What the characteristics of a good business looks like?
The basic element of a good business is derived from a good management. It is true since business is run by individuals known as managers that perform specific business functions, such as manufacturing and production, finance and accounting, sales and marketing, and human resource departments. Identifying a good business is not an easy job; an understanding of Managerial Economics is needed because it provides some tools, techniques of analysis and Economic concepts to make good managerial decisions. The purpose of this paper is to identify some characteristics of a good business and list names of the companies having these certain characteristics.
Most of good businesses have characteristics such as promising prospect, high rates of return on equity, steady growth of sales, and also strong brands equity. When we talk about a good business, we are not only talking about past and present condition of a firm, but a good business should also have a good prospect. It is true that past successes do not ensure future successes; however the most common way to predict the future is based on the companies’ historical data because those all data are available for us. Those data must depict consistent sales growth and high rates of return on equity. Moreover, since many changes can happened, it is also important for a business to anticipate and adapt continuously to the changing conditions. Since the common objective of the firms is to maximize shareholder’s value;
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A good firm has to have a steady growth of sales because a firm earns its revenue from the sales of its products or services, so it is clear why firm tend to maintain its cash flow not to fluctuate. When a firm’s sales reach its peak, it works as a signal that new firms start to enter the markets and the firm’s sales and profit will start to decline. In this case, the role of management is very essential. The firm has to manage its expansion plan, such as launch new products and entrance a new market in order to compete with its competitors.
The most common and useful measurement of a good business is by calculating its profit through return on stockholder’s equity (ROE).
ROE shows how much return that stockholders have earned on the capital that have been invested by stockholders into a business.
ROE = ________________
High rates of return on stockholder’s equity indicate a good business performance and also high growth rate of sales.
Besides steady growth of sales and high rates of return on equity, a good business must also have strong brand equity. It is important for a firm to create an image of its products on buyer’s mind so that buyers become loyal to the firm’s brand. Strong brand equity also generates higher profit since consumers want to pay more because of the reputation that the product have; moreover, it works as a powerful defense against new competitors.
From the above characteristics of a good business, there are some examples of companies which meet these certain characteristics, such as Microsoft Corporation, General Electric Company, Wal-Mart Stores, Inc., and Intel Corporation.
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Table of the position of four companies that are considered a good business.
Promising Prospect Sales Growth ROE (1999) Brand Equity
Microsoft Corporation YES 16.3% 49.8% YES
General Electric Company YES 10.7% 27.6% YES
Wal-Mart Stores, Inc. YES 19.9% 23.9% YES
Intel Corporations YES 11.9% 31.3% YES
Sales Growth based on most recent fiscal year.
Data source: http://www.corporateinformation.com/