3 Secrets Of Successful Companies

By Michael Schmidt AAA |

Some companies are just better than others. It could be name recognition, innovation, market
share or any number of other attributes that makes a good company stand out from the herd. The
important thing for an investor is being able to spot the eventual winners before they become
household names.

In this article we'll take a look at three key attributes that make a company successful. Learn to
spot them early, and you could find ride the coattails to success too.

Three Secrets of Success

So, what is it about one company that makes it a good company, and does that description equate
to a good stock to invest in? The answer depends on whether you ask an accountant, an
economist, a marketer or a human resources expert, but by pulling all of those disciplines
together, you generally can define a good company by these three characteristics:

1. Competitive advantage
2. Above-average management
3. Market leadership

Competitive Advantage
Michael Porter pioneered the concept of competitive advantage and broke it down into two
forms: differentiation advantage and cost advantage. Differentiation advantage is when a
company provides a superior service or product for the same price charged by the market. Cost
advantage is when a company provides the same service or product as the market, but at a lower
price. Porter collectively refers to these as "positional advantages" because they define the firm's
position as having the leading service or product in its specific industry. He also states that these
advantages cannot be sustained for any length of time because the promise of economic rents
invites competition.

Barriers to entry
Good companies can also maintain their high status if there are significantly high barriers
to entry into their fields. This can include large fixed costs, such as those associated with
heavy manufacturing, or long-term research and development costs, like those found in
the pharmaceutical or computer software development industries. All of these entry costs
can deter competition from entering the market, thus helping the company sustain its
leading status. (To learn more about these barriers, check out Economic Moats Keep
Competitors At Bay.)
Name Recognition
We tend to take the value of name recognition for granted when looking at a company's
status. Brand names like Kleenex and Coke have become synonymous with their
products. The problem with name recognition is placing a value on that name, and there
is no easy way to do that. A name only has qualitative value, but it can provide a long-
 term relationship between a company's products or services and its customers. While it
can be debated whether this trait alone makes a company good, when combined with the
other characteristics it can be a powerful source of success.
Price Leadership
There is nothing more powerful than providing comparable services or products to the
market for a lower price. In any economic environment, boom or bust, there will always
be a demand for low-priced services and products. Being able to come to the marketplace
with consistently lower prices across the board can fill a niche in the market that can
attract customers for a long period of time. The key in price leadership is being able to
sustain that level and fend off others who try to compete in that space. (For greater detail,
check out Competitive Advantage Counts.)

Above-Average Management
The quality of its management is a big factor in whether a company is successful, and an
important attribute in any management team is a blend of experience. Experienced managers can
not only lead a company through market cycles, but they can also provide mentorship for the
next generation of managers.

Another telling attribute is when management tends to stay at a company for a long period of
time. Talented managers can be swayed to move from company to company with handsome
compensation packages, but tend to stay at companies where they like to work and they believe
in their company's future successes. (Learn how to investigate the management behind the
numbers in Evaluating A Company's Management and Is Your CEO Street Savvy?)

Market Leadership
One of the most important characteristics in becoming a good company is market leadership.
Leadership can come in many forms, but the reputation that comes along with this tag is
priceless. The label of "industry standard" is one that every company strives for. Examples
include leading the market in quality, innovation, customer service or even warranties.

Market leadership is probably the hardest status to maintain. No competitor is content being No.2
in the industry. This is where barriers to entry come into play. If the company you are watching
competes in an industry with high barriers to entry, it's much more likely that its market
dominance can continue. Companies can also move toward market leadership by buying and
merging with other successful companies to improve their market share, vertical and horizontal
integration, and technological bases. (For more on this topic, read Which Is Better: Dominance
Or Innovation?)

Conclusion
So what is it about one company that makes it a good company, and does that good rating equate
to a good stock to invest in? If the company has a competitive advantage, above-average
management and market leadership, you are looking at a potentially strong investment. While
these traits alone don't necessarily tell the whole story, they are important factors in evaluating
whether a company might be recognized by investors globally as a good investment.
For more ideas on picking good companies to invest in, read Find Investment Quality In The
Income Statement, Measuring Company EfficiencyandThe Industry Handbook.

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