Tag Archives: Business

John H. Patterson: Pioneer in Industrial Welfare by John H. Patterson, Samuel Crowther

Like my write-up on Henry Ford and some of my other “teacher’s reference guides“, I got so much out of Pioneer in Industrial Welfare that I wanted to create a more formal write-up. As always, I have attempted to put together something which is (hopefully) a manageable, actionable and digestible introduction to Patterson’s thinking and business philosophy.

On John H. Patterson

 

 

*The vast majority of the content is from the books and not my own words. I’ve simply distilled, compiled, and added a few notes.

Competing Against Luck: The Story of Innovation and Customer Choice by Clayton Christensen

Summary
  1. This book is about how to better create, predict, and act upon innovation breakthroughs. It helps us better understand why customers behave the way they do and make decisions, shifting from relying on luck to competing against luck.
Key Takeaways
  1. It often looks like companies have good innovation processes but the fundamental problem is that the hordes of data we have today is not organized in such a way as to helpfully indicate which might be the next breakthrough idea. The data never tells you why the customers make the decisions that they do. Understanding this process and some of the questions you can pose will help you get away from relying on lucky and hit or miss innovations and being able to better predict what customers truly want. This leads us to “The Jobs Theory”
  2. The Jobs Theory
    1. The better question to ask is, “what job did you hire that product to do?” This change in perspective helps clear up what your customers truly want. Most of the focus is on customers and the products themselves and not how well the product is truly solving the job that the customer wants. This helps us understand the why of customer behavior, providing the fundamental driver of innovation success
    2. Customers hire a product to make progress, the job they’re trying to get done and the product/service solves these jobs.
    3. Jobs Theory also take into account circumstances, people’s values, emotional and social needs, and more.
    4. Never fall in love with your solution to the job, always try to find way to better understand the job and how to best solve it. These questions and lens will help you more accurately define who your competition truly is. For example, Netflix competes with every form of leisure including a bottle of wine and sleep
    5. The power lies in not being able to explain to successes but in helping a predict future innovation successes
    6. Jobs Theory is an integration mechanism allowing you to create a full narrative and to focus on the right type of complexity. The priorities and trade-offs of customers may totally change with this lens and it’ll get you to focus on what’s truly important the why of customer decision making
    7. These questions help you step into your customer shoes and truly see the world through their eyes
    8. You not only have to think of the product itself but how they find, purchase, and initially learn how to use your product
    9. Non-consumption could be your biggest opportunity as customers don’t do anything because there is no solution which satisfies their needs. This opportunity will not show up in any data but you can uncover it by observing people‘s behavior. You can learn everything you need to know about your product or service just by observing people who use and don’t use your products but you have to know what you’re looking for
    10. Whatever you see customers compensating see this as a great opportunity for some innovation which people would pay highly for
    11. Negative jobs, or what people don’t want to do, are also a rich resource for innovative ideas
    12. Observing customers use your product or service, especially in any unusual ways, is full of opportunities for improvement or for horizontal moves
    13. You have to think through and understand what other product/service/behavior is being “fired” or what you are replacing, in order to better understand where your product fits and what job it is truly doing for you and your customer
    14. Two important forces that are very rarely considered are habits (the fact that people are comfortable with something that tends to be good enough) and anxiety of choosing a new product
    15. Customers are infamously bad at knowing what they want but they can tell you very quickly and accurately where they struggle
    16. Only by constructing the narrative and taking everything into account that led to the purchase can you change the ending and see how your product could fit in
    17. You are selling progress, not products
    18. Consistent small “hires” is a great indicator you are satisfying the job needed
    19. Companies should be organized around the job to be done, rather than by geography, product line, etc.
    20. Products which nail the job they’re supposed to do don’t have to worry about price – customers are grateful for the solution
    21. Taking a job perspective will easily allow you to shift into a mindset and see clearly how to shift annoyances from the customer to internally so that the customer experience is better than ever before
    22. When a product commands high market share and has high pricing power, it is rarely the product itself which is amazing. The overall experience fits the job so perfectly that they’re hard to copy or replace. Creating experiences around this job almost inoculate you to competitors. You must understand the job, the set of experiences around the job that you need to create, and integrating around the job are critical. Helping the customer make progress, incorporating the functional/social/emotional aspects, and aligning experiences and the job
    23. Aligning around the job to be done and making that job crystal clear gives people confidence to act on their own and efficiently scales decision making because the goal is clear. This unlocks human ingenuity, innovation and enthusiasm
    24. Jobs to be done should be in verbs and nouns and not in adjectives and adverbs. It should describe the process itself and not what the customer feels
  3. A genuine insight is a thought which is known as true upon conception – no further analysis is needed
  4. Because it is so much easier to measure efficiency than effectiveness, that’s what most organizations optimize towards. It is hard but necessary to keep top of mind what is important (whether easy to measure or not) and work towards that
  5.  The voice of the customer must be the loudest voice in any decision
  6. Beware the fallacy of “data is always objective”. Data is man made and fallible
  7. SNHU keeps one vital statistic – if you could go back in time knowing what you know now, would you choose SNHU again?
What I got out of it
  1. What job is your product or service being hired to do. This framework helps you better understand what your customers need and how to best serve them. All customers buy products or services to make progress, not for the product/service itself

