Learning from Simpson Manufacturing's Barclay Simpson

The origins of the Simpson Strong-Tie [SST] trace back to a simple request in 1956 when the late Barclay “Barc” Simpson’s neighbour asked for help bending metal strips used to secure roofing joists. At the time, Barclay’s business focused on screen doors, but he had the right equipment for the job. As he continued assisting with these metal connectors, he saw a larger opportunity in manufacturing structural components for the building industry. In a strategic pivot that would have impressed Charlie Munger, Barclay sold his screen door business and committed himself full-time to producing metal supports for builders.

This shift marked the beginning of what would become a progressive, community-centred business model that went beyond profits. In the enlightening book Strong Ties: Barclay Simpson and the Pursuit of the Common Good in Business and Philanthropy, the profound impact of Barclay’s leadership and vision is carefully examined. His commitment to profit-sharing, stakeholder engagement, and expanding the definition of "value" in business challenges conventional wisdom. Barclay believed that true business success couldn’t be measured by shareholders alone, but should encompass employees, families, and the broader community. This philosophy of shared success would ultimately shape Simpson Manufacturing’s remarkable growth and reputation.

Barclay’s decision to enter the building components industry came at a crucial time: building standards were minimal, the West Coast faced a post-war housing boom, and California’s seismic activity underscored the need for safer structures.

Barclay recognized that by having Simpson products specified on architects’ plans, what were once commodity-like metal components could become essential, branded products. This insight was pivotal. By creating and rigorously testing an integrated system of metal supports, Simpson Manufacturing ensured that architects, engineers, and builders could trust their products for structural safety and durability. This strategic move helped elevate Simpson Manufacturing from a manufacturer of basic construction components to a leading brand in the industry, synonymous with reliability and quality.

Warren Buffett is known for acquiring great businesses, and while many owners have embraced his offers, some, like Barclay Simpson, have turned him down. Given Buffett’s interest in building materials, evident in Berkshire Hathaway's ownership of competitor Mitek, Simpson Manufacturing was a natural target. But Barclay, who valued his employees' welfare and believed that long-term stability was vital for their future, refused. As he explained, “I’m still the biggest shareholder—this company is not for sale. I don’t care what the price is or who wants us. Because a few years back, why, Warren Buffett really wanted us.”

Barclay’s approach wove together the principles of profit-making and the common good: a profit-sharing system gave employees a direct stake in the company’s success, while a nonhierarchical, decentralised management style empowered people to make decisions at every level. The company also promoted diversity early on, from the desegregation of plants in the 1960s to inclusive hiring practices, reinforcing Barclay’s conviction that the true capital of any business is its people.

I recently enjoyed Strong Ties: Barclay Simpson and the Pursuit of the Common Good in Business and Philanthropy by Katherine Ogden Michaels. The quotes below are drawn from this book, supplemented by excerpts from An Oral History with Barclay Simpson, housed at the Bancroft Library. This case study offers a compelling look at the elements of enduring business success and the principles that make it possible.

Simpson Strong-Tie vs S&P500 1994-2024 Normalised [Source: Bloomberg]

Philosophy

“Take your responsibilities, but not yourself, seriously. After all, has been on this earth for over two-million years, and earth is but a grain of sand in the universe.”

Obliquity

“Making a ‘profit’ is a manifestation of irrefutable value and seriousness, not simply an interest in making money per se.”

Customer Focus

“Right from the start, we have worked on building a culture where each one of us realised that his boss was not the person above him at the company, it was the customer.”

Source: Annual Report 2014

“The focus, the obsession, is on customers and users. We need to be constantly reminded that none of us has a job without customers. You want to build trust with your customers. You want to get to know them, show interest in their lives, make them feel important, and then you may find out that they get interested in you and your products much more than they would if you just fill an order. No matter what your position in the company, it's vital that you keep the customers and users in mind, whether you have direct contact or not. What do they need from you? How can you help make their jobs easier? How can you improve their lives?”

“We have to deserve the business, and we have to make money for our customers as well as for ourselves.”

Quality

“A company can only be temporarily successful without a quality product. The people in our company can feel proud of what our products can do, and each and every person in the company plays a role in ensuring that our products meet high standards.”

“At a certain point, Simpson Manufacturing pulled ahead [of the seven or eight competitors]. What ultimately gave them the edge was the quality of the Simpson product: We won't make a substandard part, and we won't sell a substandard part. We won't sell a part were not a hundred percent behind....Barc doesn't want his name on it.” KM

Creating a Brand / A Verb

“Barclay had long felt that the failure to create a brand name for his product was at the heart of his father's inability to build a truly profitable business… The concept of branding— the transformation of a generic tissue into a "Kleenex," or the "Xerox" copier machine into an internationally used verb - is an ancient precept of American business, perhaps all business.. Barclay's early focus on the importance of creating a named product was transformative, ultimately changing him from a small local businessman to the chief executive of a global company, whose brand name-Simpson Strong-Tie [SST] became interchangeable with a set of core products that have become essential to modern construction.” KM

Competitive Advantages

“What is it that is crucial to building a successful organisation? It’s the culture!”

“Barclay recognised an important gap in the rival business plan, gleaning the chance to create a brand based on the integration of manufacturing, marketing, and customer service that would directly target engineers, architects, construction firms, and other end users. In 1956, strict building codes were neither widely diffused nor systematically enforced. In this, Barclay saw a chance to link product development to engineering, and from that baseline to the establishment of precise building specifications.

Simpson Strong-Tie Connector

This realisation turned out to be prescient, especially in California, where the threat and reality of earthquakes created strong impetus for the drafting, diffusion, and enforcement of ever more exacting building codes in the coming decades. Simpson fortunes were to ride side by side with this new art and science of specification, which in large part the company also helped to shape first at the local and, eventually, at the global level.” KM

“There was a moment of transition - early on - when Barclay said, ‘We’re not a job shop making pieces of metal on demand. Were making a technical piece that carries loads throughout a structure.’ That was the beginning.” KM

“The thing you need to understand, it’s not just connectors. It’s not just screws. It's not just epoxy or tools. It's a whole systems approach to building. It's not like we sell carpet or linoleum or tile or cabinets or roofing material. All our stuff, once it's in and covered up, you don't even know it's there. You only know it's there if your house doesn't fall down. This is what we sell.” KM

Source: Annual Report 2017

“Engineers loved the products produced out of the continuous load path system, especially when Simpson Manufacturing started to systematically test and design connectors that both met and helped modify key specifications for residential building. These products offered engineers a new level of security in an era when seismic- and wind-related codes were becoming ever more stringent.” KM

“Architects loved them, too, because they offered much greater design flexibility in dealing with the load-bearing elements of a structure.” KM

“Clearly Barc's initial decision to make the leap into connectors was motivated by his instinct that there was the potential for significant growth in the industry. But what he managed to build was a business that moved way beyond the marketing of widgets-creating instead an animated world of people solving big problems using basic materials.”

“The connectors offered guarantees backed by the faith and insurance of Simpson Manufacturing and made up a relatively small portion of the overall cost of construction.” KM

Six-story building test - NHERI UCSD shake table.

“The initial insight and lasting conviction that effective testing of products was the most direct way to build trust among their target audiences of engineers, architects, and general contractors. The first test press was superseded by increasingly sophisticated devices, and, in time, Simpson products were to help shape the building codes and specifications they were designed to meet. In this marketing and manufacturing model, product development drove the drafting and enforcement of standards across the industry. Barc's early understanding of this direct linkage was indispensable in building a brand that would make the Simpson Strong-Tie appellation synonymous with a set of engineering standards based on high-quality steel, design, testing, and replicability.” KM

“The goal was to have the SST product directly specified in the drafting of blueprints, to provide engineers and builders with a load-bearing element that they could be sure wouldn't fail. Barclay believed that the key to creating this trust was the use of high-grade raw materials as well as constant testing of the product to make sure it could bear the loads being advertised - a product backed up by empirical proof, not just formulae on paper. Frugal as he was by nature, he realised that to build the Simpson brand, he would need to invest heavily in R&D so as to have a product that engineers and construction people throughout the industry would call by name. Over the years, this double-barreled business model resulted in the development of a product that was not the least expensive in the industry, but which engineers trusted over the cheaper commodity spin-offs produced by SST competitors.” KM

“Another early and key salesman brought on at Simpson Manufacturing was Hugh Oliphant... Oliphant believed that if they could get Simpson products specified on an increasing number of architects' and engineers plans, then Simpson would control the market. This turned out to be a shrewd strategy that ultimately set the product apart from its competitors.”

“They had the foresight to see that specifications were important… It didn’t mean that you got the job all of the time, but what it meant was that your product was on the plans.” KM

“We don't make commodity products, per se. We take a commodity product and make it highly specialised and better. We’re making a precisely engineered product that can support US technological input and US labor costs.. Our product has such a small cost - it's like a three- or four-dollar product - even if you make it cheaper in China, you couldn't ship it cheaply. Our product's one where you try to manufacture it near where you can use it.” KM

“Even if it was cheaper to make our product somewhere else, the logistics are a very important component of our brand. We don't want our customers to have to inventory. We'll make it. We'll store it. We'll get it to you. Again, this is part of the secret sauce. Why can we charge 20 percent more than anybody else? It's because we make a better product and we'll provide you all the information you need to use it, we'll hold the inventory, and we'll get it to you the day after you order it.” KM

“Simpson has a higher proportion of non-commodity products than most basic manufacturing companies.” KM

Small Cost versus Value Add / Pricing Power

“If you were a contractor building a $400,000 house, the Simpson portion of your house is probably— I'm winging it - 400 bucks. So why would you care? The reason you care is that with that $400 worth of Simpson stuff, you can build your house incredibly faster and stronger.” KM

“From day one, Barclay’s aim was to create the most trusted rather than the least expensive product in the industry. He and his growing sales force did this through linking sales directly to end-users, product development, and adaptation.” KM

Share the Profits / Promote Ownership

“Barclay's early design of a multilevel compensation strategy was unusual for its time -and, as it has turned out, for current times as well. The impulses behind this strategy demonstrate a rare set of convictions regarding how to build a successful business.”

“Barclay focused his strategy on providing employees with low-deductible health-care plans (way before this became a central American political issue), pension benefits, and, more radically, a quarterly profit-sharing system that has few analogues in the way American business was conducted at mid-twentieth century.” KM

“There was something radical in Barclay's early concept of compensation. This was the conviction that building employee commitment and productivity might best be accomplished through a very direct sharing of the wealth of the entire company on a quarterly basis - and that this short-term compensation vehicle should include people at all levels of the organization.

The most famous element of the compensation package is known as cash profit sharing (CPS). As Barclay originally conceived it, CPS involved the sharing of the net operating income of the business on a quarterly basis by salaried as well as hourly employees. In his own words: ‘The point was to make the company the employees' company as well as mine... that was crucial to their performance and to attracting good people and keeping them. I wanted to make it their company. If their division makes a lot of money, so do they. And again, ... the people...get a percentage. If they have a really good quarter, they can earn a ton of money. A ton. And their salaries are just average... It's worked extremely well over the years.’ His concept was simple: that everybody be all-in-together, all employees sharing both in the company's upside and downside.

In brief, that means that when the business does well, all employees split the profits, and when the company doesn't do well, there is no pool of cash from which to pay CPS, and this part of the compensation package goes away for a quarter or two until the business returns to profitability.” KM

“There is a 20 percent return to shareholders... so no employee benefits until we've made enough money that we show the shareholders that we earned a return on the investment and we've, there-by, earned the right to share.” KM

“What is indisputable is that more than any other single element in the Simpson compensation formula, the concept of sharing profits across the board on a quarterly basis has created a deep sense of vested interest among the company's employees in both the near- and long-term fate of the business. Certainly, CPS is at the root of SST's motivational system, yet it is not simply an incentivising tool but seems more in the nature of an ethical precept. At the core of the company's profit-sharing formula is a basic conviction regarding ‘fairness’, a belief that the distribution of the fruits of enterprise should be broad and wide rather than pyramidal.” KM

“Barlclay’s belief is that business growth and profits are directly linked to giving key players an ownership stake.”

“Under the ‘all for one and one for all’ principle, we make sure that everybody gets something... Few companies provide the benefits that we offer. We profit share down. We even give out stock shares. You get Simpson shares after you've been with the company ten years. You don't have to buy them.” KM

Simpson Manufacturing Annual Report 2005.

Separate Profit & Loss

“The only way that the people at a branch make a lot of money is if the branch makes a lot of money. And the granting of stock options depends on the branch making its profit goal, which is true of the people at the home office, also.”

Hire Smarter

“Great companies are built with great people. When I got into this business, I decided that I'm no genius, so I need to hire the very best people. They make the company the kind of place where they don't want to go anywhere else. They want to stay here and help build it.”

“I busted my butt to hire first-class people and make the success of the business their success, through various ways.”

“You hire smart people, then get out of their way. For Barc, this was the true religion.” KM

“Barclay observed that it is not good management practice to have geniuses at the helm of a company. Rather it is the job of a CEO to find brilliance and let it wander where it will. In his mind, the fate of the organization depended on giving people the freedom to do what they are best at rather than trying to fit them into the confines of a strict job description.” KM

Reading and Learning

“Barclay learned to love reading, a devotion that persisted throughout his life.” KM

“All his life, Barc was a voracious reader and auto-didact. His eclectic interests ranged from Epictetus, a Greek Stoic; to Mary Baker Eddy (founder of the Church of Christian Science, and author of Science and Health); to Viktor Frankl (survivor of a Nazi prison camp and promulgator of a therapeutic methodology called "logotherapy," which focuses on the importance of "attitude" in human actions); from the Bible to the Communist Manifesto; from Shakespeare to Michael Connelly; from seventeenth century Dutch painters to contemporary artists; and from theories of business management to early childhood education. His immersion in these subjects and authors shaped his view of the world - but none as intensely and abidingly as Abraham Lincoln.” KM

“Among Lincoln's fabled virtues, the ones that Barclay incorporated most effectively into his business (and his personal life) were the ability to listen and to change his mind (as Lincoln did on slavery); an innate commitment to fairness; a search for-rather than fear of-intelligence and excellence in others; a capacity for collaboration even with potential rivals; and a powerful ego, toughness, tenacity, and strong sense of irony about power and presumption. These beliefs-chopped, diced, and spiced in various ways by the people with whom Barc surrounded himself-became key ingredients in the ‘secret sauce’ of the Simpson Company.” KM

“Barclay's capacity for self-schooling was to last a lifetime. It was, in fact, a continuing way of life for him.” KM

“Critical to Barclay’s intellectual makeup was a deep curiosity about human motivations… He was committed to finding patterns in human behavior. This took the form of a lasting interest in psychology, which may have been based on an acknowledgment of the mystery of human personality as well as the nearly opposite desire to understand and categorise human behaviour in the service of the kind of predictability that might lead to productivity.”

Autonomy and Decisions at the Edge

'Strong Ties” by Katharine Ogden Michaels

“SST prized autonomy over standardization.”

“In building a business, when I took this eight-week class at the Stanford Business School - one of the professors said one sentence, which made the whole thing worthwhile. This was at the time when businesses were top-down. He said, ‘Get the decision down to the lowest level possible.’ I listened to that and I thought, ye gods, what a fantastic idea. We ran the business that way ever since.”

“Don’t tell your people how to accomplish the goal. If they ask you questions, you try and answer them. But you build strong people by letting them figure out how to do it. You tell them what the goal is; you let them figure out how to do it. If they want to talk to about it, fine. If they don’t, that’s all right, too. And they’re going to make some mistakes. But in making those mistakes, you build much stronger people.”

“Local control was for Barclay a fundamental business principle, a direct outgrowth of his insistence that decision-making should take place at the lowest possible level. At its core, Barc's belief in autonomy was ontological rather than simply operational - a principle grounded first and foremost in his personal psychology, which combined a profound distrust of complex, impersonal reporting structures with a conviction that taking personal responsibility is the engine of a productive life.”

“A coherent philosophy at the company encouraged personal initiative and pervaded all aspects of the business: There was never any fear of stepping outside the boundaries.. the best idea always won, whether it originated with a plant worker or at the highest levels.”

Tone at The Top

“Tone at the top - we do well with that, and it is Barc that has really set that tone. The dominant characteristic of his leadership is his very strong sense of propriety... and that sense of propriety is also egalitarian.”

Value All Employees

“Everybody in a company is important. Everybody. That's absolutely crucial. You must do everything you can to make people feel that they're valued. Our company culture says that everyone gets recognised for their contribution, no matter the role. There are no big shots, no parking places. It's always been first names—nobodies Mr. or Ms. You're Joe or Carol or Peter or Barclay. We're all working together toward the same goal. We rely on each other to be successful. We show each other respect.”

“We’ve never had anything but first names. Never anything else. Parking places? Nobody’s ever had one.”

“Taking care of employees is central to the mandate of any business and the key to its enduring success.”

“A key element of what made SST different is how Barc treated his people, allowing them to develop, encouraging their education, realizing the value of the employee or the person. It's just that appreciation of how valuable your people are.” KM

Family Culture

“For Barc, the key to success remained what it had always been: taking care of his employees and running his very particular kind of ‘family’ business even from within the jaws of the global marketplace.” KM

“I know it sounds funny to say, but Simpson has been a big parent to all of us who joined this company. That's why you very seldom hear about someone leaving. The turnover rate is very, very low here.” KM

Reciprocation

Barclay Simpson (Source: 2012 Annual Report)

“For Barclay, the most important part of the leadership equation - and the source of the creativity from which greatness comes - were the people themselves. From the early days, his method was based on a commitment to reciprocity, a belief that power shared begets success much more effectively than power hoarded.” KM

Empowerment

“One of the core principles that Barclay had pursued in building Simpson Manufacturing, a capacity to respect and support his employees and colleagues as a way of encouraging personal success as well as that of the company at large. This instinctive, yet intentional giving of power to others is a rare quality of the very best leaders. When combined with a certain kind of moral authority and charisma, this brand of leadership moves and compels rather than coerces.” KM

Promote from Within

“When people join our company, they don't come for a bus stop; this is a career. When we hire someone, they find out when the job above them becomes available, they've got a shot at it.”

“We promote from within; very seldom do we go outside to fill a key job.”

“This idea that employees could build a career at the company, in turn, affected the way Barclay first constructed Simpson's rather unusual compensation system, as well as shaped his commitment to hiring and promoting from within the company wherever possible. In both instances, his methods were aimed at giving his employees a tangible stake in the business and in rewarding loyalty in direct and transparent ways.” KM

“I have never seen a senior leader cling to the philosophy of promoting from within more than Barclay.” KM

Business is People

“We are a successful company, and attracting and keeping the best people has made it all possible. Great people. That's the whole secret.”

“Barclay was an early prophet of a business creed that put people at its centre.” KM

Frugality

“As was true of most of the generation that came of age during the Depression, Barclay internalised a stern frugality, which in his case he attributed also to his Scottish heritage by way of hardscrabble Vermont.” KM

“The shabbiness of the plant and office facilities in San Leandro reflected Barclay’s committed frugality, dramatising his deep and continuing preference for substance over show.” KM

“Barclay’s insistence on saving a dime and not allowing himself special luxuries - along with his famously battered, dusty cars - were sources of amusement and wry respect among SST employees, becoming a key element in the emerging culture of the company.” KM

“Barclay hates to waste a nickel of shareholder money... He was the only person I knew who took the bus in from JFK to downtown rather than a cab. And that applies to all aspects of his leadership style.” KM

Resilience and Attitude

“Attitude conquers all. You just think about that. You’ve got some project that, God, you worked hard, you’re trying to get it done and you can’t get it done. You have to accept it and get on. Don’t stew about it. So I think that sentence, I’ve tried to follow it. Well, I did follow it. Maybe sometimes my attitude was lousy, but I followed it. Then there are a couple of books that I have found important… This one is more important — Man’s Search for Meaning, by Viktor Frankl. I saw this book probably sixty years ago. He wrote it in 1947, when he was out for a couple of years, out of a Nazi concentration camp. That book, I’ve found extremely important.”

Respect and Trust

“Long-term relationships are built on trust and respect, and this applies to your everyday job. Show respect and build trust in everything you do with your customers, users, and with your fellow employees. Always be straightforward. Don't just tell people what they want to hear; tell it like it is.”

Long Term View

“Good business leaders focus on the long-term outcomes, not short-term gains.”

“The business’s view is long-range. It’s people never sacrifice tomorrow for the sake of today. So no matter how much you want the sale, you never exaggerate what our connectors can do, in order to get the business. It’ll catch up with you. You may lose the sale right now because the competitor has done that, but long run, you’ll be okay.”

Source: Simpson Annual Report 2013

“We invest in markets, products, and projects that may not pay immediate or even short range returns, but should lead to future sales and profits.”

“In Barclay's mind, the most difficult part of the job came with the realisation that a very significant segment of investors is entranced with short- rather than long-term bets. It was a challenge, swimming upstream against a countervailing interest in quick gain.” KM

Earnings Guidance

“It is earnings, not investor relations departments, which drive the long-range price of a stock.”

“Barclay has no BS in him, his investor relations were open. Because of his large share of the ownership of the company, he could get away with some things that other people couldn't, but he was just remarkable, always stressing the long term and never speculating about how were going to do next quarter.” KM

“Barclay never would make a prediction. No guidance on stock price, no predictions.” KM

“Though the analysts would try to pry predictions from him, he refused to embellish or forecast the economy or markets.” KM

Business Fanatic

“[Barclay] lead Simpson-named businesses for nearly sixty-seven years, increasing annual revenues over the years from $100,000 in 1946 to net sales of $706.3 million in 2013, the year he retired from the board of directors of Simpson Manufacturing, to $1.27 billion in 2020.”

Tenure

“I’ll bet you that you’d have a lot of trouble finding a company that has not lost almost any employees. Once in a while one leaves, yes. Usually an engineer or somebody who’s big in accounting. But very seldom. I think you’ll have trouble finding a company that has the percentage who stay there. It is because of the benefits that make them feel that it’s their company. Not just the big shareholder, but their company.”

Financial Discipline

“[From Shakespeare’s Hamlet] ‘Loan oft loses both itself and friend, and borrowing dulls the edge of husbandry’. This above all.”

Mistakes and Innovation

“It encourages innovation and creativity, by recognizing that success seldom is achieved without taking risks and making mistakes along the way. If you don’t foul up occasionally, you won’t make real progress; but try not to mess up too much.”

“There was a lot of experimentation and failure - and learning from failure.” KM

Source: 2016 Annual Report

“Because of its enduring openness to innovation and expansion, Simpson Manufacturing engaged in more than a few ventures and products that did not succeed, but the company had the continuing momentum of the core connector business to fall back on. Barclay observed that the most important thing about making a mistake is admitting it, cutting your losses, and moving forward without regrets.” KM

“A tenet that mirrors Barclay's own life practice exhorts employees to take risks, to embrace innovation and creativity, and to recognise that progress can only be achieved by experimentation and failure along the way (though one should try to foul up as little as possible).” KM

Asking Questions

“If you’re striving to understand something, never be afraid to ask the ‘dumb’ question. Pursue it in detail until the answer is clear. So often in a class, something comes up, and you think, wait a minute—what’s the answer to that? But you hold back because you don’t want to seem like a ‘dumb-head.’ Well, don’t. Ask it. If you think you’re the only one wondering, you’ve undoubtedly got company.”

Summary

Barclay Simpson recognized early on that the key to lasting business success was not only offering a product that added real value to customers but also building a team of exceptional people. Just as the metal connectors Simpson Manufacturing produces form the foundation for stronger, more reliable buildings, Barclay understood that a strong business required more than just good products—it needed a strong, interconnected culture. Riding the tailwind of post-war construction and growing regulatory building codes, Barclay’s go-to-market strategy was to position Simpson Strong-Tie as the industry standard—synonymous with quality—creating a brand that customers sought by name, not just a commodity.

Barclay’s insights into human psychology helped him build a culture of empowerment and trust within his company, giving employees the freedom to experiment, learn from mistakes, and grow. By sharing the profits of the business with all employees and promoting a decentralised structure with delegated authority, he created a robust organisational framework where each part worked together to create greater strength and resilience. This interconnectedness allowed Simpson Manufacturing to withstand the challenges of economic cycles, consistently deliver outstanding customer service, and achieve long-term success.

The company’s unique business model even caught the attention of Warren Buffett, who tried to buy the business, recognising its rare ability to create sustainable success. As Charlie Munger might say, businesses like Simpson’s are exceptional; when you find one, hold on. They provide a blueprint for long-term, enduring success that lifts not just the company, but its employees, customers, and communities.

Sources:
‘Strong Ties: Barclay Simpson and the Pursuit of the Common Good in Business and Philanthropy,’ Katherine Ogden Michaels with Judith K. Adamson, Rare Birds Books, 2022.
‘Barclay Simpson: An Oral History- Interviews conducted by Neil Henry in 2012 and 2013,’ The Bancroft Library Berkeley, California. 2013.
‘Simpson Manufacturing Annual Reports,’ 2001-2023.
‘Barclay Simpson's Nine Principles of Doing Business,’ Interview, 2013.

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Learning from J. Hyatt Brown’s Brown & Brown

A few weeks ago, I was at an investment conference with my twenty-year-old son, who is studying commerce at university. The event featured presentations from a range of highly successful companies, each with their own unique story of growth and triumph. After the second presentation, my son turned to me and said, “Dad, it was like that presentation was written for you.” The company in question? Brown & Brown.

As someone who has long been interested in the insurance brokerage industry, I decided to take a closer look at Brown & Brown. The more I learned about the company, the more I saw that it embodied many of the qualities I look for in great businesses.

Insurance brokerages, uniform sales, HVAC distributors, auto and airplane parts dealers, car rentals and chicken sandwiches may not seem like the most thrilling businesses. Yet, it is often these unassuming sectors that yield the most impressive returns. Since 1993, insurance broker Brown & Brown has achieved a compound annual return of approximately 18.5%, outpacing the S&P 500’s 10.5% annual return.

The insurance broking industry is both fascinating and essential, playing a critical role in helping businesses secure the right coverage and providing vital support when claims arise. Companies like Arthur J. Gallagher & Sons, Marsh McLennan, Aon, and Willis Towers Watson have also delivered market-beating long-term returns, underscoring the industry's resilience through various economic cycles. Notably, the average age of the ten largest American insurance brokers is exactly 100 years. Among them, Brown & Brown stands at the pinnacle.

It may not be surprising to hear that Brown & Brown is a prime example of a company that shares key qualitative success traits with other iconic organizations we’ve featured - Enterprise Rent-A-Car, LVMH, Chick-fil-A, Les Schwab Tires, Heico and Cintas. Each of these companies understand that true success hinges on empowering people, decentralising, fostering a culture that prioritizes relentless customer focus, and making strategic, long-term decisions.

Brown & Brown’s journey began in 1939 when J. Hyatt Brown’s father founded a small insurance brokerage in Daytona Beach, Florida. In 1959, Hyatt joined his father and brother at the agency, which was generating approximately $45,000 in annual revenue. Hyatt quickly recognized the potential for growth and implemented a strategy focused on aggressively securing commercial accounts, which transformed the agency at an impressive pace. After his brother pursued a different career and his father retired, Hyatt took full control by acquiring the business in 1963 for $75,000. His leadership style, built on unwavering integrity, employee empowerment, prudent financial management, and a relentless drive for performance and discipline, established the core values that became the foundation of Brown & Brown’s distinctive culture and sustainable growth. Today, those values continue to shape the company’s success, with Hyatt’s son, J. Powell Brown, leading the organization into the future.

The company's remarkable growth is propelled by a decentralized structure and an entrepreneurial spirit, where local teams operate with the independence and accountability of small businesses, delivering personalized service and superior results. Brown & Brown’s disciplined, long-standing acquisition program is also a key driver of success. By prioritizing cultural fit and building relationships over time, the company integrates high-quality businesses seamlessly, fueling long-term success. This strategic blend of organic growth and carefully selected acquisitions has established Brown & Brown as a prime example of how aligning culture and strategy can lead to consistent, market-beating performance.

I enjoy exploring exceptional companies to uncover the unique traits that fuel their investment success. Aligning your portfolio with these compounding machines has been a proven strategy for achieving long-term investment success. Below, you'll find some of my favourite insights gleaned from Brown & Brown annual reports, interviews, and published articles.

Brown & Brown vs S&P500 1993-2024 normalised [Source- Bloomberg]

Customer Focus and Exceeding Expectations

“At Brown & Brown, what makes us the same is a fierce passion for exceeding our customers’ expectations – every time. Every division of our Company and every teammate contribute their unique talents and skills to this unifying mission.” J. Powell Brown

“When we put the customer first, we know with great confidence that it will all work out for Brown & Brown in the long run.” J. Powell Brown,

“We're not just an insurance agent or an insurance broker, we are business partners. That's the way we think about it, that's the way we train, that's the way we enhance.” Barrett Brown

“The entrepreneurial spirit is deeply embedded in our culture, empowering teammates to do what it takes to provide best-in-class solutions and service.” J. Powell Brown

“While our competitors are primarily focused on the transaction, we teach our team to prioritize customer focus. That means learning to ask the right questions, really listening to the answers, and understanding the unique needs of each customer. Our continuous training is comprehensive, but it all comes down to one core principle: When the customer comes first, everything else takes care of itself.” J. Powell Brown

Long Term

“At Brown & Brown, we think long term and not merely quarter-to-quarter. We think about next year, three years from now, five years from now, and beyond, with our focus on cash flows and how to invest them wisely. By operating this way, we have consistently outperformed the S&P 500 and the other publicly traded insurance brokers.” J. Powell Brown

“We are trying to optimise returns over a long period not maximise them. You don’t create long term value in a sprint.” Andrew Watts

“We don’t try and think about beating the next quarter as it might compromise a result in the next 6 quarters.” Andrew Watts

“We don't manage the business quarter-to-quarter. Now, the analysts want to know quarter-to-quarter, and some of you, not many of you, but some of you out there as investors do get excited about the quarterly changes. Oh, the margin's down here, the margin's up, the growth rate here. We don't think of it that way. All right. We report every 13 weeks, we have a scorecard, we understand. But we think about it a year, 3 years, 5 years, 10 years, 15 years.” J. Powell Brown

“We don’t mind investment that takes us backwards, if it adds long term value.” Andrew Watts

Promote Ownership

“Twenty-one percent of the company is owned by teammates. Sixty percent of teammates are owners. If you own a share you will care more. It’s something embedded in our DNA in the 1970’s. We think it’s a real differentiator.” Andrew Watts

“We have 60% of our teammates are shareholders. That creates a different mindset in the organization. How you make decisions is different if you look at that as your money? How you lead is different when you think that the investment you're making matters? Our teammates think about our business, they care, they ask the questions.” Julie Turpin

Decentralisation & Empowerment

“What differentiates us? And I could go through all of these things, but what I want you to know is this. We're a decentralized sales and service business. That does not mean that behind the scenes that we don't standardize certain deliverables, IT, finance, internal audit, things like that. That's different, but the individual offices dictate what they go after, the people they hire, the services they provide, we have a suite of services. And sometimes those services are not provided from an office, the individual office that is going after the business.” J. Powell Brown

Hyatt Brown

“In a local office, wherever it is, in upstate New York or in San Antonio, Texas, that local office is hiring the people. They're picking the kinds of business they go after. It could be school boards, it could be contractors, it could be housing authorities, public entities, whatever, and then they invest in that business. We are actually, we invest behind winners. If you show you can grow your business organically and through acquisition, we put our chips behind those people.” J. Powell Brown

“With those closest to our clients accountable for profitability, Brown & Brown eliminates layers of redundant management and reduces high overhead associated with centralized operations. Decision-making is streamlined, and Brown & Brown’s managers are empowered to act decisively and react quickly to changes in the market.” J. Hyatt Brown

“At Brown & Brown, we believe that our local offices perform their best when given the freedom to adapt to their markets. This decentralized approach has served us well in the past, and we are confident that it will continue to drive our company’s growth.” J. Hyatt Brown

“Our decentralized structure allows decisions to be made on a local level, eliminating rigid rules and bureaucratic interference that can slow progress and stifle new ideas.” Dan Williamson

Source: Brown & Brown - Company Overview - 2024

Separate Profit Centres and Local Integration

“Much of our success grows directly from our decentralized structure in which our profit center managers are charged with both the authority and accountability for success. Placing decision-making authority at the profit-centre level, rather than at the corporate level, has resulted in superior customer service, higher pre-tax margins, improved operational efficiencies and, ultimately, increased profitability. By assuming the ultimate responsibility for all aspects of running their profit centers, Brown & Brown’s managers act essentially like entrepreneurs who have a personal interest in their agencies’ success. Our efforts to create a sense of ‘ownership’ among our employees is supported by a bonus program that plays an integral part in our compensation package. This well-devised compensation structure rewards decisions that result in higher operating profits. Conversely, poor decisions that negatively affect operating profits cost managers money in terms of reduced or forfeited bonuses” Tom Riley

“By locating claims and client service functions in individual profit centers where business originates, Brown & Brown ensures that its clients receive personalized service from local employees who have a vested interest in retaining and cultivating their business. Unlike many of the Company’s industry peers, who centralize their claims and client service operations in corporate offices hundreds of miles from their clients, Brown & Brown is committed to providing a level of personal service that only a local presence can offer.

While many companies rely on a team of client service representatives who have neither the knowledge of client accounts nor a personal stake in the retention of the business, Brown and Brown’s profit centres handle client service and claims functions for the business they generate. As a result, clients consistently receive the prompt and personal attention they deserve. Because each profit center operates much like an independent business, employees are held accountable for client retention numbers with a compensation system based on client satisfaction as well as financial performance.” J. Hyatt Brown

“By placing accountability for client-related decisions at the local level, quality service remains at the forefront of all business decisions. As a result, Brown & Brown has enjoyed superior client satisfaction, lower client turnover and ultimately higher profits. In an industry where client retention rates average 85%, Brown & Brown’s retention rate, which is in the mid 90% range, attests to the value of our decentralized model.” J. Hyatt Brown

“Each profit centre employs an accounting manager to act as its lead financial officer, closely monitoring costs and managing business at the grassroots level, where business originates. This approach leads to better control of expenses and ensures that financial information is reported accurately and promptly without duplicating the efforts of corporate accounting staff.” J. Hyatt Brown

“[In 1982] Brown & Brown reorganized to create a highly decentralized, flat system. Each office was divided into departments of business focus, such as small, middle and large commercial; personal; employee benefits; and bonds. Each department had accountability for profit and loss, and all direct and indirect costs. The Company measured everything and used the metrics to rank every office, department and salesperson. Those with the best rankings were recognized and honored. A monthly Revenue and Net Income – or Rev-Net – report was distributed to all profit centers to provide a snapshot of operating results and keep everyone focused.”

Confederation of Businesses

“We don't think of ourselves as a large organization. We think of ourselves as a bunch of very highly competitive teams that operate that operate under this umbrella called Brown & Brown, which creates a nimble, fast-moving organization.” J. Powell Brown

Internal Competition

“We are a performance based culture. It is very competitive. There are leaderboards everywhere. If you like being ranked you will like it here.” Andrew Watts

“Success can be directly attributed to the Company’s internal competitive posture. Entrepreneurial-minded employees thrive in the Company’s unique ‘survival of the fittest’ culture in which profit centre managers are afforded a great deal of autonomy with ultimate responsibility for financial results, fostering an entrepreneurial spirit. In this environment, profit centers are measured against one another and against their own past performance.” J. Hyatt Brown

“Even our highest-performing profit centres benefit from shared information as they identify ways to achieve even greater results. Just as athletes perform at higher levels with increased competition, we too benefit from the positive competitive environment that is so much a part of our culture. By vying for top positions, our strong ‘athletes’ can set their sights on achieving their goals and continually improving their performance.” Ken Kirk

Ordinary People doing Extraordinary Things

“The old saying that ordinary people can do extraordinary things bears true for us. While we consider that our employees are far more than ordinary, we believe that they achieve extraordinary results because they are challenged, empowered and rewarded for doing so.” Dan Williamson

Source: Brown & Brown - Company Overview - 2024

Culture

“The continuous growth and inculcation of the Brown & Brown culture remains central to our consistent and continued success. The culture of a business organization is the intangible webbing that allows some to rise while others languish.” J. Hyatt Brown

“Ask anyone at Brown & Brown the secret to the Company’s seven decades of success, and they will give one answer: CULTURE.” J. Hyatt Brown

"Recruiting is the life blood, continued enhancement is all about our culture. It's either magnetic attraction or it doesn't seem like the right fit, and that's okay, nothing wrong with that." Barrett Brown

"Our leadership team is built with operators, and everyone has sat in multiple seats and grown through those seats and contributed to the change that equals what we are today." J. Powell Brown

“Company leaders believe change is constant, but culture survives, so Brown & Brown is forever. The Company’s culture will survive for one nanosecond longer than the youngest person in the Company who continues to believe in its culture.” Annual Report 2008

“Our culture is the backbone of our success. Ask what sets Brown & Brown apart, and you’ll get the same answer: the Company culture.” J. Powell Brown

Source: Brown & Brown - Company Overview - 2024

Uncapped Earnings

“Brown & Brown’s successful track record attracts and retains quality individuals who aren’t threatened by competition. Rewarding individuals who display a strong work ethic and who enjoy writing new business is a hallmark of Brown & Brown. Top performers have no ceiling on their earning power, which is based on their ability to sell new business and retain existing accounts. Those top performers who meet annual goals are also awarded stock grants, driving them to continually seek out new opportunities.” J. Hyatt Brown

Transparency

“Monthly financial results are reported to all employees in both the income-producing units and integral service departments, the result of which is a team that clearly understands the company’s game plan and where they stand in relation to goals.” Dan Williamson

Lollapalooza

“A lot of people have always said, well, why are your margins higher than everybody else's? And the answer is, because we're disciplined and people say, well, that's easy to say. And the answer is no, it's actually true. We actually do the little things, the things that are really boring that don't sound like a big deal, we do them really well, maybe better than most, and it translates into high performance.” J. Powell Brown

“It is not about big ideas. It is about hundreds of small ideas, manifesting themselves every day between those we serve and those who serve them. To innovate. To experiment. To occasionally fail. To ultimately succeed and rewrite history. This is a drive that propels great companies to greater heights, and it is embedded in the culture of Brown & Brown Insurance.” J. Powell Brown

Source: Brown & Brown - Company Overview - 2024

Walk The Floors

“We have leaders, not managers. You can’t just sit in your office.” Andrew Watts

“The entire leadership team of retail - Everyone is an operator, everyone still sits in the room, everyone sits with customers. It's still my favorite thing to do, it is fun and it is valuable. And as a leader, if I personally don't have the ability to get in the trench with a teammate and deliver, then what am I? I sit on the egg. We don't do that. So, we have to do it. It's a must. But that's not force-fed. Everyone gets excited about that. That's our culture, we have teammates.” Barrett Brown

“CEO Hyatt Brown and President Jim Henderson personally visit each of Brown & Brown’s 119 offices on at least a twice-a-year basis. More than simply ‘handshaking tours,’ on these trips Hyatt and Jim participate in weekly area sales meetings and discuss business with local producers, reinforcing the strong work ethic that is the backbone of our philosophy. This personalized communication lets our people know that company leadership is part of the local team, with a keen interest in its success.” Annual Report 2003

Valuing Employees

“We have teammates, we don't have employees. We are all about athletic teams. We think we are these very competitive individual teams under this umbrella called Brown & Brown.” J. Powell Brown

“As an organization we want to be the leading global provider of insurance solutions for our customers. So, if you think about it, most organizations say it's all about the customer, and we agree it's all about the customer, but it really starts with teammates. And if you don't have the right teammates, you can't keep the customers. And so, fundamentally, we are a culture that has teammates at the center of the organization.” J. Powell Brown

“People want to be recognised for accomplishments.” J. Hyatt Brown

“Brown & Brown is in the people recruiting and people-enhancing business. The Company has built its business – and reputation – on hiring and grooming top talent, following the example set by Hyatt.” Annual Report 2008

Hire Better

“Every time that we go out to find someone, we try to get a person who is a little better, and a little better, and a little better, and a little better. Because that’s the way you build an organization.” J. Hyatt Brown

“If you want to be promoted, you have to find someone better than you to do your job because what lifts other people lifts you.” Jim Henderson

“Perhaps the greatest challenge I foresee is our ability to continue to find good people. The quest for human capital is extremely important.” J. Hyatt Brown

“Brown & Brown doesn’t just look for people, it looks for special people. Leaders must be able to attract other high-quality employees and be secure enough not only to bring in someone more talented than themselves, but also to understand why that is of benefit to themselves and the Company.” J. Hyatt Brown

“Executives aim to hire people who are better, smarter and more aggressive than they are, ensuring that each generation of employees exceeds the one before. Recruiting and enhancing outstanding employees is at the core of Brown & Brown’s corporate culture – coined an ‘American Meritocracy.’” J. Hyatt Brown

Diversity

“We are achieving success by bringing in individuals from numerous different industries and professional backgrounds. As long as the person has an entrepreneurial mindset, a self-motivated attitude, and is turned on by challenge and reward, he or she can be a leader on the Brown & Brown team. Our management team is constantly seeking ways to ensure that we hire only the highest quality people and then give them the tools which enable them to grow to their fullest potential.” J. Hyatt Brown

Entrepreneurial Spirit

“Brown & Brown’s culture promotes the entrepreneurial spirit in people.” Shane Caldwell

“We are an ‘intra-preneurial’ company comprised of people who have built their businesses from the ground up.” J. Powell Brown

Training and Continuous Learning

“Much of the Retail Division’s success is a direct result of our people. We have concentrated efforts on ‘growing’ our sales force through our internal ‘insurance school.’” J. Hyatt Brown

“100% of teammates are trained through ‘Brown & Brown University.’” J. Powell Brown

“‘Knowledge is Power’ is an old proverb that carries a powerful message. In order to continue to better serve our customer base, Powell Brown and Tom Finwall formed ‘B&B University,’ our in-house insurance training program, in early 2004. The program was designed to arm our producers with a broad base of technical knowledge. In addition to its emphasis on technical coverage issues and premium calculations, the school inculcates the discipline that is so important to long-term success in our business. The results have been exceptional.” Hyatt Brown

“‘Brown & Brown University’ continues to be a very important part of the acculturation of the new people who join us through acquisitions and who come to us from other industries, as well as a centre for reinforcement and improvement of our technical knowledge and sales training. We teach everything from basic property and casualty insurance to complex health care solutions. We will continue to invest in the training and development of our current and future teammates.” J. Powell Brown

“‘Brown & Brown University’ has been going strong for 22 plus years. It is a forever education environment that we're continuing to invest in and build in.” Barrett Brown

“Part of our Company culture is our endless pursuit of learning and sharing knowledge. ‘Brown & Brown University’ is a critical part of our ongoing education program, and is a key component of our relentless pursuit of talent development.” J. Powell Brown

Change

“While many are watching us with an eye as to whether our entrepreneurial culture is sustainable, we are moving forward with plans that allow us to constantly evaluate ourselves and to continue early change as opportunities arise.” J. Hyatt Brown

“The only constant is change” is part of our corporate culture.” J. Hyatt Brown

Growth and Cash Flow

“Growth is the mantra.” J. Hyatt Brown

“The real measure of how you are running a business is cash flow.” J. Hyatt Brown

“We believe at the end of the day, growth of cash and conversion of revenues into available capital are key to driving shareholder value.” J. Powell Brown

Acquisitions

“Acquisitions must be high quality and fit culturally. If we build relationships with acquiring companies over time we find the financials work out.” Andrew Watts

“The Company targets only profitable, well-run agencies that have high-quality people with proven records of success in serving customers.” J. Powell Brown

“Cultural fit comes first, the way they relate to fellow brokers, insurance carriers and clients. Then we talk about how much we can pay.” J. Powell Brown

“Acquisitions, which account for nearly 50% of our overall annual growth, provide us with a crucial competitive advantage.” Jim Henderson

Source: Brown & Brown - Company Overview - 2024

“We like tuck-in acquisitions, but it all starts with a cultural match.” J. Powell Brown

“If there is not a cultural fit, we do not move forward.” J. Powell Brown

“The economic value of mergers and acquisitions is apparent in our earnings statement. What is not apparent is the number of outstanding leaders that have joined Brown & Brown by virtue of the M&A process. This sourcing of ‘people talent’ through mergers and acquisitions is a key strength of our organization, which has evolved from our people-oriented approach of selecting the very best opportunities.” J. Hyatt Brown

“Mergers and acquisitions are central to our growth strategy, demonstrated by the more than 500 agency acquisitions in our history. While every opportunity needs to make financial sense, cultural fit is equally important.” Scott Penny

“Brown & Brown uses the same hometown approach when it makes acquisitions: It learns about the companies it buys by competing against them. ‘Our biggest competitor is not a large, publicly traded broker; it’s the best local agency in each town,’ says Powell. Such an agency, with 20 to 500 employees, is usually run by a guy Hyatt calls ‘the horse’ because he pulls the whole town along. He’s been head of the Chamber of Commerce, everyone knows him, and his social connections make it impossible to take away his business.

