CEO

Learning from LVMH's Bernard Arnault

Bernard Arnault, the visionary architect behind LVMH, has not only shaped a global luxury empire but has also graciously shared profound business insights. His unwavering dedication to the long-term stewardship of luxury brands has been instrumental in his extraordinary success. Since 1989, LVMH has delivered an impressive 16.4% annualized return compared to the S&P 500's 7.4% annual return, underscoring the enduring impact of visionary leadership.

Arnault's steadfast belief in acquiring and nurturing ‘star brands’ like Dior, Louis Vuitton, Moët & Chandon, Hublot, Givenchy, Dom Pérignon, Tiffany’s, Bulgari and others is a hallmark of his strategy. These brands, spanning the realms of luxury wine and spirits, leather goods, fashion, cosmetics, watches, and jewelry across continents, not only offer geographic diversification but also serve as economic stabilizers during turbulent times. The substantial cash flows generated by these established brands provide LVMH with the stability and resources to foster emerging brands for the future.

Central to LVMH's accomplishments are principles shared with other successful businesses: decentralized decision-making, employee empowerment, and an unwavering commitment to uncompromising quality. Arnault's leadership embodies the conviction that profitability is an organic result of excellence in all aspects of business.

LVMH vs S&P500 1989-2023 [Source: Bloomberg]

Arnault's emphasis on the long-term perspective, facilitated by his significant ownership stake, has empowered LVMH to adopt a patient and forward-thinking approach.

Over the decades, LVMH has curated an unparalleled collection of luxury brands which are poised to transcend generations. I recently enjoyed reading the book of interviews with Bernard Arnault titled 'La Passion créative,' where he shares his wisdom and vision for the world of luxury. Below, you'll find a compilation of my favorite extracts, peppered with Arnault's candid take on the stock market, along with a selection of quotes from separate interviews and LVMH Chairman’s letters.

Ordinary People doing Extraordinary Things

“To succeed in economic life, it is not enough to be intelligent. What is necessary is to combine intellectual abilities with solid common sense, a taste for the concrete, and above all a sense of leadership, the ability to lead high-level teams. As one of my professors told me, to make a company sublime, you have to be able to have ordinary people do extraordinary things.”

Obliquity

“Success, for an entrepreneur, is leading a company that develops, that gains market share, that manages to bring together a team. This is what has always stimulated me, more than the strictly material aspect.”

Money has never been, in my eyes, an objective or even an indicator of any significance.. Investing in a company has a meaning for me that completely transcends the material, it means investing in a team & doing everything so that this team comes out on top.

Bernard Arnault - 2022 LVMH Annual Report

“Profit is a consequence of what we do well; it should never become a goal.”

Money is just a consequence. I always say to my team, don’t worry too much about profitability. If you do your job well, the profitability will come.”

Aligned Interests

I am in favor of employee shareholdings. We are in a period of truly exceptional economic growth. Involve employees in growth by allowing them to purchase seems to me essential for social consensus and the motivation of company personnel.”

Competitive Advantages

“The brands created in the US are, for some, very strong. Their success took twenty years, that is to say a generation. Certainly, some of them are fantastic brands. But they do not have the mythical dimension that Dior or Louis Vuitton have - these have a history the Americans don't have.”

La Passion créative,’ Plon 2000.

“The formation of (our) group makes it possible to rely on classic operational synergies which offer significant economies of scale (legal services, accounting services, logistics problems, etc.) to manage the whole in an economical and rational manner in order to lower costsSynergies also work upstream on purchases of certain products, as well as on advertising. Our group has become the world's leading buyer of advertising in the luxury sector, which allows us to obtain preferential rates.”

“We saw straight away LVMH was unique in the world with “absolute star" brands from which we could build the first luxury group on the planet, capable of going through all [financial and economic] conditions. Create high-quality items, sell them worldwide through a constantly evolving network of stores.”

“Indeed, building a luxury group, in my opinion, can only be done around companies that are “real economic luxury stars.” For a brand to have this status, it needs three characteristics: timelessness, exceptional cash flow, solid growth over a very long period. The number of global brands fulfilling these characteristics can be counted on the fingers of one hand; Cartier, Louis Vuitton, Dom Pérignon, are among them. They alone can justify the creation of a real group around them.

“The group's star brands, the strongest and which have substantial and recurring cash flow, make it possible to finance those which are growing. It is this notion of shared benefits that provides the key to our success.”

“I can assure you that we will be drinking Dom Pérignon in a century; I will not say the same of certain brands of fashion, even if they are in vogue today. This stability allows our group to get through periods of crisis better than others.”

The inherent synergies as well as the economically and geographically balanced cyclicality of our activities are irreplaceable competitive strengths.”

“Mastering the paradox of star brands is very difficult and rare, fortunately.”

Our products have unbelievably high quality; they have to. But their production is organized in such a way that we also have unbelievably high productivity. The atelier is a place of amazing discipline and rigor. Every single motion, every step of every process, is carefully planned with the most modern and complete engineering technology. It’s not unlike how cars are made in the most modern factories. We analyze how to make each part of the product, where to buy each component, where to find the best leather at the best price, what treatment it should receive. A single purse can have up to 1,000 manufacturing tasks, and we plan each and every one. In that way, the LVMH production process is the exact opposite of its creative process, which is so freewheeling and chaotic.”

Owner Shareholder & Family Culture

“LVMH is a group with a family spirit.”

Risk-taking is, for an entrepreneur, like breathing, necessary to life and sometimes to survival. It is, moreover, the opportunity for adventures to be shared in the four corners of the world with teams, which vibrate all the more as the stakes and the risks increase. In addition, when you are a manager-owner, you are really associated with all the shareholders who buy your shares on the stock market; your vision is strongly influenced by this association; there are transactions, mergers, costly acquisitions, which a pure manager will do, convinced, of course, that it is in the interest of his company, but which you will consider from another angle as as majority shareholder. Will I make this move the same way a pure manager does by playing with my own money? Probably not always. I think it must be reassuring for the shareholders of a group like LVMH to have an owner at the helm.”

Continuous Improvement

All executives, all leaders of the group have and must have this constant concern in order to progress. Somewhere, we are permanently dissatisfied with what we do. I believe there is nothing worse than complacency. As soon as we believe we have arrived, that we are the best, it is the beginning of the end.”

“There is nothing worse than taking a situation for granted. It is from constant questioning that progress is born. Which sometimes leads to difficult discussions. The temptation to be complacent always exists, especially when you are a world leader. But you have to improve every day.”

LVMH Annual Report 2022

“I think, in a business which is successful, as [is each] business, I always say to my team, you should be thinking that the worst is coming. And you should never be satisfied. And you should always be frightened. In a way, state of mind is to be positive paranoid.”

Integrity

The first principle is never to lie, which is very important in business where transparency is essential, even decisive.”

Confederation of Companies

There is no limit to (our) size. The problem is not there. Our businesses are run like family businesses, independently, and that's why they succeed. Some groups are formed here or there and try to manage in a much more central way in terms of organization or creation. I think they will have many difficulties. For what ? Because success comes, in this type of business, from the size which must remain relatively modest, thus making it possible to have direct, permanent, personal contact with the products, the teams and the craftsmen. This can only work in an organization totally decentralized.”

“Today, we have a total of forty-one companies, each independent. If we have forty-five or fifty tomorrow, it will make no difference in our system since each company lives independently of the others. Our control method does not risk saturation.”

“Our company is both a large group and a federation of medium-sized companies.”

“At LVMH, we have a philosophy. A certain number of fundamental axes which govern the general strategy of all of our houses and which I can summarize. There are five: product quality, creativity, image, entrepreneurial spirit and, finally, the desire to constantly challenge oneself and be the best. This is what underlies the general philosophy of the group.

Spirit of Entrepreneurship

We want to federate a team of entrepreneurs, which includes all managers. With a permanent concern for dynamism, efficiency, motivation and complete attachment to a brand as if these companies were individual and not part of a larger group. This is part of the group's philosophy and this is how we manage to recruit talents who are real entrepreneurs. This also applies to creators. John Galliano has stock options indexed to the performance of Dior.”

“The entrepreneurial spirit, as opposed to the bureaucratic spirit that reigns in certain groups, is really present. It is a group of entrepreneurs.”

Decentralisation

“What seems perfectly useless to me, is what certain large industrial groups have done for years - strategic plans, developed at central level which are imposed on the subsidiaries. That's not how we operate at all. This centralizing approach destroys the entrepreneurial spirit.

Our decentralized organization fosters a spirit of enterprise and also, therefore, reactivity - an essential quality in periods of uncertainty.”

The responsiveness afforded by our decentralized structure is one of our key strengths. This is what enables us to remain close to the markets and stay abreast of new developments as they occur. This is what gives us the flexibility to make good decisions fast and then seize every opportunity to increase our market share by meticulously implementing those decisions on the ground.”

“[Our company is so] decentralized. Each brand very much runs itself, headed by its own artistic director.”

People Constraint

Precisely, the fact that we are not centralized but rather a federation of SMEs does not set a limit to our size. The real problem is talent. It is vital to recruit men & women of great talent. Finding them, motivating them, retaining them, working for a long time with men and women of great talent: this is where the key to success lies. This is not a size issue per se.”

Empowerment

We are pleased to have welcomed over 145,000 visitors to our workshops, allowing them to discover some of the treasures of our heritage and the virtuosity of our artisans, to attend fascinating talks and demonstrations given by creative team members, even acquiring hands-on experience in some of the techniques used in our professions.”

Quality

“Let's start with the quality. A company like ours, listed, transparent and large, gives us all the means necessary to ensure the very high quality of our products. It is a constant priority, no matter what. The fact that a family business one day joins the LVMH group does not change anything, quite the contrary, in the demand for quality.”

“A lot of companies talk about quality, but if you want your brand to be timeless, you have to be a fanatic about it. Before we launch a Louis Vuitton suitcase, for example, we put it in a torture machine, where it is opened and closed five times per minute for three weeks. And that is not all—it is thrown, and shaken, and crushed. You would laugh if you saw what we do, but that is how you build something that becomes an heirloom.”

Tenure

“Quality also comes from hiring very dedicated people and then keeping them for a long time. We try to keep the people at the brands, especially the artisans—the seam-stresses and other people who make the products—because they have the brand in their bones—its history, its meaning. At the stores, too, many of the salespeople have the brand in their bones. Most companies clean house when they acquire a new brand. We don’t do that because we have found it hurts quality terribly. When you clean house, you usher out the people who respect the brand the most and who contribute to its longevity—its timelessness, its authenticity.”

Luxury Brands

“The problem posed today by external growth with well-known brands is the amount of investment: the business world recognizes the value of luxury brands and values ​​them much more than it about ten years ago. We saw it again recently in a case of watches sold by the Mannesmann group, the prices have become very exaggerated, astronomical. This is where the limit to external growth lies. Also, the strategy that we must prioritize consists in allocating significant resources to young brands, even very young ones, that we have created or taken over, to develop them over time instead of overpaying for acquisitions. This is all the more consistent as we have the most formidable portfolio of brands in the world. We must therefore build the future on the second or third horizon rather than on the first. For example, we bought very young cosmetics brands in the United States (Bliss, Hard Candy, Benefit, Urban Decay, Fresh). They are very connected, and they offer strong growth rates of around 50% to 80% per year, or even more. If some of them confirm this dizzying journey over the next ten years, then we will have made a fantastic investment. Ten years ago it was completely different. The brands were much cheaper, and it was therefore easier to invest. We must now proceed differently.”

Source: LVMH Annual Report 2022

“We cannot be satisfied with simple style exercises! This is where the main difficulty lay, for a time. Lacroix sometimes said: “It’s wonderful, I work for a patron.” But LVMH does not aim to be just a patron! To ensure sustainability, economic results must be there. I think that Christian Lacroix has now made this reflection his own… Christian Lacroix was also, for years, not sufficiently interested in the sale of his products. Since then it has evolved. He now knows that true success is necessarily commercial and that success with fashion critics is good, but it's not enough. To meet the support of customers, the company must be able to count on the total commitment of its creator.”

“The creativity of Galliano, who expresses himself for Dior, is sometimes shocking, it's true. But if it did not shock, it would be because this creativity would be sanitized. It is not the goal. On the contrary, it is about pushing ideas to the extreme, revealing them, and then deriving commercial results from them.”

“Our whole business is based on giving our artists and designers complete freedom to invent without limits.”

“We have correspondents who keep abreast of the trends emerging in the various markets. We are watching this carefully to stay connected. We watch what our competitors are doing around the world. We monitor new creators who are in contact of young people's lives, which allows us to anticipate. Even if, sometimes, we discover phenomena that we had not anticipated.”

Some brands out there will make it to stardom. But their managers cannot be in a hurry. It takes time. But once you get the elements of a star brand aligned, they last for a long time. They stay and stay, and they deserve to.”

Keep it Simple

I don't like spending more time than necessary on one subject. Just as I don't like receiving stringy thirty-page notes. A good note is one or two pages long. Beyond that, everything becomes confused and it is useless. Especially when you receive about fifty a day.”

Retail Insights

Retail sales represent a large part of our activity, in Vuitton, Dior or Sephora stores, among others. And the word of this American entrepreneur is right, who said “retail is detail”. This is very true in trade and even more so in luxury products. Every element, no matter how small, has an impact on customers. The sale, the design of the stores, their aesthetics have always interested me. So when I go into the stores, I think I see right away what's right and what's wrong. When I think it's good I say it, and when I think it's wrong, I say it too.”

“Our group likes to sell its products without intermediaries.”

If you control your factories, you control your quality; if you control your distribution you control your image.”

I'm not sure that, in this profession, we are really competitors. We are when it comes to buying some business, but not in terms of customers. When a Louis Vuitton store sets up next to a Prada store or a Gucci store, both benefit. It is therefore no coincidence that all these luxury boutiques are generally located in the same places. In fact, the more prestigious brands are concentrated on the same site, the better they work. The notion of competition in luxury is very specific.”

Walk the Floors

Don’t go to the offices too much. Stay on the ground with the customer or with the designers as they work. I visit stores every week. I always look for the store managers. I want to see them on the ground, not in their offices doing paper work.”

Scarcity and Social Proof

“[Long lines outside our stores] is not such a bad thing sometimes, because those lines have a way of increasing demand even further.”

Short vs Long Term

What matters most to me is keeping a firm focus on the long term.”

“We have consistently adhered to a strategy of value and long-term vision which is the life blood of LVMH.

In business, I think the most important thing is to position yourself for the long-term and not be too impatient, which I am by nature, and I have to control myself.”

American companies have other flaws. The main thing, when they are listed on the stock exchange, is to be too tied to quarterly results. However, it is difficult, for a business like ours, to be permanently focused on the current quarter while we are building a brand for the next twenty years. In the United States, this sometimes leads to short-sighted decisions taken to the detriment of the long-term interest of the company.”

“Our corporate values, our global project, “creativity and quality”, will remain the basis of our action and our success. The “creative passion” will be intact in twenty years.”

“Taking a long view – that’s what the LVMH Group is all about.”

“What I have in mind every morning is that the desirability of a brand should be as strong in ten years. It’s really the key to our success.”

Leadership

To lead, you have to motivate. When you issue a criticism, there must also be somewhere a compliment. Or else you should not keep the person you are talking to. Generally, when you give criticism, you do it to people you enjoy working with and who you find valuable. You know, everyone can be criticized. The boss of a company. It must be done without breaking the motivation, making sure that the criticism stimulates rather than discourages.”

Mistakes

“High level executives have the right to make mistakes, they don't have the right to fail. Mistakes are inevitable, everyone makes them. You have to accept them. These are often very formative experiences. What is not acceptable are repeated mistakes that turn into failure.

Palchinsky Principle

“The element of uncertainty always exists in a large-scale undertaking like (buying Dior’s parent company). But we had studied, as we always do, the “worst case scenario”. We had invested a very important sum for us, 100 million, but if we had lost it, we would still have survived. This was the maximum risk we could expose ourselves to at the time.”

“Well, we don’t like failures. We try to avoid them. That is why, with many of our new products, we make a limited number. We do not put the entire company at risk by introducing all new products all the time. In any given year, in fact, only 15% of our business comes from the new; the rest comes from traditional, proven products—the classics.”

Marketing

“We must not lose sight of the fact that, in order to sell a product, we must make people dream.”

Advertising only allows you to sell more of a good product. And to possibly make an exceptional success from a product which, in any case, is exceptional. This is what happened with Dior's latest perfume, “J'adore”. It's an extraordinary global success, and it happens to be a fantastic product. Everything is successful in this perfume: the name, the juice, the bottle, the advertising, the packaging... We invested a lot and the result is there. But the same advertising effort carried out for another less promising product would not have given the same results. Fortunately, anyway. It would be too easy. If it were enough to spend on advertising to make a product work, it would be known.”

If you associate a product, whose strong personality you want to praise, and a well-known actress who does not appear sufficiently in tune with this product, then you risk being disappointed. It will work less well than with a more anonymous model.”

“All modes of communication between the brand and its customers are important, whether advertising, the press or the presentation of products. The boutique plays a key role in this, as does the way in which the sales assistants are in contact with the customers. All this maintains the image and we take care of it like the apple of our eye.”

“Most companies think it is enough to use advertising to present a picture of the product. That’s not enough. You need to project the image of the brand itself.”

“The last thing you should do is assign advertising to your marketing department. If you do that, you lose the proximity between the designers and the message to the marketplace. At LVMH, we keep the advertising right inside the design team.”

Innovation

Innovation is at the heart of our strategy.”

“In each of its businesses, LVMH embodies innovation. In cosmetics, for example, 20% of turnover is achieved thanks to products that did not exist the previous year. It is therefore necessary to create, but also to register the novelty in line with a given brand. Louis Vuitton is very modern, but at the same time it's Vuitton; even when we see the new products, we think of traveling by ocean liner!”

Small Headquarters

“Central headquarters in Paris is very small, especially for a company with 54,000 employees and 1,300 stores around the world. There are only 250 of us.”

Execution

When something has to be done, do it! In France we are full of good ideas, but we rarely put them into practice.”

“You need ideas but the idea is just 20%. Execution is 80%

Training

“If you walk into a Vuitton factory, you will see very few machines. Almost every piece is made by hand. Usually, piecework is the most inefficient operating system in the world, but for us it is different because we give our craftsmen and women fantastic training. They are trained for months before they touch the products, and then, every task they do has been studied and refined for many years, so we know precisely how to arrange the atelier. No moment or motion is wasted in there. And that allows us to offer a very high quality product at a cost that makes our business very profitable.”

Stock Market Advice

“I find the short-term recommendations of analysts or banks extremely presumptuous and often very inaccurate.”

I fundamentally believe that, to succeed in stock market investments, you have to have a long-term vision, be interested in companies and not in business sectors, invest in a company because you believe in its management and because the courses seem interesting. Then, for two or three years, you no longer have to look at the stock market. Otherwise you are speculating and above all you get angry, because it is very rare for the company's share price to rise after your investment. In the medium term, you should normally win, whatever the general development, if you bet on the right company. Even when the stock market trend is not good, you find companies that are making progress. It seems to me that this is the best way to invest. If, on the other hand, you follow the technique of the managers who buy Danone in September, sell it in November to buy Nestlé, you will see that in the end all this tends to bring commissions to the broker rather than to enrich you.”

Capitalism

Capitalism remains the best system for sharing progress in daily reality. Private companies are best placed by their growth, their vitality, their speed of adaptation in the face of novelty, to translate concretely what progress brings to humanity, technical progress in particular. It is freedom to undertake, economic freedom which are the vehicles of progress today.”

Summary

LVMH's extraordinary success is undeniably indebted to the exceptional abilities of one man—Bernard Arnault. His strategic prowess in acquisitions, profound business acumen, and unyielding devotion to the business have been instrumental. Arnault has impeccably honed the delicate art of balancing commerciality with the artistic independence of designers and the ever-evolving desires of luxury consumers.

Learning from Bernard Arnault transcends the confines of luxury, offering invaluable business wisdom. With over three decades at the helm of LVMH, Arnault's unwavering commitment to a long-term vision, his relentless pursuit of quality, and his dedication to empowering employees illuminate the path for entrepreneurs and business leaders. Diligent control over the production and distribution of luxury goods preserves the highest standards, while harnessing the momentum of global affluence has fortified LVMH's revenue streams. The diverse portfolio of brands and businesses spanning various luxury segments and geographic regions positions the company to adeptly navigate economic fluctuations and invest in a prosperous future.

Yet, even a visionary like Arnault cannot single-handedly steer a company to greatness. Arnault heeded his professor's sagacious counsel: a genuinely sublime company arises when ordinary individuals are empowered to achieve extraordinary feats—an ethos that brilliantly radiates throughout LVMH.








Sources:

La Passion créative,’ Bernard Arnault interviews with Yves Messarovitch. Plon 2000.
[Translated from French]

The Perfect Paradox of Star Brands: An Interview with Bernard Arnault of LVMH,’ Suzy Wetlaufer, HBR. 2001.

The $100 Billion Man: How Bernard Arnault Stitched Together The World’s Third Biggest Fortune,’ Susan Adams, Forbes. 2019.




Further Reading:

How Bernard Arnault became the world’s richest person. The lord of luxury is a model European capitalist—but with American characteristics,’ The Economist. December 2022.



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Learning from Bruce Plested’s Mainfreight

The qualities that define exceptional businesses transcend time, industry, and geography. New Zealand's Mainfreight stands as a contemporary testament to their universality. Over the past two decades, this exceptional company has consistently grown investors' capital by nearly 25% per annum, showcasing the unwavering power of these foundational principles.

Mainfreight's narrative traces back over four decades to Bruce Plested, a bold New Zealand accountant who was let go from his role at New Zealand Freighters due to a momentary lapse of temper amid frustrations with mismanagement. His departure marked the genesis of an audacious idea—to challenge the inefficient and price-fixing monopoly freight conglomerate operating within the confines of anti-competitive regulations. Collaborating with a former operations manager from his previous employer, his business partner, and the owner of a forklift rental business, Plested emerged as the majority shareholder with 52% ownership, while the others held 16% each. When the opportunity arose to bring in Neil Graham, a skilled operator and ex-colleague, Plested generously relinquished nine percent of his own stake and orchestrated the transfer of the remaining 16% from the forklift owner. Graham secured a quarter ownership for a modest sum of six-thousand five hundred dollars. This marked the inception of an authentic partnership.

Right from the outset, Plested was committed to distributing profits among his ‘team.’ His unwavering work ethic, customer-centric approach, transparent sharing of financials, and genuine concern for employees set the company's tone from the upper echelons. The enduring culture crafted by Plested and Graham reverberates throughout the organization to this day. A steadfast dedication to a 100-year vision instilled a long-term perspective in decision-making.

Even today, Plested remains the chairman of the company he established in 1978, while Don Braid, a seasoned 29-year veteran of the firm, has held the mantle of CEO for more than two decades. Likewise, the tenures of senior management and the board can be measured in decades not years.

What began as a modest venture has blossomed into a global, multi-modal logistics powerhouse, expanding both organically and through strategic acquisitions. Amid this evolution, the core values, ingrained culture, and unwavering long-term outlook persist. It's worth noting the remarkable feat of listing all 11,311 employees in their annual reports—a testament to their commitment to each individual's contribution.

The captivating story of Mainfreight is eloquently recounted in Keith Davies' compelling book, "Ready, Fire, Aim." Within its pages, one discovers that the qualitative attributes that permeate Mainfreight align seamlessly with those of other legendary enterprises we've explored. Once again, the competitive edge emerges from the establishment of a robust foundational framework that empowers individuals to unleash their fullest potential. Below, I've curated some of my favourite quotes from this journey.

Mainfreight have taken a culture that began as a way of life and developed it into a strategic tool that gives them enormous competitive advantage. To understand Mainfreight it is necessary to delve deep into its culture.’ Keith Davies

Mainfreight v S&P500 vs Berkshire (1996-2023 normalised) [Source: Bloomberg]

Mainfreight Culture

Culture is a competitive advantage.’

‘A capitalist with a difference - Plested consciously and quite deliberately set out to make the company the (employee’s) family, to replace the union in their affections.’

‘Plested's carefully thought out objective had been to ensure the 'team', as he insisted his staff be referred to, would have every incentive to support their company rather than bow to destructive union pressure.’

What made Plested different was a burning desire to persuade his 'team' to come along for the ride and share in the profits.’

‘Mainfreight’s philosophy broke the conventional rules of the day. Bosses were bosses and workers were workers and nary the twain should meet.’

‘This was a company where the very words staff and management were banned. It was a team.’

‘This was a true family culture.’

There was a sense of caring, epitomised by (free) hot meals each day in the canteen. The uniforms were better, the boots were better. Their pride in themselves was better. Mainfreight cared for its team. Not its staff, its team.’

‘They talk a great deal about the Mainfreight culture. In reality, it's a passion. In short, Plested and Graham built a company in their own image. A company where mate looks after mate.’

Mainfreight had prided itself on having a team atmosphere where anyone could talk to anyone. The Mainfreight team worked together, played together, ate together and shared the benefits of each other's labours. Branch managers sat at the lunch table with drivers and loaders and typists. And the team knew their joint managing directors could drive trucks and sweep the floor. Because they did. Mainfreight was capitalism in its purest form. A very New Zealand experiment that produced extraordinary results. Join Mainfreight and you joined a family.’

Plested and Graham preached the three pillars of Mainfreight. A culture built on under-promise and over service as Mainfreight kept on reinventing itself by taking chances and learning from mistakes. A culture based on constantly tearing down any sign of bureaucracy, hierarchy and mediocrity. And the all-empowering philosophy that Mainfreight was there for a hundred years, driven by margin, not revenue.’

‘Our Unique Culture’ [Source: Mainfreight website]

Why don't we have job descriptions? Because it makes sense; we are a team. Give people a job description and that's all they do. In a team everyone does whatever it takes to get the job done. That is the culture.’

Never forget that the Mainfreight culture is your competitive advantage.’

People

‘In testing times Mainfreight’s ultimate strength lay in its people.’

People ask what keeps us awake at night. The answer is simple; it is finding people capable of running the business as we expand and into the future.’

‘Plested and Don Braid were determined that the unique Mainfreight culture would not be jeopardised or diluted by growth. They knew it was people who made the difference. Their competitors now had clean trucks and polite drivers and smart IT systems and even warehouses. What they did not have was the Mainfreight attitude.’

Share the Wealth

‘I have never seen capitalism as greedy. The more wealthy you can help make all the people in your establishment, the more money everyone will make with more satisfaction.’ Bruce Plested

Plested set out to make the company a family, a team, in which everyone would have a share in the riches.’

At the end of the year there would be a bonus, with ten percent of profits split equally amongst the team. The team, always the team. The remainder of the profits went back into the company for better buildings and carpet and later the lunch room where a canteen lady served storemen and drivers hot meals like their mums made. Meals they ate seated beside the managing director.’

‘… there was an extra week's pay at Christmas. And hams. And boxes of free apples. Unheard of.’

In a typical year each branch divides 10 percent of profit between all team members on an equal basis, and there is also discretion to pay more to those judged to have performed above and beyond.’

Profitable

‘A single startling fact perhaps demonstrates more than anything the impact they made on the freight forwarding scene. Mainfreight was making a profit within five weeks and didn't borrow money for three years.’

Tailwind

‘Mainfreight’s belief in managed warehousing was borne out of the facts. In the US 70% of all manufactured products were warehoused by third party contractors. In Australia, 30 percent were warehoused by third-part contractors. By contrast, in New Zealand only 11 percent of goods were warehoused under contract.’

Value, Respect and Empower Employees

The philosophy was simple enough. Turn your people into capitalists, have them think like capitalists. You don't go on strike for silly reasons and damage your income earning machinery when you have a car and a house to protect. If you're capitalists you virtually can't be unionists.’

Plested was convinced that men who were treated with respect would return it in bucket-loads.’

Mainfreight wants people who are anti-bureaucratic and, critically, willing and able to make decisions. And that's not just the executive team and branch managers, it applies to everyone in the business. The message to everyone is simple. We need decisions made as close to the customers as possible. You decide: "Yes" or "No"?’

We want everyone thinking about what they are doing and what decisions have to be made. We want people making decisions as close to the customer as possible.'

Walk the Floors

Don Braid is a believer in management by walking about. The more you walk around the more you learn about your business. When you are on the floor with people they can't help but tell you what is going on. You don't get that in the corporate office. I don't understand what stops management doing this; it's the corporate bullshit thing. ‘I've got an office. I have a desk. I am too busy.’

The greater the promotion, the more you have to immerse yourself in the business; the more it has to become part of your daily life. Frankly, people who don't understand the logic of getting around more when they are at the top just shouldn't be there. They shouldn't want to employ or surround themselves with sycophants. That's when you have real trouble.'

‘Braid's management approach is reflected in his attitude toward ties, which follows the Don Rowlands path: I used to be a fan of the tie, an office, a car park, but that just divides us from the others. If you isolate yourself, you may as well sit in that office with your tie and hang yourself with it.'

Decentralised Decision Making

Mainfreight's decentralised management style allows its branch managers to take whatever decisions are necessary to maximise margin, and consequently increase profits.’

Mainfreight is largely decentralised in the belief that head office cannot be expected to understand the intricacies of individual branches.’

At Mainfreight we take every opportunity to decentralise the information, to decentralise the power and get people working together.'

If you make decisions then people will respect you for standing up and making them. We had to do that. To ensure everyone understood, Mainfreight added a new line to the philosophy column of their three pillars: Ready, Fire, Aim. What is means is we are taking steps forward; we are not sitting back strategically planning and waiting for an opportunity. It’s about energy and momentum. It doesn’t mean do it and worry about it later. It means make a decision. And if it’s the wrong decision we shape it up and get it right… If you have people in the business making decisions for you, taking responsibility, you have a healthy business.’

The more people making decisions and leaps of faith the better off we will be as a business.’

Quality Service, Customer-Focus & Value Add

‘When Mainfreight first started it was twenty to thirty percent cheaper than the competition but when the big four started to lower their prices, Mainfreight didn't. Service ruled. Service to the customer and extraordinary internal communication.’

Mainfreight were offering a service never seen before. Customers were suddenly the priority.’

The Plested/Graham passion: We don't work for Mainfreight. We work for the customer.'

There is a Mainfreight sign that neatly sums it all up. The success of this company is based on unshakeable beliefs:

  1. The only way to keep ahead of our competitors is by the superior performance of our people.

  2. The only measurement of that superior performance is how the customers perceive it.

We aim to delight our customers.’

It’s the little things that capture people's imagination. The service you don't expect is the service you remember. So began the tradition of sending birthday cards to customers followed up with a call on the day. How to be noticed and appreciated for little cost. Then came the Easter tradition of hot cross buns. Not sent anonymously in elegant boxes. They went the Mainfreight way, delivered by hand, then buttered and spread with jam on the spot. Do that in the middle of an office and you tend to get noticed.’

‘And there were apples: another tradition that continues to this day. Once a year everybody, team and customers, received a 9 litre bucket of apples. The impact of this seemingly innocuous gesture has to be seen to be believed.’

Source: Mainfreight website

Better systems and better handling gave Mainfreight the confidence to hold prices between eight and ten percent above their competitors. The results spoke for themselves. They offered better service than anyone else in the market and were paid accordingly.’

He who creates the most value wins. That's the business we're in, creating value.'

If your business is simply about making something the cheapest it can be then you are rooted, because that's very easy to imitate. Now, the complete logistics strategy, that's more difficult to copy. We help our customers make money because they have no need for warehouses, trucks, IT or an international network. We have a total package to make them more efficient, more profitable. Win-win.’

Mainfreight only wanted quality customers who valued their high-end product and being cared for with kid gloves, and who would pay on time.”

No Budgets & Transparency

’Rowlands (Chairman) sat in Plested's office that Monday night, as he had done many times before, and listened as the branch managers called in their crucial weekly returns, marvelling at the encouragement handed out. That was Plested's skill, getting people motivated. Those weekly returns were and remain the corner stone of Mainfreight's extraordinary success. Plested had concluded early on that budgets were 'bullshit. Far too much time was spent preparing budgets that were then invariably altered, requiring further precious time, due to unforeseen circumstances.

Source: Mainfreight 2023 Annual Report

Many companies consider themselves goalless if they don't have budgets while what mattered at Mainfreight was making more money than they did last year on a week by week and month by month basis. Mainfreight's policy of weekly returns allowed them to tell at a glance if they were ahead of or behind the game.’

Budgets are bullshit. We measure ourselves against last year. An actual figure of last year.' Wonderful. Simple.

And Mainfreight gets those figures every Monday night from all its branches.

The figures there for all to see and compare how they had fared that week compared to the previous week and the same week for the previous year. And not just for the accountants and directors to see but the cleaners, the canteen workers, loaders and drivers and the sales team. The company's innermost secrets, right down to how much they banked each day, posted on the canteen wall.

This was Mainfreight's simple solution to what many companies consider a complex problem. Give every member of the team the responsibility and the authority to make their own decisions and there was no need for budgets. Budgets are typically defended and justified as necessary to prevent expenditure blowouts.

Mainfreight just asks everyone to be sensible: If we do this, will it make the company money? If not, why are we doing it?

Souce: Mainfreight website

By studying weekly figures they could quickly identify where a problem had occurred and why. By the same token it was possible to identify where one branch manager might have introduced a profitable new innovation and quickly adapt it throughout the network. The effect of such transparency is electric. It instils a sense of responsibility. There is no time to be frivolous when people know everything they do has a direct impact on the success of the company.

Plested's door was always open. He answered his own phone. Would talk to anyone about any problem.’

‘It was exciting because at the end of every week Mainfreight posted the results up on the canteen wall. Everyone could see how much money they had made, how good they had been at packing freight into containers and trucks.’

Hire Potential & Promote from Within

Hire people smarter than you.’

‘Mainfreight is not in the business of hiring people who come to work to be told what to do. They want the ‘right' people, not just people.’

Mainfreight had begun with a policy of never hiring anyone who did not have the potential to become a branch manager. Now they wanted thinkers with the potential to be not so much branch managers as managing director. The brief was simple enough: ‘Find people for the future – people who will fit into the team, have a cultural fit. Achievers who are going to be able to take the company to another level. People able to grow and develop themselves and Mainfreight.’

When graduates come into Mainfreight there is never a promise of a particular role. The understanding is that they come into the business for a career that will unfold as they learn and show their potential.’

Over the years, time spent on the floor has been reduced, but the theory remains the same; these are likely to be the men and women who will be running the company one day. They are encouraged to make both suggestions and decisions from day one, on the basis that they know the business from the floor up.’

Only employ people who shared the Plested ethic and work ethos.’

‘Mainfreight would hire business and law graduates and then have to explain to young men and women with a B Com/LLB, whose friends were sitting in plush high-rise offices with major law firms, that they would be spending the next two years driving a forklift truck and be expected to sweep the depot floor at day's end.

The theory is that these are the men and women who will be running the company one day and they can't make critical decisions unless they know how the engine room works.’

Plested’s philosophy of employment for Mainfreight is based on Theory Z, a Japanese hypothesis. Simply, you only employ young people. You treat them as if they're going to stay with the company for forty years. And you slow down promotion, rather than moving them every six months from job to job. The objective of this deliberate process is to develop absolute champions rather than 'once over lightly' merchants. The thinking behind Theory Z is that people who are really beneficial to a company are usually those who have been there for a long time with a real depth of understanding.’

Mainfreight looks for well-educated, energetic young people with the correct attitude. And always promotes from within.’

Promotion from within is deeply embedded in the business ethic of the company.’

Adapt & Think Small

We're reinventing ourselves all the time, which is what small businesses have to do. And if you keep thinking of yourself as a small business you can do that.’

‘I never tire of repeating, we are a collection of small businesses that are constantly looking to improve.’

Mainfreight’s approach to running a big business: Don’t. The principle was simple that each branch should operate as an independent unit.'

‘Much of what we do, our approach, can be seen as small-company thinking, and the challenge is to keep that as we grow bigger.’

Appearances

Mainfreight insisted on the cleanest, best-looking trucks and best kept buildings. Everything had to look one hundred percent every minute of the day.’

Everyone is encouraged to dress as if they were meeting a managing director. A positive attitude was the order of the day, every day, a positive attitude conveying a professional, caring image.’

Personal hygiene was constantly stressed, a novel notion in the transport industry of the day. Not only were Mainfreight people expected to be clean and tidy but also their trucks and cars. This, they were told, would reflect the company's pride and attention to detail.’

‘They were taught how to answer the phone and be courteous to customers and workmates alike. To question customers on the quality of Mainfreight service and encourage them to suggest improvements. Mainfreight people arrived early to appointments, were polite to the receptionist and thanked her on leaving. It was, they were told, the little gestures that left lasting impressions. Most importantly: 'You are your word. You are accountable for all your actions.'

Seperate Profit Centres

‘The Mainfreight way involved a great deal more than embracing workers to the notion of capitalism and ensuring quality service for quality clients. Each branch, each operation was encouraged to think of itself as an island of profitability. For this to have any credibility it was essential to ensure no branch suffered as a consequence of working for another. Hence a system of inter-branch allowances that ensured administration was subservient to the operation. Not visa versa.

Freight sent from Auckland for delivery in Hamilton would be charged at a rate sufficient to allow Hamilton to unload, deliver and make a thirty percent margin. Hence smaller branches were rewarded for their place in the food chain, all the more so if they kept costs down.’

Source: 2023 Mainfreight Annual Report

All 306 branches are run as separate businesses, with no shared functions. Each has its own profit and loss statement that is reported weekly to head office and posted on the wall of every branch’s lunchroom, so all staff can see how the branch is tracking versus last year.

‘We know how much money we’ve made and all lost in each one of those 306 branches. But more importantly, the branch manager knows,’ Braid explains. (And yes, the odd investor and consultant has suggested Mainfreight centralise the back-office functions of its branches, but Braid scoffs at the idea. ‘Listen, consultants are those that come out of the hills to kill the wounded after the war. If we can’t sort it out, some suit from the city isn’t going to sort it out for us.’) The branch manager’s autonomy is absolute, but Braid and Plested also strive to push decision-making down the ranks. ‘If you make a mistake, fix it – don’t push it upstairs,’ he says simply.’ [AFR]

Trust

The key to success is ensuring the entire group benefits from every aspect of our business. We do that by trusting each other. That's the key. Trust each other, believe in each other.'

‘Nothing happens until you sell something. And what we are selling is trust. That is our competitive advantage.’

Headquarters

The company has no headquarters, with the Auckland number-one branch the closest thing. The idea is that senior management should be on the road, visiting customers or visiting branches to ensure the culture is being looked after. On this front, little things matter: is the food in the cafeteria right, are the toilets clean, is there an energy about the place?’ [AFR]

Do the Right Thing & Word of Mouth

‘Mainfreight was renowned for breaking one of the forwarding industry's cardinal rules. They paid their creditors on time. This they considered to be their advertising and marketing budget. Word certainly got around and it's still the rule today.’

Incentives

‘Plested would pore over those crucial weekly returns seeking a new advantage. In March 1990 he spotted an interesting anomaly between Dunedin and Napier. The two branches were generating approximately the same amount of sales, with identical revenues.

The difference lay in the bottom line. Dunedin was losing NZ$300,000 a year, while Napier made that much. It was an intriguing comparison, as the two branches engaged the same number of people. The difference lay in how they were engaged. Napier employed five workers and had six owner-drivers, while Dunedin employed eleven in its team. Two months after Plested's discovery, with a little financial help from Mainfreight, and no resistance, the Dunedin drivers happily became owner-drivers.

In one year Mainfreight went from losing NZ$300,000 a year in Dunedin to making NZ$280,000. The logic was stunningly simple, as explained by Bruce Plested. `When we owned the trucks, if we had a light bulb go out the driver would come in and say, ‘Light bulb doesn't go in the truck.’ We would have to phone up the auto-electrician to come down and put in a new bulb and he would charge us NZ$70. Whereas an owner-driver always carries some bulbs in the glovebox; it's easy, he whips one out and screws it in. And you don't even know it's happened.

That is multiplied hundreds and hundreds of times every day throughout the country by using owner-drivers. The reason is simple. They will do whatever is needed to keep their trucks on the road. That's how they make their money.' From that moment on Mainfreight did everything it could to help its employees become owner-drivers. The impact was extraordinary. Suddenly, when a truck needed a grease and service it happened during downtime over a weekend, not when it was needed on the road. The owner-drivers were making more money and so was Mainfreight.

Solving one small problem had effectively changed the face of Mainfreight.’

Ideas

Mainfreight developed a 'branch buddy system' with branches of similar size constantly comparing notes and visiting each other to learn by the other's initiatives and mistakes.’

‘This is not a business of rocket science. It’s not as if we have to understand nuclear physics to do it. But we are significantly advantaged if we have a lot of well-educated people questioning the way we do things and coming up with smarter solutions than we might have come up with in the past.’

Open Plan Offices

Open plan (became) an integral part of Mainfreight culture the world over. As the office walls went so did the pockets of power that prevented people mixing, sharing information, working as a team.’

Margin not Revenue

Bruce Plested had developed a personal mantra that ‘margin is what matters, not revenue.’ He constantly hammered the message, ‘If you are undercharging customers, then you’re a busy fool. Each account must produce a satisfactory margin.’

Mainfreight's marketing policy had the simple objective of attracting only those customers who appreciated added value and were prepared to pay accordingly.’

Embrace Technology

Mainfreight would be the first New Zealand company to transmit data over a radio telephone, and later the first in Australia to download information from a vehicle in the field using cellular technology.’

Think Long Term (100 Years)

‘One memorable night, as Bruce Plested and Howard Smith, the original founding partners, were yet again discussing their needs and aims, Plested suggested they should adopt a twenty- or even 50-year vision. To which Smith, emboldened by the beer in his hand, replied, 'Why not think, ourselves as a 100-year company?' It was an empowering moment. In years to come, this philosophy would give them enormous freedom and flexibility in decision-making. Now they were no longer worried about this week or this month or even this year. They were a 100-year company.’

All decisions were based on that hundred-year vision. Buying terminals and building facilities specifically for expansion. Buying land next door, creating land banks to accommodate that future expansion. The future, always the future.

Source: Mainfreight 2021 Annual Report

Every decision a long term decision. Short term expediency didn't come into it. It was never an option.

Every decision challenged with the question: 'What's the long term benefit?' A philosophy geared to keeping Mainfreight on a sensible path. Later, as they made forays into North America and Australia, there would be critics who failed to grasp this willingness and ability to think long range.’

Mainfreight's investment strategy of buying land and building their own nationwide network of branches continued. Plested and Graham again and again warned their board not to expect short-term financial success. There were constant reminders of the long-term objective of completing a network of purpose-built freight and storage terminals. Always the same message. From growth came prosperity. The one hundred year vision that would take them beyond New Zealand and Australia into Asia and the United States. By now Mainfreight saw warehousing and distribution centres as the future. Branches everywhere were buying up adjacent land for future expansion into efficient freight terminals with the consistent view of converting existing premises into warehousing and distribution centres. Mainfreight was developing those 'land banks' in the strategic heart of every town and city it operated from. The vision that only a hundred year plan allows.

Anyone looking to invest in Mainfreight would have been impressed by a network any competitor would struggle to replicate.’

We don’t have a policy of a short-term CEO or board member. The hundred year philosophy gives you that, as it encourages promotion from within.’

‘Long-term thinking has long-term returns.’

Humility & Hard Work

‘Plested remained concerned about not falling into the trap of big company syndrome. A syndrome he typified as being arrogant, using consultants, bringing in outside cleaners to sweep the depots, hiring pictures and plants and, a particular hatred, putting blue rinse in the toilets. He wanted none of that:

'We must stay lean and cost hungry, we must continue our 'do it ourselves' philosophies, and above all we must continue to work as long and as hard as ever.

To be successful as individuals and as a company, there has never been and never will be any substitute for working hard.'

Total Quality Management

Mainfreight had discovered and embraced Total Quality Measurement (TQM). Prior to that moment, Mainfreight meetings were run by the joint managing directors or branch managers with up to thirty people in attendance. Only a small fraction would have any input. Such meetings were often an excuse for those present to blame inefficiencies on outside influences such as lack of equipment or poor service. TQM changed all that with the insistence that branches form small teams that met on a regular basis to deal with issues directly related to the work those people did.

And there was a golden rule. No more than seven people attended such a meeting to ensure participation from every member of the team.

Crucially, they were not allowed to solve problems by requiring other people to change. These small internal teams had to solve problems by changing those factors they could directly influence. These became known as Positive Action Team (PAT) meetings that were significantly more effective than the big staff meetings of the past.’

Internal Competition

‘There was to be a deliberate policy of the Daily Freight and Mainfreight brands competing in the major markets. A dissatisfied customer could always leave and take their business to one or the other.’

Source: Mainfreight Annual Report 2019

Keep it Simple

‘It works because it is simple; Simple is best. If you want to change it, try to make it simpler. It’s not about making anything too difficult.’

Acquisitions

The trend was firmly established of buying sick companies for next to nothing, picking up the odd good executive on the way through, and then moving on. All the apparent benefits of the takeover paled into insignificance though compared to another lesson. They realised they could take the Mainfreight culture, the Mainfreight attitude, and plant those philosophies in a completely different company. Even a company as far removed, as directly opposite in many respects, as Daily Freightways.

Plested is of the view it was one of the most significant events of their history, if not the most significant, as it gave Mainfreight the springboard to go forward. The knowledge they could transplant such a unique culture gave enormous encouragement and confidence.’

‘Braid is emphatic that while Mainfreight is not a prolific acquirer of businesses, when it does step in to the ring it is for strategic purpose. They have to fit the jigsaw.’

‘Most crucially, [Mainfreight] discovered that companies that are for sale tend not to be in good shape; they tend to have terrible debtors, customers who expect, as of right, to pay in two or three months, customers who make life difficult. These were all lessons well learned.’

‘While the 'Mainfreight culture' is integral to the company's success, it made much of not imposing a culture on the US, rather, allowing an American version to emerge in its own time.’

‘With each acquisition Mainfreight made, local management were instructed to adapt the Mainfreight way to suit their own culture.’

As companies are prepared for sale the first thing they tend to stop spending on is IT. Operating and accounting systems are propped up for the short term - never for the future. Companies being readied for sale will do anything they can to improve the look of their books.’

‘The purchase of K&S Express and CaroTrans both involved acquiring distressed small businesses from inside larger companies. Both businesses were operating accounting systems that were part of the larger company's computer system. They did not inherit a stand-alone computer system.. Today Mainfreight is wary of buying a small part of a bigger business that does not have its own operating and accounting package.’

No matter what the acquisition, big or small, they all come with their own set of problems.’

‘10 Year Snapshot of Growth.’ Source: 2023 Annual Report

The policy now is to bring managers [from acquired overseas businesses] to New Zealand for an injection of ‘blue blood’ so they can return home and spread the gospel. There was an initial theory that may take two years, but experience has taught that that may not be long enough and that people should stay ‘for as long as it takes.’’

‘There have been other critical lessons on acquisition too. Take your time fixing them, and lift service levels before adjusting prices so customers stay with you. Be careful of changing the name of the business, especially if it has or has had a good reputation. This can cause destabilisation of customers and some team members. Beware the folly of equity-raising. Mainfreight raised funds for the Owens acquisition with an issue at NZ$1.30 a share, too little by far.

And remember, people don't sell well-managed, profitable companies. No matter what you are told, expect to find low prices, low service levels and long credit terms. Every time.’

Global Expansion

Many companies that go into China think the answer is to have their own management teams run their enterprise. Mainfreight was determined to make no such mistake. Lofaro would be the only non-Chinese member of the team. His first move was to hire only bright young locals; he wanted Chinese people calling on Chinese customers.’

Training

‘In what was an industry-first in New Zealand, in 2004 Mainfreight opened a training centre with an intensive five-day course that focused on skills but also on learning about the company's history, culture and expectations. Every new member of the Mainfreight family was expected to complete the course, as were all existing team members. Similar programmes would be run around the world as the company expanded. It was like an in-house university, right down to having a mock depot, where people learn why Mainfreight does things a certain way. Always there's the need to understand why.’

Continuous improvement

We need constant improvement; that incremental gain from continually striving to be better already delivers so much, particularly in terms of quality.’

Community

We want to be a good corporate citizen and look after the environment.’

Educating the poor is one of the most important things we can do. If we force education into them we'll get a bigger bang for our buck in terms of growing the economy than by developing any other sector of society.’

Summary

The distinctive qualities that define Mainfreight's essence resonate within many other esteemed businesses discussed in preceding posts. Be it the historic National Cash Register company from the late 1800s, the uniform industry leader Cintas, the Tractor Supply Company, or the renowned Enterprise Rent-A-Car, all share an unwavering commitment to excellence. Their management teams have embraced analogous approaches to orchestrating their operations. These very traits echo the hallmarks of the companies immortalized in seminal works such as 'Lessons from the Century Club Companies,' 'In Search of Excellence,' and 'Firms of Endearment.'

The fervor for their craft originates with the founders and permeates every facet of these enterprises. The practice of propagating business triumphs, perpetual learning, and employee empowerment plays a pivotal role in fostering enduring tenures, resulting in elevated customer service standards and augmented efficiency. Gazing beyond immediate horizons necessitates fortitude and furnishes an alternative vantage point for decision-making, thus securing an abiding competitive edge.

Mainfreight's journey, much like any narrative of business success, has been punctuated by challenges. Acquisitions took unforeseen trajectories, customers occasionally went into receivership or alliances shifted, economic downturns posed formidable trials, and missteps peppered the landscape. Nevertheless, throughout these trials, an unswerving dedication to unparalleled customer service, cultivated by a workforce that is empowered, impassioned, and motivated, coupled with an unwavering long-term vision, has forged a resilient organizational culture. This culture stands as the bedrock of Mainfreight's thriving legacy, a legacy that has endured and flourished across the passage of decades.











Sources:

Ready Fire Aim: The Mainfreight Story,’ Keith Davies, 2013. Penguin Books.

‘With Passion Anything is Possibe - Mainfreight - An Insight,’ Keith Davies, 2003. David Ling Publishing.



Further Reading:

Is this the best-run firm in Australasia? In Auckland’s industrial heartland lies a 40-year experiment in culture, radical transparency and long-term thinking that every leader can learn from.’ James Thompson, 2022. Australian Financial Review.

The IMportance of Culture,’ 2017, MastersInvest.

Culture Tutorial’ MatersInvest.


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Learning from Tractor Supply Company

Even great companies can lose their way when unexpected challenges arise, whether from external forces or internal missteps by management. A prime example of this is Tractor Supply Company, which faced a turning point when the business environment changed, and its focus began to waver. Once a thriving enterprise, it encountered setbacks that almost led to its downfall.

Charles Schmidt, the visionary behind Tractor Supply, had initially aspired to a successful athletic career but had to change his path after a severe injury. Undeterred, he turned his determination toward a business diploma but encountered failure in his first venture. Nevertheless, fate smiled upon him when he entered the world of stock brokerage, catching the attention of two customers who saw his potential and offered him a chance in the wholesale automotive car parts business, including tractor replacement parts. It was within this venture that the idea for Tractor Supply Company took root.

In 1938, at the age of 26, Schmidt astutely recognized a gap in the market and envisioned a business that catered to frugal farmers seeking affordable tractor replacement parts. Inspired by the success of renowned catalog sellers like Sears, he set out to create a reliable and cost-effective alternative to the options provided by dealers and manufacturers. Schmidt's vision materialized into a mail-order catalog business, employing a well-executed and highly targeted marketing approach. Surpassing all expectations, Tractor Supply achieved remarkable success in its very first year.

Tractor Supply Company vs S&P500 - 1994-2023 [Source: Bloomberg]

“Tractor Supply grew earnings at a rate of 23 percent per year and became a 100-bagger after just over 12 years.” Chris Mayer, One-Hundred Baggers

Driven by an unyielding pursuit of excellence, Schmidt made a pivotal decision—to expand beyond the confines of the catalog and establish physical stores. This expansion not only allowed Tractor Supply to capture a wider customer base but also provided a convenient shopping experience for those who may not have been reached solely through the mail-order catalog.

First Tractor Supply Store 1940 [Source: TSC]

Schmidt had successfully tapped into a niche market. As Tractor Supply expanded its store footprint, diversified its catalog of parts, and welcomed staff members with firsthand experience in farming, the business thrived for three decades. However, this success faced a challenge when the consolidation of family farms resulted in a shrinking customer base for Tractor Supply's traditional offerings.

To counter this trend, Tractor Supply underwent a significant transformation. It decided to rebrand itself as TSC, which now stood for ‘Town, Suburb, and Country.’ This repositioning involved broadening the range of products to include home appliances and women's clothing. Additionally, TSC acquired a chain of sporting goods stores and Chicago discount stores. Unfortunately, with this expansion and loss of focus, the business began to lose its way.

In the midst of the conglomerate craze that swept the 1970s, Schmidt was made an offer from National Industries he couldn’t refuse. National Industries was later acquired by Fuqua Industries. This transition introduced conflicting corporate objectives and starkly contrasting cultures into TSC's operations. The once-thriving employee bonus plan was discontinued, decision-making became centralized, and short-term profits took precedence over long-term stability. The relentless drive to expand the number of stores to please Wall Street exceeded the company's financial resources and infrastructure.

As a result, key members of senior management and dedicated employees began leaving the company, resulting in a detrimental loss of valuable expertise. TSC faced significant financial challenges, hemorrhaging cash and struggling to maintain its operations. Ultimately, Fuqua decided to dismantle TSC, selling off retail chains, downsizing staff, and relocating the headquarters closer to the heartland of rural America. A risky expansion into building materials nearly pushed the company to the brink of bankruptcy, leading to the intervention of Tom Hennesy, Fuqua's liquidator.

Instead of giving up on the business, Tom astutely recognized its potential and took decisive action. Teaming up with a group of colleagues, he made the bold move to acquire Tractor Supply from Fuqua via a leveraged buyout. Together, they embarked on a mission to rediscover the very foundations that had fueled the company's initial success, rekindling its core strengths and values.

The remarkable story of Tractor Supply Company is skillfully recounted in Nelson Eddy’s book 'Work Hard, Have Fun, Make Money.’ Within its pages lie a collection of inspiring quotes that resonate deeply with many of the other great companies featured in previous posts. Here are some of my personal favourites:

Business is People

"Don't be misled, the Tractor Supply story isn't really about catalogs or stores. It's a people story. It's a story about the power of vision and enthusiasm and hard work and people."

It all begins with people - Culture, mission, values, and passion.”

“Simply stated, the character of Tractor Supply at its best and its very worst is and has been determined by the character of its people.”

Simplicity and Common Sense

“What makes Tractor Supply so successful, now and when it first started. Simple, common sense stuff. But there's nothing so uncommon as common sense and nothing so complex as sticking to the simple stuff.”

“Tractor Supply has been successful because it kept things exceedingly simple. From the simple name Charles Schmidt gave the company to its straightforward customer service policy - ‘do whatever it takes’ - everything is plainly stated. Sure, it's employed a lot of complex technology and research, analysis, and brainpower along the way, but it's all been in an effort to keep things as simple as sunshine.”

“Often it's the simplest of things that are the most difficult to do...and the most worthwhile in the end.”

Fill a Need

Tractor Supply has been successful - at its onset and today - because it understood its mission, the place of importance it held in the lives of its customers. It has been an enabler of a self-reliant lifestyle. Whether it was the farmer with a broken-down tractor in the field and in need of a part before the harvest was lost or today's hobby farmer in need of a little advice from a friend who's a bit more seasoned when it comes to stretching a fence tight.”

Incentives and Sharing the Wealth

"Charles Schmidt used money to motivate. But he never viewed money as the goal of business, it was the tool to reaching the goal. He used the money as a tool to motivate and reward the hard-working people who were so critical to making his kitchen table reverie a reality. Bonuses, profit sharing, setting aside pension funds were all important elements in keeping the company's drive going, its employees motivated.”

Family

“When it was founded, Tractor Supply was a business with a family feel. It still is today.” 

"In every sense of the word, it was a family company.

“But as important as spreading the wealth was, we cannot overlook the significance of the personal gestures, letters, and notes that accompanied the checks. There was a bond here beyond money - a family tie.”

Mission and Values

"We're now a Fortune 1000 company. But history is littered with the names of companies who reached the Fortune 1000 only to fail miserably. In most cases, they failed because they lost sight of what got them there in the first place. They lost sight of their mission and values. They lost sight of the culture that made them successful.”

Think 

“Charles Schmidt's management style was one of the things that really separated him from the rest. He didn't just make a decision and say we're going to do A versus B. He would think in terms of what decision A would mean to the next series of decisions. Sometimes you end up getting surprised. When you're making a decision and don't think all the way through the problem to determine the effect, how one decision changes the whole environment you're working in, and how that affects the next decision you have to make.”

Continuous Improvement

"Schmidt kept thinking you can always make it better."

“Charles Schmidt mixed his ability to see and seize an opportunity with his natural ingenuity and desire to constantly tinker with things. Good was never good enough. Though he never set foot on a farm, Schmidt did share the farmers' tinkering spirit and ingenuity.”