The Gervais Principle by Venkatesh Rao

Summary
  1. That, ultimately is what this book is about: organizational literacy, the reading and writing of organizational forms. But there is a cost to getting organizationally literate. This ability, once acquired, cannot be un-acquired. Just as learning a foreign language makes you deaf to the raw, unintelligible sound of that language you could once experience, learning to read organizations means you can never see them the way you used to, before. Literacy of any sort gives you the power to recognize and unambiguously label things that the illiterate can easily ignore as noise, fads and bullshit. This power can have very unpredictable effects. You may find yourself wishing, if you choose to acquire it, that you hadn’t. So acquiring organizational literacy is what some like to call a memetic hazard: dangerous knowledge that may harm you. A case of “where ignorance is bliss, ‘tis folly to be wise.”
Key Takeaways
  1. Idealized organizations are not perfect. They are perfectly pathological. So while most management literature is about striving relentlessly towards an ideal by executing organization theories completely, this school, which I’ll call the Whyte school, would recommend that you do the bare minimum organizing to prevent chaos, and then stop. Let a natural, if declawed, individualist Darwinism operate beyond that point. The result is the MacLeod hierarchy. It may be horrible, but like democracy, it is the best you can do.
  2. A Sociopath with an idea recruits just enough Losers to kick off the cycle. As it grows, it requires a Clueless layer to turn it into a controlled reaction, rather than a runaway explosion. Eventually, as value hits diminishing returns, both the Sociopaths and Losers make their exits, and the Clueless start to dominate. Finally, the hollow brittle shell collapses on itself, and anything of value is recycled by the Sociopaths, according to meta-firm logic.
  3. The Losers like to feel good about their lives. They are the happiness seekers, rather than will-to-power players, and enter and exit reactively, in response to the meta-Darwinian trends in the economy. But they have no more loyalty to the firm than the Sociopaths. They do have a loyalty to individual people, and a commitment to finding fulfillment through work when they can, and coasting when they cannot. The Clueless are the ones who lack the competence to circulate freely through the economy (unlike Sociopaths and Losers), and build up a perverse sense of loyalty to the firm, even when events make it abundantly clear that the firm is not loyal to them. To sustain themselves, they must be capable of fashioning elaborate delusions based on idealized notions of the firm – the perfectly pathological entities we mentioned. Unless squeezed out by forces they cannot resist, they hang on as long as possible, long after both Sociopaths and Losers have left
  4. Which brings us to our main idea – how both the pyramid and its lifecycle are animated. The dynamics are governed by the Newton’s Law of organizations: The Gervais Principle. The Gervais Principle is this: Sociopaths, in their own best interests, knowingly promote over-performing Losers into middle-management, groom under-performing Losers into Sociopaths, and leave the average bare-minimum-effort Losers to fend for themselves. The Gervais Principle differs from The Peter Principle, which it superficially resembles. The Peter Principle states that all people are promoted to the level of their incompetence. It is based on the assumption that future promotions are based on past performance. The Peter Principle is wrong for the simple reason that executives aren’t that stupid, and because there isn’t that much room in an upward-narrowing pyramid. They know what it takes for a promotion candidate to perform at the top level. So if they are promoting people beyond their competence anyway, under conditions of opportunity scarcity, there must be a good reason. Scott Adams, seeing a different flaw in The Peter Principle, proposed The Dilbert Principle: that companies tend to systematically promote their least-competent employees to middle management to limit the damage they can do. This again is untrue. The Gervais principle predicts the exact opposite: that the most competent ones will be promoted to middle management. Michael Scott was a star salesman before he become a Clueless middle manager. The least competent employees (but not all of them – only certain enlightened incompetents) will be promoted not to middle management, but fast-tracked through to senior management. To the Sociopath level.
  5. The minimum-effort Loser Stanley tells him coldly, “this here is a run-out-the-clock situation.” The line could apply to Stanley’s entire life. Stanley’s response shows both his intelligence and clear-eyed self-awareness of his Loser bargain with the company.
  6. The future Sociopath must be an under-performer at the bottom. Like the average Loser, he recognizes that the bargain is a really bad one. Unlike the risk-averse loser though, he does not try to make the best of a bad situation by doing enough to get by. He has no intention of just getting by. He very quickly figures out – through experiments and fast failures – that the Loser game is not worth becoming good at. He then severely under-performs in order to free up energy to concentrate on maneuvering towards an upward exit. He knows his under-performance is not sustainable, but he has no intention of becoming a lifetime-Loser employee anyway. He takes the calculated risk that he’ll find a way up before he is fired for incompetence.
