What Separates Great Companies From the Rest (3 things)

What makes a great company great? If you're running a business, I'm sure you want it to be a great one, right? And great companies are those that can last, but the majority of businesses fail. So in this video, I'm going to talk about the three components of a great business. And if you stick with me until the end, I will show you how this translates into enormous financial upside for you and your business.

Let's go ahead and jump in. The first component of a great business is a strong strategy. Now stick with me here because a lot of business owners overly complicate strategy. They treat it as something in this black box. It's mysterious and it's unknown and they overly complicate the process, but I'm going to just keep things really simple for you.

Think about it—in today's world with the rise of AI and all the disruption that's going on and transformation is happening so fast that business owners, if they rely on AI, just type in this prompt, say, what are 10 ways I can improve my business? Or what are the five fastest growing trends in my industry? Whatever it is. And you'll just get a list of information.

The thing about AI is it's designed to support your biases though. So it's going to confirm whatever you're thinking and just try this. For example, you may say, I'm going to go down this path and AI will be like, that's great. Consider this or that. And it may provide some things to think about. And you're like, okay, it's really helping me out here. And then after that prompt, type something new, like, actually, I'm thinking about this direction and AI will confirm what you're thinking. It'll say, that's a great idea. Try this or this or that. And that's why we love AI is because it's confirming what we're already thinking. And it's just, it speaks so authoritatively that we believe it.

Now I'm not saying AI is bad. I think it's great in a lot of areas, but sometimes when you're using it for strategy, it can lead you astray. So you have to be very careful. There are also so many talking heads out there. They're saying, prioritize this, focus on this. So in a world of tons of options, right? Optionality could actually be really dangerous. And the more research we do, the more confusion will creep in. And then it'll just leave you wondering, okay, where the heck do I navigate from here?

So strategy is really simple. If you think about it, when you make one choice, that choice leads to another choice, which leads to another choice, which leads to another choice. And this connection between choices, right, is what makes a strategy really strong.

Now at Coltivar and in our framework, we follow a scientific method to strategy, not a business method. There are so many different strategy frameworks that exist out there, but we just keep it really simple because this is what works. If you think about the scientific method, you start with a problem. We call this the strategic problem. So we identify what's the biggest problem or the biggest constraint that's holding the company back from achieving its full potential. Then from there, we look at a company's market focus and position, their competitive behavior, and the resources or returns that they can expect by pursuing a particular option. This is where we take strategy and all these interrelated choices about where the company is going to position itself in the market and how it's going to compete with its rivals and ultimately how it will create value. We'll take all these interrelated choices and combine it into a strategy, but then you have to take strategy and blend it with finance because this interconnection right here is what creates a tremendous amount of value.

So I'll get into that here in a minute, but that's what strategy is. It doesn't have to be overly complicated. Start with a strategic problem, figure out some hypotheses, go run experiments, and then build, measure, learn, adjust, build, measure, learn, adjust.

What you don't want to do is spend thousands and thousands of dollars on all this market research, put together a ginormous deck, a strategy deck, and list out a ton of initiatives or objectives or rocks, whatever you want to call them, and confuse your team, right? It doesn't have to be that complicated. So at Coltivar, we put in place a strategy. We execute the strategy with a framework that we created called IARs, which stands for initiatives, actions, and results, and that's how you start driving performance.

All right, so that's the first ingredient because if you don't have your strategy right and you just start listing out a bunch of actions to complete, you're going to be all over the place.

All right, the next component of a great company includes metrics. All right, now there are good metrics and there are bad metrics. Once again, if you use AI and you type in what are the 10 metrics for my business that I should be paying attention to, also known as key performance indicators, KPIs, you're going to get a laundry list of items. But here's the problem. With this list right here, you may be tracking A, B, C, X, Y, Z, right, all these different metrics, but if these metrics don't tie back to your strategy, then you're just doing a bunch of random things. That's why you have to have the right metrics in place that tie to your strategy so you know whether or not your strategy is actually working. But metrics are really, really important.

Now, another thing is, is when you have your KPI dashboard, right, to monitor your metrics, let me just show you this here. Let's say you have a few metrics such as throughput or you're tracking return on invested capital or cashflow, whatever it may be, and you have your target and then you have your actual, whatever order you have it, right, and so we have a number here, number here, number here, number here, number there, and let's just say your dashboard looks something like this. Your throughput is red, your cashflow is red, and let's just say this is green, right, which would probably be impossible because if your return on invested capital is green, your cashflow is probably going to be green, but let's just play along. Let's just say this is your dashboard.