But even horses tire, and many smaller brokerages are run by the middle-aged men and women who started them. Their goal now is to take money out of the business and move toward retirement. That puts them at odds with their aggressive young producers who feel stifled in their ability to rise and don’t want to take a financial haircut when the boss bows out.

Brown & Brown’s top executives start a courtship process, meeting with these brokers several times at conferences or individually, to see if the prospect fits into the B&B culture. Brown & Brown opens up its own financials to show the prospect how it functions.

‘It’s like marriage,’ says Downs, who as a regional executive vice president negotiated several deals. ‘We date until we’re sure. We have no secrets. We share how our model works. Some will take what we say and implement it and that makes them more valuable when they do sell. That’s OK with us.’” Ed Leefeldt

“Although growth through acquisition has been accretive to earnings and has brought a substantial number of high-quality people to Brown & Brown, we must never lose our focus on internal growth. Selling new accounts and handling our existing clients to their pleasure, thereby enabling our firm to continue to enjoy a very high renewal retention rate, is essential to consistently grow our net income per share.” J. Hyatt Brown

Dividends and Re-investment

“We're really proud that we've increased our dividends for 29 years, but we don't have a very high dividend yield, because we think we can invest the money more in a better way and drive more value than actually paying it out in dividends. We'll buy stock back sometimes, if the stock's not appropriately valued.” J. Powell Brown

“Brown & Brown’s strategy is to deploy our capital back into the business by making internal investments, allowing us to take care of our customers and grow organically. We will also continue to reward our shareholders through dividend distributions and, opportunistically, buy our stock back.” Scott Penny

Fanatic

Hyatt Brown [source: Annual Report 2008]

"Come July 1, 2009, I will have worked for Brown & Brown for 50 years – 48½ as leader."  J. Hyatt Brown

Maintain Focus

‘The Company is in the insurance sales and service business. All business decisions must stay focused on Brown & Brown’s core operation. All growth must enhance the Company’s ability to sell insurance better.” J. Hyatt Brown

Small Headquarters

“Our corporate staff is lean but vigilant – therefore our overhead charge is very austere, particularly when viewed in comparison with some in our peer group.” J. Hyatt Brown

“For us, decentralization means operating with little overhead. In fact, with corporate operating expenses comprising just 3% of total revenues, we’re the leanest in our industry. Purely administrative positions are virtually nonexistent within our organization. From the executive office to customer service, everyone is responsible for sales and profitability.” J. Hyatt Brown

Community and Caring

“We're very community minded. Over 90% of our offices are  involved in support nonprofits in their local communities.” J. Powell Brown

“We have a culture of caring. We truly believe that teammates want to work for a company that demonstrates they care. We care a lot. We have 90% of our offices really support local non-profits. We also have a disaster relief fund where we help provide support to our teammates and others across the communities who are in need of that help.” Julie Turpin

Summary

Brown & Brown stands as a remarkable example of how empowering individuals and fostering a strong culture can lead to exceptional investment returns. At the helm was CEO J. Hyatt Brown, a dedicated leader who spent over 50 years with the company—a true business fanatic.

The company's decentralized structure creates separate profit centers, allowing local teams the autonomy to make decisions and take ownership of their success. This entrepreneurial spirit not only encourages accountability but also thrives on internal competition, driving teams to deliver exceptional service to their clients. With 60% of employees as shareholders, there’s a unique mindset that comes from being invested in the company’s success.

Emphasizing a long-term perspective, Brown & Brown prioritizes sustainable growth over short-term gains, steering clear of the pitfalls of quarterly pressure. It’s the small, consistent efforts—the "Lollapalooza effects"—that lead to remarkable results. By valuing people as the core of their business, Brown & Brown cultivates a strong culture where ordinary individuals achieve extraordinary outcomes.

Ultimately, Brown & Brown exemplifies that in business, it’s all about people. The combination of a strong culture, empowerment, and a focus on the long game has solidified its status as a leader in insurance brokering, delivering outstanding investment returns along the way. Brown & Brown stands as a testament to the key characteristics shared by the great businesses we've studied.

Sources:
‘Brown & Brown - Annual Reports,’ 1999-2023.
‘Brown & Brown - 2008 Annual Report.’
‘A Different Kind of Mogul - J. Powell Brown,’ Ed Leefeldt, Leaders Edge, October 2010.
‘Simpkins Speaker Series - Hyatt Brown,’ Eastern Florida State College, 2020.

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Learning from Bank of America's A.P. Giannini

In 2011, while Warren Buffett was famously pondering the world from his bathtub, an idea struck him: Bank of America was struggling and out of favor. Buffett decided to intervene, offering $5 billion in preferred equity to stabilize the bank’s balance sheet. Within 24 hours, the deal was done. The story of Buffett's bathtub epiphany made headlines worldwide, but it wasn’t until later that he revealed the true inspiration behind his swift decision. More than 50 years earlier, Buffett had read Biography of a Bank and developed a deep admiration for A.P. Giannini, the founder of Bank of America.

While most people recognize the name J.P. Morgan, A.P. Giannini arguably had an even greater influence on modern banking. Few individuals have left such a profound mark on an industry. A true visionary, Giannini saw opportunity where others only saw risk, revolutionizing banking by making financial services accessible to the average person, not just the wealthy elite.

After a successful career in fruit wholesaling that made him independently wealthy, Giannini joined the board of a bank following his father-in-law's death. After a clash with the board, he decided to strike out on his own, founding the Bank of Italy. Through a whirlwind of acquisitions, Giannini built an empire of banking operations in California and New York, cleverly navigating regulatory barriers designed to stop him. In doing so, he created the largest branch banking system in the United States, laying the groundwork for what would become Bank of America.

Many of the world’s most successful businesses have thrived by democratizing services that were once reserved for the wealthy. Vanderbilt made steamship travel accessible to the masses, Ford brought cars within reach of everyday consumers, Mars made chocolate a treat for everyone, Southwest revolutionized air travel, IKEA offered stylish furniture at affordable prices, and Zara transformed fashion into something attainable for all. A.P. Giannini did the same for banking, enabling ordinary people to access essential financial services.

Though Biography of a Bank was written over 50 years ago, its lessons remain timeless. It highlights the key characteristics of a great business: a fanatical leader driven by purpose rather than profit, a decentralized model that empowers employees, a culture of profit-sharing and stock ownership, a system where all stakeholders benefit, relentless innovation, and an unwavering focus on the core business. Having recently enjoyed the fascinating stories in A.P. Giannini - Banker for America and Biography of a Bank, I’ve shared some of my favourite excerpts below.

Pivot

“From the beginning, Giannini wanted to achieve big things, first as a commission merchant on the San Francisco waterfront, later as a branch banker, still later as the builder of a nationwide network of banks.”

Democratisation of Banking

“The son of Italian immigrant parents, Giannini left school in 1885, at the age of fifteen, to become a clerk in his stepfather’s produce firm on the San Francisco waterfront. At thirty-four he quit the produce business to open the Bank of Italy in the city’s North Beach district—a ‘people’s bank’ he called it—which catered primarily to working-class Italians.”

“Giannini liked to boast that Bank of Italy was a ‘people’s bank’ whose purpose was to serve the financial needs of those other banks had chosen to ignore.”

“The San Francisco Call praised Giannini ‘for daring to become the world’s first financier to make of banking and investment a huge democratic fraternity.’”

“Seizing on branch banking as a way to grow and prosper, Giannini democratized the banking industry in California, developing with his energy and ambition an extensive network of branches that promoted a more vigorous and productive economy.”

“A. P. Giannini, intended [the bank] to be a bank for the person of moderate means, or, as Mr. Giannini put it, ‘the little fellow.’”

“The majority of the Bank of Italy's early patrons were immigrants who had never been inside a bank before. They had hidden their surplus cash under the mattress. When they borrowed they had usually borrowed from loan sharks at merciless rates. Giannini taught them the advantage of interest-bearing savings accounts. He would loan $25 at bank rates, often with no better security than the calluses on the borrower's hands. Very few San Francisco banks would loan as little as $100, in the belief that such small transactions were more trouble than they were worth.”

Reduced Rates

“Going into the agricultural regions, Giannini accepted farm mortgages at 7 per cent, against the going rate of 8 or more. But that was in character. The Bank of America has constantly labored to protect the small borrower against high rates of interest. It was the first bank to move on a large scale into various lending fields that had once been bonanzas for loan sharks.”

“That the Bank of Italy favored lower rates was no revelation to anyone who had followed its history. ‘You are putting the borrower out of business if you charge 10 or 12 per cent,’ argued Giannini. ‘The man who will fight hard to get cheaper interest rates is one that we want to loan money to, and if he is willing to pay any old price, look out.’”

“To a local newspaperman, Giannini enlarged on the new branch's loan policy. ‘We believe that in having a prosperous surrounding country, the city will prosper and we also think that high rates of interest are ruinous to the farmers. We are here to make good times and ... 7 per cent will be our maximum rate of interest.’”

Niche Market

“Giannini insisted that at least one employee in the branch be fluent in Italian; other branch employees who spoke only English were encouraged to attend evening classes to learn the language of one or more of the other large immigrant groups residing in the area.”

Bank of America Los Angeles 1931 [Source:USC].

“Notwithstanding their great dependence on credit, most farmers found the task of borrowing money from local banks far more difficult—and riskier—than the business of farming itself. Many county banks charged unreasonably high rates of interest—up to 12 percent in remote farm towns, five points higher than the national average. Others tied up the bulk of their money in loans to a few large growers in the community, often for purposes in which the bank’s directors and officers had a piece of the action… The result, as one farmer put it, was that borrowing money from a local bank ‘was like living with a delivery system which was full of rusted plugs and padlocked faucets.’”

“By the early 1920s the Bank of Italy had emerged as an immensely powerful force in the state. A crucial factor was the activity of the bank’s Italian Department.. The department’s corps of handpicked solicitors, or ‘missionaries’ as they were called, all of them Italians, job was to turn every Italian resident of California into a depositor and stockholder in the Bank of Italy.’”

“Other foreign departments grew right along with the Italian— Yugoslavian, Russian, Portuguese, Greek, Mexican, Spanish, Chinese.”

Branch Banking

“Giannini was still the only banker in California who had scattered his branch banking operations in an increasingly powerful interlocking network of local offices far from Bank of Italy’s headquarters in San Francisco. With forty-one branches in some thirty towns and cities and $100 million in deposits, he was far ahead of the competition. Catching up with him would not be easy.”

“The results of Giannini’s efforts were astonishing. Beginning in the spring of 1927 and continuing to the end of the year, he acquired nearly a hundred banks, all of which he then merged with one or another subsidiary corporation he had created for that purpose.”

“By the spring of 1928 Giannini had succeeded in putting together the largest state banking system in California and the second largest in the country, which he would eventually call Bank of America.”

Bank of America, San Mateo Avenue, 1940's.

“Others could also see that California banking should look for its major growth to small deposits, and for its major profits to the retailing of credit to home builders, small units of farm and business enterprise, and consumers. But A. P. — because he sensed both the branch and the savings money opportunities more vividly than anyone else — exploited the relation between them more successfully than anyone else. Only branches could build savings accounts in huge quantities, and only branches could use savings accumulation on such a scale.”

“Why has California been an ideal proving ground for branch banking? Because its productive resources are remarkably diversified.”

“We are convinced that the key to our success is to be found ... in the economic, social and political soundness of branch banking itself.”

“We are rendering a service that could not have been rendered by any individual bank whose business we have acquired nor could it have been rendered by all such banks collectively.”

Competition

“‘For whatever success I have attained,’ Giannini would say toward the end of his life, ‘I give the bulk of the credit to my enemies. They stimulated me. They kept me going. I am thankful to them.’”

“We more than welcome other banking institutions entering the field, for we feel that in competition not only the banks but the public will materially benefit.”

Customer Service

“Giannini always remained the bank’s most energetic booster. He would go to extremes to attract new depositors and to keep them as customers. He did this partly to reaffirm Bank of America’s relentlessly promoted image as a ‘people’s bank’ and partly out of his own fierce competitive urge; there was no such thing as an unimportant customer. ‘When you sell people,’ he was fond of saying, ‘keep them sold.’’

Bank of America Branch, 400 Castro Street.

“To accommodate the busy schedule of local farmers, Giannini took the unprecedented step of keeping his branches open until eight o’clock in the evenings and on weekends. More important was his insistence that employees treat each customer with the same courtesy and consideration that his competitors reserved for their wealthiest clients, no matter how small their deposits. He based his strategy for attracting working-class depositors on personal and high-quality service. ‘The little fellow is the best customer that a bank can have,’ he was fond of telling his branch managers. ‘He starts with you and stays to the end; whereas the big fellow is only with you so long as he can get something out of you, and when he cannot, he is not for you anymore.’”

“One thing that has made the bank popular is the service it gives the public particularly through these longer hours. The people look for it.”

“Giannini’s bank held other attractions for Italians aside from its access to credit. It also functioned as a voluntary social service agency to assist them in nonfinancial matters. On Giannini’s instructions, the department’s missionaries encouraged Italian aliens to become American citizens and arranged for evening classes in local branch offices to prepare them for their naturalization examination. They found jobs for the unemployed, visited the sick, translated official documents into Italian or English, and paid grocery bills for the needy. Occasionally they were called on to settle domestic arguments. Before long the Bank of Italy became almost as well known among California Italians for its social as for its financial services.”

Purpose not Money

“It is our purpose to make a specialty of the interest of the small depositor and borrower. We aim to do all in our power to help in the building up of Los Angeles. We have money to loan at all times to the man who wishes to build on property that he owns. We have no money for speculators. We consider the wage-earner or small business man who deposits his savings regularly, no matter how small the amount may be, to be the most valuable client our bank can have.” A.P. Giannini

“At thirty-one A. P. Giannini had formulated the philosophy concerning the accumulation of personal wealth that he was to carry through life. ‘I don't want to be rich,’ he said. ‘No man actually owns a fortune; it owns him.’

“Somewhat by accident Mr. Giannini became a banker at the age of thirty-four. He did not go into banking for the reason that men customarily go into that or any business — to make money for himself. Giannini was then worth between $200,000 and $300,000. His young family was growing up in suburban San Mateo. Theirs was a roomy, comfortable home, called Seven Oaks, which Giannini had bought for $20,000. That was all the money and all the home Giannini intended that he or his family should ever have.”

“A.P Giannini surrounded himself with none of the trappings of a great and powerful financier.”

“As successful as Giannini was, nothing generated more public comment than his disregard for his own wealth. He saw no point in accumulating money or in surrounding himself with the signs of material success. The home in which he lived until the end of his life was the one he had purchased when he was selling fruits and vegetables on the San Francisco waterfront. The wardrobe of the man whom Fortune would include in its Hall of Fame of America’s ten greatest businessmen consisted of four off-the-rack suits, three pairs of shoes, and a handful of shirts and ties. ‘My hardest job,’ he said on one occasion, ‘was to keep from becoming a millionaire.’ When he died in 1949 at age seventy-nine, he left an estate valued at $489,278. Considering depreciation, that was less than he had been worth before he went into the banking business.’

“One consequence of Bancitaly’s remarkable rise in profits was to make Giannini potentially a very rich man. In 1924, after stepping down as Bank of Italy’s president, Giannini accepted no further salary. At a board meeting in April 1926, however, Bancitaly’s directors voted to compensate him, ‘in lieu of salary . . . and in recognition of his extraordinary services, 5 percent of the corporation’s annual net profits, ‘with a guaranteed minimum of $100,000 a year.’ Since the corporation’s net profits for 1927 were expected to be around $30 million, this meant that Giannini was entitled to receive approximately $1.5 million.

According to several reliable accounts, Giannini, who had not attended the meeting, was ‘visibly annoyed’ when he learned of the board’s action. He made it clear that under no circumstances would he accept the money. ‘I already have half a million dollars,’ he was quoted as telling a group of Bancitaly directors over lunch one day. ‘That’s all any man needs.’

Giannini recommended that Bancitaly’s board of directors donate the money to philanthropy. Specifically, Giannini had in mind the creation of a research institute to improve California agriculture. At a directors’ meeting in late January of 1928, Bancitaly’s board acquiesced in Giannini’s request and voted to donate the $1.5 million to the Berkeley campus at the University of California for the endowment and creation of a school of agricultural research. The purpose of the institute, as stated in the terms of the endowment, was ‘to rehabilitate and assist agriculture in California.’

Giannini himself remained silent about the donation. Pursued by the press, however, he told a reporter for the San Francisco Examiner, ‘I don’t want any more money. If I had all the millions in the world, I couldn’t live better than I do. I enjoy work. What is called high society doesn’t mean anything to me. I’ve always said I would never be a millionaire. Maybe this will convince some of the skeptics that I mean what I say.’”

“… Giannini said, he ‘seemed to be in danger of getting into the millionaire class.’ To prevent that, he had decided to turn over more than half his personal wealth—approximately $500,000 - to establish the Bank of America - Giannini Foundation, a nonprofit corporation whose purpose was to provide educational scholarships for Bank of America employees and to finance scientific research, particularly in the field of medicine. ‘I’ve always vowed I’d never become a millionaire,’ Giannini said.”

Bank of America, San Francisco 1943.

“Despite the enormous success of his bank, Giannini himself had no interest in accumulating money. He repeatedly resisted opportunities to cash in on profitable ventures; nor did he take pleasure from those things that money could buy. In contrast to other powerful businessmen, he collected no valuable art or priceless antiques; he lived quietly and modestly in the suburban enclave of San Mateo, shunning the glamour of San Francisco society. Giannini’s ambitions were fed not by the privileges of wealth but by the exercise of power and the creation of a gigantic bank.”

“The thing that Mr. Giannini is proudest of is the fact that he is a poor man. He has a salary, yes. It's a pretty good salary. But his tastes are simple and he spends very little of it on himself. . . . ‘When I die,’ said Mr. Giannini, ‘the world is going to be surprised at the little estate that I have left. It won't be a million. I have no sympathy for the man who just lives to make money. There may be pleasure in the game for some, but how futile.”

“Giannini believed that, once a bank helpfully concerned itself with the fiscal aspect of the everyday problems of average men and women, there was no limit to that bank's growth in size or in usefulness.”

“Giannini was the quintessential empire builder, a corporate titan whose departure from traditional banking practices not only remolded permanently the American financial system but also connected great numbers of ordinary people in a direct and personal way to one of society’s most essential institutions. Many Americans had long hoped that private enterprise would help build a society offering equal economic opportunity and greater freedom for the many. By providing easy credit to the working class, the Bank of America expanded the boundaries of life for millions. This was A. P. Giannini’s dream, and its realization was no small achievement.”

“‘Giannini was ahead of his time in instinctively grasping the importance of integrating his business activities into the social interests of large numbers of people,’ said the financial columnist Merryle Rukeyser. ‘His concept of banking for the little people was more than a slogan.’ As the son of immigrant Italian parents and a self-made man, Giannini shared with working-class families the folkloric American belief that success was achieved through a few essential elements: hard work, personal merit, and free enterprise. He had an exceptional sense of other people’s hopes and ambitions. He genuinely believed that Bank of America was the bank of the people, the institutional support for those in search of a more productive and materially satisfying life; he saw himself as a social and economic hero, ready to assist ordinary people in enjoying the benefits of the free market system. ‘It has been my aim to distribute as much good as possible,’ he said on one occasion, ‘to make as many people as possible happy.’ Through Bank of America, he had the idea of creating a greatly expanded middle class, making it larger and more accessible to more socially diverse groups of people. More important, he wanted to make this new middle class the foundation of a revitalized democracy. ‘He wanted them to have the more abundant life,’ one close associate would remember, ‘and more than any one man of his time he consciously engineered just that.’”

Promote Ownership and Profit Sharing

“Giannini was one of the very first American businessmen to promote employee ownership and profit sharing. At the time of his death nearly 40 percent of Bank of America’s shares were owned by its employees.”

Bank of America Advert 1955.

“As far back as 1923, Mr. Giannini was turning over in his mind an idea for liberalizing the extra-compensation plan for the bank's working force. ‘It is my wish to leave the control of the bank in the hands of its employees,’ he told the Coast Banker. The following year the new plan was announced. All the features of the old program, such as life insurance and pensions, were retained. In addition provision was made for the acquisition of bank stock. These benefits were open to all employees and to all officers, with the exception of A. P. Giannini.

Under the new arrangement the bank annually set aside 40 per cent of its net earnings as a gift to its workers. How much an individual received depended on his own thrift. What he saved from his salary toward the purchasing of stock the bank matched with a like amount, plus additional contributions computed on the basis of length of service, the employee's pay, and whether he was single or married.”

“[The] plan of employee compensation— over and above normal salaries — is to be used by employees in acquiring an ever-increasing share in the ownership and control of the Bank. Employees are thus put in a position to capitalize their efforts in behalf of the Bank and build themselves up to a position it would otherwise be impossible for them to attain. That in working out this plan stockholders would be benefited has been frankly admitted. That is only fair.”

Value Employees & Reciprocation

“The bank continued to make friends of its employees. It made them feel a partnership in this institution, and savor the excitement of advancing the frontiers of their calling. Christmas bonuses were equal to a half-month's salary. In 1919 a pension system was introduced that was very liberal for its day. Employees could retire at sixty-five provided they had twenty years' service.”

“Hardworking but satisfied employees went a long way toward infecting the bank's patrons with agreeable feelngs. The air of aloofness that Woodrow Wilson had deprecated in banks and bankers was nowhere about a branch of the Bank of Italy. They were bustling, genial places with the friendliness of a country store on Saturdays.”

Innovation

“A. P. Giannini was the greatest innovator in modern banking. The only other to approach his stature was J. P. Morgan, the elder.”

“As early as 1911 Giannini announced that San Francisco’s Board of Education had named Bank of Italy the ‘official’ depository for the savings of school children… each school-age child who opened a ‘one penny account’ in the Bank of Italy was likely to remain a customer for the rest of his or her life.”

Bank of America San Francisco 1943 [Source: Library of Congress].

“By 1921 Giannini was ready to promote the bank’s services among women… Giannini’s ‘Women’s Bank’ opened in June of 1921. Taking up the entire upper floor of the bank’s headquarters, it was equipped with tasteful furnishings, conference rooms, and a staff of twelve female officers and employees. The purpose of the bank, as women were informed through brochures distributed across the state, was to promote their ‘economic independence’ by providing them with the full range of professional banking services.' To assist the uninitiated, the bank conducted free evening classes on business and financial matters.”

“Other kinds of installment borrowing quickly followed Bank of America’s success with its home modernization and FHA loans. In 1936, against the angry and well-organized opposition of finance companies, the bank began offering installment credit to finance the purchase of automobiles. The demand for the loans at far more favorable rates than buyers had been required to pay from finance companies was astonishing. As the San Francisco Examiner explained, ‘When Bank of America announced its policy on automobiles at 6 percent the finance companies all over the nation had to come down off their high horses and make much lower rates.’”

“‘A veritable department-store bank,’ said one East Coast financial writer. “It will finance a new home, lend money to cover the medical expense of the new baby born there, see him through college, discount his business notes, sell him insurance or traveler’s checks when he needs a vacation. When he dies, it will execute his will. It’s a bank that does everything but blow your nose for you.’”

Challenges

“Since 1920, at every turn Giannini had had to fight to keep alive his idea of banking. His victory had been more than a victory for the Bank of Italy. A. P. Giannini and his allies had changed the course of banking in the United States, and changed it for the better.”

“Laws framed for the protection of old-style banking stood in the innovator's path. But Giannini found, by legal means, ways around obstructive regulations and statutes. He was simply ahead of the laws.. over thirty years much of the body of salutary banking legislation and regulation followed the lead of Giannini.”

“Mr. Giannini's slogan all through his career has been 'safety before profit.’ With this philosophy as a guide the Bank of Italy made remarkably few unfortunate boom [time] loans.”

“The Bank of Italy was launched and has had its remarkable record of growth on a policy of conservative yet energetic and enthusiastic optimism. The institution has never known and should never know the word ‘failure’ in any matter, large or small; nor will ‘cold feet’ ever bring it enduring or any sort of success.” A.P. Giannini

Continuous Improvement and Scale

“You have to get big to give the best service. And after that you have to keep building better. You die when you stand still.” A.P Giannini

“In 1927 one of every five Californians of all ages was a depositor in the Bank of Italy. No other banking institution in the United States had even remotely approached this density of patronage — a record to be surpassed only by its successor, the Bank of America.”

Customers as Shareholders

“Missionaries also devoted a considerable part of their time to promoting the sale of Bank of Italy stock. Sell as much Bank of Italy stock as possible. Tens of thousands of Italians eagerly responded.”

Shareholder Speculation

“Giannini appeared genuinely concerned about the tens of thousands of small investors who were borrowing money at ‘usurious rates’ from banks and finance companies to speculate in his stocks. On March 14, 1928, he issued a press release warning investors to pay off their debts and get out of the market: ‘We want them to own their own shares outright,’ he said. ‘We do not want them held as security for loans. We want our stockholders so firmly entrenched that they cannot be forced to sell out at some unfavorable time.’ Two weeks later he sent an open letter to banks and brokerage firms across the country, urging them to refrain from making loans on Bancitaly stock where the obvious intention of borrowers was to use the money to speculate in his stocks. ‘The public is attributing to me miracle working powers which I do not have,’ Giannini said.”

“More than once, after a sharper than usual rise in the market, Mr. Giannini would walk through the floors at No. 1 Powell saying to employees : ‘Our shares are too high. Don't gamble in them. Pay off your debts and sit tight. If you own your stock you have nothing to fear.’”

Bank of America Los Angeles 1931 [Source: USC].

“It is doubtful if corporate history in the United States exhibits a parallel to Giannini's effort to halt speculation in the Giannini stocks, and to get them out of the hands of speculators buying for a rise and into the hands of investors buying for income.”

“In the case of Bancitaly, Giannini went to even greater lengths to keep the price of the stock down. He borrowed from friends 39,000 shares which he sold at $50 a share below the market — that is, for $1,950,000 less than the quoted price. The loss involved was easily double Giannini's personal fortune…. There are not many men in this cynical old world of ours who could come out with a statement to their stockholders saying that they have borrowed shares of stock from stockholders to maintain the price of the securities at a sane level, then ask the holders to waive their rights to a big block of new stock issued and get away with it.”

Focus on the Business Not the Stock Price

“Obsessed as always by his expansionist ambitions, Giannini gave no outward sign that he was seriously concerned over the dizzying collapse that had swept Wall Street. He immediately made it clear to his top executives in San Francisco and New York that he had no intention of allowing anything to interfere with his goal of nationwide banking. ‘You are not to let the recent market slump change our plans. Go ahead with the work as if nothing had happened.’”

“Giannini's eyes were on the constructive work of establishing a transcontinental bank, rather than on the stock ticker.”

Culture

“Giannini was fond of calling Bank of America employees his “boys and girls,” and he demanded total loyalty from them.”

Confederation of Businesses

“By and large, what Giannini had created was a decentralized country bank.”

“Strictly speaking, there was thus no single Bank of Italy but a financial world in itself, complex and comprehensive, exerting enormous influence in the lives of millions of people. From the outside the bank looked monolithic. Inside, however, it was a confederation of banks, each rigorously disciplined and organized, each aggressively tracking down scattered communities of the foreign-born—all designed to reach the greatest number of people.”

Tailwind

“During the first half of the twentieth century, the California economy underwent a remarkable transformation that catapulted the state into one of the fastest-growing regions in the nation. From 1900 to 1950 the population increased more than sevenfold—from 1.5 million to nearly 11 million—making California the nation’s third largest state. New subdivisions, schools, shopping centers, bridges, and highways dotted the landscape from the Oregon state line to the Mexican border. California ranked first in farm production, growing enough in a wide variety of fruits and vegetables to supply the needs of the entire nation. Along with a remarkable increase in agricultural production, there was a corresponding growth in industrial production. The country’s entry in World War II gave a tremendous boost to the state’s industrial base, triggering an enlargement of production not exceeded anywhere else in the country.”

“No one has a larger claim as the architect of these momentous changes than Amadeo Peter Giannini. He was eager to promote Bank of America as a huge, sympathetic source of credit to ordinary Americans and quick to open branches in his relentless effort to increase the bank’s influence.”

“Giannini was also more aware than other bankers of California’s enormous potential for growth. He believed that what economic historians now call human capital —motivation, discipline, personal sacrifice, and the ethic of self-betterment associated with them— was nowhere more apparent than in California. What he saw, as he traveled throughout the state, was an immensely enterprising people and a region of rich and varied resources joined together in the creation of a huge new social and economic powerhouse whose influence would eventually be felt throughout the nation. The economic possibilities, he believed, were limitless.”

“Giannini’s influence over the way banks conducted their business was enormous. Over the years that followed his founding of Bank of Italy in 1904, he financed much of California’s rise to agricultural ascendancy with his liberal loan policy and the far-flung branch banking system he created to sustain it. California’s remarkable industrial development in the twentieth century — manifested in the rise of Kaiser, Bechtel, Douglas, and Lockheed, among many others — benefited significantly from Giannini’s determination to free the state’s aggressive and newly emergent community of industrialists from their dependency on Wall Street.”

No Committees

“Giannini had no patience with committees, organizational flow charts, and the mechanisms of corporate management.”

Walk the Floors

“[Giannini placed his desk] on the open floor of the bank. He avoided the protective environment of a private office and a personal secretary, answered his own phone, and frequently saw as many as one hundred people in a single afternoon on a first-come, first-serve basis. His conversations with them were of necessity rapid-fire and to the point, none lasting more than a few minutes, all held within the hearing of other people. ‘You can’t learn anything from a secretary,’ he once told a visiting reporter from New York. ‘The people who come to see me tell me what’s going on.’”

“A. P. Giannini had his desk in no private room, but in the open on the first floor where everyone entering the bank could see him and talk to him. ‘That's one trouble with bankers,’ he said. ‘They shut themselves off away from people and don't know what's going on. Why a banker should do that I can't imagine.”

“If we would have anything to do with a bank in New York we would see to it that the managing officers, from the President down, were put out in front and in the open where they would come in contact with and greet the people as they would come in or go out of the bank. That is one thing that is lacking in most of the New York banking institutions. We certainly do not want our officers cooped up in an office.”

Business Fanatic

“Giannini as the archetype of the driven businessman. Aside from Sunday dinner with his family, he had no personal life outside the bank. His capacity for work was legendary. His day began at five in the morning and ended, as he liked to say, ‘in sleep.”

“Giannini slept, lived, and breathed the bank, which he referred to as ‘my baby.’ He cared more about the bank than anything else.”

“Giannini prided himself on his incessant work habits, which he defended with one of his frequently repeated aphorisms, ‘Be first in everything.’”

“Giannini was fond of telling people later in life that he had no patience with leisure pursuits or social occasions of any kind.”

“‘My day began early and ended late,’” Giannini would recall years later. ‘In fact, it never ended at all except in sleep. And at night I did my planning for the next day, the next week and the next year; in fact, the next ten years.’”

“To the last month of his life Giannini was as interested in the service his banks rendered to the little fellow as to the corporations. He, personally, would discuss a $50 loan as earnestly and as patiently as he would discuss a $5,000,000 loan. That sort of thing alone, stretched over forty-five years, is enough to make a man remembered. Taken alone it is not enough, however, to create a great bank. Fortunately, in addition to a deep interest in the concerns of ordinary peole, A. P. Giannini had the gift to see horizons for banking that no one else had seen. He had the genius to realize them in the face of obstacles that at times seemed insuperable.”

Hiring and Autonomy

“Giannini surrounded himself with the best talent he could find and drove his executives to the limit. In return, he gave them a free hand in running their departments. ‘Come to me for advice, if that’s what you want, but don’t come to me for a decision,’ he would instruct them. ‘If a decision is involved, bring it with you.’”

“The customers of the branch deal with the local officers, and only in extraordinary circumstances are they brought into contact with the head office departments.”

“One of the secrets of A. P. Giannini's success had been his ability to develop subordinates and give them heavy responsibilities.”

Rotating Staff

“Since the early years of the bank’s remarkable climb to financial power, Giannini had maintained the practice of rotating his top executives out of their positions every five years to make way for others. ‘When a man knows he has a chance to go up the ladder instead of having to wait for the chief to die before he can hope for advancement,’ he liked to say, ‘it stimulates him to concentrate on his job and to achieve something.’”

No Yes-Men and Unconventional

“Giannini delighted in tossing out unconventional ideas in the company of his executives, suspicious of those who seemed overly eager to agree with him. ‘Are you yessing me?’ he would shout in a hoarse voice that some compared to the sound of a howitzer; he would then demand that his supporters explain why they thought he was right.”

“Not many San Francisco bankers noticed the appearance of North Beach’s newest Italian bank. The few who did were scornful of Giannini’s direct solicitation of business. Such practices were thought to be vulgar, unethical, and demeaning to the staid traditions of the banking profession.'° Giannini, however, had no such inhibitions. ‘They thought I was undignified,’ he would remember. ‘I could never figure it out. I always thought that if business was worth having, it was worth going after. How can people know what a bank can do for them unless they’re told?’”

Local Integration

“Giannini retained the services of [acquired banks] former employees; he thus avoided alienating local residents by staffing the branch with unfamiliar faces brought out from San Francisco.”

“Giannini aimed at keeping his banking premises simple and cordial. But he varied them with the neighborhood. For instance, in the heart of great wealth, would be a more elaborate and expensive building than the branch in a strictly working class neighbourhood.”

“To insure a broader distribution of the shares, Giannini liked to have a number on hand to sell locally when the bank went into a new community.”

Maintain Focus

“Giannini said he had succeeded because he had stuck exclusively to his business, which was developing and managing a bank. ‘It's no trick to run any business if a man has the intelligence and industry to concentrate on the job. The great trouble with most men is that they scatter too much. A few men can go into many things and succeed, but they are very few.’

Social Proof

“For the success of auto loans much credit is given the advertising campaign put on by L. E. Townsend, the bank's advertising director until 1952 when he retired. Townsend used newspapers, the radio and billboards to convey the bank's message: ‘Today 266 Cars Will Be Financed by Bank of America’; ‘Every Five Minutes Another Bank of America Financed Car.’”

Mistakes

‘“Giannini could tolerate mistakes, but never lazy or careless mistakes.”

Legacy

“News of Giannini’s death was given prominent coverage in newspapers across the country. The New York Times wrote, ‘The rise of Amadeo P. Giannini made pale the tales of Horatio Alger,’ adding that ‘no one has had a greater influence on the history of California.’ The Los Angeles Times editorialized that Giannini was ‘a man of large ideas and the nerve to experiment with them. Money was not an end for him; it was a means. He saw profit where others saw only risk, and from the standpoint of fiscal result he was usually right. His unorthodox methods have been much criticized, but also much copied. That he changed banking in this state, if not in the nation, can never be denied.’”

“Letters and telegrams of sympathy poured into San Francisco from around the country. Many came from ordinary people whose sentiments gave evidence to their feelings about Giannini as a figure of enormous influence, one whose motives and ambitions had differed significantly from others in the world of high finance. ‘I write so poorly,’ said one typical letter, ‘but it is not often that a great man passes away and still rarer when it is someone like A. P. He is the first big businessman for whom many people will grieve or shed any tears. While I have the greatest respect for Morgan, Vanderbilt, Rockefeller and our authentic big shots, AP was the only one of them who had any sincere interest in the average American or any love for the common people.’"

Summary

A.P. Giannini was the Bank of America. As Peter Keefe noted in a previous post, behind every 10, 100, or 200-bagger is a visionary leader. “These people are artists, focused on building something of great value—not just to accumulate wealth, but to create something meaningful for society.” Giannini was an extraordinary example of such an individual.

His success was driven by purpose, not profit. Giannini had no personal interest in getting rich, famously refusing to take a share of the bank's profits that the board offered him. For him, banking was about empowering the "little fellow" and helping communities thrive.

Corporate culture starts at the top, and Giannini laid a strong foundation. Over fifty years after reading Giannini’s story, Buffett had the chance to invest in the bank—a reminder of the lasting value of continuous learning and the profound impact that visionary leadership has on building enduring businesses.

In your quest for the next multi-bagger, remember that the qualitative characteristics Giannini embodied - from purpose-driven leadership to an unwavering focus on long-term value - are often what shape successful companies and rewarding investments.

Sources:
‘Biography of a Bank - The Story of Bank of America,’ Marquis James and Bessie Rowland James, Harper & Brothers, 1954.

‘A.P. Giannini : Banker of America,’ Felice A. Bonadio, University of California Press, 1994.

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Learning from Bloomberg’s Michael Bloomberg

Every day, thousands of traders, portfolio managers, and analysts rely on one system without which they cannot perform their daily tasks: Bloomberg.

At the age of 39, Michael Bloomberg found himself at a crossroads after being let go from Salomon Brothers, where he had devoted the last fifteen years of his career. Armed with a $10 million payout, Bloomberg decided it was time to launch a financial services firm that would leverage technology to equip traders and market participants with the knowledge and tools needed to outperform the competition. In a mere fifteen years, a modest initial investment of $300,000 would transform into a billion-dollar enterprise.