  7. So let me introduce you to the main skill required here: mastery over the four major languages spoken in organizations. I’ll call the four languages Posturetalk, Powertalk, Babytalk and Gametalk.
    1. What distinguishes Powertalk is that with every word uttered, the power equation between the two speakers shifts just a little. Sometimes both gain slightly, at the expense of some poor schmuck. Sometimes one yields ground to the other. Powertalk in other words, is a consequential language.
    2. Another way to understand the difference between Powertalk and the other languages is with a card-playing analogy. In Powertalk, you play with valuable currency, usually reality-information. In the other languages, you are playing with no stakes. The most important enabling factor in being able to speak Powertalk is simply the possession of table stakes. Without it, whatever you say is Posturetalk. The only Powertalk you can speak without any table stakes is “silence.”
  8. Treacle is a vocabulary drawn from apparently win-win/play nice frameworks, but deployed with adversarial intent.
  9. So what is going wrong here? Why can’t you learn Sociopath tactics from a book or Wikipedia? It is not that the tactics themselves are misguided, but that their application by non-Sociopaths is usually useless, for three reasons. The first is that you have to decide what tactics to use and when, based on a real sense of the relative power and alignment of interests with the other party, which the Losers and Clueless typically lack. This real-world information is what makes for tactical surprise. Otherwise your application of even the most subtle textbook tactics can be predicted and easily countered by any Sociopath who has also read the same book. Null information advantage. The second reason is that tactics make sense only in the context of an entire narrative (including mutual assessments of personality, strengths, weaknesses and history) of a given interpersonal relationship. The Clueless have no sense of narrative rationality, and the Losers are too trapped in their own stories to play to other scripts. Both the Clueless and Losers are too self-absorbed to put in much work developing accurate and usable mental models of others. The result is one-size-fits-all-situations tactical choices which are easily anticipated and deflected. And the third and most important reason of course, is that your moves have to be backed up by appropriate bets using your table stakes, exposing you to real risks and rewards. A good way to remember this is to think of Powertalk as decisions about what verbal tactics to use when, and with what. The answer to with what is usually a part of your table-stakes. The stuff you are revealing and risking. If you cannot answer “with what?” you are posturing. You are not speaking Powertalk. In the Jim-Wallace example, Jim’s table stakes were his superior knowledge of the Michael-Jan story.
  10. You learn through real Powertalk conversations with other Sociopaths. Betting real stakes, like information, credibility, labor and literal dollars. You get played for a sucker a few times along the way before you wise up. Even if you are a kind Sociopath, you learn to swallow your distaste and occasionally play hardball when you have to.
  11. But if you do have the table stakes to join important conversations, and the mental toughness to play risk-and-reward games with every conversational move, there are a couple of skills worth practicing. The second skill is low-level utterance-by-utterance control, which is much harder. You cannot consciously engineer 7-8 meanings and calibrated amounts of power and leverage into every line you utter, through careful word choice.
  12. the depth of any transaction is limited by the depth of the shallower party.
  13. If the situational developmental gap between two people is sufficiently small, the more evolved person will systematically lose more often than they win. This is the Curse of Development. When you develop psychologically, and leave somebody behind, your odds of winning get worse before they get better.
  14. Well-adjustedness is a measure of the degree to which your worldview is socially acceptable and appropriate in a given environment. Since a messed-up personality can be well-adjusted with respect to a messed-up environment, well-adjustedness has very little to do with sanity and actual mental health. Environments and worldviews really come down to a series of situations and situational reactions. If your situational reactions are generally appropriate but against your best interests, you are a well-adjusted Loser. If they are both appropriate and in your best interests, you are a Sociopath. If your reactions are inappropriate (whether or not they are in your best interests – sometimes they are), you are Clueless.
  15. Here is the non-trivial stuff, compressed into three handy laws: Your development is arrested by your strengths, not your weaknesses. Arrested-development behavior is caused by a strength-based addiction. The mediocre develop faster than either the talented or the untalented. An alternative way of looking at these three laws is to note that defense mechanisms emerge to sustain addictions even when the developmental environment that originally nourished it vanishes. These then are the developmental psychology roots of the Gervais Principle. Recall that Cluelessness goes with overperformance. That overperformance is caused by arrested development around a strength, which has been hooked by an addictive environment of social rewards. Mediocrity is your best defense against addiction, and guarantor of further open-ended psychological development.
