Our study of the best companies anchors increasingly on their approach to capital allocation. The journey from a good business to an excellent one, and the ability to compound across decades, requires not only continued operational excellence but also exceptional capital allocation at each stage.
We share below a capital allocation framework for identifying and evaluating such companies that are worthy of long-term ownership. The framework categorizes these companies into six archetypes, each one characterized by a set of unique attributes. It also presents the foundational traits shared by companies across all categories.
As we study companies across industries and stages, we notice many common pitfalls. One foundational principle is that successful capital allocation requires discipline. Most often, this discipline originates from a single founder, owner, or leader. And sustaining this discipline beyond the founder usually requires a determined leader who presents as a “re-founder.”
As we study companies across industries and timeframes, another realization we’ve had is that very few companies discover the exceptional discipline required for their respective archetype. And also, many companies span archetypes. For example, each LVMH brand operates as a “scaler” company while the overall group operates as a “specialist acquiror” that doesn’t integrate its brands, but rather aligns on both operational and financial playbooks. On the other hand, the best “generalist acquirors” realize that they cannot offer operational guidance and therefore must hold each manager fully accountable for financial outcomes. And the very few successful “consolidators” hone integration playbooks that enhance rather than stifle organic excellence. Also, counterintuitively, the best infrastructure companies use their stability in disruptive and proactive ways to expand their networks.
We look forward to sharing future learnings and welcome your feedback.
You can also print the above chart here.