In a 2006 lecture at Columbia Business School, Li Lu, a famed investor and Charlie Munger protegé, posed a question to his students: 'What truly sets one business apart from the others? What gives them an edge? Why do some businesses thrive while others falter?' Li Lu offered a crucial insight, stating, 'The best way to understand this is by studying those businesses that have already established themselves.'

Li Lu contended that virtually all businesses undergo a transformative process triggered by industry shifts that predictably shape their future. He pointed to Bloomberg as a remarkable case study, illustrating how a company emerged seemingly from nowhere to challenge well-established industry players, gradually solidifying its status as a virtual monopoly. When a product or service is difficult to replace, indispensable for daily tasks, and crucial for collaboration, the stage is set for a winner-takes-all scenario. Li Lu concluded that such insights are worth a 'sh*tload of money.'

With a steadfast two-decade commitment to Bloomberg, I've gained firsthand insight into their systems, distinguished by formidable analytics, innovative functionality, and proactive customer support. Over time the company’s moat has been widened as the business has become increasingly entrenched into the global finance ecosystem. A good example is the introduction of the chat function, an indispensable tool with profound network effects, seamlessly fostering collaboration among industry professionals, and ensuring Bloomberg remains an integral part of our daily operations.

Michael Bloomberg's story of his eponymous firm is vividly recounted in 'Bloomberg by Bloomberg,' a classic David and Goliath tale that reveals how he stealthily navigated past competitors to emerge as the dominant global markets information system today. The traits defining many of the remarkable businesses we've explored are evident here as well: a creative zealot, empowered and incentivized employees, valued and engaged customers, unique competitive advantages, and an unwavering dedication to continuous improvement. Here are some of my favorite passages:

Culture and People

“Our success continues to be derived mostly from one thing: our own people. They will always be our most important asset.”

“Our most important asset [is] our people. They are the company. You can replace our technology, data, reputation, and clients, but you cannot duplicate the group we've put together and the culture they've developed.”

Customer Focus & Good Profits

“If there is anything that defines our company, it is an awareness that nothing is more important than customer service.”

“Bloomberg has always treated its existing customers at least as well as its new ones. Not everyone else does the same. Why some companies give a better deal to their worst customers, I've never understood. What's the incentive to be a good client?”

“When we reduce our prices for new customers, we simultaneously do the same for existing ones. Treat your customers well and they'll stay with you forever.”

“Bloomberg is in the business of giving its customers the information they need - no matter what that information is - where and when they need it, in whatever form is most appropriate. We don't shoehorn programs into less-than-optimal presentation formats, or deliver them at inappropriate times and places. With all methods at our disposal, we do better. We give our customers what they need, not just what we have. When there's a difference between the two, we create or adopt a new medium - we don't ask our customers to accept less.”

Value and Empowering Employees

“The only way to have the best customer service is treat our people the best.”

“Another tenet of Bloomberg philosophy is that our main asset is not our technology, our databases, our proprietary communications network, or even our clients. It is our employees. Improving the rest is far less important than the care and feeding of ourselves - the maintenance of our culture, protecting it from the outside world. Physical plant, compensation politics, personnel policies, promotion, training, and so on-all of these at Bloomberg are designed with our culture in mind.”

“We always have our offices in the best and most expensive parts of town while our competitors look for bargain space in the low rent districts. It gets back to who you think is more important: your people or outsiders. I believe our people matter. The best for us. This is true not only at ‘headquarters,’ but everyplace.”

“The leverage we gain from employing creative people and letting them do their own thing is incredible. Our open physical plant encourages innovation, and our flat management structure guarantees a well-functioning meritocracy. Fortunately, for us, others do it differently. Typical company politics elsewhere stifle most free-thinking employees and discourage risk taking.”

“The primary function of those at the top is the care and feeding of the company's most valuable asset, its employees, including designing and administering a compensation system that encourages cooperation, rewards risk taking, and gives inducements to work hard. Job One for the CEO.”

Fanaticism & Hard Work

“The rewards almost always go to those who outwork the others. You've got to come in early, stay late, lunch at your desk, take projects home nights and weekends. The time you put in is the single most important controllable variable determining your future.”

“I learned hard work, intellectual curiosity, and the ambition to strive relentlessly for the goals I set - all of which would serve me in good stead at school, during my capitalist education at Salomon, and in creating my own company later on.”

“It's the ‘doers,’ the lean and hungry ones, those with ambition in their eyes and fire in their bellies and no notions of social caste, who go the furthest and achieve the most.”

“Work was, is, and always will be a very big part of my life. I love it. Even today, after toiling for thirty years, I wake up looking forward to practicing my profession, creating something, competing against the best, having comradeship, receiving the psychic compensation that money can't buy.”

Resilience

“Most fortunes are built by entrepreneurs who started with nothing and generally got fired once or twice in their careers. And thoughout history, the vast majority of great writers, artists, musicians, dancers, jurists and athletes have come from less financially secure families.”

Mission Statement

“Well-run organizations, whether commercial, political, educational, military, or philanthropic, have conceptual goals stated long in advance. New possibilities are always tested for fit against these predefined objectives. This insistence on a prior specific mission statement against which all proposed actions must be judged tempers the emotions to follow the ‘fad of the day.’”

Competitive Advantage - Empowering Customers

“Our product would be the first in the investment business where normal people without specialized training could sit down, hit a key, and get an answer to financial questions, some of which they didn't even know they should ask. To this day, we still don't have a competitor. Although investors can get some of our data and analysis elsewhere, most features of our system are unique.”

“From the beginning, we tried to be different. We built a unique product: We combined text and analytics with computer-driven tours that let readers automatically see the calculations and graphs of what we wrote about. We gave an illustration to complement what we told in words, then followed up with words to expand what the illustration showed.”

“Understanding and reinventing how news should be produced and delivered, as opposed to doing it ‘the way it's done,’ lets us beat the competition.”

‘1994: PC-style keyboard’ [Source: Bloomberg]

“If you're not providing something unique, you have no ability to impose charges.”

“It was obvious the economy was changing and services were taking a bigger share of the gross domestic product. .. I would start a company that would help financial organizations. There were better traders and salespeople. There were better managers and computer experts. But nobody had more knowledge of the securities and investment industries and of how technology could help them. All I had to do was find a value-added service not currently available. I conceived a business built around a collection of securities data, giving people the ability to select what each individually thought the most useful parts, and then providing computer software that would let non-mathematicians do analysis on that information. This kind of capability was sorely lacking in the marketplace. A few large underwriting firms had internal systems that tried to fill this need but each required a PhD to use and weren't available off the shelf to the little guy.”

“When it came to knowing the relative value of one security versus another, most of Wall Street in 1981 had pretty much remained where it was when I began as a clerk back in the mid-1960s: a bunch of guys using No. 2 pencils, chronicling the seat-of-the-pants guesses of too many bored traders. Something that could show instantly whether government bonds were appreciating at a faster rate than corporate bonds would make smart investors out of mediocre ones, and would create an enormous competitive advantage over anyone lacking these capabilities.”

Under the Radar and Truth Tellers

“Why did Bloomberg News rival Dow Jones and the British wire service Reuters so quickly? No big company thinks a little start-up company will ever become a major competitor. Invariably, by the time the big guy catches on, it's too late. The customers have grown used to having a choice. And playing catch-up isn't easy. In this case, major company complacency was furthered because Reuters and Dow Jones were growing at the time Bloomberg came on the scene; at first we were barely a distraction to either behemoth. Moreover, both of those established companies possessed a large status quo infrastructure with a vested interest in convincing management it was doing a good job, doing everything right, covering all the bases. So what management heard internally were reassuring feelings, not facts. I have always worried when our people tell me that we're doing great, that all is fine. As the ‘emperor’ of Bloomberg, I need someone to tell me when I've left my clothes at home.”

Competitive Landscape & Counter-Positioning

“We would have had a much tougher time had we entered an industry that had lots of small, scrappy competitors. But we went against giants, and giants are usually easy to beat. Remember the Germans and then the Japanese versus Detroit's ‘Big Three’ automakers? If you have to compete based on capital, the giant always wins. If you can compete based on smarts, flexibility, and willingness to give more for less, then small companies like Bloomberg clearly have an advantage.”

Recognition

“The more successful you are, the more likely it is that ‘you’ is a group. To win big, you must have an ability to leverage your work by identifying, including, convincing, and inspiring others to follow your vision. Then share the praise, or they won't be there for very long to help, and soon there'll be little for you to talk about.”

Family Culture

“I preach again and again at work that everyone in our company is family, that we must take care of one another. We really are related in both an emotional and a fiscal sense. Anyone who goes through life successfully receives the help of others. And no organization succeeds without most of its members contributing.”

Share the Profits

“As a private company, we don't have a stock price to worry about. But we do have to give employees the incentive to go in the same direction as the owners. I have a firmwide, long-term interest in the company's success; everyone else must be rewarded in a similar manner. All our staff get a salary commensurate with what the local market pays for their specialty and experience. Additionally though, they all share in the worldwide overall revenues of the company.”

“Everyone participates in our firmwide (as opposed to branch or product or department) success. For senior people, this revenue sharing can be 50 to 75 percent of their total yearly compensation. If we have a bad year, the most junior employees get hurt, and those who are running the company do too. In good times, both groups have smiles on their faces.”

“Our company shares its financial success: High salaries, significant revenue sharing, and generous expense reimbursement are part of everyone's package.”

CEO Pay

“My salary is equal to the lowest-paid full-time employee we have (currently, $19,000 per year). Everything else I get is from my share of the firm's earnings (and income tax regulations encourage me to reinvest most of that in research and development). I have the incentive the other stockholders and employees want me to have: to maximize the company's long-term value.”

Competition

“Competition's great-obviously for the consumer, but even for the providers. Every morning when we get up, we relish the day's upcoming battles. They keep us alive, and they keep Bloomberg's corporate family thriving. We can't wait for tomorrow. Who says we can't do that? What do you mean they'll beat us? Have them put on their boxing gloves, and send them into the ring. We're ready!”

Scuttlebutt

“When I look at a company, I pay little attention to its accounting statements. A good accountant with a creative mind can make numbers paint any desired picture. No one understates revenues and profits when they're trying to show off. Presumably, the financial situation is always equal to or worse than stated. A better way to evaluate a company is to talk to the experts. No, I don't mean journalists or analysts. I mean those who really know what's going on and what the potential is. First, I call those most knowledgeable, the customers. "Do you plan to buy more or less of this company's product?" I ask. "Are there competitors coming along with better offerings?" Then, I call the other insiders, the headhunters. "Do people want to go to work at this company, or are they trying to leave in droves?" Management, accountants, and other outsiders can say anything they want. Clients and employees never lie.”

Tone at the Top and The Golden Rule

“It's the top person's policies, personal and professional deportment, and working hours that the organization tries to emulate. While the only difference between stubbornness and having the courage of one's convictions may be the results, it's a natural reaction to attribute superior strength, knowledge, and consistency to those we follow. (But the slightest sign of vacillation can kill that image forever.) Say something as CEO and the organization responds. It may only be by analyzing, criticizing, ridiculing, or specifically deciding to ignore the pronouncement, but notice it they will.”

“Work hard. Share. Be lucky. Then couple that with absolute honesty. And never forget the biblical admonition, ‘Do unto others as ….’”

Personal Identity

“If we were going to build our business, we, too, needed a personality. The obvious choice? Me. Our competitors' founders, Messrs. Dow, Jones, Reuter, Knight, and Ridder, were all dead. I, on the other hand, was alive and out making speeches and sales calls every day in city after city around the world, turning my name and work into a great weapon that others in the financial news and market data businesses couldn't match…. I would become the Colonel Sanders of financial information services.”

Source: FT Magazine

Innovation and Permission to Fail

“Deep pockets and a strong stomach help when trying new things. Few innovations are accepted right away. You must bring changes along slowly, improving them over time, building an audience with persistence and repetition. But with just as much resolve, when you find something not working, after giving it a reasonable time, you've got to take a deep breath, bite the bullet, and stop the carnage. The embarrassment of failure can't be allowed to kill the company.”

“Companies need people with imagination and energy, particularly with regard to technology. Unbridled enthusiasm and belief that anything's possible may not be the real world, but trying things with low probabilities of success and big payoffs is a lot better than the alternatives.”

“We didn't want people to feel their jobs were in danger, or that they would be penalized for conceiving of or working on a ‘failure.’ At Bloomberg, all we ask is that they come up with as many new ideas as they can think of (no matter how "crazy"), and do their best on the projects we assign. If a concept is flawed, the blame and pain rest with me. The credit for whatever's right goes to them.”

Bureaucracy

“Our greatest challenge today? Fighting the stultifying effects of success, the paralyzing results of growth, the debilitating cancer of entrenchment.”

Private Company and Long Term View

“As a private company, we report to only a few who understand and have a long-term perspective.”

Balance Sheet

“Our financing is all long-term borrowings that mature in small, gradual tranches, something that should be manageable in virtually any financial scenario.”

Growth and The Palchinsky Principle

“Growth by acquisition is a bet-the-store, high risk gamble. It's true that a few (very few) work. But it's the kind of ‘all in up front’ risk that leaves me uncomfortable. Maybe I'm just not that smart. When I'm looking to expand, I prefer starting with a little capital that we can afford to lose, and a few people we can always reassign to other projects. This way, we never feel we're committed to stay with our mistakes, nor are we so overextended we can't handle other additional experimental ventures simultaneously. (Out of deference to our professional service providers, I won't mention the savings in accounting bills, legal charges, and investment banking fees we also get with this build-versus-buy strategy.)”

“Whether by building or buying, there are dangers in growth you ignore at great peril. We insist on management depth at every position. Lack of it would leave us vulnerable when someone quits or gets hit by a truck.”

“Growth by building gives us the chance to reward our best employees with newly created management jobs. Growth by buying would just force us to fire a bunch of people I've never met who haven't done anything bad to me.”

Acquisitions

“We're frequently presented with opportunities to grow or diversify by acquisition. I almost never let a seller's representative send us offering memoranda. If we're not seriously interested in making a bid, it's disingenuous to look; and I really don't care anyway. If the company being shopped was good enough for us to consider buying, it wouldn't be for sale.”

“At Bloomberg, we're builders, not buyers. I'd make a terrible venture capitalist; every company I look at seems overpriced. I always think we can create it more cheaply ourselves.”

“The real problem with acquisitions is that neither corporate cultures nor technologies mix. The momentary advantage to the buyer adding an existing operation often gets dissipated quickly, and then one's stuck with the reasons it was for sale in the first place. More times than not, when two good companies combine, they stay as separate functional organizations, having contact only through common ownership. When poorly run companies get together, they tend to do it at the operating level, where the worst of both can do the most damage to each other. It's probably inscribed someplace (or should be): Two negatives always produce something worse!”

Loyalty

“Loyalty is everything. Our people expect me to have it to them, and vice versa. Be honest, work hard, treat each other fairly and openly. Add a dash of competency, and we'll be together for a long time.”

Continuous Improvement and Growth

“To survive, we must grow and improve. Any supplier who offers today what it sold yesterday will be out of business tomorrow.”

“In business, growth is a necessity: You grow or you get out. No company can stay anchored to the status quo, no matter how successful it is. Customers come and go; their needs change with time, and the services that help them do their jobs are always in flux. Woe to the supplier without the best offering.”

Source: FT Magazine

“In every way, we've got to improve just to stay even. Each of us at Bloomberg has to enhance his or her skills. Every element of all our products must be improved. All our expenses need reexamination. Our suppliers must be pressed a little harder for a better deal. Our marketing should be refocused and our customer service enhanced. The basic assumptions behind our business must constantly be reassessed, "off-line" and out of sight.”

Lollapalooza Effects

“To succeed, you must string together many small incremental advances - rather than count on hitting the lottery jackpot once… I have always believed in playing as many hands as possible, as intelligently as I can, and taking the best of what comes my way. Every significant advance I or my company has ever made has been evolutionary rather than revolutionary: small earned steps - not big lucky hits.”

Training

“Our company builds employees: Constant training, retraining, coaching, and instruction from on-staff, full-time experts increase everyone's worth.”

Promotion from Within

“Almost all our management is ‘homegrown.’"

“Our company creates opportunities: Management that's promoted from within, transfers to other offices around the world, and chances to move to new areas make us different.”

Low Turnover

“We have phenomenally low turnover for a company employing many young programmers, salespeople, and reporters, and we attract a pretty diverse labor force.”

Remove Hierarchy

“We have no reserved parking spaces for senior executives. If you want to leave your car right by the door, just come in earlier. Creating class distinctions isn't constructive. That's why I don't believe in executive dining rooms either. The issue isn't fairness. If we constantly remind those people at the bottom that they are not at the top, do you really expect them to be "gung ho" about the company?”

“I've always thought titles are disruptive at best. They separate, create class distinctions, and inhibit communications.”

Diversity

“Having a diverse workforce is required by law in the United States. Having a diverse workforce is also required by capitalism in the marketplace. It increases the likelihood that the next great idea will be born here, not at some other company.”

Cross-Collaboration

“Our reporters aren't alone, our data collectors aren't alone, our programmers aren't alone. In our company, everybody's in one room and works together. The environment we've created at Bloomberg means we don't do anything independently of one another. We have been more successful in news because of that. Our reporters periodically go before our salesforce and justify their journalistic coverage to the people getting feedback from the news story readers. Are the reporters writing stories that customers need or want? Does the depth of a story's coverage matter as much as the speed with which it is disseminated?”

Community

Loyal Customer : Bloomberg User Since 2003

“We should support local causes in every city where we have a branch. It's good for business because it's good for people.”

“We want to be known as a company that not only takes care of our employees, but is also generous to our community. It all helps the bottom line. Companies that don't understand that don't do as well as they could. Give something back and you'll wind up with more!”

Philanthropy

“Don't spoil your family. After you've worked for a lifetime, your legacy shouldn't be strife, anguish, and heartbreak, particularly for those you love. Leave them enough to have a crutch in hard times, a boost in good ones, and fond remembrances for the rest of their lives… Give most of your wealth to charity!”

“How much should you carve out first for your loved ones? Do you really want to eliminate the need for them to work as hard as you did? Do you really want your children to be like those who thought themselves your betters while you struggled? Letting them have too much money is really a lot worse than letting them have too little. I've watched family after family destroyed by excessive distributions to descendants, and by family patriarchs' and matriarchs' attempts to be able to control others' behavior from the grave. With wealth comes power. With power comes the ability to damage. Gifts and inheritances influence those you love most. Inheriting too much money at one time destroys initiative, distorts reality, and breeds arrogance. When the money runs out-as it always does-those left bereft of cash can't cope. And having money with ‘strings attached’ often creates unintended and perverse distortions in behavior.”

“If we make the gifts (or at least the commitments) when we're still around, we can get the greatest satisfaction available for cash today, watching the process of helping others unfold.”

Summary

Bloomberg's remarkable success story is a compelling case study. Michael Bloomberg's ability to transform a modest $300,000 investment into a multi-billion-dollar empire, all while keeping the company privately owned, stands as a testament to his exceptional business acumen, philosophy and scalable business model. This story holds invaluable lessons for entrepreneurs, investors, and managers alike.

As highlighted by Li Lu, the importance of studying such successful enterprises cannot be understated, serving as a playbook for identifying outstanding investments. Bloomberg consistently ranks among the top private corporations acknowledged by Investment Masters as deserving of in-depth analysis. Although financial information services may seem worlds apart from the rental car businesses, fast-food chains, or uniform cleaning services we’ve studied, it's striking how the underlying business philosophies of these industry leaders often mirror one another.

If you’re wondering what most of the great investors and traders have in common, even Berkshire, it’s a Bloomberg terminal. I expect to remain a loyal customer in the years to come.

Sources:
‘Bloomberg by Bloomberg,’ Michael Bloomberg, Wiley, 2001.

‘Bloomberg is contemplating life without its founder,’ FT Magazine, Robin Wigglesworth, April 2023.

‘Li Lu Lecture - Columbia Business School,’ 2006. [Bloomberg comments - see from 1 hr 25 mins.]

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Learning from Publix's George W. Jenkins

How does a company in an intensely competitive industry become the world's largest employee-owned company, one that even captures the admiration of legendary investor Warren Buffett?

The company in question is Publix, a supermarket chain that has grown from a single store in Florida nearly a century ago into an industry titan. While Publix rode the wave of Florida's population growth, its visionary founder, George W. Jenkins, employed strategies reminiscent of some of the most successful businesses we've studied. In fact, if you refer back to the checklist we derived from one of Charlie Munger's favorite businesses, National Cash Register, you'll find that Publix not only checks off most of those boxes but goes above and beyond.

George Jenkins possessed a profound understanding of psychology and the paramount role of people in business. He grasped that business fundamentally revolves around people. From the very outset, Jenkins committed to sharing ownership and profits with the cashiers, baggers, butchers, deli clerks and bakers in his stores. He fervently advocated for employee empowerment and autonomy, affectionately referring to this approach as 'benign neglect.' Continuously in pursuit of fresh ideas, he fostered a culture of innovation and embraced the concept of failure as an inherent part of experimentation. Even though Mr. Jenkins passed away in 1996, his leadership legacy continues to shape the company to this day.

With an unquenchable thirst for knowledge and innovation, George Jenkins recognized that great ideas could originate from any source, leading him to listen more than he spoke and highly value the insights of those within the company. He frequently embarked on 'idea-seeking' journeys, extensively traveling to stay primed for opportunities and enhance the customer experience. His unwavering commitment to learning and perpetual quest to elevate customer satisfaction became pivotal to Publix's success.

Jenkins solidified a company-wide culture of promotion exclusively from within, ensuring the cherished familial atmosphere he diligently cultivated would extend to new stores. Every individual started at the bottom, irrespective of qualifications, and underwent cross-training across various divisions. This practice provided transparent career paths and instilled a profound respect in higher management for every role within the organization.

Warren Buffett has consistently emphasized the significance of studying business history, and in this regard, George Jenkins and the Publix business offer invaluable insights. As I explored Pat Watters' book, 'Publix: Fifty Years of Supermarket Pleasure,' which meticulously chronicles the history, philosophy, and evolution of Publix, it became clear that George Jenkins was not just an entrepreneur, but a man of unwavering integrity, boundless caring, and a profound sense of community spirit. The following quotes, sourced from this book and complemented by other references, exemplify the wisdom and principles of one of America's most successful and morally grounded business leaders.

Customer Focus

"If you are going to be in the retail business, the number one thing is to please the customer." George Jenkins

“Among the people of Publix, the will to take good care of the customer transcends strategy. It is an ingrained habit of mind with them, and a matter of principle.”

"The customer comes first. We don't de-emphasize the importance of our personnel policies. But everybody's main responsibility is to the stores and the customers.”

Source: Publix

“When the people of Publix tell about their work, they make it seem simple by referring often to the number-one goal of the organisation, the ideal and challenge of all that they do - pleasing the customer.”

"The difference between ordinary and extraordinary is that little extra." George Jenkins

"Always put the needs of your customers first, and the rest will fall into place." George Jenkins

"Our whole corporate culture is built around the concept George Jenkins developed in the '30s. He always said, 'Treat your customer as though she was your best girlfriend.' And around here that's the way it's done." Mark Hollis

“Another important Publix policy prevailed from the beginning - the Publix Guarantee. If a customer came back and said something was no good - George Jenkins didn't care whether it was bad or not- we gave her the money back, or something else for it. It was always a 100 percent guarantee. And it's always paid off. I'm sure we've been taken a few times but it's worth it. We all knew how Mr. Jenkins felt about customers. The customer was our boss.”

"We never want our customers to leave our stores disappointed for any reason… as Mr. George always said, 'If you take care of the product, it won't come back; if you take care of the customer, they'll always come back.' It's a very simple philosophy that I believe our managers really understand." Joseph Carvin

Obliquity

“A lot of businesses fall into the trap of setting economic goals, such as having a (certain) price-earning multiple on the company stock, or saying that volume and profits must increase by so many percent per year. People of such companies get caught up in meeting the goals, rather than giving good value. George Jenkins never fell into that trap.”

"If your objective is to do a better job, and money is secondary to you, then you succeed."

“Growth is the end result of a simple equation. As each of us continues to please our customers, more customers will look to Publix for their shopping needs. We must never lose sight of exactly what those needs are.” Howard Jenkins

Tailwind

“Publix was also riding the crest of the great wave of population growth in Florida that George Jenkins had foreseen as the basis for big expansion. The state's population was 1.9 million when George built his first proud new store in 1940. By 1967, there were 6 million Floridians to seek as customers. In 1979, there were 9 million.”

Continuous Improvement

“We’re gonna try to strive every day to make our service a little better and make our operation a little closer to perfect. I guess nobody’s perfect, but we strive for that goal anyway.” George Jenkins

"Success is a journey, not a destination." George Jenkins

Keep it Simple

“Publix has avoided getting itself tied up in complicated, structural knots. On a very large scale, it has held to the simplicity of the first store where everything was structured to please the customers.”

Philosophy Never Changes

“Some companies are founded on policy. This is wrong. Philosophy, the things you believe in, is more important. Philosophy does not change frequently – and is never compromised.” George Jenkins

Business is People

“We’re not only in the grocery business, we’re in the people business.” George Jenkins

“A large part of the Publix spirit had to do with treating employees right. We knew we could lick anybody with people. Prices and the right merchandise and the way the stores looked were important. But people were the most important.''

“People-orientation remains the most remarkable part of the Publix spirit.”

“I'm asked most frequently is "What's the secret?" "How did you do it?" The most obvious answer, of course, is one word .. people. The great industrialist, Andrew Carnegie, expressed it best when he said, ‘Take away my railroads, my ships, my factories. Destroy my equipment. Strip me of all my resources. But leave me my men and I will build it all back again.’ At Publix we have been successful in identifying and motivating the type of people who share our dreams and are willing to work hard to make them a reality.’ George Jenkins

“In other successful chains, merchandising -the strategic means we have seen for moving goods out of the stores - has been the main cause of success, with the strategies of operations and the calibre of people playing strong supporting roles. But at Publix, Personnel policy is . . . the most important reason for the success of the chain, with merchandising, operations and other factors playing the supporting role.”

“It's a people business. We'll only be successful as a result of people: our associates and our customers.” Joseph Carvin

Caring, Valuing, Empowering & Recognising People

"Take care of your employees and they'll take care of your customers." George Jenkins

“If you ask a Publix manager today what gives him or her the most satisfaction as a leader, they’ll likely say it’s the opportunity to help people grow successful careers.”

“You must, of course start with adequate salaries and effective employee benefits, but ideal employee-customer relationships cannot be accomplished without a sincere interest in your employees as real people. Our experience has shown that this is what spells the difference between 'mechanical' personnel who wait out the clock to go home, and personnel with a strong interest in the progress of the company.” George Jenkins

"My goal has always been to build a company that my employees would be proud to work for." George Jenkins

Source: Publix

“One of the most important lessons I've learned in my business career is that no man puts together an organization on his own.” George Jenkins

“In so many other ways has George Jenkins displayed an acute understanding of the psychology of the people who work with him, and a sensitivity to their needs. When plans were being drawn up for the first big warehouse and headquarters, he insisted that they include the cafeteria. The location was out in the country back then and Mr. Jenkins didn't want his people to have to drive all the way to town for lunch, or to have warehousemen doing their heavy labor on a brown-bag lunch of sandwiches. When someone protested that prices might cause a morale problem, Mr. Jenkins decreed that the meals be free. And he made sure that the menus and the cooking were top quality.”

“Publix has avoided unionization by providing better pay and benefits than unions could secure through collective bargaining.”

“The whole purpose for treating employees right is to motivate them to treat customers that way.”

“Most people who want to work, and who are reasonably good workers, can find jobs which give them salaries and benefits to take care of their basic physical needs. But people are looking for something more, and that something has to do with their relationship to THEMSELVES. You can call it self-respect or self-esteem, or individualism; but whatever you call it, it is, I believe, the key to motivation of most people working today. People must feel like PEOPLE, and not like numbers, or machines.” George Jenkins

“There is the conviction on the part of the people that management really cares about the individual. This is [commonly] expressed by personnel by the phrase, 'They didn't have to do this.’”

“Considerable organized effort is made at Publix to recognize individual employees and maintain the personal touch that has been a strength of the company since opening of the first store. The high point of this is the holding of Service Award Banquets every year in each district of Publix territory. Feted at these are employees who have completed  ten years of service with the company, accompanied by their spouses. Also honored guests are ones who have completed additional five years' employment beyond the first ten, on up to 50 years. George Jenkins and Joe Blanton and as many other officers as can get there are on hand for the awarding of service pins and certificates attesting to the number of years served.”

“The common thread that runs through all the policies of the unwritten Publix philosophy is respect for individuals. Just as treating the customer right is an ingrained habit of mind for the people of Publix, so is treating fellow workers with consideration.”

“Because ‘the ordinary’ eventually comes to be taken for granted, an essential part of superior customer service is the willingness to step up, to take the initiative, to do something out of the ordinary. To delight the customer, a person must be empowered to do the unexpected - and they must be alert to the opportunity.” Joseph Carvin

“One of the things heard most often at Publix is Mr. George's statement, ‘Publix will be a little better place, or not quite as good ... because of you.’ The associate is reminded often of his or her importance. He or she is a stockholder. He or she has the power to make a difference.” Joseph Carvin

Hiring

"A company is only as good as the people it keeps." George Jenkins

"Integrity, morals, honesty [are the] the top qualifications. You have to be knowledgeable about your job, but I would rather have a man who knew nothing about his job but have him honest and moral. Then he could learn the job." Joe Blanton

“The emphasis is on selecting high-quality new employees. The personnel department was highly decentralized. Stores were largely autonomous, but got guidance and direction from headquarters. Training of employees was, as from the beginning, of the on-the-job variety.”

"At Publix, we have been successful in identifying and motivating the type of people who share our dreams and are willing to work hard to make them a reality.” George Jenkins

“Publix reaches out toward a certain kind of person, a certain segment in the market. These are people who care about a friendly relationship, who have the need for it. There is a great homogeneity between the kind of customers that come to Publix and the kind of people Publix has working at their stores. The customers like the employees, the employees like the customers liking 'them. It's like a cross-trump in bridge. It's just one of those beautiful things that feeds back and forth.”

“Nearly all people are capable of rendering great customer service. But some of them have a desire to serve customers, while others do not. Hire people who have the desire.” Joseph Carvin

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

“Publix always promotes from within, never filling jobs from the outside, requiring every employee to start at the bottom.”

“Each senior officer of Publix has had a solid grounding of starting at the bottom and working their way up.”

“Publix's culture of promoting from within is not just ‘strong.’ Virtually 100% of Publix managers started with Publix as hourly associates.” Joseph Carvin

Promote Ownership

“People ask me all the time, ‘How do you get people to be so nice? How do you get them to be so productive? How do you get them up early in the morning and work late at night?’ It’s easy. When people have ownership of something, they do what it takes to improve the value of that ownership. It truly does make a difference.” Ed Crenshaw

“When competition opens up across the street and our sales are impacted, [our staff are] impacted. So they're incented to make sure they're doing everything they can to serve that customer to the best of their ability." Ed Crenshaw

“From the very start, George Jenkins believed in profit sharing. He also believed in employee ownership. Everybody working for the store was a stockholder. And that was a good thing for morale.”

"I'm always amazed that more companies don't recognize the power of associate ownership," says Publix CEO Ed Crenshaw, 62, the grandson of founder George Jenkins and the fourth family member to run the company. While Crenshaw has a 1.1% stake in Publix, worth $230 million, and his entire family has 20%, worth $4.2 billion, the employees (and former employees) are the controlling shareholders, with an 80% stake, worth $16.6 billion. Not surprisingly none of them belongs to a union.” [Forbes]

“Publix employees are associates. They’re not employees. They’re co-owners.”

Source: Publix

“If stock ownership is spread across the entire workforce, as it is at Publix, then stock ownership is something that can be assumed among your co-workers. When all or most of your co-workers share that same sense of ownership, the dynamics get powerful. There's now a commonality, a sense of team. There is no market in Publix stock among the general public… This is one of the many things that make being a Publix associate special. It sets Publix apart from other large companies often considered ‘employee-owned.’ Not only do almost all your co-workers own stock, but you're part of an exclusive group of people working who can and do own stock. ‘Stock ownership, more than anything, it is the foundation for identification of the individual with the group.’ It isn't just that Publix associates own stock. Or even that most of them own stock. It's the fact that, with rare exception for a few heirs and gift recipients, they're the only ones who own stock. It's the fact that this ‘exclusive club’ sets them apart, and puts them all, store manager and cashier alike, together, on the same level at the top of the organization chart. If you like acronyms, think of it as ‘We’ thinking. That is, when stock ownership is both ‘Widespread ‘ among employees and ‘Exclusive’ to employees, it leads to thinking of the company as WE. At Publix, stock ownership is the third ingredient in Publix's recipe for superior customer service. Giving better service will help the stock price rise, but that's not what motivates associate owners to give better service. It motivates associates because it causes associates to identify, and to be identified, with each other, and with what their company is all about.” Joseph Carvin

“Publix pioneered a generous retirement program. Fifteen percent of net profit before taxes each year goes into a retirement trust plan which, in 1979, had total assets of $86 million, including the ownership of 12 shopping centers.”

"With employees who feel that 'this is my company' you bet we are hard to beat.’”

“I really believe that helping other people own part of the company and participating in worthy causes has been like the Bible says - cast your bread on the waters and it comes back tenfold.” George Jenkins

Share the Profits

“Publix gives profit-sharing incentive further down the line of employees than any other chain.”

“In addition to ubiquitous ownership, Publix grants shares of a store-specific bonus pool every 13 weeks. The exact amount varies, but typically 20% of quarterly profits go into that larger pool; 20% of the pool is then paid out in cash to the store's employees.” [Forbes]

“As in the very beginning, it is profit-sharing that makes Publix an industry leader in the payroll department. Twenty percent of the profit made in each store stays there at the end of each 13-week inventory period, to be divided among all full-time employees.”

‘‘Perhaps the two most important incentives are the profit-sharing plan and the stock ownership plan. All of our full time store people share in the profits of their individual retail operation. This is paid in cash at each inventory period. In addition to sharing the profit which they have personally been involved in producing at their own store, employees also share in the profits of the company through our profit sharing-retirement trust plan. Publix sets aside 15% of the net profit before taxes and places this in trust for all eligible employees. They have 100% vested interest in their trust with 10 years participation. This profit-sharing plan and trust now has total assets of almost $86 million.” George Jenkins

Staff Turnover

“Publix’s annual voluntary turnover rate is a minuscule 5% — which makes a mockery of the retail industry average of 65%.” [Fortune]

Cross-Train

“Publix associates are encouraged to rotate through various divisions, from grocery to real estate to distribution, to get a broad sense of the business.” [Forbes]

No Layoffs

"At Publix, our associates are our most valuable asset. That's why we have a no layoff policy, ensuring job security for all eligible associates."

“Publix has never laid off an employee in its 86-year history.” [Forbes]

Family Culture

“Publix is a family in more than a metaphorical sense, and how this is yet another source of the firm's human-oriented strength.”

“Employment at Publix is literally a family affair among the ranks of the company officials, with brothers and fathers and sons working side by side. Publix is a family affair not only for officers, but up and down the line of employees as well, including husbands and wives.”

Word-of-Mouth Advertising

"A satisfied customer is the best form of advertising." George Jenkins

“Those people that call on us [suppliers] have done as much to help create the image and reputation that Publix enjoys today as a lot of our own employees have. Their word of mouth about us gets around all over the country."

Reciprocation

“One of the ways that Publix has wooed customers during the expansion years has been to give them things.”

Complaints

“About complaints in general, of which there are not all that many. We don't look at it as a complaint, but look on it as an opportunity to get in there and really work with these people. Both ways. We work with our people who made the mistake so it won't happen again, and we try to make it up to the customer who was disappointed so that she'll end up thinking even better of us than she did before anything went wrong.”

Ideas

“Throughout his career, George Jenkins wanted to be ready for opportunities. He read extensively, and he often traveled on “idea-seeking” trips. He was always looking for ways to make the customer experience more of a pleasure. Of course, he also believed that great ideas come from the people within the company. He did more listening than he did talking. That’s a great lesson for anyone who wants to be successful!”

“George Jenkins kept abreast of developments in the food industry by traveling about the country for a week or so every year looking at grocery stores, seeing what other operators were up to, searching for ways they had devised to better please the customer. The zest for improvement and innovation was shared among the employees.”

Autonomy

“There is no better example of how the policies of the Publix philosophy dovetail and support one another than the one of ‘benign neglect’. Officers, supervisors and the workers themselves enjoy autonomy on the job because there is confidence up and down the line that they know their trade because of having been trained in every phase of it from the bottom up.”

“When you put an organization chart on paper, you are more or less telling each fellow that is his job. What happens is that he stops thinking about the other fellow's problems, and that sort of draws a circle around your men, instead of giving them lots of space to grow in.” George Jenkins

“In its territorial expansion, Publix avoided the pitfalls of bureaucracy, of having decisions made from headquarters that might be appropriate for the Lakeland area, but not for the local situation in Miami. It helped to have high calibre men with their grounding in the Publix philosophy going back to the first days of the chain, to put in autonomous control of the division.”

“George Jenkins policy was to very seldom come by to see how you are doing, and he didn't offer advice, or other help. ‘He gives you the opportunity to make a success on your own, or not to.’”

“There is a universal feeling of almost all Publix employees that they have this autonomy, this independence, and this responsibility, and this is one of the things that contributes to self-esteem.”

“Mr. Jenkins will not specifically tell you that you have to do it this way, or that you should make this much profit, or you shouldn't spend this much money. That is the beautiful thing about this company. It's true in the stores, in the warehouses, all parts. It's like working for yourself. People feel like the company is theirs.”

Innovation

“Publix faced, particularly in its territorial expansion, formidable opposition from other chains. It was, indeed, engaged in a fight for its very life when first it entered the Miami area. To survive and emerge triumphant in all the peninsula part of Florida took a concerted effort as far ahead of the times as was the first super market that George W. Jenkins built. During the years of great growth, the people of Publix developed innovative strategies for virtually every phase of supermarket distribution and storekeeping. This included the pioneering utilization of that important development of the 1950s, the shopping center.”

“George Jenkins and Joe Blanton functioned as a team in the location and building of new stores. “Mr. Jenkins could pick locations better than any man. We used to wonder why in the world pick this spot? Then pretty soon, the crowds would start pouring in." It is legend that George Jenkins and Joe Blanton used to fly about Florida in a company-owned helicopter seeking out superior locations. Part of the knack was to observe from the helicopter the housing patterns near a site, and the roads and highways leading to it. They wanted a site on a heavily traveled thoroughfare, but one not frequented by trucks or tourists. And they needed the potential of at least 2,000 families within a two-mile radius.”

“The first shopping center in St. Petersburg, was built in 1954. A Publix Super Market proudly occupied one of the locations. It was George Jenkins' decision to pay the high rent there, and subsequently in other early centers. Competitors such as A & P and Winn-Dixie were reluctant to do that in the early days of the centers. Back then Publix had a larger percentage of space in the centers than any other company in the state.”

“Of the total of 70 shopping centers that Publix has developed in Florida, some were financed by the sales-lease arrangement; some are owned by employees, and some (12) by an employee retirement trust fund. Little has been made in company publications or media studies over Publix's pioneering of shopping centers. But it stands alongside the pioneering of the super market itself as evidence of the remarkable business vision of George W. Jenkins and his lieutenants.”

Change

"The key to success in retail is to always be adapting and evolving with the times." George Jenkins

“If the railroads had remembered they were in the transportation business and not the railroad business, they could tell a different story. You must change to meet the times.” Joe Blanton

People : the Growth Limiter

“Promoting from within means that Publix has had ‘controlled growth.’ The company could open more new stores if it were willing to put people from other chains in charge of them. But such people wouldn't really be ready to manage a Publix super market. Having people ready to manage the stores is as important as a good location. If we should get away from that, we would erode the faith our employees and our customers have in us.”

Expansion

“Publix's policy of expanding only by building its own new stores. This is one more Publix anomaly in the grocery business. Most chains expand mainly by acquiring others. Publix prefers to build its own kind of stores and staff them with Publix-trained people.”

“We wanted to seed every store with as many experienced Publix associates as we possibly could, so that they could talk about George Jenkins and the history of the company and the philosophy of doing business, so we could transfer that knowledge to the new people we were hiring, so that they would know what makes this company successful.”

Walk The Floors

“You don’t learn much sitting behind a desk.” George Jenkins

Source: Publix

“I resolved that if I ever got to be a big shot in this business, two things would be done. I would go around and visit the stores. And if anybody wanted to see me, they could walk into my office any time. The two policies have proved over the years to be fundamental to Publix's organizational strength.” George Jenkins

“Mr. Jenkins shares this enthusiasm for visiting the stores, having established the practice as a founding policy of Publix. And so do other people of Publix up and down the line take joy and pride in their super markets.”