 Autonomy, Trust & Empowerment

Trickle Down Trust - Schmidt's management style would create amazing loyalty. Along with sharing the company's successes, Schmidt encouraged individual initiative. Once he had good people in place, he let them work and make their own decisions without second-guessing them. He trusted them. Trust is not just a founding principle at Tractor Supply, it's a foundation principle - a principle that's trickled beginning with the man who began the company.”

"If Schmidt hired someone and they made a decision, he would stand behind it and back them up

Charles Schmidt was fiercely loyal to his people. He always felt that if there was a problem with the actual decision someone else made, he would deal with that person one-on-one later. In public, he would stand behind the person. This gave the people who worked with him tremendous courage to make bold decisions when they needed to, because they knew they weren't gonna be Monday morning quarterbacked or criticized for the decisions after-the-fact by their boss. It was the perfect management style to lure the independent-minded people who'd left the farm to go to war and would soon return home at the close of the conflict.”

The future success of Tractor Supply might best be summed up in that single phrase - getting out the way. Tractor Supply's success in the future will be based on the speed with which its leadership can get out of the way to let the team serve a growing number of customers who, themselves, long to return to out-of-the-way places. Everything is just a matter of ‘getting out of the way,’ ‘doing the right thing,’ and ‘working hard, having fun, and making money.’”

Local Company personnel in the branch stores are authorized to make adjustments and exchanges where called for rather than to refer complaints to the Company's manufacturing source. Don't let that last sentence just slide by. Local stores were authorized to act on their own when it came to making sure the customer was treated right. It's an early echo of the sign that hangs in every Tractor Supply store today, reminding team members and their customers that ‘every team member has the authority to do whatever it takes.’”

Push decision-making down to the lowest possible level.. The simple principle is to encourage your direct reports to take responsibility and make decisions, which in turn becomes a valuable learning experience for all.” Joe Scarlett

Hard Work

"There are a lot of guys out there who are smarter than I am, but they're only giving it 70 percent and I'm giving it 100 percent. There's nobody whose 70 percent is as good as my 100 percent. You can come out on top of people who are a lot shrewder and smarter than you as long as you're giving it everything you've got." Charles Schmidt

Exceed Customer Expectations

Speedy service and a ready inventory during times of crisis helped build Tractor Supply's reputation among its many loyal customers.

Satisfaction Guaranteed - Two promises have always been a part of Tractor Supply - value and satisfaction. The 1940 catalog is a perfect illustration of this. The cover proclaims - You Save When You Buy from Tractor Supply while on the very first page, it plainly states ‘Any unsatisfactory item will be exchanged promptly.’”

“Tom Hennessey believed in doing whatever it takes to make the customer happy.”

Long Term Customers

“Every team member has the authority to do whatever it takes.’ Tractor Supply posts this statement in the stores so managers and salespeople know that they can do whatever it takes to satisfy every customer. The company green lights people to do whatever it takes to retain a customer — and stands behind these decisions. The idea is that no temporary issue should take precedent over the lifetime value of a customer, which could be tens of thousands of dollars. Everyone is empowered to do the right thing.” Joe Scarlett

‘At Tractor Supply we emphasize the long-term value of a customer. A Tractor Supply customer who owns a horse will spend somewhere between $10,000 and $30,000 at our store during the lifetime of that horse. Therefore, it is our goal to make sure that every transaction is positive and successful.’ Joe Scarlett

Value & Reward Employees

“‘Our focus is people,’ said today's Chairman Joe Scarlett. ‘Our people first, the customer second, vendors third, and our communities fourth. We don't focus on the investor because if we center our energy and attention on our team members, customers, vendors and the communities where we do business, then we're going to have good results. Wall Street will take care of itself,’ Joe explained. ‘Their primary interest is results. And we'll get the results they're interested in only if we focus our attention on the key elements of the business.’”

“‘The more bonuses people make, the better the company is doing.’ said Joe. ‘We love that. The more money we pay out in bonuses, the better everyone is doing.’”

The importance of the store team is highlighted in the company's culture in numerous ways, like the company's language. Tractor Supply began calling them associates and that has since evolved into the designation of ‘team member.’ It’s more than words: Tractor Supply puts its money where its mouth is. When the company was privately held by the Gang of Five (after LBO from Fuqua), they offered an employee stock ownership plan to team members. Since 1981, Tractor Supply has had bonus plans in place for everyone in the company. At the store, if you make your store' sales plan, you get a check. It could amount to an extra day or two of pay every month.”

"‘I have a philosophy that companies - good companies - are filling a bank account with good will with their employees all the time.’ said Jim Wright (CEO 2004-2012). ‘What happened with the Quality acquisition is that for many years Joe and his team had done that, kept continually filling the accounts with good will so that we could make a huge withdrawal when we needed to… Most companies fail to build that foundation of good will to create reserves of energy and intellect that can be tapped. Too many companies whip their people all of the time only to whip them harder when they have a challenge.’”

"We want to make Tractor Supply a great place to work and a great place to shop. Note the order - a great place to work first. If it's a great place to work, then our team members will create the environment, uncover the products, and provide the legendary service that will ultimately make it a great place to shop.”

Tractor Supply has shared its success with the folks who make the register ring on the store floor, whether with stock or bonuses made available to everyone in the company.”

Complaining Customers

Any complaint [is] an opportunity to demonstrate the lengths to which Tractor Supply will go to satisfy its customers and personify the ‘Legendary’ in legendary service.” We don't want to hear about a complaint in [Headquarters]," said Joe. "If we hear about a complaint in Nashville, it means the store lost an opportunity. There's a statistic in the hotel business that says that if a guest complains because something isn't right and you fix it quickly, you get higher satisfaction ratings than if everything was fine to begin with. A person with a complaint tells ten friends while a person with a good experience only tells one.”

Social Proof

“[Early advertising stated,] ‘Check among your neighbors - You will undoubtedly find many who deal with us. They'll gladly tell you how reliable they have found us.’ To prove the point, this third edition of the Tractor Supply catalog was laced with customer photographs and testimonials. The salt-of-the-earth accolades run the gamut from ‘well satisfied’ to ‘very satisfactory’ and came from impressive agricultural hot spots such as Gordon, Nebraska, and Velva, North Dakota.”

“[Early advertising proclaimed,] ‘Our Famous Service’ and ‘Our Reputation For Fair Dealing’ and proclaimed ‘Over 100,000 Repeat Customers.’"

Inverted Management Structure

People are the driving force behind Tractor Supply and the people in the stores are the backbone of the company. Over the last twenty-plus years, Tom Hennesy and then Joe Scarlett worked hard to flip the company's organizational chart. To put at the very top, in the chief role, the people closest to the customer - the team members in the stores.”

“At Tractor Supply, we turn the organizational chart upside down," says Wright. ‘I work for all the people in the stores and distribution centers. They pay my salary; in fact, if those in the aggregate do not earn a bonus, neither do I.’”

Listen

“The most important thing the people in the Tractor Supply Store Support Center give their team members is...their ear.”

"We strive to be the world's best listeners. We try to create an environment where everybody can speak up.

Tom Hennesy believed in listening, listening to the customer and the people closest to where the action is: the people at the store level.”

"The most important ears in our company are the store managers and their crews."

Tractor Supply values people. Customers and team members. It listens to its customers and, because customers just have a way of knowing they're being listened to, those customers keep calling, writing, e-mailing, and coming back. It empowers its team members to listen to the customers as well and to ‘do whatever it takes" to make things right.’”

“In my many years with Tractor Supply Company, we made a concerted effort to listen to feedback from salespeople and managers about our products and services. And this was not a one-time effort; the conversations were ongoing and regarded as an integral part of the way we operated. The process of continuous communication yielded innumerable new ideas related to every aspect of the business. When the stores told us they needed a certain product, it was because they were listening to their customers. I can say with great confidence that the overwhelming majority of new ideas about products came from the people in the stores.” Joe Scarlett

Entrepreneurial Spirit

We encourage our people to be entrepreneurs, from the management to team members in the store.”

Ideas at the Edge / Walking the Floors

“‘Those closest to the work are the people who know the most about it,’ explained Joe. ‘Therefore, we're in the field a lot. We can't manage from the Store Support Center. I'll visit 150 stores every year.’”

Tractor Supply has thrived because of its open door policy when it came to ideas and the exchange of ideas. Charlie Schmidt had his morning coffee with his brain trust and Joe Scarlett has his coffee on the road with management team in tow as they pick the brains of everyone from team members and customers to competitors as they drive across the country.”

"The best retail ideas are never born behind a desk. They're born on the road, on the store floor, where the customers are and the real action is in retailing."

“‘Tom Hennesy came in and, instead of talking to people like me, he talked to the store managers and the district managers,’ said Joe Scarlett. Even more than twenty years after the fact, Joe's voice is still touched with a bit of wonder at the sheer simplicity of what Hennesy did - simple, yet powerful. ‘He talked to people in the field and he said, What's wrong?' And he listened to what they had to say, listened for a month or two and then said to all of us, 'We have two problems. We're confused, and we don't have any inventory to sell?' "So first of all, he said, 'Buyers start buying the goods, putting the inventory back in the stores and start taking care of the customers. And, second, he said to everyone in the company, we're going to be a farm store chain,’ remembered Joe Scarlett. We're farm stores. Here's the merchandise. Get out there and sell it.”

“Because of its simplicity on the surface, it's easy to overlook the significance of what Tom Hennesy did in those first few months at Tractor Supply. He didn't suppose that he had the answers. Even though he had a wealth of experience at a host of different companies while working all those years with Fuqua, he didn't assume that he knew more than the people closest to where the business of retailing really takes place - in the stores. He began leading by listening. ‘I knew nothing about the retail business or about farming,’ Hennesy said. ‘I interviewed every manager and asked them the same question - 'What's wrong?Hennesy's approach sent a powerful message. Not only to the people in the field but also to the people at the home office. Hennesy - through actions rather than edicts - sowed the first seeds from which would blossom the company's new culture, a culture that fostered open dialog and thought, a culture where ideas could be shared and everyone is empowered to have ideas and work to make the company better, a culture in which the customer was truly the organization's reason for being and disappointing the customer by being out of stock or not providing exceptional customer service was considered a cardinal sin. Doing the right thing - for customers and for fellow team members - was a Hennesy mantra at the heart of the company's reemerging culture.”

“Joe Scarlett, himself, is in constant motion. He's everywhere - visiting approximately 150 stores every year. He just never stops. He's always taking aside anyone he can find, wherever he can find them, to share the company's mission and vision.”

“Those of us in leadership roles often think that we have the answers to so many of the problems our organizations face. Yet, in my experience, most solutions come from those actually doing the work. In fact, I have found that those individuals responsible for producing the good or service are most likely to identify the problem in the first place! In other words, you are best positioned to overcome challenges – and even achieve productivity gains – by listening carefully to your team.” Joe Scarlett

No matter what business you are in, there is no downside to spending time on the front line with those really doing the work. There is no limit to what you can learn in the process; and, as an added benefit, I guarantee this quality time will go a long way toward earning the respect of the workforce.” Joe Scarlett

Innovation, Change and the Palchinsky Principle

"At Tractor Supply, we embrace the Intel practice stated by Andy Grove - 'Fail often, early, and cheaply.'”

"To that end, we constantly test new items or lines. Hundreds of products are in perpetual testing. Some tests may be in five, ten, or fifty stores. The success of those products will be determined by our customers.”

"Yes, there are certain risks associated with getting bigger. But the risks are even greater if we were simply trying to maintain the status quo. Or as Joe would say, 'If it ain't broke, break it. Break it and make it better.’”

“Today's Tractor Supply relies on new technology, new retail philosophies, new distribution systems and merchandising techniques, and a new breed of executive. It's interesting to note that many of these elements were missing when the company floundered during the '70s. They're the basic elements. If they're missing, it doesn't matter how good your product or your pricing your business just won't work.”

Promote from Within

“Fueling the fire within - Hennesy first surprised Tractor Supply employees when he determined to save rather than sell the company. Then he surprised them again with something that proved to be a powerful move in terms of building loyalty within the beleaguered company. He promoted from within. Unlike his immediate predecessor, Hennesy didn't bring along with him people he'd worked with other places or from elsewhere in the Fuqua organization. Given the performance of Tractor Supply at this point, he would have been more than justified in cleaning house. But he didn't.”

Do the Right Thing

We talk the talk and we walk the walk. Our number one value is Ethics - Do the right thing and always encourage others to do the right, honest, and ethical things. It is our pledge to you that Tractor Supply will always ‘Walk the high road’ - always strive to make the most ethical business decisions.”

Ethics beyond reproach and doing the right thing have not always been the given at Tractor Supply. But the company has done its best when its character was the very best.”

Hiring

“Tractor Supply has a history of hiring its customers.”

Surround yourself with stars, you'll be a star. Surround yourself with turkeys, you're going to get sliced up for Thanksgiving dinner.” Joe Scarlett

“Doing whatever it takes at Tractor Supply also means hiring the kind of store people who know what it takes, which in many cases has meant hiring the company's customers. ‘One of the greatest compliments we receive from our customers is they want to work here,’ said Joe with obvious pride. Customers make the very best team members and every one of our stores has farmers, ranchers, welders, and horse owners on staff. In fact, more than half of our team members throughout the company are farmers, ranchers, welders, and horse owners."

The company sees bringing aboard good people as the heart of what will ensure its success for the future. Tractor Supply was and is successful because it hires its customers. Early on, Charles Schmidt appreciated the wisdom of hiring all of the farm boys when they came hack from the war.”

“There's plenty of opportunity for the future. Opportunity is not the challenge. Ensuring that all of the new team members we will hire stay true to our mission and values as we go about seizing that opportunity is the challenge."

"We must recruit and reward team members at all levels. Good and passionate people who embrace the culture and our core values. Once again, company culture is the standard against which Tractor Supply will grow its people.”

"There's a 20/60/20 rule at work here," says Wright. ‘Twenty percent will readily get it and adopt the culture. Sixty percent will eventually get it. And twenty percent will resist it and may, in fact, sabotage it.’ Many companies make the mistake of trying to win over resistors. But the resistors need to be ferreted out and sent packing. The time that would have been devoted to them is far better spent praising the early adopters.

"If a manager doesn't fit our culture, we talk, coach, and provide a chance for change. If there's no change, then we release the individual to be successful somewhere else. We do this regardless of how strong the individual's performance.”

Hiring to culture also puts team members in a better position to live up to their shared mission of working hard, having fun, and making money.”

Culture & Stories

“I've come to realize that culture stands as the linchpin for a business's success - build a good culture and the sky is the limit. Tolerate a bad culture and the future will likely be grim.” Joe Scarlett

“The Tractor Supply story is such a remarkable and compelling one because it is the story of a brand and a culture and a business that has proven itself by being successful...twice.”

“Beyond the obvious differences of size and scope and sophistication between the store as it began back in 1938 and as it is today, there are some powerful similarities in the principles at work, then and now. Principles and a culture that appear to have been abandoned when the company collapsed as a part of the conglomerate culture of the 1970s.”

“At Tractor Supply, we know where we came from. We will remain humble, frugal, and passionate. We'll stay true to who we are and tightly focused on what we do.”

While the company's mission, values and core business will remain consistent, other things will continue to change at an increasingly accelerated rate.”

"What got us to $1 billion is the same thing that will get us to $2 billion and beyond - our values, our culture and our passion. That's our foundation, and it's strong enough to support a far bigger company than we are today."

“‘At sixty-five years, we're really just an adolescent in terms of our development,’ Wright explains. ‘We were a very small, conservative company for a long, long time. It gave us time to build a company and forge a culture.’ In fact, it gave the company time to forge that culture not once, but twice. Only in losing hold of it once was its value realized. Sustaining that culture, holding onto that one precious link to the past, is the critical first step in the future of Tractor Supply. ‘I don't think people realize how fragile a culture is and how important it is to sustain a successful culture once it is in place.’ Wright says. Ours has been a springboard to our recent success and will only grow more important as the number of stores and team members, increases and our speed to market accelerates.’” 

The folks at Tractor Supply love to share stories. The company's oral tradition is a natural given the fact that folks who live on the land welcome stories. And at Tractor Supply, sharing stories has become an important part of the company's culture - through e-mail, voice mail, speeches, annual reports, the company's intranet and Internet sites, the pages of the internal news-paper.”

Tone from the Top + Optimism

In a leadership role you set the tone and, importantly, your actions as a leader define the culture in your unit. If you pad your expense reports or send out overly critical communications, you’re setting a negative example. But when you display an upbeat attitude, you will soon find out how contagious it can be. Your actions have a direct impact: Typically, a positive culture with high morale leads to more productivity and less turnover.” Joe Scarlett

"Culture is fragile and the team is always looking to its leaders to see if they blink."

"Joe is a very inspirational leader. You know, a lot of CEOs of billion-dollar companies fly in private airplanes, go into a store in a suit and tie, and give the store a white glove finger test and intimidate people who work in the store. Not Joe. I mean, Joe comes in a Ford rental car, and he wants to speak with every team member who's in the store. He asks them their background, he talks to them, he takes notes, and he remembers people. And it's all genuine."

Copy Ideas

Wal-Mart and Southwest Airlines are the two companies that Joe most admires. Their cultures and business approaches struck a chord with him early on. ‘We're real students of Wal-Mart,’ Joe said.”

Tailwind

“Tractor Supply is deeply tied to American culture. Its recent growth has mirrored a cultural phenomenon in the country - the return to traditional values and the land and a renewed interest in the things that live on the land. For farmers, ranchers, hobby farmers, rural folks, and horse people, Tractor Supply seems to have become the unofficial home office for the self-reliant lifestyle.”

Fun

Tractor Supply has never taken itself too seriously and has always known how to have fun. Fun filters its way throughout the company.”

Having fun was part of Tractor Supply's early company culture. It still is.”

Under the Radar

“Tractor Supply, at its best both in the beginning and today, has been successful because it's hitched its star to a niche. It did what it did better than anyone else. It's stayed ‘out of the headlights of the big box retailers,’ as Joe likes to say. Tractor Supply was making money in its first months of operation because Charles Schmidt had discovered a niche.”

Stay Focused

“[Tractor Supply] continues to be successful today because Joe and the team continue to develop, explore, re-invent, tinker, test, but always within an understood and defined niche. In fact, the company lost its way when it tried to be everything to all people instead of being more and more what people had come to rely on from its farm and ranch store friend.”

Summary

Tractor Supply's story underscores essential principles: maintain focus on a defined niche, empower employees, listen to customers, and embrace continuous innovation. Its success as the largest rural lifestyle retailer in the U.S. is a testament to the power of culture and values in driving long-term growth and customer loyalty. Businesses and investors alike can draw inspiration from Tractor Supply's journey and learn that staying true to their core strengths and values is the key to overcoming challenges and achieving long term success.

Sources:

'Work Hard, Have Fun, Make Money.’ Nelson Eddy. 2004.

Joe Scarlett’s website.’ Editorials, Book reviews.

Further Reading:

Tractor Supply: A Portrait of a Compounder as a Young Company,’ Eagle Point Capital, 2020.

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Learning from Dollar Tree's Macon Brock

"Everybody loves a bargain." These simple words encapsulate the essence of Dollar Tree, a retail empire that has thrived over more than three decades under the strict devotion to the principle of providing affordable goods to the masses. From humble beginnings, Dollar Tree, led by its visionary founder Macon Brock, transformed from five tiny stores of closeout wares tossed in bins, to a half-billion-dollar company in just a decade.

In the early days, Dollar Tree faced skepticism and even laughter from mall developers. They scoffed at the seemingly absurd idea of selling products for a mere dollar. However, like Henry Ford in the automobile industry, Dollar Tree sought to bring scale to the dollar-store concept, making quality products accessible and affordable to the masses.

What truly set Dollar Tree apart was its unwavering commitment to selling everything for a dollar. While other chains with "Dollar" in their names deviated from the original concept, Dollar Tree stuck to its price point, maintaining consistency and building a unique identity. The company's success rested on its ability to find merchandise inexpensive enough to sell at this price, turning the retail world's traditional model on its head. By adhering to this idiosyncratic business model, Dollar Tree created a niche in the market and captured the hearts of bargain-loving consumers.

Central to the businesses success was the belief in seeking ideas from all employees. Macon Brock and his team encouraged independent thought and initiative, regardless of the source. They recognized that innovation and improvement often came from those with an up-close view of day-to-day operations. By fostering a culture of open-mindedness, Dollar Tree continuously embraced change, avoiding stagnation in a rapidly evolving retail landscape.

Dollar Tree vs S&P500 1995-2023 [source: Bloomberg]

The exceptional growth of Dollar Tree relied heavily on its people - the company’s most significant competitive advantage. Dollar Tree focused on maximizing efficiency in moving merchandise, controlling costs, and providing excellent service. While many retailers neglected the bottom end of the market, Dollar Tree defied expectations by offering quality products at an unbeatable price, exceeding customer expectations and building customer loyalty.

Dollar Tree's success story unfolded under the radar, thriving in a niche that had been overlooked by larger chains. The dollar-only concept allowed the company to grow without disrupting competitors' businesses.

This remarkable journey of Dollar Tree is told in the book, ‘One Buck at a Time - An Insider's Account of How Dollar Tree Remade American Retail.’ Within this captivating book, Macon Brock shares his remarkable story, recounting his earlier challenging experiences in the toy retailing industry and leading up to his resounding triumph building a ‘dollar’ store business. Dollar Tree's success serves as a testament to the transformative power of a simple idea executed with dedication, intelligence, and a genuine desire to make a difference. I’ve included my favourite quotes below.

Military

“At the time, I probably didn't appreciate the effect [my military] training had on me, but I certainly do now. It remade me - how I related to people, how I made decisions, how I handled the unexpected, both good and bad. My style as a leader is based on the principles I learned there. Many of today's top American business executives are Basic School graduates. That's no accident. It changes you.

You come out of Quantico with conviction. You know what you have to do, and you know how to get it done. Looking back, it occurs to me that college didn't teach me anything about life, just how to learn. Basic School taught me how to live.”

Culture & Family Feeling

“We wanted a home that fostered communication among different pieces of the operation. We wanted a certain level of informality, an atmosphere that encouraged everyone to mingle. We wanted it to feel like a small, family run business - intimate and friendly - but to work efficiently.”

Obliquity

We are not simply in the business of making money. We still hew to the idea that to be good operators we first have to be good.”

Crazy Idea

“The mall developers gave us a listen [in the early days], because we'd developed a reputation as good operators with K&K [Toy stores.] Then they laughed in our faces. They thought the idea was crazy. "You're going to sell stuff for a lousy dollar?" they asked. “Forget about it.”

Copy Ideas

“Not surprisingly, once we got started, the Everything's A Dollar folks were unhappy with us. They accused us of ripping off their idea. I can understand why they felt that way, but the charge was off the mark. We ripped off what they wanted to be. Not what they were.”

I'm no genius. I didn't come up with the dollar-store idea and can't claim any flashes of brilliance that transformed one tiny store into a national chain.”

“We saw an opportunity. We hoped to occupy the same role in the dollar business that Henry Ford had in the car business. He didn't invent the automobile, but he made it available and affordable to the masses. We wanted to bring scale to the concept, which no one else had done.”

Idiosyncratic Business

The whole business came down to that single fundamental idea (of selling everything for $1.) The rest of the retail world went out and bought a bunch of stuff to put on shelves and figured out what to charge based on what they’d spent. We did the opposite. We knew what we’d charge. We just had to find merchandise inexpensive enough to sell for that price.”

Of the three big American chains with Dollar in their names, we're the only one that actually sticks to that price.”

What we chose to sell in the stores and our ability to stick with our price point regardless of what was happening in the world, that's what made us truly remarkable and set us apart from any other retailer in the country.”

Seek Ideas from All Employees

We try to encourage ideas from our associates on just about any topic. When we improve some aspect of our stores, the idea almost always comes from someone with an up-close view of our day to day habits. We try to promote independent thought and initiative in our people.”

We were always open to new ideas, new and better ways of doing things, and it didn’t matter whether they were mine or Doug’s or a truckdriver’s. If they were good, they were good.”

Change

In retail, if you’re not changing, you’re dying. We have to strive to stay fresh, to keep surprising our customers. We can’t make that happen by embracing the status quo, even for a minute.”

Evolution

“Your local Dollar Tree didn’t materialise out of nowhere. It’s the product of a long evolution that began among the popcorn, toys, and fish tanks of that Wards Corner five-and-ten. It embodies what we learned, often the hard way, during our long apprenticeship in the toy business. It testifies to decades of sweat, moxie, and discipline from a dedicated group of people with a shared sense of mission, people who truly believed that if we did the right thing for the right reason, we’d succeed – and who proved that belief true.”

Return on Incremental Capital

The first five stores set a pattern that has held for Dollar Tree ever since. Every store paid for itself within its first year of operation… enough to cover all the costs of building out the space, keeping it full & paying everyone involved in opening & running the place.”

“Most of our stores did far better than simply pay for themselves in their first year. Some earned enough to damn near pay for a second store.”

Competitive Advantages

The biggest key to our rapid expansion, far bigger than any other factor, was our people.”

Our ability to maintain the dollar price point depended to a large degree on maximising the efficiency with which we moved merchandise from the factory to the shelf - depended on controlling costs, combining tasks, and boosting speed and service.”

Retail is not complicated. Those who do it well do it through people.”

Before we came along, the dollar had dwindled in significance. A buck no longer bought many candy bars, let alone a cup of coffee. Fact was, no one in American retail gave a damn about the bottom end of the market, and no American shopper expected to find anything of quality for a single dollar.”

Exceed Customer Expectations

Such are the deals that Dollar Tree provides its customers every day. They defy credulity. They seem to defy common sense. Yet the company's stores maintain one of the highest profit margins in the business.”

That's the key to the company's success. We can absolutely floor our customers with the prices we offer and still generate a tremendous income. We don’t have to make a killing on each item, just a healthy margin. Which is another way of saying we didn't get here by being greedy. We got here by being smart.”

We aimed to surprise and delight our customers, to do right by them. To make their lives just a little better. We could have set out simply to make a lot of money, and perhaps we would I have. But had that been our sole mission, I don't believe we'd feel nearly as good about the experience as we do.”

Under the Radar

The dollar-only concept enabled us to grow successfully among much larger chains without getting into a serious spat. We didn't hurt anybody's business. We just found a niche nobody had exploited on a large scale… Considering how well it's worked out, it's a little surprising that no new national players have come along to challenge us as dollar-only merchants.”

Keep it Simple

We'd reached a thousand stores by keeping everything as simple as possible.”

Tone from the Top

“Who, after all, knows the business better? In the course of the company’s history, the founder has done everything from buying paper clips and mopping the floors to devising long-term strategy. And perhaps more importantly, he embodies the vision everyone in the work force has shared, the goals towards which everyone has laboured.”

No one’s personality is as visible, as influential, as that of the man or woman at the top. That person is ideally symbolic and a real leader in the company’s culture; he’s the cross between a car’s hood ornament and its driver. He gives the business a face. He’s shorthand for the brand. And he has a tremendous role in charting its course.”

“Doug, Ray, and I had always managed for the corporation. We’d never cheated, never charged things to the company for our personal benefit.. We treated ourselves as employees of the company. The same went for the high officers who’d worked for us over the years. None of us took goods without paying for them - not so much as a polyresin Santa figurine. That did not go unnoticed. The officers lower in the company’s hierarchy had adopted that style as their own, and their charges had followed them. The whole culture was straight-up.”

“We made one decision I thought was particularly important: most of the building’s window’s would be shared by all. Only top management had private offices, and only five of us had offices with windows. In fact, the building had only one corner office.”

Ordinary People doing Extraordinary Things

Ordinary people doing extraordinary things. I believe you should hire people who are smart and driven to succeed, then empower those people. Trust them to achieve. Trust that they’re honest. They’re usually worth it, and if they’re not, you’ll figure it out soon enough.”

“Towards the end of my career, I was fond of saying we were ‘ordinary people doing extraordinary things.’”

Collective Effort and Long Term

Every member was essential to what we created, and everyone lived and worked by principles that we came to value together. Do your best. Do the right thing. When in doubt, choose the solution that works best for the long term.”

What made the difference, and made the company, was collective effort. We all - from buyers to warehouse workers, store managers to computer whizzes, accountants to payroll clerks - were the creators of Dollar Tree. We shared a sense of mission.”

Value, Respect & Empower Employees

To a large extent, those people in the field are the real story behind Dollar Tree's success. We try to treat them respectfully & honestly. We try to pay them decently and to provide them with good benefits so they'll choose to grow with the company. We try to catch people doing something right, and praise it.”

“Tom really paid attention to the needs of his people. Until we grew to hundreds of stores, he knew the name of everyone of our store managers and something about their backgrounds - where they came from, what they’d done.”

We were building this company, Doug and I, with no firmer idea of how to succeed than most of the people we hired to help us. They’d ask me questions, and I’d tell them, ‘Don’t ask me how to do it. I’ve never done it either. Just go do it, and I’ll have you're back. We’ll figure it out.”

We’ve found that when we give [our associates] the room to do what they’re capable of doing, they almost always pleasantly surprise us. You can’t make people do anything; they have to want to do it. So if you communicate with them openly, and share information, and encourage them, coach them, and train them, they’ll perform.”

We train our managers to ‘catch people doing something right’ - to praise them, encourage them, show them how important they are to the company's success. Because without question, they're the most important assets we have.”

We've always tried to give our people a way to share in our success.”

“We could have looked after our own people poorly, could have paid our sales associates and warehouse teams the minimum, without benefits, and not bothered with performance bonuses and investment options. But we didn't do that.”

Get out the Way

Among the important lessons I learned [in the marines] was that effective leaders knew when to get out of the way. I trusted my sargeants to do their jobs, and they didn’t let me down. In the marines, as in the business world, micro-management is a waste of time and talent.”

Appearances

The first thing that should surprise and delight customers on entering a Dollar Tree is the clean, bright, and well organised look of the store.”

Training

“To keep up with our need for well-trained managers, we took a page from McDonald’s and ran almost three hundred trainees through an education program we called Dollar Tree University.”

Start at the Bottom

We were a company of diehard loyalists, many of whom had started as teenagers stocking shelves or loading trucks and now ran the show.”

Do the Right Thing - Golden Rule

Our success has always seemed to me the result of trying to do the right thing for the right reason. Those aren’t just words. I reckon we could have bought cheaper, less worthy stuff on higher margin on our buying trips and offered it for a dollar, and our customers would have been none the wiser. But we didn’t do that. We strove to treat our customers as we’d want to be treated – and that meant getting the best quality we could afford.”

Acquisitions

“As with most of the acquisitions we’d make in the years to come, we got more than just real estate and market share when we bought a company - we got smart people and their ideas, if we were willing to listen.”

“… you can put two companies of equal size to the same task, and it won’t take long to see that their success or failure turns on elements that are few in number, and entirely human: their commitment to the mission, their overall morale, their collective determination…

Sensible Growth

“Before we signed a lease, we made sure the numbers worked for the long term. We didn't open stores willy-nilly; we controlled our growth. One rock-steady rule was that we wouldn't outrun our infrastructure. The other guys played a looser, faster game…. In sum, what the other guys lacked was discipline, and it proved their undoing.”

Competition

Competition, fair competition, is good for any company. It invigorates. It encourages good business practices.”

Dollar Concept

“Of all the questions I've been asked about Dollar Tree over the years, the most persistent by far is, ‘How long do you think you'll be able to keep the price point at a dollar?’ Even now, with the company's thirtieth anniversary behind us, people can't believe we can stick with it indefinitely.”

Personally, I viewed the dollar-only concept as sacred. It was everything… Ditch the dollar, I believed, and we'd surrender our niche. We'd also damage our negotiating position with the very vendors who were bitching about our price point, because as things stood they knew what price they had to meet before we would or could buy from them. They knew we had no wiggle room… Most importantly, we'd lose the element of surprise we had over our customers, who would not be quite as amazed at the goods we sold if they were priced even twenty-nine cents higher.

On top of all that, I was confident that the merchandise we'd sell at $1.29, or two bucks, or even three, would not be appreciably better than what we were already offering for one. I devised an experiment to test my thinking. I sent Alan Wood to New York with instructions to buy merchandise we could sell for one dollar, for two dollars, for three and five, and to bring back a sampling of good at each level. He returned, and we spread all the booty on a table and asked people in the office to pick out which items should go in each pile. They couldn't do it. Everyone was shocked.

It was impossible to tell the difference between an item we could sell for a buck and others we might charge three or even five times as much for. So how could a customer tell when she got a good buy on something? She couldn't - and she couldn't tell when she paid too much either.

That told us that the magic of our business model was having everything priced at a dollar, so a customer had no doubt, none at all, that she was getting a bargain. At a dollar for everything, the thought never occurred to her that an item might be overpriced. How could it be?

Another piece of magic that the dollar price point brought was that when a customer walked into our store, she could shut off her brain. She didn't have to think, didn't have to calculate how much she was spending. All she had to do was count ‘One, two, three, four, five, six. I have six items, and I have six dollars. I can buy this.’ Whether or not she was on a limited budget, it made the transaction as easy as spending money can be.

That little experiment made up our minds that we had to stick with a dollar. If someday we were forced by circumstance to shift it, we'd do so, we decided.”

Quality

We always tried to buy the highest-quality stuff we could afford. If we were able to beat our margin target on one item, we'd sometimes use the extra cushion that gave us in the overall margin to buy another item of better quality than we'd initially considered. Water guns, for instance. We had a two-pack, which was an okay seller. If we wanted to really wow the customer, we'd make it a three-pack. It might go from a forty-cent first cost to fifty cents, but it still fit within our overall margin, so we'd do it. If I beat my target (while sourcing goods), I could come home and be the hero. But more often than not, we decided not to try to beat the budget - we'd meet it instead, and shoot for better quality.”

Retailing Tips

"One thing did not change as our stores grew up: we continued to emphasise the element of surprise, continued to bring in merchandise of such quality that our customers could not believe we were selling it for a dollar. It was exciting for the people working in the stores, too. They never knew what was coming off that truck. Even with better-defined categories, we thus preserved Dollar Tree's treasure-hunt appeal. From week to week, people never knew what surprises might be waiting."

“From early on, we had three tests for merchandise. First, and most obviously, it had to sell for a dollar, so it had to have a "first cost" of considerably less--meaning sixty-five cents or so, tops, and as a rule considerably less than that, before tax, shipping, and such. Second, it had to have a perceived value of higher than a dollar, so anyone encountering it in our stores would be surprised it was priced so low. They'd reasonably expect to pay more. The third test was that it had to be of some quality, some value. It had to be something people would want. It couldn't be junk. Otherwise, we observed few rules. Random, serendipitous, whatever, we'd buy it, whatever it was, in any quantities we could.”

What should you put on the shelf? That's the key. If you don't get that right, it doesn't matter what else you're doing. The merchant is the most important person in a retail company. You cannot survive without a really great merchant. What he buys is key."

We went shopping around the world for merchandise without markups. The world had never seen anything quite like it. Buyers for Walmart and Kmart weren't getting in a car and driving for hours on dirt roads to find these rural factories. They weren't as hungry as we were, or as hell-bent on going to the source.

We were the Indiana Joneses of retail. We went to Italy to buy plastics, mostly kitchen and household items with modern designs and interesting colors. We went to India and bought hand-carved soapboxes and figurines made of soft stone. We found candy and cookies in Argentina. We bought handicrafts from Indonesia, which didn't have any manufacturing capability but had labor aplenty and could turn out merchandise in bulk. We went to Thailand in search of rawhide dog chews. Before then, you couldn't buy a dog chew in America for less than two or three dollars.”

Location

Dollar Tree could not have prospered without good locations for our stores. Many a good concept has failed because it opened for business in the wrong place. Real estate has always been a vital component of our success.”

We pulled Dollar Trees out of enclosed malls as our leases expired and moved into traditional strip malls and power centers. The trick was to get a storefront as close as possible to one of the anchors, preferably a variety anchor or a supermarket--a place where shoppers would be going as a matter of course.

That became our strategy: just as a remora attaches itself to a shark to take advantage of the bigger fish's supply of food, we shouldered up to big-box shopping magnets. And the strategy worked. Did it ever! The lower overhead in the strip centers enabled us to experiment with larger stores.”

Wall Street

Wall Street didn't give a damn then about long-term performance, and it doesn't now. It doesn't give a damn about the past or the future either. It focuses only on what's shiny and right under its nose. The market has a notoriously short attention span.”

Summary

Macon Brock's remarkable success with Dollar Tree highlights key factors that investors can learn from and seek in potential investment opportunities. As Charlie Munger wisely stated, "Take a simple idea and take it seriously," Dollar Tree's relentless dedication to providing affordable goods exemplifies the power of simplicity.

Their idiosyncratic business model, sticking to the dollar price point while others focused on markups and different price points, differentiated them from competitors. Dollar Tree's commitment to seeking ideas from all employees fostered innovation and adaptability. Furthermore, their ability to exceed customer expectations while maintaining healthy profit margins proved a highly sustainable long term business model.

In a world where everybody loves a bargain, Dollar Tree's story serves as a reminder to investors to seek companies with a clear and focused business model, a commitment to innovation, and a deep understanding of customer needs. When combined with an empowered, valued and respected workforce, the long term results can be astounding.


Source:
One Buck At A Time: An Insider's Account of How Dollar Tree Remade American Retail, Macon Brock. 2018.



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Learning from Jack Taylor's Enterprise-Rent-A-Car

When comparing the options of renting a Ford, Toyota, or Volkswagen from Avis or Hertz, it becomes challenging to discern any significant differences between them. They all seem like interchangeable commodities, leading many to view the car rental industry as a purely commoditized business. However, the remarkable success story of Enterprise Rent-A-Car shatters this perception entirely. How did this family-owned company become the largest car rental company in the United States, surpassing all of it’s competitors combined? Moreover, what did Warren Buffett see that compelled him to journey to Florida in an attempt to persuade the owner to sell the business? A business he would later lament as 'the one that got away.'

The captivating journey of Enterprise begins in 1948 when Jack Taylor, a freshly discharged Navy Hellcat pilot joined a small car dealership owned by his friend's father. Recognizing the untapped potential within the car rental sector, Jack Taylor presented his boss with a groundbreaking idea—to provide car leasing services as daily rentals.

“The one that got away, Enterprise. I went down to Florida and tried to talk Jack Taylor into selling to Berkshire and he was smart enough not to do it.” - Warren Buffett

Jack Taylor observed that many customers required temporary transportation due to accidents, vehicle repairs, or travel needs, and were seeking affordable options. He recognized an untapped ‘home-city’ market and devised a strategy to cater to individuals, businesses and insurance companies. To bring this innovative concept to life, Jack invested $25,000 of the $100,000 initial capital into the new business, Executive Leasing Company. Jack willingly accepted a fifty percent pay cut, acknowledging that the business's early phase would not generate immediate income.

As the business expanded across state lines, they encountered another company already using the name Executive Leasing. Consequently, a name change was necessitated, and the company adopted the moniker Enterprise, paying homage to the carrier Jack had served on during his time in the Navy.

Taylor's vision proved to be immensely successful. By focusing on exceptional customer service, competitive pricing, and conveniently located branches, Enterprise Rent-A-Car became synonymous with reliability and accessibility in the car rental industry. The company implemented a unique "We'll pick you up" service, offering complimentary transportation for customers to their rental locations—a distinctive feature that set Enterprise apart from its competitors.

[Source: Enterprise Holdings]

Through a combination of strategic hiring, comprehensive training, robust support systems, and a strong emphasis on cultivating a unique company culture, Enterprise Rent-A-Car established a blueprint for sustained success and rapid expansion in the industry.

Today, Enterprise Rent-A-Car stands as a testament to the power of the ‘Confederation of Partnerships’ business model. Harnessing the entrepreneurial spirit, promoting from within, maintaining smallness, encouraging internal competition, exceeding customer expectations, accepting mistakes, embracing technology and seeking ideas from the front line filter through many of the other outstanding businesses we’ve covered.

The quotes below mirror the qualitative characteristics that define other ‘Confederation of Partnership’ structures deployed by the likes of Chick-fil-A, Cintas, Watsco, Discount Tire and Heico. Drawn from Kirk Kazanjian’s excellent book, ‘Exceeding Customer Expectations,’ and the insights of Fred Reichheld, widely recognized as the dean of customer loyalty, their perspectives shed light on the the driving force behind the remarkable success of Enterprise Rent-A-Car.

Obliquity

I didn’t start out wanting to get rich. Making a huge amount of money was just not high on my list. Ensuring that customers were well taken care of and that employees were happy — those were the most important things. I figured if I did those two things well, I’d make money, because I would attract customers willing to pay a fair and decent price for what I was offering.” Jack Taylor

Think customer satisfaction, think employee motivation. If you get those things right, the bottom line will certainly happen.” Andy Taylor

Military Experience

My experience in the Navy convinced me I could do things that I never thought about being able to do and I could do them with confidence.” Jack Taylor

Jack Taylor [Source: Enterprise Holdings]

Idiosyncratic Business

Uncommon success comes with uncommon approaches to business. In a crowded field, you must make your business stand out. This doesn’t mean simply erecting fancy signs or engaging in promotional gimmickry. The fundamentals of the product or service you offer must be genuinely unique. Just looking different from the competition isn’t good enough. The difference has to give you a quantifiable competitive advantage. Enterprise has always tried to be very different from everyone else in the car rental business. The desire to buck conventional wisdom is something Jack Taylor has prided himself in from the very beginning… Enterprise has found many ways to truly stand out in a very crowded field.” Kirk Kazanjian

Behind the scenes Enterprise is fundamentally dissimilar from its major competitors as well. Its rental operation began by serving non-airport customers, a completely different segment of the rental market. It has a unique management and organisational structure, along with an unprecedented compensation system. Its people, are educated, career-orientated, and thrive on being part of a team-orientated entrepreneurial environment. Enterprise is also a privately held, family owned-company, which means it isn’t subject to the same pressures for quick returns and pumped-up profits that much of its competition faces.” Kirk Kazanjian

"[Enterprise] defies the norm in other ways as well: Its prices are as much as 20 percent below typical airport rates; customers routinely get door-to-door service; and branch managers generally earn substantially more than they would at Hertz or Avis." Frederick Reichheld

Operating in the home-city market was clearly unique and unconventional, but it offered several important advantages: It reduced competition, because almost every other rental car company was located at the airport, targeting business travellers. It made the cost of entry and doing business cheaper, since operating expenses were much lower in town. The home-city market also allowed the company to stress its primary differentiator – customer service.” Kirk Kazanjian

“The lesson we learned is that the home-city market is there all year and can be counted on. Business from tourists fluctuate greatly with the seasons and the economy. The incident served as a clear demonstration why it’s important not to sacrifice the potential for short-term easy money at the expense of the long-term viability of your business model.” Jack Taylor

Under the Radar

As the competition fought it out for the business travel market and kept coming up with bright ideas for customer loyalty programs, new Enterprise branches continued to sprout up under everyone’s radar screen. The company’s offices have long been located in unusual places, from strip malls next to Chinese takeouts and Laundromats, to industrial parks and inside of car dealerships. It’s cheap and convenient real estate, and it allowed the company to become the first name stranded motorists – and insurance companies – think of when needing temporary transportation.

As Enterprise discovered, no one wants to go all the way to the airport to pick up a car when they can get it from an office located next door to where their vehicle is being repaired instead. Enterprise decided to earn the loyalty of its customers by showering them with great service rather than awarding frequent flyer points. The major players didn’t seem to take Enterprise seriously. The company’s only competition came from smaller, often poorly funded businesses that quickly fell by the wayside.

For some two decades, Enterprise pretty much shared the home-city market with many small local and regional competitors, with an occasional foray by one of the big-name national brands. Those competitors with centralized management structures had trouble in the fluid world of home-city car rentals. Jack Taylor’s well incentivized, autonomous management teams, by contrast flourished in this environment.”  Kirk Kazanjian

Culture & Family Values

A corporate culture with family values at the core.”

“Enterprise Rent-A-Car revolves around our customers and employees. The values of our culture have fueled our success year after year—for over half a century. This means conducting business with integrity. Being honest. Working hard. And never forgetting to have a little fun along the way.”

Ideas Close to the Customer

"We have this belief at the corporate office, that the best ideas come from the field, where people are interfacing with customers everyday. It's another reason we start everybody at the bottom. Frankly, we have our best ideas coming from the field now everyday." Andy Taylor

“The most innovative ideas on how systems should perform come from those employees who are actually out there directly serving our customers.” Andy Taylor

Confederation of Partnerships

"The reason we have been able to grow so fast for so long is that we aren't really one big company; we are really a confederation of small businesses, a network of entrepreneurial partnerships. We could never have achieved the kind of success if we were trying to make all the decisions at headquarters." Andy Taylor

[Source: Enterprise Holdings]

Enterprise is akin to a franchise operation in the way it has structured its global business, with one headquarters at the top and hundreds of small self-run businesses below. Unlike a traditional franchise, however, the employees charged with operating these branches are not required to put up any kind of upfront investment. Like a franchise, however, the ‘owner-operators’ are paid based on profitability of their individual units. ‘I like to think of all these groups as subsidiaries of the parent,’ says COO Pam Nicholson. ‘As we continue to grow, we break our operations into new groups. Even though we’re a big company, we like to run it as a small business, giving managers the autonomy to make decisions that are close to home.” Kirk Karzanjian

I saw the power of our business model of having this highly incentivised confederation of branches with a common set of values and getting things done as small teams. I was sold right away on the fact that this could become a national – and perhaps even – a global company.” Andy Taylor

Maintaining Smallness

"The branch office network at Enterprise Rent-A-Car obviously reflects Andy Taylor’s belief in small teams with local leadership. His company consists of more than 4,400 of these teams, a number that is expanding at the rate of nearly one a day. One decision did get made at headquarters, however. Whenever an Enterprise branch grows to a specified size (usually between 100 and 200 cars), it is split in two and a new branch manager is appointed to the new location. Branch managers who successfully grow their branch receive favourable consideration for the next promotion; rather than bemoaning their loss of revenue, therefore, they continue to expand their business as rapidly as possible. Even in new airport locations, which are larger than the existing home market locations, Taylor keeps branches much smaller than those of the competition." Fred Reichheld

"The drive toward simplicity is evident across the board at Enterprise. Whenever a promising new business opportunity comes along, it is quickly spun out as an independent entity. For example, Enterprise’s used-car sales business was split apart from the rental branch system in its infancy, its management and profit-and-loss accounting kept separate from the start. This way no manager has to choose between growing used-car sales and growing the core rental business; there is a separate manager to focus on each mission. This approach provides more entrepreneurial incentive and enables the rapid growth of new businesses without sapping the strength of the core rental business." Fred Reichheld

"By assigning the used-car business to a separate set of management teams, Enterprise has created many additional management opportunities for its workforce. The energy and creativity of these separate teams have helped build Enterprise into the largest seller of used cars in the United States, without draining energy from the expansion of the core rental business, which continues to grow and divide at rates more commonly observed in petri dishes than in the car rental industry." Fred Reichheld

Enterprise’s operating structure consists of groups, regions, areas, branches. The ‘group’ is managed by a general manager, who overseas the ‘region,’ ‘areas,’ and ‘branches’ underneath. Each group is like a mini division of the entire company, with its own rental, human resources, accounting, and remarketing operations.” Kirk Kazanjian

Loyalty, Repeat Business & ‘Word of Mouth’

"At Enterprise, loyalty is everything. If we don't satisfy customers so that they will come back, we can't build the business. If we don't have happy, well-informed employees who feel bonded with the company's success we won't deliver the kind of excellent service that satisfied customers. Loyalty has been the key to Enterprise's success." Andy Taylor

Repeat customers are the quickest way to build a solid business.” Jack Taylor

Enterprise’s commitment to winning repeat business is what largely differentiates the company from the rest of the rental car industry.” Kirk Kazanjian

Offering to resolve problems the moment they are brought up can frequently transform an unhappy customer into one that is completely satisfied. It can also turn someone who never wants to do business with you again into a loyal fan.” Kirk Kazanjian

“The company was built gradually, customer by customer, with heavy emphasis on building relationships and generating both repeat business and word-of-mouth referrals.” Stan Burns

Exceed Customer Expectations

Put customers first and employees second, and profit will take care of itself.” Jack Taylor

“Over the years, Enterprise has learned that there are six primary reasons people will stop doing business with you. The biggest reason: 68 percent go elsewhere because of the poor way they were treated by employees of the company. Successful retention, therefore, means building personal relationships with customers with the goal of keeping them for life.” Kirk Kazanjian

At Enterprise, having “satisfied” customers isn’t enough. When you exceed people’s expectations and bring them to the “completely satisfied” category, they are at least 70 percent more likely to do business with you again.” Kirk Kazanjian

Enterprise knows it must make a valiant effort to bring customers to that top-level [satisfaction] box, since the cost of not doing so is so great. ‘We don’t see top-box customer satisfaction as an extravagance,’ Andy Taylor adds. ‘Rather, it’s the cornerstone of our business model.’ Kirk Kazanjian

Enterprise-Rent-A-Car proved by tracking both survey results and subsequent behaviour that completely satisfied customers are three times more likely to do business with you again than those who are somewhat satisfied.” Kirk Kazanjian

“Enterprise found that people were just as interested in good service in Europe as they were everywhere else. After all, good customer service knows no boundaries” Kirk Kazanjian

Every [Enterprise-Rent-A-Car] branch is even required to commit part of its operating budget to writing off losses involved with making whatever amends are necessary to keep a customer happy. It’s what known as the customer satisfaction account. From the day they hit the counter at the branch, our people have the ability to give away something if they need to without getting any additional approval.” Kirk Kazanjian

The most successful leaders walk in every morning asking, “How happy are our customers and what can I do to help?” In addition, they hire smart people and allow managers and employees in the branches to fix problems on the spot. In other words, they give each individual the power to make things right with the customer.” Kirk Kazanjian

“When you think about it, we’re actually not in the car rental business at all. We’re in the customer satisfaction business. And that’s a trait we have in common with every successful service company, large or small.” Andy Taylor

“The key contributor to the company's success with the insurance industry is that Enterprise is not just a rental car company. "We provide solutions and reduce the costs associated with the rental process," Andy Taylor says. "We offer a sophisticated value proposition to our customers in what is otherwise a commodity-driven business." Kirk Kazanjian

Business is People

People are the critical factor in making our business succeed.”

It’s the people that make any organisation a wonderful, service oriented company.” Kirk Kazanjian

Value, Reward & Empower Employees

"New hires at Enterprise start at pay levels 25 to 50 percent higher than those of the competition, levels that can grow at 20 percent annually for strong performers." Frederick Reichheld

If you are successful at Enterprise, you will be paid more than the competition could ever think about giving you.” Andy Taylor

If I give someone a piece of the action or a bonus based on profits, they are going to do a better job everytime.” Jack Taylor

Andy Taylor [Source: Enterprise Holdings]

A major difference between Enterprise and our competitors is that their business is cars and ours is people. They focus on building their fleet of cars; we focus on building our employees’ careers.” Andy Taylor

“Enterprise’s unique structure of giving entrepreneurial freedom and sharing profits with employees has created incredible worker loyalty, fostered innovation and produced impressive results. What the company has learned over the years is that happy employees make for happy customers.” Kirk Kazanjian

Few do as much as Enterprise to truly allow employees to behave like and be compensated as owners. This feeling of entrepreneurship spurs everyone at the company to perform at their highest potential every day. And while the approach and incentives Enterprise uses might appear on the surface to be more costly than necessary, the company’s innovative pay-for-performance plan is really what has made it so successful for such a long time.” Kirk Kazanjian

“Employees reaching the assistant manager level begin to receive both a base salary and a cut of the profits from the business. Indeed, Enterprise pays out almost 40 percent of all company profits to employees. While most companies see the payroll as a drag on the bottom line, Enterprise has always thrived on spreading the wealth.” Kirk Kazanjian

“At most companies, people are always looking up on high and asking, ‘What do you want me to do?’ We take another path. We look at our people and say, “Do the right thing for your customers and your teams.’ We let them figure it out.” Andy Taylor

Uncapped Earnings

There’s no such thing as our people making too much money in our book. Employees making lots of money are legend at Enterprise because of our structure, but the company’s own profitability has grown in line with this.” Doug Brown

Some people in the company make more than $1 million a year. Does it bother me that we’re paying so much? No. I think it’s wonderful, because in order for them to get that $1 million, if they are on a 10% bonus plan, they’ve got to be generating $10 million for the business.” Jack Taylor

“Let’s say you make $100,000 for the business and I give you 10% of that as a bonus, or $10,000. By that logic, if you make us $1 million, you get $100,000. Would I rather have you make the extra $10,000 or $100,000? It’s obvious. I’d much rather pay you $100,000. The more you make, the more the business makes. Why wouldn’t I want that to happen?” Jack Taylor

Don’t Change the Goalposts

Once you strike a deal with employees, don’t break it for any reason. In a well-structured pay-for-performance system, revel in paying big bonuses to workers.” Kirk Kazanjian 

We believe a deal is a deal. You’re helping us drive this success. Therefore, we’re going to compensate you like we said we would five or ten years ago, on the same percentage.” Andy Taylor

Business Owners

Business owners care more about the performance and longevity of their company than anyone else. After all, their livelihoods, reputations, and futures depend on the operations success. Few do as much as Enterprise to truly allow employees to behave and be compensated as owners.” Kirk Kazanjian

Separate Profit Centre

"Each branch, though company-owned, is a separate profit centre, structured to operate as an independent, entrepreneurial business. This structure, which Taylor calls a ‘Confederation of Partnerships’, simplifies the management of growth, and he acknowledges it as the most critical feature of his ongoing strategy. It does more than enable rapid growth and the flexibility to make rapid changes. It also provides better career development opportunity for employees, who get to run their own businesses much earlier in their careers than in most other companies. Branch managers are responsible for several million dollars’ worth of assets. The high level of financial responsibility creates more rewarding jobs for them and keeps them focused on maximizing fleet utilization. Taylor believes that individual accountability is the basis for a good partnership, and his small, independent branch structure makes it impossible for managers to miss either subpar or outstanding performance." Frederick Reichheld

“A few areas of the business are coordinated at the national level, such as marketing and corporate communications, to ensure the brand is consistently presented across the organisation. Otherwise, the groups are allowed to operate independently down to manging their own profit and loss statements.” Kirk Kazanjian

“Branches, groups, and regions are all responsible for their own expenses. Since compensation is based on profitability, there's a lot of pressure to keep budgets under control.” Kirk Kazanjian

Transparency and Internal Competition

"Enterprise openly shares the financial results and customer satisfaction scores of every branch office and every region. As a result, everybody can compare results and see which branches have developed winning practices, such as a van driver’s practice of offering free soft drinks to customers during summer months and an assistant manager’s allowing customers to return rental cars after hours. Because the compensation of branch and assistant branch managers is based on their branch’s profits, the managers are eager to learn from their peers. Friendly rivalries are encouraged, and it is not unusual to see competing branches wager a dinner on monthly profit reports. Every employee is motivated to find innovative ways to increase customer retention and referrals in order to build enduring relationships with the right kind of customers." Frederick Reichheld

Innovation and the Permission to Fail

“Enterprise’s ownership structure gives employees the freedom to try new things – and make mistakes. At many companies, employees often feel their jobs may be in jeopardy if they try something new that fails to take off as expected. Enterprise executives realise that mistakes lead to opportunities. Employees are encouraged to continually try new things, even at the risk of what may be perceived to be failure.” Kirk Kazanjian

“You don’t want to make anyone accountable by telling them their jobs are on the line for taking these risks [trying new things]. If you do that, they’ll never try anything new. Taking risk is part and parcel of being successful.” Andy Taylor

Managing Risk

Before doing anything, I’d ask,What is the downside risk? How badly can we be hurt? If it goes bad, can we digest the loss without it affecting our future? If we determined we could survive it, and it was something I or others thought was a worthwhile venture, we’d go for it.” Jack Taylor

Start at the Bottom - ‘Promote-from-Within’

"At Enterprise, leaders look to hire people who can grow into general managers, people who within just a few years will essentially be running their own business at a branch office. This career track is appropriately compared to a real-world M.B.A. Everyone starts at the bottom, but no one is treated as a mere underling. All branch employees are accorded dignity and respect; they are expected to dress professionally, and they are paid as professionals." Fred Reichheld

Jack Taylor and Team [Source: Enterprise Holdings]

Enterprise’s ‘work your way up’ and ‘promote from within’ policy assures that every field employee at all levels has been fully immersed in the company’s culture and way of doing business. Beginning on day one, new hires are thoroughly schooled on the ins and outs of exceeding customer expectations.” Kirk Kazanjian

Every field management position gets filled from within. General managers are never recruited straight in from the outside world. Each of Enterprise’s top executives started at the very bottom, learning what it takes to please a customer, one transaction at a time.” Kirk Kazanjian

Long Term

“Above all when it comes to growth, Enteprise believe in running its business like a marathon, not a 100-yard dash. ‘All business experiences ups and downs,’ Andy Taylor says. ‘Those that focus on the long term, instead of temporary setbacks, will be more successful in the end.’” Kirk Kirzanjian

Embrace Technology

"[Enterprise] is an acknowledged leader in electronic commerce, noted particularly for its development of advanced technology that allows insurance companies to authorize reservations and billings electronically." Frederick Reichheld

“Enterprise has long been a pioneer in the use of technology to enhance its operations and improve the overall customer experience. The company discovered long ago that no matter how good your product or service, without the smart use of technology, you'll lose out on the opportunity to make it easy and cost-effective for customers to do business with you.” Kirk Kazanjian

“Above all, technology should be used as a way to drive customer service.. Technology for its own sake is irrelevant. It only matters if it is solving a business problem, resolving a customer service issue, or creating a competitive advantage.” Kirk Kazanjian

Focus

One of the biggest factors in our success has been our ability to say no to opportunities that would pull us off track.” Andy Taylor

"For decades Enterprise Rent-A-Car resisted the temptation to diversify and remained strategically focused on the home rental market." Frederick Reichheld

Golden Rule

“Jack Taylor has built a team of people who share a common foundation in the business principle he lives by - treat others as you would like to be treated.” Stan Burns

Hiring, Diversity & Training

"Since personal skills are so crucial in building good relationships, Enterprise values EQ—emotional intelligence—at least as highly as IQ in recruiting employees." Frederick Reichheld

Most important, you must be surrounded by good people.” Andy Taylor

We look for common traits in all of our people: hard work and entrepreneurship. That’s what breeds success.” Pam Nicholson

Enterprise isn’t looking simply to hire counter clerks to check out cars. The company wants each employee to move up the leadership ladder.”Kirk Kazanjian

For most employees, their job at Enterprise is their first full-time job. Rarely are people hired from other companies (those that are hired from elsewhere, come to Enterprise to perform jobs that require a specialized background.)” Stan Burns

“The Enterprise team only knows the Enterprise way, and only a few have had exposure to the cultures of other corporations. They have never experienced a layoff (Enterprise has never had a ‘downsizing.’)” Stan Burns

“For most new hires, primary training lasts about eight months.” Kirk Kazanjian

Enterprise-Rent-A-Car hires very few degreed MBAs, because it likes to teach the fundamentals of running a business The Enterprise Way, rather than attempting to have candidates relearn what they’ve been taught in school.” Kirk Kazanjian

“The management trainee position represents a unique career trajectory that can literally take an employee from the ground floor to the executive suite in a matter of years.” Kirk Kazanjian

Local Focus

“The objective is to create a workforce in every market that mirrors the diversity of the local community. ‘We don’t set quotas, we say ‘Reflect your local market.’ We want our people who speak the same language, literally and figuratively, as our customers.” Kirk Kazanjian

“Enterprise grew rapidly in Canada, and the managers worked hard to minimize its image as a big, U.S.-based company. Just as Don Ross had done 20 years earlier in Kansas City, the Canadian managers bought cars locally, banked locally, hired locally and participated fully in the life of the community, to demonstrate their local commitment. They drew on Enterprise's knowledge and resources, but theirs was a local presence in the towns and cities of Canada. They immersed themselves in the civic affairs of the towns where they lived and worked.”