  16. Each pattern is based on a preferred, dominant variety of delusion: The Clueless distort reality. The Losers distort rewards and penalties. The Sociopaths distort the metaphysics of human life.
  17. To be an effective teacher at a given level, you need to have studied five years beyond that level. This has nothing to do with subject-matter expertise, and everything to do with trying to exit the Curse of Development zone.
  18. Status illegibility is necessary to keep a group of Losers stable. It is a deep form of uncertainty. I am not saying that there is a ranking that is just not known or knowable. I am saying there is no clear ranking to be known.
  19. Social groups grow from the illegible but stable center of the status spectrum, and leak at the legible but unstable edges.
  20. Remember, you are unique, just like everybody else. And everybody is uniquely above average. This is why, paradoxically, collectivist philosophies that value equality must necessarily value diversity. Nobody wants to be equally average. Everybody must be given a chance to be equally above average. Sociopaths detect and get wary of this dynamic very quickly:
  21. For the alpha, keeping contenders guessing through unpredictable signs of favor is the best idea. Exits work the same way. If an alpha or omega leaves, the new alpha or omega is plucked out of the illegible middle at that time. Not before. Succession planning may be a good idea in formal hierarchies, but it is a bad idea in social groups.
  22. Groups must remain socially fluid to work. Fluidity is the other side of illegibility.
  23. social skill, such as joke-telling ability, is a behavior whose effectiveness is determined by the reaction of a group. A joke is funny if the audience laughs. A proven mathematical theorem remains true even if a billion people scream that it isn’t. Theorem-proving is not a social skill in that sense. Like theorem-proving, social skills are information skills, since nothing tangible is produced besides an effect on others’ minds. Unlike theorem-proving though, the value of the product is based on social proof rather than objective proof. Social skills produce information; a social truth hypothesis (such as a joke). If it passes a social proof test, it becomes a piece of social capital, the grand narrative of the group. In other words: Social skills → Social truth hypotheses → Social proof → Social capital
  24. Most forms of humor attempt to raise or lower status of individuals via game-like structures, with defined roles and a structurally predictable script (the surprise comes from the content). There is always a jokester, a victim (which can be the same person by design or accident) and crucially, an audience. The victim may or may not be present. So there are at least three roles in a piece of humor, of which the role of audience may be played by a group. Sociopath jokes usually involve straight-faced delivery and private laughter, with no hint of mockery.
  25. Among the Sociopaths, status is irrelevant. Table stakes and skill at using them is what matters. Sociopaths pay attention to what you have, and how well you bargain with it. Not who you are.
  26. Clueless jokes are zero-sum, but Loser jokes are actually non-zero-sum. This does not mean they are win-win. This is a variety of non-zero-sum called mutual exploitation, that is sadly under-studied by game theorists. It simply means you can create net positive value by taking turns beating each other up competitively (aside for game-theory geeks: in the iterated prisoner’s dilemma, you get mutual exploitation by breaking the constraint that the cooperation payoff must be higher than the average of the defection and sucker payoffs). You can also create net-negative toxic non-zero-sum outcomes.
  27. Among Losers, in specific situations, status may go up or down, but overall, it just goes round and round. There is no grand status hierarchy. Only a top, a bottom, and an illegible middle. Newcomers attempt to successfully lose themselves in the middle. Situational wins and losses create a turbulent churn that maintains the illegibility without creating any decisive movement within the group.
  28. We’ve been drilling deep into social dynamics, and we finally get to that one deeply human quality that makes all this possible. It’s called empathy. The ability to feel what another human being is feeling. All this complicated social psychology does not need to be explicitly understood. For high-empathy people, all this is natural. By participating in collective feeling in groups of any size, and reacting to basic attraction/aversion drives, you can actually safely navigate all the complexity by instinct. Not only can you do this, you will actually feel good doing this. This feeling is called happiness. I don’t have time to go into this, but happiness is entirely a social phenomenon, and there’s plenty of evidence that the best way (and from my reading, the only way) to get happy is to get sociable. Non-social feelings that seem like happiness turn out, upon further examination, to be distinct emotions like contentment, equanimity or hedonistic pleasure. This isn’t particularly surprising. Our brains are designed like our bodies: just as we possess backs that others can scratch more easily than ourselves, our brains contain “backs,” so to speak. That’s where happiness lives, and is brought alive by empathic scratching.