“Time and again, we have seen how the visits inspire confidence in workers and boost morale. In addition to the common practice of informal visits, there has been in recent years, an organized program of visitations twice a year. All officers participate. They go around and they see the people, they shake hands, they thank them. They talk to as many people as they possibly can. This tells that stock person, that front-service person- you know, doggone, they care about me. It makes people feel important. Publix management goes out of the way to keep employees from feeling depersonalized, like numbers.”

Open Door Policy

“People are not afraid to walk into Mr. Blanton's or Mr. Jenkins office and speak their minds. They don't take affront, but rather realize that the person is saying, "Here is a problem. How do we solve it? Indeed, the open-door policy is followed throughout the organization. There are very few cases, if any, where a worker at any level does not feel comfortable going to a department head or a manager and saying what is on his or her mind. The policy, obviously, keeps lines of communication open. It also helps Publix officials avoid the "status angle." And knowing you can talk to the bosses, on up to the biggest ones, any time you feel the need is bound to enhance the all-important self-esteem. Finally, the policy keeps the bosses in touch with what is going on at all levels.”

Good Profits

“We've got systems around here where everybody in the place is worrying about the company making enough money. So I spend part of my time checking up on the stores that make too much money. You can only make so much money out of a grocery store before you start cheating people.” George Jenkins

“We don't take any more profit than we have to take."

Win-Win

“So much of Publix's ability to treat the customer right derives from its treating others right those who supply the company, those who do the work in the stores and the warehouses of the company, the offices and the centers of distribution.”

“Appreciation for food-industry trading partners is institutionalized each year at a big Publix barbecue held in their honour. ‘That's the small way in which we try to repay them for the service they've given us,’ explained Mr. Jenkins.”

“George Jenkins has, from the beginning, insisted that Publix treat in like manner those with whom it does business. ‘In dealings with salesmen, never mistreat one or take advantage of one. Treat a salesman as though he were a guest in your home.’ George Jenkins said this was the philosophy he had always used.”

“Mr. Jenkins encourages buyers and other officials to visit suppliers' plants to learn all they can. We learn their problems and they learn ours and we try to work them out.”

Golden Rule

“Mr. Jenkins taught me a long time ago to practice the Golden Rule - to do unto others as you would have them do unto you. If you follow that basic principle, you're going to achieve what you want.”

Fanatic

“When Mr. George, as he was known, stepped down in 1989 after 59 years, the company had a stellar reputation and $5.3 billion in sales from 367 stores, all in Florida.”

"George Jenkins ran the company pretty much well into his 80's.” Ed Crenshaw

Tone from the Top

“When George Jenkins visited stores, it wasn’t unusual to see him stepping in to help bag groceries or take customers to their cars. Publix associates loved the opportunity to work side-by-side with Mr. George. While customers may have felt honored to have their bags carried out by the founder of the company, Mr. George felt more honored to serve them.”

"Lead by example and always be willing to roll up your sleeves and get to work." George Jenkins

“The things that are done at Publix ‘flow from the character’ of George W. Jenkins. He built Publix entirely on his own personality.”

"While most people work all their lives to see how much money they can accumulate, George Jenkins worked all his life to see how much he can give somebody else. Sizeable quantities of company stock are given away each year to employees of Publix.”

“I kept reducing my interest in the company," Mr. Jenkins explained recently. ‘Now I own only about four percent of the company that I started and did own 100 percent.’”

Respect

“If you want people to respect you and your company, you must show respect for them.” George Jenkins

Local Focus

“Of the staff selected to run the store in the shopping center that Publix built at the site, 98 percent lived in the immediate neighborhood. To Publix's way of thinking those who live in an area are best equipped to deal effectively with area shoppers - a policy that Publix adheres to with all its stores."

Reinvest Capital

“Profits were the fuel for rapid expansion. It was years before we ever declared a dividend. George Jenkins would just plow it back in and grow on it. The profits were invested in new stores, new equipment, real estate for shopping centers, warehouse and distribution facilities, and reduction of debts.”

“The profits were plowed back to make the company grow and produce even greater profits to be likewise plowed back.”

“All the profits were being plowed back into expansion. This probably accounts for the fact that, though Mr. Jenkins is looked upon as a very wealthy man, his limousine is often dusty, his trousers are frequently rump-sprung, and he owns no yacht, beach cottage, fishing lodge, or any of the other luxuries with which Florida tycoons surround themselves.”

Appearances

"Publix has always been known for cleanliness. When you enter a Publix, things are immaculate. The aisles are particularly wide and are wonderfully merchandised. The stores are bright and cheery green, and all of their associates, from managers on down, convey a highly professional image."

Competitive Advantage

“Officials of other chains request from Bud Ruth, director of personnel, permission to visit the stores and warehouses to learn the secrets of Publix's success.

‘I tell 'em,’ he reported, you can go out there and ask all kinds of questions and get some great answers. But how're you going to go back and plug this stuff into your organization? It's not going to be an easy task. Because this isn't something that's just happened in the past two or three or even eight or ten years. This is something that has been going on from the very start.

What Mr. Ruth was referring to is the extraordinary approach of Publix to employees and, through them, to customers that did, indeed, begin in the first little store. This approach is guided by a set of principles and policies which amount to no less than a highly sophisticated, subtle, philosophical system. The principles and policies dovetail and support one another, so that the whole of the philosophy is greater than its parts. It combines shrewd business methodology with a high level of morality to provide guidance to the people of Publix in attaining their goal.”

Lollapalooza Effects

“There’s no real thing you can put your finger on and say, ‘You do this and you'll be successful.' Success is an accumulation of little things. There's not any one big thing. The big things pretty well take care of themselves. But it's doing the little things unusually well that'll get you ahead in the long run.” George Jenkins

Smallness

“Autonomy stemming from the policy of benign neglect gives people the sense of working for a small company. Officers treat you like you're in a small company. Publix people don't realize how big the company really is. And that, of course, goes a long way toward explaining how Publix has held onto small-company motivation. The stress on autonomy is part of the reason that the people of Publix never say they work ‘for’ the company. ‘They work for themselves.’”

Headquarters and Bureaucracy

“Publix is not overloaded with a bureaucracy of officialdom. Business Week noted that in 1968, there were only 55 executives above store manager, and quoted Mr. Jenkins: "I know we are lean, but we like it that way. The main idea of this is to avoid having ‘layers of bureaucracy.’”

Mistakes and the Fear of Failure

“The Publix spirit back then, as now, left room for error on the part of employees. They are not afraid of managerial retribution if they try something and it doesn't work.”

“The Spirit of forgiveness prevails throughout Publix. In most companies, if you make a mistake, you never hear the end of it. But at Publix, if you make one, it's looked upon as one of the risks of trying to do things better and different. It brings out the best in everybody.”

“The only way we learn is by failing and learning from our mistakes." George Jenkins

Community

“Mr. George  was once asked how much would he be worth if he hadn’t given so much away. ‘Probably nothing,’ he answered. Our founder instilled in us the value we have today of being a part of the community and helping wherever we can.”

"Success is not just about making a profit, it's about making a positive impact on the community." George Jenkins

“Mr. Jenkins and the other officers are not only active in civic affairs, but they also heartily encourage all employees to be so.”

Do the Right Thing

“Don’t let making a profit stand in the way of doing the right thing.” George Jenkins

Source: Publix

"I believe in doing things the right way, not just the easy way." George Jenkins

“People are treated right by Publix because it is right to do that.”

Focus on the Controllables

"I've heard George say that if something is worrying you, do what you can about it. If you can't do anything about it, then just quit worrying about it.”

Technology

“The people of Publix look at other technological advances in terms of what they will mean to the customers. Publix has handled the technological aspects of the business. They never get caught short on the technical end, but they do things because they are better for their customers. The quality of what they have to sell, in terms of product and service, is a lot more important to Publix than technological refinements."

Long Term

"Too many companies are subjected to the stock market and analyst calls, and it's all about what we can do to make sure this quarter we're projecting this and meeting this. We're in this business for the long haul - 83 years so far." Ed Crenshaw

Summary

In conclusion, Publix's remarkable success story underscores the significance of intangible assets such as a strong company culture, committed staff, and a philosophy of caring and sharing. These elements may not be quantifiable on balance sheets, but they play an indispensable role in driving a company's prosperity. George Jenkins, the visionary founder of Publix, instinctively grasped the value of these attributes and made them the cornerstones of his business philosophy.

When you study George Jenkins and the Publix legacy, you are essentially enrolling in a Master Class in the application of psychology to business success. His understanding of human psychology, his emphasis on empowerment, and his commitment to employee well-being are lessons that transcend conventional business wisdom.

As we reflect on the lessons learned from Publix, it becomes evident that Tom Peters was onto something profound in his classic book, 'In Search of Excellence.' The traits and practices that Peters highlighted in his book align closely with the core principles that have propelled Publix to greatness. Publix's journey is a testament to the enduring power of these principles and serves as a real-world case study of excellence found.

In today's ever-evolving business landscape, where competition is fierce and markets are volatile, companies that prioritize their people, nurture a vibrant company culture, and foster an environment of care and sharing are more likely to endure. While financial metrics are undoubtedly crucial, it's essential not to overlook the immeasurable value of these qualitative attributes.

In the end, Publix's journey reminds us that excellence is not merely a goal but an ongoing commitment to doing the right things, day in and day out. It's a reminder that success is not just about profits but also about the positive impact a company can have on its employees, customers, suppliers and communities. Publix has shown us that when excellence is embedded in the DNA of an organization, it becomes a source of enduring strength and resilience, and can allow a company to stand the test of time.

Sources:
‘Publix - Fifty Years of Shopping Pleasure, 1930-1980,’ Pat Watters. 1980.

‘A Piece of the Pie: The Story of Customer Service at Publix,’ Joseph Carvin ,2018.

‘The Public Checkout - Beyond the Aisles with Your Favorite Supermarket.’ Publix blog.

‘The Walmart slayer - how Publix’s people-first culture is winning the grocer war,’ Brian Solomon, Forbes, 2013.

‘My Five Days of Bleeding Green,’ Christopher Tkaczyck, Fortune, 2016.

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Learning From McDonald’s Ray Kroc

We all know McDonald's. And we've all probably eaten there; it's a pretty rare person who hasn't dined at one of their restaurants at some point in their life. And given there is more than 35,000 of them in 120 countries, and that they serve over 68 million of us every single day, it's no surprise that they're so well known and so successful. 

Ray Kroc is the man behind the business. Like myself, you may have seen the recent film 'The Founder', which details the rise of this incredible iconic company. And like with the podcasts I listen to, having watched the movie, I was keen to find out more about Ray Kroc and how he came to grow the McDonald's brand into the most successful fast-food chain in history.

“I can’t think of anybody else who, before McDonald’s, ever did what McDonald’s did to create a chain of restaurants on such a scale, that worked.” Charlie Munger

Luckily for me there was a biography available which went into far more detail about his story and the secrets to his success. And I just finished that book, 'Grinding it Out', which is a fascinating read. Whilst the movie portrays Ray in a less than positive light at times, I found the book far more factual with some incredibly interesting parallels to other businesses and leaders I have reviewed in recent times. 

Which is also no surprise.

Ray began his career selling paper cups and milk shake machines and stumbled across the Californian Hamburger bar run by the brothers, Dick and Mac McDonald in the 1950's. Realizing the incredible potential of the company, at the age of fifty-two, he negotiated franchising rights with the brothers and launched the McDonald's franchise in 1955.

Since then, the franchise idea has been copied so many times that these days Restaurant Franchises are a dime a dozen. There are so many of them about, in so many formats and brands, its almost impossible to work out which is the best. I know people who have ventured into the world of franchising, only to be bitten by over promising and under-performance, which over time led to them closing the doors and losing their initial investment. And many of the bigger franchise groups simply don't care. There are so many people on the waiting list for a franchise, that they can just sell that failed franchise to the next person. And then the next. As long as they are taking their cut and getting their fees, its doesn't matter to them whether an individual franchise fails. It doesn't matter, until it does.

One of the most striking things about the success of the McDonald's model is that Ray worked out that for the business to be ultimately successful, the franchisee had to make money. If the franchisee was making money, then the franchisor would, too. Warren Buffett, who once owned more than four percent of McDonald's, identified this trait in successful franchises as well.

"You want a franchise operation — you want the franchise operator to make money and you want him to create a capital asset that’s worth more than he’s put in it. That’s the goal." Warren Buffett, Berkshire AGM 1998

"Whereas Dairy Queen will, in most cases, receive 4 percent of the franchisee’s sales, in terms of a royalty, at a McDonald’s there’s more than that percentage, plus rentals and so on. So they’re two different — very different — economic models. They both depend on the success of the franchisee in the end. I mean, you have to have a good business for the franchisee to, over time, have a good business for the parent company." Warren Buffett, Berkshire AGM 1998

"A successful franchisee can sell his operation for significantly more than he has invested in tangible assets. And we want it that way, obviously, because that means he’s got a successful business, and it means that, over time, we will have a successful business." Warren Buffett

I have mentioned many times that the Investment Masters learn from their mistakes. Buffett himself has espoused the value of it and also mentioned that he made a mistake with McDonald's. A Billion Dollar mistake.

"The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald's was a very big mistake." Warren Buffett, Berkshire Letter, 1998

Source: Bloomberg

Following on from the recent posts about Walmart, Les Schwab Tires, Panera Bread, Nucor, Home Depot and Starbucks, I have added my favourite quotes and points from Ray Kroc's book below...

Love What You Do

"For me work was play. I got as much pleasure out of it as I did from playing baseball."

"There's nothing more fun for me than rubbing elbows with a bunch of operators and talking shop."

"In many corporations when the top guy moves it's to a figure-head role. He becomes chairman of the bored. Not me."

Early Experience

"I spent a lot of time thinking about things."

"I learned that you could influence people with a smile and enthusiasm and sell them a sundae when what they'd come for was a cup of coffee."

"No self-respecting pitcher throws the same way to every batter, and no self-respecting salesman makes the same pitch to every client."

"Too many salesman, I found would make a good presentation and convince the client, but they should have stopped talking. If I ever noticed my prospect starting to fidget, glancing at his watch or looking out the window or shuffling papers on his desk, I would stop talking and ask for his order."

"I stressed the importance of making a good appearance, wearing a nicely presented suit, well-polished shoes, hair combed, and nails cleaned. "Look sharp and act sharp," I told them. "The first thing you have to sell is yourself. When you do that, it will be easy to sell paper cups."

"There's almost nothing you can't accomplish if you set your mind to it."

Keep It Simple

"My first motto for McDonald's - KISS - which meant, 'Keep it simple, stupid.'"

It's About People

"[My management style] proceeded on the strength of my salesman's instinct and my subjective assessment of people... I've been wrong in my judgements about men, I suppose, but not very often."

"I liked to get people fired up, fill them with zeal for McDonalds, and watch the results in their work."

Tone At The Top

"I've never been too proud to grab a mop and clean up the rest rooms, even if I happened to be wearing a good suit."

"I've never submitted a personal expense account to McDonald's in my life. In the early days, of course, it would have been an empty exercise. I didn't take a salary; I was keeping the thing afloat with my income from Prince Castle Sales, But even in later years it never entered my mind that I should be reimbursed by the company. I pay most of my company expenses out of my own pocket, although, of course, I do use my company credit card. But by the same token, I have purchased a fleet of nineteen customised Greyhound buses, outfitted with kitchens, rest rooms, telephones, colour television, and lounge-style seating and I rent these to the corporation for one dollar a year. Each of our district books the use of one of these Big Mac Buses to its operators for worthwhile activities such as taking disadvantaged children and senior citizens on outings. I also bought the company plane, a Gulfstream G-2 jet. McDonald's rents it from me for the same low price, one dollar a year."

"I couldn't give [my first two employees, Harry Sonneborn and June Martino, who worked tirelessly and neglected their families] them raises to compensate them for their past efforts, but I could make sure they would be rewarded when McDonald's became one of the country's major companies, which I never doubted it would. I gave them stock - ten percent to June and twenty percent to Harry - and ultimately it would make them rich. At the time, of course, Chicago Transit Authority tokens would have been worth more." 

Risks And Mistakes

"You have to take risks. I don't mean to be a daredevil, that's crazy. But you have to take risks, and in some cases you must go broke. If you believe in something, you've got to be in it to the ends of your toes. Taking reasonable risks is part of the challenge. It's the fun."

"If you are willing to take big risks, and I always have been, you are bound to blow one once in a while; so when you strike out, you should try to learn as much as you can from it."

"None of this is meant to sound as though I think I've never made a mistake, Far from it. I could probably write another book about my mistakes. But it wouldn't be very interesting. I've never seen negatives add up to a plus."

"I learned then [with early set-backs] how to keep problems from crushing me. I refused to worry about more than one thing at a time, and I would not let useless fretting about a problem, no matter how important, keep me from sleeping."

"A good executive does not like mistakes. He will allow his subordinates an honest mistake once in a while, but the will never condone or forgive dishonesty."

"Achievement must be made against the possibility of failure, against the risk of defeat. It is no achievement to walk a tightrope laid flat on the floor. Where there is no risk, there can be no pride in achievement and, consequently, no happiness."

No Master Plan

"There is a certain kind of mind that conceives new ideas as complete systems with all their parts functioning. I don't think in that 'grand design' pattern. I work from the part to the whole, and I don't move on to the large scale ideas until I have perfected the small details. To me this is a much more flexible approach. For example, when I was starting McDonald's, my original purpose was to sell more Multimixers. If I had fixed in my mind as a master plan and worked unswervingly toward that end, my system would have been far different and much smaller scale creation... At the risk of seeming simplistic, I emphasis the importance of details. You must perfect every fundamental of your business if you expect it to perform well."

Customer Comes First

"I thought of the customer first."

"My philosophy was one of helping my customer, and if I couldn't sell him by helping him improve his own sales, I felt I wasn't doing my job."

"[When you] Look at it strictly from the customers point of view, which is how I do it, because this guy is our real boss - you see the importance of every penny."

Look After The Stores

"There is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other. Once you get into the supply business, you become more concerned about what you are making on sales to your franchisee than with how his sales are doing. The temptation could become very strong to dilute the quality of what you are selling him in order to increase your profit. This would have a negative effect on your franchisee's business, and ultimately, of course, on yours."

"Many franchise systems came along after us and tried to be suppliers, and they got into severe business and financial difficulty. Our method enabled us to build a sophisticated system of purchasing that allows the operator to get supplies at rock-bottom prices."

"Convincing [suppliers in California] that we were an honest operation, that we protected our operators, and that we would take no kickbacks, was a big order. They could not be persuaded that if they would supply McDonalds restaurants with items the way we wanted them at prices that would allow us to sell hamburgers for fifteen cents, our growth would put them on Easy Street."

"I said [to Harry of Interstate Foods when he wanted to show his appreciation by giving a sign or a clock for the stores.] ".. let's get this straight, once and for all. I want nothing from you but a good product. Don't wine me, don't dine me, don't buy me any Christmas presents. If there are any cost breaks, pass them on to the operators of McDonald's stores."

"[I told Frank Cottee when he was drafting the franchisee licensing agreement ..] "you can hogtie these guys with all the ifs, buts and whereases you like, but it's not going to help the business one goddamn bit. There'll be just one great motivator in developing loyalty in this operation. That is if you got a fair, square deal, and the guy makes money. If he doesn't make money, I'm in a peck of trouble. I'm gonna lose my shirt. But I'll be right out there helping him and doing all I can to make sure he makes money'. As long as I do that, I'll do just fine."

"We are an organisation of small businessmen. As long as we give them a square deal and help them make money, we will be amply rewarded."

Cultivate Win-Win Relationships

"Fred would go out to Milwaukee or Molina or Kalamazoo or wherever a new operation was starting, and he'd call on a baker there and tell him about McDonald's and the buns we would like him to make for us. Fred had the figures laid out cold, so the baker could see why our way was better and how it would save him money. He'd never heard of the kind of box we wanted, so Fred would set up a meeting with the box manufacturer. Supplying buns to McDonald's was the break of a lifetime for many of these men."

"Our stores were selling only nine items, and they were buying thirty or forty items with which to make the nine. So although a McDonald's restaurant's purchasing power was no greater than any other in a given area, it was concentrated. A McDonald's bought more buns, more ketchup, more mustard, and so forth, and this gave it a terrific position in the marketplace for those items. We enhanced that position by figuring out ways a supplier could lower his costs, which meant of course, that he could afford to sell to a McDonald's for less. Bulk packaging was one way; another was making it possible for him to deliver more items per stop."

"Whenever Fred came up with a better idea of handling a product, I'd see to it that our suppliers implemented it in all their operations. My years of experience in selling paper cups and Multimixers paid off here, because I knew exactly what hands held the strings I wanted to pull to get the job done. I didn't start McDonalds until I was fifty-two years old, and then I became an overnight success. But I was just like a lot of show business personalities who work away quietly at their craft for years, and then suddenly, they get the right break and make it big. I was an overnight success all right, but thirty years is a long, long night."

"I've always dealt fairly in business, even when I believe someone was trying to take advantage of me. That's one reason I have had to grind away incessantly to achieve success. In some ways I guess I'm naive. I always try to take a man at his word unless he's given me reason not to, and I've worked out many a satisfactory deal on the strength of a handshake." 

Transparency

"I like people who level with me and speak their minds. I always say exactly what I think; it's a trait that's gotten me in trouble plenty of times, but I never have problems getting to sleep at night with a guilty conscience."

Invest in Tough Times

"[When I re-asserted myself as Chairman and President] I removed that misguided moratorium on building new stores. In reviewing our real estate picture, I discovered all kinds of locations we had purchased and sort of stockpiled for future development. When I was told we were waiting for the local economy to improve in those areas, I hit the ceiling. 'Hell's bells, when times are bad is when you want to build!' I screamed. 'Why wait for things to pick up so everything will cost more? If a location is good enough to buy, we want to build on it right away and be in before the competition. Pump some money and activity into a town, and they'll remember you for it."

Decentralise

"It has always been my belief that authority should be placed at the lowest possible level. I wanted the man closest to the stores to be able to make decisions without seeking directives from headquarters."

"Authority should go with the job. Some wrong decisions may be made as a result, but that's the only way you can encourage strong people to grow in an organisation. Sit on them and they will be stifled. The best ones go elsewhere. I knew that from my past experience with [my boss] John Clark at Lily Tulip Cup. I believe that less is more in the case of corporate management; for it's size, McDonald's today is the most unstructured corporation I know, and I don't think you could find a happier, more secure, harder working group of executives anywhere."

Focus on Your Core Competency

The first Indiana McDonald's opened in 1956. Source: McDonalds Corporation

"Another judgement I made early in the game and enforced through the years would be no pay telephones, no juke boxes, no vending machines of any kind in McDonalds restaurants. Many times operators have been tempted by the side income some of these machines offer, and they have questioned my decision. But I've stood firm. All of those things create unproductive traffic in a store and encourage loitering that can disrupt your customers."

Innovate & Experiment

"A well-run restaurant is like a winning basketball team, it makes the most of every crew member's talent and takes advantage of every split-second opportunity to speed up service. Once our bun-box was finalised, Fred kept coming up with refinements on it."

"Fred applied the same sort of thinking he'd used on the buns [individual rather than clusters and pre-sliced] to all the other supplies being purchased. It's important to make clear Fred wasn't buying these items on behalf of the corporation and we weren't selling to the operators. We set the standards for quality and recommended methods for packaging, but the operators themselves did the purchasing from suppliers."

"The purpose of all of these refinements [for the beef patties - i.e. specific wax packaging paper, optimal stacking etc], and we never lost sight of it, was to make our griddle man's job easier to do quickly and well. All the other considerations of cost cutting, inventory control, and so forth were important to be sure, but they were secondary to the critical detail of what happened there at the smoking griddle. This was the vital passage in our assembly line, and the product had to flow through it smoothly or the whole plant would falter."

"Some of my detractors, and I've acquired a few over the years, say that my penchant for experimenting with new menu items is a foolish indulgence. They contend it stems from my never having outgrown my drummer's desire to have something new to sell. 'McDonald's is in the hamburger business,' they say. 'How can Kroc even consider serving chicken?' Or, 'Why change a winning combination?'

"Of course, it's not difficult to demonstrate how much our menu has changed over the years, and no-body could argue with the success of additions such as the Filet-O-Fish, the Big Mac, Hot Apple Pie, and Egg McMuffin. The most interesting thing to remember about these items is that each evolved from an idea from one of our operators. So the company has benefited from the ingeniuity of its small businessmen while they were being helped by the system's image and our co-operative advertising muscle. This, to my way of thinking, is the perfect example of capitalism in action. Competition was the catalyst for each of the new items. Lou Green came up with Filet-O-Fish to help him battle against the Big Boy chains in the Catholic parishes in Cincinnati. The Big Mac resulted from our need for a larger sandwich to compete against Burger king and a variety of specialty shop concoctions."

"I keep a number of experimental menu items in the works all the time. Some of them now being tested in selected stores may find their way into general use. Others, for a variety of reasons, will never make it."

"Back in the early days when we first got a company airplane, we used to spot good locations for McDonalds stores by flying over a community and looking for schools and church steeples. After we got a general picture from the air, we'd follow up with a site survey. Now we use a helicopter and it's ideal. Scarcely a month goes by that I don't get reports from whatever districts happen to be using our five copters on some new locations that we would never have discovered otherwise. We have a computer in Oak Brook that is designed to make real estate surveys. But those print outs are of no use to me. After we find a promising locations, I drive around it in a car, go into the corner saloon and into the neighbourhood supermarket. I mingle with the people and observe their comings and goings. That tells me what I need to know about how a McDonalds store would do there. Hell, if I listened to the computers and did what they proposed with McDonalds, I'd have a store with a row of vending machines in it."

The first McDonald's fast food franchise c.1955 Source: Time Magazine

Complacency And Humility

"Business is not like painting a picture, you can't put a final brush stroke on it and then hang it on the wall and admire it. We have a slogan posted on the walls around McDonald's headquarters that says, 'Nothing recedes like success. Don't let it happen to you'."

Embrace Change

"Change has been our history, and you can't consider our growth without taking into account the context in which it occurred, an America in which tremendous social changes were taking place. McDonald's is vastly different now from the company it was back in the early days, and that's good."

Competition

"You can learn all you ever need to know about the competition's operation by looking in his garbage cans. I am not above that, let me assure you, and more than once at two o'clock in the morning I have sorted through a competitor's garbage to see how many boxes of meat he'd used the day before, how many packages of buns, and so forth. 

"My way of fighting the competition is the positive approach. Stress your own strengths, emphasize Quality, Service, Cleanliness, and Value, and the competition will wear itself out trying to keep up. I've seen it happen many times."

"My attitude was that competition can try to steal my plans and copy my style. But they can't read my mind; so I'll leave them a mile and half behind."

"The thing that has made this country great is our free enterprise system. If we have to resort to this - bringing in government - to beat our competition, then we deserve to go broke. If we can't do it by offering a better fifteen cent hamburger, by being better merchandisers, by providing faster service and a cleaner place, then I would rather be broke tomorrow and out of this business and start all over again in something else."

Summary

I like what Charlie Munger says about McDonald's and the impact its educational style has had on people.

"I had fun once at a major university when I said I thought McDonald’s succeeded better as an educator than the people in the university did. And what I meant was McDonald’s hires a lot of people who are quite marginal at the very start of their working career. And they learn to show up on time for work and observe the discipline. A lot of them go on in employment to much higher jobs. And they’ve had an enormous constructive effect about educating into responsibility a lot of people who were threatened with not making it. So I think we all owe a lot to the employment culture of McDonald’s. And it’s not enough appreciated." Charlie Munger

In over fifty years of investing, there just isn't a lot Buffett and Munger haven't worked out. Which means that their ideas and opinions on business and investing are usually on the money.

Likewise, if I found just one company that had succeeded using the successful and ethical traits I have listed above, it would just be an anomaly. Its a sample of one and whilst unique, could hardly be called a trend. But when you have so many businesses from so many different industries who have those same traits and beliefs, and are successful because of it, its kind of hard to refute don't you think?

Further Reading: 'The Master CEOs' - The Investment Masters Class

Keep learning on Twitter: @mastersinvest

TERMS OF USE: DISCLAIMER

Learning from Les Schwab

"If you want to read one book that will demonstrate really shrewd compensation systems in a whole chain of small businesses, read the autobiography of Les Schwab, who has a bunch of tire shops all over the Northwest. And he made a huge fortune in one of the world’s really difficult businesses by having shrewd systems. And he can tell you a lot better than we can." Charlie Munger, Berkshire AGM 2004

Every successful company that grows and prospers in an industry that has both powerful competitors and relatively low barriers to entry must have an edge. They've got to have a differentiator that sets them apart, something unique that gives them an advantage in an otherwise crowded economic space.

It's in studying these sorts of businesses and then identifying the characteristics, systems and/or circumstances that allowed them to succeed that can help you formulate your own mental models. These characteristics are typically unconventional, unique and qualitative in nature and often combine to produce results in a non-linear fashion; what Charlie Munger refers to as 'lollapalooza' results. 

Of course, information on these companies is now readily available to us all in a plethora of forms. I'm still a fan of books, though, particularly those that educate me to different ways of thinking, or more importantly those books that are recommended by greats such as Buffett and Munger. In that regard, you can't go past Les Schwab's memoir, 'Pride in Performance, Keep it Going!'

"It’s an interesting book, and, you know, selling tires, how do you make any money doing that?" Warren Buffett

In a speech at the University of California in 2003, Munger drew on the Les Schwab story as a case study to highlight how he combines mental models with a checklist approach to analyse investments.

At 15, Les Schwab was an orphan. At 30, with a $3,500 investment he built the most successful independent tire chain business in the US. Schwab was a straight shooter whose story parallels many of the businesses and leaders we've reviewed recently; Walmart, Home Depot, Panera Bread, Nucor and Starbucks. And like those stories, his lessons have stood the test of time. While the book was written over 30 years ago, the lessons are as relevant today as they were then.

Les Schwab's extraordinary success can be traced to his fanatical nature combined with a business philosophy of empowering, sharing and rewarding staff. Other success traits include a long-term focus, absolute transparency, a win-win culture, continuous innovation and prioritising front line employees. His generous profit sharing plans started with a deal he offered his second employee in 1954, and are probably the most unique sharing plans ever created for employees. A staff retirement fund incentivised employees and provided the capital for the business to both support those staff and grow. It also secured retirements for thousands of employees. It's these characteristics which made the Les Schwab Company almost impossible to compete against. 

I've included some of my favourite extracts from the book below.

Fanaticism & Tone at the Top

"I am 68 years old now. And I've run it in overdrive my whole life."

"It was not unusual for me to drive 600 miles or more in one day and make many stops."

"I think the biggest misconception the public has about a successful businessman is he is working for more money. You won't find many truly successful ones that are greedy."

"I am seventh or eighth down the line if you consider bonuses. I have never taken a bonus from the company."

"I've always wanted to be the best tire dealer, not necessarily the largest tire dealer."

Culture

"Our company is a large family."

"I told my managers .. 'If you don't do for your employees what I have done for you, then this company will die when I die'."

"Mary Kay, founder of the very successful Mary Kay Cosmetic Company has a saying .. 'do good for people and it will come back to you ten fold. Do bad and it will also come back to you tenfold'."

Love your Customer

"Love your customer, give him top service, give him the best available price the first time and stay with it, and don't let your customers run your business."

Pricing Power

"People don't buy tires on price, they buy from someone they trust and from someone who will smile, and from someone who will give service and stand behind what they sell."

Share Profits with Staff

"I encourage you to share profits with your employees. I encourage you in every way possible to 'build people'. This is good for America, it is good for you, and it is good for your employees."

Les Schwab [Source: The Bulletin]

"[The sharing plan that I started in 1954] was the start of the profit sharing plan we still use today. We still share 50 percent of our profits, but we share with all employees in the store. The manager now gets 25% of what is left after sharing with all other employees."

"My thinking has always been, if I give away half the profits I still have half left; if I share $10,000,000 with people, I still have $10,000,000 left over before taxes. I don't understand why businessmen can't do this, as it is unselfish for good reasons. It helps a lot of other people."

"'Unselfish for good reasons' has been a slogan of mine for nearly 34 years."

"I believe in sharing with those who helped me. The more you share, the more you have left for yourself. I don't like to think about having it left for myself. I like to think about it as having it left to expand the business, and to create more opportunity for more young people."

"[When competition arrived that operated for lower cost and somewhat lower prices] after thinking about this for a year or so, wondering if I should cut wages and benefits, I finally made the decision. That decision was, 'If I couldn't be proud of my company, If I couldn't pay good wages, if I couldn't have good benefits, if I couldn't have the best employees, then why would I even want to stay in business, as I had all the money I wanted personally'. So we did nothing, and we won. The customer likes us best. Life is hard .. for the man who thinks he can take a short cut."

"With our programs the employees leave a lot of their money in the company, or Trust, and this too can be used to expand the programs. It's self perpetuating."

"I can't remember one single man leaving our company and doing better outside."

"We have a need to continue to make our company the best employee company in the area. I've never been sorry for my desire to be a good employer. The more I've done for my employees, the more successful our company has been."

"There's something in our program that makes a man, several hundred miles from the main office, be at the store at 7.30am and stay there until 9.00pm. If needed. It's not a thick policy book, it's not a lot of supervisors, as we don't have them; it's something that our programs created in him right in his heart. That is opportunity, the right to be successful, to be a good family man and hold his head high."

Build People

"People are the success of our company. Most anyone can sell tires. The only difference between a Les Schwab Tire Centre and most any tire dealership is the people working there.. And that's why we must continue to ask ourselves .. how can we do an even better job?"

"What is the best route to follow to continue to be successful? What should our company do to to build for the future? The answer is, as it has always been ... BUILD PEOPLE."

"How can you make people feel important? The best way is to believe that they are important. Really believe it!"

"The success of any company is in direct proportion to the ability and motivation of its people, and that fits anything."

"We teach our managers to believe in making the men under them successful."

Empower Staff

"I ask our people to reach for goals that they think are way beyond what they might think possible"

"In our 34 years of business, we have never hired a manager from the outside, nor have we ever hired an assistant manager directly to that job. Every single one of our more than 250 managers and assistant managers started at the bottom changing tires. They have all earned their management jobs by working up."

"We are different from most of the American corporations, as we think the most important people in the company are the people on the firing line; the ones who sell, do the service work and take care of the customer. Most American corporations have the fat salaries and outrageous bonuses for the top people, and treat people at the end of the line as peons. I guess that is why, if you are on the ball, you can beat them on any type of fair competitive basis."

"The office and all the computers, all the records in the world just tell the stores and the other departments what they did last month, last year. Too many corporations think all the brains are in the main office and all the bonus money is paid to the four or five high people. All the others are peons, or just numbers, and if you have a union, that really makes them a number. The truth is that the success is at the other end. The office merely keeps their records and tells them how they are doing. The real job for the office people is to provide motivation, to create programs that make it possible for them to be successful, to be fair, to be open, to have really open communications, to have no secrets, to support them."

"Our managers have much more leeway than any chain type operation that I know of. But the manager, in no way, can take a free ride."

"I'll make a prediction that if our top four or five people in the [head] office start to make more than our top four or five store managers, then our company won't be the company it is today. They won't as long as I am alive. This is an unusual way to run a business; but more businesses would be successful if they gave more attention to the people on the front lines."

Correct Incentives

"We already had an excellent Trust fund set up for our warehouse company which was the same as the stores. I didn't want a bonus based upon the profit of the retreading shop or warehouse, because we could name our own profit. We had captive customers, our stores and member dealers."

Decentralisation

"A company starts, it grows, and as it grows, more and more of the decision making moves to the main office. And this is one hell of a big mistake. The decision making should always be made at the lowest possible level... Give your manager the authority to make his own daily decisions, under certain guidelines of course, but let him run his show."

"Let the people at the store level and your manager know you are behind them. They are the ones who make you successful, not the person in a nice office who has nothing to do today but to send out another damn directive. If it doesn't help the store, tear it up .. tell the store to tell the office to go to hell."

"[We tell store managers that] we expect you to run the store. You are on your own, and you will sink or swim according to your abilities."

"Each store operates as a separate entity and each store operates as a separate business. The store employees share only in the profits of the store they work in."

"The thing that held it together [in the early days] was that we ran each store as a separate entity."

"We have had over the years some people in the [head] office that sometimes think they are more important than the stores. The office serves only one purpose, and that is to serve the stores."

"If the store manager runs his store right, he doesn't have to spend hours and hours looking at the office reports; if he's doing okay the records will show it. In fact if he spends too much time in his office reading the mail, it is a sure thing his store will suffer. Sell tires, give service, keep expenses low, make sure everything is billed out, keep good communications with employees, be careful with credit, watch for leaks .. do these things and you'll come out all right. The damn computers can't run a tire store, they can only tell you what you have done."

"I've told accountants .. you tell us where the pencil has gone; but, if you were smart enough to tell us where the pencil should go, you would really earn the high fees you charge us. The same goes for lawyers."

"Stay out of a store 30 days and you've forgotten 50 percent of what you know."

Look After The Stores

"I never allowed any company to give spiffs directly to our people. Give it to the company, and we'll decide what to do with it."

"Our theory has always been to make the store, or our Member Dealers successful. That if they were successful, then the home office just had to be successful. The big bonuses, the most opportunity, I feel should be at that end. The large corporate policy is that the large bonuses, and the most opportunity, is in the home office. The men at the so called' bottom end' were only numbers. Then I asked 'Who is right? On one side we have the large corporate theory, and on the other you have the Les Schwab theory. Are we smarter than those huge companies? ..  and I think the answer is, you're darn right we are."

"[In response to new lower priced competition I asked] should we attempt to lower our cost by taking away benefits, pay lower salaries? By doing this, we could milk the stores and Member Dealers and pull this back into the home office. Sounds good, but it doesn't work that way. We took the opposite approach. This was the start of our program to make better jobs for the men down the line. We increased wages, we changed and improved our medical, dental and insurance programs. We increased our cash bonus making it 12 percent to be shared instead of 10 percent... The results proved us right. We had better employees than our competitors. We gave better service. I don't have any way of really knowing, but I don't think our percentage wage cost was any higher than our competition because our people just plain 'put out out more'."

"We know that our stores that sell the tires must be successful, and they are more important by far than the main office." 

"The large rubber companies turned out to be our best friends. Why? Because, their ways, their policies broke their dealers, often leaving us as the only deter in town in a position to give service."

Invest in Your Own People

"It is rarely that we accept new member dealers. They have to already be in business; they have to be the most successful dealer in the area, and they should be in good financial shape. We get calls constantly wanting to start what they call a franchised store. Actually, we are not a franchised company, as we don't charge a franchise fee. Sometimes they do have the money but don't have experience. If we are going to take the time to do this, we would rather spend it on our people. We have the money to start more stores, and we don't want to gamble on inexperienced people. Also, if they (a prospective member dealer) expect us to finance them, then we would rather finance one of our own people with one of our own stores."

Innovation and Change

"I told my managers at a meeting that we were going to modernise all our stores, we were going to have tiled restrooms and we were going to have men's and ladies' restrooms. They laughed. Who had ever heard of tiled restrooms in a tire business?"

"When we create programs [eg. profit sharing contract, free-flat tire repairs for ladies, TV advertising approach, employee Trust fund, cash bonus program, 'More Mile' retreading program, centralised retreading plant etc], we are successful. Our future depends on us creating our own programs for the future. If we fail to create, then we will die on the vine, like so many other companies have done in the past."

"Just as sure as the sun will rise tomorrow, our customers will change. We must take into consideration changes as we plan our future advertising, our promotions, our themes, our future image in the marketplace."

"Things, ideas, and people change. If we wait for things to happen the right moment may have passed and the market will have slipped by. We must continue to build enthusiasm into our company. Without enthusiasm out company is dead."

Transparency & Honesty

"All major decisions are made at our store manager meetings. This is the place to argue like hell, but once the decision is made you must follow."

"I've always believed in the complete open book policy. I haven't any reason to hide our profit statements, or to hide anything."

"To me an important element in establishing a happy, prosperous atmosphere is our insistence on open, free, and honest communications in our business meetings. We owe each other our honest opinions at all times. No one wants to follow a weak leader. We build strong leaders with open and honest communications."

"I really do think that young men who work for the Les Schwab Company for three or four years is almost as good as taking three or four years of business schooling. The reason for this is the complete openness of the company. Every employee in every store is encouraged to read and study the Profit and Loss Statement of his store. Each store has a monthly meeting around the P&L Statement. They are encouraged to ask questions."

"[I tell managers] be honest with the people we work with. Be honest with your customer. I've told you before, I'll tell you again .. 'There's absolutely no excuse, no reason, or cause for you to be anything but 100 percent honest with the people you work with, or with the customer you serve."

Humility & Complacency

"If we become complacent, brother it's all over with"

"One thing we must guard against is complacency"

"If we think there is a free lunch, if we rely own last year's results and ask for pay for non-productive items, then this company will turn the corner, too, and then we too will start down the hill. And once you start down, it is mighty hard to turn around. Remember this in years to come and if we do start to fail, remember today, because there will be an association."