"Today 90 percent of the U.S. population lives within fifteen miles of an Enterprise Rent-A-Car branch. Andy Taylor learned long ago the value of organizing his business into small, stable teams with maximum responsibility, flexibility, and accountability. Enterprise can deliver superior service at a profit because employees at each branch have free rein to make the decisions that affect their own customers and the profitability of their unique branch. Although headquarters has initiated important systemwide technology upgrades, Enterprise relies primarily on local initiatives for service and cost improvements." Frederick Reichheld

Appearances

“Dress for success. While fellow salesmen dressed in loud casual wear, Jack Taylor made sure his people always presented a professional appearance, closer to that of bankers. As research later revealed, professionally dressed employees put the customer at ease.” Kirk Kazanjian

“For Enterprise the dress code is deeply linked with the company's history and culture. In the 1950’s Jack had learned that one of the best ways to differentiate himself and his people from the competition was to look different. "If we look different, we’ll act different. I want these people to look like bankers when the customers walk in." Jack was emphatic from the earliest days and he reminded anyone who deviated from the proper style of dress - that appearance does matter.” Stan Burns

Keep it Simple

“Make no mistake, the rental car business isn’t rocket science. As the folks at Enterprise will readily admit, in some ways the company’s meteoric rise is testament to the KISS adage – keep it simple, stupid. The company’s core operating principles are built on the bedrock business values first laid out by Jack Taylor and now carried on by his son, Andy.” Kirk Kazanjian

Headquarters to Serve

"There is a tendency for managers at headquarters to take things away from the field organisation as we get bigger. But I have always resisted that. We should only do things in St. Louis that the branches can’t even come close to doing as well. We believe and preach that the best ideas come from the field dealing directly with customers. The real job of headquarters is to help the branches be the very best that they can be. Outside of our information technology staff, which we consider a strategic weapon, we have a very small group of people here at headquarters." Andy Taylor

“Enterprise-Rent-A-Car actually has a very small headquarters considering the size of the company. Very little of what [Enterprise] do is centralised to headquarters.” Kirk Kazanjian

I regard our headquarters as a massive switching station of ideas." Andy Taylor

Sensible Growth

“Company officers admit they have the financial muscle to grow more quickly, but they want to use the expansion of this business to reward those working their way up in the company instead of bringing in managers from the outside to develop the business as fast as possible.” Kirk Kazanjian

Expanding too fast can negatively impact customer satisfaction, which spreads everywhere and causes reputation problems." Andy Taylor

Keep growth under control. Although it all turned out well in the end, Andy Taylor admits that the company's confidence caused it to overexpand in the early 1980s. "We were growing revenues more than 30 percent a year and sometimes got a little ahead of ourselves," he says. "We put some people into positions where they couldn't succeed and opened branches in the wrong places.” Kirk Kazanjian

"Experts estimate that Enterprise is the most profitable firm in its industry, so profitable that its rapid growth is funded through internally generated cash flow and privately placed debt. Despite the investment surge required to launch it to the top of the industry, Enterprise’s profitability has enabled it to remain a privately held company." Frederick Reichheld

Acquisitions

To date, we've made a decision to stick to our 'organic growth' model. We've decided against growing by acquisition. To this day, when we enter a new market or launch a new line of business, we take a 'greenfield' approach and build it from scratch. That's the only way to ensure that our new ventures remain true to Enterprise's culture and heritage.” Andy Taylor [2007]

Privately Owned

“We as a family have agreed that we want the company to remain privately owned by the Taylor family, with all generations involved in managing it. This gives us a huge competitive advantage. We don't have outside shareholders and are therefore able to run Enterprise in the best way we see fit.”

Our family-owned structure allowed us to take a long-term view of serving the customer first.” Andy Taylor

Wrong Incentives

"Jack and Andy Taylor have learned that paying on profits alone is not wise, because some employees will take shortcuts that boost current earnings but diminish the assets needed to boost future profits. Pure profit incentives need to be balanced with incentives to build long-term assets such as customer and employee loyalty." Fred Reichheld

Summary

From its inception, Jack Taylor laid a strong foundation by identifying a unique market niche, assembling a team of exceptional individuals, sharing the business’s success, fostering innovation at all levels, and nurturing a culture of exceeding customer expectations, which enabled Enterprise to expand its operations worldwide.

The fact that a family-owned business has achieved such dominance in an industry largely dominated by large global corporations is remarkable. Despite the absence of external capital, Enterprise's exceptional long-term growth remained unhindered. The advantage of family ownership allowed them to adopt a strategic, long-term approach, sometimes prioritizing customer satisfaction over short-term gains, thereby ensuring sustained success. Warren Buffett eloquently encapsulates this sentiment, stating:

"Jack Taylor didn't invent artificial intelligence, he didn't do anything that anyone of us couldn't do. We could have entered this business. But Jack Taylor lived by the creed of delighting his customers and working with his people, establishing a relationship with them, so they, in turn, would want to delight the customers. He couldn't take care of every rental car, but he learned how to project himself and his attitude to his fellow man and the desire to make a friend out of every customer. He managed to take very ordinary cars and turn them into this extraordinary business from virtually nothing." - Warren Buffett

"Jack Taylor didn't worry about whether the Federal Reserve was going to tighten or ease, or whether the stock market was up or down yesterday. He didn't worry about the things he couldn't change, but he did focus on the one thing he could change, and that was the customer's experience." - Warren Buffett

Identifying a few business success stories like Enterprise Rent-A-Car can greatly contribute to the success of one's investment portfolio. Little wonder that Warren Buffett was eager to include it in Berkshire’s stable of investments.







Sources:
"
Exceeding Customer Expectations: What Enterprise, America's #1 car rental company, can teach you about creating lifetime customers,” Kirk Kazanjian, 2007.
"Exceeding Customer Expectations: The Enterprise Rent-A-Car Story," Stan Burns, 2007.
"Loyalty Rules!: How Today's Leaders Build Lasting Relationships,” Fred Reichheld, 2001.
Warren Buffett discusses Enterprise-Rent-A-Car,” Goldman Sachs Summit, [watch from 6 mins 20].





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Learning from Cintas' Richard Farmer

Its not something you’ll hear often, but sometimes it’s the seemingly ‘boring’ businesses that deliver the best returns. These are the companies that stick to what they know, making incremental improvements over time and operating at a level that outperforms their competitors. The boring businesses tend to attract less competition, and when the industries in which they operate are dominated by mom-and-pop operators, there can be a very long runway for growth. Industry consolidation drives scale benefits and leads to a widening of the competitive advantage.

While Uniform rental doesn’t sound like an exciting business, the returns generated by the industry leader, Cintas Corporation, certainly are. By 2004, Cintas Corporation had delivered sales growth of 23% a year for 35 years while profits grew at a staggering 30% per annum. In fact, a $100 investment in Cintas Corporation back in 1984 would be worth nearly $60,000 today, a return that dwarfs the $4,200 return from the S&P500 and even surpasses the $16,800 return from Warren Buffett's Berkshire Hathaway.

The Cintas story is the veritable rags to riches story. The journey started in 1929 during the Great Depression when Doc and Amelia Farmer collected shop towels from industrial companies along the Ohio River. They washed, recycled and sold the clean towels back to companies. Doc’s son took over the business, and was eventually joined by his son, Richard Farmer. Richard was a visionary entrepreneur who recognized the potential of the uniform rental market and tried to convince his father to expand into this area. Tensions between father and son rose because of this, and at just 25 years of age, Richard was handed the reins of the business. Undaunted, he propelled Cintas to new heights by acquiring over 200 competitors, expanding into a national footprint, and vertically integrating through uniform manufacturing.

Cintas vs S&P500 1984-2023 [Source: Bloomberg]

Cintas exemplifies the "Confederation of Partnerships" business model, which is also used by successful companies like Chick-fil-A, Discount Tire, and Enterprise Rent-a-Car. This model embraces the entrepreneurial spirit and utilizes the collective intelligence of all team members. At Cintas, every facility operates as a separate profit center, and employees are incentivized through a generous profit-sharing program and company ownership. With an unwavering commitment to exceeding customer expectations and a strong drive for continuous improvement, Cintas has a distinct competitive advantage that is difficult for other companies to match.

The engaging book "Rags to Riches - How Corporate Culture Spawned a Great Company" tells the inspiring story of Cintas, written by the late Richard [Dick] Farmer, who was at the helm of the business for over five decades. Below are some of my favorite extracts from the book. Once again, we can observe the same timeless qualitative features that have been identified in many other successful businesses discussed in previous posts. If you are observant, you will notice that most of the checklist items extracted from the recent study of the National Cash Register Company are prominently displayed at Cintas.

Culture

Corporate cultures separate the winners from the losers.”

“Culture includes common beliefs, ethics, and values. It is the invisible force behind the tangibles and observables in an organisation.”

Corporate culture is the single most important distinguishing factor between greatness and mediocrity. It is a major reason Cintas is different from competitors and other companies. It is our ultimate competitive advantage.”

“The company holds many values sacred - honesty and integrity - hard work - a spartan approach to business - continuous improvement - positive discontent - and going about our business with a sense of competitive urgency. These are just a few of the values included in the Cintas culture and spirit.”

“At Cintas, our culture is no accident. It is our planned approach to business. And every Cintas Partner must be aware of this approach.”

Competitive Advantage

“Ever since my experience in developing the permanent press uniform, I remembered the taste of what it was like to have an authentic competitive advantage. I swore that I would do whatever it took to develop obvious and authentic competitive advantages.”

“Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I'm talking—again—about our corporate culture.”

“Our whole strategy in product development was to come up with new products that our customers liked better. By the time our competitors figured it out, we moved on to the next thing. We've held that edge until this day and we hope to hold it forever.”

Purpose, Principal Objective

Success depends on people sharing a common purpose, counting on one another as partners to do whatever it takes to keep the enterprise growing and healthy.”

Without a guiding principle on which to base decision-making, organisations are doomed to failure.”

The principal objective gives us guidance we need to make decisions in the best interests of our shareholders, our partners and their families.

"The principal objective of our company is to maximize the long term value of Cintas for our shareholders and our working partners (employees) by exceeding our customers' expectations." It was very precise language. For shareholders, we wanted to maximize the value of the stock. For working partners, we wanted to maximize the value of the stock because they were owners through an Employee Stock Ownership Plan (ESOP) and we also wanted to maximize their career opportunities. Growth obviously provides career opportunities. The only way to accomplish this was to exceed our customers' expectations.”

Exceed Customer Expectations

We do not want to just satisfy our customers. We want to exceed their expectations and make them raving fans of Cintas.”

“How have we achieved our phenomenal growth? The answer is simple. We have run our business to satisfy the needs of our customers. We try to exceed every customer requirement every time. When making business decisions we always ask how this decision will benefit our customers.”

Exceeding customers’ and fellow partners’ needs is the simple, overriding business necessity. That is the attitude required to successfully compete and at Cintas, we pursue it with a passion you can feel. We call this attitude ‘Competitive Urgency’ and define it as follows: ‘Competitive Urgency - attending to every detail of our business with a sense of urgency, enthusiasm, professionalism, and thoroughness.’”

Only total customer satisfaction is acceptable.”

“In our organization, the customer is the boss. We have only two kinds of partners at Cintas: those who serve customers, and those who serve the people that do. Our working partners realize that their paychecks do not come from Cintas; they come from our customers.”

Promote & Share Ownership

“I realised that in order to achieve our dream, we needed very talented people. I have always been more comfortable with ‘partners’ than ‘employees’. And so, as I added key people, I saw to it that they were owners and partners in the business.”

My goal was to share equity with people who would stay for the long term. What is important, I thought, is what your piece of the corporate pie is worth, not what percentage of the pie you own. I needed people who could make my piece of the pie more valuable.”

“I continued to provide stock to talented executives who had already joined the company or who were joining… giving them shares in a private company that would eventually be worth something. I wanted them to think of themselves as partners.”

Incentives & The Best Paid Employees

"The general manager’s compensation system that we perfected was very similar to the one I put in place when we set up our first satellite in Cleveland in 1968. A general manager in our uniform rental division would get a salary of $10,000 a year. That’s it. Everything else depended on how he or she performed. They got six percent of their profit after expensing all corporate overhead and local taxes, but not federal taxes. We still do it that way today. While the $10,000 salary is ridiculously low by today's standards, each plant is far larger than originally visualized. So the six percent of profits yields a very nice income. Today, general managers at Cintas are by far the best paid in the industry and in many other industries as well.”

Separate P&L

We decided that each business unit, whether a plant or a branch, would have a separate profit-and-loss statement, which is an unusual arrangement in corporate America. The general manager is totally responsible for that P&L, including personnel. They are running a business. They report to a group vice president, who has other plants reporting to him or her. This vice president also has a modest salary and gets most of his annual compensation in the form of a bonus based on the profits of his or her group.”

Entrepreneurial Atmosphere

The structure of incentives and guidelines helped us maintain a very entrepreneurial atmosphere despite the fact that we were getting bigger. I kept saying to myself, I want everybody to be a Dick Farmer. That may sound like I was letting my ego get out of control, but the point was that I wanted everybody to be in business for themselves. We obviously had to have some centralized rules and procedures, but the goal was to give everyone as much latitude as possible to run their business. As a result we became much more performance-oriented in our compensation system than the vast majority of companies I know.”

Even the top people in the company – the very top – have a program heavily weighted toward performance.”

Smallness & Local Knowledge

Our goal was to achieve economies of scale, but at the same time be attentive to local needs. We wanted each satellite's profit centre to be run by a general manager who had excellent local knowledge, providing the sort of service that only small, local companies can. This would be a classic balancing act. We'd be a big company nationally—but a small company in each locality.”

Hiring and Employee Turnover

High employee turnover became our No. 1 priority and challenge. We had been growing so fast that we were hiring out of desperation instead of hiring meticulously… [We] put together a program to lower our employee turnover. The first thing we had to do was measure the turnover, by location and by job classification. The second thing we had to do was determine the reason some-one left. We did that by calling every single person who left to find out why he or she left. We found the biggest reason people were leaving was because they were bad hires in the first place. For example, we had been hiring people with no transportation to get to work. We also had hired people who lived 40 and 50 miles away from our plants. They obviously wouldn't stay long. So we put together a list of specific hiring criteria. Our hires had to have certain characteristics.”

Fanatic

I had total passion for the business. I always had business on my mind 24 hours a day, seven days a week, whether I was on vacation with my family or whether I was home watching TV. I always had a pen and pencil in hand to jot down business ideas as they came to mind.”

‘Customer Awareness Duty’

“When we first started trying to make sure everyone at the company stayed in touch with customer needs, we met some resistance. So we began putting teeth into it. We decided that no one could get a raise unless they did Customer Awareness Duty every year. That means actually riding on a route with a service sales representative actually servicing our customers or going to a Cintas plant or facility and working with the partners there.”

Anytime anyone does their Customer Awareness Duty, they must write a memo to their supervisor, passing along whatever they learned and any ideas they came up with. It is almost impossible for someone to work with a customer, whether an external or internal one, and not come up with ideas on how to improve things. This process has been invaluable. We've gotten some great ideas through this program.”

People : the Growth Limiter

The major impediment holding us back from faster expansion was our ability to attract managers. .. If we were going to be able to establish a national presence within the two-year time frame, we had to attract talent in a hurry.”

Frugality and Finding Efficiencies

“The Cintas story proves, if there was any doubt, that the real way to build sustainable wealth is to pinch pennies. Work hard. Make sacrifices. Reinvest in the business. And go for the long term.”

“Another ‘Farmerism’ I used was aimed at making sure everyone was as cost-conscious as possible. We should all be on the lookout for barnacles, I'd say. When a new ship is put into the water, it has a clean hull. It moves fast through the water and is very manoeuvrable. It has nothing to hold it back. But if that ship sits in a port for a year, barnacles will accumulate on the hull. It'll slow down the ship. It'll take more power to run the ship than it should. It will become less manoeuvrable because of all the drag. Businesses are just like ships. We have to look for the barnacles. Whether we know it or not, we've got barnacles. Your job is to find those barnacles and scrape them off. Then I'd give examples of barnacles—buying things that you decided you needed 10 years ago and you don't need them anymore. Or having somebody prepare a report that was very important to you five years ago, but now you no longer need it. But they're still preparing it for you. That's a barnacle. People we've outgrown or are occupying positions that are no longer needed—they're barnacles too.”

Intuition & Decision Making

“Cintas means ‘The Uniform People.’ Sometimes when you have a gut instinct among just a handful of key players, you should go for it. Sometimes the intuition of people who are deeply involved in an issue is better than all the research that money can buy. If you wait for all the gears to grind, you might never make a decision.”

Never Satisfied

We are never satisfied with the status quo. We constantly strive to improve the process, the systems, the products and the service. We have a sense of ‘Positive Discontent’ at Cintas - a constructive discontent focused on making things better than they are.”

We created a Continuous Process Improvement initiative for all our plants. We started having brown paper sessions throughout the company. The savings and quality improvement were tremendous.”

“Like everyone else at Cintas, our R&D department had an attitude of positive discontent. Nothing is ever perfect. Nothing is ever good enough. We are never satisfied. We wanted everyone to be challenging and questioning everything we do. So in that spirit, our R&D department told all our suppliers that the first product you sell us will be your worst one- because we'll work with you to make it better.”

Family

“The spirit of Cintas is rooted in its history and family values.”

Ethical and Moral Standards

We live by the rules, we have high ethical and moral standards… We believe business relationships are based on value exchanged between two companies. Service and value generate loyalty and repeat business, not gifts, meals or entertainment. So, we will politely decline gifts, regardless of circumstances.”

Value & Empower Employees

We are humble, and respect the partners on the front line. We view everyone in the company as important. Everyone in the organisation is performing a vital function, contributing to our principle objective.”

We want every working partner to challenge, in a positive way, every aspect of our business, so that we can constantly improve the products and services we provide to our customers.”

“One of the first things we typically did was refurbish the lunchrooms of companies we had acquired. We repainted them. Then we put in new refrigerators and new vending machines… "The old man really cares about our conditions," I could almost hear them saying. "He is a stickler for cleanliness."

Decentralised Decision Making

“Part of our character is the humble realisation that leaders do not know it all. We have learned that when there is a problem, the person who knows most about it is the partner on the shop floor, who actually does the work. Our partners are likely to know far more about the problem and how to solve it, than the supervisor.”

If we are buying new trucks, the partners driving them are involved in the decision. If we are considering buying a piece of machinery, the operators help decide what we’ll do. If we are thinking about a new office procedure, our office partners get involved before we do anything. This kind of input has avoided costly mistakes and earns the commitment from everyone for better results.”

“One enduring lesson that I carried with me through life was that the folks on the line know better than anyone else why a particular quality problem or scheduling problem might develop. Long after I had become an executive, I always went to the people on the front line to get their opinion on how to solve a problem. They usually knew the answer better than their supervisor.”

Emergent Effects

“Our objective is to build a self-regulating organisation with everyone understanding what they should or should not do.”

Optimism

We are enthusiastic! Positive attitudes and optimism are a must in a fast-paced environment like ours… We do not let situations we cannot control cloud a positive approach to our jobs.”

Win-Win

Unless a corporation maximises its value for customers, shareholders and working partners it’s doomed to failure, along with the people who have spent their careers working there.”

Cintas Management System

We created what we call now the Cintas Management System. It consisted of written guidelines on how to handle recurring problems. We went back over the files and notes that had accumulated over the years. We documented the systems that we had developed. We put it all in writing. This may seem like some sort of bureaucratic exercise, but it wasn't. It wasn't perfect at first, but over the years it has become one of the key ingredients in the Cintas culture. Each time we identify a recurring problem, we huddle up to determine the best way to solve the problem. We issue a preliminary policy and invite comment from managers. Then we issue the policy and we expect everyone in the organization to follow it until we change the policy. This practice started way back in the 1960s in response to a very real challenge.”

Stick to The Knitting

There is also commonality among all the things we now do. They are business services, not consumer services. They typically are recurring services, meaning we do them over and over. Most are based on route delivery. As long as we stay in that sweet spot, our expertise in one area can be translated into another.”

Teaching Culture & Hiring

“We began to talk about our character - how people viewed us from the outside and what they thought of us when they met us or did business with us. We began to define our character, which in a word is "professional." We wanted everyone who visited a Cintas plant or saw a Cintas truck or met a Cintas person to say, "Wow. These people are professional." We lived by the rules, we acted with competitive urgency in everything we did, and we had a sense of positive discontent. We weren't grumblers and complainers, but we looked for constructive ways to make things better than they were. So we defined our corporate culture in writing. From that time on, we have had a formal process of teaching corporate culture to every new manager or supervisor.”

It takes about three hours to stand in front of a group of 20 to 30 new people and explain our corporate culture in detail. Defining, documenting, and teaching our corporate culture has had a tremendous impact on our company. People now understand what our culture is and why each of the three elements—the principal objective, corporate character, and management system—is so important. And, among other things, defining our culture has helped reduce turnover. The second thing we did in 1981 was change our recruiting systems. Instead of targeting people between 25 and 35 years of age who had been exposed to other corporate cultures, we decided to go after younger people who were just graduating from college. At that age, they weren't used to any particular kind of corporate culture. This led to the creation of our Management Trainee Program.

Training

“Beginning that year of 1981, we began to hire people graduating from college, putting them through a two-year training program.. We took each new class of trainees and started them as supervisors in the factories and on the routes. We rotated them to new positions every six months.”

“You may accuse me of trying to create a Marine-like environment to shape young people and you wouldn't be too far from the truth. We eventually expanded our efforts to reach out to young people. Today, we hire 350 to 400 people right out of college each year. We also hire many Junior Military Officers. They are a great source of talent.”

“The Cintas Scholars Program involves hiring freshman or sophomore college students as summer interns. After their first summer we invite those students whom we want back to return for the next summer. When they come back, they are given a higher level of responsibility and more pay. At the end of their college career, they have been with us for two or three summers. They know us and we know them. It's tough for any other company to offer them more money than we can because they already have the grassroots experience that we would expect a management trainee to obtain in two years. We are way ahead of the recruiters working for other companies.

Best Team Wins

“The reason recruiting is so important is that business is just like sports. The team with the best players wins. Of course, you have to have the quality of coaching and the facilities have to be top-notch, but the quality of people is without a doubt the No. 1 challenge. Over time, this has shaped our whole culture.”

Acquisitions

I was aware, early on, that our industry would consolidate. It had all the characteristics. It consisted of mostly family-owned companies and there were often two or three such companies in a single city… My strategy was to play a major role in the coming consolidation of the uniform business.”

Most of the owners I dealt with were confronted with one or more of these problems:

  • They were in their 60's and were tired of working every day, but had no successors lined up;

  • They had a son or daughter in the business, but were aware that their offspring weren't strong enough managers to take over;

  • They just wanted liquidity. All were wealthy, but their wealth was tied up in buildings, trucks, equipment and inventories. That was the plight of the entrepreneur;

  • They were second- or third-generation managers who had siblings, but they were not in the business. So they had no way to share the value of the business unless they sold it.

I became very knowledgeable about these problems. I could "speak the language" of these owners.”

Cintas has played a master role in the industry consolidation. We have acquired more than 220 companies.”

The biggest mistake we made in integrating acquisitions was waiting too long to install Cintas management people. Too often, we let the acquired management team take their best shot at making everything click. It hardly ever worked. We were way too tolerant.”

“We were very dedicated to converting the culture of the acquired companies to the Cintas culture. In [most cases], we had to work at meshing our cultures. We had special seminars for the managers of the acquired companies including the corporate culture course. That helped tremendously in opening their eyes to the difference between their culture and ours and showing them the benefits of adopting our culture.”

No Consultants

We created our compensation system ourselves. We never used consultants and paid no attention to compensation surveys. I didn’t really care what someone else was getting paid at another company. I didn’t give a hoot.”

Appearances

“We cannot afford the risk of allowing our attire to leave a bad impression with a customer or prospect. It is important that our appearance impresses people. Appearance is important in other ways, too. We pay attention to house-keeping in our facilities, our trucks and equipment. They are orderly, clean, efficient and businesslike. The plant floor shines. Our desks aren’t littered. We want anyone who comes in contact with Cintas in any way to have a favourable impression.”

Tone From The Top

“I suspect a lot of people think I'm a fanatic, but I see how the smallest actions that top managers take are magnified throughout the company and its culture. If the boss picks up a scrap of paper he finds in the hall, other people will be inclined to do similar things.”

Vision - Buy In

I've always encouraged all of our operating managers to paint a vision for their staff. They should try to communicate the full picture of what they're trying to accomplish. That way, employees are not just doing a job. They're sharing a vision. If they share a vision, a job is more than a job.”

Transparency

“One other thing I started doing soon after Dad gave me the keys was showing our books to employees at the end of each fiscal year. I started having an annual meeting with our top people. We reviewed the sales and profits for the year just finished and talked about goals for the coming year. I told people where we were doing well and what we needed to improve on. Eventually, we graduated to taking space in a local motel to show everybody the numbers. I also started publishing an annual report with black and white pictures. I sent it to my bankers, lawyers, accountants, and employees.

“Dad thought that revealing our financials was stupid. "Everyone will want more money," he said. "Well, we've got to deal with that if they want more money," I replied. "We either have to give it to them or explain why we're not going to give it to them." My philosophy was, "How can you win the game if you don't know the score?"

Harness Technology

“Our industry had been trying for a long time to determine how to make technology work, but Cintas was the first to put all these elements into place. The fact that we began to use state-of-the-art technology as we grew meant that it was relatively easy for us to absorb newer technology as it came along. Other companies that started late had to try to make quantum leaps to catch up. That is highly risky and prone to failure.”

Reading

I was an avid reader of business articles. I read Fortune, Business Week and Forbes cover to cover every time they appeared.”

IPO Pricing - Win-Win

“As we travelled and kept meeting potential investors, my attitude began to change. I was beginning to understand that the worst thing we could possibly do was be too greedy and have people buy our stock, only to see the value decline. I decided I had the wrong attitude about trying to get absolutely the most I could get out of this IPO. I talked to Bob Kohlhepp and he finally agreed with me that the best way to run a public company was to make sure the initial investors have a nice run-up in the value of their shares. That way, we would have long-term, loyal investors. We wanted everyone to have a good deal, not just me.”

Summary

Cintas' success over the last five decades can be attributed to its unique company culture, starting with the committed leadership of Dick Farmer, the type of business manager that Buffett admires. Farmer prioritized a long-term view, focused on the company's core competencies, shared profits with employees, embraced technology, fostered innovation, and empowered his team to exceed customer expectations.

Although manufacturing, renting, and cleaning uniforms may not be the most glamorous occupations, the Cintas story highlights the attractive returns these businesses can generate when you combine superior management in an industry largely protected from disruption. Warren Buffett famously wrote to his shareholders at the turn of the century that he had invested in such "cutting-edge" industries as bricks, carpet, insulation, and paint. ‘Try to control your excitement,’ he wrote. As Ralph Wanger once noted, investors sometimes pay an entertainment tax for stocks with an exciting story, which is worth keeping in mind in your investing endeavours. Riding a multi-decade, multi-bagger like Cintas is as close to the holy grail of investing, and anything but boring!

Sources:
Cintas: The Spirit is the Difference,’ Richard T Farmer, Cintas Corporation 2010.

Rags to Riches - How Corporate Culture Spawned a Great Company,’ Richard T Farmer, Orange Frazer Pr Inc, 2004.

Further Reading:

Ten Years', Investment Masters Class. 2017.


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Learning from Helzberg Diamond's Barnett Helzberg Jnr

What makes a retail business successful? Indeed, how do we measure the success of such a company? Profitability, margins, sales per store? Returns on capital? The number of stores the business operates out of or their geographical presence? Staff retention and company culture? Customer loyalty? You could successfully argue that all of these things and indeed many more comprise the traits that determine their success. But what makes them truly great? What does a business have to do to be so good, so innovative and so successful that it would stand out from thousands of companies and be attractive to someone like Warren Buffett?

These are the things that concerned Barnett Helzberg when he was contemplating selling his beloved family business - the third generation jewelry chain, Helzberg Diamonds. As he walked the bustling streets of New York City one day, he heard a lady call out, "Hey Warren Buffett!" That was enough to catch Barnett's attention. You see, he was a huge fan of Mr. Buffett and had just attended his third annual Berkshire Hathaway meeting in Omaha. He couldn't resist the opportunity to say hello to his idol.

Without missing a beat, Barnett thrust his hand out and introduced himself, "Hello, Mr. Buffett. I'm Barnett Helzberg, of Helzberg Diamonds in Kansas City." In the next 30 seconds, Barnett uttered a few words that would change the course of his family's business forever. "I believe that our company matches your criteria for investment."

Buffett's response was simple but brimming with promise. "Send me the information. It will be confidential." With those words, the wheels were set in motion for a deal that would seal Helzberg Diamonds' fate. In 1995, Berkshire Hathaway acquired the highly profitable chain of 143 jewelry stores across 23 states.

“A lot of companies in the jewelry business do not get good returns on capital. It’s not an industry where most of the participants are prosperous. It takes unusual sales per square foot compared to competitors to succeed in that, and we have one operation that does that in spades at Borsheims, and then a different type of operation that does it at Helzberg’s. The typical jewelry store operation is not a very good business, but we think we’ve got two good operations,” Warren Buffett said in 1995.

Helzberg Diamonds' appeal to Warren Buffett is not hard to fathom. To gain an understanding of what made the company so successful, one need not look far. Barnett Helzberg, the company's former CEO, offers valuable insights in his book, "What I Learned Before I Sold to Warren Buffett - An Entrepreneur's Guide to Developing a Highly Successful Company.” In the book, Helzberg shares the experiences and lessons learned from running a thriving chain of jewelry stores with sales per store nearly twice the industry average. Below are some of my favorite quotes from the book.

Selling to Warren Buffett

My dream buyer for the family business all along was Warren Buffett. I knew we could trust him to keep the headquarters in Kansas City, resist changing the company's character, and retain the jobs of all of Helzberg's associates. It might have been simpler to sell to the highest bidder, but that notion seemed as sensible as choosing a brain surgeon based on the lowest price rather than on talent and reputation.”

Customer Service

Great service exists - fortunately for entrepreneurs it's a rarity. What an opportunity for the ambitious until super-service becomes commonplace (it never will).”

“You can provide outstanding service - and own your customer. It will make everyone’s job more fun. It will build your business. Great entrepreneurs recognise the goal is the total customer experience, not just the quality and price of goods or services purchased or given.”

Exceed your customers’ expectations (under-promise - over-deliver).”

“You must jump very quickly on the wrong kind of customer service and promote a three-strikes-and-you’re-out mentality and never accept less than the best in customer treatment from your staff. That must be built in as one of the absolutes of your business culture.”

Listen to Your Customers

“Listening is a discipline, and not an easy one! When I’m speaking, I’m learning nothing. I’m not always learning even when listening, but I have a better chance.”

The point is listen to your customer, not necessarily yourself, your wife, or your third cousin. We are all victims of our own experience as well as beneficiaries thereof! Your personal biases can dangerously skew your decisions. Judge within the context of your customer’s likes and dislikes.”

Loyalty & Complaining Customers

Make building loyalty (long-term customer value,) not just satisfaction, your prime goal.”

Your complaining customers [are] your greatest opportunity.. I firmly believe the best customers you may ever have will be the ones who come to you angry but were disarmed by your willingness to listen and respond sympathetically to their complaints. They leave feeling special because you went out of your way to help resolve their problems. These are customers who return again and again because they know you care about them and want them to be happy… The point is to find every opportunity to show your customers you want to take care of them. Rather than be reluctant about resolving a customer’s problem, do it with joy.”

A recent Wall Street Journal explained the incredible value of making the angry customer happy compared with the value of the loyal customer. The FedEx concept of calculating the lifetime value of loyalty (that is, $20,000 per year X 20 years is a $400,000 customer) dramatically portrays this concept. Be proud of the fact that unhappy customers think enough of you to express their unhappiness. The biggest loss to your business are the customers who never come back to complain about a perceived problem. Instead, they tell all their friends that they’ll ‘never deal with that lousy company again.’ One study I read estimates that one unhappy customer tells 18 other people about a bad experience. What a huge missed opportunity. I much prefer that formerly unhappy customers tell their friends how we fixed their problems.”

Obliquity

Please add a couple of challenges to that simplistic perception that profit is the be-all and end-all. It's not. First thing to ask, "Is whatever action we want to take getting us closer to our objective?" Let me say this clearly: The objective of a business is not just to make money. That is the byproduct of a job well done. The theme at Ford one year was "Does it sell cars?" At Helzberg Diamonds that inspired, "Does it sell diamonds?" Second thing to ask, "What is the return on the investment?" Profit, though a simple and quantifiable measure, is far, from the whole answer. End of conversation.”

Seek a Niche

“[My father] refused to sell a diamond solitaire in an engagement ring that was not ‘perfect,’ that is, internally flawless, with good color, good cut, and absolute clarity. As he struggled for a name for this concept, he picked up a box of baking soda on which he read, ‘This baking soda is certified to be perfect.’ Thus, Helzberg "Certified Perfect" Diamonds.”

If you are in a crowded, competitive market, create your own market, that is, not the diamond market, the perfect diamond market; not the beef market; the angus beef market; not the beer market: the freshest beer market.”

Be different - and better! You need a unique selling proposition.”

Focus on the Controllables

“When growing up, I was intrigued that my father only concerned himself with those business elements that were controllable. He refused to acknowledge the Depression and did quite well during that period. He was unwilling to talk about recessions or 20-inch snow-falls. He only thought about and talked about those conditions within his control. Dad was a great believer in ‘not sweating the small stuff.’ He taught us to concern ourselves only with those things over which we have control. I thought he was unique in this until I realized this is one of the key common traits of highly successful people. Those folks are never victims; they take what comes and handle the situation. The rest is a waste of time.”

Copy Ideas

I was always taught that many, many people were out there developing ideas I could use. I have found that to be true throughout my life. [My] thoughts and ideas have all been borrowed or stolen from many wise people. Think of the world as your garden of marvelous people and ideas with unlimited picking rights for you. Enjoy the flowers!”

Mistakes - Learn & Move On

Most entrepreneurs could dwell at length on their mistakes. The reason to look in the rearview mirror is to divine exactly what you learned and how you will prevent a repeat of those particular errors. Self-flagellation is a waste of time and brain power. Unreasonable build up of fear, causing you to turn to stone and not innovate, is even worse. Of course, these are not all of my mistakes - that will take another, far larger book. The positive spin to put on your errors is to see them as learning experiences rather than unproductive errors.”

Seek Contrary Opinions

Want to increase your chances of making a great decision? Find someone who disagrees with you. That might sound counterintuitive, but I’ve learned that getting a contrary opinion from a friend, a customer, or an advisory board member can be a way of guiding you to a more rewarding decision.”

Being a boss doesn’t make you right. Just because you make the ultimate decisions doesn’t mean you have all the answers. That sign on the door doesn’t make you smarter than everyone else. It just helps people find you.”

“People you work with may think you only want to hear the good things, not what is really going on. You can become desperate for the truth, so value that person who disagrees with you, for that individual is a true asset.”

Humility & Hiring

Arrogance is counterproductive because arrogant people tend not to listen to and learn from others. Arrogant people are a tremendous turnoff to folks who work with them, cutting off real communication. Most of us know so little about the world, no matter how deeply we know about one small part of it, that we really don't have the right to be arrogant.”

“I love the thought that god gave us Mozart to keep us all humble. I’ve been blessed with many opportunities to remain humble and I do believe being the dumbest guy in the room can be the smartest thing you can do as a leader.”

“I’ve never kidded myself. Our business really began to perk when I hired people smarter than me. Often, all I had to do was get out of their way. When you find these great people, they make your dreams come true, and then they go beyond your dreams. If you don’t care who gets credit, you can get anything done.”

“Nearly every entrepreneur can tell stories of holding on to people too long.”

“I learned from my mentors always to look for character, values and people skills. Hire someone who is not only a good fit for the job but, equally important, a good fit for the company culture.”

If you don’t have the right people in the right positions, you have neglected your duty and harmed the company.”

“Have several people interview job applicants, so you can get other people's opinions. If possible, have the applicant visit the workplace for a day, so each of you can get a better feel for each other, the job, and the culture. Don't be hurried, and don't succumb to pressure.”

Surrounding yourself with dwarfs does not make you a giant.’ - Yiddish Folk saying.”

Share Profits

Profits are important, sharing them is important.”

At Helzberg Diamonds, we had a tradition of increasing individual earnings as much as 17 percent in the form of 10 percent profit sharing, 5 percent in a check called ‘progress sharing,’ and 2 percent immediately vested funds with their match in IRA’s. Lots of dollars went into other rewards such as awards, recognitions, and celebration as well! Devise your own system, but be very careful. Remember that change can be considered a take-away and take-aways are not fun, so go slowly. Try temporary systems, and don’t paint yourself into a corner (remember, a privilege quickly becomes a right).”

Value & Empower Employees

Treat people as you want to be treated.”

When people feel valued and see their efforts and ideas count for something, they will strive for peak performance.”  

“Great teachers understand the power of positive reinforcement to increase desired behaviors, and so do great entrepreneurs and managers.”

If you are good to your company associates, you’re associates will be good to your company.”

We gave careful attention to the people who were at the front lines. The top 25 sales associates each month received a small gift with a handwritten personal note from me.”

“One day after about 30 years of experience, another instant flash of the obvious; I suddenly realized that numero uno was not the customer but our own associates; everything literally emanated from them. They were the key to the success of the company - without question. That means you treat each with respect and you celebrate and glorify the success of the leaders in performance.”

Our honoring the top sales producers knew no bounds.”

“The old song that says, ‘You gotta love 'em in the A.M., love 'em in the P.M.’ always comes to mind when I think about Helzberg associates.”

People who perform a job every day are just as much experts, and often more so, than consultants who live hundreds of miles away. Engage them in coming up with ways to improve productivity of your business, using some of their ideas will commit them to the task much more readily than if you just tell them what to do. Yes, there are diamonds buried in your own backyard! By asking for the opinions of associates, you immediately dignify the jobs they do, enhance their self-esteem, and increase their effectiveness.”

If you believe in people, you will on occasion, depending on the risk and the reward, willingly allow them to fail. If someone else's idea isn't as good as yours, but it's still okay, you're often better off allowing it done his or her way. Quality of execution is far more important than the idea.”

Motivation and execution will tend to be far better if the individual applies his or her own ideas to the challenge. This concept of ownership is the one that can ignite the spark in your associates, get the job done better than you can expect, and reward them with the joy of accomplishment. It also may be the toughest for many entrepreneurs to embrace.”

Pure psychological ownership can fire up enthusiasm and leadership qualities in those around you. It will point you to future leaders. This concept says, ‘I trust you, I believe in you,’ and it can motivate the living hell out of people. Ownership is key to success.”

“In order to succeed in an increasingly complex business world, entrepreneurs need the talents of everyone in the organisation. Believe in the abilities of others and let them grow and perform at their best. Helping others harvest their triumphs will allow you to achieve more success than you could hope for by insisting everything be done your way.”

Transparency

“One lesson I learned from my associates was that the more open management could be with the team members of the business, the more appreciation there was of the company and the more psychological ownership it gave others.

People

“I had been taught from day one by my dad that ‘Business is People.’”

“At the end of the day, we found that our key success factor was people. We believed in our people. We felt they knew how to operate a store better than anyone in the business, so we decreased the risks inherent in reaching into a new market by transferring in proven managers and associates from successful stores.”

Win-Win

“A conscious decision should be made regarding treatment of suppliers. Your team should get together periodically to review your care and feeding program and its effectiveness.”

Tone from the Top

There is a perception that if the boss does it, it is acceptable! Whatever you do, you are teaching. That is a great plus; it can also be a great minus if you don’t keep it in mind and conduct yourself as you expect others to.”

Everything you do communicates! You always set an example whether or not you want to!”

Ideas

A new idea is delicate. It can be killed by a sneer or a yawn; it can be stabbed to death by a quip and worried to death by a frown on the right man’s brow.”

The courage to ask questions is an attribute. Don't be afraid to ask people more experienced than you for their help. They'll be complimented… The more people you talk to, the greater the brew of ideas you will have to marinate your brain… Even new inventions build on creative ideas that someone thought about before… You are heir to the discoveries of many entrepreneurs who skinned their shins trying something new.”

“Attend industry seminars, subscribe to trade publications. The acronym MBWA (management by walking around) is an apt description of another important method you should be using to monitor your industry. Don't scorn competitors and do have open eyes, open ears, and an open mind.”

Focus

Focus is your lever to success. As the leader you need to be sure you and your team are doing the right things, and as managers they need to be doing things right… Anything that decreases focus on these right things inhibits progress. Investing unlimited effort in failing projects does not create success.”

“Among our happiest and best decisions were throwing out the dead merchandise horses and finding that the success of the company increased proportionately. We eliminated china, crystal, all flatware, luggage, radios, small appliances, and other non-jewellery items - ad infinitum and ad nauseum. The practice of optometry in a few stores ended. We found the less we sold, the better we sold what was left: fine jewelry. The time to give up on peripheral items had come; we were early in the game of giving them up. The company gained great focus and, doing fewer things, became far more successful.”

Cut Marginal Stores

“When you are operating a group of retail stores, there is always the usual bell curve of weak to great performing stores. Much conventional practice dictates committing great effort to the weakest segment. When I discussed this with my friend Steve Lieberman, the hotdog magnate who ran hundreds of Carousel Snack Bars in shopping centres for many years, he said, ‘You make more money closing bad stores than opening new ones.’ His philosophy made sense.. Our attitude became to upgrade the herd annually, closing the weakest stores each year.”

Each activity you undertake exacts the price of not being able to pursue alternate activities. You are investing the time and talents of your associates.”

“Because of their semi-permanency and their unlimited parasitic appetite, underperforming operations destroy the good people you send there for turnaround while simultaneously depriving those great managers and great teammates of an exciting opportunity as well as putting capital to non-productive uses. Management’s challenge is to take advantage of the unlimited opportunity to focus the talents on its most talented people on winners. Riding the winners to success was what created the large average sales volume of Helzberg Diamonds stores.”  

Certainly one of the most profitable things ever done in our company was the consistent closing of marginal stores that destroyed human resources (who can be motivated in a weak store with the label of ‘poor store’ on it?), used capital, drained central office focus, and really had no reason for being. What a waste of good teammates. A modest turnaround is not nearly as profitable as sending great people to good stores to build them to great so sending the not-so-strong manager to do the impossible makes even less sense. Cut those cancers out as fast as you can. You will not believe how your profits benefit.”

Pricing

When possible and practical, prices should be raised in very minute amounts over a long period, even if the need for an increase does not exist at a given time. Your customers will be far happier with the price if you avoid a major surprise and shock.”

Performance Standards & Internal Competition

Setting clear standards of performance tells people what the goals are. Standards allow us to measure our performances and they tell us how far we've come and how far we have to go to reach our destination. They are essential to a successful business. At Helzberg Diamonds we gave a lot of thought to performance standards. We found that when used in a positive way, high performance standards motivated high achievers to push the envelope of their abilities. One early goal was to have $1 million average sales per store. When we hit that, the goal became $1.5 million ... and of course, after achieving that goal the new goal became $2 million. This was no secret. We communicated it ad nauseum. We quit looking at the competition's average volume per store and competed with our own figures every year.”

Balance Profit and Volume

No one should be working on a pure profit bonus. It encourages short-term thinking. Therefore we created bonuses partly on profit and partly on volume. Profits are short-run and volume is long-run. If your sales volume is climbing (and you are not ‘giving the merchandise or services away’), then you’ve either added customers or are making better customers out of your present ones or doing both. The increase has everything to do with your customers’ buying decisions. It means you and your associates are doing a better job. Your customers are voting! Growing sales are vital to your company’s future. Profit is certainly a necessity. However, profit alone can be a dangerous measurement and can lead to decisions that don’t pay-off in the long run. Balance between both is key!”

Under the Radar

Think out carefully opportunities for publicity that disclose anything about the company you do not wish your number one competitor to know. Control carefully the information that goes outside the company and even the information that does not. As you grow, realize that a little paranoia is a healthy thing.”

Think Long Term

Plan for long-run success, not short-run profits.”

Stay Private

We had no interest in going public. We didn't want to be pressured to pay more attention to quarterly earnings and stock price than to the long-term operational health of the company and the well-being of our associates.”

“After wasting the time and the dollars involved in partial preparations to go public, I realized that in my provincial view that move would be the ruination of the company. We would be pushed for quarterly earnings at the expense of the long-run profits and top people in the company would be investing great amounts of time and effort in ways that did not sell more diamonds, such as shareholders' meetings, analysts' meetings, public relations planning, ad nauseum, ad nauseum.”

Continuous Improvement

Entrepreneurs should always be massaging a successful formula in looking for ways to improve and be up-to-date in building differences from the competition.”

“My conclusion: Win, lose or draw, you must keep trying! Yes, even when you succeed you must continue striving!

“Winston Churchill said it best: ‘Never give up! Never! Never! Never!’ When Thomas Edison tested and rejected thousands of materials to develop the electric light filament, he showed dogged persistence as much as genius. I wonder if people realise how hard he had to work in spite of the genius label. He labelled these many tests ‘successful’ because he learned that yet another substance would not work. He understood success as a process; failure occurs only when you give up.

Mentors

Mentors have made such a major difference in my life in so many ways that I am a great believer.”

“A major part of Helzberg Diamond’s success was because of the extreme value of my mentors and the extreme openness of my associates.”

Failure

All successful people have failures. How many times did you fall before you could walk? I'm told Babe Ruth struck out 1330 times, but he's remembered for hitting 714 home runs. Despite missteps, entrepreneurs are a special breed who do not give up on the larger goals.”

Change

“What could be more challenging and exciting than the continuing changes of the business world? Fighting change is trying to hold off the inevitable. Change is going to occur, no matter what you do, so be prepared for the twists and turns in your industry. Don't be stuck in what has been, like so many of the downtown merchants who did not seize the earliest opportunities to open in covered malls (I know this first-hand because I was one).”

Execution & Buy-in

My revelation is that the execution is far more important than the idea. The people I most admire are those who know how to execute. The quality of execution is far more important than the quality of the idea. I was taught at a very young age to let individuals do things their own way as much as possible even if I thought my idea was somewhat better. That advice spoke to execution. People believe in their own ideas and will generally execute those ideas far better then someone else's!”

Executing an average idea well will far exceed results of a great idea executed poorly! If the person who executes believes in the idea, the likelihood of success is far greater than in cases where that person is not convinced or excited or committed.”

Fun

“Instead of communicating stress, communicate the atmosphere of fun. Stress is like a virus, and you can quickly spread it to your customers by being impatient, curt, pushy, and downright rude.”

I quickly learned that the most important side of business is the human side so it wasn't unusual that when one of our stores wasn't meeting its sales goals, we advised the sales team to quit trying so hard and start having fun with their customers.”

Do you have to be creative to have fun? It helps, but it's not necessary. Most of the time you just need to be friendly. Compliment a customer's tie or dress. Perform small favors. We cleaned customers' rings free while they shopped. We put new watch batteries in at no charge. Make your customers feel welcome and at home.”

Luck

No one has an easy prescription to become a successful entrepreneur. If they say they do, they’re fibbing. It takes a lot of luck, which often translates into seeing and seizing opportunities before someone else does.”

Give Back

Giving back may be the most fun you will ever have. Giving back is the most selfish thing I do personally because I get so much out of it. I don't feel it's in any way generosity, but rather the most enjoyable, the most ennobling and perhaps the most selfish thing I do.”

Summary

Just like the great trading maxim goes, 'Cut your losses and let your profits run,' or as Peter Lynch famously said, 'Don't remove the flowers and water the weeds,' Barnett Helzberg adopted this approach with his chain of jewelry stores. He cut the marginal stores and put the firm's energy and resources into the best stores. Helzberg understood that underperforming stores not only depletes the profit and loss account but also the firm's most valuable asset, its people.

Recognising that business is all about people, Helzberg looked first for the right personality and cultural fit when hiring employees. He invested in his store associates, strategically moved them into new stores to ensure the firm's culture was retained as the business grew, promoted fun, and celebrated their successes. His insight into what motivates people enabled him to extract the best from his team.

By gradually raising prices, Helzberg avoided sudden price shocks that could deter customers. Complaining customers were embraced as an opportunity to create a pool of new, loyal, long term customers. Differentiation through a strategy focused on "Certified Perfect Diamonds" helped Helzberg Diamonds stand out in a commodity product. Removing distractions, which might have been short-term profitable, increased clarity and ensured long-term viability.

It's not surprising Buffett was attracted to the business as it carries many of the hallmarks of the great businesses we've studied. In the jewelry store industry, despite most participants’ poor economics, Helzberg's business acumen developed a rare gem.






Source:
Helzberg, B. (2003). “What I learned before I sold to Warren Buffett: An Entrepreneur's Guide to Developing a Highly Successful Company.” John Wiley & Sons.

Further study:
How Buffett acquired Helzberg’s Diamonds,” Warren Buffett Archive CNBC, Annual Meeting 1995.’
'“
What You Need to Know About the Jewellery Businesses,” Warren Buffett.

Learning from National Cash Register's John H Patterson

Successful Investors are drawn towards successful businesses. And when I say successful businesses, I’m not referring to those standard ‘run of the mill’, ‘provides good returns’ type companies that most investors look for, but those that actually stand out from the crowd due to their innovative people and practices. These businesses are typically mavericks and icons that are industry leaders and are globally recognised for such. But the real power in these companies is that, once identified, they offer much more than just sound investing value - they allow us to learn from them. And its powerful learning, indeed; we not only learn what makes these companies tick, but also the minds of their founders or managers and what sets them apart from their competitors. Its this knowledge that often gives us an edge when we come to select future investment opportunities. This knowledge, more than anything, can teach us more about investing than the standard run of the mill quantitative methodologies that are still taught in most schools.

“If finance were — when finance is properly taught, it should be taught from cases where the investment decision is easy. And the one I always cite is the early history of National Cash Register Company, and that was created by a fanatic who bought all the patents, and had the best salesforce, and the best production plants. He was a very intelligent man and passionately dedicated to the cash register business. And of course, the cash register business was a godsend to retailing when cash registers were invented. So that was the pharmaceuticals of a former age. If you read an early annual report prepared by Patterson, who was CEO of National Cash Register, an idiot could see that this was a talented fanatic. The investment decision was easy. If I were teaching finance, I would collect a hundred cases like that. And that’s the way I would teach the students.” Charlie Munger

Given Charlie Munger’s success in the world of investing, his advice is worth heeding. Rather than relying on quantitative tools like spreadsheet modelling, beta calculations, or discounted cash flow analysis, Munger takes a more holistic approach, focusing on the key elements that will shape a business's future prospects. This approach is also shared by Warren Buffett, who famously remarked, "The only way we know how to make money is to try and evaluate businesses."

The business traits that consistently emerge as critical factors for a company's success have stood the test of time. From the titans of industry like Vanderbilt, Rockefeller, Henry Ford and John H Patterson, to modern-day icons like Jim Sinegal of Costco, Arthur Blank of Home Depot, or Yvon Chouinard of Patagonia, much of it has to do with people, human nature, and the process of innovation. None of these have changed much over time.

John H Patterson’s story is a fascinating one of entrepreneurial success. At the age of just twenty-five, he began selling coal on the side while doing his job managing a toll booth on a canal. Through his dedication to providing customers with more than they expected and always delivering on his promises, he quickly learned how to differentiate himself in a commodity business. Within a year, he had become a successful coal merchant.

As Patterson's success continued, he began to acquire additional assets, including a store, coal mines, and railways. However, despite his efforts, the store struggled to turn a profit. He eventually discovered that his clerks, incentivized to win customer favor and maximize orders, were consistently undercharging. To remedy the situation, he promptly fired the three clerks and installed two cash registers in their place. The change was so successful that Patterson and his brother underwrote a new script placement by the cash register’s maker, the National Manufacturing Company. A year later, after the company reported a loss, he had dumped most of the stock.

Picture Credits: NCR Annual Report 1906

When Patterson later stumbled upon a store manager whose business was being successfully run in his absence thanks to a few National Manufacturing cash registers, he grasped the potential of the machines to revolutionise American business. He determined to buy the company, offering the owner $6,500, which he accepted. The following day, Patterson offered $500 to annul the contract, but the owner refused. The seeds of an almost forty-year reign over the National Cash Register Company had been planted.

“I have in my files an early National Cash Register Company report in which Patterson described his methods and objectives. And a well-educated orangutan could see that buying into partnership with Patterson in those early days, given his notions about the cash register business, was a total 100% cinch.” Charlie Munger

Although nearly a century has passed since John H. Patterson passed away, the business principles he advocated for remain just as relevant today as they were in his time. Below, I've shared some of my favorite excerpts from Andrew Crowther's excellent book, "John H. Patterson: Pioneer in Industrial Welfare." Additionally, thanks to the detective work of Jessie Rancourt, you'll also find extracts from the 1906 Annual Report that Charlie Munger referred to in a speech given at the USC Business School in 1994.

Hire Right

We get the best class of people to come with us. Mr. Rockefeller, of the Standard Oil Company, says that success depends upon the selection of the right people.”

Tone from the Top

A boss whom the workers can see daily toiling away harder than any of them is certainly the one who will get the most work from his men.”

Business is founded on confidence; success on co-operation.”

Volume

"Charge a profit, a reasonable profit, but always a profit on every sale. Then make your real money by volume of business."

“Everybody knows that profit is the difference between expenses and receipts, and yet fully one half of the business men make more effort to cut down expenses than to increase their receipts.”

Exceed Customer Expectations

“Patterson said that no one had a right to expect business unless he satisfied customers. Every customer got what he paid for and a little more.”

“The smallest complaint was a personal affair for John Patterson and he settled each complaint to the absolute satisfaction of the customer and regardless of expense.”

"Every business which works for the betterment of humanity should be eagerly pressing forward and not waiting to be shoved forward. There are those who say that successful selling depends upon knowing what the public is asking for and then giving it to them. I do not agree with this viewpoint. I do not think that real success is attained by following in the wake of the public. My idea of successful business is this: Fill not only every known want of your customers but also have in ready reserve that which you calculate they are going to need next year or the year after.”