  29. Why do we use the word “cringe” to describe the peculiar brand of humor in The Office? Think about the word. You cringe when you anticipate pain. Physical cringing, such as the cowering reaction you instinctively produce when you realize your car is going to hit another car, or when you realize somebody is going to hit you, serves to mitigate the anticipated damage. You also cringe via empathic anticipation of someone else’s impending pain.
  30. In this episode, Ryan is still not a Sociopath, so he cringes. Jan and David Wallace on the other hand, maintain an effortless poise no matter what Michael or Dwight get up to. To get there, they have to sequester empathy through detachment, and give up on happiness. We’ll see how and why that pact with the devil happens next chapter. In summary, seasoned Sociopaths maintain a permanent facade of strategic incompetence and ignorance in key areas, rather than just making up situational incompetence arguments. This is coupled with indirection and abstraction in requests given to reports. The result is HIWTYL (heads I win, tails you lose) judo.
  31. Loser group successes are effectively inflated, and blame discounted. So as Loser groups accumulate a history, internal valuations of earned credit are steadily inflated, and assessments of culpability run a deficit. A successful group systematically overvalues its capabilities and develops a blindness to its weaknesses. Sociopaths design the system this way because they are only interested in building an organization that lasts long enough to extract the easy value from whatever market opportunity motivated its formation. Expensive investments that will not pay off before the organization hits diminishing returns are not made. (It is revealing that the longest-lived businesses are family-owned – Sociopaths have an incentive to think long term if they intend to pass the business on to their progeny.)
  32. There are only three ways to get a bureaucracy to do anything it wasn’t designed to do: by stealth, with secret and deniable support from allies in the staff hierarchy; by getting air-cover from a sufficiently high-up Sociopath who can play poker with whichever oversubscribed Sociopath is in charge of exception-handling for the specific process (i.e. jumping the appeals queue and calling in favors to ensure the required ruling); and through corruption and bribery.
  33. That is what Sociopaths ultimately do with their lives if they survive long enough: generate amoral power from increasing inner emptiness, transforming themselves into forces of nature. As a side-effect, they also manufacture transient meanings to fuel the theaters of religiosity (including various secular religions) that lend meaning to lives of Losers and the Clueless. This meaning is achieved via subtraction, through withdrawal of complexities that the latter are predisposed to ignore, leaving behind simpler, more satisfying and more tractable realities for them to inhabit.
  34. Small minds discuss people, average minds discuss events, great minds discuss ideas. And in Jamesian solitude, Sociopaths find ideas contending in their minds. The creative destruction they script in the world of Losers and Clueless is mirrored by a creative destruction in their minds. This process creates power, but destroys meaning, especially the meanings of social realities. The result is increasing inner emptiness and external power. It is this very emptiness that allows the Sociopath to play hero for the Clueless and priest for Losers. Recall that Sociopaths create meaning for others through the things they subtract, rather than the things they add. This is something conspiracy theorists typically don’t get: manufacturing fake realities is very hard. But subtractive simplification of reality is much easier, and yields just as much power.
  35. Sociopathy is not about ripping off a specific mask from the face of social reality. It is about recognizing that there are no social realities. There are only masks. Social realities exist as a hierarchy of increasingly sophisticated and specialized fictions for those predisposed to believe that there is something special about the human condition, which sets our realities apart from the rest of the universe. There is, to the Sociopath, only one reality governing everything from quarks to galaxies. Humans have no special place within it. Any idea predicated on the special status of the human – such as justice, fairness, equality, talent – is raw material for a theater of mediated realities that can be created via subtraction of conflicting evidence, polishing and masking.
  36. To turn status-seeking into a control mechanism is to devalue status. To devalue something is to judge any meaning it carries as inconsequential. In terms of our metaphor of masks of gods, the moment you rip off a mask and wear it yourself, whatever that mask represents becomes worth much less. So the Sociopath’s journey is fundamentally a nihilistic one.
  37. The major theme of Office Space, unlike The Office, is not deciphering and navigating the gridlock on the road to power, but exiting the rat-race altogether, to a state held up as an ideal of freedom: exile.
  38. The only true exit is to a freer mind. The only true state of happy exile is one which allows you to penetrate the social fictions that surround you, whether you remain within a cubicle or build a life around Burning Man.
What I got out of it
  1. Fun read showing why and how The Office is so funny and cringe-worthy. Organizational literacy is a great filter to have in your arsenal – Sociopaths, Clueless, Losers make up the typical hierarchy