Accountability

"All people must carry their weight or move aside; and that includes me."

"We must earn our way every day. And those not earning their way must have the limb sawed off the tree, as cruel as that may sound.. and that goes for Member Dealers, you must earn your way or we must saw off your limb and drop you from the tree."

Win-Win

"I don't want my company to take advantage of anyone."

"I talked about our operation as being a three-way partnership. The stockholders as one unit, the corporations and its people as another unit, and the employee Trust Fund as the third unit. Our company will always be successful as long as all three units work in harmony. Greed can come from any of the three, but most likely it would show up first with the stockholders, it usually does in any company."

"A company, any company, should work up programs and policies that are fair to stockholders, to management and to the employees. And then we should have very open communications, follow the open book policy. If you can't defend it, it must be wrong. If it is wrong, then make it right."

Scale

"I found out early in business life that there was power in volume buying. I think this was one of the main reasons I had such a desire to get big. I know today, right or wrong, that our company can buy tires for much less than the small independent dealers. Many times we could sell at their cost and have the profit we needed."

Summary

Its no accident that we can draw similarities between the likes of Nucor, Panera Bread, Walmart, Home Depot and Starbucks with Les Schwab's Tire Business. Whilst they are all in vastly different industries, each of these business mavericks have struck upon the same ideals when determining how their businesses should run. And whilst all of these appear very similar in terms of things like culture and business ethics etc, the truth of the matter is that as an investor, these things are not easily discovered; they're not evident upon first glance at these organisations.

Ok, its fair to say that their income statements will probably reflect positively because of these traits, but in reality the income statement doesn't tell you why. It also doesn't tell you what to expect in the future - which is what investing is all about. You can't peruse pages and pages of spreadsheets or P&L's to determine that front line people are empowered or that the company has a humble culture. These things are discovered by spending time learning about the business, doing channel checks and considering the factors that make them successful. And by that I mean real time, not time just sitting behind your computer analysing numbers. I can't stress enough the value to be gained from a truly deep dive into organisations to understand what makes them tick; the answers are not to be found on the income statement.

And its not just me espousing this idea - if Munger and Buffett do it, then the rest of us should, too.

Further Reading:
“Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs”, Charlie Munger Speech, University of California, 2003 [courtesy Tilson Funds]
CEO Series - The Investment Masters Class
"A sad day in Les Schwab country", The Bend Bulletin 2007

Keep learning on Twitter: @mastersinvest

TERMS OF USE: DISCLAIMER

Learning from Wal-Mart's Sam Walton

"Walmart figured out ways to do things at lesser costs that people needed — where people spent money in big quantity." Warren Buffett

The Walton family is the richest family in America. And their wealth is the product of one man: the late Sam Walton. Walton's career tracks like many other greats of our time; starting from humble beginnings, soaking up knowledge and learning from others, and then developing an innovative concept of their own along the way.

Walton's first job out of college was as a management trainee at JC Penney. This was in 1940. In 1945, Walton borrowed $20,000 from his father-in-law to buy a Ben Franklin variety store in Newport, Arkansas; population 7,000, and within five years store sales had increased from $72,000 to $250,000 a year. Walton's landlord, noticing the success, wanted to give his son the store and refused to renew the lease, at any price. And Walton was devastated. Rather than drowning in self-pity though, Walton packed his bags for Bentonville, Arkansas, population just 3,000, where he bought a new store. It wasn't until 1962, when Sam Walton, aged 44, opened the first Wal-Mart. 

In 1991, and in poor health, Walton published the memoir 'Sam Walton : Made in America' chronicling history's greatest retailing success story. At the time, Wal-Mart's market capitalisation had escalated from just $135m fifteen years earlier to over $50b. Between 1977 and 1987, Wal-Mart delivered average annual returns of 46% pa. One hundred dollars invested in Walmart in 1972 would be worth $136,000 today, compared to $2,500 invested in the Dow Jones Index.

Wal-Mart vs Dow Jones Industrial Average - 1972-2018 [source: Bloomberg]

Walton's story contains many of the same themes that have characterised other great businesses we've covered such as Koch Industries, Nucor, Home Depot, Pixar and Panera Bread. These themes include reciprocation, win-win philosophy, constant innovation, humility, and culture; they all permeate through the book.

It's little wonder Buffett kicks himself when he didn't buy Wal-Mart in the early days. In fact, Buffett cites this miss as his biggest investing mistake. A 'Mistake of Ommission' that, by 2004, had cost Berkshire shareholders more than $10 billion dollars.

"Walmart — I cost us about — it’s up to 10 billion now.  I cost us about $10 billion. I set out to buy 100 million shares of Walmart, pre-split, at about 23. And Charlie said it didn’t sound like the worst idea ever came up with, which is — from him, I mean, it was just ungodly praise.   And then, you know, we bought a little and then it moved up a little bit. And I thought, “Well, you know, maybe it will come back” or what. Who knows what I thought? I mean, you know, only my psychiatrist can tell me. And that thumb sucking, reluctance to pay a little more — the current cost is in the area of 10 billion." Warren Buffett, Berkshire Meeting 2004

"We blew Walmart, too. When it was a total cinch, we were smart enough to figure that out and we didn’t." Charlie Munger 2017

Highlighted below are my favourite excerpts from Walton's book that explain the key drivers to Wal-Mart's success.

Education and Smarts

"I wasn't what you'd call a gifted student, but I worked really hard."

Learn from Others

"I learned a lesson which has stuck with me all through the years; you can learn from everybody. I didn't just learn from reading every retail publication I could get my hands on, I probably learned the most from studying what John Durnham was doing across the street."

Love

"I loved retail from the very beginning, and I still love it today."

"If you love your work, you'll be out there everyday trying to do it the best you possibly can, and pretty soon everybody around you will catch the passion from you - like a fever."

Focus on Customers and Staff

"The secret to successful retailing is to give your customers what they want."

"Our philosophy of putting the customer ahead of everything else."

"Everything we've done since we started Wal-Mart has been devoted to this idea that the customer is our boss."

"We exist to provide value to our customers, which means that in addition to quality and service, we have to save them money."

"The idea was simple, when customers thought of Wal-Mart, they should think of low prices and satisfaction guaranteed."

"Exceed your customers' expectations. If you do, they'll come back over and over. Give them what they want and a little more. Let them know you appreciate them."

"I'll tell you this; those companies out there who aren't thinking about the customer and focusing on the customers' interest are just going to get lost in the shuffle - if they haven't already."

"I read in some trade publication not long ago that of the strip of 100 discounters who were in business in 1976, 76 of them have disappeared. I started thinking about what really brought them down. It all boils down to not taking care of their customers, not minding their stores, not having folks in their stores with good attitudes, and that was because they never really even tried to take care of their own people. If you want people in the stores to take care of the customers, you have to make sure you're taking care of the people in the stores. That's the most important single ingredient of Wal-Mart."

"As much as we love to talk about all the elements of Wal-Mart's success - merchandising, distribution, technology, market saturation, real estate strategy - the truth is none of that is the real secret to our unbelievable prosperity. What has carried this company so far so fast is the relationship that we, the managers, have been able to enjoy with our associates. By 'associates' we mean those employees out in the stores and in the distribution centres and on the trucks who generally earn an hourly wage for all their hard work. Our relationship with the associates is a partnership in the truest sense. It's the only reason our company has been able to consistently outperform the competition - and even our own expectations."

"The more you share profits with your associates - whether it's in salaries or incentives or bonuses or stock discounts - the more profit will accrue to the company. Why? Because the way management treats the associates is exactly how associates will then treat the customers. And if the associates treat the customers well, the customers will return again and again, and that is where the real profit in this business lies, not in trying to drag strangers into your stores for one-time purchase based on splashy sales or expensive advertising. Satisfied, loyal, repeat customers are at the heart of Wal-Mart's spectacular profit margins, and those customers are loyal to us because our associates treat them better than salespeople in other stores do. So in the whole Wal-Mart scheme of things, the most important contact ever made is between the associate in the store and the customer."

"I didn't catch on to that idea for quite a while. In fact, the biggest single regret in my whole business career is that we didn't include our associates in the initial managers-only profit-sharing plan when we took the company public in 1970."

"Lip service won't make a real partnership - not even with profit sharing. These days, the real challenge for managers in a business like ours is to become what we call servant leaders. And when we do, the team - the manager and the associates - can accomplish anything."

"The decision .. to commit ourselves to giving the associates more equitable treatment in the company, was without a doubt the single smartest move we ever made at Wal-Mart."

"Today, more than 80% of our associates own Wal-Mart stock, either through profit sharing or on their own, and personally I figure most of the other 20% either haven't qualified for profit sharing, or haven't been with us long enough to catch on. Over the years, we've also had a variety of incentive and bonus plans to keep every associate involved in the business as partners."

"One simple thing puts it all together: Appreciation. All of us like praise. So what we try to practice in our company is to look for things to praise. look for things that are going right. We want to let our folks know when they are doing something outstanding, and let them know they are important to us."

"We want our associates to know and feel how much we, as managers and major shareholders, appreciate everything they are doing to make Wal-Mart the great company it is."

"As long as we're managing our company well, as long as we take care of our people and our customers, keep our eye on those fundamentals, we are going to be successful."

Experiment & Keep Innovating

"It didn't take me long to start experimenting - that's just the way I am and have always been."

"We paid absolutely no attention whatsoever to the way things were supposed to be done, you know, the way the rules of retail said it had to be done."

"I think my constant fiddling and meddling with the status quo may have been one off any biggest contributions to the later success of Wal-Mart."

"I've always been driven to buck the system, to innovate, to take things beyond where they've been."

"Most folks were pretty skeptical of the whole [Walmart] concept. Walmart was just another one of Sam's crazy ideas. It was totally unproven at the time, but it was really what we were doing all along; experimenting, trying to do something different, educating ourselves as to what was going on in the retail industry and trying to stay ahead of those trends."

"We were probably ten years ahead of most other retailers in scouting locations from the air, and we got a lot of great ones that way. From up in the air we could check out traffic flows, see which way cities and towns were growing, and evaluate the location of the competition - if there was any."

"Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find a niche by going in exactly the opposite direction."

Empower People

"My role has been to pick good people and give them the maximum authority and responsibility."

"You've got to give folks responsibility, you've got to trust them, and then you've got to check on them."

"We were among the first in our industry with the idea of empowering our associates by running the business as an open book."

"Sharing information and responsibility is a key to any partnership. It makes people feel responsible and involved, and as we've gotten bigger we've really had to accept sharing a lot of our numbers with the rest of the world as a consequence of sticking by our philosophy."

"At our size today, there's all sorts of pressure to regiment and standardise and operate as a centrally driven chain, where everything is decided on high and passed down to the stores. In a system like that, there's absolutely no room for creativity, no place for the maverick merchant that I was in the early days of the Ben Franklin [store], no place for the entrepreneur or the promoter."

"The bigger we get as a company, the more important it becomes for us to shift responsibility and authority toward the front lines, toward that department manager who's stocking the shelves and talking to the customer."

"Our buyers have much more responsibility for deciding what's carried in our stores than buyers at most other companies."

"We all worked together, but each of them [managers] had lots of freedom to try all kinds of crazy things themselves."

Be Optimistic & Accept Mistakes

"It's not just corny saying that you can make a positive out of most any negative if you work at it hard enough. I've always thought of problems as challenges."

"When somebody made a bad mistake - whether it was myself or anybody else - we talked about it, admitted it, tried to figure out how to correct it, and then moved on to the next day's work."

Imitate

"Most everything I've done I've copied from somebody else."

"I guess I've stolen - I actually prefer the word 'borrowed' - as many ideas from Sol Price as from anybody else in the business."

Listen, Remain Open Minded & Decisions at the Edge

"[Sam Walton] was always open to suggestions, and that's one reason he's been such a success." Claude Harris

"I don't like to go to the [management] meeting and hear about just the good things that are happening. I like to hear what our weakness are, where we aren't doing as well as we should and why. I like to see problems come up and hear suggestions as to how it can be corrected."

"We're always looking for new ways to encourage our associates out in the stores to push their ideas up through the system."

"Listen to everyone in your company. And figure out ways to get them talking. The folks on the front lines - the ones who actually talk to the customer - are the ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organisation, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you."

"Great ideas come from everywhere if you just listen and look for them. You never know who is going to have great ideas."

Hard Work

Working weekends; it's just something you have to do if you want to be successful in the retail business."

"Four-thirty [am] wouldn't be all that unusual a time for me to get started down at the office."

Competition

"I was visiting stores all the time, and I still do today."

"I ran the country studying the discounting concept, visiting every store and company headquarters I could find."

"Some folks no doubt figured we were a little fly-by-night - you know, in the discount business today but out selling cars or swampland tomorrow. I think that misunderstanding worked to our advantage for a long time, and enabled Wal-Mart to fly under everybody's radar until we were too far along to catch."

"We would be putting in fifty stores a year, when most of our [competitive] group would be trying to start three, four, five or six a year. It always confounded them."

"[The competition] didn't really commit to discounting. They held on to their old variety concept stores too long. They were so accustomed to getting their 45% mark-up, they never let go. It was hard for them to take a blouse they'd been selling for $8.00, and sell it for $5.00, and only make 30%. With our low costs, our low expense structures, and our low prices, we were ending an era in the heartland. We shut the door on variety store thinking."

"I remember [Sam Walton] saying over and over again; go in and check our competition. Check everyone who is our competition. And don't look for the bad. Look for the good." Charlie Cate

"I like to keep everybody guessing. I don't want our competitors getting too comfortable with feeling they can predict what we're going to do next. And I don't want our own executives feeling that way either. It's part of my strong feeling for the need for constant change, for keeping people a little off balance."

"Competition is actually the reason I love retailing so much.. There is always a challenger coming along .. To stay ahead of those challengers, we have to keep changing and looking back over our shoulder and planning ahead."

"So far none of our competitors has yet been able to operate on the volume that we do as efficiently as we do. They haven't been able to get their expense structure as low as ours, and they haven't been able to get their associates to do all those extra things for their customers that our do routinely; greeting them, smiling at them, helping them, thanking them."

Touch the Business

"Because I have spent as much time as I could out where it counts, in the stores, seeing if we're doing the job we should be, it has put a very heavy load on all our executives, especially since I expect them to get out in the stores too."

"I always tried to maintain a sense of hands-on, personal supervision - usually flying around to take a look at our stores on a regular basis."

"A computer is not - and never will be - a substitute for getting out in your stores and learning what's going on. In other words, a computer can tell you down to the dime what you've sold. But it can never tell you how much you could have sold."

"At Wal-Mart we are absolute fanatics about our managers and buyers getting off their chairs in Bentonville and getting out into those stores."

"The really valuable intelligence that surfaces in these [management] sessions is what everybody has brought back from the stores."

"Visiting the stores and listening to our folks was one of the most valuable uses of my time as an executive. Our best ideas usually do come from the folks in the stores. Period."

"For a long, long time Sam would show up regularly in the drivers' break room at 4am with a bunch of doughnuts and just sit there for a couple of hours talking to them. He grilled them. 'What are you seeing at the stores?' 'Have you been to that store lately?' 'Is it getting better?' It makes sense. The drivers see more stores every week than anybody else in this company. And I think what Sam likes about them is that they're not like a lot of managers. They don't care who you are. They'll tell you what they really think." Lee Scott

Scale

"The efficiencies and economies of scale we realise from our distribution system give us one of our greatest competitive advantages."

"When you own and manage your distribution and logistics channel, you have a great competitive advantage over companies that rely on third-party suppliers."

Culture

"A strong corporate culture with its own unique personality, on top of the profit-sharing partnership we've created, gives us a pretty sharp competitive edge."

"We've always tried to install in our folks the idea that we at Walmart have our own way of doing things. It may be different, and it may take some folks a while to adjust to it at first. But it's straight and honest and basically pretty simple to figure out if you want to. And whether or not the folks want to accomodate us, we pretty much stick to what we believe in because it's proven to be very, very successful."

"I enjoyed doing what I was doing so much and seeing the thing grow and develop, and seeing our associates and partners do so well, that I never could quit."

"If you're committed to the Walmart partnership and it's core values, the culture encourages you to think of all sorts of ideas that break the mood and fight monotony."

"We and the associates and the management like to do things together that contribute to the community and make them feel like a team, even if they don't directly relate to selling or promoting our merchandise."

"The bigger Wal-Mart gets, the more essential it is we think small. Because that's how we have become a huge corporation. - by not acting like one."

Tone at the Top

"A lot of people think it's crazy of me to fly coach whenever I go on a commercial flight, and maybe I do it a little bit. But I feel like it's up to me as a leader to set an example. It's not fair for me to ride one way and ask everybody else to ride another way. The minute you do that, you start building resentment, and your whole team idea begins to strain at the seams."

"We as a family have bent over backwards not to take advantage of Walmart, not to press our ownership unfairly, and everybody in the company knows it."

Drive Win-Win Relationships

"We're co-operating with our big vendors these days at the highest levels."

"We can get beyond a lot of our old adversarial relationships and establish win-win partnerships with our suppliers and our workers, which will leave us with more energy and talent to focus on the important thing, meeting the needs of our customers. "

"In the future, free enterprise is going to have to be done well - which means it benefits the workers, the stock holders, the communities, and of course, management, which must adopt a philosophy of servant leadership."

"You may have trouble believing it, but over time we've tested the old saying, it has paid off in spades: the more you give, the more you get."

Harness Technology

"We as a company have been ahead of most other retailers in investing in sophisticated equipments and technology."

"Without the computer, Sam Walton could not have done what he's done. He could not have built a retailing empire the size of what he's built, the way he built it. He's done a lot of other things right, too, but he could not have done it without the computer. It would have been impossible." Abe Marks

Accept and Adapt to Change

"To succeed in this world you have to change all the time."

"You can't keep doing what works one time, because everything around you is always changing. To succeed, you have to stay out in front of that change."

"I've made it my own personal mission to ensure that constant change is a vital part of Wal-Marts culture itself. I've forced change - sometimes for change's sake alone - at every turn in our company's development. In fact, I think one of the greatest strengths of Wal-Mart's ingrained culture is its ability to drop everything and turn on a dime."

"Just like everybody else, in order to survive, we need to keep changing the things we do."

"If American business is going to prevail, and be competitive, we're going to have to get accustomed to the idea that business conditions change, and that survivors have to adapt to this changing conditions. Business is a competitive endeavour, and job security lasts only as long as the customer is satisfied. Nobody owes anybody else a living."

"A whole lot has changed about the retailing business in the forty-seven years we've been in it - including some of my theories. We've changed our minds about some significant things along the way and adopted some new principles. But most of the values and the rules and the techniques we've relied on have stayed the same the whole way."

Humility

"If we ever get carried away with how important we are because we're a great big $50b chain - instead of one store in Blytheville, Arkansas, or McComb, Mississippi, or Oak Ridge, Tennessee - then you probably can close the book on us."

"A lot of bureaucracy is really the product of some empire builder's ego. Some folks have a tendency to build big staffs around them to emphasise their own importance, and we don't need any of that at Wal-Mart. If you're not seeing the customer, or supporting the folks who do, we don't need you."

Lollapalooza

"One thing you'll notice if you spend very much time talking with Sam about Wal-Mart's success. He's always saying things like ‘This was the key to the whole thing.' or That was our real secret.' He knows as well as anyone that there wasn't any magic formula. A lot of different things made it work, and in one day's time he may cite all of them as the key' or the 'secret.' What's amazing is that for almost fifty years he's managed to focus on all of them at once all the time. That's his real secret.” David Glass

Team Work

“If you want to build an enterprise of any size at all, it almost goes without saying that you absolutely must create a team of people who work together and give real meaning to that overused word ‘team-work.’ To me, that's more the goal of the whole thing, rather than some way to get there.”

Celebrate and Have Fun

“Celebrate your successes. Find some humor in your failures. Don't take yourself so seriously. Loosen up: and everybody around you will loosen up. Have fun. Show enthusiasm-always.”

Investors and the Long Term 

"I believe the folks who have done the best with Wal-Mart stock are those who studied the company, who have understood our strengths and our management approach, and who, like me, have just decided to invest with us for the long run."

“If I were a stockholder of Wal-Mart, or considering becoming one, I'd go into ten Wal-Mart stores and ask the folks working there, "How do you feel? How's the company treating you?" Their answers would tell me much of what I need to know."

"As companies get large, with a broader following of investors, it becomes awfully tempting to get into that jet and go up to Detroit or Chicago or New York and speak to bankers and the people who own your stock. But since we got our stock jump-started in the beginning, I feel like our time is better spent with people in the stores, rather than off selling the company to outsiders. I don't think any amount of public relations experts or speeches in New York or Boston means a darn thing to the value of the stock over the long haul. I think you get what you're worth."

"As business leaders, we absolutely cannot afford to get all caught up in trying to meet the goals that some retail analyst or financial institution in New York sets for us on a team-year plan spit out of a computer that somebody set to compound at such-and such rate. If we do that, we take our eye off the ball."

"If we fail to live up to somebody's hypothetical projection for what we should be doing, I don't care. It may knock our stock back a little, but we're in it for the long run. We couldn't care less about what is forecast or what the market says we ought to do. If we listened very seriously to that sort of stuff, we never would have gone into small-town discounting in the first place."

Postscript: Amazon

While Buffett initially missed Wal-Mart, he took a position in 2005. In 2017, Buffett exited the position. The Internet had changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers. A new competitor also emerged.

Unencumbered by store costs and a conventional retailers mindset, Amazon.com harnessed technology to lower costs, increase selection and convenience and developed a pact with shareholders to accept limited profitability in return for a long term competitive advantage.  

“Walmart’s a fabulous company. What Sam Walton’s and his successors did is one of the great stories of American business. I think retailing is too tough for me – just generally. We bought a department store in 1966 and I got my head handed to me. I bought Tesco in the UK and I got my head handed to me. Retailing is very tough and I think the on-line thing is very hard to figure out. I think Amazon in particular is an entity that’s gonna have everyone in their sights, and they've got delighted customers and it's extraordinary what they’ve accomplished. That is a tough, tough competitive force. Now Walmart is pushing forward online themselves and have all kind of strengths but I thought I’d look for an easier game.”  Warren Buffett 2017

Walmart Share Price vs Amazon - 1972 Normalised Source: Bloomberg

Amazon Share Price vs Dow Jones vs Walmart - 1998 Normalised Source:Bloomberg

Summary

Sam Walton's incredible story illuminates the characteristics that combined to create a compounding machine. They have a relentless focus on the customer and a competitive edge derived from: distribution scale, embracing counter-parties, empowering employees, experimentation driving innovation, first mover advantages and corporate culture. And when combined with a large runway for sales, shareholder returns were phenomenal.

The history of Wal-Mart also highlights the brutality of capitalism. Change is inevitable. No business is forever. Trees don't grow to the sky. In 2015, after just two decades, Amazon’s value bypassed that of Wal-Mart. Ironically, Sam Walton ended his memoir contemplating whether there could be another Walmart.

"My answer is of course it could happen again. Somewhere out there right now there's someone - probably hundreds of thousands of someones - with good enough ideas to go all the way. It will be done again, over and over, providing that someone wants it badly enough to do what it takes to get there. It's all a matter of attitude and the capacity to constantly study and question the management of the business." Sam Walton

As Walton had copied others, Amazon's Jeff Bezos copied Walton. According to Brad Stone's book, 'The Everything Store: Jeff Bezos and the Age of Amazon', Bezos studied the lessons of Walton and weaved them into the fabric of Amazon. 

Notwithstanding, Sam Walton's legacy of prioritising the customer, continuous innovation, technology embracement, and developing win-win relationships remains enduring. As Bezos became the Sam Walton of the 21st Century, the next Bezos maybe out there now.

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Further Reading: 

MASTER CEO'S

Ray Kroc - McDonalds

Howard Schultz - Starbucks

Ken Iverson - Nucor

Bernie Marcus - Home Depot

Sol Price - The Price Club

Jim Sinegal - Costco

Sam Walton - Walmart

Jeff Bezos - Amazon

Karl Albrecht - Aldi

Arthur Blank - Home Depot

Yvon Chouinard - Patagonia

Bob Iger - Disney Corporation

Herb Kelleher - Southwest Airlines

Charles Koch - Koch Industries

Les Schwab - Les Schwab Tires

Charles Schwab - Charles Schwab Co

Jamie Dimon - JP Morgan

Ron Shaich - Panera Bread

Lynsi Snyder - IN-N-OUT Burger

Leonard Lauder - Estée Lauder

Willis Johnson - Copart

Don Keough - Coca-Cola

Ed Catmull - Pixar

Hunter Harrison - Railroader

Julian Richer - Richer Sounds

Bruce Halle Discount Tire

Dick Erickson - Sun Tires

Culture, Enculturation and the Cult of Home Depot

Have you heard the story about the two guys who were fired from their jobs running a US hardware chain, who then went on to build a hardware powerhouse that delivered investor returns that made the S&P500 and even Buffett's Berkshire Hathaway look pedestrian? That's right, I'm talking about Home Depot, which since inception has been an astounding compounding machine. 

Like Buffett himself, Home Depot's co-founders, Bernie Marcus and Arthur Blank, have shared the secrets to their success in the 1999 book 'Built from Scratch - How a Couple of Regular Guys Grew the Home Depot from Nothing to $30b'. Home Depot turned the hardware industry upside down. They introduced big box stores which utilised high volume turnover and direct product sourcing to offer unbeatable prices, they encultured and empowered their staff to harvest customer relationships and they grew the market for do-it-yourselfers by teaching their customers the needed skills to save money. Fast forward to today and Home Depot's market capitalisation is an astonishing $229b!

The history of retailing is filled with once-great companies that disappeared off the face of the earth. It's one of the toughest industries to survive in, let alone prosper, given the minimal barriers to entry, changing customers demands and ruthless competition.

"Retailing is a tough, tough business, partly because your competitors are always attempting and very frequently successfully attempting to copy anything you do that's working. And so the world keeps moving. It's hard to establish a permanent moat that your competitor can't cross." Warren Buffett

In light of the above, it should come as no surprise that the defining characteristic underpinning Home Depot's success is Culture. In recent posts we've learnt the importance of culture and you'll see how Marcus and Blank have leveraged it to phenomenal success. 

Warren Buffett has long recommended studying great businesses as case studies to enhance investment skills, and ‘Built from Scratch’ is one of the most insightful business books I've read. It tells the story of The Home Depot's founders, sharing invaluable lessons on customers, employees, competition, scaling a business, brand-building, and more—critical topics for anyone in business. You won't find anything in the way of margin guidance, inventory turns, staffing ratios or comparable store sales; all that stuff that tends to fill analyst models. This is all qualitative stuff. 

Below you'll find some some of my favourite passages from the book, nuggets of wisdom that can help you frame the questions you ask and worthwhile observations in your own quest to find compounding machines. 

Push Boundaries

"We were always pushing boundaries beyond where our industry's conventional wisdom suggested we could go."

"No one believed we could do it, and very few people trusted our judgement."

Culture

"Ten years ago, The Home Depot advertised stores that were bigger than two and a half football fields. That was a point of difference. Today, who isn't bigger than two and a half football fields? We also said we carried more than 30,000 items. That was a point of difference. Well, who doesn't have more than 30,000 items today? And who doesn't have low-price guarantee? If all those things have become a commodity, why is The Home Depot still so successful? It is the culture of the people."

"The numbers are important as a measure of our success. But we've attained them because of a culture that is agile and flexible enough to change direction as quickly as events demand it."

"You can copy a Black & Decker drill and sell it for the same price that we do, but you can't copy The Home Depot culture. We think we're very difficult to emulate without believing in the same values that we do."

"Another important issue for us in considering an acquisition is culture. If ours is not akin to what we're acquiring, it represents a major problem. Is what they believe in similar to what we believe in? If not, we're going to have to work very hard to make it fit, and it may not be worth it. That's why we generally prefer to build from within."

Home Depot Share Price vs S&P500 and Berkshire Hathaway. Source: Bloomberg

Competitors

"The Home Depot is far ahead of Lowe's in every major measurement of success. We produce on average about 40 percent more volume out of our big boxes than they do at a 40 percent greater rate of profitability."

"When you only copy somebody and don't really understand why they're doing what they're doing, you're never going to be as good as the original. That's Lowe's problem vis-a-vis The Home Depot. They copy almost everything we do, from store design to marketing. But the reason they still only achieve about 60 percent of our volume is that they don't understand the essence of what we do: take care of the customers."

"The industry knew we were edging closer and closer to them but they never prepared for us. They all knew that we would eventually present a direct threat, but they couldn't think in terms other than the way they had for decades."

"The way we did business was hard for old-timers to understand. They couldn't understand sales volume and velocity as opposed to gross margin. Their key was selling less at a higher price; ours was selling more at a lower price. They couldn't understand our dynamics or the numbers."

"The fact we were able to design our company on a clean sheet of paper and weren't hampered by years of tradition and years of people being committed to a certain sort of business form played to our advantage with both customers and the industry."

The Customer

"Whatever it takes, serve the customer."

"Nobody could compete with us on price."

"Never, ever take the customer for granted."

"The key is not to make the sale. The key is to cultivate the customer."

"We believe in doing more than customer service. We call it customer cultivation. If you cultivate it will bear more fruit."

"Every business is there to please the customer."

"One of our values: caring for the customer. Care for them today and they'll be back tomorrow."

"We don't just develop an intellectual relationship with our customers and associates. There also needs to be a tight emotional bond. At the end of the day, we're in the people business. And people need bonds with each other."

"The reason we have our business is because customers trust us."

"We did not for one minute take the customers coming own our store for granted. We really wanted them back, and our entire service culture developed from that. It wasn't some lofty idea written by out-of-town consultants in a policy book nobody read. It was necessary."

"The job of the people working in the stores [is] to do whatever it takes to make customers happy."

"We are in the business not to destroy a competitor but to serve the customer. If, as a result of that, we end up hurting a competitor, that is fine, but it can't be our focus. Our focus has to be on the customer. The truth of the matter is, we have to win the customer. We don't have to beat the competitor, we have to win the customer."

"The way to win the hearts and minds of customers is with merchandise, price comparisons, and sufficient stock. But that is the mechanical part of the business. We win their hearts and their minds with our people."

"If I ever saw an associate point a customer toward what he or she needed three aisles over, I would threaten to bite that associate's finger. You won't even see aisle numbers in our stores. There is not a retailer on the face of the globe with 1,000,000 square foot stores other than Home Depot without some aisle numbers. Why? Well, if we had aisle numbers, when a customer asks, "Do you know where I can find this widget?" it would be very easy for our associates to point and say, "aisle eight." If there are no aisle numbers, the employee has to say, "Let's take a walk and we'll find it together.""

"Our people were already instructing weekend warriors in an informal way. Putting on How-To-Clinics became a way of formalising the teaching and making it available to all of our customers and further cultivating their interest in do-it-yourself home improvement. We saw people who were all thumbs before they came into The Home Depot go on to do room additions or build their own homes. That's a big part of how we created demand that never existed before."

"We gave customers the knowledge to do it themselves at the right price. Today, you could install a Mills Pride kitchen yourself for $3,000 that would have cost you $25,000 and the services of a pro twenty years ago."

"Home Depot is and always will be evolving to find new and better or additional ways to serve our customers."

People

"Why have I been successful my whole life? Because I've always surrounded myself with people who are better than I am."

"The company didn't blossom from miracles. It came from our instincts, knowing whom to do business with and whom to avoid."

"The single most important reason for the Home Depot's success is our effort to take care of associates."

"You can teach anyone about a drill, but you can't teach people how to smile and be kind to other people."

"We learned that love and compassion do a hell of a lot more than just buying people."

"Hire the best people. Payroll is not an expense to us; it's an investment." 

"The people at the stores are the most important - after customers - because they interface with the customer, and since Bernie and I really couldn't begin to tell you how to wire a house, we are the least important when it comes to satisfying a customer."

"Everyone who works at the Home Depot is an associate of Bernie and me."

"[Sales Associates] are the heroes of the company, the ones who create a cult among our customers. We're trying to make our customers bleed orange."

"We value what the salesperson on the store floor says just as much - sometimes more - than what a district manager says, if they're right. That's because the salesperson touches the customer more."

"We also put a larger percentage of our overall sales back into store payroll, putting more people on the sales floor than anyone else."

"We're only as good as our people - especially the men and women working in our stores. If the front line isn't absolutely committed to the cause we can't win."

"Setting the stores gives our people ownership. We don't own these stores; they do."

"We pay people what they are worth. That is the cornerstone of the culture of the company."

"When it comes to people, you must look past the numbers, past the resumes, and look at their heart and soul. And you must treat people as you would want to be treated."

"One of our values is caring for our people. If we expect them to take care of our customers, we've got to take care of our associates." 

"Our theory has always been that if we were going to get rich, we wanted our associates to get rich with us. If we were going to benefit, they were going to benefit as well. That has always been a part of our philosophy."

"Everyone has a stake in the company that goes beyond earning a day's wage. Associates have a real vested interest in cultivating customers and building lifelong relationships with them."

"Our associate turnover is very low for the home improvement industry."

"Our competitive advantage is having knowledgeable salespeople."

"As good as we are on price, that is never the most important decision. More important is product and project knowledge."

"Our Atlanta Training Center teaches new and existing store managers and district managers how and why our culture, philosophy and leadership approach works."

"What makes us so different from anyone else in our industry is that we take the inverted management structure so seriously."

"Bernie and I believe it's all about trust. With the right value system and the right knowledge to do their job, people can be trusted to make the right decisions. If you can operate with that kind of trust, you don't have to micromanage. And people will do more good for the company than anyone could ever dictate."

"There is a cultural adjustment that must take place for anyone to be valuable to this company."

Head Office

"The sign at the front entrance of our main offices in Atlanta says "Store Support Center" Not "World Headquarters." It is not a corporate ivory tower. It is truly the store support center. We want everybody in this building to know that we are here to support the stores." 

"Everyone's career depends on how the associates in the stores function. If the people in the Store Support Centre or divisional offices don't feel like they are selling a product to customers in the stores, then they are part of a bureaucracy, and they will stymie the stories, not help them."

"We don't care what your job is. What have you done to sell a product to our customers? What have you done to bring a customer into our stores? What have you done to make a manufacturer want to sell to our company? You have a role, and if you don't think you do, you don't belong here. If you don't know what that role is, you need to find out."

Decentralisation and Empowerment

"Our store managers and their assistant managers have more operating and decision-making leeway than in any other retail chains in America. We want them to roam and test parameters to see how far they can move out on the fringe of the property."

"One of our big advantages that we have over most of our competitors is being decentralised. It allows us to be close to the customers and access the best knowledge in the field. That way we can do not only what is right for the stores, but also respond to the marketplace and support the associates in the stores."

"We insist, we demand that our people take risks, and then take responsibility for those risks. "It is your business, your division, your market, your store, your aisle, and your customer. It is not a Home Depot customer, it is your customer.""

"Don't wait for some Home Depot bureaucrat to give you an answer or fix your problem. And don't blame somebody else. If you have something that needs to be fixed, fix it."

"We expect the associates to run their store like it is their own business, tailoring a great deal of the product selection to local needs and buying local products."

"Our people are shopkeepers. As long as they run their business well or reasonable well, we don't bother them."

"Our culture is about making sure people understand that they are empowered to do what is right. We worry about the other stuff; just do what is right now."

Values

"Our values are the magic of Home Depot. By consistently and emphatically teaching and enculturating them through the ranks of managers and on to the people working in the stores, we know that each and every one of these 160,000 folks will take care of the customer and each other. The rest takes care of itself."

"If a company's values are nothing more than words hanging in the lobby of a corporate headquarters for visitors to see, they're a fantasy, dead on arrival."

"A sure way to grow the company is to clearly state our values and install them in our associates. Values are beliefs they do not change over time; they guide our decisions and actions. They are the principles, beliefs, and standards own our company. We call this process of enculturation 'bleeding orange.'"

"Our values empower our people to be their best. If we can implant a value system that lets them apply their basic goodness and ingenuity to the Home Depot and its customers, that's all we need to succeed."

"These values are our company. They are out belief system, and we believe in them as much today as when the first Home Depot stores opened in June 1979. Without them, we're no different than our competition. Our competitors could copy them just as they've copied our stores, products, and merchandising ideas. But they would have to believe in the ideas underlying these values to make them effective, and that's a tough step to take."

"We believe there is no perfect, ongoing formula, as long as your values remain constant."

Transparency

"Managers can ask any kind of question no matter how blunt, invasive, or even offensive it might be. These meetings are intended to be naked, honest exchanges of information and opinions. Bernie insists on it - no pussyfooting around."

A Vision

"A great company goes beyond making money. A great company has a mission, a vision, a dream."

"You must stick to a vision and turn people into believers."

Setting examples

"If an associate picked something up off the floor, it was because we did it first. We set the example. Few people ever felt that they were working for somebody."

"Let me go back to the essence of what the company is: Role-modelling. Every manager and every district manager in this company is a trainer and a teacher."

Change

"The world changes, the environment changes, competition changes, people change, everything changes. Retailers can't ever stay the same. If you don't change you are a dead duck. You must wake up every morning and wonder, "Who will destroy me today if I don't keep my eyes open?" You must constantly think about ways to out-manoeuvre the competition and be the number one horse."

"Responding to change is one of the reasons for the success of the Home Depot."

Innovation

"Much of our success through the years has resulted from a love of discovering and inspiring new products, putting a new sales spin on reliable classics, and our passion for seeing them move through the cash registers."

"We are always looking over our shoulders. The essence of keeping our company great is its non-stop reinvention, because if you are in constant motion, nobody can catch you. You must maintain that motion, whether it be physical layout of the store, merchandising, advertising, or a thousand other factors. It is no different than changing your clothes everyday. If your spouse wore the same clothes everyday, after a while, you'd stop looking at him or her."

"No matter what your business, you cannot stay still for any length of time, or our competitors will scratch and crawl over you."

"[We do] workouts. This involves getting all the people closely tied to any given business problem and to lock themselves in a room together - for as long as two days - and work out potential solutions. Even if it's something we're doing well, how can we do it better?"

Flexibility

"Our flexibility and our enhanced ability to adapt, is not only to positive developments but to negative ones, too. That was a very, very important issue that goes back to finding out what you are doing right and what you are doing wrong."

Planning Ahead

"One of the key strategies of this company has always been to do things before we needed to do them. That might sound obvious, but lots of companies get painted into a corner, then have to react instead of pre-act."

Humility & Studying Failure

"You can't ever, ever take it for granted that you own the business. Because everybody who does eventually disappears of the face of the earth. We learned that by studying people who failed and understanding why they failed. Failures - especially our own - are great teaching tools. If someone fell on his face prior, why would you do the same thing again?"

"Bernie and I relearn our business firsthand from people on the floor of the stores. The associates know more about the products and what the customers are looking for than we do. It is a changing, teaching experience."

"We are not more important that the customer."

"Even our investors find it hard to believe the founders of the company still participate in training managers, expounding the The Home Depot explicit values, as if that were beneath us."

Store Walks

"Store walks are such an important and valuable tool to this company, that they're required not just of our executives, but of our board of directors, too."

"It flattens the management pyramid by creating communication from the very top to the very bottom of the company."

"Some managers manage by walking fast and looking worried. We would rather them take their time, focus, see what the customer is seeing, talk to the customer, and interact, because that is where you get all your answers."

"Bernie and I probably spend 25 to 30 percent of our time in the stores. The balance is spent training managers in our culture and teaching merchandising."

Common Sense & Bureaucracy

"Common sense was an overriding factor in everything we did. Nothing but our values, ethics, and morality were set in concrete."

"Bureaucracy is giving in to stupidity and ignoring common sense. When you know something is wrong and you don't challenge it, you have become bureaucratic. The root cause of creating a bureaucratic environment is when people are afraid to make mistakes. We want our people to be unafraid of making mistakes."

"The culture of this company intentionally beats down our associates' fear of bureaucracy, opening up very honest face-to-face interaction. Smart associates are not afraid of us."

"If anything ever kills the personality of this company, it will be creeping bureaucracy."

Summary

Payroll is not an expense, its an investment. Place customers at the forefront and encourage staff to interact with them. Learn from your mistakes and the mistakes of others. Have Management and Board Members walk the store floors. Empower your people. Share the winnings. Set the example. Innovate and drive constant change. Remove bureaucracy. Support your staff.

But why do all of this? Because great Culture is a competitive advantage that is hard to compete against. And its hard to argue against when you look at Home Depot's returns since inception. $100 invested in 1981 would have earned you $2,377 on the S&P, $9,719 within Berkshire Hathaway, and an astonishing $569,000 in Home Depot.

And you don't have to be a rocket scientist to see that in the end it's very easy maths indeed. Great Culture = Great Business.