“We had to educate our first customers; we have to educate our present-day customers; and our thought has always been to keep just so far ahead that education of the buyer will always be necessary. Thus the market will be peculiarly our own our customers will feel that we are their natural teachers and leaders.”

Loyal & Repeat Customers

“The first sale of any device is to be considered only as a first lesson to the consumer. The big sales are always in the future.”

Appearances

The offices had to be clean. Mr. Patterson was about as neat a man as ever lived and everything about him had to be likewise. He thought that no man could do accurate work amidst disorder.”

Source: ‘From One to a Million’ 1911.

“It was Mr. Patterson’s nature to prescribe for his business and for those about him in every detail. He wanted all his salesmen and executives to be well dressed. In later years, when money was freer, he had a way of rounding up the men in the offices and sending them to New York "to get the hayseed off them." He would send men with orders to tailors for several suits of clothing; he bought travelling bags and neckties by the dozen. If a man were not shaved he would present him with a razor.”

“Do not hide your office on a side street or upstairs where no one can get at it. Have it where it will be easy to get at; fix up good window displays that will attract attention; have competent men to show machines to those who come in, and you will sell more machines in your office than you have ever before, and not only make your rent, but a handsome profit besides. ‘Light and cleanliness are the two great essentials to selling. A dark store is never as profitable as a light one. People are attracted by light. Many a store can be made light by knocking a few more holes in the wall. No one has yet failed in business because he spent too much money in lighting his store’”

Open-minded

It was possible to show him that he was wrong and he would reverse himself in an instant. For John Patterson, curiously enough, never had any pride of opinion; he was for some idea not because it was his but because it was right; show him that the idea was wrong and he was for the new right just as energetically as he had been for the old right!

Humility & Frugality

“Whenever business was booming and the sales people were congratulating themselves on how good they were, Patterson had a habit of drawing a wiggly line which by convention was known to be a snake and then lettering under it: "When the sun shines, look out for the adder."

“In the later years of his life, Mr. Patterson had a personal income of about half a million dollars. He could as easily have had double that income but he preferred to have the money stay in his institution. He made no investments of any kind. He had a modest house overlooking Dayton and a small camp in the Adirondacks. He bought a great tract of land with the idea in view of selling home sites to those who worked with him and of providing a natural park where the people of the city might get fresh air. Eventually he gave the tract to the city. He probably spent less money on himself than any rich man in the country. The remainder of his income he gave away and most of it he gave away personally with the sole idea of making better citizens, or, as he liked to put it, ‘making better business.’”

Incentives and Uncapped Earnings

“It is not human nature to work as hard when an income is assured as when the income depends solely on the effort exerted. It was not a new idea to put men on commission. It was a new idea to put them on commission in order that they could earn more. Patterson started in at once to help them to earn more.”

“The N. C. R. agents thought that if they made too much money Mr. Patterson would immediately cut their commissions. They could not understand any other course, and there was no reason why they should understand any other course. It was one of Mr. Patterson's hardest tasks at this time to convince the sales force that the N. C. R. interest was in having the largest possible number of cash registers sold and that the company could not make any money unless the agents did.”

Source: ‘From One to a Million,’ NCR 1911.

If you can sell a million dollars in a week, we'll hire a brass band to take your commission to you. We can't make any money unless you do." Mr. Patterson's actions in refusing to cut commissions were severely condemned by many men in business.”

“The profit-sharing plan has been many years in the making and is still in the experimental stage. Mr. Patterson approached wages never with the thought of how little he could pay, but first to see how much he could pay, and then to find what he could give in addition to the wages.”

“The plan was put into operation for the first time in 1917 and in its final form it operates in this fashion. (The executives under the plan do not receive salaries quite as large as they might receive in other companies of similar size. Their fortunes depend upon the fortunes of the company, but the workingmen have their shares over and above the highest going wages.) The profit-sharing plan provides that, after deducting from the year's profits a sum equal to 6 per cent interest on the money invested, the remainder is divided equally between the company and the employees. The half that goes to the company is used for buying additional land, buildings, machinery, inventions, and similar expenditures necessary in an expanding business. The company takes all the risk; the employees take none; but every increase of efficiency or elimination of waste on the part of an employee is reflected in the amount of the profits in which he shares.”

Three distributions of the profits are made to the employees each year..”

“One half of the employees' share, or 25 per cent of the total profits, is given to the managing employees, including executives, department heads, and their assistants, of which there are approximately 600. The remaining 25 per cent is divided between all other employees in the office and factory, with the exception of those who have been employed less than thirty days.”

This dividing of employees into groups is done on the theory that those who contribute the most to the making of the profits are entitled to the largest share in them.”

“Under this plan, not only do all employees, from the general manager to the messenger boy, have the incentive to do their best in their positions and thereby earn more profits, but the employees in the B, C, and D groups have the added incentive to advance into a higher group.”

Quality

“Our Test Department carefully examines the materials used to make National Cash Registers. We believe that nothing is too good for the merchants in all parts of the world who use these machines. Each register is rigidly inspected several times as it is built.”

Tough Times

“We can drop with business or we can build a bridge and go across. Let's build a bridge." His way of building a bridge was to intensify every sales effort. Patterson did not draw in for a panic. He put on extra effort, and each panic marked a substantial advance by the N. C. R. The company really grew up in the Panic of 1893.”

Mr. Patterson met that depression as he had met every other depression- -by drawing up a new sales plan, by holding conventions all over the country, by extending his advertising (Mr. Patterson always enlarged his advertising when business was bad for it was then, as he said, it was most needed), and by putting on sales pressure from every direction.”

Patterson believed that cutting down expenses to make ends meet was the surest possible way to prevent them from meeting. He held that cutting down expenses cut down initiative and energy. If his bank account became anaemic, he went right out after the fresh blood of new business. He doubled his volume in the depression following the Panic of 1893. John Patterson was always at his finest when in trouble. He fairly revelled in it.”

Innovation & Continuous Improvement

“[Patterson implemented] the policy of never considering the product as finished and which was to resolve into a definite policy a few years later when he formally established the inventions department, which became so famous.”

Patterson said to his people and repeated thousands of times afterward: "Send in the complaints. They are our schoolbooks from which we learn what is needed and how to remedy the difficulty. We propose so to improve the quality of our registers as to make them look as finished as a watch."

Every idea that seemed to have merit was tested. It was axiomatic that everything being done by Patterson’s company was to the end of preparing to do it better.”

“With the new building came the formal establishment of one of the fundamentals of the success of the company and an idea which Mr. Patterson was the first to work out the Inventions Department. Previously Mr. Patterson had himself been the department.”

“Patterson had it firmly fixed in mind that the product must ever be improved, and gradually this became an integral part of the business.”

We shall continue to experiment and give all ideas scientific, thorough, and practical tests before putting the same on machines. No expense or trouble will be spared to fully try all ideas advanced to us by our representatives, or to try and overcome any fault that may be discovered in the present machine.”

The business that is satisfied with itself, with its product, with its sales, which looks upon itself as having accomplished its purpose is dead. The actual burial may be postponed; but it is dead because it is not going forward. To my mind, nothing can ever be good enough.”

I am always dissatisfied; I preach dissatisfaction. I can always see where something might be better; and therefore our business is never at rest and I never want it to be. The throbbing heart of business is the intense desire to do better. When that desire ceases, the heart stops.”

Patterson was afraid of contentment. He was afraid of people around him becoming content. He refused to believe in perfection other than as a goal far off that could never be reached. He would seldom praise a good piece of work and if he did he would join an exhortation with the praise, as: "That's fine, now do better.”

Much of the growth of this business is due to the constant improvement of our product. For thirty-six years every effort has been made to make National Cash Registers meet the needs of merchants in all parts of the world. We are never satisfied, but are always trying to improve.”

Filling a need

Patterson went into the making of cash registers only because he thought every merchant would eventually have to use one. Thereafter he worked on the theory not of supplying what the buyer wanted for the buyers then did not want cash registers; he worked on the theory of supplying what the buyer could use to the best possible advantage once he had been taught the need.”

Advertising & Social Proof

Advertising differed from any which up to that time had been seen, in that every piece held a reason why the purchase of a register would make money for the purchaser. It was educational advertising. He borrowed from the patent-medicine people the wrinkle of attaching testimonials of satisfied users.”

"‘We know nothing about advertising,' said Mr. Patterson,’ but we want to learn. ‘Some day we will have a big business. Good advertising will get it for us. Visit the agents. Secure all the ideas from them that you can. Find out their needs. Those men are in the field and they know what is needed.’ John H. Patterson never pretended to know anything about advertising, but as a matter of fact he was probably the first man in any business other than the patent medicine to make advertising an integral part of his business.”

Word of Mouth

“From the beginning Mr. Patterson insisted that no advertising could equal the word-of-mouth advertising of the satisfied user.”

Patterson recognized that the best salesmen were contented customers and so he made it a primary principle that any man who bought must not only be satisfied with the purchase but must be kept satisfied by being instructed not only how to use his machine, but also how to make money out of it. Considering his ideals, any other course was impossible to him.”

Low Prices

“The object of The N. C. R. Co. is to stop the open cash drawer - to sell at lowest prices and benefit the billion. National Cash Registers are the lowest-priced machinery sold in the world.”

Reinvestment & Retained Earnings

From the very beginning Patterson regarded a profit not at all as a personal perquisite but as something to put back into the business to make it bigger and better. He put back the profits with supreme confidence. He was always willing to go down with the ship.”

Obliquity

“One of the reasons for Patteron’s success was that from the very first he had objectives larger than his business—he never worked for money as money. He did not believe in sharp shooting for profits. He wanted his money to come as an incident to service. One finds that men do not create success—whatever the definition of the moment may be—unless they believe in themselves and in what they are doing.”

Good Profits

Mr. Patterson insisted then, and it is now everywhere considered a sound sales policy, that a sale should not be made to any one who could not make money out of what he bought. His messages all went to show the merchant's need of a register and not the N. C. R.s need of a sale. There is a distinction here which is not yet universally grasped.”

Transparency

Mr. Patterson wanted to be constantly in touch with all of the agents. He thought that a business should not have secrets but that what one agent knew was good for every other agent to know. He believed that the progress of business depends upon the interchange of information among those in business.”

Internal Competition

“Mr. Patterson not only put into The N. C. R. (a bulletin to salesmen) the records made during the month by each salesman and as much of their methods as they would write in to him, but also he began to go around among the agencies himself and to publish in the paper the most interesting experiences that he encountered.”

A man who made a good record had his picture printed in The N. C. R. with an account of what he had done - Patterson did this partly to reward the man and partly to challenge all the other men to go and do likewise.”

“The men who sold their full quotas were designated members of the Hundred Point Club and invited to Dayton for the annual convention. The man who first got his quota in the year was the president of the club, the second man was the vice-president, and the third was the secretary, and the fourth was the treasurer. Thus evolved a unique organization of best salesmen, and each year since its inception the club conventions have been growing in importance until they now are the event of the Dayton year.”

Guaranteed Territories - Sharing Ideas

“We bring all of you people together and we ask one person and another person to get up and talk and then we ask for criticisms and suggestions. “Now, why do we do that? We couldn’t do that if we didn’t have guaranteed territories. You people wouldn’t be here to teach others to go into your territory and sell goods in your territory and get all the benefit of what you know. You would keep everything to yourselves. Guaranteed territory prevents all that and therefore you are able to come here and help each other.”

Value Employees

“The success of this company has been due to the enthusiasm we have been able to inspire in it, by persevering, by coaxing, by forcing, by recognising merit, by publishing good things done, by offering prizes. To be successful you must not only have ability but you must treat your men so that they will have confidence in you and in the company."

“Patterson began the idea of the modern factory; a place in which human beings might work in the greatest comfort, with entire self-respect and with the highest efficiency. The old idea was that a factory was just a place to work and that the employees were ‘hands.’"

"Labour is suspicious- and has a right to be. Generally speaking, it is not fairly treated and it has not been given either its rightful share in industry or its proportion of income. The idea has been to get everything that is to be had out of a man, keep him down, regulate his wages by the smallest amount he will take and not by what he is worth, and when he is worn out, to throw him off like an old shoe.”

Enthusiasm is the biggest asset in business. It is the one thing that you have to work eternally to keep up. The N. C. R. was built by the enthusiasm of the organization both in the shops and in the field.”

“I have found that a man lacks enthusiasm when:

  1. He has not an appreciation of the work in hand.

  2. He is out of sympathy with what you are doing.

  3. He lacks knowledge of the business and the motives of the officers.

  4. He is not in harmony with his surroundings.

  5. He does not realise his obligations.

Treat people well and they will treat you well. They will not instantly respond but they will in the long run. Be square with them.”

"Do not try to take any advantage and do not try to get the last cent's worth of energy out of them. They will give you their best if they think you are giving them your best; they will not work the better for being forced.”

"It pays to do good; it pays to help them to help themselves in every moral and physical way and also to give them every possible opportunity for advancing to higher positions and more money.”

“We take the attitude that if anything more can be done not reasonably done, but if it can be done at all for the improvement of comfort or safety, we will do it.”

Source: ‘From One to a Million’ 1911.

“I am so thoroughly convinced that it pays that I would recommend changes to keep labour happy no matter what might be the immediate effect upon our business, for it is only the ultimate effect that counts.”

Probably no individual ever did as much as Mr. Patterson toward providing for the pleasure and recreation of those who worked with him.”

“Every plan of the N. C. R. was designed to estimate men by their results and then to pay them by their results. Whenever possible he liked to overpay.”

The more we do for our employees, the better work they can do.”

We found that people do the best work when they are best cared for. Nothing is more important to workers than good food. Three dining rooms are operated for our employees. Warm, substantial, well-cooked meals are furnished at cost, and often less than cost.”

Mr. Patterson's policy of trying always to have the N. C. R. do more for those who work for it wholeheartedly than any other company had ever thought of doing for its people. For that was Mr. Patterson's way with men.”

“For a factory was to Mr. Patterson not an assorted lot of bricks and mortar surrounding an assorted lot of iron and steel contrivances. A factory to him was a collection of human beings.”

Source: ‘From One to a Million’ 1911.

“During the critical years when the N. C. R. was building, a fair portion of the citizens of Dayton and all the politicians did everything in their power to block any movement which might benefit the N. C. R. Mr. Patterson was regarded as a menace. For who had ever heard of treating employees the way he treated them, or paying higher wages than it was necessary to pay? And why have so much nonsense about buildings and landscape gardening? Why not run a factory instead of a show?

Mr. Patterson believed that clubs promoted social and business intercourse, understanding, and cooperation. He inspired the organisation of the Dayton Woman's Club and largely financed the purchase of its fine clubhouse. In the factory he organised the Advance and Progress Club for executives, in addition to the Woman's Century Club for women employees, and the N. C. R. Women's Club for the women of N. C. R. employees' families. The Old Barn Club was the personal property of Mr. Patterson, but he turned it over to public use in order to provide country club advantages.”

Workers are entitled to decent and comfortable surroundings at their work. Good working conditions keep workers healthy and happy and add to their self-respect. No employer can afford to provide work places that injure the efficiency of employees. When workers are contented they do more and better work."

Incentives

"Keeping workmen is not altogether a matter of wages, but the wages are of the highest importance. I have always believed in paying men well, but paying them on results. Every job that can be so arranged is on the piece-work basis; we encourage the making of the highest possible wages.”

Staff Turnover

Our labour turnover is trivial when compared with most concerns of our size.”

Promote from Within

“Patterson’s ventures in hiring stars were all failures and the men who really helped him make the company were all men who had come up through the ranks.”

Walk the Floors

Mr. Patterson moved his desk out among the machinery and at once he began in his characteristic way to work through the men toward the product. He began to call meetings of the foremen and job foremen.”

“When the business was smaller I used to travel about through the shops a great deal, knowing everyone, and taking pains to ask them if they had anything to suggest. Then I had them in meetings and I called for suggestions.”

Patterson for the first time really saw what the agents were doing, he had never before inspected the front-line trenches. He had stayed at headquarters. But after that trip no executive of the company was ever permitted long to remain at headquarters; they were supposed to be out on the road holding conventions of salesmen and finding out why registers were being sold or why they were not being sold.”

Harness Technology

“Much of the work in this factory is done with the aid of machinery. Improved machinery has enabled us to do many things more quickly and better than they were done in the past. It enables us to pay high wages and still sell our cash registers at such low prices. Machinery makes men dear, their products cheap.”

Training

"Teaching is my hobby and we provide the means to find knowledge. The employees have to go to some trouble to stop learning. It takes many forms and directions.“

“Then began the idea of holding night classes so that the employees could learn how to get better jobs for themselves. The whole atmosphere gradually became one of teaching and as such it continued--with the N. C. R. as a university and with every executive and employee, from Mr. Patterson down, as students.”

“When Building No. 3 was finished, part of it was turned into a large schoolroom - an unheard-of idea at the time. Many manufacturers inquired whether Mr. Patterson was running a business or a school. His invariable reply was: ‘Business is only teaching.’”

Ideas

Out of the plan to hold forth rewards for thinking came the suggestion system for the factory force, the profit-sharing plan for both the factory and office, and the famous Hundred Point Club for the salesmen. The suggestion system was another of Mr. Patterson's new ideas.”

I was depending solely for ideas upon myself and upon the comparatively few men about me, and I had no means of knowing who were the bright lads scattered throughout the organisation. That is, I was not only throwing away the brains of about five thousand people, which should have been concentrated in making business better.”

“The suggestion system which has grown and grown until in one year some 3,200 suggestions were submitted.

We decided that a complaint was truly a suggestion leading to an improvement, and therefore to-day both complaints and suggestions are on the same basis. We placed all over the factory suggestion boxes in which any member of the organisation might place his idea and we gave one dollar apiece for suggestions or complaints.”

Instead of paying for a suggestion we found that greater enthusiasm was aroused and more suggestions offered by making a contest. We have two contests in each year, one ending June 30th and the other December 31st. Twelve hundred dollars is offered in 128 prizes; the best suggestion adopted receives $100, the next $75, the next $50, the next $30, the next three $25 each, the next six $20 each, the next thirty-five $10 each.”

We ask [employees] for help from them on all divisions of the business.”

Most of the mechanical improvements in the cash register of today are due to suggestions from employees.”

“Take a typical six months. The number of suggestions received was 3,536; the number of suggestions adopted was 1,315 or 37.2 per cent scattered among 58% employees. Of these 128 received prizes.”

"The suggestions cover the entire mechanical and selling operation of our business, and although I regard the financial gain as highly important, I do not think that it is anything like as important as that other gain which we cannot measure in money- the bringing of men with ideas to top positions in our organisation.”

National Cash Register Employees Dayton Ohio - 1910

“With ideas it is different. It may very well be that the chap with the most active mind and who will do the most to promote the business will not necessarily be the most expert with his hands. Indeed, the best idea men are not commonly the most expert workmen. I have found that the very active brain does not as a rule seem to go with the super-skilled hand,”

The employee is encouraged to observe, think, and suggest, and that alone makes a better man of him. He knows that if he gets into the limelight through his suggestions he is going to get a better job.”

Practically every one of our present factory executives and foremen reached his position through making suggestions.”

Local Focus

It was Patterson’s constant aim to have as leaders for the various organisations natives of the respective countries, and eliminate everything American from the organisations that could in any way be objected to by the natives. Mr. Patterson was thoroughly international and felt at home in whichever country he has happened to visit. He respected and complied with the customs of each country and always impressed upon the leaders of the organisations that they should adapt our business and business methods as much as possible to local conditions.”

Delegation

“Mr. Patterson [had the] new idea of deliberate delegation of duties; the old idea of business was that the executive should delegate to others only that for which he could not find time himself. The new idea of Mr. Patterson's was that an executive should do only what he could not delegate that the chief business of an executive was to think and to plan. Hence his motto: “Never do anything if you can get someone else to do it.”

That business is best which requires the least attention from the head. The pyramid plan of organisation is used at this factory. Everyone has certain duties and responsibilities. This permits the management to give a part of their time to planning for the future.”

Mr. Patterson was a strong believer in giving authority and placing responsibility on the officers and employees of the company, and by placing confidence in them he made them self-relying.”

Emergent Effects

When a few men try to carry the entire load the business suffers. It does not progress as it should. When everyone shoulders his part of the responsibility it is much easier to go ahead. Great tasks can only be accomplished by the assistance of all parts of an organisation.”

Fanatic

Mr. Patterson would not tolerate the sort of man who amasses a fortune, calls himself successful, and retires to bask in the light of past performance. When something was finished, Mr. Patterson crossed it off his chart and went on with the next thing. And when he died his chart was fuller of things to do than at any time before in his life.”

“It is to be remembered that he started late that he was past forty before he took on the N. C. R. He fought, and he worked night and day against odds almost impossible to realise. Often, had he admitted to himself the possibility of being bankrupt, he would have been bankrupt. Not recognising failure, he could not fail. He expected obstacles and it did not make much difference what kind of obstacles at the moment stood in his way he had accustomed himself to dealing with all kinds.”

“Every day Patterson made notes of the things that he should not have done during that day and resolved not to do them again.”

Men do not do big things in dilettante fashion—they put their whole selves in their work, making all else subordinate.”

Keep it Simple

The great company was brought about—step by step and by methods which, although they sound pretentious in generalisation, were exquisitely simple.”

Humility

Patterson had no conception of leisure. Patterson detested the "idle rich"; whenever he heard of a man building a palace or spending some great sum on a necklace, he usually drew a chart to show how much good that man missed doing by not devoting the money to education or to the saving of babies. He never bought an expensive painting in his life; he was not opposed to purchases in the interest of the public, but he spoke bitterly of those who would pay a quarter of a million for a canvas to hang in their own homes where only they and their friends could have the benefit.”

Patterson considered himself only a trustee of what he earned, and his expenditures had to be governed by the laws he made for his trusteeship. He expressed his whole theory of the use of money and of the function of the large corporation in pyramid form and it explains intimately how he shaped his life.”

Mr. Patterson gives to deserving but unfortunate employees and to others. He keeps only enough for his board and clothes and necessaries for himself and children. He has no outside investments except Hills and Dales which the people enjoy with him. On his last trip he can take nothing with him, as shrouds have no pockets.”

“Patterson believed in the equality of effort, not of remuneration. A workman earning twenty-five dollars a week for good work stood just as high with him as an executive drawing fifty thousand dollars a year. When he found the office girls were holding themselves above the factory girls because they could wear better clothing while at work he put all the girls in the organization into white aprons.”

Multi-Disciplinary & Learning

“It must be remembered that Mr. Patterson was an almost uncannily skilled adapter rather than an originator; the line between adapting and originating is hard to draw for he got suggestions from quarters where no other human being would have found them and then turned them in such fashion that no one else would have recognised the suggestion.”

Patterson read or had read for him every business publication; if he found good ideas in a book or magazine article, he bought hundreds of copies and sent them to his executives. He was always learning and he expected everyone about him to be learning.”

Summary

In his annual Berkshire letter, Buffett emphasizes that he and Charlie prioritize picking wonderful businesses over selecting stocks. This approach, which involves identifying the characteristics of exceptional businesses, buying them, and holding them for the long term, has been key to Berkshire Hathaway's success.

John H Patterson, a visionary leader, implemented several innovative strategies that propelled National Cash Register to become one of the most successful companies of its time. As Charlie Munger put it, Patterson "surfed" a technology evolution while delivering customers far more in value than their cost. Patterson's focus on empowering workers, promoting reciprocation, selling based on value-add, sharing profits, striving for continuous improvements, and soliciting ideas from front-line employees helped create an exceptional business that continues to inspire successful companies today.

These principles are based on fundamental truths: customers reward outstanding service, employees want to feel valued and incentivized, innovation comes from trial and error, sharing information adds value, hard work leads to results, and mistakes are opportunities for learning. Ultimately, customers want to be delighted. Keep these principles in mind when evaluating a business, as they have been proven to work time and time again. The fact they form the foundation of Charlie Munger’s recommended study into the investment process, suggests they can add value to each of us.

 




Sources:
John H. Patterson: Pioneer in Industrial Welfare,” Samuel Crowther, Doubleday, Page & Company, 1923.

Picture Credits -
NCR Annual Report 1906 - h/t Jessie Rancourt



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Learning from IKEA’s Ingvar Kamprad

Some brands are so powerful in their categories, so innovative in their thinking and design and so well marketed they have become synonymous with our everyday lives; quite simply, they have become iconic. Apple’s iPad or iPhone are good examples, as is Nike and their sporting equipment and Amazon and their online retail platform. And when you think of flat pack or ‘build it yourself’ furniture, the only name that comes to mind is IKEA.

But its not only about product or brand awareness. The hallmark of many of the successful businesses we've studied has been their strong business model, the unique organizational cultures shaped by visionary leadership, an agility in responding to change, and the unwavering commitment to long-term goals and IKEA, the furniture business founded by Ingvar Kamprad, is a prime example of these successful business traits.

Kamprad saw the opportunity to provide well designed furniture at affordable prices to the general public and created a business model that democratized luxury. From the start, his goal was to offer prices much lower than competitors, achieved through unconventional methods such as large showrooms outside cities, sourcing from low-cost locations, flat-packing for distribution savings, self-service and assembly to reduce production costs, and a focus on high volume for economies of scale.

Like many successful companies, including Nike, Disney, Hershey, FedEx, and Amazon, IKEA encountered obstacles in its early days that threatened its success. One of these challenges was the resistance from existing furniture retailers to Ikea's low-priced products, which led to suppliers boycotting the company. This forced Kamprad to look for suppliers in communist Poland, where he discovered significant cost savings. Another issue was that the company's original mail-order model faced competition from low-quality products offered by other firms, which eroded customer trust. To overcome this, Kamprad opened a showroom to display Ikea's products, setting the stage for the development of its worldwide store network. Through these challenges, IKEA was able to turn obstacles into opportunities.

Kamprad's frugal nature and focus on cost control allowed for low prices and drove growth through increased volume and economies of scale. His long-term commitment to providing furniture at accessible prices for a wider audience enabled the business to expand globally and attain substantial long-term value, even at the cost of near-term dilution to earnings, which may not have been feasible under public ownership.

Kamprad embodies the qualities of a true ‘business fanatic’ admired by Buffett and Munger. Decades ago, he restructured the business, transferring a significant portion of ownership to a charitable foundation. He was a visionary leader who never stopped striving to improve the business, always with an eye towards ensuring its longevity beyond his lifetime. Though he has passed, his legacy lives on in the spirit of IKEA, which remains committed to delivering quality furniture at accessible prices to all, as he envisioned from the beginning.

A few years ago, I was astounded by the timeless relevance of Ingvar's 1976 "Testament of a Furniture Dealer." Recently, I had the pleasure of meeting a former country head of IKEA who recommended two books: "Leading by Design - The Ikea Story" by Ingvar Kamprad and Bertil Torekul, and "The IKEA Edge" by Anders Dahlvig. I've used these sources to shed light on the key qualitative attributes that have driven IKEA’s exceptional success as one of the world's leading companies.

Democratising Luxury

“Ikea was intended to make the kind of quality products afforded by the rich available to everyone else.” Anders Dahlvig

“The product range – our identity. We shall offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.” Ingvar Kamprad

“What keeps me going is the feeling that in a wider sense I am participating in a gigantic project of democratisation, though a different one from what is normally talked about.” Ingvar Kamprad

“Expressed a trifle solemnly, our business philosophy contributes to the democratising process. It makes good, handsome, and cheap everyday articles available to a great many people at a price they can afford.” Ingvar Kamprad

Scale-Economics-Shared

Ikea spared no efforts to decrease the buying costs of the products. However, unlike many companies, it reinvested these improvements in lower prices to the customer, and did not primarily use them in improving margins. This is a very different business model compared to most other retail companies. Herein, we see one of the basic elements of the Ikea model. The company focused on developing its customer base, even if it meant, in the short term, sacrificing its profit margins.” Anders Dahlvig

Low Prices & Quality

“‘Delivering prices so low that the many people will be able to afford them.’ This is the most fundamental statement that exists in Ikea's business model. Low prices take priority over everything else. Low prices are the very foundation of the vision and business idea.” Anders Dahlvig

It is the many people whom we aim to serve. The first rule is to maintain an extremely low level of prices. But they must be low prices with a meaning. We must not compromise either functionality or technical quality.” Ingvar Kamprad

No effort must be spared to ensure our prices are perceived to be low. There shall always be a substantial price difference compared to our competitors, and we shall always have the best value-for-money offers for every function. Every product area must include ‘breath-taking offers.’” Ingvar Kamprad

Low price is written into our business idea as an essential condition for our success. Anyone can tell you that it’s impossible to have a low price, good quality and good profitability if you don’t have low costs. So cost-consciousness has to permeate everything we do, almost to the point of that kind of exaggerated meanness that some may call ‘penny-pinching.’” Ingvar Kamprad

The company's focus is on decreasing sales prices to customers and making products affordable to more and more people. Lower sales prices deliver higher sales volume.” Anders Dahlvig

“The internal goal is to always have prices at least 20 percent below the competition on comparable products, and often even more than that. For instance, between 1999 and 2009, we strove to reduce prices by 20 percent.” Anders Dahlvig

“To be able to compete on prices and maintain a profitable business, retailers must be better than the competition at operating efficient stores.” Anders Dahlvig

“Ingvar took self-assembly as his starting point in the actual manufacturing process and changing this and that there, cutting away a millimetre here, a centimetre there, all with the aim of saving material and keeping the price down.” Bertil Torekull

“From Kamprad comes the same perpetually driving question: How can we make it a little cheaper? What do you think? Of course we can.” Bertil Torekull

“One of IKEA’s basic principles is that of ‘the substantial price difference.’” Bertil Torekull

“Throughout its history, IKEA has shown that it is focused on customer need for quality furniture that does what the consumer wants it to do.” Anders Dahlvig

Competitive Advantage & Long Term Focus

 “The aim of our effort to build up financial resources is to reach a good result in the long term. You know what it takes to do that: we must offer the lowest prices, and we must combine them with good quality. If we charge too much, we will not be able to offer the lowest prices. If we charge too little, we will not be able to build up resources. A wonderful problem! It forces us to develop products more economically, to purchase more efficiently and to be constantly stubborn in cost savings of all kinds. That is our secret. That is the foundation of our success.” Ingvar Kamprad

Ingvar Kamprad [Source: IKEA]

“Innovations in the retail industry are often easy to copy, and potential differentiation is short lived. Substantial success can only be achieved only when a retailer has a unique product range and is in control of the whole value chain.” Anders Dahlvig

“By doing things differently, companies can establish a unique position in the market, one on which they can thrive for a long time.” Anders Dahlvig

“The Swedish range expression is one of the company's important competitive advantages.” Anders Dahlvig

Why do customers choose Ikea over other retailers? What are the customer needs that Ikea satisfies?

  • Design, function, and quality at low prices

  • Unique (Scandinavian) design

  • Inspiration, ideas, and complete solutions

  • Everything in one place

  • ‘A day out,’ the shopping experience

These five success criteria come across as very basic solutions to customer needs. You may well say that they are similar to those of most companies. The difference, in my opinion, is that Ikea is much better at delivering on these customer needs than are other retailers. The company's business model represents a blueprint for how they are executed. Most competitors focus on one or at most two of these customer needs. The real strength of Ikea lies in the combination of all five.” Anders Dahlvig

Cost-consciousness must be a part of every priority. Having said that, our vision is a long-term vision, and it can only be achieved with strong profitability on a long-term basis. This means we must be prepared to accept a lower level of profit, in the short term, if this puts us in a stronger long-term position. So when the economy slows down, we will continue to invest in our concept, sticking to the investment programs in our stores, sticking to our training programs and our pricing targets.” Anders Dahlvig

Differentiation

The product range is at the core of any retail company. Being able to differentiate in range and price versus the competition is more important than any other aspect of retailing. Location, services, store standards, etc., are all important, but they are secondary to having an attractive product offering. Range differentiation is a major challenge in many retail sectors, such as food, DIY, or electronics, where the major brands are developed and owned by other companies further back in the value chain. Ikea controls the entire value chain including the product range, a factor that puts it in a good position.” Anders Dahlvig

“To be really successful in global expansion, you need to offer something unique, something the local competition cannot match.” Anders Dahlvig

Differentiation in product range and price is key to superior profitability. When the product range is controlled by other companies as is commonly the case in the fast-moving consumer goods sector (FMCG)-retail companies have a problem. Retail sectors where this is a dilemma include the food sector, the DIY sector, and the electronics sector. In these sectors, the range is pretty much the same among different retailers, and competing on price is almost impossible. The brand owners are interested in keeping stable prices, and the retailers have a hard time competing on price… When all other components are the same, size seems to make difference to profitability.” Anders Dahlvig

“‘No-brand’ retailers have a much bigger challenge [trying to compete] since they need to increase the level of own brands and ideally move to 100 percent. This is not just a matter of ‘fixing’ some products. It means a total transformation of the company.” Anders Dahlvig

Financial Resilience

IKEA catalogue 1970 [Source: IKEA Museum]

Ikea has a very conservative financing policy - earn your money before you spend it. Growth is important, but you should take good care of your customers before you add new ones (i.e., new stores and markets). Development comes from listening to and learning from your customers, not from a quick-fix copy of what the competition is doing.” Anders Dahlvig

“With a liquidity of 20 percent and a solvency of 50 percent, both IKEA and Ingvar Kamprad reveal themselves. For thus have the laws been since the birth of IKEA: A good cash reserve always must be ensured, all property must be owned, all expansion must be self-financed.”

Acquisitions

All growth so far has been organic. Ikea has been reluctant to grow through acquisition and merger with other companies. With a strong culture and specific needs in terms of store size and location, it is very difficult to find a suitable company to acquire. I think it is fair to say that Ikea is not in a hurry. This may seem like a contradiction, given the track record of fast growth over many years.” Anders Dahlvig

Growth and Profitability

Growing sales in existing stores is the most cost-efficient way to grow the company. Second to that is to build new stores in existing markets. The most expensive option is to open in new markets.” Anders Dahlvig

Ikea thrives on growth. Its history is all about growth. And I believe opening new stores is the engine of most retailing.” Anders Dahlvig

“If we had taken ten kronor for that mug, and not five, then we would, of course, have ‘earned’ more on each mug - perhaps one and a half kronor - and had a better ‘gross profit margin.’ But we would have sold only half a million of them instead of almost twelve million, on which we now earn one kronor each.” Ingvar Kamprad

Big sales volumes create buying price advantages.” Anders Dahlvig

Don’t Fear Mistakes

Ingvar Kamprad [Source: IKEA]

Only while sleeping one makes no mistakes. Making mistakes is the privilege of the active – of those who can correct their mistakes and put them right. Our objectives require us to constantly practise making decisions and taking responsibility, to constantly overcome our fear of making mistakes. The fear of making mistakes is the root of bureaucracy and the enemy of development.” Ingvar Kamprad

No one has had as many fiascos as I’ve had. Only those who are asleep make no mistakes.” Ingvar Kamprad

“In IKEA’s business philosophy, the whole matter should be inscribed as a golden rule: regard every problem as a possibility. New problems create a dizzying chance.” Ingvar Kamprad

Delegate & Empower

“Accepting and delegating responsibility -  In an expanding company there is neither the time nor the resources to work out precise descriptions of all the different areas of responsibility and draw up the boundaries between them – especially as there is always going to be a lot of new, unoccupied positions. This means that we must always be willing to accept and to delegate responsibility.” Ingvar Kamprad

“We often must have the courage to promote people who show potential even before they have any documented experience. We encourage those who have the desire and the courage to take responsibility when given a relatively free hand. We could give many examples of young co-workers who have taken responsibility and reached a position which would never have been possible in any other company.” Ingvar Kamprad

The framework is sacrosanct, but within it is freedom, and a wealth of innovation is allowed to explode.” Ingvar Kamprad

Value Employees

“The companies whose staff see their job as merely a meal ticket – they are the companies which have problems. No one can be happy or do a good job unless they like the place where they work. After all, it’s there that they spend most of their waking hours. Feeling appreciated and motivated leads to good results. Many surveys have shown that co-workers tend not to regard things like salary, working hours and a company car as the most important things. For them, interesting tasks, the feeling that their efforts are appreciated by managers and co-workers alike; the pleasure of being part of a successful team; and a sense of “belonging” and togetherness, both at work as well as outside work, are far more important criteria.” Ingvar Kamprad

What is fundamental in leadership? Love. Deep down is a genuine sense of caring.” Ingvar Kamprad

Share of Voice vs Share of Market

“That the Ikea brand is bigger than the company’s actual size is shown by the fact that in 2007 Ikea was ranked only number 37 in sales among all retail companies. However, in terms of brand recognition, the ranking was number 38 among all global brands and first among retail companies.” Anders Dahlvig

Culture

The company culture is the glue that keeps the organisation together, that makes the company different from all others. It is, quite simply, the soul of the company. To keep it strong, therefore, it has to be integral to everything you do.” Anders Dahlvig

Companies that build a strong company culture that is adapted to their business have a powerful marketplace advantage.” Anders Dahlvig

Tone from the Top

The leaders of the company must be living examples of the values; Ikea’s culture must be reflected in everything they do. This is something they can never delegate away or compromise on.” Anders Dahlvig

“All elements of what today is called the Ikea culture are in fact the values and characteristics of Kamprad himself.” Anders Dahlvig

Kamprad’s unpretentiousness became the example, and later on it never paid to have any special pretensions. Those who tried did not survive long and left of their own accord.” Bertil Torekull

IKEA Catalogue 1954 [Source: IKEA Museum]

Promote from Within

“The founder is still there after 65 years, and during those decades the company has had only three CEOs, all internal promotions.” Anders Dahlvig

Ikea promotes the highest levels of management internally, which ensures stability and understanding of the criteria for success.” Anders Dahlvig

Walk the Floor

“Understanding the details of all levels of the business is an important part of kea's values. Managers must have experience on the shop floor and spend time in the stores and at the suppliers. Ikea promotes this through so called anti-bureaucratic weeks, during which corporate managers are encouraged to take time out from their regular work and spend time working in the stores in order to better understand the realities of the customers and employees.” Anders Dahlvig

Hiring

Recruit the Right People. How high you set the bar when recruiting will determine how successful you will be. Lower demands equal lower results; higher demands bring higher results. When in doubt, do not recruit, even if you are under pressure to fill a vacancy. Most of the time, your gut feeling is correct. External recruitment, in most cases, should be a last resort.” Anders Dahlvig

Staffing a company with the best people is key to achieving the best business results.” Anders Dahlvig

“A cornerstone of the company’s practices became the culture of promoting people on potential rather than experience.” Anders Dahlvig

“The company uses ‘value based recruitment’ in all parts of the company. Candidates must be suitable not only from a standpoint of technical competence, but also whether they share the company's values.” Anders Dahlvig

“Seventy-five percent of Ike employees work in the stores. The most important task of the store is to attract, develop, and retain good people.” Anders Dahlvig

“Ikea’s policy regarding the salaries the company pays is to position itself in the middle of the market. The salaries Ikea offers its employees must be fair, but they must not be the main reason for choosing to work for the company.” Anders Dahlvig

Ownership

“We want managers and co-workers who understand all aspects of Ikea’s operations; people who can think about their function, but are able to think like owners too.” Anders Dahlvig

Headquarters

The store managers and buyers are the heroes of the company.” Anders Dahlvig

“In total, global staff functions, including finance, HR, marketing, sales, restaurants, property, legal, and so forth had around 260 people in 2008. The company had about 125,000 employees.” Ander Dahlvig

“We want a lean, effective, highly competent Service Office organisation with a passion to give the best possible service to the stores.” Anders Dahlvig

Encourage Ideas

We encourage our co-workers to come up with unconventional ideas and to dare to try them out. Of course, this has to happen under controlled conditions within the framework of our concept, and it is certainly no excuse for foolhardiness. After all, you only need to invent the wheel once.” Ingvar Kamprad

“IKEA encourages everyone to come up with new and better approaches, giving all employees the opportunity to be part of development and change.” Anders Dahlvig

Obliquity

“For those who are motivated by profits and through profits by the creation of their own wealth, we must make the case that this objective is best achieved through being a good company because good companies attract good people who can then deliver the profits.” Anders Dahlvig

“Companies should seek to deliver value in a broader sense than merely returning value to shareholders. They have a larger social mission beyond profit.” Anders Dahlvig

IKEA catalogue 1967 [Source: IKEA Museum]

Purpose

Most people feel motivated and happy if work has a bigger meaning beyond power, wealth, and other inflated statements.” Anders Dahlvig

Most people want more from their lives than just to earn their keep, provide for their family, and live for the moment. With a greater purpose than just making money, companies can provide a larger meaning in work and life for their many employees, which is something many people look for.” Anders Dahlvig

“Studies show that people who work for IKEA believe that they really are working for a better society and therefore like working for IKEA. They believe that in their daily lives they are contributing to a better world.” Ingvar Kamprad

Humility & Frugality

“We do not need fancy cars, posh titles, tailor-made uniforms or other status symbols. We rely on our own strength and our own will.” Ingvar Kamprad

“We must be willing to accept criticism and act upon it without delay. Listen to customers, suppliers and others around you.” Ingvar Kamprad

“Simple habits, simple actions and a healthy aversion to status symbols are a part of the IKEA culture, but we must never forget to show respect for each other.” Ingvar Kamprad

At Ikea, people greet each other with first names. Managers and employees on all levels conduct business travel in the same way - there's none of the division between first-class and coach that one sees at many organizations. Managers and employees eat together in the staff canteen. Everyone adopts the same informal and common dress code. The company tries to eliminate all status symbols and create a trustful relationship between employees and managers.” Anders Dahlvig

I have always said that I believe that the biggest threat to Ikea is Ikea itself. Some worry that some new technological innovation will come along and change the game of home furnishing retailing in a way that would jeopardize Ikea. However, I think this is unlikely. Competitors so far have shown little sign of innovation, and people will, I assume, need home furnishings in the future. The big threat is from within.”

“I think Ikea needs a real challenge from a global competitor in order to better itself. As we all know, lack of competition can be a powerful sleeping pill.” Anders Dahlvig

“The founder’s own ability to embody the company motto, his frugal habits, and his notorious inclination to travel standard class even as a billionaire have contributed to an aura of legend and progress, but also of modesty and ordinary humanity.” Bertil Torekull

Not allowing himself to be arrogant, Kamprad puts himself last in line for food at certain functions, although others urge him to go first. He simply can’t.” Bertil Torekull

“The tales of the simplicity and thrift of the billionaire are more than just myths - they are reality. His total lack of external finery, grand clothes and habits, smart watches, or luxury car have become so much a part of the image of himself and the company.” Bertil Torekull

“Kamprad is always the same. Never boast, always show humility, take nothing for granted, always think about and prepare for bad times ahead, never let anything go to your head - deep down in the marrow of his bones is the conviction that success is the worst enemy of success.” Bertil Torekull

Keep it Simple

Keep it simple! Complicated systems and rules are a form of paralysis.” Ingvar Kamprad

Simplicity is a fine tradition among us. Simple routines mean greater impact. Simplicity in our behaviour gives us strength. Simplicity and humbleness characterise us in our relations with each other, with our suppliers and with our customers.” Ingvar Kamprad

Consistency

“Another important factor for Ikea's success that at first glance may seem to be in conflict with differentiation is consistency. Companies frequently change the core components of their business such as their range or their target customer groups. This may, of course, be necessary when you are in trouble, but it does not help in building a strong brand identity.“ Anders Dahlvig

Local Decision Making

Make decisions on a local level wherever possible.” Ingvar Kamprad

“Ikea’s philosophy has been to recruit and invest in local people.” Anders Dahlvig

Local responsibility is always important. In the retail world, store management has an enormous impact on performance. The difference between a good and a bad store manager can mean a difference in store profitability of 100 percent or more. Good people will stay motivated in the stores if they feel that they are fully in charge of their operations.” Anders Dahlvig

All business is local, they say.” Ingvar Kamprad

Small Teams

“Don’t forget: a small team with a lot of decision-making power can deliver a knock-out punch to sluggish bureaucracy.” Ingvar Kamprad

Maintain Focus

Concentration – important to our success. The general who divides his resources will invariably be defeated. Even a multitalented athlete has problems. For us too, it is a matter of concentration – focusing our resources. We can never do everything, everywhere, all at the same time. Our range cannot be allowed to overflow. We will never be able to satisfy all tastes anyway. We must concentrate on our own profile. We can never promote the whole of our range at once. We must concentrate. We cannot conquer every market at once. We must concentrate for maximum impact, often with small means.” Ingvar Kamprad

IKEA Catalogue - 1972 [source: IKEA Museum]

“In 2010, Ikea stores had more than 600 million visitors. Almost anything could probably be put into the stores and it would sell well, at least initially. And there have been many proposals to add products to the company's mix. However, the company has not let itself be tempted to stray off track; only home furnishing products are allowed into the stores. This is the area Ikea knows well and where it can create competitive prices. This way the company stays focused on delivering on its vision and business idea and maintains a clear brand profile.” Anders Dahlvig

“Ikea is better at building long-term advantages and creating stronger growth when prioritising and focusing on fewer areas. History has shown many times that this strategy pays off.” Anders Dahlvig

Continuous Improvement

Most things still remain to be done. A glorious future! The feeling of having finished something is an effective sleeping pill. A person who retires feeling that he has done his bit will quickly wither away. A company which feels that it has reached its goal will quickly stagnate and lose its vitality. Happiness is not reaching your goal. Happiness is being on the way. It is our wonderful fate to be just at the beginning. In all areas. We will move ahead only by constantly asking ourselves how what we are doing today can be done better tomorrow. The positive joy of discovery must be our inspiration in the future too.” Ingvar Kamprad

We have already found satisfactory solutions for most of what we have to do, But that doesn’t stop us questioning every single one of our production methods and techniques, nor constantly asking ourselves: “Why?”, “Why not?”, or “Is there another way of doing this?” Ingvar Kamprad

“We have already learned that success can be a dangerous thing. It can easily lead to stagnation and death. Once we’ve accomplished one thing, we need to remember that there is still plenty left to do.” Ingvar Kamprad

Change

Dynamism has to live on, the company has to change all the time, be supplied with new cells or die.” Ingvar Kamprad

Customer Psychology

“Ikea integrates the customer even into the sales process. I think that when customers feel that they are in charge of an activity, they often perceive it as better service even if it means more work for them.” Anders Dahlvig

The restaurants are viewed as part of the communication mix rather than as a profit centre. This is one of the secrets to the very low prices in the restaurants and food shops. The restaurants are there to sell more home furnishings by encouraging people to remain in the store for a longer time.” Anders Dahlvig

History of IKEA logos [Source: IKEA Museum]

“By providing a children’s ballroom, a restaurant, and different family activities, Ikea tries to create something more than just another shop - the company offers the family a fun day out.” Anders Dahlvig

“The bistro is situated beyond the exit checkout. Sometimes called ‘the calming-down department’ - when the customer has paid up after a wearying trip around the store and is exhausted, he or she is offered something that ‘makes up for it all,’ a cup of coffee and an almond cake, for instance, or a hotdog, for next to nothing.” Bertil Torekull

No Master Plan

The company’s growth was not strictly planned but proceeded by taking advantage of opportunities as they presented themselves.” Anders Dahlvig

“In the early days of simple operations, improvisations, times of joy and sudden impulses we were feeling our way along, failing, trying again, and succeeding.” Ingvar Kamprad

Tailwind

“In thirty years, employment in agriculture was reduced by 75 percent, and the suburbs grew as if sprouting out of the ground outside cities. During the first twenty years after the end of the war, one million new apartments were built… townspeople need to furnish their homes as cheaply as possible.” Bertil Torekull

A Family Culture

“Kamprad quite literally sees his company as a kind of family and himself as the father.” Bertil Torekull

The firm as family became Ingvar’s greatest pride. In the name of family, the Ikea spirit was created... At heart he regards his employees as children, siblings, and other relatives, although their numbers now are approaching forty thousand.” Bertil Torekull

“When Kamrpad speaks of IKEA, the phrases together, family, belong to each other, and fellowship arise again and again. They are never missing. IKEA is first and foremost a family.” Bertil Torekull

Environmental Considerations

“Not only is maintaining environmental standards a cost (and, as such, a potential threat to profitability and shareholder value), but in fact environmental work can contribute to increased profitability, more motivated workers, and a long-term strengthened position in a market. A strong environmental stand, in other words, represents a potential market advantage.” Anders Dahlvig

“In most cases, what is good for the environment means using fewer resources; using fewer resources most often results in lower costs, which Ikea has been able to pass along to our customers.” Anders Dahlvig

Unconventional

Daring to be different is one of the most important criteria behind the IKEA success. It’s the thinking behind some of the most significant aspects of our business idea. Here are some examples: while other furniture retailers were selling manufacturers’ designs we started to make our own designs. While furniture dealers set up shop in the centre of town, IKEA was building large stores out of town. While others turned to furniture factories to help them make tables, IKEA got them made by door manufacturers. Whereas others sell their furniture assembled, IKEA lets customers assemble it themselves.” Ingvar Kamprad

“By always asking why we are doing this or that, we can find new paths. By refusing to accept a pattern simply because it is well established, we make progress. We dare to do things differently! Not just in large matters, but in solving small everyday problems too. It is no coincidence that our buyers go to a window factory for table legs and a shirt factory for cushions. It is quite simply the answer to the question ‘why?’” Ingvar Kamprad

The Ikea mantra is that people have more time than money. In other words, the company rewards its customers for their involvement in the distribution of the company's products. The more your customers do, the less they pay. The entire sales system is based on integrating the customer in the distribution process. The customers not only choose, pick, and pay for the products they want, they transport and assemble these products themselves. By using this system, Ikea can keeps its costs low and thus reduce its prices even more.” Anders Dahlvig

“The steered customer flow is one important principle of the store.” Anders Dahlvig

Self-service is now Ikea’s selling model and has remained so. Self-service, numerous checkouts in the exit area, and a decrease in order sales provided a formidable boost to profitability and turnover. The customer took over what was perhaps the weightiest element in all furniture sales: deliver and unpacking.” Bertil Torekull

Win-Win

Nursing the supplier is one of Kamprad’s hobbyhorse principles - one he still imparts to his staff.” Bertil Torekull

It never pays to work negatively.” Ingvar Kamprad

“As I often say: the best deal is when neither buyer nor seller lose, but both gain.” Ingvar Kamprad

Own the Property

“When making a new store investment decision, you can be sure that land prices will never be cheaper in the future. You can be equally sure that getting a retail license will never get easier. I think it is wise to buy as much land as you possibly can and build bigger (with a retail license) than you initially think you need to in order to ensure flexibility for the future.” Anders Dahlvig

Owning the property perhaps slows the pace of growth, but provides security. No landlord can come in ten years’ time and raise the rent by 20 percent.” Ingvar Kamprad

Fanatics

“Most of the job remains to be done. Let us continue to be a group of positive fanatics who stubbornly and persistently refuse to accept the impossible, the negative. What we want to do, we can do and will do together. A glorious future!” Ingvar Kamprad

IKEA catalogue 1968 [Source:IKEA Museum]

A demon in me says I have so much to do … I am never satisfied. Something tells me what I’m doing at the moment has to be done better tomorrow.” Ingvar Kamprad

Ingvar loves it, always wants to lie as close to it as possible, and never tires of improving it, never wants to go home from work… The day he is free of IKEA, life for him will no longer be worth living.” Bertil Torekull

I would hardly wish for the next generation to be as tied to their work as I am.” Ingvar Kamprad

Private Ownership & Founder

“Ikea is not a listed company and can work from a more long-term perspective.” Anders Dahlvig

“The most likely scenario when entering most emerging markets is many years of low or no profitability and a high level of risk before you can harvest. This is probably less appealing to investors and management in many publicly owned companies who are looking for superior returns in the shorter term.” Anders Dahlvig

“I see many advantages of strong owner control. In such companies, it's more likely that the business will have a longer-term perspective and be willing to take more risks.” Anders Dahlvig

The existence of a present, dedicated, and knowledgeable founder and owner is a considerable advantage. The founder is crucial to establishing the strong heritage and values that give the company a soul by which loyalty and motivation among the employees can more easily be created. No employed CEO will stay long enough to be able to take on that role.” Anders Dahlvig

“Since Ikea is a private company, it need not concern itself with maximizing shareholder value in the short term. This policy gives Ikea greater security and the ability to control its own destiny.” Anders Dahlvig

“There is very little pressure to pay dividends to the owner (the Ikea Foundation) if the capital is needed to expand the business. For me as CEO, for our management, and for our employees, it was always very comforting to know that the profits stayed within the firm and were reinvested into the business.” Anders Dahlvig

“Today everyone has been converted to the conviction that going public would do more harm than good to IKEA in the long run. The perils of quotation on the stock exchange are exposure to the media and demands for constantly increased profit and expansion, regardless of the business cycle of competition and vision. Public companies like to distribute one-third of their annual profit to their shareholders, money that disappears out of the companies and works against building up reserves, something IKEA needs in order ‘to take bold decisions.’” Bertil Torekull

“North American sales director, Kent Nordin, comments, ‘No stock exchange company would ever have accepted the weak development we reported in the beginning [when entering the US]. But since long-range timing and patience is an IKEA credo, we had time to rethink and build a partly new base for survival.” Bertil Torekull

“It would take 22 years before IKEA North America could report that all the region’s twenty stores were in the black.” Bertil Torekull

Summary

Ingvar Kamprad wasn't the first to bring luxury to the masses. He followed in the footsteps of Vanderbilt (steamships), Ford (automobiles), Hershey (chocolates), and McDonalds (eating out). Since Ikea's creation, Southwest Airlines have democratized the skies and Zara and Uniqlo have done the same in fashion.

Ikea's business model has proven to be a formidable force in the furniture industry, democratizing luxury by providing access to high-quality, stylish furniture at an affordable price. With its ability to overcome challenges, utilize and share economies of scale, and maintain a long-term focus, Ikea serves as a valuable guide for unconventional success. The insights of Ingvar Kamprad, Bertil Torekul, and Anders Dahlvig provide valuable lessons for aspiring entrepreneurs and investors.

So the next time you're putting together a bookshelf with an Allen key, remember the man who made it all possible and give a nod to the furniture king, Ingvar Kamprad.









Sources:
The Ikea Edge: Building Global Growth and Social Good at the World's Most Iconic Home Store,’ Anthony D. Fitzgerald, Kogan Page, 2020.

Leading by Design: The Ikea Story,’ Ingvar Kamprad and Bertil Torekull,’ HarperBusiness, 1999.

Testament of a Furniture Dealer,’ Ingvar Kamprad, IKEA AB, 1976.



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Learning from Sun Tire’s Dick Erickson

Dick Erickson was impressed as he entered the sixth Les Schwab Tires store of the day. He was struck by the bustling activity and immaculate presentation. The modern stores were open early and everything, from the workshops and restrooms to the well-groomed and friendly staff, was spotless. The customers were all smiles. Les Schwab Tires, a tire business in the west, was known for earning margins more than double the industry average, sparking Erickson's curiosity. That day, he was determined to uncover the secret behind their success.

Charlie Munger, one of the world's most accomplished investors, has shared valuable lessons on the importance of curiosity, the power of incentives, and the value of emulating successful strategies. Erickson, the founder of Sun Tires, exemplified these principles.

Erickson spent that day visiting Les Schwab Tires closely observing and studying the methods and identifying key strategies to implement in his own business. Like other successful business leaders, such as Sam Walton, Jeff Bezos, and Jim Sinegal, Erickson understood the value of emulating successful strategies and was not hesitant to adopt them in his own business. So much so, that over the next two decades, he made an annual pilgrimage to the Les Schwab Tires stores, returning consistently with new and innovative ideas to enhance Sun Tires' operations and performance.

One key strategy he identified was Les Schwab's defined profit-sharing plan, which he implemented at Sun Tires and found to be highly effective. This unique incentive structure is at the top of the list of strategies recommended by Charlie Munger for studying incentives.

In addition to implementing a profit-sharing plan, Erickson ran each store as a separate profit and loss centre and implemented the practice of sharing weekly store performance metrics to drive internal competition, which is a common strategy among successful companies. However, what sets Sun Tires apart is the concept of "Specialized Work Units" for the business units that provided support functions. Erickson benchmarked industry norms to establish cost targets based on a percentage of revenues and then incentivized staff to support the revenue-driving functions and minimize costs, to maximize their take-home pay. This strategy fostered employee unity, decreased dependence on middle management, and removed bureaucracy.

The human capital practices of employee empowerment and incentives have been instrumental in driving Sun Tires' success in a highly competitive industry. This approach is a unique way to build a successful business, and more information on how these concepts were implemented at Sun Tires can be found in Dick Erickson and Danny Murphy's excellent book, ‘How the Rubber Meets the Road.’

I’ve included some of my favourite extracts from the book below.

Tone at the Top

“In any leadership role, if the leader is not walking his or her talk, the follower or the subordinate will become sceptical of what the leader is saying. You must be a living example of what you’re telling people.”

