- Most people have an intuitive sense for what constitutes a great product or what constitutes a great culture, but not for what constitutes a great business.
- This could be because the environment we’re coming out of defines a great business differently than the environment we’re heading into.
- One idea that withstands the test of time is that a great business generates durably high returns on invested capital.
- “Durably high returns on invested capital” boils down into three words…free cash flow.
One way to do that is to think about the atomic units of investment for your business.
○ The difference between an investment and an expense is that an expense yields no future benefit and investment yields a future benefit. At the early stages, the atomic unit may be the customer unit. Hopefully that’s a very clear investment, where the amount of money you put in to acquire and serve the customer is less than the amount of money you get back from the customer.
○ If that’s true at the unit level, you can start to roll that up into the operating unit. Maybe the operating unit level is the city, maybe it’s a product line, maybe it’s a segment, but hopefully over time, the customer rolls up to the operating unit.
○ The operating unit rolls up to the company and produces free cash flow at the company level over time.