Follow us on Twitter: @mastersinvest

TERMS OF USE: DISCLAIMER

Further Reading: 
Investment Masters Class: Learning from Arthur Blank
The Home Depot: Built from Scratch

Learning From Jamie Dimon

There are a number of letters that I look forward to reading each year. Some of them are well known and Buffett's are, of course, a classic example. There are also others that have added enormous value to my thinking over the years, and that have opened my eyes to many new and varied investment opportunities. They have also helped me spot emerging themes, new ideas, thought processes and mental models. I mentioned Buffett because his 2011 letter is a case in point. In that letter, Buffett recommended reading Jamie Dimon's annual letters. And it's little wonder; Buffett has said this about Dimon in the past...

"I think he knows more about markets than probably anybody you could find in the world." 

"I recommend you read Jamie Dimon’s letter, at JPMorgan, is a tour de force, in terms of describing the banking scene, the economic scene. He has some real insights in there about some very important subjects."

“We don’t own that stock, but it’s a letter that I think everybody could learn a lot from reading.”

Jamie Dimon, the son of a stockbroker, has been at the helm of JP Morgan [and it's predecessor firm 'Bank One'] since March 2000. In that time the tangible book value has compounded at 11.8%pa vs 5.2%pa for the S&P500. Not surprisingly, the stock price has followed, delivering a 12.4%pa return vs the S&P500's 5.2%pa over that period. A cumulative gain of 691% versus 147% for the S&P500. Not bad considering the multitude of challenges that have faced global banks over that period, including the worst financial crisis since the Great Depression.

Source: Jamie Dimon Annual Letter [JP Morgan]

What's evident from Dimon's letters is his grasp of both investing and business; two essential characteristics according to Buffett which are required for success. 

"Being an investor you're buying pieces of a business. And being a businessman, you better understand alternatives for money, in terms of allocating capital - and therefore you are partially an investor. So I've benefited in both roles by the fact I was in the other one." Warren Buffett

Dimon's 2017 letter covers off on many of the themes we have highlighted in other posts that define successful businesses and CEOs. Dimon's information is likely as good as it gets, he has a bird's eye view of the global economy and his letter provides insights into markets, the economy and possibilities for the future. At 47 pages, it's comprehensive. But it's an easy read and for that you can thank Warren Buffett...

"I read his [Buffett's] partnership letters when I was in high school or college and he would say 'I'll speak to you as if you're my smart sister who doesn't know everything I know so I have to go out of my way to explain it to you and business isn't complicated'. I always felt exactly the same way." Jamie Dimon

I've included some of my favourite extracts below..

How to Consider Banks

" .. we believe tangible book value per share is a good measure of the value we have created for our shareholders. If our asset and liability values are appropriate — and we believe they are — and if we can continue to deploy this capital profitably, we now think that it can earn approximately 17% return on tangible equity for the foreseeable future. Then, in our view, our company should ultimately be worth considerably more than tangible book value."

"... tangible book value “anchors” the stock price."

Source: Jamie Dimon Annual Letter [JP Morgan]

Buybacks

"In prior years, I explained why buying back our stock at tangible book value per share was a no-brainer.. While we prefer buying back our stock at tangible book value, we think it makes sense to do so even at or above two times tangible book value."

" ... we much prefer to use our capital to grow than to buy back stock. Buying back stock should only be considered when we either cannot invest (sometimes that’s a function of regulatory policies) or when we are generating excess, unusable capital."

Quarterly Earnings & Stock Price

"Our stock price is a measure of the progress we have made over the years. This progress is a function of continually making important investments, in good times and not-so-good times, to build our capabilities — people, systems and products. These investments drive the future prospects of our company and position it to grow and prosper for decades."

"We do not worry about the stock price in the short run, and we do not worry about quarterly earnings. Our mindset is that we consistently build the company — if you do the right things, the stock price will take care of itself."

Source: Jamie Dimon Annual Letter [JP Morgan]

"Do not confuse financial success with profits in a quarter or even in a year. All businesses have a different customer and investment life-cycle, which can be anywhere from one year to 30 years – think of building new restaurants to developing new airplanes or building electrical grids. Generally, anything our business does to grow will cost money in the short term (whether it’s opening branches or conducting research and development (R&D) or launching products), but it does not mean that it is not the right financial decision.

A company could be losing money on its way to bankruptcy or on its way to a very high return on invested capital. Diligent management teams understand the difference between the two scenarios and invest in a way that will make the company financially successful over time.

You need to invest continually for better products and services so you can serve your customers in the future. A bank cannot simply stop serving its clients or halt investing because of quarterly or annual earnings pressures.

It does not work when long-term investing is changed because of short-term pressures – you cannot stop/start training programs and the development of new products, among other investments. You need to serve your clients and make investments while explaining to shareholders why certain decisions are appropriate at that time. Earnings results for any one quarter or even the next few years are fundamentally the result of decisions that were made years and even decades earlier."

Satisfy Your Customers

"It is a given that you will not grow your share – unless you are satisfying your customers – and we know they can always walk across the street to be served by another bank."

Culture

"If you build the right culture, where management teams are intensely analytical and critical of their own business’ strengths, weaknesses and opportunities, you can create great clarity about what those opportunities are."

Win-Win

"Building shareholder value is the primary goal of a business, but it is simply not possible to do well if a company is not properly treating and serving its customers, training and motivating its employees, and being a good citizen in the community. If they are all done well, it enhances shareholder value."

Importance of Employees

"Talented, diverse employees deliver lifelong – and satisfied – customers. They also deliver innovative products, excellent training and outstanding ideas. Basically, everything we do emanates from our employees. And all of this creates shareholder value."

"We want to have the best people, period. We know happy customers start with happy employees, and we want to be the best place to work everywhere we do business."

Long Term

"We would rather earn a fair return and grow our businesses long term than try to maximize our profit over any one time period."

"Diligent management invest in a way that will make the company financially successful over time."

"[Public companies] can continue to resist pressures to focus on the short term at the expense of long-term strategy, growth and sustainable performance. And in my mind, quarterly and annual earnings per share guidance is a major contributor to that short-term focus.

It can cause companies to hold back on technology spending, marketing expenditures and other investments in their future in order to meet a prognostication affected by factors outside the company’s control, such as fluctuations in commodity prices, stock market volatility and even the weather.

That’s why during my time as JPMorgan Chase’s CEO we’ve never provided quarterly or annual net earnings guidance and why we would support any company that considers dropping such guidance in the future. We totally support being open and transparent about our financial and operational numbers with our shareholders – this includes providing guidance or expectations around number of branches, likely expense levels, “what ifs” and other specific items."

"With their own sizable investment portfolios, most public companies could use their power as shareholders to urge public companies and asset managers to take a relentlessly long-term focus... That may mean using performance benchmarks over three-, five- and even 10-year periods, in addition to shorter period benchmarks."

Fortress Balance Sheet

"Our bank operates in a complex and sometimes volatile world. We must maintain a fortress balance sheet if we want to continually invest and support our clients through thick and thin."

"We have always believed that maintaining a strong balance sheet (including liquidity and conservative accounting) is an absolute necessity."

"JPMorgan Chase has to be prepared to handle multiple, complex, global and interrelated types of risk."

Stress Testing

"To explain how serious we are about stress testing, you should know that we run several hundred tests a week – including a number of complicated, potentially disastrous scenarios – to prepare our company for almost every type of event. While we never know exactly how and when the next major crisis will unfold, these rigorous exercises keep us constantly prepared."

Consider Alternative Scenarios

"In the financial markets, we must be prepared for the full range of possibilities and probabilities."

"We strive to try to understand the possibilities and probabilities of potential outcomes so as to be prepared for any outcome. We analyze multiple scenarios (in addition to the stress testing I wrote about earlier in this section). So regardless of what you think about the probabilities, we need to be prepared for the possibilities, including the worst case."

"In essence, we try to manage the company such that all possibilities, including the “fat tails” (the worst-case scenarios), cannot hurt the company."

Mitigate Risk

"When I hear people talk about banks taking risks, it often sounds as if we are taking big bets like you would at a casino or a racetrack. This is the complete opposite of reality.

Every loan we extend is a proprietary risk. Every new facility we build is a risk. Whether we are adding branches or bankers – or making markets or expanding operations – we perform extensive analytics and stress testing to challenge our assumptions. In short, we look at the best- and worst-case scenarios before we “take risk.” Much of what we do as a bank is to mitigate or manage the risk being taken."

Don't Overly Rely on Models

"We try to intelligently, thoughtfully and analytically make decisions and manage risk (and not overly rely on models)."

"We rely heavily on detailed and constantly improving models as a foundational element of that analysis. But we are cognizant of the fact that models by their nature are backward looking and have a difficult time adjusting to material items, including the following:

• The character and integrity of those with whom you are doing business
• Changing technology as it impacts industries (including the banking industry)
• Future changes in the law or even how the law might be interpreted differently 10 years from now
• Deteriorating international competiveness (as what happened to our tax code)
• Emerging competitive threats
• Changes in industrial structure; e.g., new sources of competition
• Political influence and unexpected litigation
• Public sector fiscal challenges, demographic changes and challenges managing the nation’s healthcare resources

There are other items – but you get the point. Judgment (which will never be perfect all of the time) cannot be removed from the process."

"There has been an excessive reliance on models [in markets]"

"Banks and regulators need to be more forward looking and less backward looking — particularly when examining risks across the system."

Mistakes

"Since we know we will be wrong sometimes, we almost always look at the worst possible case – to ensure JPMorgan Chase can survive any situation."

Understand Volatility and Non-Linearity

"We are always prepared for volatility and rapidly moving markets – they should surprise no one.

I am a little perplexed when people are surprised by large market moves. Oftentimes, it takes only an unexpected supply/demand imbalance of a few percent and changing sentiment to dramatically move markets. We have seen that condition occur recently in oil, but I have also seen it multiple times in my career in cotton, corn, aluminium, soybeans, chicken, beef, copper, iron – you get the point.

Each industry or commodity has continually changing supply and demand, different investment horizons to add or subtract supply, varying marginal and fixed costs, and different inventory and supply lines. In all cases, extreme volatility can be created by slightly changing factors.

It is fundamentally the same for stocks, bonds, and interest rates and currencies. Changing expectations, whether around inflation, growth or recession (yes, there will be another recession – we just don’t know when), supply and demand, sentiment and other factors, can cause drastic volatility."

"The biggest negative effect of volatile markets is that it can create market panic, which could start to slow the growth of the real economy."

Avoid Bureaucracy

"Bureaucracy is a disease. Bureaucracy drives out good people, slows down decision making, kills innovation and is often the petri dish of bad politics"

"Leaders must continually drive for speed and accuracy to eliminate waste and kill bureaucracy. When you get in great shape, you don’t stop exercising."

Innovation

"We need to simplify our processes while accelerating the pace of change and driving new innovations."

"You can take any part of your business and re-imagine it. You can get all the right people in the room to think about a certain process and re-imagine how it could be done from the ground up."

Complacency

"Complacency is another disease. It is usually borne out of arrogance or success, but it is a guarantee of future failure. Our competitors are not resting on their laurels – nor can we. The only way to fight complacency is to always analyze our own actions and point out your own weaknesses. It’s great to openly celebrate our successes, but when the door is closed, management should emphasize the negatives."

Continue Learning

"In less mutable times, a degree meant that formal learning was complete. You had acquired what you needed for a successful career in your field. A degree in today’s world cannot mean the end of your studies. New discoveries, new advancements, new technologies and new terminology all mean that a degree will not carry you as far into the future as it once did. We must place a higher premium on lifelong learning. Corporations can do a lot to encourage and foster such a shift."

Geopolitics

"I will not spend time dwelling on geopolitics here, which can – but rarely does – upset the global economy."

US Economy

"Unemployment may very well drop to 3.5% this year, and there are more and more signals that business will improve capital expenditures and raise payrolls. Credit is readily available (though still not enough in some mortgage markets). Wages, jobs and household formation are increasing. Housing is in short supply. Underlying consumer and corporate credit have been relatively strong. All these signs lead to a positive outlook for the economy for the next year or so."

US Tax Changes

"The good news is that the recent changes in the U.S. tax system have many of the key ingredients to fuel economic expansion: a business tax rate that will make the U.S. competitive around the world; provisions to free U.S. companies to bring back profits earned overseas; and, importantly, tax relief for the middle class."

"I believe tax reform will have both short and long-term benefits. In the short term, we already are seeing some companies increasing capital expenditures, hiring and raising wages."

"Some argue that the added cash flow going to dividends and buybacks is a negative – it is not. It simply represents capital finding a higher and better use than the current owner has with it. And that higher and better use will be reinvestment in companies, innovation, R&D or consumption. Thinking this is a bad thing is just wrong. Tax reform’s real benefit will be the long-term cumulative effect of retained and reinvested capital in the United States, which means more companies, innovation and employment will stay in this country."

Inflation

"Importantly, as long as rates are rising because the economy is strengthening and inflation is contained, it is reasonable to expect that the reversal of QE will not be painful. The benefits of a strong economy are more important than the negative impact from modest increases in interest rates."

"I believe that many people underestimate the possibility of higher inflation and wages, which means they might be underestimating the chance that the Federal Reserve may have to raise rates faster than we all think. While in the past, interest rates have been lower and for longer than people expected, they may go higher and faster than people expect. If this happens, it is useful to look at how the table is set – what are all the things that are different or better or worse than during prior crises, particularly the last one – and try to think through the possible effects."

Uncertainty of QE

"One scenario that we must be prepared for is the possibility that the reversal of quantitative easing (QE) by the world’s central banks — in a new regulatory environment — will be different from what people expect."

"Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal. We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets"

Passive Investing and ETF's

"Far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.

Bonds

"It would be a reasonable expectation that with normal growth and inflation approaching 2%, the 10-year bond could or should be trading at around 4%. And the short end should be trading at around 2½% (these would be fairly normal historical experiences). And this is still a little lower than the Fed is forecasting under these conditions. It is also a reasonable explanation (and one that many economists believe) that today’s rates of the 10-year bond trading below 3% are due to the large purchases of U.S. debt by the Federal Reserve (and others)."

"This situation is completely reversing. Sometime in the next year or so, many of the major buyers of U.S. debt, including the Federal Reserve, will either stop their buying or reverse their purchases (think foreign exchange managers or central banks in Japan or China and Europe). So far, only one central bank, the Federal Reserve, has started to reverse QE – and even that in a minor way. However, by the end of this year, the Fed has indicated it might reduce its holding of Treasuries by up to $150 billion a quarter. And finally, the U.S. government will need to sell more than $250 billion a quarter to fund its deficit."

"... we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know – but even that is not the worst case. If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect. As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment."

Technology

"Overall, technology is the greatest thing that has ever happened to mankind. It is the reason why we enjoy our high living standard. It is staggering how our lives have changed when compared with 100 years ago. We live longer and work less; we are healthier and safer; and during that time period, billions of people have been pulled out of poverty."

".. our vibrant economy has always found a way to adjust to job loss by creating new jobs and sometimes changing the way we work by reducing work days and work hours.

"We know technology has been a great force, and for the benefit of mankind, that force should be left unleashed. In the event that it creates change faster in the future than it has in the past – and the economy is unable to adjust jobs fast enough – the best protection is continual workforce training, education and re-education, supplemented by income assistance and relocation."

Trade & Global Engagement

"Global engagement, trade and immigration — America’s role in the world is critical."

"As a nation, we cannot isolate ourselves any more than we can stem the ocean’s tide."

"Any system created by humans, however, is ultimately fallible. Sustaining the current order and ensuring its longevity mean acknowledging its flaws."

"Retreating from the world is not the solution, nor is burning down the current system and starting anew. At the same time, we cannot and should not turn a blind eye to the real pressures millions of families face at the hands of globalization, technological advances and other factors."

"We should acknowledge many of the legitimate complaints around trade. Tariffs and non-tariff barriers to trade are often not fair; intellectual property is frequently stolen; and the rights to invest in and own companies in some countries, in many cases, are not equal. Countries commonly subsidize state-owned enterprises. When the U.S. administration talks about “free” and “fair,” it essentially means the same on all counts. This is not what has existed. It is not unreasonable for the United States to press ahead for more equivalency."

"China has realized significant economic and employment gains since joining the WTO in 2001. China was expected to continue on an aggressive path of opening up its economy, but this has happened at a much slower pace than most nations expected. Now, more than 16 years later, it has the second-largest economy in the world and is home to 20% of the Fortune 500 companies, yet it still considers itself a “developing” nation that should not be subject to the same WTO standards as the United States and other “developed” countries."

"Anything that starts to resemble a trade war creates risk and uncertainty to the global economic system."

I don't think that it needs to be said how remarkably similar Jamie Dimon's thinking is to other great Business and Investment Masters. We have written about their collective emphasis on innovative thinking and learning from mistakes, understanding non-linearity and volatility, whilst avoiding things like bureaucracy and an over reliance on models many times before. And this is not a coincidence; these are important fundamentals that each of these Masters value as the reason for their success. And the good news is that you can access this learning without having to have gained the many years of experience each has had to undergo to obtain it in the first place. Lucky you! I strongly recommend reading the entirety of Jamie's letter - it is both insightful and educational and should add as much value to you as it has to me.

Sources: Jamie Dimon, Annual Letter 2017, JP Morgan

Learning from Panera’s Ron Shaich

The restaurant industry is a hyper competitive industry - this has long been the case. It's mature, fragmented and has negligible barriers to entry. New entrants are attacking all the time. And it's an industry which is as “tough as hell” to succeed - did you know that more than one third of restaurant chains are out of business within a decade or two? If that's the case, how on earth can a bread company significantly outperform Warren Buffett's Berkshire Hathaway over two decades?

The answer to that question lies at the feet of Ron Shaich, the founder and Chairman of Panera Bread. Panera was the best-performing restaurant stock of the past 20 years, delivering a total shareholder return up 86-fold from 1997 to July 2017 [before being taken private], compared to a less than two-fold increase for the S&P 500 during the same period. The stock annualised returns at an astonishing 25 per cent per annum.  

Source: Bloomberg

It's no secret that I'm always interested in learning from great CEO's and investors - those people with outstanding track records of success regardless of the industries they work within. I recently enjoyed listening to a Forbes interview by Steven Bertoni with Ron Shaich. This prompted me to learn more about how this 26-year veteran CEO successfully navigated the changing dynamics of the restaurant business, empowered his staff and adjusted to change to maintain a competitive advantage over the long term. And once again, you'll find many of the characteristics that define Mr Shaich define other world class CEO's. 

Here are some of my favourite snippets from both the Forbes Podcast and Ron Shaich's excellent website ...

Leadership

"This is what we do as business leaders; we discover today what is going to matter tomorrow and make sure our companies are prepared and ready for that as the world unfolds."

"The role of leadership is to separate the wheat from the chaff and know what the deeper trends are. We don't follow fads. What we do it try to figure out is what is going to really matter in a deep and profound way three to five years from now."

"Leadership always requires developing a hypothesis, understanding where the world is going and making a smart bet into that."

"I believe one of our roles as leaders is to tell the truth, and tell the truth most importantly to ourselves."

Learning

"I go to work to learn .. I love the sense of making a difference and figuring things out."

“We as leaders don’t take enough time to learn. The one thing that I don’t think we learn and value enough is empathy. We don’t feel what the customer feels.”

"I view my work as a lifelong learning journey. I go to work to learn about how the world works. How humanity works. And what will work in the world."

Walk The Floors

"The British author John le Carré once quipped, "The desk is a dangerous place from which to view the world." I couldn't agree more. I visit anywhere from 25 to 100 Panera cafes every month. And what I always find is a kind of real-time performance art—dynamic interactions between our frontline crews and constantly shifting casts of customers, with the overriding goal of ensuring that when customers exit our "stage," they are nourished in soul as well as body. The performances always differ. And I inevitably learn something new. When I learn, the results are actionable ideas and a broadened vision. Opportunities for change are revealed."

Three-Step Process

"It's not complicated. It starts first by telling ourselves the truth. In a really ruthless way. Second, to understand what few things really matter to get the jobs done that consumers are hiring us to do.  What do we really have to do and how do we prepare ourselves to be able to do that as the world plays out over the next two to five years. Thirdly, we get it done. You take those three things and you can have success."

"I tell my team all the time that Panera’s success comes down to three things we’ve always been able to do: 1. Tell the truth. 2. Know what matters. 3. Get the job done. Most people do not have the insight, foresight, or wherewithal to do all three. But I firmly believe that doing all three is the key to success in business and in life."

What Job Clients Hire For

"[With Panera] it was very clear to me we were serving real consumer needs. We had a dominant position, a better competitive alternative in a range of different jobs that consumers were willing to hire us for. That manifested itself in very high unit volumes, consistent from Detroit, Portland to Miami. You could see its reproducability."

Long Term

"I think long term."

"I've won because I had enough credibility, I voted enough stock, that I was able to make these long term bets. That's what gave us competitive advantage."

"What drove our outperformance was our ability to make long-term transformations multiple times over 36 years. As a long term CEO; 26 years, I've had the opportunity to really look back and really reflect on the public markets. And here is what I see - I see investors no longer owning companies but renting stock. Forty years ago the average holding time for a public company was 8 years, today it is 8 months. People are renting their stock. You have a very different world.

Source: Ron Shaich IGNITE 2010 Presentation

You have activists, you have a lot of money managed passively and you have the index funds deferring often to ISS to make judgments, and nobody feels capable of separating the wheat from the chaff. So we go to the path of least resistance and say it can't hurt to help the activists. We see it across multiple industries - a company has a flat year after years of success, and activists get voted in to control the board. Someone can walk in and say I own 2% of the company and another 6% in derivatives, I'm your owner, cut costs in half and R&D, lever up the balance sheet, sell the stock and let someone worry about the carcass.

That has an effect on CEO's. At the same time we see the FANG companies. The hottest companies in the public markets.  They are the ones who are winning. What is their competitive advantage? They have capital structures that let them make long term decisions.

I was on the board of Wholefoods which was sold to Amazon. And what is Amazon doing? The same things we would have done at Wholefoods; investing in digital and cutting prices because the competitive environment changed. But in Wholefoods we couldn't do it because of the short term pressures coming at us from people who wanted us to produce the results right now. What has Amazon got? The room and time to make these kinds of investments.

Here's my point. These put CEO's in a very weak position. CEO's want to please. They don't want the vulnerability of someone walking in and taking control. So they tighten up. They get short term. That's the reality. They go for cost cutting, and ignore innovation and building community and taking care of team members. The ultimate result is that it dramatically affects the ability to do long term transformation, dramatically effects GDP growth and economic competitiveness for society."

"I began to recognise for our ability to continue to do great work, I could think of no place better than with an ultra-long term investor, that allowed our people to do it."

"Studies such as this one from the Harvard Business Review conclude that founder-led businesses often outperform professionally managed firms. I would suggest that
they do so because the founder's commitment runs far deeper and is often longer-term in nature than that of the professional manager. And commitment and focus is what drives performance."

Importance of Competitive Advantage

"I've learned that competitive advantage is everything. Simply put, competitive advantage is what prompts customers to choose you over your competitors. Without it, your business just fades away."

"You must develop true competitive advantage. You must be the best alternative for certain guests, so much so that they walk past the establishment next door to visit your concept. Sounds easy, right? Well, in a world where a new restaurant pops up every day, true competitive advantage is one of the most difficult things to attain. But it is the critical piece that separates those who succeed from those who fail."

"You will accomplish little if you don’t maintain long term competitive advantage. It will take courage. Whatever your situation, you will ultimately fail if you don’t deliver a superior experience for your target customer by doing what competitors don’t."

"What sustains a company over the long term is how it thinks, not what it does. Because what it does is a by-product of how it thinks. Panera in its core comes from a view that competitive advantage is everything. If we don't have a reason for people to walk past competitors and come to Panera, then we don't exist. Losing competitive advantage is the greatest risk in business, and that's where our focus is." 

"When [EPS] growth does occur, it’s only because the management team is intently focused on continually sharpening the concept’s competitive position through food, experience, people, communication and operational excellence."

"Focus intensely on making the right decisions today to build your same-store profitability in the future. Recognise that same-store profitability is, in the long term, most directly impacted by your competitive position. Bet on the things that will improve your competitive position. I call these ‘smart bets.’ Making these bets requires an understanding of what the competitive landscape will look like two, three or more years in advance."

"I view my role as CEO as protecting those that discover ways to build competitive advantage."

How to Develop Competitive Advantage

“We may serve 10 million people a week, but if we’re going to be competitive, it’s all about one guest’s experience.”

"So how do you create competitive advantage?

First, make sure the niche you focus on is big enough to sustain you, but not so easily duplicated that you simply become a test lab for larger competitors.

Second, recognise that you can’t please all the people all the time. Instead, develop a concept that’s the singular best choice for some customers on some days rather than the second-best choice for everyone, every day.

Third, accept that maintaining competitive advantage in this industry — with its low barriers to entry — is really difficult. One day you’re the most attractive alternative on the block. The next day your target customer is walking past your door to a ‘new and better place’ down the street.

Fourth, recognise and avoid the reactionary nature of our industry, which often leads to diminished competitive advantage. As concepts begin to look more and more alike, companies move further away from being the best competitive alternative for a certain group of customers. And before you know it, yesterday’s favourite is suddenly an industry has-been.

To avoid this you must stand for something over the long term. You have to mean something to your target customer. You can’t be changing every day."

Long Term Transformation

"The key to me has been to try to find means and mechanisms for competitive advantage and opportunities for long term growth. If you look at it, Panera has continued to transform itself - six different transformations over the 36 years I have run this company. You can go all the way back to its formation. I formed it initially as a 400 square foot cookie store in downtown Boston."

Innovation

"Driving innovation is the most important role of the CEO."

"Innovation begins with understanding what job you're trying to complete for whom, and then determining what matters to that audience, looking for patterns, and trying to understand it."

"Most companies' systems and functions are designed to efficiently deliver a business model that was successful yesterday. But what you accomplished yesterday won't help you succeed tomorrow. For that, you must continually turn to discovery."

"We must avoid the trap that befalls many big companies. That is, they bulk up their delivery muscle while letting their discovery muscle wither. Instead of innovating and doing the things that will help them discover the next growth opportunity, they devote an inordinate amount of resources and focus to getting the work done, on time and on budget. Of course, delivery matters. A company that busts its budgets and misses its sales targets won't endure for very long. But in terms of the competitive advantage it can generate, discovery matters more. Much more. When it reverses its priorities and puts discovery at the forefront, a company stands a far better chance of getting to the future first."

"I often think of myself as the discoverer-in-chief. The most powerful role I have is protecting the people that are dreaming about where this company can be in two to three to five to 10 years."

"I have long believed that every innovation process starts with learning. And learning depends on observing and questioning, which in fact led to the creation of Panera itself. In 1993, when I was the CEO of Au Bon Pain, we acquired a 19-store chain called the Saint Louis Bread Company, which we believed would help us build a gateway to the nation's suburbs. But instead of immediately trying to scale Saint Louis Bread, we spent the next two years studying it."

"We ran down more than a few dead ends on the road to creating Panera. Nor did we seamlessly move from question to solution. There were many interim steps along the way: observing, brainstorming, testing, prototyping, iterating, retesting, and more. But our innovation process started by asking questions."

People and Incentives

"If an organization is to build same-store profitability, it is essential that it have the right people to actually get the job done. And it must incentivise them to do so. I’m always amazed at the number of restaurant companies that incentivise their operators on the wrong things when it comes to building value. They incentivise on actual versus budgeted results, instead of base store profit growth year over year over year. Frankly, this misguided focus on short-term metrics degrades shareholder value."

Culture

Source: Ron Shaich IGNITE 2010 Presentation

"We Made a Smart Bet on a Clear Set of Shared Behaviours: Cultural Values."

"Ask any of Panera’s 100,000 employees what they like most about our corporate
culture and they will undoubtedly reply, ‘No jerks.’ Those two words — No. 1 on our
list of cultural values — set Panera apart as an enterprise. They ensure that our
relationships with each other and with our guests are based on respect and honesty, and they establish a standard for our conduct."

Growth

"In my opinion, growth is not a pedal to be pushed. It is not an end in itself. Rather, growth is simply a means of building shareholder value by capitalising on a successful business model.

Growth is a double-edged sword; it is either additive or subtractive of economic value. The bottom line is that growth can only build value if the underlying business model is worthy of being reproduced. Because let’s face it, the world does not need another restaurant — not unless that restaurant actually offers its customers something better.

Growth only makes sense once you have already built a business model that offers a better competitive alternative, and if management is highly confident they can deliver strong and consistent returns on investment. You must have these two elements in place or else you really have no right growing. Indeed, without these two elements in place, growth simply becomes a form of gambling with your stakeholders’ money — foolishly placing bets when the odds are strongly stacked against you."

"We can all recall numerous concepts that said they “needed to grow” to keep their P/E high and their shareholders happy. Unfortunately, a misguided focus on growth as an end often leads to more bad outcomes than good. Like lemmings, those management teams that encourage reckless growth march their companies right off the side of the cliff."

Contrarian Approach

"I'm contrarian by nature. I am looking for where the world is going to be in three to five years and where am I going to be."

"Your management team must be prepared to go against the herd. I call this being contrarian."

“'Contrarianism' is not unique to Panera. In fact, I would argue that the most successful companies in our industry — the McDonald’s, Dardens, Starbucks, Chipotles and Yum! Brands of the world — have all utilized contrarian thinking, applied consistently over the long term, to build competitive advantage. Each of these companies is obsessively focused on their target niches, steadfast in their long-term strategy and contrarian in their thinking — all to build further competitive advantage."

Stock Prices

"I have never focused on the stock price or the financial performance. It's a by-product. I don't make the financial performance . What I can make is a better guest experience. And when you deliver on the guest's experience in an absolutely committed fashion, the by-product is performance. One of the things we often confuse in business and life is the difference between means, ends and byproducts.

Source: Ron Shaich - IGNITE 2010 Presentation

I focus on the guest experience. When we deliver a superior guest experience, when we deliver large runways for growth, we then have a future. That is what drive's the financial performance.

The folks that focus on the stock price, in the end, always hit the rocks. They are giving me a great competitive alternative because they're short terming. When you're focused on the next quarter and squeezing the company, you're giving me a great big opportunity to do a better job than you are. Because things of value take time."

Quarterly Earnings

"Wall Street judges Panera and every other public company by what we've achieved over the previous thirteen weeks and what it appears we'll achieve over the next thirteen. Such shortsightedness is one reason why I pay very little attention to quarterly earnings. Today's performance is the byproduct of discoveries and decisions that we made many months and often even years ago. Our time horizon must always extend far beyond the next quarter. As always, that means doing the hard work of imagining what the world will look like in five years and aligning ourselves with those long-term consumer trends."

"Every 13 weeks brings the beginning of yet another cycle of reporting to our investors, analysts, board, banks, franchisees, and team members. After hearing our reports, many of these stakeholders focus on a metric that means a lot to them but comparatively little in and of itself to me, earnings-per-share growth. In the aftermath of every call, we get either applause or boos based solely on how our EPS growth has fared against analysts’ estimates, which always amuses me. If we exceed Wall Street’s consensus estimates for the quarter, we are deemed a brilliant, forward-thinking management team. If we miss the Street’s estimate, we land on the list of downwardly spiralling companies that are plagued with questionable leadership. That’s an awfully wrongheaded approach to gauging a company’s long-term prospects."

"Despite the constant pressure to submit to quick fixes, you stand a far better chance of delivering strong quarterly results year after year when you focus on strengthening your competitive advantage and growing only when your business model offers a proven competitive alternative."

Win-Win Approach

Source: Ron Shaich 2010 IGNITE presentation

"When I go to the ATM, I'm usually required to make a deposit before I make a withdrawal. I'd argue it's the same in business. We have to spend less time figuring out how to extract economic value from our stakeholders and more time creating what is valuable to them. Doing so is what ultimately creates long-term value."

"From its inception, Panera has utilized the principles that some call conscious capitalism, and which we at Panera like to call “enlightened self-interest.” This notion of a conscious approach to value creation is built on the fundamental premise that every business has a deeper purpose than short-term profit maximization. Indeed, we regard profit and the creation of shareholder value as the byproduct of making a difference for our key stakeholders and society. When we deliver for our customers, employees, vendors, and the wider community, shareholder value follows."

Turnarounds

"Turnarounds are long-shots, and almost impossible to pull off. Business books abound with stories of heroic CEOs who come to the rescue of once proud companies that failed to adapt to a changing world.

There's Lou Gerstner's turnaround at IBM. Steve Jobs' improbable resurrection of Apple. And Lee Iacocca's stirring rescue of Chrysler. We can celebrate those stories, even as we recognize that turnaround attempts seldom turn out very well. Equally problematic, a turnaround is an expensive substitute—in terms of squandered resources and the toll its takes on associates—for serial innovation. As the strategist Gary Hamel puts it in The Future of Management, a turnaround "is transformation tragically delayed." For any executive team, the real challenge is "to build organizations that are capable of continuous self-renewal in the absence of a crisis [my emphasis]."

"My message: Don’t avoid the inevitable. Be a realist now and innovate while you have the breathing room, the resources, and the credibility with your stakeholders. Do that, and your company will avoid the need for a “radical turnaround” expert in the future."

Spreadsheets

"Many executives have a love affair with spreadsheets. I am not one of them. In fact, I encourage my team to approach spreadsheets with a healthy dose of skepticism, and I caution everyone else to do the same.

The future is filled with uncertainty and no one likes uncertainty. Uncertainty implies risk, and we all seek ways to minimize risk. The hard numbers of the spreadsheet make the future seem more certain. However, a spreadsheet is only one possibility of the answer, not the answer itself. A spreadsheet is merely a way to organize data. Its numbers generally capture trends of the past, but it is in no way predictive of what’s to come.

The best strategic decisions reflect a healthy balance of historic data and well-considered knowledge. We need to look to other companies and industries as models for what will happen in the future.

Here’s a metaphor: 16-year-olds. If you are familiar with any 16-year-olds, you know
they can be terrors to live with. Given raging hormones and the developmental need to
question and reject authority, 16-year-olds can truly test the parent-child bond. I know
of what I speak. If I looked at the accumulating data related to my 16-year-old son’s
recent behavior and projected that into the future, I would consider putting him up for
adoption. I’m not going to do that, however, because I know the past is not likely to
be predictive of what’s to come. By the time most 16-year-olds reach the age of 25,
they lose much of their edge and morph into wonderful adults — at least that’s what I
see when I look at my friends’ older children. The spreadsheet I would build based
solely on the behavior of 16-year-olds may reflect what is going on in the recent past and today, but not the changes that looking to other models tell us will occur in future months and years.

"French writer and philosopher Voltaire noted long ago that, “Doubt is not a pleasant condition, but certainty is absurd.” Today’s executives would be wise to apply that thinking to spreadsheets. Their data reveals yesterday’s truths; their spreadsheets of tomorrow are merely one possibility, but not a likely outcome. What they need is perspective and guardrails."

Questions

"I wrote a memo for the guy who took over from me, and I basically defined how I would compete with Panera if I wasn't part of Panera. How I would take out Panera. Our CEO asked me to work on it. I ended up painting a vision for how Panera could re-transform itself. That transformation was rooted in using digital to fix guest experience. Redefining how we innovate. Build a loyalty program. Finding large adjacent billion dollar businesses we could enter. I was asked to step back in as CEO [as the CEO was sick] and I did and I used this transformation model."

"I think we've approached technology very different from anybody else. Back in 2011 we didn't start out to create a digital program or a mobile app. We started out to solve a guest experience. And so much of what we do as business people is rooted in empathy. Empathy for our guests. That's one of the most powerful skills we as business leaders can have. On my way to work I would call Panera ahead and speak to a manager to make an order and my son would run in and pick up in 30 seconds. He'd do that and I thought wow this is phenomenal. What about the other 8.5m people we serve every week, they don't have that experience. It was great to have your food made simultaneously with your trip to the store. I began to imagine how we would do that. I began to say digital offered a powerful alternative to meet a guest need."

What I find particularly enlightening about Mr Shaich's approach, beyond the obvious similarities between his own and other Investment and Business Masters' approaches, is that he dares to think differently. It obviously has made a  profound difference to his company's performance. You can't argue against an 86-fold increase in shareholder returns over 20 years! Even Warren Buffet's Berkshire Hathaway hasn't done that well, and Berkshire is a shining light for most investors. By simply thinking differently, Shaich has been able to transform his business multiple times and after some trial and error, and learning along the way, develop a brand and customer experience that offers tremendous value to all stakeholders - customers, staff and shareholders alike. Its truly remarkable to see.

His approach also makes me question my own portfolio - am I a business owner or a mere renter of stocks? I know what I would prefer to be. How about you?

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TERMS OF USE: DISCLAIMER

Further Reading on CEO Masters:

Charles Koch - Koch Industries

Howard Schultz - Starbucks

Ken Iverson - Nucor

Ed Catmull - Pixar

Jeff Bezos - Amazon

Arthur Blank - Home Depot

Learning from Home Depot’s Arthur Blank

It doesn't really seem to matter how many successful businesses I come across; I'm constantly amazed at the synergies that exist in all of them. By now you'll no doubt see the obvious correlations between them all as well, and the really interesting thing about it all is that in each and every one of them, both the ones I have reported on here as well as others we are yet to review, the lessons we take from them are not to be found in academic institutions. 

They don't teach this stuff at universities, or in prestigious MBA programs; all of the individual success components that go together to make up each of these outstanding businesses came from one or two individuals who dared to think and act differently. 

I love learning from people who have built and run successful businesses. Like the Investment Masters, there are many commonalities across great businesses and great business people. As I've written many times before, to understand a stock you must understand the business. One of my favourite podcasts 'How I Built This - with Guy Raz' recently interviewed Arthur Blank, the co-founder of Home Depot, who stepped down as co-Chairman in 2001.

To say Home Depot has been a phenomenal success would be an understatement. Home Depot was founded in 1978 and went public in 1981. One hundred dollars invested in Home Depot in 1981 would be worth approximately $540,000 today versus $2,300 in the S&P500. I came across Home Depot's phenomenal performance reading one of the annual letters of Arlington Value Capitals' Allan Mecham. Mecham noted that despite it's 49X PE multiple in 1984, Home Depot's share price went on to compound at 20%pa over the following 29 years. 

Prior to co-founding Home Depot, Arthur Blank was running Handy Dan with his colleague Bernie Marcus. Handy Dan was the most most successful home improvement chain in the US at the time and the most profitable subsidiary of an ailing conglomerate, Dylan Inc. Despite the subsidiary's success, Blank and his colleague, Bernie Marcus, were fired after a corporate raider, notorious for retrenching company's incumbent senior management, took control of Dylan Inc.

After reflecting on their newfound situation, Blank and Marcus decided to set up their own hardware business. In doing so, they inverted the typical question a start-up might propose - they asked 'who couldn't we compete with?' 

“I wanted to take my time, as did Bernie, and think through the options we had and didn’t want to rush into anything. I took the better part of the year off, did a lot of running, spent a lot of time with my kids. I was looking at a lot of alternatives. We wanted to think outside the box. Bernie had said ‘If we were ever to leap frog our own business, the Handy Dan home improvement centres, what kind of home improvement centre store could we not compete against?’ We said we could never compete against the big warehouse, no frills, down market, low prices, great service, great services. So instead of taking that Handy Dan model of the Four’s [four million dollars sales, forty percent margin, 40 staff people, etc] we said, 'lets try and leap frog the industry dramatically.'”

Buffett takes a similar approach when he analyses businesses ... "One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it."

In the early days, while establishing the business plan, Blank and Marcus realised that if their start-up was to be successful it was going to come down to them to make it so...

“The reality is the investors in our company, 144 of them. Really what they were buying into were myself and Bernie. We had the experience and they looked back at Handy Dan Home Improvements Centres, and they said we’re betting on people here, we are not betting on one small store.”

The opening day of their first two stores was a crushing disappointment. What led to their actual success was listening to the customer and a lot of trial and error..

“We had this grand opening and nobody came. We spent the next year, and one of our core values is to listen and respond. I spent 75% of my time on the floor of the store finding out from customers what is it they like, didn’t like, and we kept changing the mix, adding things, taking things off, changing prices, assortments and vendors, making sure of service levels in areas they wanted them. We kept refining the model. Every competitor came into our store and visited us said ‘you're crazy, the stores are much too big, prices are much too low, you have way too much product and stock, too many services, the math isn’t going to work." Of course the math wasn’t working in 1979. We fine tuned it and got it where it needed to be. It exploded in 1980 and 1981 and the numbers were incredible.”

In a similar fashion to both Nucor and Koch Industries, which we learnt about recently, one of the most important aspects of the success came from their business culture. Home Depot's was built around helping customers and listening to the people on the front line..

“We never really wrote the core values down … I said to Bernie "we’re living these values which by far and away are the most important thing we can do, but they’re not written down . I figured out you and I are going to open a lot of stores in the future that we’ll actually never see."  There were too many new stores. We needed to document and write down our core values which are really focused on our associates, our people, our relationships and communities, and giving back. The people who are serving drive everything we are doing. Those are the ones that we listen to, those are the ones we respond to, those are the ones we care for, those are the ones we nurture, and that’s the mentality of the training we’ve given to all of our associates.”