“Good customer service isn’t magic. The focus on customer service must come from the top down in any organisation.”

Hiring Policies and the Spirit of Service

“When I was hiring people for any form of customer service, I was always trying to detect whether they had the spirit of service in them.”

“I’ve seen people lose control of their payroll, thinking that if they hired in advance to prepare for an increase in business, the customers would show up. That’s not necessarily so. Sun Tire hire people as they were needed, and I recommend that approach to others.”

Copy Ideas

Need a game plan? Copy one. You can’t copy patented devices or processes, copyrighted information, or trademarks. On the other hand, you can observe the way a successful business operates and incorporate some of what they do in your plan.”

Copying someone else’s successful plan can be very efficient way to build a business. However many entrepreneurs have a problem with copying a game plan. They have their own strong opinions about how to do things. They’d prefer to make their own mistakes and learn as they move forward.”

“What I’ve figured out in business has been by watching successful people and imitating them.”

Exceed Customer Expectations

“Start with a game plan that you know will exceed customers’ wants and needs.”

Exceeding customers’ wants and needs should always be the top priority.”

Excellent customer service leads to longevity in business. When customers know that your company is going to solve their problems, they will keep coming back. He will tell their friends about your company. That leads to growth. Excellent customer service also gives employees something to take pride in.”

Treating customers in ways that build trust is one way to beat the competition.”

“When you work in customer service, you must stay upbeat no matter what’s going on in your personal life.”

“Tires are a commodity. We had plenty of competition that sold and serviced similar products. Tire stores usually had three ways to compete: low price , association with name brands (Michelin, Goodyear, Firestone), and customer service. It was like a three-legged stool which must have all three legs balanced to function well. Most tire stores focused on brand names and competitive prices. Customer service was last on the list and there were only few competitors working in that direction. There were several reasons:

  • Good service is hard to perform consistently.

  • Marketing good service is also a challenge.

  • Training blue-collar workers to focus on customer service and perform to customers' satisfaction isn't easy.

Since most tire stores were concentrating on name brands and competitive prices, customer service appeared to be the best way to set Sun Tire apart. We sold name brands and made tires available at competitive prices, just like most of the other stores. If customers wanted Michelins, we had them. If customers wanted competitive prices, we had something for them. However, I saw customer service as the best way to win at the tire game. It wasn’t just a business strategy though, I wanted customers to be happy.”

Word-of-Mouth Advertising

Excellent service is the key to developing loyalty from customers and clients. Excellent service is also the best way to turn customers into members of your booster club. It’s a well know fact that the most effective advertising isn’t advertising in the traditional sense at all. The best advertising is by word-of-mouth, someone telling a friend how great it was to do business with an organisation. When people get truly excellent service, they tell their friends about it because they know that their friends like excellent service as much they themselves do.”

Appearances

“Whether your operation involves showrooms, waiting rooms, dining rooms, or meeting rooms, the cleanliness and neatness of the facilities are evidence of your attitude towards customer service. Customer areas should always be neat and clean. Work areas should also be neat, and as much as possible, clean. In the tire business, you can’t expect the work areas to be sparkling clean like a hospital. Still, even in work areas that are hard to keep clean, everything should look neat.”

Reward and Empower Employees

“Employees should be given the opportunity to earn the best compensation in the industry.”

There’s value to empowering employees. When a customer came back with some problem, the manager could take care of it up to $500. For problems up to that level, they didn’t have to get an approval from a superior. By allowing employees to make decisions at levels they are capable of, the need for supervision is reduced and the customer gets taken care of more quickly. A positive by-product is that employees feel engaged and empowered and that gives them positive feeling about their work.”

When profit sharing is substantial, most employees do their best to improve profitability. Since other organisations didn’t have anything like Sun Tire’s program, it gave us an edge in terms of recruiting and retention.”

Sensible Growth

“Due to ego, some business owners pursue growth for the sake of growth. Growing at a moderate pace is sometimes better than trying to grow too quickly. A Sun Tire manager once remarked to me that he didn’t understand why we didn’t have fifty stores. I explained that good managers are the key to growth, and I believed in having a manager ready for any new store.”

Expect Tough Times, Learn from Them

There are going to be tough times in every business. The important thing is to learn from them, make appropriate changes, and be prepared to do better next time.”

Humility

I never got caught up in the expensive trapping of success. I didn’t get a second home, or a luxury car, or an Armani suit.”

A good mentor will share with you what he thinks you need to hear, not necessarily what you want to hear.”

Complacency

“I’m convinced that complacency can absolutely destroy a company. If I ever become complacent, it didn’t last long. I’ve been consistent about looking for better ways to get things done.”

Transparency and Internal Competition

The ‘Iron Man Report’ was a weekly report to provide transparency about how each store was performing compared to the other stores. I started with twelve items, but one of my mentors told me that was too many. People can’t concentrate on more than a handful of things at the same time. When the Iron Man Report came out, it was bragging rights to the achievers. The tire business is competitive, and I always wanted managers who liked to compete. The Iron Man Report provided an opportunity to compete within the company. Sharing the reports gave each store a picture of how they stacked up with the other stores. Nobody wanted to be on the bottom month after month.”

It’s particularly important for a profit-sharing plan to be defined and transparent. That way, employees can see and understand how the amounts are calculated.”

Store Location

“When people talk about getting a great deal on a secondary location, I shake my head. For retail, you must have a good primary location.”

Develop Trust

Trust reduces the cost of doing business. When more trust is placed in workers, less management oversight is needed. Lower management expenses translates into a better bottom line. Trust and honesty are like brother and sister. Trustworthy employees do not steal from the firm. Trust among team members fosters efficiency.”

Train Staff

Train, train, train. Employees should continually receive the training they need to be successful in their jobs.”

Community Engagement

“It’s important you support whatever community you are in with your time and money. Business owners need the support of their communities. In turn, they should find ways to give back to their communities.”

Merit-based Competition

Some companies have non-compete clauses in their employment contracts. Sun Tire never did. I always thought that if someone felt like he or she could do better elsewhere, he or she ought to be free to move on.”

Profit Share Program / Seperate Profit & Loss

“In many companies that have profit-sharing, the profits are calculated at the end of the year. Then a percentage of the profits are distributed to employees based on salary and/or position. In many organisations, the numbers are mysterious to anyone outside of upper management or the accounting department. At Sun Tire, we did things differently. Here are some of the things we wanted in a profit-sharing program.

  • Every employee would get a fair shot at earning a substantial amount in addition to his or her salary. The amount would be based on the productivity of his or her store or department in the company. Your position and your time in the company would define your bonus program

  • A program that would keep tire changers and mechanics, our front-line employees, engaged and motivated throughout the year.

  • Each employee would have a retirement account paid for out of company profits.

  • Profits would be transparent to all employees. Profits from each store or department were recorded and placed into a trust account.

To measure the profit coming in from a store is straightforward. Each store had a Profit and Loss (P&L) ledger. Subtract the expenses from the revenues and you have your profit amount. End-of-year profit-sharing checks were paid out of the trust to managers. Tire changers and mechanics received a monthly bonus based on the profits of the stores they were in.”

‘Specialised-Work-Units’

We had other departments Administration, Warehouse Operations, and our Call Center which were important contributors to the company's growth and success. However, they didn't generate revenue. How could a bookkeeper or warehouse workers be rewarded for their valuable contributions to the profit-ability of the company? This was one challenging part of the plan.

We developed what I referred to as Specialised Work Units (SWUs). These included Administration and Warehouse Operations. Another one for the Call Center was in development at the time Sun Tire was sold. For profit-sharing to work for the whole organisation, there had to be a customised P&L ledger for each of the SWUs as well as the stores.

How did I come up with an ‘income’ figure for the Administration Department? I discovered that administrative costs throughout the tire industry were three to four percent of revenue. That's the percentage an owner of a tire business could expect to pay out for administration. For example, a tire company with annual revenues of ten million dollars would have about $300,000 to $400,000 in annual expenses for administration. I used three percent to develop a baseline figure for income for Sun Tire's Administration Department.

In the Sun Tire Defined Profit-sharing plan, the owner would split the difference between the hypothetical $300,000 and the actual expenses for Administration. If the Administration Department, which consisted of three employees, reduced their costs by $100,000, I would split that amount with the department. That would equal $50,000 into the trust for Administration. Within the department, there was a formula for dividing up the payout at the end of the year. Obviously, the employee who headed the department got a larger percentage than her subordinates.

With this method of profit-sharing in place, employees were engaged and highly motivated to work efficiently. The game wasn't just to punch in your hours on a timecard and get a check every week. At the end of the day in the stores, when the tire changers and mechanics asked their managers how the store had done for the day, they were sincerely interested. Being part of an SWU produced a sense of ownership for employees. The SWUs also had a degree of autonomy so that they could do what they needed to do to stay productive and efficient as a unit. At Sun Tire, The Administration Department, The Warehouse, and The Call Center all worked for and supported the stores. They had an interest in the continuing profitable growth of the stores.

When I first developed this plan for Administration, my outside accountant told me that nobody else he knew of was doing anything like it. There were people whose opinions I respected who told me I was being foolish to put a plan like that in place. I went ahead, and the program worked. The Administration Department reduced their expenses from the industry average of three to four percent down to 1.75 percent.

The Administration Department was very efficient. I know that similar companies had as many as six employees in Administration compared to our three. Also, with weekly store performance reports and weekly paychecks plus monthly profit-sharing checks for many employees, our Administration Department was doing more than the departments in similar organisations.”

Ownership Mentality

Since our employees were thinking more like managers, there was no need for a layer of middle management to oversee them. They wanted their units to be productive and efficient because they stood to reap substantial rewards for their efforts. The more they saved for the company, the larger their share of the profits would be. So, when a copy machine started getting clunky, our employees were more inclined to try to get another year out of it rather than requesting a new one. And when they got a new one, they might decide they didn't need all the latest features. At some point, it appeared to me that we needed to add an employee to the Administration Department. Our office manager said the department could continue to get all the work done without adding another employee. Another employee would have been one more expense on the P&L ledger and one more person to split the profit-sharing with. As long as the department was efficient and effective, I learned to keep my mouth shut about adding another employee.”

Another benefit of defined profit-sharing was reduced shrinkage. If a tire changer sees thievery that results in a lower profit-sharing check, he's going to take an interest in that. I remember one mechanic who asked me how the profit-sharing program worked. After I answered his questions, he told me about a manager who was stealing. If the profit-sharing had been too low, that employee might have taken less of an interest.”

“Some organisations put in cameras to fight shrinkage. I put in a defined profit-sharing program and I think it worked better than cameras.”

Summary

The practice of emulating successful strategies and models employed by other businesses has been a prevalent tactic in the creation of highly successful companies throughout history. Charlie Munger has acknowledged the utilization of this approach in the development of Berkshire Hathaway, stating that "All Berkshire Hathaway does is copy the right people."

The importance of having a strong and capable team, particularly in the customer service industry, has been a recurrent topic of discussion. Herb Kelleher, the founder of Southwest Airlines, has noted that the significance of individuals and their attitudes cannot be overstated in the customer service business. Service that exceeds customer expectations is a distinct competitive advantage, as it drives customer loyalty and fosters positive word-of-mouth advertising for the business. This is often achieved when employees are empowered, respected, trusted, and rewarded for their efforts.

It is noteworthy that the three tire businesses we’ve covered, which have generated results that are the envy of the industry, possess many similar characteristics. The ‘confederation of partnerships’ model is a particularly powerful business model that can lead to attractive long-term returns when executed effectively.


Source:How the Rubber Meets the Road,’ Dick Erickson and Danny Murphy, 2020.

Further Reading:
Learning from National Tire’s Bruce Halle,’ Investment Masters Class 2023.
‘Learning from Les Schwab,’ Investment Masters Class, 2018.

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Learning from Discount Tire's Bruce Halle

Few companies can boast of a track record of annual revenue growth for fifty consecutive years. One such company is Discount Tire Company, America's Number One Tire retailer. Starting small, with an emphasis on customer service and a decentralized partnership model, Discount Tire has achieved extraordinary success in a highly competitive and unremarkable industry.

By empowering employees through profit-sharing and delegation, Discount Tire’s founder, Bruce Halle, fostered a self-motivated culture of success. By harnessing Robert Cialdini’s principle of ‘reciprocation’, Discount Tire attracted loyal customers through complimentary tire services, driving repeat business while leveraging the powerful marketing tool of word-of-mouth advertising.

The book ‘Six Tires, No Plan’ by Michael Rosenbaum tells the story of Discount Tire’s remarkable success. Success which has come through a combination of qualitative factors, many evident in the other great and enduring businesses we’ve studied; valuing and respecting employees, sharing profits with staff, hiring the right people, exceeding customer expectations, delegating authority to those closest to the customers, fostering a culture of innovation by encouraging ideas from all employees, promoting from within, maintaining focus and managing growth responsibly.

“Over more than fifty years of operations, the tire retailer has never had a down year for sales and has never had a layoff. In 2011, Discount Tire recorded more than $3 billion in revenue and ended the year with more than 820 locations.” Michael Rosenbaum

This blog post explores those strategies and philosophies gleaned from the book that have made Discount Tire such a phenomenal success.

Simple Model

“Discount Tire’s model was very simple: offer low priced products, convince customers they were getting a deal, give them surprising benefits like free snow tire mounting or clean bathrooms and try to build positive word of mouth.”

Competitive Advantages

“A customer might appreciate the deal he got on a set of tires, but customers didn’t know one tire from another. What they did recognise was courtesy, friendliness and a clean store, all of which would become touchstones of the company.”

“Discount Tire has succeeded, in part, by exceeding the generally low expectations that both customers and employees might have about the tire business. Customers don’t expect quick turnaround, clean bathrooms or free repairs. New employees don’t expect a lucrative career, team membership and a company that worries about their families.”

“Much of Bruce Halle’s success flows from his retail focus – each store is uniquely important, each customer is uniquely valuable and each employee is a priceless individual. He never talks to the tire techs about tires, focusing instead on their lives and dreams, families and school.”

We are in the people business, and we just happen to be selling tyres. We haven’t just adopted this idea as a catchphrase or as part of our vision statement. We live this way. We are truly interested in the happiness of our customers and our people. I train my new hires to take action if they ever meet an unhappy customer. Not just to emphasize, but to take action.”

"A tire is a commodity. You can get one elsewhere. The differentiator is the people. By having people with great attitudes, you make the difference for Discount Tire. We hire people with the right personality and the right attitude. We can always teach them how to change tires. People do business with people they like. Hire, motivate and reward the people that others will like and, no matter what the product, the probability of success rises sharply.”

“Discount Tires success depends on having the right people on the team.”

Accept Mistakes & Learn

“Bruce Halle made as many mistakes as anyone else along the way, but he did two things that most people fail to do: he learned from his mistakes and he made it a practice to blame nobody but himself when things went awry.”

Servant Leadership & A Family Culture

“Although Bruce Halle had no leadership role as he left college, his style of servant leadership was already embedded in his DNA. As a company owner, he would see his employees as extended family to be protected. In turn, he would expect those he protected to look out for others.”

Reciprocation & Valuing Employees

“From the start, Bruce Halle wanted his employees to be very happy. While he cannot recall a time when he analysed the connection between happy employees and good customer service. Halle recognised the strength between the two. Customers who are treated rudely don’t return. Employees who are miserable at work are less likely to treat their customers well. Therefore, he couldn’t keep customers happy unless he made his employees happy first.”

“Bruce Halle’s philosophy is focused - not exclusively - but focused - on what is good for his people and his company.”

“Halle seldom talks about business, preferring to talk to individuals about their lives, families and interests. Halle sees his success as tied to the success of each individual within the organisation.”

Halle also provides a solid array of employee benefits and frequent gifts as a way of saying thank-you for their commitment.”

“Because the individual employee is the ‘secret sauce’ in Discount Tire’s success, the company is built around the worker more than it is designed around the customer. Hire the wrong people and you’ll find that you can’t beat them hard enough to make them treat customers well. Hire the right people and no beatings are necessary.”

“We’re in business to make money, but the way you let Mr.Halle down isn’t by not selling tires, but by not taking care of the people.”

Happy employees make happy customers, but happy customers don’t always make for happy employees. So we need to find a way for employees to believe in what they do. It’s in our mission statement to be the best and to care for and cultivate our people. When we show people how much we care, that’s where the magic happens and they become passionate about what they’re doing.

Employee Turnover

“The turnover rate is more than 80 percent for part-timers, reflecting the rigors of tire changing, but turnover drops to a miniscule 2 percent for store managers.”

Exceed Customer Expectations

"Worry about the customer first and the spreadsheet last."

It’s not so much that we’re selling tires but a matter of making friends over time. You want repeat customers, people who refer us to family, friends, co-workers .. we want to make them customers for life.”

“The culture of the company is very, very simple. Bruce Halle said, ‘Respect your fellow employees. Look after each other. Take your customers in as family.’ How are you going to treat your customers if you, in your mind, say, ‘That’s my dad coming in?’”

Halle opted to repair flat tires at no cost, reasoning that this type of pleasant surprise would endear Discount Tire to any customers who happened to walk in with a flat. The free service was popular with customers but seldom copied by competitors.”

Every transaction at every store involves tires or wheels, but what the company is selling is customer service. If customers aren’t happy, they won’t come back.”

“Discount Tire is built around ‘Who’, as in ‘Who will make us successful?’ Customers can buy tires anywhere, and most customers cannot tell the difference between one tire and another. For a company to excel in a commodity market, product differentiation is a non-starter. Improve the customer experience, however, and brand value explodes.”

“The process of tire sales is relatively straightforward, but Discount Tire’s approach includes extra steps to instil confidence and loyalty in the customer. Making sure to thank the customer and ask them to come back is common sense, at the least, but it’s often missed in retail stores.”

"We need the customer. The customer doesn't need us.”

“If you lose a customer over price, you have to buy them back later. It's better to give them the price to get them to stay in the first place.”

Discount Tire measures customer satisfaction with a net promoter index, which nets out the difference between customers who would recommend the company and those who would pan it. Only scores of 9 or 10 on a 10-point scale count as positives, and anything below 7 is a negative. Most companies average 5 to 10 percent, according to one study, and a net promoter index over 50 percent is considered solid. Discount Tire consistently scores at the 80 percent level.”

When a customer is dissatisfied, the store manager must address them personally. At 6.00 p.m. each night, every store manager receives an e-mail with the names of unhappy customers who need to be contacted within twenty-four hours. Ultimately, the managers will convert many of the unhappy customers into lifelong patrons simply by making a personal connection and offering to solve their problems. This is not rocket science or the stuff of MBA dissertations, but it is highly effective.”

Empowerment, Autonomy & Walking the Floor

“The fact is that we are empowered from day one to take care of any customer for whatever reason, to keep them safe and to gain a customer for life.”

Bruce Halle’s job is not to micromanage but to support and inspire. In fact, supporting and inspiring is the real reason for the site visits. Spending time in the stores, chatting with the workers, he works to bridge the distance that would naturally develop between a nineteen-year-old kid busting tires and the owner of eight hundred tire stores.”

Discount Tire gives its employees a wide circle of latitude and a small number of rules that allow no deviations. Steal from the company, abuse your employees, or mistreat customers, and the exit door is wide open.”

The corporate office doesn’t decide which products to promote at the store; that decision is left to the store managers as well.”

Bruce Halle was a management-by-exception type of leader, relying on his people to do the job they were hired to do and stepping in only when something was askew.”

“Another mistake Bruce Halle won’t make is overloading his store managers with mandates from the corporate office. Contrary to general business practice and theory, Discount Tire is built around its employee and the individual store. Stores are treated as independent operating businesses, each with a mission to delight the customer. Corporate meddling can get in the way of success as the store level and, by transference, the entire company.”

The guys and gals in the stores run the company. While the corporate purchasing team works regularly to obtain volume pricing or other breaks from manufacturers, the corporate office won’t tell its store managers which tires to push. The company will arrange promotions, but there is no mandate for any store to participate. “What do we know about what they sell in Lobbock, Texas, or what they should be selling in Lobbock, Texas? ‘We don’t, so we have no business telling them what they should sell. We’re not the customer. The people in the stores are serving the customer and driving our company forward, so we need to listen to them.”

Ideas

Idea are more powerful and supported when they percolate from the ground up, instead of coming down as pronouncements from on high. Rather than announcing strategies du jour from the home office, Discount Tire relies on interaction among store managers within regions and connections among the regional officers to develop and transmit good ideas.”

There is nothing wrong with stealing a good idea.”

Golden Rule

Bruce Halle’s philosophy is to treat people like you want to be treated.”

Ordinary People & Team Players

The prototypical backstory of a Discount Tire executive includes a lack of specific goals, average or lower-than-average grades and minimal expectations of the job or company. Most applicants are looking for nothing more than a steady paycheck and, maybe, a place to bide their time while they figure out what to do with their lives. In many respects, they look just like Bruce Halle.”

“The search for people with the right attitude led directly to the lost boys. The cadre of young men - and they are almost always men, joining the company often shared a certain lack of focus in life. What separated the keeps from the rest of the pack was a willingness to work hard and to find that focus as part of a team. The team is critical, because the team is bigger than the individual, and a person who believes in the team will often be committed to serving others - including both the company and its customers.”

Promote From Within

The company starts all its operating employees as part-time tire techs, the people who do most of the tire changing in the bays, or, rarely, as full-time assistant managers. Since Bruce Halle started the company in 1960, this practice has been a sacred promise at Discount Tire. Nobody gets the keys to a store without starting out in a lower level, busting tires. Just like Bruce T Halle. That consistent policy of promotion from within creates enormous loyalty among Halle’s employees. At the corporate office, every operating executive up to the CEO Tom Englert began his career in the back of a Discount Tire store.”

“We’re a promote-from-within company. Everybody knows that in this company you start at ground level. Look at all our vice presidents, our senior vice presidents, all the way up to Tom Englert, our CEO. They all started at the same place. We’ve been around fifty years and we’ve never had a layoff.”

“If I were to bring someone in at a high level without having worked in the stores, I may as well get in my care, drive around to the stores and slap every one of the guys in the face – because that’s literally what I’d have done to them. And I would never do that.”

Free Services

“Over time free services brought in paying customers, convincing Halle that free can be very profitable.”

“It’s all about earning the referral, about the word of mouth, and if you have to give away a tire to keep a customer happy, it will come back to you tenfold.”

“Bruce Halle needed a good gimmick to build his customer counts. As spring arrived, he offered to change snow tires at no cost. Drivers who came in to change their tires for free might be enticed to return when they needed new tires later. The tire-changing service proved to be a winner for Discount Tire, with customers lining up around the block to take advantage of the deal.”

"Nobody gets up in the morning and says, 'What a beautiful day. I think I'll go buy four tires.' They get up and say, 'I have to buy new tires.' It's like going to the dentist.” Because customers tend to view tire buying as a necessary evil, it's not too difficult to exceed their expectations. When Bruce Halle started changing snow tires at no charge, the lines extended around the block. Customers responded, as well, when he offered to repair flat tires at no charge and provided free tire inspections. While many financial analysts might consider such freebies unaffordable, Halle found the free services to be highly profitable, especially when the value of referrals is considered. For the cost of a free tire repair—usually less than $30—Discount Tire can acquire a lifelong customer. While the company might invest $50 to $100 in giving away a tire or two to a cash-strapped driver, that person will come back as a paying customer when he or she is back on firmer financial footing.”

Share Profits with Staff and Don’t Cap Earnings

Discount Tire Company has no franchises and no equity investors other than Bruce Halle. But Halle wants every employee to think of the store as his own – and treat both employees and customers accordingly. While employees don’t own title to the stores, they do earn the same kind of returns any minority partner might. In addition to base salary, they share in the earnings of the store: they get 10 percent of the first $200,000 in earnings and 20 percent of every dollar above that level. As would be the case with any other owner, there’s no cap to their earnings potential. The deal is simple. Bruce Halle personally scouts out the location of each store, and the company supplies the capital to buy or lease the property, build the store and provide inventory and equipment. The store manager is responsible for hiring, training, marketing, scheduling, customer service and cost control.”

No Commissions

“Halle didn’t want his people working on commissions. He knew from his own experience that commissions created the temptation for extra upselling. At Discount Tires, the most powerful calling card was savings. If customers had the sense they were being lured in by cheap prices, only to be pressured by commission salesmen, the company would suffer. Bait-and-switch marketing would not drive referrals or repeat business.”

‘Responsible Growth’

“With around eight hundred stores in operation, Discount Tire has the bench strength to open eighty to a hundred stores or more each year. But the company’s strategic plan includes a mandate to ‘grow responsibly,’ and the capital requirements are daunting. Instead, the company is targeting forty to fifty new stores per year . The management team has learned the lessons of companies, that, like armies, moved too far ahead of their supply lines. Bruce Halle and his team won’t grow as fast a possible because they are unwilling to spread capital or manpower across too broad a network.

Tailwind

“Sunbelt states offered substantial promise. Rising populations meant more than simply increased demand for replacement tires. New residents to any state might have no particular loyalty to more established retailers… The decades-long population shift into the Sunbelt states has been a major boon for Discount Tire.”

Headquarters

At the corporate office, the stores are recognised as the customers who need to be delighted by the home office, just as the buying public must be delighted by the stores.”

“’If you go out and spend an extra million dollars on something,, how many tires do the guys in the stores have to sell to pay for it?’ Bruce Halle asks. ‘We have to fight bureaucracy, fight it, because it’s like a disease that creeps in all by itself.” Bruce Halle might love the people who work for him at the corporate office, but he has a strong belief that oversized corporate staffs can drain the life from an organisation by taking too much control from the people in the stores. Worse, every dollar invested at headquarters is a dollar that can’t be spent on store expansion.”

In the stores, growth is applauded, but growing headcounts at corporate is discouraged whenever possible.”

At corporate headquarters, six executives are responsible for overseeing twenty-three regions. The job of management is to hire the right people, immerse them in the corporate culture and get out of the way.”

Store Location

“Pick the right [store] location, and it will support a large team over a period of decades. Pick the wrong location, and the people inside will suffer. ‘I can move the inventory and the equipment from a bad store, but I can’t move the store,’ Halle says simply, ‘It’s not a mistake that’s easy to correct’. While Halle has delegated most of the daily tasks of running the company, finding the right place for Discount Tire’s next store will always be the chairman’s realm.”

“Discount Tire will lease locations when absolutely essential, but the clear preference is to own, not rent. The company owns approximately 80 percent of the properties that house its stores, and with stores that remain in business twenty, thirty or more years, the long-term benefits are clear.”

Store Acquisitions

“Having built hundreds of stores, Bruce Halle has learned that there's much more to real estate than the oft-cited location, location, location. Buying an existing tire store, he says, is seldom the most inspired choice. "When you get somebody else's store, you are getting their reputation too," he warns. "You repaint the building and put a different sign on it, but a customer is driving down the street and sees that tire store and thinks, I had a hell of a bad experience there. I'll never go there again. He doesn't even know it's changed its name or ownership, so that hurts. When we pick up somebody else's store, it takes three times longer to make it profitable."

Focus

“Discount Tire sells tires and wheels but doesn't offer oil changes, alignments or general automotive services. By focusing on a limited number of services, the company can reduce customer wait times and build satisfaction. Training expense is reduced, inventory management is simplified, work scheduling is more predictable and units per man hour can be maximized. By servicing customers faster, the stores can service more customers per day with the same number of employees and work bays, which leverages the fixed investment in each store.”

Closed Sundays

Bruce Halle pays a price for keeping his stores closed on Sundays, one of the busier days for any retail business, but he wouldn’t short change his employees on one of the few benefits he allowed himself when he opened his first store.”

Fun

Fun was a critical ingredient for Bruce Halle from day one. If the workplace was fun, people would feel more like teammates, and teammates worked harder to make the entire team successful.”

Summary

Like many other great business founders, Bruce Halle realised that while he sold tires, he was really in the customer satisfaction business. He understood that you’ve got to give to get. His free services endeared customers to the business, provided a point of differentiation from his competitors, and harnessed the most powerful marketing tool of all: word-of-mouth advertising.

Halle placed a paramount emphasis on customer satisfaction, treating customers as friends and addressing any issues that arose promptly.

From day one, Halle structured his business for success. He was careful in choosing the right employees with the appropriate demeanor and he shared each store’s profits with the workers. Delegated responsibility and an uncapped earnings potential added to employees sense of ownership and ensured decision making and idea generation occurred at the point closest to the customer.

This structure enabled ordinary people to achieve extraordinary success - they were trusted, empowered and valued. As a result, a ‘confederation of partnerships’ emerged, resembling a collection of small, entrepreneurial entities. In the words of Peter Kaufman, this created ‘leaping emerging effects.'

These qualitative characteristics, which ultimately define the culture of Discount Tire, are primarily centred on people. Over five decades of positive returns attest to their importance. They can serve as useful markers for identifying potentially outstanding businesses in your own endeavours.


Further Reading:
http://sixtiresnoplan.com/

Learning from Les Schwab,’ Investment Masters Class. 2018.

Source: ‘Six Tires, No Plan - The Impossible Journey of the Most Inspirational Leader That (Almost) Nobody Knows,’ Michael Rosenbaum, 2012. GreenLeaf Press.

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Learning from James Dyson

When you look back in history at some of mankind’s greatest achievements, one of the things that stands out in almost every case is that those successes came with a lot of blood, sweat and tears and an incredible amount of persistence. Often what appeared on the surface to be an “overnight success’' actually took years to achieve. Henry Ford and his self-propelled vehicle, Walt Disney and his animated pictures, Alexander Bell and his telephone and even the Wright Brothers and their aeroplane; all were examples of people who failed many, many times before they eventually succeeded, often facing distressing financial hardship along the way.

But if you were one of these people and were inventing something that could be potentially momentous and change things forever, at what point would you give up after encountering multiple failures? After 10 attempts? 50? What about 1,000? You’d have to think you were on a road to nowhere if you had failed that many times. So how about 5,127 times? How does that grab you?

Incredibly, that’s the number of hand-made prototypes James Dyson built over a four year period before he finally achieved success with his cyclonic vacuum cleaner. Labouring through trial and error, Dyson overcame a brutal patent abuse, endless rejections from both venture capitalists and the world’s leading appliance manufacturers whilst managing an ever expanding overdraft he didn’t extinguish until the age of forty-eight. Contrast that with today, Sir James Dyson is the UK’s fourth richest resident with a net worth of c.US$9.7 billion.

Dyson struck on the idea of a cyclonic vacuum from his experience manufacturing his first product, the ‘Ballbarrow.’ Applying paint to the metal frame created havoc in the factory - excess waste and mess. Seeking a solution, Dyson asked around the trade and eventually arrived at a cyclonic separator. He recalled, ‘I found the centrifuge dust extraction principle of the cyclonic separator utterly fascinating.’

James Dyson’s recently published memoir, ‘James Dyson - Invention: A Life,’ is a tale of constant innovation, incredible challenges overcome and the deep resilience required to create one of today’s leading technology companies.

One of my favourite insights from the book relates to the opportunity set afforded Dyson by the vacuum industry’s incumbent players. Hamilton Helmer labelled this power ‘Counter-Positioning’ in his best-selling book on competitive strategy, ‘7 Powers.’ The opportunity arises when a newcomer adopts a new, superior business model which the incumbent doesn’t mimic due to anticipated damage to their existing business. In the case of vacuum cleaners, the incumbents were making billions selling replacement bags to their customers. Why create a product which puts at risk that perpetual revenue stream?

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If there’s one thing I’ve noticed about successful business founders, it’s that there is no straight line to success. Without perseverance and resilience beyond the scope of all but the rarest of people, these businesses would die on the vine. I’ve included some of my favourite extracts below.

Failure and ‘Trial & Error’

“This might sound boring and tedious to the outsider. I get that. But when you have set yourself an objective that, if reached, might pioneer a better solution to existing technologies and products, you become engaged, hooked and even one-track-minded. Folklore depicts invention as a flash of brilliance. That eureka moment! But it rarely is, I’m afraid. It is more about failure than ultimate success. I even thought about calling this book ‘James Dyson: Failure’, but was talked out of it because it might give the wrong impression.”

The failures began to excite me. ‘Wait a minute, that should have worked, now why didn’t it?’”

Research is about conducting experiments, accepting and even enjoying failures, but going on and on, following a theory garnered from observing the science. Invention is often more about endurance and patient observation than brainwaves.”

Learning by trail and error, or experimentation, can be exciting, the lessons learned deeply ingrained. Learning by failure is a remarkably good way of gaining knowledge. Failure is to be welcomed, rather than avoided. It should not be feared by the engineer or scientist or indeed by anyone else.”

Ballbarrow - Diedre Dyson with the first solo Invention [Source: Dyson]

“The Ballbarrow - my first consumer product, my first solo effort - was a failure but one from which I learned valuable lessons. There was a lesson about assigning patents, another about not having shareholders. I learned the importance of having absolute control of my company and not undervaluing it.”

“One of the really important principles I learned to apply was changing only one thing at a time to see what difference that one change made. People think that a breakthrough is arrived by a spark of brilliance or even a eureka thought in the bath. I wish it were for me. Eureka moments are very rare. More usually, you start off by testing a particular set-up, and by making one change at a time you start to understand what works and what fails. By that empirical means you begin the journey towards making the breakthrough, which usually happens in an unexpected way.”

“I worked on the [production] line for two weeks to understand how to make the vacuum cleaner more efficiently and have watched all of our lines ever since .. I learned which components were difficult to assemble and encouraged our engineers to visit lines frequently. Most importantly, this experience helped me look as all our subsequent products to understand where production inefficiencies fell.”

“Of the 5,127 prototypes I made in the coach house of the cyclone technology for my first vacuum cleaner, all but the very last one were failures. And yet, as well as painstakingly solving a problem, I was also going through a process of self-education and learning. Each failure taught me something and was a step towards a working model. I have been questioning things and learning every day ever since.

Learning by doing, Learning by trial and error. Learning by failing. These are all effective forms of education.”

“When I was trying, unsuccessfully, to raise capital to start my vacuum cleaner business, all the venture capitalists turned me down, with one even saying that they might consider the opportunity if I had someone heading up the company from the domestic appliance industry. This was at a time when that industry was vanishing from Britain because, taken as a whole, its products were uncompetitive.”

Life Lessons

Every day is a form of education.”

“It was playing games, however, that taught me the need to train hard and to understand teamwork and tactics. The planning of surprise tactics, and the ability to adapt to circumstance, are vital life lessons. These virtues are unlikely to be learned from academic life and certainly not from learning by rote.”

“Long-distance running taught me to overcome the pain barrier: when everyone else feels exhausted, that is the opportunity to accelerate, whatever the pain, and win the race. Stamina and determination along with creativity are needed in overcoming seemingly impossible difficulties in research and other life challenges.”

“Doing things with my hands, often as an autodidact and with an almost absence of fear, became second nature. Learning by making things was as important as learning by the academic route. Visceral experience is a powerful teacher. Perhaps we should pay more attention to this form of learning. Not everyone learns in the same way.”

Creativity & Invention

In order to stay ahead we need to focus increasingly on our creativity.”

“At Dyson, we don’t particularly value experience. Experience tells you what you ought to do and what you’d do best to avoid. It tells you how things should be done when we are much more interested in how things shouldn’t be done. If you want to pioneer and invent new technology you need to step into the unknown and, in that realm, experience can be a hindrance.”

“[You] need to listen to your customers, aiming to improve products wherever necessary and, if you are an inventor, simply for improvements sake. This is not to say we at Dyson ask our customers what they want and build it. That type of focus-group-led designing may work in the very short term, but not for long.”

“I still find myself saying and putting into practice some of the same things Jeremy Fry [an early mentor/employer] said and did when I worked for him half a century ago. As an inventor, engineer and entrepreneur, he believed in taking on young people with no experience because this way he employed those with curious, unsullied and open minds.”

The inventing mind knows instinctively that there are always further questions to be asked and new discoveries to be made.”

“The Land Rover, the Swiss Army penknife, the Citroen 2CV, the Bell 47 helicopter and Alec Issigoni’s Mini - what I liked so much about these machines - and my affection for them remains undimmed - is their ingenuity and the fact that the power of invention invested in them made for designs that re-imagined and revolutionised their market sectors and even created wholly new markets. And yet, for all their functionality, each is a highly individual product with a character and charm of its own. What is equally interesting is that these radical machines made use of pre-existing ideas and components.”

A design might be considered ahead of its time and, sometimes because of this, even ridiculous. The hugely successful Sony Walkman was dismissed when first launched because who could possibly want a tape recorder that couldn’t record. And it was received knowledge, until Volkswagen and, later, Honda crossed the Atlantic with the Beetle and the Accord that Americans were wedded resolutely to big cars.”

“The Sony Walkman is another fascinating success story because, at first, its design appeared to defy common sense. Priced at $150, the compact silver and blue Walkman wasn’t cheap, while within Sony it was controversial and brave because it was unable to record, and no one made a ‘tape recorder’ that wouldn’t do so before… With lightweight foam headphones and no function other than playback, the Walkman emerged. The press lampooned it. Even the name was ridiculous. The Japanese press was wrong, although the market hadn’t known it wanted a tiny personal stereo. When it saw the attractive little device, and heard it in action, it fell in love with it… By the mid-1980’s, the word had entered the Oxford English Dictionary. Sony’s Masura Ibuka - one of the Japanese company’s founders - hoped to sell 5,000 Walkmans a month. He sold 50,000 in the first two months. By the time production ended in Japan in 2010, more than 400 million had been sold worldwide.”

Without entrepreneurship, an inventor may not be able to bring their radical or revolutionary products to the marketplace or at least not under their own control. Without becoming an entrepreneur, they have to licence their technology, putting them at the mercy of other companies that may or may not have a long-term commitment to a particular new idea or way of thinking about the future.”

“The idea [for the cyclonic vacuum cleaner] had been in my head since welding up the giant metal cyclone for the Ballbarrow factory. Now it made increasing sense. Here was a field - the vacuum cleaner industry - where there has been no innovation for years, so the market ought to be ripe for something new. And, because houses need cleaning throughout the year, a vacuum cleaner is not, like my Ballbarrow, a seasonal product. It is also recession proof. Every household needs one. It seemed to tick all the boxes. In any case, I’d used one since childhood and knew from experience that there had to be a better vacuum cleaner.”

“If you believe you can achieve something - whether as a long distance runner or maker of a wholly new type of vacuum cleaner - then you have to give the project 100% of your creative energy. You have to believe that you’ll get there in the end. You need determination, patience and willpower.”

Bio-mimicry is clearly a powerful weapon in an engineer’s armoury.”

“It’s a part of the Dyson story that I made 5,127 prototypes to get a model I could set about licensing. This is indeed the exact number. Testing and making one change after another was time-consuming. This, though, was necessary as I needed to follow up and prove or disprove every theory I had. And, however frustrating, I refused to be defeated by failure. All of the 5,126 I rejected - 5,126 so-called failures - were part of the process of discovery and improvement before getting it right on the 5,127th time. Failure, as I had already begun to learn with my experience with the Ballbarrow business is very important. I find it important to repeat that we do, or certainly should, learn from our mistakes and we should be free to make them.”

Every judgement in science stands on the edge of error and is personal… I have long had great admiration for engineers like Alec Issigonis [designed the Mini] and Andrew Lefebvre of Citroen .. they questioned orthodoxy, experimented, took calculated risks, stood on the edge of error and got things right. And when they got there, they continued to ask questions.”

“One of the ways we made Dyson distinctive is by not allowing ourselves to rest on our laurels.”

“A jet engine spins at 15,000 rpm, a Formula 1 engine at 19,000 rpm and a conventional vacuum cleaner motor at 30,000 rpm. Why go very much faster? Although at the time we were neither designers nor manufacturers of electric motors, we wanted to come up with a breakthrough in their design, creating a quantum leap in performance: many times faster, much lighter and smaller, brushless for a longer life and no emissions, more electrically efficient and above all controllable for speed, power and consumption.. The turbine speed we initially aimed for was 120,000 rpm.. Today, Dyson pioneers the world’s smallest high-speed motors. These have enabled us to reinvent the vacuum cleaner again with a pioneering new Dyson format. They have also allowed us to improve products in wholly new areas.”

“People often ask if we would supply other companies with our motors. Although it might be profitable to do so, we supply no one other than ourselves. This is because I want Dyson engineers to be 100% focused on our next exciting motor development and not retrofitting our motors to someone else’s product.”

“With each new motor we aimed to double its power output and halve it’s weight.”

Dyson Supersonic™ Hair Dryer

“We had been experimenting for some time with blades of air and working with sophisticated computational fluid-dynamics models for a project that remains secret… We had accidentally developed a new form of hand dryer. What’s more it didn’t need a heater… It has a carbon footprint six times smaller than that of paper towels… Despite our inroads, the paper towel industry retains 90% of the hand-drying market, worth billions of dollars each year. The big players want to defend a highly lucrative status quo.”

As often happens, our observations during the development of the Dyson Airblade hand dryer led us to the principles used in other products, like our Air Multiplier fans and, in turn, to heaters, humidifiers and air purifiers.”

“For me, [the hairdryer] was another of those products, used frequently by hundreds of millions of people, stuck in a technological time warp. Existing hairdryers were heavy and uncomfortable to use.”

“Ever since the Industrial Revolution, inventions had tended to compound inventions.”

It is hard for other people to understand or get excited about an entirely new idea. This requires self-reliance and faith on part of the inventor. I can also see that it is hard for an outsider to understand the challenge and thrill of inventing new technology, designing and manufacturing the product then selling it to the world.”

“After the event, a revolutionary new idea can look so obvious - surely no one could possibly have doubted it? At their conception, though, new ideas are not blindingly obvious. They are fragile things in need of encouragement and nurturing against doubting Thomases, know-it-alls and so-called experts. Just as Frank Whittle discovered, it is easy for people to say ‘no,’ to dismiss new ideas and to be stick-in-the-muds, pessimists, or even cynics. It is much harder to see how something unexpected might be a success.”

We certainly have taken big risks, with the digital electric motors, the washing machine, the electric car and our research into solid-state batteries. Not all have been commercially successful. That is the point. By its very nature, pioneering will not always be successful, otherwise it would be all too easy. We don’t start these ventures with the inevitability of success - we are all to aware we may well fail.”

Obliquity

Inventors rarely set out to make money per se, and if they do theirs is more often than not a pipe dream.”

I didn’t work on those 5,127 vacuum cleaner prototypes or even set up Dyson to make money. I did it because I had a burning desire to do so. And as do my thousands of colleagues, I find inventing, researching, testing, designing and manufacturing both highly creative and deeply satisfying.”

Focus Groups & Experts

“Just before the launch of the Mini car, Austin Morris did indeed consult a focus group, and nobody wanted this tiny car with small wheels. So they cut the production lines down to one. When the public saw it on the street, they were most enthusiastic for it. Austin Morris never caught up with demand, missing out on serious profits.”

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“The bestselling British car of all time is the Mini - If market research had ruled Alec Issigoni’s roost at BMC, it would never had existed… Alec’s view [was] that ‘market research is bunk’ and that one should ‘never copy the opposition.’”

I am cautious of experts .. Experts tend to be confident that they have all the answers and because of this trait, they can kill new ideas. But when you are trying to break new ground, you have no interest in getting stuck in engineering conventions or intellectual mud.”

“Venture capitalists proved to be no help. [Six] venture capitals turned me down.”

“I had been warned that at £200, or at least three times as expensive as most other vacuum cleaners, the DC01 would prove to be too expensive. It sold really well.”

“The marketing team, who I listened to, said to me, ‘If you make it £200 cheaper you will sell a lot more [Dyson washing machines],’ and I believed them. We made it £200 cheaper and sold exactly the same number at £899.99 as we had a £1,089 and ended up losing even more money. I had made a classic mistake. This might sound counter-intuitive, but I should have increased the price. The Contrarotator was not meant to be a low cost washing machine.”

Controversial: Dyson ‘clear’ bin

“Although there is no guarantee of success, disruptive ideas can revolutionise a company and its finances through intuition, imagination and risk-taking as opposed to market research, business plans and strategic investment.”

“Early on in our story, the [Dyson vacuum cleaner’s] clear bin was another ‘clear’ example of going our own way regardless. Trusting our own instincts, we decided to ignore the research and the retailers. Pete and I had been developing the vacuum cleaner and we loved seeing the dust and the dirt. We didn’t want to hide all the hard work the machine had done. Going against established ‘experts’ was a huge risk. No one could confirm that what we were doing was a good idea. Everyone, in fact, confirmed the reverse. The data were all against it. If, however, we had believed ‘the science’ and not trusted our instincts, we would have ended up following the path of dull conformity.”

Innovation, Constant Improvement & Change

“I greatly admire Soichiro Honda for his addiction to the continuous improvement of products. and Takeo Fujisawa. Their genius was to think against the grain while focusing on continuous improvement. The company [Honda] continues to invest a sizeable chunk of its income into R&D, aiming for constant improvement and innovation.”

“Rather like the way some sharks have to keep moving to stay alive, innovative engineering-led manufacturers need continuous innovation to stay competitive. Striving for new and better products is often what defines such companies. At Dyson, we never stand still. In a quarter of a century, we have gone from making a revolutionary vacuum cleaner to prototypes of a radical electric car. Invention tends to compound invention and companies need to be set up for this.”

“What was exciting is that, although our main focus was the vacuum cleaner, our thinking was that of a tech company. How else could we evolve cyclonic technology? What other uses could we put it to?

Investment in new technologies requires many leaps of faith and huge financial commitment over long periods.”

“I believe that it is critical to keep on improving and never to relax with a product that appears to be selling well. Permanently dissatisfied is how an engineer should feel.”

“Our product development process is now truly a twenty-four hours a day process.”

“What I can say is that if you came back to see what Dyson’s up to in five, ten, twenty or a hundred years from now, whether with our products or through our farms, things will be very different indeed. It’s all tremendously exciting and we should have cause for optimism.”

“Every day is an adventure and a response to the unexpected. Even if things appear to be in some kind of stasis, a company must move on. It has to get better, evolve and improve in order to survive. There is no greater danger than satisfaction.”

“What we do know is that companies always have to change to get better at what they do, plan to do and even dream of doing in the future. The adage that the only certainty is change is true, and this means not being afraid of change even if, for a company, it means dismantling what you have built in order to rebuild it stronger or killing your own successful product with a better one, as we did with our new format battery vacuum cleaners.”

Counter-Positioning

“Anyone watching me at work might reasonably have wondered why Electrolux and Hoover weren’t making and selling a vacuum cleaner like mine. With all their resources, surely they could have leaped ahead of me - one man and his dog, as it were, in a rural coach house - and cornered the market between them. There were though, at least three good reasons why they didn’t even think of pursuing a similar path to me. One, which went without saying, was that the ‘No Loss of Suction’ vacuum cleaner had yet to be invented. The second was that the vacuum cleaner bag replacement business was highly profitable. And the third, to my surprise, was that well established electrical goods companies seemed remarkably uninterested in new technology. With no outside challenges, they could afford to rest on their laurels. For the moment at least.”

“I went to see Electrolux, Hotpoint, Miele, Siemens, Bosch, AEG, Philips - the lot - and was rejected by every one of them. Although frustrating, what I did learn is that none of them was interested in doing something new and different. They were, as I had already understood, more interested in defending the vacuum cleaner bag market, worth more than $500 million in Europe alone at the time. Here, though was an opportunity. Might consumers be persuaded to stop spending so much on replacement bags, which, by the way, are made of spun plastic and are not biodegradable, and opt for a bag-less vacuum cleaner that offered constant suction instead? If so, I might stand a chance against these established companies.”

Multi-Disciplinary Approach

“I loved my time at the Royal College of Art not least because of its lively and inventive cross-disciplinary approach. Here, as I progressed, I realised that art and science, inventing and making, thinking and doing could be one and the same thing. I dared to dream that I could be an engineer, designer and manufacturer at one and the same time.”

Commerciality & The ‘Art of Selling’

Inventions, though, no matter how ingenious and exciting, are of little use unless they can be translated through engineering and design into products that stimulate or meet a need and can sell.”

“Even the most worthwhile and world changing inventions, from ballpoint pen to the Harrier Jump Jet, need to be a part of the process of making and selling to succeed.”

“Selling goes with manufacturing as wheels do with a bicycle. It is far more than flogging second-hand cars or contraband wristwatches. Products do not walk off shelves and into people’s homes, And when a product is entirely new, the art of selling is needed to explain it. What it is. How it works. Why you might need and want it.”

“Jeremy Fry taught me not to try to pressure people into buying but to ask them lots of questions about what they did, how they worked and what they might expect of a new product. Equally, I learned that most people don’t really know exactly what they want, or if they do it’s only from what they know, what is available or possible at the time. As Henry Ford said, famously if he asked American farmers what they wanted in terms of future transport, they would have answered ‘faster horses.’ You need to show them new possibilities, new ideas and new products and explain these as lucidly as possible. Dyson advertising focuses on how our products are engineered and how they work, rather than on gimmicks and snappy sales lines.”

Word of mouth and editorial remain the best way to tell people what you have done. It is far more believable than advertising and a real compliment when intelligent journalists want to go off and talk about your product on their own free will. If you have new technology and a new product, a journalist’s opinion and comment is far more important and believable than an advertisement.”

“Within eighteen months, the DC01 vacuum cleaner was the biggest seller in the UK market. Our first sales were through hefty mail order catalogues. These devoted a few pages to vacuum cleaners. We were among the last pages, at the bottom, with a small, square picture of the DC01… Ours was the most expensive in these catalogues by some margin and they were not the sort of place you would expect expensive items to be sold. Both we and the buyers at the catalogue were, in fact, astonished that DC01 did so well through their pages, with repeat orders coming in. I have never, though, believed that someone’s income is a bar to them wanting to buy the best product and a vacuum cleaner is an important purchase.”

We decided to highlight the Achilles’ heel of other vacuums - the bag and its shortcomings.”

I love the fact we tackled prosaic products, making the vacuum cleaner into a high-performance machine.”

“From the beginning we decided that we would create our own publicity materials and advertising. We would not use outside agencies. This is because we want to talk fearlessly about technology, which, of course is what had driven Dyson into being. Since we have developed the technology, we should know how to explain it to others.”

“I didn’t want anyone to buy our vacuum cleaner through slick advertising. I wanted them to buy it because it performed. We could be straightforward in what we said, explaining things simply and clearly.”

I believe that trustworthiness and loyalty come from striving to develop and make high performing products and then looking after customers who have bought them. I am not a believer in the theory that great marketing campaigns can replace great products. What you say should be true to who you are.”

Manufacturing

“Experience taught me that, ideally, a manufacturer - Dyson certainly - should aim to source as little as possible from outside the company. Those of us who drove British cars made in the 1970’s know pretty much exactly why. Poor assembly aside, what often let these cars down were components sourced from poor-quality external suppliers. Electrical failures were legion.”

“Obviously at Dyson we cannot make absolutely everything on own own, but we work with suppliers so that they are in tune with us, with our manufacturing standards and our values. Because what we’re doing is special and different, we can’t go to a company like Foxconn, for example. which makes well known American, Canadian, Chinese, Finnish & Japanese electronic products. Those products are mostly made from off-the-shelf components. We design our own components. We don’t buy them off the shelf.”

“You can manufacture good-quality, pioneering technology much more readily when you sit side by side with your suppliers rather than 10,000 miles away in a different time zone.”

We build close relationships with owners of factories so we can build our machines in their premises. The tooling, assembly lines and test stations are ours and we control the purchasing and quality. We don’t approach a sub-contractor and say, ‘Make me a product of this or this design.’ We tend to go to outfits which have never made vacuum cleaners before or hairdryers, robots, fans and heaters or purifiers or lights, and we teach their people to make things using our production methods. It’s a heavily engaged and involved process of learning and improvement.”

“We need other factories because, expanding at the rate of 25% each year, we simply couldn’t cope with the planning and building of new factories even in Singapore, Malaysia and the Philiipines.”

Going Global

“I knew that if Dyson was to be a successful technology company, rather than just a British vacuum cleaner manufacturer, we couldn’t be Little Englanders. We needed to become global, and quickly. England, and the rest of the United Kingdom, is simply not a big enough market on its own to sustain the constant and huge investment technology requires.”

“In 2004, we took the DC12 cylinder vacuum to Japan, calling it the ‘Dyson City.’ It was engineered specifically for the tiny, perfectly formed homes of Japan. We were amazed by its success. Within three months it had captured 20% of the Japanese market.”

“Dyson has become as much an Asian business as a British one: our products are sold in eighty-three countries around the world, so we are arguably a truly global company. Having started in Britain and consistently grown in Britain, we, for some time now, sell over 95% of our products in our global markets.”

Acquisitions

We are not in the business of buying up other companies. It may be a quick way to acquire technology or a business that would augment a company, but it can be difficult to assimilate the people and their ways of doing things. Usually, I feel, it’s better to start your own research project or your own business, which, although slower to begin with, develops organically and is stronger for it.”

Dyson Electric Car

“Because of the shifting commercial sand, we made the decision to pull out of production [of our electric car] at the very last minute. N526 was a brilliant car. Very efficient motors. Very aerodynamic. Wonderful to drive and be driven in. We just couldn’t ever have made money from it, and for all our enthusiasm for the project we were not prepared to risk the rest of Dyson.”

“Fortunately, we were able to stomach the £500 million cost and survive. We did, though, push ourselves to learn a great deal in areas including batteries, robotics, air treatment, and lighting. We also learned more about virtual engineering as a tool in the design process and how, we would be able to make products more quickly and less expensively. These were all valuable lessons for the future.”

Private Company & Long Term Thinking

“Today, Dyson is a global company. I own it, and this really matters to me. It remains a private company. Without shareholders to hold back, we are free to take long-term and radical decisions. I have no interest in going public with Dyson because I know that this would spell the end of the company’s freedom to innovate in the way it does.”

“When you own the whole company, and especially if you are free of debt, from the early days and for better or worse, all decisions are your own. So you take these very seriously and follow your own view of risk balanced, hopefully, with reward. This certainly sharpens the mind.”

“We’re one family-owned company following its interest and passions.”

The advantages of a family business are that they can think in the very long term, and invest in the long term, in ways public companies are unable to do. I also believe that family-owned enterprises have a spirit, conscience and philosophy often lacking in public companies.”

Win-Win & ESG

“In our first year in Currys [retailer], Mark Souhami, one of the bosses alongside the founder Stankley Kalms, invited me to lunch with them both. They explained that because of Dyson they were now making a profit in their vacuum cleaner section and he wanted more Dyson products.”

“I have always loathed companies that use ‘greenwash’ as part of their marketing. I would rather reduce our environmental impact quietly and by action. We were, and remain, a company primarily of engineers and because of this we have sought from the outset to use as little energy or materials as possible to solve or complete one particular task. Lean engineering is good engineering.”

“For me, as for all Dyson engineers, lightness - lean engineering and material efficiency - is a guiding principle. Using less material means using less energy in the process of making things. It also means lighter products that need less energy to power them and are easier to handle and so more pleasurable to use.”

Dyson has always focused on making long-lasting machines that use fewer resources while achieving higher performance. Lighter machines resulting from developing new technology and reinventing the format, consumer less energy and are not only better for the planet but also more pleasurable to use. Our cord-free vacuum cleaners, for instance, are a fraction of the weight and use a fraction of the electricity than their predecessors did. This has come about by taking an entirely different approach and developing new technology, motors and batteries, from the ground up.”

We must move ever closer to a culture whereby we minimise the use of materials through lean engineering along with the recycling of products at the end of their lives. It’s not just okay to politely offset our carbon footprint. We have to deal with it at source.”

“As Dyson, we are trying at every turn to touch the ground lightly in everything we do, to make more from less and to create a circular system through which we aim to recycle everything we use.”

Removing Middlemen

“Over the past three years we had been striving to sell more products direct to our customers ourselves, either online or through Dyson Demo stores. By early 2021 we had 356 Dyson stores. We have been opening them around the world so that customers can try our Dyson products in the best possible way. There are two reasons for this. First, we like to have a direct relationship with our customers, who are buying our product for which we are responsible, and we want to know how we can help them.

Secondly, retailers around the world are declining in numbers and sales. They are nothing like the force they were, due of course to the decline of the high street and the rise of internet shopping. If you want to buy from a website, why not buy from the Dyson website! Why not deal directly with the manufacturer?’”

“When I started out with the vacuum cleaner business, wholesalers and retailers made most of the money .. which is why today a lot of our sales at Dyson are direct.

Cutting out the middleman, and those who add no value, ought to be a popular national campaign. It would mean a possibility of profit for risk takers and producers, and lower prices for consumers.”

Listen to Customers

Listening to what our users say is gold dust and I really enjoy reading or hearing about complaints. We devised a system of reporting all remarks heard by customers in stores or by store salespeople from all over the world, so that everyone in the company can see this priceless intelligence.”

Optimism

I have great faith that science and technology can solve problems, from more sustainable and efficient products to the production of more and better food, and a more sustainable world. It is technological and scientific breakthroughs, far more than messages of doom, that will lead to this world. We need to go forwards optimistically into the future as if into the light, and with bright new ideas rather than darkness and end to human ingenuity portrayed by doomsayers.”

