Mario O. Vicari has the opportunity to work with hundreds of private companies and he gets to see it all — from the very best performers to those that seem to constantly struggle and lots in between.
“The bell curve is truly at work here,” says Vicari, CPA, Director at Kreischer Miller. “The majority of private companies fall within the middle (wide) part of the curve, which makes them marginally better or worse than average. On the other hand, there are very few companies at the far ends of the curve, which puts them at the extremes of performance.”
Smart Business spoke with Vicari about the most common characteristics that define the top 3 percent of U.S. private companies.
■ Strategy — Strategy is not just a one-day retreat to clarify next year’s plan. These companies consistently spend real time to consider their strategy. They look at how to clarify the plan and how to adapt it to a changing world where technology is disrupting everything and competitive threats are greater than ever. These companies have the discipline to get their heads out of the details and focus on the big picture objectives that drive their business forward. Strategy should be an intentional activity, not an afterthought.
■ Culture/values — Great companies are crystal clear about their core values, which are exhibited in the culture at the company and the attitude of the people. These companies have clarity about what they stand for and it pervades the culture. It’s not about big signs on the wall, but rather alignment to the values that are exemplified by the leaders of the company.
■ Market niche — Most of the highest performing companies exploit positions in the market that others cannot see, cannot serve or don’t want. They exploit places in the market that offer a competitive advantage and are willing to make tradeoffs about what customers and markets to serve. They do not try to be all things to all people and don’t stray from the place where they have the best advantage. They are disciplined and stay in their niche.
■ Customer rules — The best companies have rules around customer acquisition. They take the act of adding a new customer very seriously and are discerning about who they will work with and what margins and payment terms they will accept. They are not afraid to say “no” to a business that does not fit their rules.
■ Execution — The best companies execute at a very high level because they don’t try to do too many things at once. Because they have limited resources, they know that they can only take on so many new things outside of the day-to-day operations and still be effective. They prioritize the most important items and focus on those.
Many companies have a laundry list of things that they want to do to improve the business and make the mistake of trying to do too many of these things at once while getting nothing done. The best companies work on two or three important objectives and see that they get fully implemented.
■ People — When selecting people, these companies are very conscious of the person’s fit with the company culture. They look beyond the technical and experiential requirements of the job and are not afraid to deselect people when they have to. They will confront thorny personnel issues if performance becomes a concern or if the person cannot grow his or her skills in relation to the increased requirements due to the company’s growth.
■ Capital allocation — The best companies are thoughtful about how to allocate capital after earning a profit. They know that value is created based on the free flow of cash in the business — not its accrual earnings.
Therefore, they are very discerning about investing profits in capital equipment, or making other investments and acquisitions until they are convinced that the return on invested capital exceeds the cost of capital from the investment. They are also careful about not letting their profits disappear on the balance sheet in the form of excess inventory and receivables beyond the level needed to support the growth of the business. This means that they generate and keep plenty of cash. ●
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