says Martin. "All other things being equal, a $10 billion market offers more potential for growth than a $10 million market."
Martin identifies five broad forces that tend to underpin most big market opportunities:
The rise of do-it-yourself home improvement in the 1990s, and the rise in recent years of environmentally-friendly consumer products and social networking are examples of broad consumer shifts that have led to a tidal wave of opportunity for the market leaders.
Baby boomers continue to drive markets. For instance, as Baby Boomers started saving for retirement from 1985 to 2009, mutual fund assets increased from $495 billion to $11.1 trillion. Find the next trend in Baby Boom spending habits, and you'll find the next tidal wave of opportunity.
Government regulations can launch entire industries and keep existing industries afloat. Examples include ethanol production, for-profit educational operations, hazardous waste disposal, and financial rating agencies. Those industries all rely on government regulations for their survival. "The potential for government action to create huge, unexploited market opportunities is real," says Martin, "and, provided the underlying demand is not manufactured along with the regulations that create the market, the opportunity for investors can be real as well."
New products drive growth, but some product innovations are far more significant than others. "Evolutionary innovation," in which products are gradually upgraded incrementally through the years through years of advances, is the most common form of product innovation. But "revolutionary innovations," like the iPod, can be fertile ground for investors, says Martin, "because revolutionary product innovations are radical improvements that can transform the market and tend to shift the entire demand curve."
On rare occasion a new technology comes along that changes the world. The cotton gin, electricity, and automobiles are all examples of disruptive technologies. The most recent was the Internet, which changed the way people communicate, interact, and conduct their business across all demographic groups, market segments and geographic regions. "Disruptive technology is a particularly virulent form of product innovation that spurs the development of entirely new markets," says Martin, "and, in the process, upsets old business models. The net effect is to effectively dislodge existing customers and put them up for grabs."
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