“The depressing thing is that harbingers of doom and gloom get far more attention than optimists and problem solvers. I feel very strongly that progress should be embraced and encouraged, and it is a duty of governments and companies to catalyse the ideas of the progressive and harness them to achieve good ends.”

Summary

Most people would consider someone who’d failed 5,126 times and succeeded just once, a failure. Yet, that’s exactly what James Dyson did. That one success was the acorn that grew into a $US10 billion dollar fortune (talk about asymmetric returns!)

There’s a myriad of lessons for inventors, investors and entrepreneurs in the pages of this book. Many of the lessons are equally applicable to each endeavour; maintaining focus, taking a long term view, continuously learning, challenging conventional wisdom and adopting a multi-disciplinary mindset.

As you delve into the story an investment case emerges and the pieces of the puzzle start to fit together. An inventive fanatic full of passion, tenacity, resilience and self-belief recognises a prosaic industry that’s been neglected by technology and ripe for disruption. The target market is huge and somewhat immune from the vagaries of the economic cycle. A kernel of inventive insight, a variant perception on consumers preparedness to pay more for quality products and constant iteration leads to the development of a revolutionary product.

Driven by a purpose beyond wealth accumulation (obliquity), a ‘technology’ business emerges. Full control of the ecosystem and intellectual property become further competitive attributes difficult to challenge. As technology compounds (a’la Brian Arthur) the barriers to competition widen. The tone is set from the top - a culture of continuous innovation and rejecting the status quo flourishes. Risk taking on a scale where failure is tolerable (a’la Palchinsky principle) is encouraged, creating new possibilities. Private ownership and low debt affords a long term view - no one is watching the quarterly shot clock.

While there is no spreadsheet or financial model, there is a full scale mental model, or theory, developing. The component mental models, together, shed light on the Dyson company’s extraordinary success. My contention is this latter model will prove more useful in determining whether Dyson will continue to prosper in the future.

Let’s not forget however, that without James Dyson, there would be no Dyson. Like many of the great businesses we’ve studied, it started with a fanatic.

Source:
James Dyson - Invention: A Life,’ James Dyson, Simon & Schuster, 2021.

Further Learning:

James Dyson - Invention: A Life - Interactive Portal.’


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Learning from Trader Joe's, Joe Coulombe

It’s a rare person who can run their own business, and rarer still are those who can do it well. And in a world of stiff competition and consumer fickleness, those people who’s businesses can both survive and thrive in that environment are probably the rarest of them all.

If you choose a manager to whom you entrust your capital, in the words of Charlie Munger, choose a ‘business fanatic.’ Such individuals live, sleep and breathe their businesses. They’re not bound by the same restraints as most business people; constantly pushing boundaries, trialing new approaches, thinking outside the box, challenging conventional wisdom and always looking for business improvements. If you’re in business, these are the last type of people you want to compete with. One man that epitomized such fanaticism was the late Joe Coulombe, founder of the convenience store chain that carried his name, Trader Joe’s.

“Edward H. Heller, a pioneer venture capitalist used the term ‘vivid spirit’ to describe the type of individual to whom he was ready to give significant financial backing. He said that behind every unusually successful corporation was this kind of determined entrepreneurial personality with the drive, the original ideas, and the skill to make such a company a truly worthwhile investment.” Phil Fisher

Joe tells his story in the book, ‘Becoming Trader Joe - How I Did Business My Way and Still Beat the Big Guys.’ It contains a wealth of wisdom, particularly when it comes to thinking about running a successful retailer. Over more than a quarter of a century, Trader Joe’s sales grew at a compound rate of 19% per year and the company’s net worth grew at a compound rate of 26% per annum over the same period - no mean feat for a commodity business that’s hard to differentiate. Furthermore, the business never lost money in a year and incredibly each year was more profitable than the last.

When the competitor 7-Eleven extended it’s footprint into California in the 1970’s, Pronto Markets, the precursor to Trader' Joe’s, already enjoyed the highest sales per store of any convenience operator in America by a factor of three. A high wage policy, strong locations, a few liquor licences, and the beginnings of a differentiated strategy through product knowledge was the core of their success.

One of the mental models I particularly enjoyed in the book was Joe’s concept of ‘Double Entry Retailing.’ A form of second level thinking, Joe recognised that making changes to Demand Side factors had an influence on Supply Side factors which aren’t always obvious. A striking example was the introduction of orange juice freshly squeezed on the premises. While a great Demand Side success - customers embraced the product - it was a total nightmare to administer because of the Supply Side issues; the great variation in sweetness of oranges over the course of a year, difficulty in ensuring machines squeezed the right amount and disposal of the leftover rinds. As a result it was eventually phased out.

You’ll recognise many of the characteristics that form a common link with the other great businesses we’ve studied. I’ve included some of my favourite extracts from the book below.

Harnessing Demographic & Technological Change

‘The clue, the keystone of the arch of Trader Joe’s, was a small news item in Scientific American in 1965. When we left Stanford, my father-in-law, Bill Steere, a professor of botany, gave me a subscription to Scientific American. In terms of creating my fortune, it’s the most important magazine I’ve ever read. The news item said that, of all the people in the US who were qualified to go to college in 1932, in the pit of the Depression, only 2 percent did. By contrast, in 1964, of all the people qualified to go to college 60 percent in fact actually did. The big change, of course, was the GI Bill of Rights that went into effect in 1945.

A second news item, one from the Wall Street Journal, told me that the Boeing 747 would go into service in 1970, and that it would slash the cost of international travel. In Pronto Markets we had noticed that people who travelled - even to San Francisco - were far more adventurous in what they were willing to put in their mouths. Travel is, after all, a form of education.

Trader Joe’s was conceived from those two demographic news stories. What I saw here was a small but growing demographic opportunity in people who were well educated. 7-Eleven, and the whole convenience store genre, served the most basic needs of the most mindless demographics with cigarettes, Coca-Cola, milk, Budweiser, candy, bread, eggs. I saw an opportunity to differentiate ourselves radically from mainstream retailing to mainstream people.”

Obliquity

“I hope you’ll consider the following, my favourite quote from my favourite book on Management, ‘The Winning Performance’ by Clifford and Cavanaugh,’ ‘The fourth (general themes in winning corporations] is a view of profit and wealth-creation as inevitable byproducts of doing other things well. Money is a useful yardstick for measuring quantitative performance and profit and an obligation to investors. But … making money as an end in itself ranks low.’”

A Bias to Action & Tenacity

“In 1962, Barbara Tuchman published ‘The Guns of August’, an account of the first ninety days of WWI, It’s the best book on management - and, especially, mismanagement - I’ve ever read. The most basic conclusion I drew from from her book was that, if you adopt a reasonable strategy, as opposed to waiting for an optimum strategy, and stick with it, you’ll probably succeed. Tenacity is as important as brilliance.”

Trying to find an optimum solution in business is a waste of time; the factors in the equation are changing all the time.”

Value, Empower & Pay Employees Well

“You’ve got to have something to hang your hat on. The one core value I chose was our high compensation policies, which I put in place from the very start in 1958… This is the most important single business decision I ever made: to pay people well. First Pronto Markets and then Trader Joe’s had the highest-paid, highest benefitted people in retail.”

“Time and again I am asked why no one has successfully replicated Trader Joe’s. The answer is that no one has been willing to pay the wages and benefits, and thereby attract - and keep - the quality of people who work at Trader Joe’s.”

thumbnail_IMG_1551.jpg

“[I was asked,] ‘But how could you afford to pay so much more than your competition?’ The answer, of course, is that good people pay by their extra productivity. You can’t afford to have cheap employees.”

“Equally important was our practice of giving every full-time employee an interview every six months. At Stanford I’d been taught that employees never organise (join unions) because of the money; they organise because of un-listened-to grievances.”

The [store] Captains had the salary plus a bonus that theoretically had no limit. The bonus was based on Trader Joe’s overall profit, allocated among the stores based on each store’s contribution. In 1988, several Captains made bonuses of more than 70 percent of their base pay. Unless a bonus system promises, and delivers big rewards, it should be abandoned.”

“My idea, often stated to everybody, was that the [store] Captains should have the chance to make more than executives in the office. In a traditional chain store, managers aspire to become bureaucrats with cushy, high-paying jobs in the office. I wanted to kill such aspirations at the start.”

“Part timers .. at a time when the minimum wage was $4.35, we often paid $13.00 per hour because these people were worth it.”

Productivity in part is a product of tenure. That’s why I believe that turnover is the most expensive form of labor expense.”

We instituted full health and dental insurance back in the 1960's when it was cheap. When I left, we were paying $6,000 per employee per year!”

Each full-timer was supposed to be able to perform every job in the store, including checking, balancing the books, ordering each department, stocking, opening, closing, going to the bank, etc. Everybody worked the check stands in the course of the day, including the [store] Captain.”

In thirty years we never had a layoff of full-time employees. Seasonal swings in business were handled with overtime pay to full-time employees, and by adjusting part-time hours. The stability of full-time employment at Trader Joe’s was due in part to caution opening new stores, and insisting on high volume stores.”

Cost of goods sold is the dominant expense. The funny thing is that grocers seem to spend more effort squeezing payroll than squeezing Cost of Goods Sold, though there is at least five times more opportunity in the latter.”

Retail & Real Estate Decisions

‘First we upped the investment ante by taking only prime locations, which could generate the most sales, even though the rents were higher. A lease is an investment, perhaps the most serious and certainly the least changeable a retailer can make. Financially, a lease is simply a long-term loan… Most retail bankruptcies come from bad real estate leasing decisionsEarly in my career I learned there are two kinds of decisions: the ones that are easily reversible and the ones that aren’t. Fifteen-year leases are the least-reversible decisions you can make. That’s why, throughout my career, I kept absolute control of real estate decisions.”

“The keys to management are strong locations with good people.”

“People often ask me, how many stores did we have at such-and-such time? It’s the wrong question to ask. What’s important is dollar sales. For example, from 1980 to 1988, we increased the number of stores by 50 percent but sales were up 340 percent.”

My preference is to have a few stores, as far apart as possible, and to make them as high volume as possible.”

“Too many stores, to many irreversible leases, too much geographical saturation was a recurrent theme in the failure of American retail chains in the twentieth century.”

Ancient Mariner Retailers claim that ‘volume solves everything.’ If it’s profitable volume, they’re right. Things go most sour in the lowest-volume stores. It’s like riding a bicycle, the faster it goes, the more stable it is. The ‘normal distribution’ of most chains is 20% dogs, 60% okay stores, and 20% winners. I believe in ruthlessly dumping the dogs at whatever cost. Why? Because their real cost is in management energy. You always spend more time trying to make the dogs acceptable than in raising the okay stores into winners. And it’s in the dogs that you always have the most personnel problems."

“I believe that the sine qua non for successful retailing is demographic coherence: all your locations should have the same demographics whether you are selling clothing or wine.”

“I liked semi-decayed neighbourhoods, were the census tract income statistics looked terrible, but the mortgages were all paid-down, and the kids had left home. Housing and rental prices tend to be lower, and more suitable for those underpaid academics. Related to this, I was more interested in the number of households in a given area than the number of people in a ZIP code. Trader Joe’s is not a store for kids or big families. One or two adults is just fine.”

“Computerisation has radically upgraded the statistics available: I’d probably do it more formally now. But there’s no substitute for ‘driving’ a location to ferret out traffic problems. And do it at night, too.”

“I hardly need to mention that a trading area is rarely determined by a radius. It’s determined by geographical barriers, boulevard access, and where the demographics lie.”

Let’s go back to the question of number of stores. How do you space them? Here are some parameters: You need to have enough stores in a trading area to economically amortise the radio advertising. You need enough stores in an area to have a large enough pool of employees. My rule was that distance between stores should not be measured in miles but in driving time. I wanted no less than twenty minutes between stores. That pretty much avoided the dread word, cannibalisation. Could a given trading area support more Trader Joe’s? Almost certainly! I figured we could break even at ten thousand core residences. But I wanted super-volume stores. If the credo that super-volume stores have the fewest operating problems is valid, then the overall health of the chain, in the long run, is maximised.”

How many trading areas should you enter? As long as you can preserve the culture of the company, and as long as logistics don’t kill you, go ahead.”

“Never, never, never sign a lease with a ‘continuous operation’ clause. That clause means you must stay open - you can’t ‘go dark’ and just pay the rent.”

Product Knowledge

The buyers at the supermarket chains knew nothing about what they sold, and they don’t want to know. What they did know all about was extorting slotting allowances, cooperative ad revenue, failure allowances, and back-haul concessions from the manufacturers.”

Four Tests

“The advantage of hard liquor merchandise was that it met three tests:

a) A high value per cubic inch, essential to a small store format
b) A high rate of consumption
c) It had to be easily handled

If we could have added a fourth test, it would be that we had to be outstanding in the field. Still trying to maximise the use of a small store, I looked for categories that met the Four Tests; high value per cubic inch, high rate of consumption; easily handled; and something in which we could be outstanding in term of price or assortment. For example, diamonds met the first test but flunked the second. Fruits and vegetables met the first and second but flunked the third because produce requires constant reworking. Fresh meat flunked the third test even more.”

Purpose

Most of my ideas about how to act as an entrepreneur are derived from ‘The Revolt of the Masses’ by Jose Ortega y Gasset, the greatest Spanish philosopher of the twentieth century. I believe it offers a master ‘plan of action’ for the would-be entrepreneur, who usually has no reputation and few resources. Ortega offers an explanation of how such a person can get an enterprise started. In the context of the career of Julius Caesar, an entrepreneur who started without power, Otega says of the state:

Human life, by its very nature, has to be dedicated to something, an enterprise glorious or humble, a destiny illustrious or trivial .. The State begins when groups, naturally divided, find themselves obliged to live in common. The obligation is not of brute force, but implies an impelling purpose, a common task which is set before the dispersed groups. Before all, the State is a plan of action and a Programme of Collaboration. The men are called upon so that together they may do something .. It is pure dynamism, the will to do something in common, and thanks to this the idea of the state, is bounded by no physical limits.

Most of my career has been spent selling ‘plans of action and programmes of collaboration.’ If you want to know what differentiates me from most manager’s that’s it. From the beginning, thanks to Ortega y Gasset, I’ve been aware of the need to sell everybody.”

Radical Transparency

“Throughout my career, my policy has been full disclosure to employees about the true state of affairs, almost to the point of imprudence. I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn the plans, but that his own troops would not.”

Growth

Growth for the sake of growth still troubles me. It seems unnatural, even perverted. This helps explain why I went from 1974 to 1978 without opening another store. To keep sales increasing during the mid-1970s, we relied on new ideas implemented in existing stores. This was my favourite form of growth. I don’t think that any given store ever fully realises its potential.”

Smallness & Empowerment

“We developed a prototype [Trader Joe’s] store of 4,500 square feet. Here’s a good question: Given my need to get away from convenience stores, why did I stick with small stores? The answer was verbalised for us in ‘In Search of Excellence,’ Tom Peter’s best-selling book on management. He called it ‘The Power of Chunking’:

‘The essential building block of a company is the section [which] within its sphere does not await executive orders but takes initiatives. The key factor for success is getting one’s arms around almost any practical problem and knocking it off… The small group is the most visible of the chunking devices.’

The fundamental ‘chunk’ of Trader Joe’s is the individual store with its highly paid [store] Captain and staff; the people who are capable of exercising discretion. I admire Nordstrom’s fundamental instruction to its employees: use your judgement. Trader Joe’s finally settled down at an average of about eight thousand square feet in the 1980’s, but the concept of a relatively small store with a relatively small staff remains in force.”

Marketing & Customers

“At all times I wrote the Fearless Flyer [marketing newsletter] for over-educated, underpaid people. This requires two mindsets:

Trader Joe’s Fearless Flyer Newsletter

Trader Joe’s Fearless Flyer Newsletter

1) There are no such things as consumers - dolts who are driven by drivel to buy stuff they don’t need or even want. There are only customers, people who are reasonably well informed, and very well focused in their buying habits.

2) We always looked up to the customers in the text of the Fearless Flyer. We assumed they knew more than they did, we never talked down to them.

3) Given the first two assumptions, we assumed that our readers had a thirst for knowledge, 180 degrees opposite from supermarket ads. We emphasised informative advertising.’

Originally, we distributed the Fearless Flyer only in stores and to a small but growing list. [Later,] by mailing to addresses rather than to individuals - by blanketing entire ZIP codes - we were able to tremendously expand the distribution of the Fearless Flyer. The ZIPs to which we mailed, of course, were chosen on the basis of the likely concentration of over-educated and underpaid people.”

Word of Mouth

Word of Mouth: The Power of True Believers. As everyone knows, word of mouth is the most effective advertising of all. I have been known to say that there’s no better business to run than a cult. Trader Joe’s became a cult of the over-educated and underpaid, partly because we deliberately tried to make it a cult and partly because we kept the implicit promises with our clientele.”

There aren’t many cult retailers who successfully retain their cult status over a long period of time. A couple in California are In-N-Out Burger and Fry’s Electronics. But across America, in every town, there’s a particular donut shop, pizza parlour, bakery, greengrocer, bar, etc. that has a cult following of True Believers.”

Pricing

“One of the fundamental tenets of Trader Joe’s is that retail prices don’t change unless costs change. There are no weekend ad prices, no in-and-out pricing… I have always believed that supermarkets pricing is a shell game and I wanted no part of it.”

Retailing

The fundamental job of a retailer is to buy goods whole, cut them into pieces, and sell the pieces to the ultimate consumers. This is the most important mental construct I can impart on those of you who want to enter retailing. Most ‘retailers’ have no idea of the formal meaning of the word. Time and again, I had to remind myself just what my role in society was supposed to be.”

“[We decided] no outsiders of any sort were permitted in the store. All the work was done by employees.]”

“From 1958 through 1976, we tried to carry what the customer asked for, given the limits of our small stores and other operational parameters. Each store probably had access to ten thousand stock keeping units (SKUs), of which about three thousand were actually stocked in any given week. By the time I left in 1989, we were down to a band of 1,100 to 1,500 SKUs, all of which were delivered through a central distribution system.”

“Along the way not only did we drop a lot of products that our customers would have liked us to sell, even at not-outstanding prices, but we stopped cashing checks in excess of the amount of purchase, we stopped full-case discounts, and we persistently shortened the hours. We violated every received wisdom of retailing except one: we delivered great value, which is where most retailers fall.”

[We were] willing to discontinue any product if we were are unable to offer the right deal to the customer.”

“Instead of national brands, [we] focused on either Trader Joe’s label products or ‘no label’ products like nuts and dried fruits.”

We wouldn’t try to carry a whole line of spices, or bag candy, or vitamins. Each SKU had to justify itself as opposed to riding piggyback into the stores just so we had a ‘complete’ line. Depth of assortment was of no interest.”

Each SKU would stand on its own two feet as a profit centre. We would earn a gross profit on each SKU that was justified by the cost of handling that item. There would be no ‘loss leaders.’

Above all we would not carry any item unless we could be outstanding in terms of price (and make a profit at that price) or uniqueness.

‘I do not believe in keeping ‘spoils’ in the back room until some salesperson comes by to pick them up. I believe that products should move in only one direction, never back up the supply chain. When a bottle was broken, a can dented, or a ‘short fill’ was discovered, it went to the trash bin.”

“A guideline: No private label product was introduced for the sake of having a private label. This is 100 percent contrary to the policy of most supermarketsEach private label product had to have a reason, a point of differentiation.”

The willingness to do without any given product is one of the cornerstones of Trader Joe’s merchandising philosophy.”

No bulky products like paper towels or sugar, because the high-value-per-cubic inch rule still prevailed.. We simply went out of business on the ‘bulkers’ and did not replace them with private labels.”

I believe in the wisdom that you gain customers one by one, but you lose them in droves.”

“Back in 1967, [we] made a bet that rising levels of education would fragment the masses, that a small but growing group of people would be dissatisfied with having to consume what everybody else consumedThis philosophical approach put us in conflict with the mainstream of American retailing, which emphasises continuous products. Thus when a supermarket promotes Coca-Cola it doesn’t have to explain that Coca-Cola is a secret formula for a soft drink created a century ago in Atlanta.. Wines have not been popular in America because, intrinsically, they are not continuous products. You can’t just order up some more sugar and chemicals and make another batch. In 1987, I outlined to the buyers where I thought we should go:

1) we want continuous products. Any sane person does. We want continuous products which are profitable without creating a high-price image.

2) to create such products, they needed to be differentiated at least in order to avoid direct price comparison.

3) products in which we had an absolute buying advantage. For example, we were the largest seller of cheap Bordeaux blanc in the United States.

4) I was willing to continue to indulge in the spectacular ‘closeout’ sales of branded products, but I wanted to do so in the context of much greater overall sales, principally generated by continuous products, most of them private label.”

“I don’t think that the internet grocery store will successfully invade food retailing because you’re dealing with four different temperatures: dry grocery, refrigerated products, frozen products, and ice cream when you try to home-deliver foods.”

Showmanship is the sum total of all efforts to make contact with the customer. It’s the most ephemeral, the most difficult, and the most important of the Demand Side activities.”

All the research on whether people turn to the left or the right, or whether you can ‘force’ people to the rear of the store, is irrelevant if you’re a value retailer.”

Win-Win

Honour thy vendors: After all, these are the guys you’re buying from. They should not be treated as adversaries. Five year plan 1977 said, ‘Buying, therefore, is not just a matter of trying to beat down suppliers on price. It is a creative exercise of developing alternatives.’ Many of our best product ideas and special buying opportunities came from our vendors.”

Vendors should be regarded as an extension of the retailer, a Marks and Spencer concept. Their employees should be regarded almost as employees of the retailer. Concern for their welfare should be shown, because employee turnover at vendors sometimes can be more costly than turnover of your own employees.”

Tenants who enter negotiations with the idea of beating the landlord at the objective future game usually get the kind of landlords they deserve. And vice versa.”

Other non-merchandise vendors are very much extensions of Trader Joe’s and should be treated as much. Since we owned no trucks, warehouses, etc., I asked our people to keep track of the outsourced drivers and do their best to see that our contractors were paid reasonable wages with reasonable working conditions. Turnover is the most expensive labour expense!’

Committees

“I want to make it quite clear that I called all the shots. I reject management by committee.”

Economies of Scale

“The point where the ‘buying power’ and ‘selling power’ curves cross each other creates the magical physical thresholds. There are two magical physical thresholds that a retailer must achieve to be competitive: the truckload, and the ocean container load. These thresholds mark the limit of most economies of scale.”

Focus & Outsource

We tried to stay out of all functions that were not central to our primary job in society: namely, buying and selling merchandise.. [We’d] been getting rid of all functions except those buying and selling. We got rid of our own maintenance people, we sold off almost all the real estate we had acquired during the 1970’s, we never took mainframe computing in-house, etc.

Some choice quotes from Dr. Drucker: ‘In-house service activities have little incentive to improve their productivity .. The productivity is not likely to ramp up until it is possible to be promoted for doing a good job at it. And that will happen in support work only when such work is done by separate, free standing enterprises.’”

Business Problems

All businesses have problems. It’s the problems that create the opportunities. If a business is easy, every simple bastard would enter it.”

“This is one of the most important things I can impart; in any troubled company the people at lower levels know what ought to be done in terms of day-to-day operations. If you just ask them, you can find answers.”

Adapt, Challenge the Status Quo

“Believe me, you have to have a system for everything that has to happen in your business - you just may not be conscious of it. And you probably have still other systems that are not needed. That’s why The Winning Performance calls for a ‘continued contempt for business as usual.’ To practice ‘constitutional contempt,’ you have to arrive every day with the attitude, ‘Why do we do such-and-such that way?’ Better yet, why do we do it at all? Usually the answer is, ‘We’ve always done it that way,’ ‘That’s the way we did it at my last job,’ or ‘All our competitors are doing it.’

Mental Model - Double Entry Retailing

“I hit on the idea of using double entry accounting as an analogy, what I call Double Entry Retailing. On the left side of the ledger is the business in terms of how its customers see it: I call this the Demand Side. On the right side of the ledger are the factors that limit or determine the retailer's ability to satisfy those demands: the Supply Side.

All businesses, whether manufacturing, wholesaling, services, etc., have [the] fearful symmetry of both Demand and Supply sides. And all businesses are subject to the ultimate supply-side constraint of cash: you can do anything, no matter how stupid, within that fearful symmetry, as long as you don't run out of cash. From my view, the Demand Side of Retailers can be analysed in terms of five variables:

1. The assortment of merchandise offered for sale.
2. Pricing: stability and relative to competition.
3. Convenience: geographical, in-store, and time.
4. Credit: the accepted methods of payment.
5. Showmanship: the sum of all activities that result in making contact with the customer, from advertising to store architecture to employee cleanliness.

Here are factors on the Supply Side:

1. Merchandise Vendors
2. Employees
3. The way you do things: "habits" and "culture"
4. Systems
5. Non-merchandise vendors
6. Landlords
7. Governments
8. Bankers and investment bankers
9. Stockholders
10. Crime

As in double entry accounting, the change in any factor must be matched by a corresponding change in another factor. For example, a decision to increase geographical convenience (Demand Side) obviously involves some change of policy with landlords (Supply Side) including the amount of rent you're willing to pay. Consider how Barney's paid through the nose because they thought they had to offer the geographical convenience of being in Beverly Hills. How big a factor was this in Barney's subsequent bankruptcy? Was it Demand Side success at the price of Supply Side failure?

The lists above aren't much different from other businesses. What distinguishes retailing is the asymmetry of the fearful symmetry: the huge number of customers (Demand Side) vs. the number of suppliers. This is the exact opposite of a government defence contractor.

This lopsided butterfly may cause a retailer to act as if the only people they have to ‘sell’ to are customers: the Demand Side. That’s a major mistake. All the people on the supply side have to be sold, too.”

“One of the smartest things we ever did was to cut the hours of Trader Joe’s. This is mostly a Supply Side question, but the quality and attitude of the employees handling our customers is a Demand Side factor.”

Employee Ownership

From the beginning of Pronto Markets, one of my basic principles, one of my basic goals, was employee ownership of the business. Getting there, however, was complicated.”

Summary

I found the similarities between Trader Joe’s approach to retailing and the German retailer Aldi strikingly similar. Despite being on opposite sides of the world, both businesses evolved complementary retailing practices: a focus on private label, above market wages for employees, a win-win mentality and continuous innovation. It’s little wonder the Albrecht family were attracted to the business. Aldi acquired Trader Joe’s in 1979 and retained Joe as the independent manager for another ten years.

Paying staff well, empowering and sharing information with them and maintaining smallness are consistent themes across many of the successful business stories we’ve studied. When it comes to the specifics of retailing, the analogy of super-volume stores better able to provide balance is a useful one. As are the insights into economies of scale, pricing strategy, jettisoning poorly performing stores, the power of word-of-mouth marketing and the means to abolish bureaucracy through the outsourcing of non-essential functions.

Every business has its own quirks and idiosyncrasies. Identifying what they are and how they contribute to a firm’s success can provide clues in our own quest to find compounding machines; in the long run, it’s business success which determines share prices. The more businesses you study, the larger the toolkit of mental models you’ll have to apply in your investment endeavours.

Source:
Becoming Trader Joe - How I Did Business My Way & Still Beat the Big Guys,’ Joe Coulombe, Patty Civalleri. Harper Collins. 2021.

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Learning from John D Rockefeller

We’ve all heard of today’s Titans; those business moguls that possess incredible net worth that rivals almost all others. Bezos, Musk, Gates, even Buffett and Munger. These are household names to both investors and businesspeople the world over. But there was one Titan that could rival them all, and indeed is regarded as the richest American to ever live. Who was it?

John D Rockefeller.

With an estimated net worth of $400b today, how did he earn that title? How did one man find himself literally crushed by money and yet was still able to retire in his mid 50’s?

He did it by owning a great business - which is key to long term investment success. The very best businesses aren’t just slightly better than their competition, they’re orders of magnitude better. Businesses which can grow their earnings and compound their investor’s capital can underwrite their share price performance for years to come - making them one of the safest and surefire ways to investment success.

At the foundation of history’s greatest businesses is usually a powerful business model. In the case of Rockefeller’s Standard Oil, it was ‘Owning the Choke-Point,’ the narrow part of an hour glass separating suppliers and consumers; the centre of the ecosystem. It’s an enduring business model that has delivered windfall profits to company shareholders for centuries.

“Rockefeller had an annual untaxed income of $58m in 1902 - or about a billion dollars in tax-free income per annum in today’s money.”

If the names Chevron, Conoco, Exxon, Mobil or Amoco ring a bell, you’re already familiar with the legacy of Rockefeller’s business, The Standard Oil Trust. An indomitable energy company whose activities spanned production, storage, transport, infrastructure, distribution and retailing that touched consumers and businesses the world over. Standard Oil has long been considered the greatest monopoly of all time.

There are a myriad of lessons for today’s investor in the history of John D Rockefeller and Standard Oil; owning the choke-point, keeping prices low, leveraging and sharing scale, embracing technology, continuously innovating, empowering employees, decentralising, aligning management, growing the market, spurning debt, encouraging internal competition and harnessing tailwinds are as relevant today as they were over a hundred years ago.

Standard Oil’s ability to consistently increase profitability and defy the notoriously boom-bust nature of its industry descended from its ownership of the choke-point; the point where oil supply was transformed into commercial products and distributed for sale.

Rockefeller started out in refining, recognising the benefits of scale, he amalgamated capacity to extract favourable terms from the railways. As refining competitors buckled, Rockefeller drove further consolidation; taking partial stakes, retaining management, and using scrip based funding ensured interests were aligned - creating emergent effects.

Rockefeller recognised the benefits in keeping prices low; the pool of potential buyers was expanded while new competition was deterred from entering the industry. Ever frugal, Rockefeller focused on costs and looked for ways to increase efficiencies; embracing new technologies, constantly innovating and leveraging economies of scale ensured competition was muted. By 1907, the Standard Oil leviathan refined 87% of the kerosene market and was more than twenty times the size of its most serious competitor.

Having come of age in an era of emerging corporate dominance and nascent regulatory oversight, Standard Oil’s anti-competitive tactics [there were many!] eventually attracted Government attention. In 1911, after forty-one years of existence, the Supreme Court ordered the Trust be dismembered into thirty-seven subsidiary companies [including those five companies mentioned above]. The post split performance of Standard Oil Trust might prove a useful guidepost given the regulatory concerns overhanging some of today’s tech titans.

By his mid-fifties, Rockefeller had retired, yet the enormous tailwind of the automotive generation would make him far richer in retirement than in his working life. An abiding self-belief that he was fulfilling God’s wish to earn and share wealth had created a predilection for charity from an early age. At the time of Rockefeller’s death, a few weeks short of his 98th birthday, his career would be defined as much by his philanthropic endeavours as it was by his business success.

Rockefeller’s incredible story has been told in the wonderful book, Titan, by Ron Chernow.

“Another book that I liked very much was ‘Titan’, the biography of the original John D. Rockefeller. That’s one of the best business biographies I have ever read. And it’s a very interesting family story, too. That was just a wonderful, wonderful book. And I don’t know anybody who’s read it who hasn’t enjoyed it. So I would certainly recommend that latest biography of John D. Rockefeller the first.” Charlie Munger

‘Titan’ is a fantastic journey into the highly complex and contradictory mind of one of the world’s shrewdest businessmen. While not an easy read (bring a dictionary!) it’s worth the effort. While barely scratching the surface of this epic biography, I’ve included some favourite extracts below.

Education and Smarts

“‘I was not an easy student, and I had to apply myself diligently to prepare my lessons.’ said Rockefeller, who described himself accurately as ‘reliable’ but not ‘brilliant.’”

“[When playing childhood games] to ensure that he won, he submitted to games only where he could dictate the rules.”

“‘I was trained from the beginning to work and save,’ Rockefeller explained. ‘I have always regarded it as a religious duty to get all I could honourably and give all I could.’”

“Once Rockefeller spent three days helping a local farmer dig potatoes for 37 cents per day. This set up an instructive contrast for the frugal boy when, soon afterward, he loaned one farmer $50 at 7 percent interest and collected $3.50 at year’s end - without a stitch of work. He was thunderstruck by the happy math, which hit him with the force of a revelation. ‘The impression was gaining ground on me that it was a good thing to let the money be my slave and not make myself a slave to money.’”

Optimism

“[Rockefeller] was a confirmed exponent of positive thinking.”

“Like other Gilded Age moguls, Rockefeller was shaped by his faith in economic progress, the beneficial application of science to industry, and America’s destiny as an economic leader.”

“[After the 1929 market crash, Rockefeller was encouraged to make a calming statement] Rockefeller issued a press release, ‘These are days when many are discouraged. In the ninety years of my life, depressions have come and gone. Prosperity has always returned, and will again.’ In his peroration, he said, ‘Believing that the fundamental conditions of the country are sound, my son and I have been purchasing sound common stocks for some days.’”

Embrace Technology

“The firm relied upon the railroad and the telegraph, the two technologies then revolutionising the American economy.”

“Standard Oil also profited immeasurably from the revolution in oil transport as barrels gave way to tank cars.”

“The railroads balked at investing in rolling stock that couldn’t also transport general freight, So Rockefeller stepped boldly into the breach… As the owner of almost all the Erie and NY Central tank cars, Standard Oil’s position grew unassailable.”

“Only belatedly did Rockefeller discern the full potential of pipelines… [Ultimately] gaining uncontested control of all major pipeline systems connecting oil wells to railroad trunk lines. ‘Practically not a barrel of oil could get to a railroad without Rockefeller’s consent… ‘Rockefeller’s firm had now advanced far beyond the railroads to more efficient pipelines.’”

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Understand the Business

“For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible emotion. They gauged performance, exposed fraud, and ferreted out hidden inefficiencies. In an imprecise world, they rooted things in solid empirical reality. As he chided slipshod rivals, ‘Many of the brightest kept their books in such a way that they did not actually know when they were making money on a certain operation and when they were losing.’”

Efficiency and Scale Advantages

“The proliferation of railroads enabled Rockefeller to extract discounts from them by playing one off against the other.”

“Rockefeller’s ceaseless search for even minor improvements meant that within a year refining had overtaken produce as the most profitable side of the business. Despite the unceasing vicissitudes of the oil industry, prone to cataclysmic booms and busts, he would never experience a single year of loss.”

“His tight-fisted control of details and advocacy of unbridled expansion. Daring in design, cautious in execution - it was a formula he made his own throughout his career.”

[Rockefeller] was a mastermind of many negotiations with the railroads.. Since oil was a relatively cheap, standardised commodity, transportation costs inevitably figured as a critical factor in the competitive struggle.”

Rockefeller had built gigantic plants so he could drastically slash his unit costs. Even his first partner remembered that ‘the volume of trade was what he always regarded as of paramount importance.’ Early on, Rockefeller realised in the capital-intensive refining business, sheer size mattered greatly because it translated into economies of scale.”

“Once describing the ‘foundation principle’ of Standard Oil, Rockefeller said it was the ‘theory of the originators’ .. that the larger volume the better the opportunities for the economies, and consequently the better opportunities for giving the public a cheaper product without .. the dreadful competition of the late ‘60’s ruining the business. During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from this gospel of industrial efficiency.”

Emerging Effects

Rockefeller activated a self-sustaining movement as his new allies agreed to consolidate business in their localities and supervise the purchase of remaining independent refiners. A massive chain reaction was thus set in motion that rippled through both refining centres, with local businessmen acting as Rockefeller’s agents.”

Owning the Choke-Point

“The spot chosen for the new refinery tells much in miniature about Rockefeller’s approach to business… Able to ship by water or land, Rockefeller gained the critical leverage he needed to secure preferential rates on transportation - which was why he agonised over plant locations throughout his career.”

“[Rockefeller’s] overriding reason for his attachment to Cleveland: It was the hub of so many transportation networks that he had tremendous room to manoeuvre in freight negotiations.”

“Rockefeller’s first visit to Pennsylvania must have persuaded him that he had picked the right entry point to the business. Searching for oil was wildly unpredictable, whereas refining seemed safe and methodical by comparison. Before too long, he realised that refining was the critical point where he could exert maximum leverage over the industry.”

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“Rampant speculation had so overbuilt the industry that total refining capacity in 1870 was triple the amount of crude oil being pumped. By then, Rockefeller estimated 90 percent of all refiners were operating in the red. Producers and refiners didn’t shut down operations in the expected numbers causing Rockefeller to doubt the workings of Adam Smith’s invisible hands: ‘So many wells were flowing that the price of oil kept falling, yet they went right on drilling.’ The industry was trapped in a full blown crisis of overproduction with no relief.’ Thus in 1869, Rockefeller feared his wealth might be snatched away from him. As someone who tended toward optimism, ‘seeing opportunity in every disaster’, he studied the situation exhaustively instead of bemoaning his luck. He saw that his individual success as a refiner was now menaced by industrywide failure and that it therefore demanded a systematic solution. This was a momentous insight, pregnant with consequence. Instead of just tending to his own business, he began to conceive of the industry as gigantic, interrelated mechanism and thought in terms of strategic alliances and long term planning. Rockefeller cited the years 1869 and 1870 as the start of his campaign to replace competition with cooperation in the industry. The culprit, he decided, was ‘the over-development of the refining industry,’ which had created ‘ruinous competition.’ If this fractious industry was to be made profitable and enduring, he would have to tame and discipline it. A trailblazer who improvised solutions without any guidance from economic texts, he began to envision a giant cartel that would reduce overcapacity, stabilise prices, and rationalise the industry.”

“Between February 17 and March 28 1972 - between the first rumours of the SIC [proposed agreement between Standard Oil and the railways] and the time it was scuttled - Rockefeller swallowed up twenty-two of his twenty-six Cleveland competitors… Another businessman might have started with small, vulnerable firms, building on easy victories, but Rockefeller started at the top, believing that if he could crack his strongest competitor first, it would have tremendous psychological impact.”

“In retrospect, it seems peculiar that Standard Oil - omnipotent in refining, transportation, and distribution - owned just four production properties in the early 1880’s… He had long profited from the juxtaposition of cooperation in refining and competition in production.”

“Rockefeller applied to iron ore [interests] lessons he had learned in oil, such as controlling an industry through transportation and demoralising competitors with prices too low for them to match.”

“The unity of Standard Oil partners was especially impressive given the organisation’s byzantine structure, a far-flung patchwork of firms, each nominally independent but in reality taking orders from 26 Broadway [Standard Oil head office].”

Innovation

“Scarcely dreaming that oil would ever supersede their main [agricultural produce] commodity business, they [Rockefeller & partner] considered it ‘a little side issue.’”

Rockefeller wasn’t stultified by precedent or tradition, which made it easier for him to innovate. He continued to value autonomy from outside suppliers. At first, he paid small coopers up to $2.50 for white oak barrels before he showed, in an early demonstration of scale, that he could manufacture dry, tight casks.. for less than a dollar a barrel. The Cleveland coopers bought and shipped green timber to their shops, whereas Rockefeller had the oak sawed in the woods and dried in kilns, reducing its weight and slicing transportation costs in half.”

“Regarding each plant as infinitely perfectible, Rockefeller created an atmosphere of ceaseless improvements.”

“Below the executive committee came a battery of specialised committees dedicated to transportation, pipelines, domestic trade, export trade, manufacturing, purchasing and so on. These committees standardised the quality of subsidiaries engaged in similar work, enabling managers to swap insights and align their operations… These were chosen experts who had daily sessions and study of the problems, new as well as old, constantly arising. The benefit of their research, their study, was available for each of the different concerns.”

Rockefeller created the model for the vertically integrated oil giants that would straddle the globe in the twentieth century.. By 1891 Rockefeller had gained control of a quarter of American oil production.”

Tailwinds

“The [civil] war had stimulated growth in the use of kerosene by cutting the supply of southern turpentine .. kerosene emerged as an economic staple and was primed for a furious postwar boom.”

The [civil] war markedly accelerated the timetable of economic development, promoting the growth of factories, mills, and railroads. By stimulating technological innovation and standardised products, it ushered in a more regimented economy. The world of small farmers and businessmen began to fade, upstaged by a gargantuan new world of mass consumption and production.”

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Europe emerged rapidly as the foremost market for American kerosene, importing hundreds of thousands of barrels yearly during the civil war. Perhaps no other American industry had such an export outlook from its inception. By 1866, fully two-thirds of Cleveland kerosene was flowing overseas.”

Low Prices

Rockefeller’s goal was to forestall potential competitors through low prices and thus minimise risk and chance disruptions.”

Standard Oil had not kept prices low out of altruism but to deter competition and ‘keep our profits on such a basis that others would not be stimulated to enter the field of competition with us.’ This belied Rockefeller’s frequent claim that his motive was to bequeath cheap oil to the working people.”

“Rockefeller was obsessed with high-volume, low cost production to maintain market share, even if he temporarily sacrificed profit margins. As he noted, ‘This fact the Standard Oil Company always kept in mind: that they must render the best service and be content with largely increasing volume of business, rather than increase the profit so as to tempt others to compete with them.’ When discussing prices with subordinates, he frequently reminded them, ‘We want to continue, in reason, that policy which will give us the largest percentage of business.’”

“In general, Standard Oil did an excellent job at providing kerosene at affordable prices. It boasted far lower unit costs than competitors and relentlessly drove down costs over the years.’ Between 1880 and 1885, its average cost of processing a gallon of crude oil went from 2.5 to 1.5 cents. [In the 20 years to 1890] the retail prices of kerosene had plunged from 23.5 cents to 7.5 cents per gallon.”

“But Standard Oil never sought a perfect monopoly because Rockefeller realised that it was politically prudent to allow some feeble competition.. A very smart monopolist, Rockefeller kept prices low enough to retain control of the market but not so low as to wipe out all lingering competition.”

“Rockefeller new that if he got greedy, other products could be substituted for kerosene, and this, too, curbed his appetite for excess profits.”

“Rockefeller keenly felt a need to freeze the industry’s size, stymie new entrants, and create an island of stability in which expansion and innovation could then occur unimpeded.”

John D Rockefeller’s NY Residence

John D Rockefeller’s NY Residence

Empowering People

Rockefeller wanted to be surrounded by trustworthy people who could inspire confidence in customers and bankers alike.”

“In the early days, Rockefeller knew the name and face of each employee.”

“Rockefeller generally received excellent reviews from employees who regarded him as fair and benevolent, free of petty temper and dictatorial airs.”

So highly did Rockefeller value personnel that during the first years of Standard Oil he personally attended to routine hiring matters.

“‘The ability to deal with people is as purchasable a commodity as sugar or coffee,’ Rockefeller once said, ‘and I pay more for that ability than for any other under the sun.”

Employees were invited to send complaints or suggestions directly to Rockefeller, and he always took an interest in their affairs. His correspondence is replete about sick or retired employees. Reasonably generous in wages, salaries, and pensions, he paid somewhat above the industry average.”

“His employees tended to revere Rockefeller and vied to please him. As one said, ‘I have never heard of his equal in getting together a lot of the very best men in one team and inspiring each man to do his best for the enterprise.”

“At first, Rockefeller tested employees exhaustively, yet once he trusted them, he bestowed enormous power upon them and didn’t intrude unless something radically misfired.”

“People who worked for Rockefeller usually found him a model of propriety and paternalistic concern.”

“Rockefeller’s decided the leading men [management co-owners] would receive no salary but would profit solely from the appreciation of their shares and rising dividends - which Rockefeller thought a more potent stimulus to work.”

“When it came to mergers, Rockefeller didn’t fight for the last dollar and tried to conclude matters cordially. Since he aimed to convert competitors into members of his cartel and often retained the original owners.”

“The creation of Standard Oil was often less a matter of stamping out competitors than of seducing them into co-operation. In general, Rockefeller was so eager to retain original management that he accumulated expensive deadwood on the payroll and, for the sake of intra-empire harmony, preferred to be conciliatory.”

One of Rockefeller’s greatest talents was to manage and motivate his diverse associates. As he said, ‘It is chiefly to my confidence in men and my ability to inspire their confidence in me that I owe my success in life.”

“Free of an autocratic temperament, Rockefeller was quick to delegate authority and presided lightly, genially, over his empire, exerting his will in unseen ways.”

The Trust’s formation created negotiable securities, and this profoundly affected the Standard Oil culture. Not only did Rockefeller urge underlings to take stock but made money abundantly available to do so. As such shareholding became widespread, it welded the organisation more tightly together, creating an esprit de corps that helped in steamrolling competitors and government investigators alike. With employees receiving huge capital gains and dividends, they converted Standard Oil into a holy crusade.”

“Rockefeller hoped the Trust would serve as a model for a new populist capitalism, marked by employee share ownership. ‘I would have every man a capitalist, every man, women and child,’ he said, ‘I would have everyone save his earnings, not squander it; own the industries, own the railroads, own the telegraph lines.”

“[Rockefeller’s] committee system was an ingenious adaption, integrating the policy of constituent companies without stripping them of all autonomy. We must remember that Standard Oil remained a co-federation and most of its subsidiaries were only partially owned. A top down hierarchical structure might have hampered local owners whom Rockefeller had promised a measure of autonomy in running their plants. The committee system galvanised their energies while providing them with general guidance. The committee encouraged rivalry among local units by circulating performance figures and encouraging them to compete for records and prizes. The point is vitally important, for monopolies spared the rod of competition, can easily lapse into sluggish giants.”

Walk The Floors

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“In the first years of Standard Oil, Rockefeller regularly toured his facilities and was extremely inquisitive and observant, soaking up information and assiduously quizzing plant superintendents. In his pocket, he carried a little red notebook in which he jotted suggestions for improvements and always followed up on them.”

Financial Strength

“[Rockefeller] always moved into battle backed by abundant cash. Whether riding out downturns or coasting on booms, he kept plentiful reserves and won many bidding contests simply because his war chest was deeper.”

Standard Oil weathered the six-year depression magnificently, a fact Rockefeller attributed to its conservative financial policy and unparalleled access to bank credit and investor cash.”

“The Standard Oil Trust’s resilience during the depression of the 1890’s, its tested immunity from market fluctuations, cheered Rockefeller, who attributed this to Standard’s large cash reserves and conservative dividend policy.”

“Since the early 1880’s, Standard Oil had been self-financing, very liquid at all times, and free from the thrall of Wall Street bankers.”

Grow the Market

To inflate demand, Rockefeller sold hundred of thousands of cheap lamps and wicks and sometimes distributed them gratis with the first kerosene purchase.”

“Rockefeller also sold, almost at cost, heaters, stoves, lamps, and lanterns to widen the market. In the manner of a modern corporation, Standard Oil created demand as well as satisfied it.”

“Rockefeller continually extended the market for petroleum by-products, selling benzine and paraffin, and petroleum jelly in addition to kerosene.”

Fanaticism & Obliquity

Rockefeller derived a glandular pleasure from work and never found it cheerless drudgery. In fact, the business world entranced him as a fount of inexhaustible wonders. ‘It is by no means from money alone that these active-minded men labor - they are engaged in a fascinating occupation.’ he wrote in his memoirs. ‘The zest of the work is maintained by something better than mere accumulation of money.”

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“Rockefeller seemed destined to succeed as much from his fastidious work habits as from innate intelligence.”

“Even in as a young man, Rockefeller was extremely composed in crisis. In this respect, he was a natural leader; The more agitated others became, the calmer he grew.”

The passion for excellence originated with Rockefeller and radiated throughout the organisation. The ethos of Standard Oil’s operations around the world was John D Rockefeller’s personality writ large.”

Rockefeller inspired subordinates with his fanatic perfectionism.”

Humility

“Aside from the occasional courtesy call from other moguls, he hobnobbed with the same family members, old friends, and Baptist clergy who had always formed his social circle.”

“When someone expressed surprise to Rockefeller that he had not gotten a big head, he replied, ‘Only fools get swelled up over money.’ Comfortable with himself, he needed no outward validation of what he had accomplished.”

Rockefeller preferred outspoken colleagues to weak-kneed sycophants and welcomed differences of opinion so long as they weren’t personalised.”

Frugality

“From his mother he learned economy, order, thrift, and other bourgeois virtues that figured so largely in his success at Standard Oil.’”

Rockefeller engaged in strenuous rituals of austerity, and grimly sought to simplify his life and reduce his wants. He liked to say that ‘a man’s wealth must be determined by the relation of his desires and expenditures to his income. If he feels rich on ten dollars, and has everything else he desires, he really is rich.’”

“Rockefeller spent a ridiculous amount of time protesting bills both large and small.”

“[Rockefeller would say,] save when you can and not when you have to.”

“The world’s richest man never lost the thrifty boyhood habits that had made him the nonpareil of American business.”

Secrets

“Rockefeller trained himself to reveal as little as possible.”

“He learnt to cultivate a secretive style and a defiant attitude toward strangers.”

“Rockefeller never allowed his office decor to flaunt the prosperity of his business, lest it arouse unwanted curiosity.”

“Rockefeller was concerned that if he advertised his own wealth through fancy houses, he might attract investors into the refining business and only worsen the excess capacity problem.”

“Ever alert against industrial espionage, Rockefeller never wanted people to know more than was required and warned one colleague, “I would be very careful about putting someone into a position where he could learn about our business, and be troublesome to us.”

Rockefeller equated silence with strength. Weak men had loose tongues and blabbed to reporters, while prudent businessmen kept their own counsel.”

Anti-Competitive Tactics

Since the rules of the game had not yet been encoded into law, Rockefeller and his fellow industrialists had forged them in the heat of combat. With his customary thoroughness, Rockefeller had devised an encyclopaedic stock of anti-competitive weapons. Since he had figured out every conceivable way to restrain trade, rig markets, and suppress competition, all reform-minded legislators had to do was study his career to draw up a comprehensive antitrust agenda.”

Rockefeller perfected a monopoly that indisputably demonstrated the efficiency of large scale-business.”

Post Split

“During the ten years after Standard Oil’s 1911 dismantling, the assets of its constituent companies quintupled in value.”

“Those who had seen the Standard Oil dissolution as a condign punishment for Rockefeller were in for a sad surprise: It proved to be the luckiest stroke of his career. Precisely because he lost the antitrust suit, Rockefeller was converted from a mere millionaire, with an estimated net worth of $300 million in 1911, into something just short of history’s first billionaire.”

“What quickly grew apparent, however, was that Rockefeller had been extremely conservative in capitalising Standard Oil and that the split-off companies were chock full of hidden assets. Two other factors encouraged a veritable feeding frenzy in the stocks. For years, the shares of Standard Oil of New Jersey had been depressed by the antitrust litigation, but with the litigation ended, they bounced back to more normal levels. And the explosion of the automobile industry created euphoria about the endless growth prospects of the petroleum industry.”

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Many of the newly independent companies were powerful enough to inspire fear as freestanding entities. Standard Oil of New Jersey remained the world’s largest oil company, second only to US Steel in size among American enterprises and retaining 43% of the value of the old trust.”

Philanthropy

“During his first year on the job, the young [Rockefeller] donated about 6 percent of his wages to charity, some weeks much more. ‘I have my earliest ledger and when I was only making a dollar a day I was giving five, ten, or twenty-five cents.”

“Even as a teenager, he took palpable pleasure in distributing money for charitable purposes, and he insisted that from an early date he discerned the intimate spiritual link between earning and dispensing money.”

Since his adolescence, charity had been interwoven with the fabric of his life.”

“Rockefeller argued that the rich should donate large sums to worthy causes during their lifetimes, less their money be frittered away by idle heirs.”

Rockefeller regarded his fortune as a public trust, not as a private indulgence, and pressure to dispose of it grew imperative in the 1900’s as his Standard Oil stock and other investments appreciated fantastically.”

“Rockefeller believed that certain universal principles of businesslike efficiency should apply to non-profit ventures no less than to profit-making ones.”

Never before had a rich benefactor spent his money in this area.. ‘It marked the first large public recognition of medical education and research as a rewarding subject of philanthropy.’”

“Rockefeller Foundation played an integral part in the rise of American medicine to the pinnacle of world leadership.”

“Rockefeller’s philanthropy was more orientated toward the creation of knowledge, and if it seemed more impersonal, it was also far more pervasive in its effect.”

“The fiercest robber baron had turned out to be the foremost philanthropist.”

Rockefeller established the promotion of knowledge, especially scientific knowledge, as a task no less important than giving alms to the poor or building schools, hospitals, and museums.”

Summary

Studying history’s great businesses and managers can enlighten us to factors that characterise success and help shed light on new investment opportunities. While technologies change and economies evolve, the business models that define these great companies can endure for decades, even centuries.

Since the days of Standard Oil, many businesses have achieved effective ownership of the choke-point. Even the Mafia recognised the significant benefits accruing to such a position when they controlled New York’s concrete industry in the 1980’s. Collecting a tax of 1-2 percent on every new skyscraper - if you wanted to build you had to talk to the Mob.

More recently we’ve witnessed a multitude of companies monopolising industry choke-points. The capital-light nature of some of these technology businesses with their first mover advantages, network effects, increasing returns and winner-take-all dynamics may mean even longer life cycles.

Businesses which can compound capital for decades are the holy grail of investing. Charlie Munger likes to remind us, "There are certain fundamental models out there that do not take the kind of ability that quantum mechanics requires. You just have to know a few simple things and really know them.” The choke-point is one of them.

There was only one John D Rockefeller,” concludes Chernow’s epic biography. Indeed, there was.

Reference:
Titan - The Life of John D Rockefeller, Sr,’ Ron Chernow, 1998, Random House.

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Learning from Chick-fil-A’s S.Truett Cathy

The business world is diverse, with companies operating in a variety of industries, some of which are more complex and difficult to compete with than others.

In the next few years, the world’s leading semiconductor company will release a chip with almost 300 million transistors per square millimetre! Hard to copy? Unquestionably. How about a fast food outlet selling chicken sandwiches? On the face of it, not that hard to compete with. You can replicate the ingredients, the store fit-outs, the locations, the marketing and the packaging - but the one secret ingredient you might struggle to copy is the culture.

Consider Chick-fil-A, the fast food business that’s taken over America. A private company, Chick-fil-A is now the third largest chain behind McDonalds and Starbucks. In 2019, it generated more than $US11 billion in revenue, signifying 52 consecutive years of sales growth. When it comes to sales-per-store, no major US fast food chain comes close; the average store turns over more than a Burger King, KFC, Domino’s and Subway combined. And the stores are closed on Sunday!

On the basis of sales per store you’d expect Chick-fil-A could achieve a premium for the franchises it sells. It costs more than $US1 million to open a McDonald’s, a Burger King, or a KFC restaurant, and yet opening a Chick-fil-A restaurant costs just $US10,000.

Charlie Munger’s counsel to understand Chick-fil-A and it’s incredible success would be to ask his favourite question, ‘What in hell is going on here?

Luckily for us, Chick-fil-A’s founder, S. Truett Cathy, addressed just such a question in his book, ‘How did you do it, Truett?' The answer aligns with another of Charlie’s mental models, ‘businesses that go ridiculously far in maximising and/or minimising one or a few variables tend to have the winning systems.’

“I’d recommend a book by S. Truett Cathy who started Chick-fil-A, the chicken burger chain. The book, ‘How did you do it Truett?,’ was really good. I've been hoping that Chick-fil-A becomes a public company since then.” Francois Rochon

Legendary customer service lies at the heart of Chick-fil-A’s success. There’s even such a thing as Chick-fil-A memes; Parodies of the lengths employees will go to delight their customers. A few years ago a video of a 20-year-old Chick-fil-A worker went viral, ‘The way you interact with people really matters, it transforms their day,’ the eager employee later explained. Termed ‘second-mile-service,’ staff have been known to change a customer’s tyre or drop their lost keys or cell phone home, earning the company the top spot amongst fast food chains in the American Customer Satisfaction Index in each of the last seven years.

Source: QSR 2020 Ranking the Top 50 Fast-Food Chains

Source: QSR 2020 Ranking the Top 50 Fast-Food Chains

The late S. Truett Cathy understood that a business has a higher purpose than just making money. From the humble beginnings of a single restaurant, S. Truett Cathy rode the tailwind of America’s urbanisation, living his religious values, empowering his franchisees, listening to his customers, encouraging innovation, embracing crises, exceeding his patron’s expectations and taking a long term view. In the process he created a multi-billion dollar fast food enterprise.

S. Truett Cathy has shared his experiences and wisdom in a collection of short business books. Highly engaging, the lessons of ‘servant leadership,’ managing growth, selecting and valuing employees, delivering quality and setting the tone from the top are but a few of the mental models to be gleaned. Chick-fil-A’s unconventional approach to franchising provides a bounty of lessons in itself.

I’ve include some of my favourite S. Truett Cathy quotes below.

Education and Smarts

“As a young boy I had a speech impediment so severe I could not pronounce my own name.”

“When I was in school, I never was an achiever. I wasn’t able to make the chorus, I could never play a musical instrument, I didn’t excel in sports, and I certainly didn’t excel academically. But I had established some good work habits and had an attitude that has been very beneficial to me.”

Keep it Simple

“Every day, we remember the Chick-fil-A Chicken Sandwich is really a simple concept. We take advantage of our biggest opportunities when we keep it simple, focusing on serving great tasting food in a clean, wholesome environment with great customer service. That hasn’t changed in the sixty-one years I’ve been in the restaurant business.”