They managed growth one store at a time, constantly seeking improvements and empowering their people..

“Sam Walton was asked how did you get from $10b to $20b dollars [in sales]. Sam said we opened one store at a time. And that’s all we did. At Home Depot, we had a one year budget, a 5 year plan, but we focused on every single store and our plan was that each store had to be better than the last store we opened up.  So we didn’t have any planograms, we didn’t have any ‘you have to do it this way’, we didn’t let the model get frozen, we made the folks running the store think about ‘this is the last store, how do I make this store better?', 'how do I own it?', 'how do I feel accountable for it?', 'how do I inject my ideas into, and how do I make it better?'. So every store got better.”

After looking back on his successes, Blank gives valuable advice to young folks: "make sure you have balance in your life, because too many young executives' attitude is to work hard, put my career on 5th gear and go, go, go. When you return home in ten years you won't recognise your kids and your spouse will look at you and say 'who are you again?' It's important to find balance in your life."

He also attributes much of his success to intelligence and hard work, versus luck and timing.

"I think that luck and timing is a big deal. I really do. A lot of success is based on timing and luck and being in the right place. But, also about seizing opportunities and being prepared to go out of your comfort zone. I'm a big proponent of Outward Bound; I've done a lot of the course myself. A lot of it is based on their strategy which is to serve, to strive and not to yield. Having that entrepreneurial drive and spirit, to get up every day, to have purpose in your life everyday, to become better every day. I am doing this because I have a passion for doing it and I love being of service to other people in whatever form I can be."

Its clear that innovative thinking, learning from your mistakes, loving what you do, continuous self-improvement, effective culture, listening and humility are common threads for both successful businesses and investors. We've certainly written about these things often enough. Luck has very little to do with it, as does the formulaic approach to operating businesses that we are taught within academic institutions. Success is created through hard work and daring to be different. Easy wins are exactly that, easy; meaning that the expected returns should be commensurately low. Even Home Depot took several years to show the right returns and in those early years the 'nay sayers' were everywhere. The British SAS got it right with their motto; "Who dares wins."



 

Learning from Charles Koch

If you've been reading my recent posts, particularly those about Nucor, Pixar and Starbucks, you may be getting the feeling by now that we seem to be highlighting certain key points of business success over and over. Well, if you've had that feeling you're not wrong, and here's additional confirmation these particular aspects of business lead to success. 

After putting down the book 'Plain Talk' about Nucor's model for business success, I picked up Charles Koch's book 'Good Profit'. Charles has been the chairman and chief executive of Koch Industries since 1967, a role he assumed from his father, who had built the business into a $21m enterprise. Today, Koch Industries is the second largest private company in the US, worth more than $100b. Koch Industries has outperformed the S&P500 over five decades by an astonishing 27-fold!

So what has allowed Koch Industries to achieve such spectacular performance?

The answer to that questions lies with the characteristics we have found common to other great companies featured in past posts [Nucor, Pixar, Starbucks, etc]. The parallels between how Charles Koch thinks about managing Koch Industries and how Ken Iverson and Ed Catmull managed their successful companies is staggering. The book details Charles' management philosophy, which he calls Market-Based-Management [MBM]. This philosophy is based on Charles' five decades of interdisciplinary studies, experimental discovery, and practical implementation across Koch businesses world wide. The core objective of MBM is to generate good profit, the profit that comes from creating superior value for customers while consuming few resources and always acting lawfully and with integrity.

"Market-Based Management emphasises Principled Entrepreneurship over corporate welfare, virtue over talent, challenge over hierarchy, comparative advantage over job title, and rewards for long-term value creation over managing to budgets"

In an environment of rapid technological disruption, Koch Industries has been able to adapt and prosper, even as the business has grown into a large organisation with more than 100,000 employees. You'll notice most of the sub-titles in this post are both the same as the Nucor post and also titles of tutorials that form the basis of the Investment Masters Class. Great business sense and great investing go hand in hand.

Let's hear from Charles .. 

Culture

As with the views of most of the Investment Masters we have reviewed, effective Culture is vital for success in business. Charles agrees and has identified the key elements that combine to create a culture that cultivates true business effectiveness.

"For us, culture is key."

"Every organisation has its own culture. If that culture is not created consciously and purposefully, it will degenerate into a cult or personality, or an "anything goes" environment. Whether good or bad, an organisation's culture is determined by the values, beliefs, and conduct of its members, as well as rules and incentives set by its leaders - and modeled by them behaviourally."

"It requires focus, discipline, and persistence to produce a culture dedicated to superior results."

Koch's culture promotes behaviours and individual conduct over functional competency. This shows out in their hiring policies.

"[MBM places a great focus] on culture and on hiring based not just on skills but on virtues, with the goal of ensuring our businesses and leaders foster integrity, courage, compliance and respect."

"Many companies have principles somewhat similar to Koch's Guiding Principles, but rarely are they the basis for a company's culture. As Koch we strive to hire and retain only those who embrace our principles."

Innovation, accountability and leadership are all integral to a successful culture...

"To build a culture of discovery, we must encourage, not discourage, the passionate pursuit of hunches (no matter their origin)."

"A culture that lacks accountability lacks integrity and cannot survive, let alone thrive."

"Leaders must solicit the best knowledge internally and externally and create a culture in which the best knowledge is used regardless of the source."

"It is particularly important for everyone to embrace a challenge culture, both by soliciting different perspectives and expertise, and by having the courage to constructively speak up when we disagree."

"Because leaders set the standard - both by how they lead and by what they do - they are the guardians of, and must be held accountable for, the culture."

Vision

Companies that lack a Vision, lack purpose. They are missing a goal to strive for and a path to growth and greater returns.

"The lack of an effective vision, or, a conflict of vision, is a root cause of the failure of many great businesses."

"Each [businesses vision] needs to be aspirational in order to expand the thinking of leaders and employees throughout the organisation."

"Our vision is to create long-term value by economic means for customers, society, and the company. Customers come first in this list because without them there is no business."

"In deciding which businesses to pursue, Koch looks at how we can make good profit in the long term. This is fundamental to our vision because unless a business creates value for others, it will cease to exist (unless coercion is involved)."

Win-Win

Clearly the idea of customer value is important for Koch. If the customer attains a benefit from its transaction with the business, then that is ideal, because without customers, there is no business.

"We prefer to look at business through a win-win mindset."

"I had a clear understanding that the purpose of business was to create value for customers."

"Our goal was - and still is - to be the best counter-party of choice to our customers, vendors, communities, and employees."

"For a business to survive and prosper in the long term it must develop and use its capabilities to create real, sustainable, superior value for its customers, for society, and for itself. Only by doing so can it continue to inspire and attract customers, suppliers and partners."

Unconventional

Identify a differentiator - what can Koch do differently that gives them an edge in the market?

"We are constantly improving our capabilities, building new ones, and finding new opportunities for which they can create value. This is a departure from the conventional wisdom of most companies, which stick to industries they know well."

"Koch's emphasis on compounding is another difference between the vision of our company and that of many others."

"Koch's vision is different from most because it's focused on value creation and people."

"Other companies typically have a much different business philosophy and management approach."

Long-Term Perspective

The value of retaining long-term thinking...

"We remain private so we can focus on the long term."

"Short term profit created by liquidating assets and avoiding expenditures necessary for long-term success, can be illusory."

"When employees are rewarded only for short-term accounting profits without factoring in what long-term profits were missed, they will tend to make sub-optimal decisions."

"Short term profits, while necessary, are not sufficient for long-term business success. We have always shared the same vision for Koch; to innovate, grow, and reinvest in order to maximise long-term value by applying our core capabilities. If we try to smooth our earnings (as some public companies feel compelled to do to defend their stock price) our future would not be as bright."

"Based on its vision, Koch (and each of its businesses) develops and implements strategies that will maximise long term value."

"When setting priorities, one of the most difficult choice is between short-term optimisation strategies and long-term growth and innovation strategies. The natural tendency is for a business to under-invest in long term strategies. To offset this tendency it needs to commit dedicated resources to growth and innovation. Since long-term strategies won't result in profits for some time, incentives must be designed to reward progress in the interim."

"Another type of perverse incentive is endemic at publicly traded companies: the quarterly earnings report. Management at a public company is under a great deal of pressure to meet quarterly earnings forecasts, because falling slightly short can cause a significant drop in the stock price. Consequently, management is motivated to make decisions that optimise short-term earnings at the expense of maximising real long-term value.  Such decisions may include under-investing in attractive cyclical or long-term opportunities, ignoring needed write-downs, or even manipulating the books. Perverse incentives like these make managing a public company extremely difficult."

Individual Behaviour over Functional Brilliance

Like many other successful business leaders, Koch place an emphasis on people fitting with their values and culture rather than just having functional competency. Its a lot easier to train someone to fill a functional need than it is to change them to fit the culture...

"We focus first on values."

"The best coaches place as much emphasis on virtue as on talent."

"Having skills and intelligence is important, but we can hire all the brightest MBA's in the world, and if they don't have the right values, we will fail. Therefore, we hire based on values first - then talent."

"We increased our efforts to hire first on values, and only then on talent and experience. It is our goal to fill every position with individuals who are equally virtuous and talented, but if forced to choose between one or the other, Koch will choose virtue every time. Why? Because we understand that talented people with bad values can do far more damage to a company than virtuous people with inferior talents."

Information, Knowledge & Sharing

This one speaks for itself.

"There is no stronger form of communication than face-to-face sharing."

"Having a better point of view than our competitors has been a key driver of our success."

"Seek and use the best knowledge and proactively share your knowledge while welcoming challenges."

"In refining, as in all our businesses, developing a superior understanding of our markets has been critical to our approach and to our success."

"We study not only the history of a business or industry, but also existing and potential technologies, competitors, customers, applicable laws, and industry structures, and how all these factors are changing - both for industries we participate and for those we are considering. We then analyse their value chains and cost structures, future demand for their products, competitive positions of participants, and other meaningful factors and trends. We seek to understand the future drivers and level of profitability for the various segments of relevant industries. Even so, we recognise that uncertainty guarantees that any point of view can, at best, only be directionally correct"

"Whether the goal is to cure cancer, build a smaller and faster smartphone, or develop a more efficient and environmentally friendly way of making nylon, disruptive innovation requires creating, acquiring, sharing, and applying knowledge."

"For a culture to create spontaneous order that contributes to discovery, it must constantly seek, nurture, and implement new knowledge."

"Knowledge sharing isn't just important for innovation. Seeking, sharing, discussing, or challenging ideas and plans plays a crucial role in every aspect of an organisation's success."

"Replicating the way the scientific community organises itself, wherein knowledge is shared freely with a commitment to disproving even the most cherished hypothesis, leads to innovation."

Measuring Performance

Koch place value on measuring the things that matter rather than just producing reports for the sake of reporting.

"To guide activity correctly we must measure what leads to results, rather than what is easy to measure."

"A business must develop measures that help it understand the drivers of profitability."

"It is usually wasteful to develop detailed information beyond what is necessary to make good decisions. When evaluating an investment, unnecessary detail just distracts from the key drivers. Since it is impossible to predict outcomes precisely, trying to do so - as in making financial projections to several decimal places is wasteful. Even worse, such attempts create a false sense of confidence."

"A successful organisation should measure - and do its best to understand - the profitability (and profitability drivers) of its assets, products, strategies, customers, agreements, and employees, and anything else for which it is practical to do so."

"We need to ensure we are not wasting time providing information that is nice to have, but doesn't improve results."

Change

And change is eternal, and that Koch have to keep abreast of those changes.

"Consumer needs and desires are constantly evolving."

"Change is ever present in society, the economy, and politics. Companies, products, methods, and individual skills are constantly being replaced by superior alternatives."

"Base on our changing point of view, we modify our thinking about the best opportunities and how to capture them."

Limited Hierarchy and Bureaucracy

Once again leadership and the erosion of bureaucratic empires is vital for growth, innovation and success.

"Command-and-control companies are less innovative and less competitive over time."

"There's a tendency for many successful companies to rest on their laurels, and become complacent, self-protective, and less innovative. In such bureaucratic cultures, employees can survive only by running with the herd. Decline sets in."

"Verbal exchanges lead to the discovery of new and better ways to create value. When such exchanges are hampered by overbearing taboos, bureaucracy, systems, procedures, tenure, knowledge hoarding, egos, or hierarchy, knowledge sharing is stifled."

"At Koch, truth is what gets results. It is what stands the tests of evidence and criticisms - not what someone in the hierarchy declares is true."

"Like many companies, Georgia Pacific [when acquired by Koch] had a command-and-control structure in which challenge of leaders was discouraged. We broke down this strict hierarchy in which leadership seemed above and apart from other employees."

Humility & Complacency

Humility as always is a fundamental trait of a successful culture and leadership.

"My father, Fred Koch, exemplified much of what is at the core of our culture: the value of hard work, integrity, humility, and a lifelong dedication to learning."

"Guard against self-assuredness. None of us at Koch can ever declare victory and lose focus on what matters."

"Arrogance is one of the most destructive traits of an organisation."

"We all need to exemplify humility and intellectual honesty as vital attributes of our culture."

"I don't consider any work I do "good enough" - because complacency and eventual decline are embedded in that mental model."

"Complacency and defence of the status quo are surefire prescriptions for business failure, because creative destruction is always with us."

Learning

Seeking knowledge from others and their experiences...

"I sought to read everything I could on the subject [of societal well-being] from every relevant discipline, including history, economics, philosophy, science, psychology, sociology, and anthropology."

"I am a bona-fide book person. My home contains more books than I'll ever have time to count."

"MBM draws from the wisdom of philosophers, economists and psychologists willing to face reality and use logic."

"Everyone, in every business, and in every position within a company, can be constantly learning and strengthening the values that drive good profit."

"No matter what business we are in, we can all learn a great deal from the best company (internal), the best industry (competitive), and the best in any industry anywhere in the world (world-class)."

Mental Models

The use of mental models appears time and time again within the doctrine of the Investment Masters.

"Mental models are intellectual structures that enable us to simplify and organise the myriad inputs we get from the world around us. They shape and support our thinking, decision making, opinions and beliefs."

"The quality of our mental models determines how well we function in the physical world. The same is true for the economic world, which is why Koch industries invests tremendous time and effort to ensure that our MBM mental models fit reality. Any business with behaviour based on faulty mental models will eventually fail."

"The most reliable signal that a business is using reality-grounded mental models and providing service that customers truly value is a profit made over time under beneficial rules of conduct."

"Theoretical grounding is necessary, but by itself it is not sufficient to obtain results. Success in applying new mental models - and thus acquiring personal knowledge - comes only after correct, frequent, and prolonged practice."

Ideas

Ideas and innovation are actively encouraged within the organisation...

"Ideas are encouraged and challenged, not destructively criticised."

"Free speech within a company allows the exchange of information and ideas that generate innovation and progress."

"When a workplace culture of respect and trust is promoted, employees share their ideas and seek out the best knowledge to anticipate and solve problems."

"Businesses with good ideas but poor execution ultimately fail."

Challenging and Testing Ideas

And rather than just accept those ideas at face value, they need to be vigorously and constructively agitated to ensure their value.

"The kind of communication that fosters value creation requires constant disagreement."

"One of our top priorities is impressing on new employees that not only is it permissible to challenge their bosses respectfully if they think they have a better answer, but they have an obligation to do so. And supervisors have the obligation to create a culture that invites challenges."

"We are able to create superior value for customers because we attempt to replicate a free community of scientists - constantly sharing knowledge and ideas, testing hypotheses, experimenting and adjusting to what honestly works - rather than succumbing to establishment pressure."

"Continual questioning and brainstorming to find a better way is what we call challenging. It must be seen as an opportunity to learn and improve, not as a chance to kill another person's idea. Leaders should encourage challenges by asking open-ended questions such as "What are we missing here?" or "Is there a better way to do this?"

"The quality of a challenge depends on having the courage and willingness to respectfully question anyones' - up to and including the CEO's - beliefs, ideas, proposals, and actions."

"We need to strive - seeking help when needed - to clearly articulate our hypothesis, which, when made concrete and specific, can be challenged, tested and improved to the point that we believe them to be valid."

"To be most effective, [a] challenge process must include people with different perspectives, kinds of knowledge, and expertise. This is the kind of diversity that is important for innovation and reaching the best decision."

"To drive the process of creative destruction internally, nothing and no-one can be immune to challenge. Each of us, from the front-line supervisors to the CEO, must help foster an open environment that invites challenge and embraces change."

Take Risks and Accept Failure

Failure and its acceptance are integral to growth and learning as well as success.

"Confusing as it might seem, failure and getting results are not mutually exclusive. When driving experimental discovery within a company, failure is not desirable, but should be expected. Sometimes today's positive results can only be derived from lesson's of yesterday's failed experiments. As Einstein observed "Failure is success in progress."

"By not unduly penalising well-planned experiments that fail, we fuel an engine of small and frequent bets that can generate powerful discovery and learning. This is vital to innovation, growth, and long-term profitability."

"Koch's model for growth today is still a trial and error process."

"Perfection is the enemy of progress: Progress - whether in business, an economy, or science - comes through experimentation and failure. Those who favour a 'grand plan' over experimentation fail to understand the role that failed experiments play in creating progress in society."

"Experimental discovery is needed because we cannot know the final destination when our journey begins. Innovation usually involves numerous changes in direction that lead to the discovery of new paths."

"A key factor in our success has been the willingness to admit to mistakes and mitigate our losses in a timely manner. Rather than squandering our scarcest resource (talent) trying to save a marginal business, we've learned to focus that resource on opportunities with real potential."

"Our practice of exiting businesses with limited potential for us and focusing on ones with greater potential has been a key element in our success."

"I can never undo all the damage that has been done [by management failures], but I can commit myself to improving as a result of these management failures and helping others avoid the same mistakes."

Trust, Value and Empower your People

Koch understand that people are their greatest asset, and that being a manager doesn't mean that that person is always right.

"The old cliche is true: Good people are a company's most valuable resource. They are also essential for good profit. I join Jack Clark in feeling grateful for everything and entitled to nothing. I am especially grateful for all our good people."

"Organisations should treat people as individuals, according to their virtue, talents and contributions. Teamwork requires honesty, dignity, respect and sensitivity. Making people feel appreciated leads to better long term results."

"Just like owners usually take better care of their property than renters do, when an employee "owns" well-defined areas at work, she takes greater pride and responsibility for outcomes. This greatly improves results."

"At Koch we have found that each employee can help experiment and improve our ability to get results through MBM. In fact, employee innovations and contributions constitute most of the examples in this book."

"[We follow] a vision that focuses on what our employees can do to seize opportunities to create value for our customers."

"Leaving the particulars to those doing the work encourages discovery and enhances their ability to adapt to changing conditions."

"Freeing people to explore new approaches, within Koch's Guiding Principles, leads to innovation."

"[The concept that] the person with the comparative advantage to make that decision well (not necessarily the highest ranking person) should be the decision maker - leads to greater value creation."

"Granting well defined decision rights flies in the face of hierarchical norms."

"In an environment with clear decision rights, the owners of good decisions reap rewards, just as entrepreneurs in a free society do when they use their private property to create value for their customer and society."

"Decisions should not be made by those in closest proximity, but rather by those with the comparative advantage to make sound decisions, including the best knowledge."

"Too many businesses insist that decisions ought to be made by the highest-ranking person in the company hierarchy. But this should only be the case when that person is the one with the comparative advantage to make that decision. Tenure, credentials, or titles are not reliable predictors of good decision-making ability."

"No matter your role in the company, you should actively seek knowledge and alternative points of view."

"If the goal is to develop a culture that will be competitive in the long term, it's crucial for a company to give its people the right amount of responsibility to seek a better state."

The Right Incentives

Reward should encourage innovation and long term value.

"At Koch, base pay is recognised as an advance payment for the value an employee is expected to create for the company."

"With our approach, when individual employees create more value than their leaders, they are compensated more than their leaders, no matter what title. This is the same philosophy used by sports teams in which the top performers are paid more than the coach."

"Every company should strive to leverage incentives to motivate all employees to fully develop and apply their capabilities to maximise long-term value for the company in a principled way."

"At Koch, we do not reward roles or positions. We reward individuals for specific contributions and results, not for some generalised or averaged result. At Koch, anyone can earn more than his boss if he creates more value. Our goal is to motivate all employees to maximise their contribution, regardless of the role."

"All incentives, whether financial or not, should motivate each employee to fully develop her aptitude to create value, to innovate and drive creative destruction."

"At Koch we use incentives to attempt to align the interests of each employee with the interests of the company, our customers and society. Our philosophy is to pay employees a portion of the value they create for the company."

"If we don't hold employees (especially leaders) accountable for results and instead continue to compensate them the same regardless of their performance, we undermine the whole system."

"We recognise our incentive system is more demanding to administer than budget-, formula-, or hierarchy-base systems. However, in our experience, the effort Koch expends connecting employees to how they can create more value- and rewarding them for it - causes them to greatly increase their contribution."

"We have found that aligning incentives with performance almost always improves outcomes."

Innovation

And of course, Innovation...

"Now, more than ever, if you don't have a culture of innovation, your days are numbered."

"At Koch, we stress the importance of incessantly embracing innovation and replacing old products, services, and methods with newer and better ones."

"Koch has grown through innovation and by painstakingly identifying and acquiring businesses that are beneficial to our customers and Koch as a whole."

"Anyone who wants to maximise creativity should work as part of multi-disciplinary teams, share ideas - not in isolated silos - and their leaders must provide them sufficient resources and time to do so."

"Koch strives to drive what Schumpeter called creative destruction, creating "the new commodity, the new technology, the new source of supply, the new type of organisation."

"Companies must realise they are not competing just on price and output of existing products. They have to relentlessly strive to come up with new and better products and produce them more efficiently than the alternatives."

"We must continually drive constructive change in every aspect of our company or we will fail."

"We constantly pursue disruptive innovations and opportunities through internal and external development as well as acquisition."

"Koch's reality-grounded MBM mental models, customer focus, and innovation have made us one of the world's largest and most successful private companies, generating exceptional long term performance."

"Even successful companies struggle to keep up because, given human nature, we all tend to become complacent, self protective, and less innovative as we succeed."

Conclusion

Koch's returns are an example of doing the right things rather than just doing things right. Innovation is encouraged, staff can earn more than their boss, titles mean nothing and customers are all. Many businesses fall short of what they could achieve or fail altogether because they fear to allow change within their walls, and prefer structure and hierarchy and regulations to provide them with security and comfort. Koch is another strong example of ideals and values that espouse great investing. If Koch can do it, and the Investment Masters all do it, shouldn't the businesses you own do it also?

Learning from Nucor’s Ken Iverson

Steelmaking is a tough, capital-intensive business in an industry characterised by booms and busts. Barriers to entry are low, foreign competition can be intense and you're a price taker - it's a commodity product. When looking at a business, Warren Buffett has long espoused pricing power as the most important determinant, which coincidentally is something steel companies don't have.

“You really want something where, if they don’t have it in stock, you want to go across the street to get it. Nobody cares what kind of steel goes into a car. Have you ever gone into a car dealership to buy a Cadillac and said “I’d like a Cadillac with steel that came from the South Works of US Steel.” It just doesn’t work that way; so that when General Motors buys, they call in all the steel companies and say, “Here’s the best price we’ve got so far, and you’ve got to decide if you want to beat their price, or have your plant sit idle.”  Warren Buffett

So how does a small US steel company rise from obscurity to eventually dominate steelmaking in the United States? In large part, the answer to that question resides at the feet of Ken Iverson. The late Ken Iverson took Nucor Steel from its origins as a small-town steel business in the 1960's, to America's third largest steel player in 2002. Today, with the legacy culture instilled by him, Nucor is America's largest steel company.

So what was their secret to success? Interestingly, they had no secret formulas and no intricate management models that others lacked; basically, they simply changed the steel-industry paradigm on how to do business. They became a company that paid its workers more than anyone in the industry, yet was the lowest cost producer; a company that never laid off a worker or shut down a facility for lack of work, and a company that never lost money in any business quarter for more than thirty consecutive years! These simple changes to culture created an organisation that provided sustained returns over long periods and a business that was incredibly difficult to compete against.

I came across Nucor's enviable track record a while back when reading James Heskett's excellent book 'The Culture Cycle'. The book includes a few case studies on companies, Nucor being one of them.  More recently, I stumbled across Ken Iverson's book 'Plain Talk' after it was recommended by one of the Investment Masters.

'Plain Talk' is an easy read, I finished it in a few days. Its a no-nonsense, simple guide to business success by one of America's greatest corporate leaders.

It's fascinating how many of the mental models, thought processes and approaches of successful business leaders like Ken Iverson parallel with the Investment Masters' mindsets. It's little wonder that Buffett encourages investors to think like business people when acquiring stocks and for business people to think like investors when running businesses.

Let's hear from Ken Iverson on the keys to Nucor's success..

Culture

"It's helpful to think of corporate culture as all the things that shape interactions among the people in your company, it's customers and suppliers."

"I'm often asked; ‘How do your explain Nucor's success?’ My stock reply: ‘It is 70% culture and 30% technology.’ The truth is, I'm not sure if it is 80 to 20 or 60 to 40, but I'm certain our culture accounts for more than half of our success as a business. Equality, freedom, and mutual respect promote motivation, initiative, and continuous improvement."

"Without a doubt, Nucor's culture is its most important source of competitive advantage, and always will be."

"Don't think, though, maintaining such a culture is easy. It demands daily attention to combat our worst human tendencies to divide ourselves into camps of ‘We vs They.’”

"Egalitarian business culture is an extraordinary practical way to sustain employee motivation."

Unconventional

"We at Nucor so often chose paths different from those followed by most corporations"

Simplicity

"Simplicity is what makes Nucor successful."

"Mainly we try and focus on what really matters - bottom-line performance and long-term survival."

"Our competitive strategy is to build manufacturing facilities economically, and to operate them efficiently. Period."

"Basically, we ask our employees to produce more product for less money. Then we reward them for doing that well. Simple."

"Nucor is founded on principles so basic, they sound corny. We believe in treating people the way you'd want to be treated."

Long Term Perspective

"Managing with a long term-perspective is just common sense to us. But I'll admit, not everybody sees things as we do. And, like managers in most large businesses, we must sometimes answer to those who froth at the mouth, pound on tables, and yell at us to do whatever it takes to maximise earnings right now! I'm referring, of course to stock analysts."

"Over a three-to-five year period, the success and growth in equity in a business will be reflected in its stock price, rewarding the investor."

"We're not dogs on a leash, doing tricks to manage the stock price or maximise dividend quarter by quarter. We're eagles. We soar. If investors want to soar, they'll invest with us. The speculators, we don't need."

"Every decision we make as managers is rooted in long-term perspective."

"A focus on long-term survival over shorter-term consideration can change every aspect of your business because it drives fundamentally different priorities."

"What we did was push aside the notion that management and employees have inherently separate interests. We've joined with our employees to pursue a goal we can all believe in; long term survival."

PainSharing and No Layoffs

"Department heads had taken pay cuts of up to 40%, and the general managers and other officers were earning 50-60% less than we had made in preceding years. My own pay dropped that year to about $110,000 from about $450,000 the year before. We not only shared the pain, we doled out the lion's share to people at the top."

"‘Painsharing’ has helped us get through the tough times without ever laying off a single employee or closing a single facility for lack of work, even when the industry was shedding thousands of jobs."

Employment Policy and MBA's

"We're not hung up on recruiting from big, prestigious universities."

"Job descriptions are pretty much the same for everyone here: ‘Come to work and be productive as heck for twelve hours.’”

"We haven't had much luck with the MBA's we've hired out of the top business schools."

"Business school curricula should begin with developing managers' ability to understand people and to effectively relate to them."

"The fact is, few business school professors have ever managed anything, and their lack of hands-on experience shows in their students."

Decentralisation and Smallness

"Nucor has consistently required its general managers to generate a return of at least 25% on the assets we place under their control."

"All the other decisions [outside minimum 25% return on assets employed and ethical standards of the company and a few general policies] are left to managers and employees of each division."

"We've tried to keep our divisions small. When a business grows beyond 400 or 500 people, it's hard for management and employees to stay connected."

"Decentralisation isn't good, Centralisation isn't bad. Each is a sound option under the right circumstances."

"Each division operates its one or two plants as an independent enterprise. They procure their own raw materials; craft their own marketing strategies; find their own customers; set their own production quotas; hire, train and manage their own workforce;create and administer their own safety program. In short, all the important decisions are made right there at the division."

"You have to pursue the virtues of smallness, starting from the top of the business down."

"Our headquarters staff, including the clerical personnel, numbers just twenty-two."

"Communicate all the time, with everyone. That's what people in small businesses do. In fact, communication is probably the single greatest virtue of smallness."

"Fortune 500 executives visiting Nucor are intrigued to find that a major business can be so lean, simple and rational - in other words, so much like a small business."

"We prefer small towns. Labour in rural areas is a great untapped resource."

Information & Transparency

"Delegation without information is suicide."

"Too much information puts you in the same position as too little information - you don't know whats going on."

"The key is to identify the fraction of information that is truly useful to you, so you can concentrate on it."

"Try to focus on the information that tells you what you need to know under ordinary circumstances, and that will give you early warning when something extraordinary is going on."

"Sharing information is another key to treating people as equals, building trust, and destroying the hierarchy."

"At Nucor, our official information policy is to ‘share everything.’”

Limited Hierarchy

"Managers don't need or deserve special treatment. We're not more important than anyone else. We just have a different job to do."

"Management's authority comes from the employees."

"You must attack hierarchy. You have to destroy it."

"We think you get a heck of a lot by minimising the distinction between management and any other employee in the company."

"Our executives get the same group insurance, same holidays, and same vacations as everybody else. They eat in the same cafeterias. They fly economy class on regular commercial flights. We have no executive suits and no executive cars. At headquarters, our 'corporate dining room' is the deli across the street."

"No one in the company is more than four promotions away from having my job!"

"Adding more layers of management would wreck one of the great strengths of our business - very short lines of communication."

"Strip out a half-dozen or so layers of the management's hierarchy, and employees' information and ideas will find their own way to wherever they need to go."

Walk The Floors

“Whenever I’ve run a plant, I’ve made it a practice to get around and talk with every manager in the plant each morning. I’d sit and chat and drink coffee with people all over the facility. I might not get back to my own office and my own pile of work until late in the morning, and I’d arrive there with my caffience quota for the day. But it was always worth it. During my morning stroll, I might talk with a dozen or more people. I’d get an up-to-the-minute picture of what was going on in each and every part of the operation. Even more, I’d find out if people were feeling confident or anxious; see first-hand how well our technology was working; and get a sense which managers were struggling and which might be ready to take on more responsibility. This was also a good way to get people used to seeing me, so I wouldn’t scare them when the day came (as it surely would) that I needed information from somebody honestly and quickly. By taking those strolls, I always knew what people thought. I had a strong sense of who they were, what they could do, and what they cared about. They knew the same things about me. I can’t imagine staking my success on a group of people and not knowing them. It would be like trying to fly a plane with one wing.”

Humility

"When you have power, real power, as Nucor's general managers do, you need to stay humble."

"Be a part of your company. Never set yourself above it."

Ideas

"You should also try to be genuinely open to the ideas people bring to you."

"I can't stand it when there are no strange new ideas floating around the company."

"Don't study an idea to death with experts and committees. Get on with it and see if it works."

"You should never let someone else - even a so-called expert - tell you if a risk is worth taking. You have to decide for yourself."

"You can become a proponent of spreading more information to employees, giving them more responsibility for generating ideas, and increasing their decision-making powers."

Test Ideas

"I worry when sparks don't fly [at general manager meetings held three times a year]. These meetings are designed to let each of us tap into the collective wisdom of all us. That wisdom won't come out if we're worried about stepping on one another's toes."

"Our general managers say what they think, even if they know I won't like it."

"It's a heck of a lot easier to listen to someone tear down your position when you know the disagreement is honest, objective, and motivated by what they truly believe is good for the company."

"Open debate also safeguards against little problems getting tucked away in some dark corner, where they can grow into big problems."

Take Risks and Accept Failure

"People won't try to accomplish extraordinary things if their managers won't tolerate failure. You should take care never to criticise when things turn out badly. That's a surefire way to stop people taking prudent risks."

"Don't wallow in the failure. Learn from it. Look forward not back. Urge them to try again."

"I have no desire to be perfect. In fact, none of the people I've seen do impressive things in life are perfect. They never settle for latching onto one approach or mastering one way of doing things. They experiment. And they will often fail. But they gain something from every failure. That's what it takes to achieve, I think, in business as well as in life."

"Probably half of the new technologies, approaches, and other ideas we try fail."

"Some risks, even big ones, are worth taking once you've weighted them against appropriate criteria."

"Don't fall into the trap of ruling out failure. Risk, by definition, carries the possibility of failure. See that possibility. Study it, but never, ever hide from it."

"Aversion to risk is deadly in business, especially in industries marked by rapid advances in technology."

"Managers who avoid risk and fear failure spend their entire careers cheating themselves, their people, and their companies."

"You have to know yourself. You have to realise the fears and ambitions are the lenses through which you view and assess risks, and that the image those lenses convey may not always be true."

Trust, Value and Empower your People

"I believe people are our company's most valuable resource."

"I can't imagine staking my success on a group of people and not knowing them."

"Employees - not managers - are the engines of progress."

Nucor Annual Report 2002 - All Employees listed

"If you want to manage autonomously, you'd better stay connected with your people."

"[We list] every Nucor employee, in alphabetical order, on the cover of our annual report. In a lot of companies, that would be seen (justifiably) as a hollow gesture. In ours, it's an expression of what we truly believe, that each and every one of those people is equally important."

"If you really want answers you can use to make the business perform better, ask the people who are doing the actual work of the business. It's that simple. Front-line employees continually amaze me with the capacity to make improvements."

"We built Nucor under the assumption that most of the ‘genius’ in our organisation would be found among the people doing the work."

"Every manager should be something of a psychologist."

"I've found that, as employees, many people want first and foremost to be appreciated for who they are."

The Right Incentives

"People earn according to what they produce, and those earnings are determined simply and objectively."

"Base pay is just a fraction of what our people have the opportunity to earn."

"What must employees do to earn their weekly bonus? Two things; a) work in teams; b) produce!"

"Our employment cost in 1996 was roughly half the total employment cost per ton produced by the big steel companies. Our people earn more because they're more efficient and more productive. We didn't make it that way. We just structured compensation to give them a clear incentive and turned them loose."

"Nucor officers receive a base salary that is typically just 75% of that earned by executives in comparable positions across manufacturing. The remainder of their compensation is variable and entirely at risk, just like the production bonus. At the officer level, Nucor ties bonus compensation to return on shareholder equity."

"Nucor's approach to compensation.. I think is one of the most critical elements of our company's success."

"At a minimum, pay systems should drive specific behaviours that make your business competitive. So much of what other businesses admire in Nucor - our teamwork, extraordinary productivity, low costs, applied innovation, high morale, low turnover - is rooted in how we pay people. More than that, our pay and benefit program tie each employee's fate to the fate of the business."

Cyclicality and Debt 

"Steel making is a cyclical business - a business of booms and busts. Supermarkets offer a classic contrast. People have to buy groceries every week, even when the economy is down. Since grocery store revenues experience relatively mild fluctuations, supermarkets can carry substantial debt most of the time. On the other hand, people can go months or years without steel. Sink a steel company too deep into debt before the industry plunges into a long "bust" cycle, and you may not come out the other side, especially if the technology you invest in flops."

"We have a history of conservative financing, so we won't be too vulnerable to down cycles."

Innovation

"Good managers are supposed to ponder possibilities beyond their areas of immediate authority. They are supposed to be students of the business."

On M&A

"A lot of corporations jump into new businesses, make acquisitions, and even decide to merge based on very questionable criteria like 'favourable ratios', 'minimal redundancy' and (my personal favourite) ‘Strategic synergism.’ Perhaps that's why more than half of such moves eventually fail - ‘strategic synergism’ often turns out to be what I'd call ‘BS synergism,’ Ratios or no ratios, the people of the company have no idea how to make the new business or the newly merged organisation work."

"Weigh mergers and acquisitions from an employees' perspective."

"We have made very few acquisitions. We tend to build businesses from the ground up."

Summary

It's no coincidence that Nucor's incredible achievements come down to just a few critical traits that all Investment Masters deem fundamental to success in any company - Culture, Humility, Reward, Innovation, Simplicity and the ability to Learn from past Mistakes. They weren't reliant on complicated models or academic theories, they didn't hire the best qualified people or have a proprietary product differentiator, nor did they seek perfection in anything they did. Indeed, they made mistakes like many other businesses, and were able to succeed using rural talent pools. What paid off for them was firstly getting their culture right. The people were efficient and productive because the business allowed them to be.

There's no loyalty in the steel business, but there is steel in the business of loyalty. How does your company compare?

Learning from Howard Schultz

It goes without saying that business and investment are linked. To be able to do one effectively, you need to understand the other. And understanding the ingredients of a great business most certainly helps the investment process become great in itself.

"I am a better investor because I am a businessman, and a better businessman because I am an investor." Warren Buffett

While I enjoy studying great investors, I also enjoy learning about great business people and hearing how they've developed their companies. One of my favourite podcast series is 'How I Built This', hosted by Guy Raz. He's had some great guests on his show including Southwest Airline's Herb Kelleher, Airbnb's Joe Gebbia, Spanx's Sara Blakely, Whole Food's John Mackay, 1800-Got-Junk's Brian Scudmore, Kickstarter's Perry Chen and Buzzfeed's Jonah Peretti to name just a few. In listening to all of these great people, I've noticed lots of commonalities around their cultures, innovation, customer focus and management philosophy.

"When investing, we view ourselves as business analysts - not as market analysts, not as macroeconomic analysts, and not even as security analysts." Warren Buffett

A recent episode featured Howard Shultz, one of America's most successful entrepreneur's and the man behind Starbucks. The interview begins with Howard telling the story of growing up in a two-bedroom apartment with his parents and two siblings in a housing project in Brooklyn, where a real sense of community and diverse neighbours of like-minded values were prevalent. His dad, a blue collar worker, was injured on the job in the 1960's, and found himself without healthcare or workers compensation. This incident fractured Howard's belief in the American dream. However these experiences would play a key role in determining the culture that would ultimately define Starbucks.

Howard Shultz wasn't a great student.. but he was competitive..

"I was a not good student, I don't think I applied myself very well"

"I was an athlete because in the Projects where the entire day was spent in the school yard, a concrete school yard, playing any sport you could invent or organise. You would dive on concrete to win.  My competitiveness was born out of being that kid in the school yard"

In both business and investing, competitiveness and perseverance often trumps intelligence. Michael Steinhardt, one of the most successful investors of all time, noted “I don’t think those people who have very special records in the stock markets are necessarily brighter or have more cerebral abilities than the next person.  I think it’s a matter of competitive intensities". 

As we mentioned in many previous posts, success in business, as in investing, requires a sense of humility. Howard Schultz developed a sense of humility at an early age..

"I was very fortunate, I finished school I somehow convinced people at Xerox to hire me. I didn't have a business degree. I got a sales job at Xerox. This was 1976. At Xerox first they sent you to a sales training school and then for six months after that all you do is make 50 cold calls a day. Not on the phone, you have to make physical cold calls to an office. I think the rejection of cold calling, the humility that comes with the disappointment of someone not saying yes to you, I went through a steep learning curve and I started having a higher level of self esteem"

We can see this humble approach mirrored by many other successful people. William Thorndike's book, 'The Outsider CEOs', finds that the leaders of America's most successful companies all shared the characteristic of humility in common. Donald Keogh, the sixty year business veteran and two decade CEO of Coca-Cola, cited the assumption of infallibility as one of the 'The Ten Commandments for Business Failure'.

When Howard Schultz stepped into the first Starbucks store he was impressed..

"This is the kind of environment and product and young company I would like to be part of. Over the course of a year I kept banging the door to say to the founders,"If you expand the company I think I can help you"

Howard left Xerox and joined the tiny Starbucks company in 1982. Upon a trip to Italy to source coffee he realised that Starbucks should get into the business of selling coffee in cups, not just coffee beans by the pound ...

"What struck me [in Italy on my first tour of coffee stores] was the sense of community. I would go to the store at the same time every day and I would start seeing the same people. I realised when I was in Italy that Starbucks was in the coffee business, perhaps the wrong part of the business. There was no service of any cup of coffee at any Starbucks. It was just pounds of coffee for home use".

The Italian coffee houses weren't just selling coffee, they were selling an experience..

"A lot of people said it was a crazy idea to roll out coffee stores, but we believed early on that what we had seen in Italy was replicable in America, through an American lens, it was thinking let's create a store not only just a store for coffee but produces this sense of community between home and work. Early on we realised the brand we were going to build was going to be experiential" 

After parting with the original owners and buying the Starbucks business in 1987, Howard realised that to grow, he needed to invest and that losses were inevitable..

