Buffett judges a business on its ability to sustain superior organic growth, developing the existing business and markets powerfully, and expanding into new products and geographic areas continuously in ways that enhance the intrinsic value.
Buffett allows his business managers so much room in which to manage because he wants them to build the business as if it were their own. Top managers often pay lip-service to this idea, but the reality is very different. Rewards, like share options and bonuses, tend to be linked to the performance of the whole company.
Buffett argues that nobody should be rewarded for results that are outside his or her control. If people create greater wealth from their direct responsibilities, share that wealth with them directly, giving both due reward and the incentive to optimize "organic growth".
Organic growth
Your business can grow in several ways. Does it:
* Sell more year-by-year to existing customers by:
(a) increasing demand, for existing products and/or services?
(b) improving existing products and/or services?
(c) introducing new products and/or services?
* Sell more year-by-year to new customers by:
(a) widening the demand for existing products and/or services?
(b) cashing in on the appeal of improved products and/or services?
(c) introducing new products and/or services?
Supervise growth by insisting on full, regular financial reports that tell you how the company is performing on the same clear criteria that persuaded you to buy. Never be fuzzy. If everyone knows what is expected of them, then you can safely expect that what you want will be achieved.
Analysis
If you have not answered YES to every part of the above questions, something is wrong. Draw up plans for filling the gaps these answers reveal in your organic strategy. It is possible to fill gaps by acquisition, but that only makes sense if you follow Buffett's strict rules of purchase.
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