IMG_0446 (1) 4.jpeg

Customers

Be kind to your customers. It’s the key to success… You can’t beat the Golden Rule as a business philosophy: Do unto others as you would have them do unto you.”

The customer is always king. He or she is always right. You know the kind of service you like to have from people behind the counter. That’s the kind of service we want you to offer the customers.”

Listening to my customers - One of the first things I learned in the restaurant business was to find out what my customers wanted then provide it to them.”

“The key to succeeding with a paper route - and the restaurant business, I would learn later on - is to take care of the customer.”

“Ever since I was a teenager delivering newspapers, I have tried not to lose a single customer. I treated each one like the most important person in the world, and delivered each paper as if I was delivering it to the front door of the Governor’s Mansion.”

“The customer is always right, and I always oblige the customer.”

Courtesy is cheap to provide, and it pays great dividends.”

“The bottom line is, the customer standing right in front of you is funding your paycheck, and perhaps your future. Treat that one person right. Give him or her all of your attention for the moment. Have a servant’s attitude. The customer is always right, even when he or she is wrong.”

We are building success one loyal customer at a time, and we make sure that everyone who comes in leaves with the intention of coming back.”

We outperform other quick-service restaurant chains because of the courtesy and kindness we offer our customers. We advertise on radio, television, and in newspapers, but none of that takes the place of having customers as our cheerleaders.”

Servant Spirit

S Truett Cathy [Source: Chick-fil-A]

S Truett Cathy [Source: Chick-fil-A]

“To often these days, especially in retail situations, when I say, ‘Thank you,’ the response is ‘No problem.' Or worse, just a grunt. It seems the best I can hope for is, ‘You’re welcome’. I asked our Operators, team members, and corporate headquarters to say, ‘My pleasure’ whenever someone thanked them. The purpose was not just to change the words we say, but to remind those we serve, as well as ourselves, of the ‘servant spirit’ and ‘second-mile’ orientation we are continually building into our business.”

Second-Mile service is about the heart, and it goes above and beyond the requirements, making sure customers not only get what they expect, but something more that makes them say, ‘Wow!’ Almost everyday we hear about a team member helping change a customer’s tire or making an extra effort to return lost keys or a cell phone that was left behind.”

“You can do a lot of things short of giving away food to express hospitality, but
the most important thing is to feel in your heart the desire to serve.”

Competitive Advantages

“Chick-fil-A is what it is today because of its product, people, and purpose.”

Businesses don’t succeed or fail. People do.”

“I believe the reason Chick-fil-A is so successful is simple - we care much more than our competitors. Being successful requires more than just unlocking the doors every day. Our philosophy of ‘doing the right thing and doing things right’ is hardly ever the easiest solution. It is, however, always the best solution.'“

Source: Chick-fil-A

Source: Chick-fil-A

“Because almost all Chick-fil-A franchised Operators have only one restaurant, they’re in the store virtually every day and have the best interest of their particular restaurant in mind. They care about the quality of people on their team and the quality of the food they serve. Better people and better food means higher sales and higher profits for the Operator.”

Two things set our people apart: We’re happy to be here, and we have the spirit of a servant. In our restaurant, both of those feelings must come from me, the Operator.” Charles Gibson, Chick-fil-A Operator

“Today we go out of our way to keep people from being able to figure out our product. Our company makes our seasonings, and another makes the breading.”

Raising prices for me has always been the absolute last resort - after we squeeze out every bit of waste we can.”

“Although we’ve been closing my places of business on Sunday for more than forty years [in deference to S. Truett Cathy’s religious beliefs], I keep hearing the same comments and questions. I don’t believe we’ve lost any sales in the long run. In the shopping malls we usually generate more sales per square foot in six days than many others do in seven. We also believe that by giving employees that free day, we attract the kind of people who want Sunday off because of their own convictions.”

Associate with Quality People

Associate yourselves only with those people you can be proud of whether they work for you or you work for them.”

You’ll be the same person five years from now as you are today except for the books you read and the people you associate yourself with. I hope I’m not the same person today that I was five years ago.”

Hiring & Firing

“If you really aren’t interested in serving others, you don’t need to be in the restaurant business in the first place. We like to say we recruit smiles. You can’t teach a sour person to be joyful.”

Source: Chick-fil-A

Source: Chick-fil-A

A good attitude is one of the best guarantees of success. A less qualified individual with a good attitude would be more welcomed at my company than a highly talented individual with a bad attitude.”

“From the beginning, and until only recently, I interviewed every new candidate. I knew all the Operators by name, and most of their spouses and children.”

“I never want to fire someone simply to save money. I want everyone who works at Chick-fil-A to feel secure that we will not resort to layoffs because we have overextended.”

“We don’t hire people because they need a job. We hire people because we need them. We must be very selective... The wrong person working just ten hours a week can run off a lot of customers.”

The biggest impact on service is our people.”

“Motivation expert Zig Zigler has said that among the top twenty-five attributes companies look for in an executive, not one of them deals with experience. Character traits are most important. Everything else can be learned.”

Hire Better People

“When you get to this size, you grow through the talent of others - people I have attracted through the years who make my job look easy. I divided the tasks among other people more skilled in their areas than I am, and I trust them to do the job well.”

Trust

Loyalty begins with trust. My policy has always been to select trustworthy people - then trust them!

Success in any relationship or endeavour begins with trust. It’s amazing how much you can accomplish when you trust the people around you and they trust you.

A lot of what we do is trust. The Chick-fil-A franchise Operator Agreement is based on trust. It’s the biggest key to our success.”

We trust our Operators to make good decisions - and they do.”

Obliquity

“It’s an axiom of business that if you help people get what they want, you’ll get what you want.”

Profits should be the score of the game, not the name of the game.”

What counts in this business is not how much money we make or how much chicken we sell. What counts is the difference we make in the lives of others.”

Reciprocation

“We would be loyal to [the Operators], treating them as we wished to be treated, and they would reciprocate. They did. Fewer than five percent of our Operators leave the chain in any given year. Other chains tout their ‘knowledge management’ with their computer and communications systems; we manage knowledge by keeping people - and their knowledge - in the organisation.”

I look for ways to do special things for customers. Like when I see a customer three or four times in the same week, I go to their table and give them a ‘Be Our Guest’ card. I figure if they’re spending fifteen or twenty dollars a week, I’ll give them a free sandwich. All of this fits into the Chick-fil-A philosophy that I first experienced when I went to work for the company.” Chick-fil-A Employee

Value Employees

The most important people in this business are our employees. Some people will say customers are most important, but if we create the right atmosphere where our employees enjoy their jobs and have opportunities for growth, they will get a kick out of their work. Then that feeling will spill right over to the customer.”

“Studies show that between 65% and 80% of working people do not like what they are doing for a living. That’s a sad fact because a person spends one-third of his life on the job.”

Operators

We do all we can to make our Operators successful because if they’re successful, so is the company.”

The most important decision we make at Chick-fil-A is selecting restaurant Operators who care about others, who can motivate their team, and who understand how to run a business. Our franchise Operators determine the success of the chain. They’re the ones meeting customers and selling chicken sandwiches.”

The Operator selection process can be lengthy, sometimes as long as a year, because we want to be certain before we make a franchise commitment that we believe the relationship will last.”

Our relationship with our Operators begins with the assumption that we have the same goals and we all plan to succeed. Our operators own their own business, but our relationship is extremely close.”

“It’s easy to apply for a position as an Operator of a Chick-fil-A Unit, but hard to qualify... We don’t select or even seriously consider an Operator or a member of staff unless we want the individual to be with us until one of us retires or dies. Because of that, Chick-fil-A has one of the lowest turnover rates in the restaurant industry.”

“Two requirements of being an Operator are that the Operator run only one restaurant and must be on-site to manage it.”

We supply the initial capital for the restaurant, so we don’t have to limit our search for Operators to people with high personal net worth. The only money required is $5,000 refundable initial capital commitment. To fuel the kind of growth we desire, we need eager, talented, honest, dependable, people-orientated Operators who are hungry to succeed in the restaurant business.”

“The first question most people ask about our [Operator] agreement is, ‘How could you afford such a generous arrangement with Operators?’ The answer is obvious. We love it when an Operator earns a lot of money because that means we are also earning a lot of money from the restaurant. The more successful we make the Operator, the more successful we are.

c594cca4687a530baf2640d42ab0bd04.jpg

We are placing our reputation and our future in the hands of one individual. Because we build the Unit and then lease it to the Operator, the ability and the character of the individual are more important than his money.”

“The more we can foster the feeling that we are a group of people working together, depending on each other, and not just bound by a franchise agreement, the more likely we are to be loyal to each other.”

“In my first meeting with a potential Operator, I explain that our commitment is going to be like a marriage, with no consideration given to divorce. We’re much more careful about selecting Operators when we know we cant easily get rid of them.”

Our lifelong commitment to the success and well-being of Operators has resulted in loyal Operators who then experience tremendous loyalty from their team members - and, in turn, their customers - especially when compared to the rest of the quick-service restaurant business.”

We have created this ‘loyalty effect’ at Chick-fil-A through a unique relationship with our Operators.”

The Operator is the CEO, manager, president, and treasurer of his or her own business. I haven’t changed the basic agreement with Operators since my first Chick-fil-A restaurant opened in 1967.”

“Our Operators work closely with us, but they are the owners of their own business.”

Chick-fil-A - Closed Sunday

Chick-fil-A - Closed Sunday

“Another key to Operator loyalty lies in our decision to allow each Operator to have only one restaurant… A few Operators believe that because they have trained their staff well, their presence isn’t needed. But I’ve found that team members will always perform better when the Operator is on site.”

“We have a saying around the office, ‘An Operator gets the people he or she deserves to have.’ Good people attract good people.”

“We had our design people spend a lot of time in the field talking with Operators and seeing how they ran their business. Experienced operators know better than anybody how to serve people quickly and efficiently.”

We screen very carefully our Unit Operators. Therefore, we assign our unit realising that this is the most important decision we make. We can decorate it beautifully and out the best equipment in there are prepare the very best food, but if we don’t have the very best Operator, we have blown the whole thing.”

“Another question we often hear is, ‘Why don’t you offer typical franchises where the franchisee makes a substantial investment?’ The answer is similar to my answer regarding a public offering, and can be found in our needs. A restaurant company needs two things to succeed, capital and talent. Franchise restaurant corporations raise capital by selling the rights - usually for hundreds of thousands of dollars - to open a restaurant to people who have already succeeded in business and are looking for a good investment. Sometimes the franchise owner will work directly in the restaurant, but most of the ones I have met are looking to own several units from which they draw income. They aren’t interested in actually wearing a uniform and serving customers. Restaurant magazines are full of articles discussing franchisees blaming franchisers for their lack of success, when the problem is their own lack of time in the restaurant.”

Commitment

“I want everyone at Chick-fil-A to know that we don’t build and open restaurants just so we can close them if they don’t work out. We must be careful about how we build them, where we put them, and who we put in there to run them. Anybody can open a restaurant. All it takes is money. But keeping one open is what makes the difference.”

Family

We felt like a family, and in many cases we actually had family members working together.”

When we have team members working together like a family, they extend that feeling to their customers.”

“When Paul Richards was a manager of the Dwarf House [S Truett Cathy’s first restaurant], he mailed out about four hundred birthday cards with handwritten notes to customers every year. He visited them when they were sick and sent food when there was an illness or death. Customers knew we cared. That’s really the key: caring.”

Take Risks & Accept Contrarian Views

“We don’t want to scare people into thinking they can’t take any risk or push limits of their responsibility, or we’ll end up with a bunch of timid Operators. We encourage people to think and to experiment under reasonable circumstances.”

I want people who work with me to feel completely relaxed when they take a viewpoint opposite mine. I respect their opinions - I would not have hired them if I didn’t - and I want them to feel my acceptance and appreciation for them when we disagree. When you have a dynamic atmosphere, you never know where great ideas will come from. They just come.”

We prosper by debating ideas and voicing our opinions.”

Ideas for new products come from Operators, staff members, and customer surveysWe introduce new products only after letting our customers try it out in test conditions in a few restaurants throughout the change.”

Appearances

Source: Chick-fil-A

Source: Chick-fil-A

“Customers can choose from many places to eat. They are quick to pick the most appealing restaurant, the the appearance of the people who work in it can affect such decisions favourable or unfavourably.”

“We concentrate on making sure the back of the restaurant is manicured nicely. Our drive-thru customers spend a lot of time back there, and if they see that area is clean and pleasant, they can be assured that everything is clean inside as well.”

Humility & Tone from the Top

Everyone from the Operator to the newest hire must be willing to do any job in the restaurant: prepare food, wash dishes, mop floors, clean restrooms. I was the janitor at the Dwarf House, and it’s still my job to pick up paper on the floor, or whatever else needs attention.”

When top executives demonstrate that they don’t mind doing the dirty jobs, team members understand that every job is important.”

Incentives

“Each year Chick-fil-A brings all our Operators and their spouses together for a business seminar in an exotic resort complex. Through Chick-fil-A’s ‘Symbol of Success’ program we give a new car to an Operator to use for one year if sales in his or her unit increase by 40% or more in one year. If that Operator shows at least a 40% increase the second year, he or she gets the title to the car. We awarded forty-six in 1984 alone. Other incentive awards for Operators include trips, merchandise and cash bonuses.”

Consistency

“I tell our Operators at Chick-fil-A Units today: Consistency is one of the most important aspects of the food business. You can even build your business on bad coffee as long as your’e consistent. Customers are very sensitive to change.”

“We hope customers visiting anywhere in the country know the Chick-fil-A Chicken Sandwich they order will taste just like the ones they eat back home. Few things are more important that consistency in the food business.”

Word of Mouth & Retaining Customers

Word of mouth in the food business is more important than any other source of advertising. It’s better to maintain your present customers than to spend a lot of time and expense replacing them with new ones.”

Imitate

“Business often remained on my front burner even when we were traveling on family trips… We made lots of stops along the way. Whenever I saw a fast-food restaurant I hadn’t visited, I stopped, went in, and observed their operations, taking away ideas on what was or wasn’t working.”

Evolve & Adapt

“Many successful people I know set magnificent goals for themselves, then let nothing stand in the way of their achievement. I don’t engage in that kind of long-range planning. Instead, I leave myself and our company available to take advantage of opportunities as they arise.”

Frugal

“Some people think I’m a penny pincher today, but when you grow up in a family and in a time where every dollar must be stretched as far as it will go, you learn to watch where your money goes.”

Managing Growth

To succeed we knew we had to start small and grow slowly. This is where so many start-up companies today make their mistake. Dreamers dream big, and they want to reach their goals quickly. There’s nothing wrong with big dreams. But my experience tells me that we’re more likely to reach our dreams if we climb with care and caution, putting one foot in front of the other.”

Source: Chick-fil-A

Source: Chick-fil-A

In all my years in the restaurant business, I have tried never to overextend. I’m satisfied stepping from one plateau to the next, making sure we’re doing every thing right before moving on. Financial experts tell me our strength would allow us to open restaurants at a much more aggressive pace than our current seventy per year. But I’d rather have seventy restaurants operating efficiently and professionally than 500 restaurants where half are run well and the others are not.”

The most common reason companies fail, I believe, is their desire to grow faster than they can manage. This can be particularly true with companies that make a public offering and find themselves staring at a pile of money. All they want to do is grow. But you have to digest growth as you go.”

Debt

New units are built from the profits of Chick-fil-A. We try not to go into debt to expand.”

“Companies may set goals, and if all goes according to plan everything works out well. But if they have extended themselves to the limits of their finances and their talent, even a slight economic downturn can force them to lay off employees to salvage the company. You don’t build a good reputation by discharging people, but rather by developing people.”

I am conservative in the amount of money I will borrow to build a new restaurant. I also prefer to own the real estate under our restaurants rather than to lease. The initial investment is greater, but when the loan is repaid, the advantage is clear.”

Private Company

“Chick-fil-A is now one of the largest privately owned restaurant companies in the country. Many others have achieved our size by offering ownership in their companies to the public. We have resisted and will continue to resist that status.”

“In the early years we did not offer stock for sale because I could not predict how fast the company might grow or what dividends we might pay to anyone who might invest. Additionally, I’m afraid the directors, if we had a bad year, might tell me I’m old fashioned and fire me. Too often, Wall Street analysts are more interested in profits than they are in principles and people.”

Our system puts the cash in the hands of the Operators today, instead of sometime down the road with a lump sum, and encourages them to earn all they can, save all they can, and give all they can right now. Their focus is on today’s customer.”

“Stanley Marcus, retired chairman of Neiman Marcus, said, ‘A public corporation concentrates on profits while a private company concentrates on its people’. By operating one of the country’s largest privately held restaurant chains, Chick-fil-A has been able to do a lot of things that would not be allowed by others in the industry. For example, as a public company, we could not easily give away brand-new Lincoln automobiles, sponsor annual business seminars in posh resorts, offer $1,000 scholarships to our young people, or help support Winshape Centre and Berry College, to name a few projects.”

Letter from Warren Buffett

Letter from Warren Buffett

Community Engagement & Ecosystem

Our people contribute to their community in ways they could not if they were associated with any other company. They feel a sense of significance.”

Another key to success in our little corner of the world is community involvement. If somebody calls and asks for something, we give them something. And if churches and schools don’t call us, we call them, and make the offer.”

“It seems the more we give to our community, the more customers support us.”

“The pure and simple bottom line at Chick-fil-A is a commitment to people, and that’s the staff, operators, crew, and the public. From the outset we wanted to have a positive influence on all who came in contact with Chick-fil-A.”

Summary

Today’s business landscape is changing at the fastest rate in history. Technology advancements have disrupted businesses and competitive moats have been filled like never before. Yet, there are some things that haven’t changed and likely won’t. Customers will always enjoy exceptional service and they’ll reciprocate, it’s human nature.

Almost forty years ago, the research underlying Tom Peters’ book, ‘In Search of Excellence’ found, ‘The intensity of customer orientation that exists within top performing companies seems to be one of the best kept secrets in American business.’ Warren Buffett’s exposure to countless businesses across a multitude of different industries has made him conscious of the value in delighting customers, “Don’t just satisfy your customers – delight them .. Anybody who has happy customers is likely to have a pretty good future.” It’s little surprise Buffett expressed an interest in acquiring Chick-fil-A [see letter above].

When it comes to finding great businesses, being able to filter out the noise and identify the key variables that won’t change is hugely valuable. The same ingredients that have delivered Chick-fil-A success for more than 70 years, are likely to deliver success in the future. When ‘delighting the customer’ defines a business’ culture, the results can be extraordinary. That’s how S. Cathy Truett did it.




Sources:
How did you do it Truett?” S Truett Cathy, 2007.
Eat Mor' Chikin - Doing Business the Chick-fil-A Way,’ S.Truett Cathy, 2002.
It’s Easier to Succeed Than to Fail,” S.Truett Cathy, 1989.


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Learning from Estée Lauder's Leonard Lauder

‘Paris, the Eiffel Tower, Estée Lauder.’

Kind of rolls off the tongue doesn’t it? Now try this one: ‘Esther Lauter, Brooklyn, Business Fanatic.’ While the former conjures up images of glamour and beauty, the latter does so less, and is rather the story of one woman’s unrelenting drive and obsession to create a luxury brand renowned the world over.

From the start, Estée recognised the psychological benefits of a name that sounded feminine and vaguely European, distinctive but elegant, and easy to pronounce and remember. She settled on her baby nickname ‘Estee’ and added an accent mark to make it a little French while softening the hard German Lauter to a more amorous Lauder.

I recently enjoyed reading ‘The Company I keep - My Life in Beauty,’ the story of one family’s journey to the top of the world’s cosmetic and beauty stage. The story is told by Estée’s son Leonard who joined the company in 1958 when it was still a fledging mom-and-pop company, with less than $1m in revenue and product distribution limited to just a small handful of prestige specialty stores. In time, Estée’s creativity, intelligence and fanaticism combined with Leonard’s business acumen and acquisition prowess created the powerhouses that are The Estée Lauder Companies today.

The Lauder’s were applying a repertoire of ‘influencing’ tools long before Charlie Munger’s favourite psychologist, Robert Cialdini, identified them in his bestselling book of a similar name. A Clinique beauty expert dressed in a lab coat and armed with the ‘Clinique computer’ would trigger the power of authority; free samples and gifts would engage the reciprocation tendency; Saks 5th Avenue provided the requisite social proof; glamorous models and compliments from the beauty counter initiated the liking disposition; while limited distribution created a sense of scarcity.

“The [Clinique] beauty experts exuded exactly the right combination of scientific authority and style.”

Two of my favourite takeaways from the book were Leonard’s insights into the creation and evolution of prestige brands and their delicate relationship with distribution channels and his ‘modus operandi’ of ensuring constant competition within the business. The book is brimming with business lessons; the need for patience; the danger of becoming a prisoner of the P/E ratio, staying under the radar, the value of a diverse workforce, setting the tone from the top, and the benefits of ‘walking the floor’ to name but a few.

There’s a plethora of mental models you’ll recognise from many of the other great businesses we’ve studied. Hopefully there’s one or two new ones you can add to your own investing toolkit. Below you’ll find some of my favourites.

Estée Lauder vs SP500 1995-2021 [Source: Bloomberg]

Estée Lauder vs SP500 1995-2021 [Source: Bloomberg]

Family

“The company and I grew up together, our lives as closely paired as twins. It has always been more than a family company: it was - and continues to be - my family.”

My mother strongly believed in ‘family’ as a powerful asset, and she was right. There's a lot of research comparing the sustainability and profitability of family companies whether the family is in control or "just" works there, to non-family companies. Because of their sense of stewardship, the family companies tend to be more profitable and more sustainable in the long run.”

Family for me is not limited to my blood relatives; the concept extends to all of our employees at The Estée Lauder Companies. We make a big effort to make everyone in the company feel part of the Estée Lauder family.”

“It’s been said that there are two things that can destroy a family business: the family and the business, and they both have to be kept in order.”

Culture

“Seeing how Revson [Revlon CEO] treated some of his top executives pointed me in a direction that I think always worked out for us. You can make a nice place to work and still make money.”

Quality

“I learned early that being a perfectionist and providing quality was the only way to do business.”

My mother was a stickler for quality. Quality was, to use a modern term, a differentiator.”

Never skimp on quality; put your heart and soul into producing the best-quality products to present to your public. Don’t let anyone talk you out of it.”

Reciprocation

“My mother had discovered what she called ‘The sales technique of the century’: free samples.”

‘A Gift for You’ - Estée Lauder advert 1989

‘A Gift for You’ - Estée Lauder advert 1989

A free sample was the basis on which Estée Lauder was built.”

“‘I visited the sales personal in the dress department, the hat department, the shoe department, as well as other cosmetic departments,’ she [Estée Lauder] later wrote. ‘To each saleswoman, I brought a gift of my makeup or cream, exactly what I’d be giving away to customers as they claimed their free gifts they’d been promised in advertisements. ‘I learned the merchandising method of inducing the whole store to speak for my products,’ she concluded. ‘The point was to keep placing the products in the public eye, keep devising new ways of capturing the consumer’s attention.’”

“The giveaways created an opportunity to exercise the high-touch Estée Lauder sales approach, encourage spontaneous buying, increase loyalty among existing customers, and bring in new ones.”

Value Employees

If you respect the people that work for you, they will respect you.”

“As time went on, I made a habit of writing once a year to everyone who worked behind the counter, expressing my recognition of and gratitude for their hard work. I’d write individual notes - not ‘Dear Everyone’ form letters - and I’d sign each one. As the company grew, I had to resort to dictation, but each letter was personalised - and each one signed by me.”

I firmly believe that people don’t work only for money. They work for recognition.”

Find a way to congratulate someone for a job well done. Even if your note is just a little one-liner, when you say ‘thank you for doing a good job,’ it’s more likely the recipient will go to the ends of the earth for you.”

When we went public in 1995, I persuaded all the members of the Lauder family to carve out a portion of their personal stock and give it as a gift to the employees of Estée Lauder. It wasn't enough to enable everyone to splurge on a yacht, but it was enough to make each person feel that we were all in this together.”

Ideas

“I’m a big believer in what I call ‘lateral creativity’ - getting ideas from everywhere.”

Competitive Advantage

“My mother didn’t realise it at the time, but her insistence on personally training saleswomen would be a key differentiator when she eventually opened counters in department stores.”

“My parents didn’t have the capital to create even one such salon, let alone a chain of salons that could compete against Miss Arden and Madame. Instead, my mother hones in on a different platform to reach her customers: select specialty stores.”

“My mother instinctively knew that a brand is defined by its distribution. If we were sold in Saks Fifth Avenue, then we had made it. How to get Estée Lauder products into Saks was the main topic of dinner conversation every night.”

Estée Lauder / Saks Fifth Avenue

Estée Lauder / Saks Fifth Avenue

“At Estée Lauder, everything was and still is about training. It’s one of our key differentiators from our competitors. Training is all about teaching people that they can achieve anything if they know what to do and how to do it and giving them the confidence to do it well.”

Competitive Strategy - Avoid Competitors

“Backing into the fragrance market through bath oils taught me another lesson. Our non-threatening strategy enabled Estée Lauder to stay below the radar of major competition. French perfume manufacturers scoffed, saying, ‘We don’t do bath oils.’ Meanwhile, sales of Youth Dew skyrocketed. I learned the importance of choosing my battles - and not to dismiss a competitor just because they seem innocuous.”

“The lesson my mother drummed into me: Everyone is a competitor or a potential competitor. You can’t ignore anyone.”

Change

“In 1960, there were 4,500 malls accounting for 14 percent of retail sales. By 1975, there would be 16,400 shopping centres scooping up 33 percent of retail sales… We owned the suburban stores. First to market always wins.”

Economic Resilience

‘My mother was onto something: even in 1933, one of the worst years of the Depression, cosmetic sales were higher than they had been before the crash.”

Compete with Yourself

“I learned a valuable lesson [running two film clubs at college]: you can compete with yourself and win. It was a lesson that, a decade later, would spawn Clinique and would eventually inform the thinking behind The Estée Lauder Companies’ portfolio of brands.”

Instead of waiting to see what our rivals might dream up and then respond, wouldn’t it be better for us to leapfrog them and create our own competitor first? A multi-brand model for Estée Lauder had always been in my mind. I thought, ‘I know just what I’d do if I were competing with Estée Lauder. Why let a competitor do it? I’ll do it.”

Clinique wasn’t just a new line of skin-care or makeup: it was an entirely new way of thinking about beauty.”

In retrospect, the Clinique and Estée Lauder brands both competed and complemented each other. Clinique was the ‘anti-cosmetic,’ so wherever Estée Lauder sold well, Clinique didn’t. And where Estée Lauder lagged, Clinique did well.”

Clinique's first computer, launched in 1968, was used to determine skin type and deliver personalised results.

Clinique's first computer, launched in 1968, was used to determine skin type and deliver personalised results.

I created Clinique specifically to compete with Estée Lauder. Competing against myself is an idea that never grows old. Who was going to compete with M.A.C? The answer, unquestionably, was Bobbi Brown Cosmetics. [When we acquired] Bobbi Brown it was the perfect counterbalance to M.A.C.”

Creating our own competition both brings about something and prevents something. What I was trying to bring about was becoming the market leader, and we’ve done that: we are the largest supplier of prestige cosmetics in the world and we are the dominant player in almost every prestige market, largely because of that strategy. Second, I knew that a brand can’t live forever. I had seen older brands, which were once market leaders fade away. People would come up to me and say, ‘Oh, Estée Lauder, my grandmother loves your products.’ If they said, ‘My daughter loves your products,’ I’d be thrilled. But ‘my grandmother?’ Not as great. So we kept on acquiring companies or launching our own competitors so that as new consumers came into the market, they would discover their own newer brands and they would make them theirs.”

Humility

“Being a waiter was a good experience because I believe you have to do grunt work in order to appreciate the big things.”

Patience

“It didn’t happen overnight. The sampling and Gift-with-Purchase programs were like planting an accord. They didn’t really bear fruit for another year, and only then did Youth Dew [fragrance] itself start to take off. This would be a valuable lesson in patience that I would apply to subsequent fragrance launches.”

“We took a bath before Clinique started paying off… just six months after the launch of Clinique, our cashflow problem had become a crisis.”

Brands

“The navy also taught me about strategy. The aircraft carrier was always accompanied by several destroyers, which served as a screen for the large ship. I would use that analogy in business: The small brands would protect the main brand. Clinique was the first screen for the Estée Lauder aircraft carrier, followed by Origins and Prescriptives. Later, the brands we acquired for the The Estée Lauder Companies’ portfolio would support the heritage brands.”

“My dream was to make Estée Lauder the General Motors of the beauty business, with multiple brands, multiple product lines, and multinational distribution.”

‘In 1956 Estée Lauder advertising proudly lists price at an unprecedented $115 a jar’ Source: Estée Lauder Companies

‘In 1956 Estée Lauder advertising proudly lists price at an unprecedented $115 a jar’ Source: Estée Lauder Companies

“[Launching in Europe] we deliberately chose a different approach: Re-Nutriv, the most expensive cream in the world… [Treatment] creams were unabashedly expensive - and that was one of their selling points. Estée Lauder led this rarefied club.. Not only was it a terrific product; it had one of the most brilliant positioning statements we’ve ever made: the most expensive cream in the world… it was the positioning, not the ingredients, that propelled its success.”

I wanted Estée Lauder to be the most upmarket brand there was. I wanted to have limited distribution so that every store that was selling our product knew that the person they were selling to could only come back to them; conversely, the person who was buying revelled in the exclusivity of where she bought it. That’s how you build a great brand and a great business.”

“I knew that out products had to be the highest quality, unique, creative, original, and, of course, efficacious. The Lauder brand would be synonymous with luxury, and Re-Nutriv would be the epitome and standard-bearer of luxury products.”

We wanted to sell our products in high-end specialty stores because their prestige gave us prestige.”

Positioning a brand says, “This is who we are.” I’ve seen too many companies fail by trying to reposition a brand. Know who you are and stick to it. Enhance your brand but don’t reposition it.”

“Up until then, every cosmetic ad was designed to sell a product. I decided that rather than selling only a product, our ads would sell the brand.. All our advertising would be orientated toward the brand. Focusing on the brand would hone our identity and be our North Star. Marketing a brand gives you more pricing power. If a product is a musical instrument, a brand is the entire orchestra.”

The launch of Clinique was a classic case of leveraging market segmentation. Looking back, this was probably the most important lesson I learned in my career: if you understood market segmentation, you understood everything.”

“Its well known in our industry that when customers like one product from one brand, they’re willing to try - and maybe buy - other products. Fragrance, in other words, broadened the profit stream for the entire Estée Lauder brand.”

“Fragrance became an intrinsic part of the all-round concept of being an Estée Lauder woman. Our fragrance advertising sold romance and prestige. You can’t sell romance with an anti-wrinkle cream.”

“A few years earlier, I had retained Harvard Business School professor Michael Porter to consult on the future of Estée Lauder. His advice: ‘Never get stuck in the middle.’ If you’re in the middle you’re nowhere. You’re neither value line nor the prestige line, so what are you?”

Brands have their own DNA and don't always follow the story you script for them. It’s like when a child is born: you think she's going to become a doctor and she decides instead to become an astronaut or an actor. We thought [with Prescriptives] we were launching another treatment line - another anti-Lauder line, a’la Clinique—but that morphed into a cosmetics/colour line driven by the Calyx fragrance.”

“I had an epiphany: I realised we needed new brands to understudy our existing brands as well as to fill in the gaps and expand the company as a whole. We needed to launch or acquire competitors so that as newer consumers came into the market, they could discover new brands and make them their own.”

“Creating a new brand that really is new is very difficult to do. It’s even more difficult to do from inside an established organisation. Outsiders are all about blowing up conventions: ‘I’ve got to beat the old guys.’ People inside the organisation, however, hesitate: ‘Let’s be careful in creating something new, so we don’t destroy what we have.’ Playing it safe sabotages boldness.”

I’m a risk taker and I always have been. In order to survive, you have to take chances. But I don’t believe you should destroy the old before building the new, you’ll have no ground to build on. Brands need to change to stay relevant. Consumers are constantly evolving in ways you can’t even imagine.”

“As I saw it, acquiring brands was - and remains - a great way to expand our customer base. In order to grow, we needed to acquire not just new brands but new thinking. The best way to acquire new thinking was to acquire a company with the founders, who could then, with our help, drive their original creation to new heights.”

“There’s nothing more high-touch that a freestanding store, no better way to protect the brand and control the customer experience.”

Autonomy

“M.A.C Cosmetics would have an organisation all of its own, from top to bottom. They would be able to create their own world without anyone saying, ‘You can’t do that.’ There wouldn’t be any naysayers around.”

Distribution

One of our most important epiphanies was, ‘You’re defined by your distribution.’ For us, that meant luxury department and specialty stores, pure and simple.”

You’re known as much by where you don’t sell as by where you do sell.”

I’ve said it a thousand times: you’re defined by your distribution. If you’re in luxury, stay in the luxury segment. Don’t be bewitched by the volume that can be gleaned by selling in a distribution channel that does not match the equity of your brand.”

In the prestige sector, no brand is strong enough to withstand over-distribution. Distribution is forever.”

“Financial analysts always praise ‘distribution expansion.’ But without realising it, they’re encouraging slow death because over-distribution kills a luxury brand. Over-distribution certainly killed the Prescriptives stores. And that is especially poignant, because over-distribution went against everything we stood for. We had become a prisoner of our P/E.”

Growth

I decided to focus on growth: growth of market share and rate of growth. America loves growth. Growth is a story that gets people excited.”

Keep it Simple

Our formula was simple; limited distribution in prestige specialty and department stores accompanied by the personal touch of a beauty advisor.”

Hiring & Firing

“[The Navy taught me the greatest lesson of my life…] no matter how smart you think you are, there’s always someone who’s smarter. No matter how good you are, there’s always someone better. I vowed that when I got out of the Navy and went into business, I would search out and hire exactly those people. So if they were the head of sales, they would sell better than me. If they were a copywriter, they would write better copy. They all had to be better. I would respect and celebrate their abilities and never be threatened by them. This belief would play an enormous role in the growth of Estée Lauder and help us build a company of the greatest people in the world.”

“Don’t hire your best friend and don’t hire former classmates. In short, don’t hire people that you can’t fire. Friendship is friendship but business is business.”

“My father had a saying when he had to fire someone: ‘Better a sharp pain in the end than pain without end.’ If you’re having trouble with a person who looks like they will not be able to improve, it’s better to help them to leave than to suffer with them. There is a point beyond which patience becomes neglect, Fail fast. Cut your losses.”

Everyone in the world has worth. If you cannot get someone to produce for you in a satisfactory manner, it is almost always your fault and you should acknowledge that, honestly and with respect. When I have to fire someone, I’ll say to them, ‘It’s really not your fault, it’s our fault." We probably didn’t train you right, we didn’t supervise you well, we didn’t work with you properly, and we didn’t put you in the job most suited to your talents. The reason I’m asking you to leave is not because you are no good. It’s because we’re not good enough to be able to use the great talents you have.”

Win-Win

During our promotions the first floor of the stores reported sales increases well over 100 percent. Thanks to limited distribution, the stores got a fantastic return on investment.”

The intimacy of our relationship with our stores was crucial to our growth... It’s often said that you can only be as good as the people who work for you want you to be. I would add, we could only be as good as the people we are selling to want us to be, too. Our message: ‘Support Estée Lauder and you support your store.’ To enable them to support us, we supported them with a lot of work behind the scenes. Each store was given an annual program, broken down month by month, of what we would do to improve our business - and theirs.”

We’d always had a partnership with our stores: more than a partnership, the stores were part of the extended Estée Lauder family.”

Diversity / Women

Almost the entire Clinique leadership team was composed of women. (Over the years, when Clinique was run by women, its P&L was always higher than any of our other P&L’s). This was the secret sauce. In fact, I would turn it into a management formula. Every time I set up a new international office, I always wanted to have two people in charge: a man and a woman.”

Our great strength has derived from the fact that from the beginning, we had women giving women the products and knowledge to make themselves feel beautiful, as opposed to Charles Revson [Revlon] telling women that he, as a man, knew what would make women desirable to men. Today, this is what is called ‘mirroring’ the market.

The last thing you want is a team of mini-mes. Difference - whether it’s a different background, different ethnicity, age, or different gender - is a source of strength.

Committees

I never relied on a committee for a final decision. Committees are the death of creativity and productivity.”

Mistakes

Never be afraid to admit you’ve made a mistake. It shows you’re human and people will respect you more.”

Market Share / Private Company

“I never, ever forgot that once you've lost market share, you can't get it back again so easily. And I was always going to protect our market share, no matter how much it cost. As a private company, we had a huge advantage over our publicly held rivals: we could spend years nursing along a new brand or spending to gather market share because we didn't have to answer to our shareholders.”

“We were always contrarian. When the competition tightened its budget, we increased ours: we doubled down to protect out market share.”

It would have been difficult to sustain the flexibility that nurtured Clinique and Origins if we had shareholders demanding a steady stream of profits and growth. The hard fact is, I don’t think we would have been able to maintain either brand if we had been a public company.”

“Getting ahead of the curve also means imaging and preparing for what might go wrong. Don’t wait for bad things to happen to you. Don’t wait to defend your market share. Fight for every percentage point while you’re growing because by the time you lose it, it will be too expensive to get it back.”

Frugality

My wife liked to regale people with stories of my frugality. For example, I couldn’t understand why she had to take a taxi to visit stores in Brooklyn. ‘Why can’t you take the subway?’ I’d gripe. Anyway, because our overhead was so low, we could afford to use - in fact, we could insist on using - expensive ingredients.”

“I am the legendary Scrooge-in-Chief.”

Instinct

“As I established my place at Estée Lauder, I learned the most important lesson that would shape my career and life inside and outside the company: to trust my instincts. Instinct is something that is natural and ingrained: however, instinct has its foundation in experience. If you have enough experience, somewhere along the line, instinct will kick in. If we’re making a decision to buy a company, my experience helps me connect the dots faster and see bellwethers others might not. Then my instinct will take over and make the decision.”

First to Market

First to market always wins.”

“My dream was to put our stake in the ground. We had a once-in-a-lifetime opportunity: to be the first brand of prestige cosmetics in what could become an enormous market. Deep in my gut, I knew that Europe was ready for Estée Lauder.”

Clinique Computer (Source: Estée Lauder Companies)

Clinique Computer (Source: Estée Lauder Companies)

Launch first, launch strong, and stay strong: it worked for us then and continues to work for us today.”

Whenever possible, we created product lines that would open new market segments where Estée Lauder would be first.”

“My radar was honed for overlooked demographics. That led to the 1963 launch of Aramis, the first prestige men’s fragrance and the cornerstone of a collection of men’s grooming aids.”

When you launch first, you have no competition to sweep aside. You automatically become the authority.”

“We became the first prestige brand to advertise on television.”

“Our objective was to have at least 33 percent of our business each year be totally new products.”

Walk the Floor

Listen to and learn from people on the ground. They’re the ones who really know what’s going on.”

“It taught me a valuable lesson: to listen to our customers and the people who worked behind the counter. They were my consumer research. And it was free.”

“One of the most rewarding - and certainly one of my favourite - activities in helping build the Estée Lauder business was visiting our stores. These visits had several objectives. The first was to listen to our consultants and buyers and learn what was really going on. The second was to let the people in the trenches know that their work was recognised and appreciated, and inspire them to do better. The third was to send a message to everyone who worked for us that store visits were an important thing to do.”

“Retailers in the ‘mass business’ call these ‘store checks.’ However, I don’t consider these visits check-ups. They are a learning tool for management and a motivational tool for everyone.”

“If you study military history, you'll find that the most effective leaders are those who engage with their troops on the eve of battle: Henry V speaking to his ‘band of brothers’ before Agincourt; Vice Admiral Horatio Nelson signalling the British fleet that ‘England expects every man to do his duty" as the Battle of Trafalgar commenced; General Dwight D. Eisenhower shaking the hands of the paratroopers before they jumped on D-Day. We at Estée Lauder were fighting a war on two fronts—our ‘class’ competitors in prestige stores and our ‘mass’ rivals elsewhere. We needed to do more than just ‘check the store.’ We needed to learn and inspire our employees, our stores, and ourselves.”

I’d ask the counter manager questions: What was the best-seller at that particular moment? What were people asking for? What were people liking - and not liking? Which products would she like to see us add to the line?”

Store visits were deep dives that delivered ideas in droves. I loved those van trips. They were the oil that helped our company run smoothly and built Estée Lauder and Clinique into powerhouse brands.”

When I visited a store, my job was to connect with people and listen.”

Tone at the Top

It’s very important for a leader to send the right message through his actions. For example, on one of the van trips I was having breakfast at a swanky hotel with two friends who were art dealers. The discussion drifted to the fact that I would only fly economy. ‘'Economy?’ they asked, shocked that the president of a luxury beauty company would take a seat in the back of the plane. ‘How can you fly only economy?’ I answered, ‘If I'm going to make all our executives fly economy, then I'll fly economy, too.’ That's how we were able to build a fast-growing business without ever having to borrow one dollar from the bank—and they knew it.”

When I walk through the hall of the company, if I see a piece of paper on the floor, I pick it up. It’s important for employees to see you doing that. Because if you don’t care, why should they?

Crisis

Crisis can be a means of fusing the company together. Laughter helped smooth the path through hard times.”

Tactical versus Strategic Mistakes

When it comes to strategy, you can make tactical mistakes but you cannot afford to make a strategic mistake. What do I mean? A tactical mistake is one that, if you make it today, will only cost you today. A strategic mistake is one that, if you make it today, will cost you tomorrow - and tomorrow and tomorrow.”

Long Term

“I’ve always felt that you can’t deal with the day after tomorrow. You have to deal with the decades after decades. One of the things that made Estée Lauder so successful in my thinking is that we think in decades, not in the short term.”

We prided ourselves on our patience. My son William likes to use the term ‘patient capital,’ shorthand for how we allocate our resources. Knowing that it often takes years for a new brand to become profitable, we could afford to invest the time and money [when we were a private company] to let a brand grow at its own pace and mature in particular markets.”

Patient capital enables you to launch for the long term. Some people think that if you introduce a new product today, you need to make money immediately or have to pull the plug. After you’ve been around a while, you know that if the product makes money year one, you can almost guarantee it won’t make money in the future. It’s a flash in the pan. But if you hang in until year three, it will pay off for the long term.”

Invert

I always work backward to move forward. I start imaging what I want to see happen in three to five or even ten years from now, and then I worked backward to articulate steps I have to take today and tomorrow and next year and the year after.”

IPO

I felt the price [of the initial public offering] should be modest, so that the aftermarket would see strong growth and give our investors confidence that the company was a good investment.”

Wall Street Journal 1989 (Source: Estée Lauder Companies)

Wall Street Journal 1989 (Source: Estée Lauder Companies)

“The scrutiny you face from being in the public eye is a different experience than you've ever had if you've been a privately held, family company. Instead of steering the ship on our own, we'd have to answer to partners. The aims and considerations of outside shareholders are often very different from your own. They tend to eschew the long-term good for the immediate reward of short-term gains.”

I swore to myself and my colleagues that we would continue to run Estée Lauder as a privately held company: Our decisions would be steered by what was good for either market share, long-term profits, and/or brand equity, rather than what Wall Street wanted.”

Acquisitions

I think of myself not as a brand buyer but as a brand builder.”

The first two acquisitions sparked a sea change in my thinking: from then on, I would look to the entrepreneurs to come up with ideas that we couldn't imagine. We would try to enlist and support these new creators, make their operations more efficient, but never change their DNA. In return, we would offer them a chance to expand their company's name and footprint and their life. We could make them and their employees richer and happier.”

My strategy was to target brands that were either beating us in a particular category or pioneering a new path in the luxury market. I looked for companies that showed a track record and momentum, had an infrastructure that was working, and understood their distribution and how that distribution supported their brand. We could build upon and boost what their founders had started. I avoided big companies with entrenched identities. I wanted small businesses with plenty of room to grow - with our help. I’d rather buy a $1m company and build it to $100m than try push a $100m company to $200m.”

We only bought companies that already had momentum. Newton's law of inertia says that an object in motion tends to stay in motion. Look for brands and products that are growing; the consumer is giving you millions of dollars of market research that you don't need to purchase.”

I was never interested in turnarounds. I didn’t have the patience to bring the troubled brand to health, and they were probably in trouble for good reason.”

“We’ve since expanded our portfolio of acquisitions to include more than twenty-five brands. It’s a carefully constructed collection that gives us balance - in the brands we own, in the markets where we do business, and in the diversity a global company needs to protect itself from the ebb and flow of world economies. This balance gives us competitive strength and consumer appeal.”

Summary

The Estée Lauder Companies have survived and thrived in a constantly evolving and intensely competitive industry through empowering and engaging their salespeople, supplementing existing brands with new ones and exercising the patience required for them to succeed. While the business has recognised and engaged many of the psychological tools of influence, long term sustainability comes from pleasing an ever changing customer.

Leonard’s engaging book sheds light on many of the qualitative characteristics we’ve witnessed in the other great businesses we’ve studied; factors that have been creating competitive advantages in companies for decades. When you find a combination, you’ll often see the lollapalooza outcomes; so desired by Charlie Munger.

Many of the timeless lessons espoused by Leonard and his mother will be as relevant tomorrow as they have been through the more than 70 years The Estée Lauder Companies have been thriving in business. Leonard has been generous to share them with us and if we listen, it should allow our investments to harness a beauty of their own.







Source:
The Company I Keep - My Life in Beauty,’ Leonard A. Lauder, HarperCollins 2020.
‘Key Moments of History,’ Estée Lauder Companies - website.
'The Estée Story,’ Estée Lauder Companies - website.





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Learning from Disney's Bob Iger

All industries face evolution and the inevitable change that comes with it. Its virtually unavoidable, and never more so than in recent times - technological advancements, competitive landscapes and the demands of consumers change almost daily, and only those businesses and industries that can adapt will survive. Even fewer will come out the other side stronger than when they went in, and only manage to do so because they have clarity of vision and purpose.

Intel’s Andy Grove noted that at the turn of this century, the entertainment industry was ‘facing the valley of death’; customers & distribution channels were fragmenting, customer choice was exploding, barriers to entry were collapsing, technology was filling old moats and niches were opening for new players to exploit. And the Disney Corporation was no exception.

The man tasked with navigating this new industry landscape for Disney was Bob Iger. Mr. Iger had started in the television industry in 1974 and joined Disney through their 1996 acquisition of ABC/Capital Cities, where he was CEO. Disney named Iger the president and COO in 2000, making him Disney's number two executive under chairman and CEO, Michael Eisner. He was appointed CEO of the Disney Corporation in 2005.

“Bob Iger is a home run hitter. I mean he is really, really good. And he’s a great guy on top of that.” Warren Buffett

In an industry confronting a strategic inflection point, clear and strategic direction are imperative. In his wonderful book, ‘Only the Paranoid Survive’, a journey into fundamental industry change and strategic inflection points, Intel’s Andy Grove observed:

It is very hard to lead an organisation out of the valley of death without a clear and strategic direction’.

Luckily for Disney, by the time he was CEO, Iger had identified some simple strategic priorities that would address the entertainment industry’s rapidly evolving landscape. Three clear priorities would guide the Disney Corporation for the next few decades; a focus on high-quality branded content; embracing technology; and becoming truly global. Combined, they would remain the cornerstone of Disney’s decision-making process throughout Iger’s tenure.

Iger wasn’t afraid to embrace change. He recognised the company’s inimitable history and scale meant Disney could leverage and monetise other high quality brands like no other. Iger sought out the pinnacle of the world’s entertainment assets; acquiring Pixar in 2006 for $7.4 billion, Marvel Entertainment in 2009 for $4 billion, Lucasfilm in 2012 for $4.06 billion, and 21st Century Fox in 2019 for $71.3 billion.

In making such bold acquisitions, once again, Andy Grove’s advice is telling: ‘when dealing with emerging trends, you may very well have to go against rational extrapolation of data and rely instead on anecdotal observations and your instincts.’ Battling internal dissent, it was Iger’s instinct that ultimately prevailed to conclude these acquisitions. And each alone was a home run.

‘Of all the changes in the forces of competition, the most difficult one to deal with is when one of the forces becomes so strong that it transforms the very essence of how business is conducted in an industry.’ Andy Grove, Ex CEO, Intel

Recognising the technological inflection point transforming the industry, Iger implemented the courageous step of disrupting his core distribution business. Despite significant upfront costs, the negative impact on near term earnings and the resultant backlash from Wall Street, Iger looked towards a future where Disney connected directly to customers and by-passed the middlemen that had exerted significant control over the industry.

‘Most managements will do too little too late and fritter away the protection that the bubble of their existing business would otherwise have provided them with.’ Andy Grove

The legendary Bob Iger’s story is told in his recent book, ‘Ride of a Lifetime - Lessons in Creative Leadership.’

I’ve included some of my favourite extracts below.

Universal Ideas

‘My experiences from day one have all been in the media and entertainment world, but these strike me as universal ideas: about fostering risk taking and creativity; about building a culture of trust; about fueling a deep and abiding curiosity in oneself and inspiring that in the people around you; about embracing change rather than living in denial of it; and about operating, always, with integrity and honesty in the world, even when that means facing things that are difficult to face.’

Education and Smarts

‘I got mostly B’s and a few A’s in high school, but academics was never my passion.’

Optimism

One of the most important qualities of a good leader is optimism, a pragmatic enthusiasm for what can be achieved. Even in the face of difficult choices and less than ideal outcomes, an optimistic leader does not yield to pessimism. Simply put, people are not motivated or energised by pessimists.’

Optimism in a leader, especially in challenging times, is so vital. Pessimism leads to paranoia, which leads to defensiveness, which leads to risk aversion. Optimism sets a different machine in motion. Especially in difficult moments, the people you lead need to feel confident in your ability to focus on what matters, and not to operate from a place of defensiveness and self-preservation.’

People

‘There’s nothing more important than the quality and integrity of your people and your product. Everything depends on upholding that principle.’

Creativity

‘However you find the time, it’s vital to create space in each day to let your thoughts wander beyond your immediate job responsibilities, to turn things over in your mind in a less pressured, more creative way than is possible once the daily triage kicks in.’

Bad News / Unexpected

‘I tend to approach bad news as a problem that can be worked through and solved, something I have control over rather than something happening to me.’

‘I sometimes chide [my team] that they don’t report bad news fast enough to me.’

‘There are always crises and failures for which you can never be fully prepared.’

Moat / Competitive Advantage

We manufacture fun.’

‘Shanghai Disneyland cost about $6 billion to build. It is 963 acres, about eleven times the size of Disneyland. At various stages of its construction, as many as fourteen thousand workers lived on the property. [It took] eighteen years to complete the park.’

It is impossible to overstate the creative and technical brilliance of Disney’s Imagineers. They are artists, engineers, architects, and technologists, and they occupy a place and fulfill a role that is unmatched anywhere else in the world.’

‘Rupert Murdoch was clearly worried about the future of 21st Century Fox. ‘We don’t have scale,’ he said several times. ‘The only company that has scale is you.’ Rupert’s decision to sell was a direct response to the same forces that led us to create an entirely new strategy for our company. It’s hard to overstate how sweeping the disruption is in our industry, but his decision - to break up a company he’d built from almost nothing - was as good a marker as any of its inevitability.

Lollapalooza

‘[Michael Eisner] understood that ‘great’ is often a collection of very small things, and he helped me appreciate that even more deeply.’

Integrity

Nothing is more important than the quality and integrity of an organisation’s people and its product. A company’s success on setting high ethical standards for all things, big and small. Another way of saying this is: The way you do anything is the way you do everything.’

True integrity - a sense of knowing who you are and being guided by your own clear sense of right and wrong - is a kind of secret weapon.’

Strategy

‘A CEO must provide the company and its senior team with a road map… this kind of messaging is fairly simple: This is where we want to be. This is how we’re going to get there… I landed on three clear strategic priorities. They have guided the company since the moment I was named CEO:

1) We must devote most of our time and capital to the creation of high-quality branded content. In an age when more and more ‘content’ was being created and distributed, we needed to bet on the fact that quality will matter more and more. It wasn’t enough to create lots of content; and it wasn’t even enough to create lots of good content. With an explosion of choice, consumers needed an ability to make decisions about how to spend their time and money. Great brands would become even more powerful tools for guiding human behaviour.

2) We need to embrace technology to the fullest extent, first by using it to enable the creation of higher quality products, and then to reach more consumers in more modern, more relevant ways. From the earliest Disney years under Walt, technology was always viewed as a powerful storytelling tool; now it was time to double down on our commitment to doing the same.

3) We needed to become a truly global company. We were broad with our reach, doing business in numerous markets around the world, but we needed to better penetrate certain markets, particularly the world’s most populous countries, like China and India.’

Don’t be in the business of playing it safe. Be in the business of creating possibilities for greatness.’

Disney Corporation vs S&P500 - March 2005 to 2021 [Source: Bloomberg]

Disney Corporation vs S&P500 - March 2005 to 2021 [Source: Bloomberg]

Innovate / Adapt

‘This job requires an ability to constantly adapt and re-adapt.’

If you want innovation, you need to grant permission to fail.’

‘I’ve thought every day about how technology is redefining the way we create, deliver, and experience media, and what it means to be both relevant to a modern audience and faithful to a nearly hundred-year-old brand.’

The foundation for risk-taking is courage, and in ever-changing, disrupted businesses, risk-taking is essential, innovation is vital, and true innovation occurs only when people have courage. This is true of acquisitions, investments, and capital allocations, and it applies to creative decisions. Fear of failure destroys creativity.’

‘A deep and abiding curiosity enables the discovery of new people, places, and ideas, as well as an awareness and understanding of the marketplace and its changing dynamics. The path to innovation begins with curiosity.’

‘[Roone Arledge at ABC sports] changed the way we experience televised sport. He knew, first and foremost, that we were telling stories and not just broadcasting events, and to tell great stories, you need great talent .. Athletes were characters in unfolding narratives .. He wanted to try every new gadget and break every stale format. He was always looking, always, for new ways to connect to viewers and grab their attention. Roone taught me the dictum that has guided me in every job I’ve held since: Innovate or die, and there’s no innovation if you operate out of the fear of the new or untested.’

I didn’t want to be in the business of playing it safe. I wanted to be in the business of creating possibilities for greatness. Of all the lessons I learned in that first year running prime time, the need to be comfortable with failure was the most profound. Not with lack of effort but with the unavoidable truth that if you want innovation - and you should, always - you need to give permission to fail.’

‘In early 2001, every media and entertainment company was feeling the ground shifting beneath it’s feet, but no-one was sure which way to run. Technology was changing so fast, and the disruptive effects were becoming more obvious and anxiety-provoking… It was an interesting time, and marked what I saw as the beginning of the end of the traditional media as we knew it. Of great interest to me was that almost every traditional media company, while trying to figure out its place in the changing world, was operating out of fear rather than courage, stubbornly trying to build a bulwark to protect old models that couldn’t possibly survive the sea change that was under way.’

‘I’ve been in the business long enough to have heard every old argument in the book, and I’ve learned that old arguments are just that: old, and out of step with where the world is and where it should be.’

‘After the dust settled on the last of our ‘big three’ acquisitions, we begun to focus even more on the dramatic changes we were experiencing in our media business and the profound disruption we were feeling. The future of those businesses had begun to seriously worry us, and we concluded it was time for us to start delivering our content in new and modern ways, and to do so without intermediaries, on our own technology platform.’

Did we have the stomach to start cannibalising our own still-profitable business in order to begin building a new model? Could we disrupt ourselves, and would Wall Street tolerate the losses that we would inevitably incur as we tried to modernise and transform the company?

I know why companies fail to innovate. It’s tradition. Tradition generates so much friction, every step of the way. I talked about the investment community, which so often punishes established companies for reducing profits under any circumstances, which often leads businesses to play it safe and keep doing what they’ve been doing, rather than spend capital in order to generate long-term growth or adapt to change.’

Technological developments will eventually make older business models obsolete. You can either bemoan that and try with all your might to protect the status quo, or you can work hard to understand and embrace it with more enthusiasm and creativity than your competitors.’

Quality

‘If you’re in the business of making things, be in the business of making things great.’

‘[Roone’s] mantra was simple: ‘Do what you need to do to make it better’. Of all the things I learned from Roone, this is what shaped me the most. When I talk about this particular quality of leadership, I refer to it as ‘the relentless pursuit of perfection.’ It’s a mindset really, more than a set of rules. It’s not, at least as I have internalised it, about perfection at all costs. Instead, it’s about creating an environment in which you refuse to accept mediocrity.’

Culture

Strong leadership embodies the fair and decent treatment of people. Empathy is essential, as is accessibility. People committing honest mistakes deserve second chances, and judging people too harshly generates fear and anxiety, which discourage communication and innovation. Nothing is worse to an organisation than a culture of fear.’