"We weren't profitable [in the first few years after I bought the company] but in order to grow the company and raise the money, we said kind of metaphorically, we want to build a one hundred story skyscraper, we're going to have to invest to build the foundation. We started investing heavily. Like any other start up - investing in people, processes, IT and infrastructure - the company lost money almost from the day I bought it. Investors understood early on, we were going to lose money in order to build a much bigger company"

This is no different to many businesses today, in spite of most market participants' demands for short term profitability. As Charlie Munger says “Almost all good businesses engage in ‘pain today, gain tomorrow activities".

Starbucks continues to invest for growth; In a recent podcast I listened to, Investment Master Thomas Russo, highlighted why he likes businesses that show 'A willingness to suffer'. He touched on Starbucks' foray into China...

“Companies that can make the trade off [to invest in growth] are much more powerful in their position to secure permanent and enduring franchises. The companies that choose to not swing for the long term fence leave themselves exposed.  A company that faces this question of how to invest for the long term is Starbucks. I met the chairman of Starbucks recently and he was being grilled by a young analyst as to why he wasn’t showing profits in China. He expressed the trade-off so well when asked “when will you give us profits from China?" His answer was “How big do you want us to be?” And they asked again, back and forth. And finally the CEO said “It’s quite simple, We are profitable at the store level and we could easily be profitable at the country level. But we think China offers a vast opportunity and if we invest enough upfront, we will own the dominant brand in the category we create".

If you’re the first-mover, in a category that is created by your brand, you have the first-mover advantage for eternity. And if Starbucks were permitted to invest for that type of profitable future they would have to be permitted to show losses at the start as they build warehouses, manufacturing, distributions and advertise aggressively. All with the idea of building an enduring franchise and in doing so generating reported losses for quite a considerable amount of time. They are willing to do it and as a result they won’t end up as one of thirty coffee companies sharing a market, but they have the chance of becoming quite powerful.

That’s the mindset you look for as a long term investor – brand, capacity to invest behind the brand and then the willingness to suffer from the investment until scale is reached. Then you have the benefit of that strong brand, created over that build up period, affording you pricing flexibility and price elasticity relative to consumer incomes because of the strength of the brand.”

Starbucks did things differently, they still do ... 

"Even today Starbucks is not a traditional marketing company. It sounds really old fashioned but we built the company one customer at a time, one cup at a time"

And like Jeff Bezos more recent experience in building Amazon Web Services, Starbucks was lucky enough to have a long runway without competition..

"I think the large companies [like Nestle] never believed you could build a national company and brand around selling coffee in a cup. I think they were naive, maybe arrogant and they gave us a lot of runway."

In 1996, Howard convinced the board to expand internationally and open the first store in Japan. Consultants hired by the board recommended against investing in Japan, believing it would be a disaster .. it wasn't. 

“The board said we should probably hire an outside resource, a consultant – a word that really gives me hives. If we have to hire a consultant it means we don’t really know our business.” 

Interestingly, the Seventh 'Commandment of Business Failure' in Donald Keogh's book is 'Put all Your Faith in Experts and Outside Consultants'. It should come as no surprise that both Buffett and Munger are on the same page ..

'“We never hired a consultant in our lives; our idea of consulting was to go out and buy a box of candy and eat it.” Warren Buffett

“I have never seen a management consultant’s report in my long life that didn’t end with the following paragraph: “What this situation really needs is more management consulting.” Never once. I always turn to the last page. Of course Berkshire doesn’t hire them, so I only do this on sort of a voyeuristic basis.  Sometimes I’m at a non-profit where some idiot hires one." Charlie Munger

Howard stepped down as CEO in 2000 ...

"I felt like I was repeating myself, I no longer felt engaged in the fun, creative part of the business where I get the most joy. I was not having fun. I decided I needed a break. I did step away. I was Chairman and as Chairman I should of been paying more attention to the company."

Eight years later, in 2008, Schultz returned after Starbucks had lost its way and the share price hit a record low..

"Two things hurt the company, the country was heading into a cataclysmic financial crisis. I would describe those years as the years of hubris. Starbucks was growing at a pace at which growth and success began to cover up a lot of mistakes. Too many stores cannibalising other stores, financial controls and discipline not being leveraged. The big mistakes was Wall Street and the share price became an albatross on the company's neck.  Growth became the strategy and growth is not a strategy. Growth meant too many stores, growing in areas that should not have had a Starbucks and the experience, which had defined the essence of the company was being compromised by efficiency. The management team started measuring yield, sales per hour and doing things that were so dilutive to the essence of the foundation of the company. I began going into the stores and not recognising what we had built."

Warren Buffett expanded upon just such an issue in his 2005 letter to shareholders..

"If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible;  cumulatively, though, their consequences are enormous.

"When our long-term competitive position improves as a result of these almost unnoticeable
actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted."

Howard decided to return as CEO because he loved the business ...

"I came back for two reasons, what it means to love something and the responsibility that goes with it"

Like great investors, great business people love what they do. Donald Keogh, with more than sixty years' business experience observed "I have never met a successful person who did not express love for what he did and care about it passionately."

Howard closed 900 stores and retrained every employee on how to make quality coffee. Every store manager, ten thousand in total, were brought together in an auditorium and told they each needed to take every customer interaction personally and to act as if it was their own store. Failure to correct the situation would mean they were not going to be able to feed their families. Within a year, the downward spiral that almost engulfed Starbucks, was a memory.

Howard referred to his employees as partners and introduced free college tuition, health care, and stock options. Like him, many people in the company were not born with a silver spoon and he wanted to offer them a work environment not available to someone in his fathers' day. Soon customers began to realise workers had ownership and the intimacy built between baristas and customer began to build. Starbucks enjoyed much lower staff turnover than the rest of the industry. He had created a win-win culture.

So what did Howard learn from the mistakes?

"The question was what did we learn? We were so hungry and so driven when we started the company. But when we were that successful people got sloppy and lazy. This is so vitally important.. Success in any business, no matter what it is, is not an entitlement, it has to be earned. And we stopped earning it and that is why we got in trouble"

"Building a company is a lonely place sometimes, your imprinted, especially as a man, of not demonstrating vulnerability. I think one of the most undervalued characteristics of leadership is vulnerability and asking for help. I've done that a number of times. When you're vulnerable and ask for help people come towards you, I have tried to do that every step of the way and be honest and truthful about what I know and don't know and most importantly what I believe."

As we learnt in the last post, turning a business around is rarely successful.  Nancy Koehn, a professor and historian at Harvard Business School, noted that Howard Schultz is “one of the few globally recognized CEOs who turned around a multibillion-dollar enterprise when growth stalled. The probability of a company coming back after it stalls like that is very low.”

Against the odds, Starbucks managed to turn around. Howard built a successful culture, focused on ensuring his staff and customers were relevant and that their experience was both positive and assured. He retrained his employees, gave them ownership and offered them rewards that few other companies have bothered with. He resuscitated the company after it had stalled.

And we can learn from this.

The Investment Masters are firstly good business people. An understanding of business and the businesses they invest in is paramount to success. And humility and a willingness to learn from the errors of the past are integral things that success demands. Howard Schultz learned this and Starbucks survived and thrived – one person, one cup and one neighborhood at a time.

Creativity - Learning from Pixar

I recently read Creativity Inc, a book by Ed Catmull, who is co-founder of Pixar. Ed is a deep thinker, who after a two decade goal produced the first computer-animated feature film 'Toy Story'. Upon achieving this goal, and after recognising the missteps of other successful companies run by smart people, Ed devoted himself to the challenge of building a successful company with a sustainable creative culture that could outlast its founders. 

Most of the books I read have been recommended by the Investment Masters, and Creativity Inc is no different. I can't recall which Investor recommended it, but I have seen it on quite a few recommended reading lists over time. I thoroughly enjoyed the book and it's no surprise it's highly recommended, the parallels in thinking between Ed Catmull and the Investment Masters are striking. Successful investing after all, requires creativity.

“We put great emphasis on a consistent investment process that demands enormous creativity, energetic sourcing, outside-the-box thinking, intellectual honesty, and vibrant debate.”  Seth Klarman

“We think we try harder than most to be rational and creative. The combination of the two is important.” Nick Sleep

 “It’s imperative to be creative because a stock currently is selling at a price that the average investor thinks is the right price, so you have to come to a decision that that price is wrong and that the stock deserves to sell at a higher price for some reason. That reasoning is creative thinking because other people aren’t thinking that way because if other people were thinking that way, the stock would be at a higher price. Every idea is a creative idea.”  Ed Wachenheim

Creativity Inc, provides insights into how to enhance creativity and develop a creative culture. In many ways, Ed Catmull reminds me of Ray Dalio of the world's largest and arguably most profitable hedge fund, Bridgwater Associates. Both Ed and Ray have developed cultures that require high levels of transparency, seeking multiple viewpoints and consistently testing ideas. You'll notice many of the quotes below could have as easily been spoken by Ray Dalio as Ed Catmull.  It's probably no surprise that both Ed and Ray cite Einstein as one of their idols.  

"One of my favourite books is "Einstein's Mistakes" ... Provide people with as much exposure as possible to what’s going on around them. Allowing people direct access lets them form their own views and greatly enhances accuracy and the pursuit of truth." Ray Dalio

"Albert Einstein [was a boyhood hero]. I read every Einstein biography I could get my hands on as well as a little book he wrote on his theory of relativitiy. I loved how the concepts he developed forced people to change their approach to physics and matter, to view the universe from a different perspective. Wild-haired and iconic, Einstein dared to bend the implications of what we thought we knew. He solved the biggest puzzles of all, and in doing so, changed our understanding of reality." Ed Catmull

I've included some of the my favourite quotes below. Many of the sub-headings are topics from the Investment Masters Class tutorials [click on sub-headings to read tutorials].

TEAM DYNAMICS

"The leaders of my department understood that to create a fertile laboratory, they had to assemble different kinds of thinkers and then encourage their autonomy."

"My world view, forged in academia, that any hard problem should have many good minds simultaneously trying to solve it."

"I've made a policy of trying to hire people who are smarter than I am."

"When it comes to creative inspiration, job titles and hierarchy are meaningless."

"The responsibility for finding and fixing problems should be assigned to every employee, from the most senior to the lowliest person on the production line."

"What is more valuable, good ideas or good people? .. Ideas come from people .. To reiterate, it is the focus on people - their work habits, their talents, their lives - that is absolutely central to any creative venture."

"Find develop, and support good people, and they in turn will find, develop, and own good ideas."

QUESTIONS

"I've never stopped questioning."

"To foster a creative culture continually ask questions. Questions like : If we had done some things right to achieve success, how could we ensure that we understood what those were? Could we replicate them on our next project? Perhaps as important, was replication of success even the right thing to do?"

MISTAKES

"What makes Pixar special is that we acknowledge we will always have problems, many of them hidden from our view, that we work hard to uncover these problems, even if it means making ourselves uncomfortable"

"Mistakes are part of creativity."

"Mistakes aren't a necessary evil. They aren't evil at all. They are an inevitable consequence of doing something new (and, as such, should be seen as valuable; without them, we'd have no originality.)"

"Failure is a manifestation of learning and exploration. If you aren't experiencing failure, then you are making a far worse mistake: You are being driven by a desire to avoid it."

"In a fear-based culture, people will consciously or unconsciously avoid risk. They will seek instead to repeat something safe that's good enough in the past. Their work will be derivative, not innovative. But if you can foster a positive understanding of failure, the opposite will happen."

"Iterative trial and error - has long-recognized value in science. When scientists have a question, they construct hypothesis, test them, analyze them, and draw conclusions - and they they do it all over again. The reason behind this is simple. Experiments are fact-finding missions that, over time, inch scientists towards greater understanding. That means any outcome is a good outcome, because it yields new information."

"There are two parts to any failure: there is the event itself, with all its attendant disappointment, confusion and shame, and then there is our reaction to it. It is the second part we can contro.l"

"Failure gives us chances to grow, and we ignore those chances at our own peril."

"We get worried if a film is not a problem child right away. It makes us nervous." 

"Discussing failure and all its ripple effects is not merely an academic exercise. We face it because by seeking better understanding, we remove barriers to full creative engagement."

"Companies, like individuals, do not become exceptional by believing they are exceptional but by understanding the ways in which they aren't exceptional. Post-mortems are one route into that understanding."

"The key to solving problems is finding ways to see what's working and what isn't, which sounds a lot simpler than it is."

HUMILITY

"The most compelling mechanisms [we follow] are those that deal with uncertainty, instability, lack of candor and the things we cannot see. I believe the best managers acknowledge and make room for what they do not know - not just because humility is a virtue but because until one adopts that mindset, the most striking breakthroughs cannot occur."

CONFIRMATION-COMMITMENT BIAS

"The more time you spend mapping out an approach, the more likely you are to get attached to it. The nonworking idea gets worn into your brain, like a rut in the mud. It can be difficult to get free of it and head in a different direction."

"There is nothing quite as effective, when it comes to shutting down alternative viewpoints, as being convinced you are right."

IDEAS

"Our job is to protect our [new ideas] from being judged too quickly. Our job is to protect the new.”

"At too many companies, the schedule (that is the need for product) drives the output, not the strength of the ideas at the front end."

TESTING IDEAS

"If someone disagrees with you, there is a reason. Our first job is to understand the reasoning behind their conclusions."

"The Braintrust [primary delivery system for straight talk] is one of the most important traditions at Pixar - It's premise is simple: Put passionate people in a room together, charge them with identifying and solving problems, and encourage them to be candid with one another."

"Most crucially, they [the Braintrust] never allowed themselves to be thwarted by the kinds of structural or perceived issues that can render meaningful communication in a group setting impossible."

"We are true believers in the power of bracing, candid feedback and the iterative process - reworking, reworking, and reworking again, until a flawed story finds its throughline or a hollow character finds its soul."

"We believe that ideas - and thus films - only become great when they are challenged and tested."

"The film itself - not the filmmaker - is under the microscope. This principle eludes most people, but it is critical: You are not your idea, and if you identify too closely with your ideas, you will take offence when they are challenged."

"People need to be wrong as fast as they can. In a battle, if you're faced with two hills, and you're unsure which one to attack. The right course of action is to hurry up and choose. If you find out it's the wrong hill, turn around and attack the other one."

"The key is to look at the viewpoints being offered, in any successful feedback group, as additive, not competitive."

"Seek out people who are willing to level with you, and when you find them, hold them close".

"There's a difference between criticism and constructive criticism. With the latter, you're constructing at the same time that your criticizing. You're building as you're breaking down, making new pieces to work with out of the stuff you've just ripped apart. That is an art form in itself."

CANDOR

"Telling the truth is difficult, but inside a creative company, it is the only way to ensure excellence."

"A fundamental Pixar belief: Unhindered communication was key, no matter what your position."

"Societal conditioning discourages telling the truth to those perceived to be in higher positions."

".. replace the word honesty with another word that has a similar meaning but fewer moral connotations - candor. No one thinks that being less than candid makes you a bad person (while no-one wants to be called dishonest.)"

"I truly believed that self-assessment and constructive criticism had to occur at all levels of a company, and I tried my best to walk the talk."

"A hallmark of a healthy creative culture is that its people feel free to share ideas, opinions, and criticisms. Lack of candor, if unchecked, ultimately leads to dysfunctional environment."

"Candor could not be more crucial to our creative process. Why? Because early on, all of our movies suck."

"Filmmakers must be ready to hear the truth; candor is only valuable if the person on the receiving end is open and willing, if necessary, to let go of things that don't work."

"Candor isn't cruel. It does not destory. On the contrary, any successful feedback system is built on empathy, on the idea that we are all in this together, that we understand your pain because we've experienced it ourselves."

CHANGE

"We are always changing, because change is a good thing."

"It's folly to think you can avoid change, no matter how much you want to. But also, to my mind, you shouldn't want to. There is no growth or success without change."

"I think the person who can't change his or her mind is dangerous."

"Everything is changing. All the time. And you can't stop it. And your attempts to stop it actually put you in a bad place. It causes pain., but we don't learn from it. Worse than that, resisting change robs you of your beginner's mind - your openness to the new."

THE UNEXPECTED & RANDOMNESS

"Some people see random, unforeseen events as something to fear. I am not one of those people. To my mind, randomness is not just inevitable, it is part of the beauty of life. Acknowledging it and appreciating it helps us respond constructively when we are surprised."

"Randomness remains stubbornly difficult to understand. The problem is that our brains aren't wired to think about it. Instead, we are built to look for patterns in sights, sounds, interactions, and events in the world."

"How can we think clearly about unexpected events that are lurking out there that don't fit any of our existing models?"

"No matter how intensely we desire certainty, we should understand that whether because of our limits or randomness or future unknowable confluences of events, something will inevitably come, unbidden, through that door. Some of it will be uplifting and inspiring, and some of it will be disastrous."

"We must always leave the door open for the unexpected."

"The mechanisms that keep us safe from unknown threats have been hardwired into us since before our ancestors were fighting saber-toothed tigers with sticks. But when it comes to creativity, the unknown is not our enemy. If we make room for it instead of shunning it, the unknown can bring inspirations and originality."

"Randomness doesn't occur in a linear fashion." 

GENIUS?

"The puzzle of trying to understand randomness: Real patterns are mixed in with random events, so it is extraordinarily difficult for us to differentiate between chance and skill."

"We must acknowledge random events that went our way, because acknowledging our good fortune - and not telling ourselves that everything we did was some stroke of genius - lets us make more realistic assessments and decisions."

WHAT YOU KNOW?

"When faced with complexity, it is reassuring to tell ourselves that we can uncover and understand every facet of every problem if we just try hard enough. But that's a fallacy. The better approach, I believe, is to accept that we can't understand every facet of a complex environment and to focus, instead, on techniques to deal with combining different viewpoints."

"Creativity demands that we travel paths that lead to who-knows-where. That requires us to step up to the boundary of what we know and what we don't know."

"While we know more about a past event than a future one - our understanding of the factors that shaped it is severely limited. Not only that, because we think we see what happened clearly - hindsight being 20-20 and all - we often aren't open to knowing more."

"Acknowledging what you can't see - getting comfortable that there are a large number of two-inch events occurring right now, out of sight, that will effect us for better or worse, in a myriad of ways - helps promote flexibility."

MENTAL MODELS

"Only about 40% of what we think we "see" comes in through our eyes. The rest is made up from memory or patterns that we recognise from past experience."

"We do have to function, so simultaneously, the brain fills in the details we miss. We fill in or make up a great deal more than we think we do. What I'm really talking about here are our mental models, which play a role in our perception of the world."

"All we need is a tiny bit of information to make huge leaps of inference based on our models - as I say, we fill it in."

"We have to learn, over and over again, that the perceptions and experiences of others are vastly different than ours."

"Successful leaders embrace the reality that their models may be wrong or incomplete."

"When humans see things that challenge our mental models, we tend not just to resist them but to ignore them. This has been scientifically proven. The concept of confirmation bias."

"If our mental models are mere approximations of reality, then, the conclusions we draw cannot help but be prone to error."

"Our mental models aren't reality. They are tools, like the models weather forecasters use to predict the weather. But as we know, all too well, sometimes the forecast says rain, and boom, the sun comes out. The tool is not reality. The key is knowing the difference."

"Our models of the world so distort what we perceive that they can make it hard to see what is right in front of us."

"I am constantly rethinking my own mental models for how to deal with uncertainty and change and how to enable people."

INNOVATION

"While experimentation is scary to many, I would argue we should be far more terrified of the opposite approach. Being too-risk averse causes many companies to stop innovating and to reject new ideas, which is the first step on a path to irrelevance."

RESEARCH TRIPS

"You'll never stumble upon the unexpected if you stick only to the familiar. In my experience when people go out on research trips, they always come back changed."

"Research trips challenge out pre-occupied notions and keep cliche's at bay. They fuel inspiration. They are, I believe, what keeps us creating rather than copying."

INTUITION & RIGHT BRAIN THINKING

"I've heard some people describe creativity as 'unexpected connections between unrelated concepts or ideas'. If that's at all true, you have to be in a certain mindset to make those connections."

"To have a "not know mind" is a goal of creative people. It means you are open to the new, just as children are."

"Paying attention to the present moment without letting your thoughts and ideas about the past and the future get in the way is essential. Why? Because it makes room for the views of others."

"Focusing on something can make it more difficult to see. The goal is to learn to suspend, if only temporarily, the habits and impulses that obscure your vision."

"While many activities use both L-mode [left brain] and R-mode [right brain], drawing required shutting the L-mode off. This amounted to learning to suppress that part of your brain that jumps to conclusions, seeing an image as only an image and not as an object... Artists [that] have learned to employ these ways of seeing [using techniques to engage only the right brain] does not mean they don't also see what we see. They do. They just see more because they've learned how to turn off their mind's tendency to jump to conclusions. They've added some observational skills to their toolboxes."

LEARNING

"I believe no creative company should ever stop evolving."

"Send a signal about how important it is for every one of us to keep learning new things. That, too, is a key part of remaining flexible: keeping our brains nimble by pushing ourselves to try things we haven't tried before."

When PIXAR embarks on a new film they are heading into the unknown. Similarly, an investor's results will be determined by the future. Both crafts demand creativity.  It's no surprise Ed Catmull and Ray Dalio are both at the top of their field, and that they hold to similar ideals and virtues in their craft. Many of their life experiences have been similar but different - learning from their own mistakes and those of others, employing smart teams, changing the thinking paradigm and allowing innovative thoughts and creativity to be integral parts of their operations, being honest and open with yourself and others and above all to never stop learning - the day you think you know it all is the day you either need to stop, or start again from scratch.

We can use Ed Catmull as an example of how to go to 'infinity and beyond' ..... 

Learning from Jeff Bezos

"I've never seen any person develop two really important industries at the same time. Jeff Bezos is the most remarkable businessperson of our age." Warren Buffett

I remember listening to Warren Buffett complementing Jeff Bezos at Berkshire Hathaway's first live-streamed annual meeting in April 2016. In a more recent interview, Buffett referred to Jeff Bezos and recommended viewers watch the Charlie Rose interview with him [see here]. Below I've summarized some of the aspects of the interview I found most interesting ...

THINK BACKWARDS

".. the thing that connects everything that Amazon does is the number one - our number one conviction and idea and philosophy and principle which is customer obsession, as opposed to competitor obsession. And so we are always focused on the customer, working backwards from the customer's needs, developing new skills internally so that we can satisfy what we perceive to be future customer needs. We have a whole working backward process that starts with the customer needs and works backwards. So that is really, if you look at, seems like we are in a bunch of different businesses." Jeff Bezos

'Thinking backwards' or 'inverting' is a commonly undertaken method of analysis by the Investment Masters. In a recent Wealthtrack interview, Investment Master Thomas Russo stated... "Amazon is nothing to do with technology, Bezos is all about customer service. All about the consumer experience. Bezos’s job is to reason back from what steps it will take to improve consumer experience and that directs his investment. That is purely the ‘Charlie Munger’ story. Charlie has said at annual meeting for decades, the way to live your life is through the power of ‘inversion’. Think of what it is you want to create, and reason backwards to come up with most efficient way to get there. That’s Charlie Munger in spades and that’s exactly what Bezos is talking about."

INVENTIVE CULTURE

"We have a very inventive culture, so we like to pioneer invent." Jeff Bezos

The Investment Masters recognise that a common trait amongst successful companies is a culture of innovation. In a study of US firms, James Heskett, a Professor Emeritus at Harvard University's Business School and renowned business culture expert, found "organizations with the best performance were those with values and leadership that encouraged behaviours such as innovation, continuous quality improvement, bench-marking against the world's best, and efforts to import good ideas from anywhere outside the organisation as well as to generate them within". Mr Heskett noted "we deemed these values and behaviours typical of an adaptive culture, one that supports an organisation's ability to adapt to change in the competitive, social and regulatory environment."

THINK LONG TERM

"Willingness to think long-term. I think that is another common thread that runs through every single thing we do." Jeff Bezos

"It's the combination of the risk-taking and the long-term outlook that make Amazon, not unique, but special in a smaller crowd. And then finally, taking real pride in operational excellence, so just doing things well, finding defects, and working backwards." Jeff Bezos

The Investment Masters possess a profound appreciation for the advantages of adopting a long-term perspective. They extend their gaze over three to five years, if not further, in order to discern the prospective competitive stance of a company, project its potential earnings, and consequently estimate its future value. Warren Buffett has informed Berkshire's shareholders that he will measure the success of his investments 'by the long term-progress of the companies rather than by the month-to-month movements of their stocks.’

Occasionally, companies may forego near-term earnings by investing in longer-term initiatives. Thomas Russo makes the point with respect to Berkshire's investment in GEICO: "when is it sensible to accept lower earnings? When you have the capacity to suffer. Buffett decided to forgo profits at GEICO to take market share from 2% to 11% by spending more on marketing."

Conversely, companies that are subject to short term imperatives, and are unable to adopt a longer term view are likely to suffer over the longer term. The highly successful corporate investor, Henry Kravis of KKR notes .. “The trouble, in my opinion, with corporate America today, is that everything is thought of in quarters. Analysts push them. “What are you going to earn this quarter?” We say to the management of companies, “You are here today. Where do you want to be five years from now, and how are you going to get there?” It may very well mean taking a step backwards. But believe me, in five years, we are going to have a company that is much more productive, efficient, and competitive.”

ROOM FOR IMPROVEMENT

"I am never disappointed when we're not good at something because I think, well think how good it's going to work when we are good at it... There is so much opportunity. Nobody really knows how to do a great job of offering -- apparel online yet. And we have tons of invention and ideas and working our way through that experimental list." Jeff Bezos

COMPETITION

"One of the most unusual things that happened with Amazon Web Services is the amount of runway that we got, which is a gift, before we faced like-minded competition - it appears to me just empirically that if you invent a new way of doing something, typically if you are lucky, you get about two years of runway before competitors copy your idea. And two years is actually a pretty long time in a fast-moving industry so that's a big head start." Jeff Bezos

"Amazon Web Services got seven years of runway before we faced like-minded competition." Jeff Bezos

Competition is what destroys corporate returns. As Investment Master, Sam Zell has noted "There's no substitute for limited competition. You can be a genius, but if there's lots of competition, it won't matter. I've spent my career trying to avoid it's destructive consequences." Having a runway without competition allowed Bezos to establish a first mover advantage by building scale which allowed pricing at a level which is uneconomical for potential competitors without such scale.

INNOVATE

"Every year, 500, 600, 700, 800 new features and services [are added to Amazon Web Services.]" Jeff Bezos

Companies must continue to innovate. The Investment Master, Phil Fisher stated .. “The company that doesn’t pioneer, doesn’t take chances, and merely goes along with the crowd is liable to prove a rather mediocre investment in this highly competitive age”. Famous Nobel Prize physicist and renowned thinker Richard Feynman said “I think that to keep trying new solutions is the way to do everything.”

THE POTENTIAL OF AMAZON WEB SERVICES [AWS]

"Amazon.com, the retailer needs these things. But pretty soon everybody is going to need these things. And so with a little extra work, we can turn what we were going to build just for ourselves into a service for the world. And that's what we did." Jeff Bezos

Amazon realised the benefits of turning a cost centre into a revenue generator. Ben Thompson of Stratechery, one of the most insightful commentators on digital businesses and disruption, has noted.. "The incredible potential of Amazon Web Services is as clear as its initial prospects in 2006 were, well, cloudy. AWS only came about after Amazon had experimented with more full-service offerings like powering the websites of Target or Toys-R-Us, and there were plenty of skeptics as to whether companies would entrust critical operations to a 3rd party. It soon became apparent, though, that both economics and simplicity were overwhelmingly in the public cloud’s favor, and Amazon was years ahead of everyone. 

... the economics of scale achieved by Amazon (and its closest competitors, Google and Microsoft) are so incredible that multi-billion dollar companies like Netflix view it as more efficient to pay Amazon than to build their own data centers. The calculus is even more stark when it comes to any sort of startup: it’s so much easier and cheaper to get started with AWS that the idea of buying your own server infrastructure — an expense that consumed the majority of venture capital in the dot-com bubble era — is preposterous. This is great from Amazon’s perspective: the company effectively has a stake in nearly every significant startup, and for free; if the company succeeds, Amazon will be paid, handsomely, and if they fail, well, Amazon covered their own costs of providing cloud services along the way."

Not only did AWS provide Amazon with a significant revenue opportunity, it highlighted the benefits of opening up parts of Amazon to competition. In a recent article "Why Amazon is eating the world" author Zack Kanter notes "Because of the timing of Amazon’s unparalleled scaling — hypergrowth in the early 2000s, before enterprise-class SaaS was widely available — Amazon had to build their own technology infrastructure. The financial genius of turning this infrastructure into an external product (AWS) has been well-covered — the windfalls have been enormous, to the tune of a $14 billion annual run rate. But the revenue bonanza is a footnote compared to the overlooked organizational insight that Amazon discovered: By carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation."

AMAZON PRIME MODEL

"You say to yourself, well, what else -- now that I have paid my $99 a year, how else can I use this membership? And so when people join Prime, they buy more shoes, they buy more diapers, they buy more dish-washing detergent, they buy more books and electronics and toys and so on and so on. And so we really want people to join Prime." Jeff Bezos

Amazon benefits from the psychological bias of sunk costs. Amazon Prime is similar to the Costco model - a subscription service. Amazon Prime has the additional benefit that members gets things for 'free' which is likely to trigger reciprocation tendencies. The more people buy on Amazon, the more scale benefits Amazon gets and the larger the competitive advantage. In addition, members feel they have made an investment, so are less likely to 'shop around'.

Richard Thaler, Professor of Behavioural Science at the University of Chicago, touched on the cognitive biases that drive the success of a subscription model in his excellent book 'Misbehaving.' He noted "In order to shop at Costco a customer must become a 'member', which currently costs a household $55 a year. It seems likely that members view the annual fee as an 'investment' and make no attempt to allocate that cost over the various purchases they make during the year. Rather, it serves as a sunk cost, offering up yet another reason to shop at Costco. Similarly, Amazon charges customers $99 a year to become a "prime member" which entitles them to "free" shipping. Again the cost of the membership may well be viewed as an investment that does not "count" toward the cost of a particular purchase."

ARBITRAGING OTHER PEOPLES CAPEX

"So Amazon was a tiny, little company that started with four people, and that -- we could only do, we built Amazon because we didn't have to do any of the heavy lifting. The transportation and logistics infrastructure of U.S. Postal Service which would have been hundreds of billions in CapEx, already existed. We didn't have to build the internet, it was run on long distance cables that were actually put in the ground for long-distance phone calls. And we didn't have to build a payment system, the credit card system already existed. So all these things would have been tens of billions or hundreds of billions in CapEx and we got to rest on top of them.. On the internet, two kids in a dorm room can change an industry completely." Jeff Bezos

Amazon had a first mover advantage that leveraged a combination of technologies to create a business which would not have been possible without other peoples inventions and capital spending. Amazon falls into a category that Charlie Munger would define as a multi-factor-triggered 'Lollapolooza' effect.

Both Charlie Munger and Warren Buffett recognise the brilliance of Jeff Bezos and what he has achieved with Amazon. Studying successful business people and business models can provide insights into the investment process. As Warren Buffett says, "I am a better investor because I am a businessman, and a better businessman because I am an investor."

Further Recommended Reading:

"Why Amazon is eating the world" - Tech Crunch - Zack Kanter
"Amazon's New Customer [Whole Foods]", 'The Amazon Tax", "The AWS IPO" - Stratechery - Ben Thompson
"Invert, Always Invert" Investment Masters Class Tutorial
 

The Ten Commandments of Business Failure

“I like to study failure… we want to see what has caused businesses to go bad." Warren Buffett

"If I were ordaining rules for running boards of directors, I'd require that three hours be spent examining stupid blunders." Charlie Munger

Most business schools spend time studying the ingredients for business success. Many of the Investment Masters acknowledge the benefits of inverting a concept, looking at an investment question or problem in another way. Instead of searching for the ingredients that make for a successful business, trying to identify the common factors that will kill a business, can both help you avoid potential loss and help you identify businesses worth pursuing.

A great starting place is Don Keough’s book, "The Ten Commandments for Business Failure." Don Keough, a philosophy major, is a former CEO of the Coca-Cola Company and Berkshire Board Member. The book is introduced by his good friend, Warren Buffett.

Mr Keough notes, "A company doesn't fail to do anything. Individuals do, and when you probe a bit you usually find that failure lies not in a litany of strategic mistakes - though they all may be present in one form or another - but the real fault lies, as Shakespeare noted, in ourselves, the leaders of the business."

"Businesses are the products and extension of the personal characteristics of its leaders - the lengthened shadows of the men and women who run them. They are the main actors on the business stage and when, through one of more personal failings, they take a business in the wrong direction, then the business is headed for failure".  

Mr Keough recognises the commandments aren't startling breakthroughs in management thinking. They just make 'common sense.’ Mr Keough challenges the reader, ‘Show me a failed business, even one based on the latest wikinomics, and I will bet you with considerable assurance that their leaders have violated more than one of these commandments. One step towards failure unchecked, leads to another.’

I've outlined the Ten Commandments and added some comments along the way.

1) QUIT TAKING RISKS

When you are comfortable in your position there is a temptation to quit taking risks. The one constant for a business is change. A business must adapt to change, try out new products, processes and services and respond to changing technology, economics and customer needs.  

In light of the speed of technological change disrupting industries it is paramount businesses continue to evolve. Evolving means taking risks. I recently read an interview with Jorge Paulo Lemann, the 19th richest person in the world, and a founder of 3G. 3G is an investment company that has had enormous success buying and growing global businesses.

"Something that I always thought college doesn't give is the ability to assess and take risks.  It will teach you how to assess risks mathematically or theoretically, but hardly. And in general, it teaches you not to take risks, which is to say be careful. And I think in life, you have to take risks, and I think the only way you learn to take risks is practicing, practicing. So I practiced on the waves, playing tennis tournaments, later in business etc. I only mention this because I think a lot of people study hard, and I think in order to do more, or do exceptional, you have to take risks." Jorge Paulo Lemann

In the book 'Adapt - Why success always starts with failure', Tim Harford discusses failure when there is a pathological inability to experiment. He offers a method for experimentation known as the 'Palchinsky Principles;' first, seek out new ideas and try new things; second, when trying something new, do it on a scale where failure is survivable; third, seek feedback and learn from your mistakes as you go along.’

Phil Fisher touched on this concept in his writings, 'Developing an Investment Philosophy’,“The company that doesn’t pioneer, doesn’t take chances, and merely goes along with the crowd is liable to prove a rather mediocre investment in this highly competitive age.”

2) BE INFLEXIBLE

Companies and investors, that refuse to change when it is clearly evident a strategy or process isn't working are bound for failure. The newspaper companies that failed to adapt to the rise of the internet are a case in point. They lost their edge in real estate classifieds, employment advertising and general advertising. So too have the TV networks that failed to recognise the global reach of the internet will far surpass free-to-air and cable networks limited geography.

Mr Keough believes, "flexibility is a continual, deeply thoughtful process of examining situations and, when warranted, quickly adapting to changing circumstances. It is, in essence, the key to Darwin's whole notion of the survival of the fittest.”

3) ISOLATE YOURSELF

CEO's who isolate themselves from their businesses or who surround themselves with only ‘yes people’ are likely to fail. Managers that do well understand their marketplace and understand their customers, their staff and their competitors.  

Mr Keough points out Charles Kettering, the great engineering genius who helped steer GM during its glory years, said "Don't bring me anything but trouble. Good news weakens me." If you isolate yourself you will not only not know what you don't know about your business, but you will remain supremely and serenely confident that what you know is right.   

So too, the great investors are seekers of truth. They ask what they do and do not know. They look to have investment ideas tested.  

4) ASSUME INFALLIBILITY

Mr Keough notes "Annual reports often amuse me, particularly the letter to shareholders. In one report after another, even if the company has had a thoroughly disastrous year, the chairman's letter is frequently an artful exercise in finger pointing at a number of causes ranging from unforeseen currency fluctuations to the unusually active hurricane season."

Once again, like good investors, managers must acknowledge and address mistakes, learn from them and move on. Ignoring or sweeping problems under the rug or finger pointing will lead to failure. "If you want to increase your chances of failure, deny the possibility that you are not always 100% perfect in your judgement. Ignore the fact that sometimes others do know a thing or two." Do the same in investing, and you'll fail too.

5) PLAY THE GAME CLOSE TO THE FOUL LINE

Trust is an essential foundation of any business. Mr Keough notes, "All business finally boils down to matters of trust - consumers trust the product will do what it promises it is supposed to - investors trust that management is competent - employees trust management to live up to its obligations.”  

Many of the great investors focus on companies whose culture is win-win. Over time studies shows businesses with good cultures outperform those with poor cultures.

6) DON'T TAKE THE TIME TO THINK

There are plenty of example of business failure which could have been averted if management stopped to think about the consequences of their decisions. Being human, managers suffer the same emotional biases investors do.

Confirmation bias, greed and fear and groupthink are a few examples. Like investors, managers can test ideas, study similar situations/mistakes, and invert concepts to aid their thinking process. Mr Koeugh notes "If you want to fail, don't take time to think. If you want to succeed, take lots of time to think. Thinking is the best investment you'll ever make in your company, in your career, in your life."

“Thinking is the hardest work there is, which is probably the reason so few engage in it.” Henry Ford

7) PUT ALL YOUR FAITH IN EXPERTS AND OUTSIDE CONSULTANTS

Experts and consultants have vested interests, biases and shortcomings. Just like stock market forecasters, business and industry forecasters track records usually tell you more about the forecaster than what’s likely in the future. Be skeptical of companies that cite and rely on industry analysis to support acquisitions or major corporate change.  

Mr Keough notes, "You'll fail if you don't stop to think. Well, you'll also fail big time if you let yourself be flattered, and there is never a shortage of charming con artists in just about every field who will use flattery as a sales tool."

“Anyone who says businessmen deal in facts, not fiction, has never read old five-year projections.” Malcolm Forbes

“I have never seen a management consultant’s report in my long life that didn’t end with the following paragraph: “What this situation really needs is more management consulting.” Never once. I always turn to the last page. Of course Berkshire doesn’t hire them, so I only do this on sort of a voyeuristic basis. Sometimes I’m at a non-profit where some idiot hires one." Charlie Munger

"Organisations that take the word of overconfident experts can expect costly consequences … however, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers.” Daniel Kahneman

8) LOVE YOUR BEAURACRACY

The same limitation and dangers of a committee approach to investing often applies to the process of running a business. Committees suffer from Groupthink. Warren Buffett once reported that in the first month of ownership of one acquired company, they eliminated fifty-four committees that were chewing up about ten thousand man-hours. Berkshire Hathaway operates with 25 people at head office.  

To combat bureaucracy at the Coca-Cola Company, Mr Keough isolated the core of the business to drive decision making, "every expense we made, every department we created, every project we took on had to answer to the basic question: Will this help to create and serve customers? If the answer was not a ringing and positive ‘Yes?’ whatever it was we were spending or undertaking had to be eliminated. Once you decide you have fifty things to do that are unrelated to your customer, soon you have fifty bureaucracies composed of individuals doing things extremely well that they shouldn't have been doing because it didn't serve the customers in any way."

With business, as with investing, focus on the factors that matter.

In his 2014 letter Warren Buffett made the point that his successor would need one other particular strength, "the ability to fight off the ABC's of business decay, which are arrogance [see point 4 above], bureaucracy and complacency [see point 1 above]." He noted "When these corporate cancers metastasise, even the strongest of companies can falter."

9) SEND MIXED MESSAGES

Mr Keough notes, "sending mixed or confused messages to your employees or your customers will jeopardise your competitive position, and result in failure.” 

Companies need to ensure their employees are rowing in the right direction. In part this has a lot to do with having the right incentives, values and purpose. History is littered with companies whose move into unrelated businesses took the focus off their core business.

“A majority of life’s errors are caused by forgetting what one is really trying to do.” Charlie Munger

10) BE AFRAID OF THE FUTURE

Mr Keough notes, "When you focus on the failures of the world day in and day out, it shapes your whole attitude toward life and the future.”

One optimist in a sea of pessimists can make all the difference. If you want to succeed, approach the future with optimism - and passion.

* 11) LOSE YOUR PASSION FOR WORK  - FOR LIFE *

Mr Keough added a little bonus - an eleventh commandment. He notes "I have never met a successful person who did not express love for what he did and care about it passionately.” He suggests making an emotional connection with your customers. Remind yourself every day as to just what the customer is looking for, expects, and wants from your company.  

As in investing, management must have a passion for what they do. The business environment does not afford the luxury of complacency.

The same human foibles that undermine investors can undermine management and their businesses. Mr Keough states "Human nature is the reason I have, regrettably, such confidence in the principles of this little book." 

Recognising those common factors and red flags of business failure can assist investors in avoiding companies more susceptible to failure. After all, avoiding the permanent loss of capital is key to successful investing. 

Sources:
'The Ten Commandments for Business Failure' - by Don Keough

Further Study: 
'Adapt - Why success always starts with failure' - Tim Harford
Video: ‘Warren Buffett & Don Keough: The Ten Commandments of Businesses Failure & Buying Coca-Cola’