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The DNA of Corporate Greatness

All my life, I've been a student of greatness. I've read about it, studied it, and savored the biographies of Michael Jordan, Phil Jackson, and Genghis Khan. I yearn for greatness the way Gollum yearns for the Ring of Power. (My precioussss!)

In my studies, I've read hundreds of business biographies. History may not repeat itself, but it definitely rhymes, and there is a common thread that runs through many great companies. As a value investor, I believe it's important to identify these intangible factors -- things you can't plug in to your discounted cash flow models, but that nevertheless contribute strongly to a company's economic moat.

The companies I wanted to focus on are Starbucks (Nasdaq: SBUX  ) , Google (Nasdaq: GOOG  ) , and Whole Foods Market (Nasdaq: WFMI  ) . I chose these companies because, for the most part, they sell commodities and operate in fiercely competitive markets where the battle for market share is won and lost every day. Here are some of the common traits I found:

The Disneyland factor
Disneyland is many things to many people. For children, teens, adults, and parents, a trip to Disneyland, despite the long lines and high prices, is often a unique and memorable experience no matter how many times it's repeated. More so than competing theme parks like Knott's Berry Farm and Six Flags (NYSE: SIX  ) , Disneyland seems to create a "magical" environment. I believe places like Starbucks, Whole Foods Market, and even Google's home page similarly provide that sort of safe haven, a place different from the rest (or as Starbucks founder Howard Schultz calls it, the "third space").

I remember the first time I walked into Whole Foods. It smelled good, the workers seemed genuinely happy, and there was just a good vibe around the place. I also recall reading somewhere that after the bombing in the London subway, visits to Starbucks increased, because the company's stores are a place of comfort to many. Similarly, any observer can feel the simple friendliness of Google's homepage, in comparison to the competition's cluttered sites. Creating a magical environment is very difficult, because a company's culture is formed at inception -- as the company grows and replicates, that initial DNA is passed down. If you don't have it, you probably never will.

Fanatical employees
Throughout history, we've seen over and over that the team/army/competitor that cares more, wins. Many historians believe the reason the U.S. won as a heavy underdog during the American Revolution, and lost despite vastly outnumbering its opponent in Vietnam, was that in the former case, the army was fighting for something it believed in; in the latter, it wasn't. Anyone who has seen the new movie 300 knows that passion can mean more than numbers. (If you're looking for a hilarious 300 parody, check this out -- I'll give you a dollar if you don't laugh.)

That said, I think it's significant that great companies like Starbucks, Google, and Whole Foods (as well as other great companies like Enterprise and Costco (Nasdaq: COST  ) ) pay their employees more, provide them with unique benefits, and instill in them a sense of purpose and job satisfaction. It's not hard to identify these types of companies. When you talk to their employees, you get a sense that they care more, whether it's from the smile on their face, their willingness to go the extra mile, or the obvious pride they take in their job.

Sweating the details
It's no surprise that hard work and success are correlated. Anyone who knows anything about Michael Jordan knows that he worked as hard as, or harder than, any of his competitors. While we all focus on his stunning athletic abilities, we often tend to overlook the most important part of his success: his work ethic and attention to detail.

I noticed a lot of these obsessive, almost maniacal traits in founders of great companies. To them, the smallest error in detail would compromise the customer experience, which would be simply unacceptable. That's why guys like Sam Walton, Howard Schultz, and Steve Jobs have obsessively turned small details into huge competitive advantages. For example, Jobs famously ordered that the iPod not have any visible screws -- something incredibly difficult to accomplish. This seemingly minor detail, in retrospect, played a small role in helping Apple (Nasdaq: AAPL  ) claw its way back to prominence.

The intangible moat
In the end, there's a lot more than these three factors that goes into making a company great. However, I do believe that looking for these factors will help value investors better understand some of the more intangible components of an economic moat.

Related Foolishness:

Costco, Starbucks, and Whole Foods are Stock Advisor recommendations. You can find out why with a 30-day free trial to the Gardner brothers' market-beating service.

Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.

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