A company’s culture is shaped by a lot of things, but this is one of the most important - you have to convey your priorities clearly and repeatedly. In my experience, it’s what separates great managers from the rest. If leaders don’t articulate their priorities clearly, then the people around them don’t know what their own priorities should be.’

‘‘Pixar needs to be Pixar’, I said [when acquiring the company]. ‘If we don’t protect the culture you’ve created, we’ll be destroying the thing that makes you valuable.’

‘If you trust your own instinct and treat people with respect, the company will come to represent the values you live by.’

Failure

‘I’ve never had too much fear about trying something and failing.’

Acquisitions

‘Disney had done due diligence about the assets [ABC Cities] they purchased, but there was no way they could understand all of the complexities of the company they were about to own.’

A little respect goes a long way, and the absence of it is often very costly. Over the next few years, as we made the major acquisitions that redefined and revitalised the company, this seemingly trite idea was as important as all of the data-crunching in the world; If you approach and engage people with respect and empathy, the seemingly impossible can become real.’

“You certainly can’t make a major acquisition without the necessary models to help you determine whether a deal is the right one, but you have to recognise that there is never 100 percent certainty. No matter how much data you’ve been given, it’s still, ultimately, a risk, and the decision to take the risk or not comes down to one person’s instinct.’

Disney acquisitions under Bob Iger

Disney acquisitions under Bob Iger

People sometimes shy away from taking big swings because they assess the odds and build a case against trying something before they even take the first step. One of the things I’ve always instinctively felt, is that long shots aren’t usually as long as they seem.’

‘.. a recurring theme in nearly every discussion I had about Pixar. I was told over and over it was too risky and ill-advisedIt’s true on paper the deal didn’t make obvious sense. But I felt certain that this level of ingenuity was worth more than any of us understood or could calculate at the time. As with everything, the key is awareness, taking it all in and weighing every factor. Nothing is a sure thing, but you need at the very least to be willing to take big risks. You can’t have big wins without them.’

The buyer often destroys the culture of the company it’s buying, and that destroy value. A lot of companies acquire others without much sensitivity regarding what they’re really buying. They think they’re getting physical assets or manufacturing assets or intellectual property (in some industries, that’s more true than in others). In most cases, what they’re really acquiring is people. In a creative business, that’s where the value is.’

‘The Pixar acquisition served our urgent need to revitalise Disney Animation, but it was also the first step in our larger growth strategy: to increase the amount of high-quality branded content we created.’

‘The acquisition of Marvel has proved to be much more successful than even our most optimistic models accounted for.’

‘Looking back on the acquisitions of Pixar, Marvel and Lucasfilm, the thread that runs through all of them (other than that, taken together, they transformed Disney) is that each deal depended on building trust with a single controlling entity.’

Pricing Power

‘Michael’s [Eisner - ex CEO] biggest stroke of genius might have been his recognition that Disney was sitting on tremendously valuable assets that they hadn’t yet leveraged. One was the popularity of the parks. If they raised ticket prices even slightly, they would raise revenue significantly, without any noticeable impact on the number of visitors. Building new hotels at Walt Disney World was another untapped opportunity, and numerous hotels opened during Michael’s first decade as CEO… Then came the expansion of theme parks [Hollywood Studios & Euro Disney]. Even more promising was the trove of intellectual property - all those great classic Disney movies - just sitting there waiting to be monetised… It’s not an exaggeration to say that he taught me how to see in a way I hadn’t been able to before.’

Decentralised

‘[Tom Murphy & Dan Burke of Cap Cities/ABC] also believed in a decentralised corporate structure.. Other than a CFO and a general counsel, there was no corporate staff, no centralised bureaucracy, and very little interference with the business units.’

‘[Disney’s] centralised decision making had a demoralising effect on senior leaders of our businesses, who sensed that the power to run their divisions really resided at Strategic Planning… We had to start reconfiguring the apparatus and pushing strategic responsibility back to the businesses sooner rather than later… There were about sixty-five people in Strat Planning, and they’d taken over nearly all of the critical business decisions across the entire company. All of our senior business leaders knew that strategic decisions about the divisions they ran - Parks & Resorts, consumer products, Walt Disney Studios, and so on - weren’t actually theirs to make. Power was concentrated within this single entity at Burbank [and were] viewed more as an internal police force than our partner to our business… To my mind they were often too deliberate, pouring over every decision through their overly analytical sieve.. I wanted to drastically reduce the size of the group and begin streamlining our decision making by putting more of it in the hands of business leaders.’

Pain Today, Gain Tomorrow

‘It’s better to give up a release date and keep working to make a better movie, and we’ve always tried to put quality before everything else, even if it means taking a short-term hit to our bottom line.’

‘We were now fully committed to also becoming a distributor of our own content, straight to consumers, without intermediaries. In essence, we were now hastening the disruption of our own business, and the short term losses were going to be significant.’

The decision to disrupt businesses that are fundamentally working but whose future is in question - intentionally taking on short term losses in the hope of generating long-term growth - requires no small amount of courage. Routines and priorities get disrupted, jobs change, responsibility is reallocated. People can easily become unsettled as their traditional way of doing business begins to erode and a new model emerges.’

‘To often, we led from a place of fear rather than courage, stubbornly trying to build a bulwark to protect old models that can’t possibly survive the sea change that is under way. It is hard to look at your current models, sometimes even ones that are profitable in the moment, and make a decision to undermine them in order to face the change that’s coming.’

Worthwhile Markets

‘In one of our conversations about some initiative I was considering, Dan [Bourke] handed me a note that read: ‘Avoid getting into the business of manufacturing trombone oil. You may become the greatest trombone-oil manufacturer in the world, but in the end, the world only consumes a few quarts of trombone oil a year!’ He was telling me not to invest in projects that would sap the resources of my company and me and not give much back. It was such a positive way to impart that wisdom, though, and I still have that piece of paper in my desk, occasionally pulling it out when I talk to Disney executives about what projects to pursue and where to put their energy.’

Career Advice

Do the job you have well; be patient; look for opportunities to pitch in and expand and grow; and make yourself one of the people, through attitude and energy and focus, that your bosses feel they have to turn to when opportunity arises. Conversely, if you’re a boss, these are the people to nurture - not the ones who are clamouring for promotions and complaining about not being utilised enough but the ones who are proving themselves to be indispensable day in and day out.’

Surround yourself with people who are good in addition to being good at what they do.’

Take responsibility when you screw up. In work, in life, you’ll be more respected and trusted by people around you if you own up to your mistakes. It’s impossible to avoid them; but it is possible to acknowledge them, learn from them, and set an example that it’s okay to get things wrong sometimes.’

Humility

‘I can’t emphasise how much success is also dependent on luck, and I’ve been extraordinarily lucky along the way.’

‘To hold onto that awareness of yourself even as the world tells you how powerful and important you are. The moment you start to believe it all too much, the moment you look yourself in the mirror and see a title emblazoned on your forehead, you’ve lost your way.’

Summary

While Bob Iger stepped down from running the Disney Corporation last year, the business’ recent record share price is testament to the courage, creativity and resolve he showed in transforming this great company. For even the great Disney Corporation, with its cast of irreplaceable characters, wasn’t immune to the winds of change.

Iger fortified the business with the acquisition of Pixar, Marvel, Lucasfilm and 21st Century Fox which together provided an unprecedented stable of the world’s best entertainment product. In a bold move that was sure to hurt near term earnings, Iger developed the capability to deliver that content directly to consumers through the new Disney+, ensuring Disney controlled its destiny and longevity of success.

I hope you’ve recognised many of the characteristics common to the other great businesses we’ve studied; innovation and embracing change, tolerating mistakes, decentralisation, focus on quality, accepting pain today for gain tomorrow. Many of these are found in Tom Peter’s seminal classic, ‘In Search of Excellence,’ a book itself replete with Disney anecdotes of 40 years ago.

“A special attribute of the success-orientated, positive, and innovating environment is a substantial tolerance for failure.” Tom Peters

Every business book has its lessons, in Bob Iger’s case there’s a myriad of business, investing and life lessons. Collating the ideas into mental models to apply to investments can help identify potential opportunities and pitfalls. One mental model I particularly enjoyed was the ‘Trombone Oil Market.’ It’s a reminder to do things that are worthwhile, not to chase markets that are too small. As Linkedin’s founder Reed Hoffman noted, “If it’s the left-handed scissors market, it’s too narrow.” When it comes to investing we can seek out the same.

I’ll let Bob himself have the final say:

‘If you’re in the business of making things, be in the business of making things great.’

Source:
The Ride of a Lifetime - Bob Iger. Penguin Random House. 2019.

Further Reading:
Creativity - Learning from Pixar’ - Investment Masters Class. 2017.



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Learning From Cornelius Vanderbilt

“In 1850, a decade before the Civil War, the United States’ economy was small—it wasn’t much bigger than Italy’s. Forty years later, it was the largest economy in the world. What happened in-between was the railroads. They linked the east of the country to the west, and the interior to both. They gave access to the east’s industrial goods; they made possible economies of scale; they stimulated steel and manufacturing—and the economy was never the same.” W. Brian Arthur

Vanderbilt rode this wave like no other. He was rich. Filthy rich. At the peak of his wealth he owned the equivalent of one in every nine dollars in the United States. His heirs would build the largest mansions Americans had ever seen. Mansions that spanned New York’s city blocks and extravagant country estates like ‘Biltmore’, a gilded-age 250-room French Renaissance chateau that holds the title of America’s largest house to this very day.

Biltmore Estate, North Carolina

Biltmore Estate, North Carolina

The ‘First Tycoon - The Epic Life of Cornelius Vanderbilt’ tells the fascinating story of Cornelius Vanderbilt, the business magnate who built an empire in shipping and then, at the ripe old age of seventy, in US railroads. Nicknamed ‘The Commodore’, Vanderbilt’s endeavours fighting brutal short-squeezes, double-crossing business partners, a race to provide passage across the Panama, personally saving the US stock market and the gifting of his largest ship to the Union Navy to fight the Civil War are relayed in vivid detail.

The book’s most useful learnings might relate to the insights into Vanderbilt’s business acumen. While they say history doesn’t repeat, it does rhyme, and despite two centuries passing since Vanderbilt first plied his trade ferrying cargo on New York’s harbour, the lessons in his business success remain as relevant today as they were then. I’ve included a collection of ‘Business Lessons’ extracted from this truly exceptional tome.

Grow the Market

Vanderbilt understood the benefits of increasing patronage by lowering prices; a strategy exploited in more recent times by SouthWest Airlines whose ex-CEO Herb Kelleher explains, ‘Charge low fares, get more people to fly, get them to fly more often, and you will produce the best return to shareholders.’

“Soon afterward he launched the Bellona on a new season of high-speed competition, powered by another cut in the fare to Philadelphia. The repeated price reductions were a stark departure from the past. They delivered a competitive advantage, of course, but also showed that Gibsons and Vanderbilt believed in a growing market – that more and more people wanted to travel between two cities, and would do so by steamboat if rates were cheap enough. This notion of an expanding economy was surprisingly new. The Livingstons’ North River Steam Boat Company had kept the same number of boats running to Albany at the same fare for years, and saw ridership steadily drop. They believed there was a natural number of passengers, and that competition was destructive, robbing them of their due.”

Increased Efficiency

How do I make a profit? Vanderbilt would rhetorically ask in court in 1869. “I make it by a saving of the expenditures. If I cannot use the capital of that road for pretty nigh $2,000,000 per year better than anyone that has ever been in it, then I do not want to be in the road.” He would elaborate at length on his approach. “That has been my principle with steamships. I never had any advantage of anybody in running steamships; but if I could not run a steamship alongside another man and do it as well as he for twenty percent less than it cost him I would leave the ship.”

Lowest Costs

“Vanderbilt carried on the business war, the one he knew best. His and Mills’ ships continued to connect via Panama, rather than Mexico, but the Commodore’s prowess at cutting costs would allow him to slash fares until he had cut open the very arteries of the Accessory Transit Company.”

The Selfish Revolutionary

Fifth Avenue Mansion - Vanderbilt II

Fifth Avenue Mansion - Vanderbilt II

Screen Shot 2019-10-28 at 7.35.42 pm.png

“For all his contradictions over the years, he remained the master competitor, the individual who did more to drive down costs and open new lines in steam navigatiuon than any other. More than that, he had helped shape America’s striving, productive society. Waging war with his business, he had wrought change at the point of the sword. He was the selfish revolutionary, the millionaire radical.”

Scale Advantages

“What he did not realise was that the world he had made himself – the world that gave rise to these individualistic, laissez-faire values – was beginning to disappear, thanks in part to his own success. He helped create enterprises on a scale never seen before in the United States. Small proprietors could not compete against him.”

Culture - Tone at the Top

What Vanderbilt did was set general policies, as well as the overall tone of management. Any corporation has an internal culture shaped by the demands, directives, and expectations that rain down from above. The Commodore created an atmosphere of efficiency, frugality, and diligence, as well as swift retribution for dishonesty or sloth. Every employee knew he was watching.”

Cornelius_Vanderbilt_-_NARA_-_528566.jpg

Customer Focus

“The testimony of Vanderbilt and his men produced ‘a decided change in public sentiment, which had previously run altogether in favour of the Central management,’ the Times reported. For one thing, Vanderbilt had a chance to present himself in his own terms. ‘I have always served the public to the best of my ability’, he remarked. ‘Why?, Because, like every other man, it is in my interest to do so, and to put them to as little inconvenience as possible.’”

Integrity, Shareholder Alignment

“His honesty attracted great admiration, for this was an era when even the best corporate officials routinely engaged in self-dealing, as they had since the first appearance of railroads in the 1830’s.”

“Thomas A. Scott, demanded kickbacks in the form of stock from outside contractors, such as sleeping-car and express companies. In the Central, Corning and other directors had ordered the company to purchase iron, goods, and services from their own firms. ‘The peculiarity of Mr. Vanderbilt’s railroad management,’ Putnam’s Monthly Magazine wrote, ‘is that instead of seeking to make money out of the road in contracts and side speculations, he invests largely in stock, and then endeavours to make the road pay the stockholders.’ The only compensation he accepted as president of his roads was in dividends on his own shares. ‘I manage it [a railroad corporation] just as I would manage my individual property. That is my notion, and the way I think a railroad ought to be managed,’ he told the assembly committee in February.”

Debt

“When I have some money I buy railroad stock or something else, but I don’t buy on credit. People who live too much on credit generally get brought up with a round turn in the long run. The Wall Street averages ruin many a man there, and is like faro.”

The Capital Cycle

“The Panic of 1873 started one of the longest depressions in American history - five straight months of economic contraction. In the next year, half of America’s iron mills would close; by 1876, more than half of the railroads would go bankrupt. Unemploynient, hunger, and homelessness blighted the nation. "In the winter of 1873-74, cities from Boston to Chicago witnessed massive demonstrations demanding that authorities ease the economic crisis," Eric Foner writes. The irony is that the fall was far more severe because of the rapid rise of the previous decade. The expanding, increasingly efficient railroad network had created a truly national market. The fates of farmers, workers, merchants, and industrialists across the landscape were tied together as never before. New York had cast its financial net across the country, which meant that credit flowed to remote regions far more easily than before but also that financial panics -affected the entire nation. As Vanderbilt pointed out, railroad overbuilding was an underlying economic problem, and it was exacerbated by Wall Street's craze for railway securities. When the bubble burst, the consequences were felt across the country with devastating suddenness and severity.”

New Business Enterprises, Lowered Prices, Dislocation

“And yet, even before the Commodore's death it was clear that the forces he had helped to put in motion were remaking the economic, political, social, and cultural landscape of the United States. There was the transparently obvious: the dramatically improved transportation facilities that allowed Americans to fill in the continent; the creation of enormous wealth in new business enterprises; and the railroads’ economic integration of the nation, bringing distant farms, ranches, mines, workshops, and factories into a single market, one that both lowered prices and dislocated older communities. (The new availability of western foodstuffs, for example uprooted New England farmers.) And there was the less obvious, such as the emergence of a new political matrix in which Americans struggled to balance the wealth, productivity, and mobility wrought by the railroads and other industries with their anxiety over the concentration of vast economic power in the hands of a few gigantic corporations. Though government regulation would emerge slowly and fitfully—fiercely opposed by many - it would take its place at the center of politics in the decades ahead.”

Engine of Social Revolution

“The importance of the railroad in the nineteenth century is a historical cliché; a cliché can be true, of course, but will have lost its force, its original meaning. Garrison's letter, on the other hand, speaks to the railroad's dramatic impact at the time of the Civil War. It was, one contemporary writer argued, "the most tremendous and far reaching engine of social revolution which has ever either blessed or cursed the earth." It magnified the steamboat’s impact, instilling a mobility in society that unraveled traditions, uprooted communities, and under-cut old elites. It integrated markets, creating a truly national economy.”

Evolve and Adapt

“The Commodore’s character played a role as well. Over the decades, his personality had evolved in parallel with his changing material interests. He had earned his reputation as a ferocious competitor in steamboats, a business notoriously prone to warfare, due to the low start-up costs and the inherent mobility of the physical capital - the steamers—which allowed a proprietor to fight on one route after another. It was also a time in his life when New York's merchant aristocrats derided him as a boorish outsider. After devoting himself to railroads, however, he had consistently pursued peace, seeking industry-wide agreements (though he remained ready to fight when attacked). The transformation reflected the nature of the railroad business, but it also suited his late-life status. The elite now thought of him as an "honorable & high toned" gentleman, precisely the sort of man who sought dignified arrangements, not economic bloodletting.”

Sacrifice Short Term Profits

Screen Shot 2020-11-09 at 9.35.57 pm.png

“Time and again, Vanderbilt showed  himself to be patient and diplomatic in dealings with Corning and Richmond, as he sacrificed short-term proficts for long-term stability.”

Decisive Strategic Advantages

“What did he see in it that no one else did? From the very beginning of Vanderbilt's career, he had focused on transportation routes that had decisive strategic advantages over competitors. The Stonington railroad for example, ran from a convenient port inside Point Judith over a direct line to Boston with easy grades that he made into the fastest and cheapest to operate at the time of his presidency. Likewise, the Nicaragua route to California had possessed a permanent superiority in coal consumption over Panama, thanks to shorter steamship voyages.”

Fixed Cost Leverage

Vanderbilt sorely wanted the long-distance passengers and through freight that came from the West via the Central, no matter how little revenue he received. Unlike a steamboat and steamship line, a railroad suffered from high fixed costs. It was an immovable piece of infrastructure. Whether trains ran or not, the tracks, bridges, buildings, locomotives, and cars had to be maintained; conductors, engineers, firemen, and laborers had to be paid. At least two-thirds of a railroad's expenses remained constant no matter how much or how little traffic it carried.  If the Commodore could get additional business, even at losing rates, it would improve the Harlem's outlook. To gain access to that rich flow of freight from the West, Vanderbilt decided to pursue diplomacy with the Central.”

Vanderbilt Residences - Fifth Avenue

Vanderbilt Residences - Fifth Avenue

Net Worth

“On the other hand, these figures do provide some context for the scale of Vanderbilt's fortune. If he had been able to liquidate his $1oo million estate to American purchasers at full market value (an impossible task, of course), he would have received about $1 out of every $9 in existence. If demand deposits at banks are included in the calculation, he still would have taken possession of $1 out of every $2o. By contrast, Forbes magazine calculated in September 2008 that William Henry Gates III—better known as Bill Gates—was the richest man in the world, with a net worth of $57 billion. If Gates had liquidated his entire estate (to American buyers) at full market value at that time, he would have taken $1 out of every $138 circulating in the American economy. Even this comparison under-states the disparity between the scale of Vanderbilt's wealth and that of any individual in the early twenty-first century, let alone his own time.”

Summary

Vanderbilt’s legacy provides timeless and universal lessons in business success. He thrived in an era of enormous technological change as railways revolutionised the American economy. Yet his approach to business is evident in many of the successful businesses we see today; tapping new markets through lower prices, respecting shareholders, sharing scale advantages and sacrificing short term profits for long term gains.

Vanderbilt was a legend. He held himself to a higher morale compass than his ruthless competitors. A lifetime spent in shipping proved no impediment to grasping the opportunity the nascent railway industry presented. Striving always for competitive advantages, Vanderbilt once again leveraged the benefits of scale to deliver his customers lower fares. For this he was amply rewarded. Incredibly so.







Reference:
The First Tycoon: The Epic Life of Cornelius Vanderbilt’ T.J Stiles, 2010.





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Learning from Patagonia’s Yvon Chouinard

When you think about business planning for the future, most CEO’s talk about anything from the next quarter to a five year plan. Its certainly important to think ahead, and successful companies often plan their way forward using these time scales to determine both the growth and profitability goals they wish to achieve, and the strategies and plans for them to get there. Its rare to look much further ahead than these timescales however, and I can’t think of many businesses that do, which is why I was struck by Yvon Chouinard’s oft-quoted reference to the next ‘hundred years’.

Patagonia is the brainchild of Yvon Chouinard, who not only wanted to build a business with the highest possible quality products, but also wanted his company to do the right thing by the environment along the way. Profitability was an oblique goal and indeed, was seen as nothing more than a byproduct of success; Chouinard recognised early on that there was no business to be done on a dead planet. That’s a different mindset altogether.

Patagonia does things differently. Not only does it look well beyond the standard timescales for its business and plan for the next 100 years, in a world of fast fashion, where people will prefer to discard worn clothing rather than retain, Patagonia builds its clothing products for the long term as well. It offers an iron-clad guarantee that provides free repairs; if its worn out, or broken, then return it to the store and Patagonia will repair it at no cost. Forever.

Let My People Go Surfing’ is the extraordinary story of an unlikely businessman and his journey to create the highest quality outdoor products while doing good for the world. It’s one of the most enjoyable business books I’ve ever read. And I’m not alone. His staff view the book as an almost sacred text, and all strive to live by the values contained within. Recently I stepped into a Patagonia store to find that not only had all the employees read the book, but they also mentioned that many customers had studied the text in business management classes. It’s no surprise.

Flip through the pages of a Patagonia catalog and you’ll see why it’s amassed a cult following.

Yvon started out with the eponymous climbing gear company, Chouinard Equipment, which made high quality climbing gear for his customers. It wasn’t long afterwards that he identified that his ‘pitons’ were detrimentally affecting the cliff faces, so he abandoned them for a more environmentally friendly alternative. And it didn’t stop there. Since then, Chouinard moved into clothing and has developed his business into one of the most socially responsible corporations on the planet.

“The cumulative effects of Chouinard's original product began to hammer at the company's environmental conscience, the result of numbers of the pitons being left behind in the rock. Consequently, Chouinard became an advocate of "clean" climbing that made use of such products as its Hexentrics and Stoppers nuts. The company introduced the first tubular ice screw in the late 1970s.”

As can be expected with an innovative business such as this, it shares many of its characteristics for success with other great companies. The same recurring themes are highlighted: Family Culture, Innovation, Empowering Staff, Embracing Change, Focus on the Long Term, a Win-Win Mentality, No Compromise on Quality, Maintaining Smallness; just to name a few. Patagonia has established an ecosystem that espouses strong relationships with suppliers and customers alike. And this was purposeful - Yvon studied and then extracted these universal characteristics from other great businesses. But he didn’t stop there. He also drew inspiration from other ideologies he embraced; from the environment and the management structures of ant colonies to Darwinian evolution at the edge of chaos.

These are some of the markers I use on my own quest to find great companies. They form the basis of the mental models I search for that when combined, can produce winning corporate DNA.

Below are fascinating excerpts from Chouinard’s sacred text, ‘Let My People Go Surfing.’

Profit is Not Primacy

Financial Philosophy: We are a product-driven company. That means the product comes first and the company exists to create and support our products.”

yvon1.jpg

“At Patagonia, making a profit is not the goal, because the Zen master would say profits happen ‘when you do everything else right.’”

Our mission statement says nothing about making a profit. In fact, our family considers our bottom line to be the amount of good the business has accomplished over the year. However, a company needs to be profitable in order to stay in business and to accomplish all its other goals, and we do consider profit to be a vote of confidence, that our customers approve of what we are doing.”

“Without giving its achievement primacy, we seek to profit on our activities. However, growth and expansion are values not basic to this corporation.”

Borrow Ideas

Borrow ideas from other disciplines. We beg, borrow, and steal ideas from other companies and culture.”

“We should borrow and adapt ideas even from unlikely sources. McDonald’s is as far from Patagonia as you can get in its image and many of its values. No one at McDonald’s ever tells a customer, ‘Sorry, we’re all out of iceberg lettuce today.’ It successfully organises on-time delivery every day of the week, and I think Patagonia could learn a lesson from McDonald’s and the symbiotic relationship it enjoys with its suppliers.”

Empower Employees

[Our] philosophies must be communicated to every one working in every part of the company, so that each of us becomes empowered with the knowledge of the right course to take without having to follow a rigid plan or wait for orders from the boss.”

Simplicity

“I believe the way toward mastery of any endeavour is to work toward simplicity; replace complex technology with knowledge.

“The best performing firms make a narrow range of products very well. The best firms’ products also use up to 50 percent fewer parts than those made by their less successful rivals. Fewer parts means a faster, simpler (and usually cheaper) manufacturing process.”

Unconventional

“I had always avoided thinking of myself as a businessman. I was a climber, a surfer, a kayaker, a skier, and a blacksmith.”

“I knew I would never be happy playing by the normal rules of business. If I had to be a businessman, I was going to do it on my terms.”

I read every book on business, searching for a philosophy that would work for us. I didn’t find any American company we could use as a role model.”

Fun

“One things I did not want to change, even if we got serious: work had to be enjoyable on a daily basis.”

Having fun should be part of the culture at Patagonia.”

Innovation

“We learned an important lesson in business. [Our new innovative] fabric would never have been developed if we had not actively shaped the research and development process. From that point forward, we began to make significant investments in our own research and design departments. Our fabric lab and our fabric development departments became the envy of the industry.”

Source: Patagonia catalogue

Source: Patagonia catalogue

Testing

You can minimise risk by doing your research and, most of all, by testing. Testing is an integral part of the Patagonia industrial design process, and it needs to be included in every part of the process. It involves testing competitors’ products; ‘quick and dirty’ testing of new ideas to see if they are worth pursuing; fabric testing; ‘living' with a new product to judge how hot the sales may be; testing production samples for function and durability, and so on; and test marketing to see if people will buy it.”

Change

[We] begin with an attitude of embracing change rather than resisting it - not just changing without reflection and weighing the relative merits of the new ideas, but nonetheless assuming that if we only look hard enough, there may be a better way of doing things.”

“The owners and managers of a business that they want to be around for the next hundred years had better love change. The most important mandate for a manager in a dynamic company is to instigate change.”

“Evolution [change] doesn’t happen without stress, and it can happen quickly. Our company has always done its best work whenever we’ve had a crisis. When there is no crisis, the wise leader or CEO will invent one. Not by crying wolf but by challenging the employees with change.”

“Every organisation, business, government, or religion must be adaptive and resilient and constantly embrace new ideas and methods of operation.”

“When I look at my business today I realise one of the biggest challenges I have is combating complacency. I always say we’re running Patagonia as if it’s going to be here a hundred years from now, but that doesn’t mean we have a hundred years to get there! Our success and longevity lie in our ability to change quickly. Continuous change and innovation require maintaining a sense of urgency - a tall order, especially in Patagonia’s seemingly laid back corporate culture. In fact, one of the biggest mandates I have for managers at the company is to instigate change. It’s the only way we’re going to survive in the long run.”

Source: Patagonia Catalogue

Source: Patagonia Catalogue

It’s the same in nature. Nature is constantly evolving, and ecosystems support species that adapt either through catastrophic events or through natural selection. A healthy environment operates with the same need for diversity and variety evident in a successful business, and that diversity evolves out of a commitment to constant change.”

Only on the fringes of an ecosystem, those outer rings, do evolution and adaption occur at a furious pace; the inner centre of the system is doomed to failure by maintaining the status quo. Businesses go through the same cycles.”

Only those business operating with a sense of urgency, dancing on the fringe, constantly evolving, open to diversity and new ways of doing things, are going to be here one hundred years from now.

Diversity

“A clothing company of the size of Patagonia, if it is not diversified in its product line and operations, is as much at risk as a farming operation growing a mono-crop. Only the ‘diseases’ are different.”

“At Patagonia, we sell our product at a wholesale level to dealers, sell through our own retail stores, through mail order, and through e-commerce, and do it all worldwide. The diversity of distribution has been a tremendous advantage to us. In a recession, when our wholesale sales are down, our direct sales channels do well because there is no lessened demand for our goods from our loyal customers."

Doing business in Japan, Europe, Asia and Latin America, and Canada also buffers us against downturns in the economy in any one of those areas.”

Few businesses have the confidence to try to master all four business styles, but when you do master them, the four means of distribution work very powerfully in concert. We consider each to be essential to Patagonia’s relationship with the customer.”

Learn By Doing

“There are scientific ways to address a new idea or project. If you take the conservative scientific route, you study the problem in your head or on paper until you are sure there is no chance of failure. However, you have taken so long that the competition has already beaten you to market. The entrepreneurial way is to immediately take a forward step and if that feels good, take another, if not, step back. Learn by doing, it is a faster process.”

First Mover Advantage

You can’t wait until you have all the answers before you act. It’s often a greater risk to phase in products because you lose the advantage of being first with a new idea.”

Being first offers tremendous marketing advantages, not the least of which is you have no competition. Coming in second, even with a superior product, is often no substitute for just plain being first.”

Culture

"In every long-lasting business, the methods of conducting business may constantly change, but the values, the culture, and the philosophies remain constant.”

“Despite our own growth at Patagonia, we were able, in many ways to keep alive our cultural values as we grew.”

“We never had to make a break from the traditional corporate culture that makes businesses hidebound and inhibits creativity.”

“We built a new administration building that had no private offices, even for executives. The architectural arrangement sometimes created distraction but helped keep communication open.”

Family

Not only was the company like an extended family, but for many it was family, because we always hired friends, friends of friends, and their relatives.”

Selling

“My first principle of mail order argues that ‘selling’ ourselves and our philosophy is equally important to selling product. Telling the Patagonia story and educating the Patagonia customer on layering systems, on environmental issues, and on the business itself are as much the catalog’s mission as is selling the product.”

“Over the years we have come upon a balance between the product content and the message - essays, stories, and image photos. Whenever we have edged that content towards increased product presentation, we have actually experienced a decrease in sales.”

Source: Patagonia catalogue

Source: Patagonia catalogue

“In owning our retail stores, we’ve learned that it is far more profitable to turn that inventory more quickly than to have high margins or raise prices.”

Part of Patagonia’s authenticity lies in not being concerned about having an image in the first place. Without a formula, the only way to sustain an image is to live up to it. Our image is a direct reflection of who we are and what we believe.”

The catalog is our bible for each selling season. Every other medium we use to tell our story - from the website, to hangtags, to retail displays, to press releases to videos.”

“If we come out with a product that is difficult to promote, it’s probably because it’s no different than anyone else’s and we probably shouldn’t be making it.”

“We have three general guidelines for all promotional efforts: 1) Our charter is to inspire and educate rather than to promote, 2) We would rather earn credibility than buy it. The best resources for us are the word-of-mouth recommendation from a friend or favourable comment in the press, 3) We advertise only as a last resort and usually in sport-specific magazines.”

Advertising rates dead last as a credible source of information. Overall, we do far less advertising (usually less than 1 percent of sales) than most outdoor companies, let alone clothing companies.”

Value Employees

We provided a cafeteria that served healthy food where employees could gather throughout the day. And we opened an on-site childcare centre. At the time it was one of only 120 in the country; today there are more than 8,000.”

“If you care about having a company where employees treat work as play and regard themselves as ultimate customers for the products they produce, then you have to be careful whom you hire, treat them right, and train them to treat other people right.”

Our benefits package is generous but strategic. Each benefit makes good business sense for us. We offer comprehensive health insurance, even to part time employees, in order to attract serious athletes to work in our retail stores.”

Patagonia’s internship program allows employees to leave their jobs for up to two months to work for an environmental group and still receive their Patagonia paychecks and benefits.”

Hiring

It’s our first principle of hiring, that as many Patagonia employees as possible also be true Patagonia customers.”

We also seek core Patagonia product users, people who love to spend as much time as possible in the mountains or the wild.”

We’ll often take a risk on an itinerant rock climber that we wouldn’t on a run-of-the-mill MBA.”

Hiring people with diverse backgrounds brings in flexibility of thought and openness to new ways of doing things, as opposed to hiring clones from business schools who have been taught a codified way of doing business. A business that thrives on being different requires different types of people.”

As much as possible we hire from within, to keep the company culture strong. And then we train, and take the time to train, as though our future depended on it.”

We don’t want drones who will simply follow directions. We want the kind of employees who will question the wisdom of something they regard as a bad decision.”

“In a company as complex as ours, no one person has the answer to our problems, but each has a part of the solution.”

Walk The Floor

“In this information age it’s tempting for managers to manage from their desks, staring at their computer screens and sending out instructions, instead of managing by walking about and talking to people. The best managers are never at their desks yet can be easily found and approached by everyone reporting to them.”

Tone at the Top

The best leadership is by example. Malinda’s and my office space and the CEO’s is open to anyone, and we always try to be available. We don’t have special parking spaces for ourselves or any upper management; the best spaces are reserved for fuel efficient cars, no matter who owns them. Malinda and I pay for our own lunches in our cafeteria; otherwise it would send a message to the employees that its’s okay to take from the company.”

Decentralised & Smallness

“Systems in nature appear to us to be chaotic but in reality are very structured, just not in a top down decentralised way. Deborah Gordon, a professor at Stanford University who studies ant colonies, says that there is no specific ant in charge of a colony, no central control. Yet each ant knows what its job is, and ants communicate with one another by way of very simple interactions; altogether they produce a social network. A top down central system like a dictatorship takes an enormous amount of force and work to keep the hierarchy in power. Of course, all top-down systems eventually collapse, leaving the system in chaos.”

“I believe that for the best communication and to avoid bureaucracy, you should ideally have no more than a hundred people working in one location. This is an extension of the fact that a democracy seems to work best in small societies, where people have a sense of personal responsibility.”

“Hundreds of studies in factories and workplaces confirm that workers divided into small groups enjoy lower absenteeism, less sickness, higher productivity, greater social interaction, higher morale - most likely because the conditions allow them to engage what is best in being human, to share the meaning and fruits of their labour.”

Respect Customers

We treat customers with respect, too. We don’t farm out phone calls to a service bureau in Delhi.”

We have an ‘ironclad’ guarantee, and we honour it - even if we have to go to great lengths. We do know that the extra steps we take are worth it. Our catalog re-order rate from customers, season after season, far exceeds the mail-industry standard. In fact, it’s off the charts.”

Source: Patagonia catalogue

Source: Patagonia catalogue

“We don’t speak to what is perceived as the lowest common denominator. We speak to each customer as we want to be treated, as an engaged, intelligent, trusted individual.”

We recognise that we make most profit by selling to our loyal customers. A loyal customer will buy new products with little sales effort and will tell all his friends. A sale to a loyal customer is worth six to eight times more to our bottom line than a sale to another customer.”

Listen To Customers

“To stay ahead of the competition, our ideas have to come from as close to the source as possible. With technical products, our ‘source’ is the dirtbag core customer. He or she is the one using the products and finding out what works, what doesn’t, and what is needed.”

Win-Win / Ecosystem

In 1986, we committed ourselves to donate 10% of profits each year to small groups working to save or restore natural habitats. We later upped the ante to 1% of sales, or 10% of pretax profits, whichever was greater. We have kept that commitment every year, boom or bust.”

We consider ourselves to be an integral part of communities that also include our employees, the communities in which we live, our suppliers and customers. We recognise our responsibilities to all these relationships and make our decisions with their general benefit in mind.”

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Develop long term relationships with suppliers and contractors. Patagonia has never owned a fabric mill or sewing shop. To work on a single endeavour with so many other companies, with no compromise in product quality, requires a mutual commitment much deeper than the traditional business relationship.”

We do as much business as we can with as few suppliers and contractors as possible. The downside is the risk of becoming highly dependent on another company’s performance. But that’s exactly the position we want to be in, because those companies are also dependent on us. Our potential success is linked. We become like friends, family; mutually selfish business partners; what’s good for them, is good for us.”

We put a lot of effort into choosing factories that have healthy relationships with their employees.”

“If you want to get things right the first time, rigorous specs aren’t enough. You have to be a full partner. You have to make sure your supplier and contractors have the necessary knowledge and tools to get the job done to your design standards.”

I think of Patagonia as an ecosystem, with its vendors and customers as an integral part of that system. A problem anywhere in the system eventually affects the whole, and this gives everyone an overriding responsibility to the health of the whole organisation. It also means that anyone, low on the totem pole or high, inside the company or out, can contribute significantly to the health of the company and to the integrity and value of our products.”

Source: Patagonia catalogue

Source: Patagonia catalogue

“A successful, long-lived, and productive company like Patagonia could be compared, on the most basic level, with a healthy environment, simply in the fact that both are composed of various elements that must function together in some kind of balance in order for the whole system to work.”

Quality

Maximum attention is given to product quality, as defined by durability, minimum use of natural resources, multi-functionalism, non-obsolescence, and the kind of beauty that emerges from absolute suitability to task. Concern over transitory fashion trends is specifically not a corporate value.”

The first part of our mission statement, ‘Make the best product’, is the raison d'être of Patagonia and the cornerstone of our business philosophy.”

Source: Patagonia Catalogue

Source: Patagonia Catalogue

“‘Make the best’ is a difficult goal. It doesn’t mean ‘among the best’ or the ‘best at a particular price point.’ It means ‘make the best’ period.”

“The challenge for Patagonia, or for any company serious about making the best product of its kind, is to re-create on an industrial scale the hand knitters devotion to quality. You cannot hand off your pattern or blueprint or model to the lowest-bid contractor and expect to get anything close to what you had in mind.”

“We believe that quality is no longer a luxury. It is sought out by the consumer, and it is expected. For example, the Strategic-Planning Institute has been collecting data for years on the performance of thousands of companies. [Their] report has begun to show quite clearly that quality, not price, has the highest correlation with business success. In fact, the institute has found, overall, companies with high-product and service-quality reputations have on average return-on-investment rates twelve times higher than their low-quality and lower-priced competitors.”

Whenever we are faced with a serious business decision, the answer almost always is to increase quality. When we make a decision because it’s the right thing to do for the planet, it ends up also being good for business.”

Stick to Knitting & Recessions

“You have to know your strengths and limitations and live within your means. The same is true for business. The sooner a company tries to be what it is not, the sooner it tries to ‘have it all’, the sooner it will die.”

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We don’t force our growth by stepping out of the specialty outdoor market and trying to be who we aren’t. We let our customers tell us how much we should grow each year. Some years it could be 5% growth or 25%, which happened during the middle of the Great Recession. Consumers become very conservative during recessions. They stop buying fashionable silly things. They will pay more for a product that is practical, multi-functional, and will last a long time. We thrive during recessions.”

Not Fashion

“Our design and product development calendar is usually eighteen months long, too long to be a contender in any new fads. We rarely buy off-the-shelf fabrics or existing prints, so we have to work with artists and design studios in producing original art.”

When you give in to fashion trends, you doom used clothes to the trash heap.”

Long Term

“I did know we had become unsustainable and that we had to look to the Iroquois and their seven-generation planning, and not to corporate America, as models of stewardship and sustainability. As part of their decision process, the Iroquois had a person who represented the seventh generation in the future. If Patagonia could survive this crisis [an earlier sales and cash-flow crisis], we had to begin to make all our decisions as though we would be in business for a hundred years. We would grow only at a rate we could sustain for that long.”

Long-term capital investments in employee training, on-site child care, pollution controls, and pleasant working facilities all are negatives on the short-term ledger. When the company becomes the fatted calf, it’s sold for profit, and its resources and holdings are often ravaged and broken apart, leading to the disruption of family ties and the long-term health of local economies. The notion of businesses as disposable entities carries over to all other elements of society.”

When you get away from the idea that a company is a product to be sold to the highest bidder in the shortest amount of time, all future decisions in the company are affected. The owners and the officers see that since the company will outlive them, they have responsibilities beyond the bottom line. Perhaps they will even see themselves as stewards, protectors of the corporate culture, the assets, and of course the employees.”

Private Ownership

Being a publicly held corporation or even a partnership would put shackles on how we operate, restrict what we do with our profits, and put us on a growth/suicide track. Our intent is to remain a closely held private company, so we can continue to focus on our bottom line: doing good.”

Debt

“We are a privately owned company, and we have no desire to sell the company or to sell stock to outside investors, and we don’t want to be financially leveraged.”

“Not only don’t we want to be financially leveraged, but our goal is to have no debt, which we have achieved.”

A company with little debt or with cash in the kitty can take advantage of opportunities as they come up or invest in a start-up without having to go further in debt or find outside investors.”

Scenario Analysis

A company should always be playing ‘what if’ scenarios, e.g what if all our top management goes down in an airplane crash, our warehouse burns down, our main computer melts down or gets a virus? Or what if there is a 25% downturn in business or sales in Japan suddenly explode beyond our wildest planning?”

Consultants

“When a problem comes up, the effective CEO does not immediately hire a consultant. Outsiders don’t know your business the way you do, and anyway, I’ve found that most consultants come from a failed business.”

Environment

“Repair is a radical act. As individual consumers, the single best thing we can do for the planet is to keep our stuff in use longer. This simple act of extending the life of our garments through proper care and repair reduces the need to buy more over time - thereby avoiding the carbon dioxide emissions, waste output, and water usage required to build new products.”

Source: Patagonia catalogue

Source: Patagonia catalogue

“We strive to balance the funding of environmental activities with the desire to continue in business for the next hundred years.”

“Patagonia’s environmental efforts began in the 1970s by trying to prevent the destruction of our surf breaks and by trying to stop the physical damage to the rock walls of Yosemite. Later we started looking at minimising the environmental hurt with manufacturing our products.”

“One of the hardest things for a business to do is to investigate the environmental effects of its most successful product and, if it’s bad, to change it or pull it off the shelves.”

Dont-Buy-This-Jacket-Patagonia.jpg

When we act positively on solving problems instead of ignoring them or trying to find a way around them, we are further along the path to sustainability. Every time we’ve elected to do the right thing, it turned out to be more profitable.”

“Worldwide we are using the resources of several planets. We can no longer afford to use a natural resource only one time. Today, our Repair Centre in Reno Nevada, is the largest garment repair facility in North America. It employs more than fifty people who complete more than forty thousand repairs per year.”

Each time we tried to do the right thing for the environment, regardless of the cost to us, we ended us saving money.”

Summary

Many of us grow up wanting to climb a mountain and Yvon Chouinard did exactly that. Not only did he achieve that goal, he also established a global business that helps others achieve their vision all while offering environmentally sound business practices along the way. And its the envy of the industry.

Patagonia really does do things differently. From 100-year plans to investing in the planet’s health, the business is once again, another example of how one person’s extraordinary vision has led to not only corporate success, but also to providing a healthy ecosystem that allows suppliers, staff and customers to exist harmoniously. Forever.

Source: ‘Let My People Go Surfing’, Yvon Chouinard, Penguin Books.

Video: ‘Let My People Go Surfing, 10 More Years of Business Unusual, Trailer. Patagonia.


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Learning From Copart’s Willis Johnson

True Rags to Riches stories are actually few and far between. We often hear of the biggies; the Jeff Bezos’ story, the Bill Gates story, the Steve Jobs’ story or even Warren Buffett’s history. The thing that is common among most of the ones we know is that they tend to be tech gurus or famous investors. They’ve all built companies that are the envy of the world and become famous along the way. But how often do you hear about a guy who only went to high school, was given a junkyard, and was able to turn it into a multi-billion dollar company? Not often, I bet.

Willis Johnson’s incredible story is a rag-to-riches tale of a budding young American entrepreneur who scrapped and saved, kept trying new things and ultimately turned a small auto junkyard into a multi-billion dollar business. An investment in Willis’ Copart in 1994 has been a veritable 150-bagger!!

Johnson tells the story of Copart in his 2014 auto-biography ‘Junk to Gold’. An easy read, it contains a wealth of business wisdom and life lessons. Johnson’s passion for wheeling & dealing emerged while buying, dismantling and selling old cars as a teenager with his entrepreneurial father. It also tells how he was conscripted to the US Army and did a tour of duty in Vietnam where only half his unit survived, how he also earned a Purple Heart and some new skills to apply to the dismantling yard he purchased on his return. With his newly acquired junkyard, Johnson strived for growth.

In the words of Charlie Munger, Johnson is a ‘Talented Fanatic’ who disdained standard industry practice. Instead, he introduced clean and organised stores that more closely resembled a retail store than the typical ‘bunch of wrecked cars in a field’. He was the first to dismantle not just cars, but parts, which he refurbished for sale. Introducing an industry catalogue and improving customer communications made him a valued partner to customers.

Like Charles Schwab at Schwab Corporation, Willis wasn’t afraid to embrace new technology if it meant increased efficiency and improved customer service. It also provided a jump on competitors. In Sam Walton style, Willis unashamedly copied ideas from everywhere: competitors, other industries; even Disneyland and a John Wayne movie.

As Willis redefined the role and scope of junkyard operations he built scale through acquisitions. Never shy of trying new things, Willis jumped at an opportunity to add a salvage auction business to his broadening interests. Introducing new technology, leveraging national scale for customers and introducing a new innovative pricing mechanism that turned the customer incentive structure on its head, Willis expanded the salvage auction business to become the core of the multi-billion dollar enterprise that Copart is today.

COPART Share Price vs S&P500 Normalised [Source: Bloomberg]

COPART Share Price vs S&P500 Normalised [Source: Bloomberg]

I’ve included some of my favourite extracts from the book below..

Common Sense

Earn a PhD in Common Sense. The time I spent as a kid with my dad was much more of an education for me than what went on between school bells.”

Know What You Don’t Know

I know what I don’t know. I also think it’s a good idea to learn as much as you can.”

Integrity

“Both my dad and I also built reputations in the business world of always standing by our word and never doing business if a deal felt wrong. We both walked away from opportunities that may have helped our businesses but would have crossed a moral or ethical line.”

“With any deal, you want to treat folks right, like you’d like to be treated.”

A Bias For Action

“Although times were hard [in the early days], I never stopped dreaming big and looking for something better.”

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Business Model

‘Think of us [Copart salvage auctions] like the local sewer system. We’re a utility. Nothing can get rid of us - nothing. Two of the biggest businesses in the world are car manufacturers and insurance companies. If insurance companies don’t write insurance policies on cars, then they’re out of business. If manufacturers don’t make cars, then they’re out of business. They’re always gonna make cars, and they’re always gonna insure them. We’re the guy in between. As long as we’ve got the land in the right place to put the cars on, we can’t fail. We are like the septic tanks of the sewer system. You can’t have the system without us.”

Cost Conscious

“Dad also had an expression: ‘Take care of your pennies and the dollars will take care of themselves.’ It’s a phrase I have also passed on to others so they would learn the same lesson I learned from him - that small amounts of money can add up to either big profits or big losses. You can’t ignore the small expenses or the small amounts of money unaccounted for if you hope to succeed at the end of the day.”

Customers

‘I tripled the income at the yard by taking good care of customers and calling body shops and mechanics to tell them what inventory we had in stock.”

Be your customer’s most valuable partner. My continued passion for the business helped me find new ways to innovate Copart. One of the biggest innovations was the Percentage Incentive Program, or PIP, which I started as a test with the Fireman’s Fund - an insurance company that was a client of Copart. I knew I could get the insurance company more money if I cleaned these [smashed] cars up [before sale], but I also knew I would have to charge the insurance companies for that service. That was a problem because insurance companies didn’t want to pay you to clean up a wrecked car. To them it was junk so I had to find another way.

I proposed a deal to the Fireman’s Fund. Instead of charging fees [to transport and auction the wrecked cars], I would keep a percentage of the sale price for each car. The Fireman’s Fund was thrilled because they were seeing their returns go up. And I was watching Copart’s profits go up with the returns. But maybe, most importantly, PIP represented a significant shift in the industry. Now the salvage auction was a partner with the insurance company, with the goal of getting the best possible price for each car, eliminating any arguments over fees.”

“Copart needed to provide not just a good service but legendary service - service that left customers saying, ‘Wow, how did they do that?’ and telling others about the experience.”

Do the right thing. Through the [Katrina Hurricane] ordeal, Copart did not pass any of its added costs on to its customers. Copart chose to absorb costs because it was the right thing to do. Copart also absorbed costs because it wanted to prove to its customers it was not just a vendor but a business partner they could rely on even at the worst possible time.”

Investors

Be careful who you go into business with. [At the Copart IPO] Most investors thought it was all about them liking me. But in my case, I also had to like them. I wasn’t doing business with just anyone with a cheque book. I have to trust you - and you have have to be someone I feel good about being associated with.”

Stick to The Knitting

“One thing I’ve taught all the executives in the company is that while you may be good in our business, that doesn’t mean you are good in any other business. Don’t get a big head and think you know it all, because that’s when you lose. You’re really good in the car business. You’re really good in the recycling business. You’re not necessarily good in everything else, and you need to understand that. Stay with what you are good at, venture out if you see an opportunity, but pull your horns in if you make a mistake.”

Military Lessons

“The military teaches you order, timing and discipline. It teaches you how to work as a team. It was the best education I could get.”

“[The military] taught me cleanliness and order. Keeping things lined up makes for efficiency. In the military, we were told to face right and line everything up shoulder to nose. I bought that back to the dismantling business, lining up the cars in the yard in a perfect row. I also learned that a coat of paint helped cover up a lot of bad stuff and was the cheapest way to make something bad look good.”

“The war taught me how to make the best decisions for the people around me, not just myself.”

Innovation

I built Copart’s culture on change and embracing new ideas.”

“I’m not afraid to break the mould and go where no one else has gone before. When people tell me, ‘Willis you can’t do that,’ it just pushes me to show them I can.’”

“I expanded the [scrapping] business to a large dairy farm next door and got it zoned so they could rent out some of the land to local dismantlers. Customers going to the other dismantlers would have to drive by our yard first, which led to more business. I would also purchase parts from other dismantlers and turn them for a profit. Dad didn’t like this at all. He didn’t want me helping his competitors make money - even if it meant we made more money.”

My dream was to build up the parts side of the scrap business was starting to come true. As I was able to buy better cars, [I] was able to stock more and better parts, including motors, transmissions, and rear ends. As this happened the business relied less on scrap iron, which gradually went from the main revenue stream to a byproduct of the parts business.”

I was the first in the industry to dismantle parts, not just cars. By the time I was done, I could get $700 for the same parts sold separately that were sold together by my competitor [as a whole engine] for $400. And the customer was happier. I also had fewer buy-backs because I didn’t have to guarantee all the parts on the motor. This caused my profit margin to far exceed that of my competitors.”

“I knew that to really compete with other auto dismantlers in the Sacramento region, I would need to do something different... If we were going to compete, we needed to specialise in a car the other dismantlers in town didn’t want to carry.”

“I’m not the kind of guy who says, ‘Look, kid, I’ve been doing this for twenty years, and I’m not interested in changing.’ I never have a problem if someone tells me something is broken. I have always wanted to do things better and improve on the model.”

Taking chances and changing things up made Copart what it is today. It’s the spirit of the company, and that spirit will never change.”

Build A Brand / Geographic Reach

“Now a public company, Copart had the resources and reputation needed to expand its footprint so we could not only keep up with IAA but also continue to be able to give big insurance companies a broader geographical range of services.”

I wanted to be able to build a network of locations so I could take on national contracts. I didn’t want just to be able to handle some of Allstate’s cars; I wanted all of them.”

“I just didn’t want to grow to grow. I wanted to build a brand. I wanted anything with a Copart logo on it to run the same way - same computer system, same pricing, same way of treating our employees - so people started relating our name to a certain way of doing business.”

Technology

“Most people kept paper records of all their parts. But I was one of the first in the business to computerise inventory. I spent $110,000 on a large reel-to-reel computer, about double the amount most people spent on a house at the time. Other people thought I was crazy (or stupid - or maybe both) to spend so much money on a computer for a wrecking yard. But I was never afraid to spend money on technology if it could help us be more efficient. And it turned out that the whole industry would end up computerising once they saw the benefits it gave people. As large and foreign as this machine seemed back then it paid off because it gave me a complete picture of the business and the inventory, which in turn gave me more knowledge and control over the yard which helped me make money.”

Any company today has to pay attention to technology and how the world is changing and incorporate that if it wants to survive. You can’t do things the same way and expect to be around in ten years. The world moves too quickly.”

“VB2 [a Virtual bidding tech platform] put Copart ahead of the technology curve. But it had not just been VB2. The fact we computerised early, the company developed CAS to share data and keep track of all its inventory, and [we] embraced the internet when it first came out all led up to Copart being prepared to develop and implement technology ahead of its competition.”

Ideas

Ideas can come from anywhere - even John Wayne. One rare night, I was in the trailer watching an old John Wayne movie about WWII. In the movie John Wayne kicked down the doors of a Quonset hut that housed the officer’s club. The movie made me think of my own prefabricated, semicircular steel hut in a new light. I thought, Well, if they can make it look decent in the movie, decorate it all up for officers, maybe I can do that.”

I’d mine other wrecking yards for ideas I could take home and implement. We’d suck in all their ideas, and they didn’t care if they told us because we weren’t direct competitors.”

You have to do your research and if you don’t stay on top of reading about other people’s ideas, you never come up with ideas yourself. It’s good to learn from others.

Learn from Walmart. What made the U-Pull-It model [wrecked cars on stands where hobbyists/home mechanics pay an entry fee to come in and dismantle cars parts themselves] unique was the high volume of cars it could turnaround. I liken it to the Walmart of dismantling.”

Make your business like Disneyland. I got my inspiration to create new services within my companies from Disneyland. Disneyland to me was a model of how to build businesses within a business. I paid a fee to get in the gate. And then I went to a restaurant, I paid to eat and drink. Then I paid at the gift shops. I paid for tickets to the rides. Everything I did was another business. Okay, I’ve got to find a business that has multiple revenue streams within it. Disneyland taught me about building other revenue streams. Every time you can add revenue streams to the same pipeline, the profit margin change drastically. You are putting more through that pipe.”

“If [employees] have the ability to speak their mind, the company benefits too because that’s when great ideas are born

Tone From the Top

I never expected anything from anyone that I wouldn’t do myself. I used to dismantle cars alongside my employees.”

Value Employees

If employees are happy, that translates directly to how we treat our customers and how we can move forward as a company.”

I always made sure I knew what the average pay was in the area and paid more and gave more benefits. I didn’t want people to leave, and I didn’t want them to be in a union.”

Tell them you love them. We learnt it wasn’t just enough to treat your employees nice, give them good benefits, and hope they got it. We treated the employee nice, gave them as many benefits as we could, and treated them like we didn’t want them to leave - because we didn’t. But we didn’t tell them we loved them; we didn’t show them how much they meant to the company. That’s where we had fallen short.”

Culture

From 2002 Copart was going to be a company that didn’t just hire based on skill-sets or IQ. It was going to hire based on attitude - EQ. We were going to be a company in which people liked their co-workers and had fun at what they did.”

Becoming a big, public company, we decided, didn’t mean we had to sacrifice having a culture where people worked hard, had fun and were rewarded for it.”

Mistakes

Admit your mistakes. Everyone makes bad decisions, and I’m not immune. The good thing about Copart is even though sometimes we have bad ideas, we learn from them and correct them. Any time you make a mistake or bad news comes and you’re really upset about it, remember there’s a lesson in it. Just chalk it up as a lesson, and don’t let it happen again. When you lose a customer because you bid wrong, don’t get mad at the customer. Ask yourself, ‘What did we do wrong to not get the contract?’”

Summary

Although I didn’t mention them above, Willis’ expectation that people weren’t going to fly as much after 9/11, but rather drive, gave him the insight that more cars were going to be wrecked allowing a better preparedness for growth. It’s little kernels of history like this that can spark ideas in situations we face today.

Willis’ analogy of the ‘local sewer system’ is a useful mental model when thinking about other businesses. So is inverting the pricing mechanism for salvage auctions from fixed prices to a commission structure that instantly aligned the customer with the auctioneer. It created a win-win relationship where both parties benefited from higher prices. When combined with the national scale to reduce the transportation costs of salvaged vehicles, it provided a competitive advantage difficult to replicate. Applying technology for efficiency and geographic reach [via virtual bidding] made the company’s moat even wider. The makings of a Lollapalooza effect!

“Extreme success is likely to be caused by adding success factors so that a bigger combination drives success, often in non-linear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often results are not linear. You get a little bit more mass, and you get a lollapalooza result.” Charlie Munger

While not all great businesses share the same characteristics, they often have at least a handful that unify them. In the case of Copart, those common themes include being close to the customer, win-win relationships, scale advantages, a large runway for growth, network effects (connecting more buyers and sellers), constant innovation, embracing technology, valuing employees, good culture, first mover advantages, sticking to the knitting and tone from the top. And let’s not forget the creative fanatic driving the whole process, Willis Johnson.

Sources:
Junk to Gold’ by Willis Johnson. 2014. Westbow Press.


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