It's great to have metrics and it's great to have a KPI dashboard, right, so you have visibility into your business, but if you're just over here, right, as this leader and you're looking at your KPI dashboard and you're like, oh, wow, yeah, throughput's bad, cashflow is bad, but you don't know how to fix it or you don't have a system to take this, your report card, and then turn it back into initiatives, actions, and results to drive your strategy, then they're disconnected, and this is where a lot of companies struggle, even businesses that have a strategy and that have metrics in place because they don't interconnect, and this is the critical thing is being able to look at your metrics and then determine how am I going to change my behavior and the actions within the company to drive better results, right, so a good strategy, having metrics in place is really, really important.

Now, the third component of a great company is cashflow. I love cashflow. Now, 82% of small businesses fail because of cashflow problems. It's crazy, right? Now, cashflow is key, and cashflow comes by having a strong strategy, by measuring performance, measuring these things right here, driving actions, the right actions that are going to have the biggest upside on the company, which ultimately comes back here and feeds cashflow. Cashflow is super critical in your business.

Cashflow allows you to do three things. It allows you to pay yourself or investors through dividends or distributions, to pay down your debt, or to reinvest in your business. It's not about revenue. It's not about profit. It comes down to cashflow. That's what makes a company great, so these are the three main components of a great company.

Now, you can argue with me, and maybe in the comments, you'll say, Steve, what about people? People are everything. I don't disagree. People are part of the strategy, right? You're going to hire people to support your strategy and to execute your strategy, right? People are super critical, and I'm all for building high-performing teams, but you have to know where things fit, and you have to start at a high enough level. Otherwise, you're going to get way lost down here in the weeds.

All right, so these are the three main components that drive cashflow. Now, I told you at the beginning that if you stick with me until the end, I'll show you how this translates into massive value for your business, all right? And the way this translates is because if you do these three things, you get valuation, right? So if you look at this, this is what you build right here, and this is your prize. This is what you get.

Now, if you don't take the time to build this right, guess what? Your prize is going to be smaller. And I don't know about you, but life is so short, right? And there's so many priorities. My kids are getting older. I'm getting older. And when I look at the effort that I put into things, I'm like, if I'm going to do it, I want to have a big upside. If I'm going to run a race, might as well run a marathon, right? If I'm already going to get out there and put on my shoes and do the running, why do a 5k when I could do a marathon, right? That's just the way I think. So if I'm going to go for it, I'm going to go big.

And Stephen Schwarzman in his book, he mentioned this, which I love. And Stephen Schwarzman, he's the CEO, the founder of Blackstone, the world's largest private equity firm. He said, small goals are just as hard as big goals. And I know this from working with companies because running a business like a restaurant takes a tremendous amount of work. And you can spend 80 hours a week running one single restaurant, or you can spend 80 hours a week running a giant tech empire, right? They're both hard. They're both hard in their own ways. So if you're going to go for it, go big.

And if you have these three components in place and you're crushing it, your valuation is going to be much bigger because guess what? Businesses are ultimately valued based on cashflow.

Think about it like this: everything—real estate, bonds, stocks, all financial assets—are basically a cashflow machine. So here's an asset and here's a person and a person has some cash, right? They take this dollar and they put it into the asset, the asset machine. And hopefully this machine spits out not just $1, but two, three, five, or $10 in the future, right? That's how it works.

Now there's a time component to this because you may put in $1 and get three and you're like, wow, that's great. But if that took you a hundred years to get your $3 back, that's a terrible investment. So the faster you go, the faster the velocity is, the more valuable the asset is. Because if I put $1 in and I get $3 out in one minute, that's going to make this machine, this asset super valuable.

So there is a time component. So when you're running your business, right? You have to run it very intentionally because time is your enemy. Time is going to destroy your business. Competitors are going to creep in, new technology is going to come in. There's going to be disruption in your company.

That's why I like focusing on these three things, which allow me to move fast and create a lot of cashflow at this velocity that will translate into a higher valuation. But these are the three components of a great business. And if you do these correctly, the size of the prize is enormous.