The Early Days of WL Gore and Associates by Bob Gore

Summary
  1. Bob Gore, son of founder Bill Gore, recounts the early days at WL Gore and what has made the company sustainable and successful
Key Takeaways
  1. Bill Gore was very enthusiastic and did not have a lot of patience for bureaucracy. He was an entrepreneur from a young age and loved to improvise, move quickly and always emphasized product development. He always was experimenting and he got the family involved by trying out new products or materials with them. He was always looking for the practical potential in new materials.
  2. Always believed in the idea of “value pricing” – price products for what they are worth, not what they cost to manufacture
  3. From DuPont he learned and enjoyed the task force approach and the fact that a group of people can come together without titles without a formal hierarchical position.
    1. People just just get the job done as well as working harder and more enthusiastically then when they were in their usual 9-to-5 jobs. This eventually led to the lattice business structure as opposed to the typical pyramid structure. He became wary of corporate structures and believed that standard accounting tended to make bad business decisions
  4. Another chemist at DuPont had a machine shop and Bill was jealous of that. He was not able to just go ahead and make what he needed to make and use it but had to fill in a request for shop work and would be processed according to its place in the queue. That kind of obstacle destroys momentum and destroys enthusiasm which is why Bill set up a shop in his own basement so that he could experiment and follow his passion
  5. My advice to the man who contemplated an individual enterprise is to carefully consider if he has a dream of compelling importance and to follow his dream
  6. Mother served as moral support and encouragement. Never complaining and keeping everyone happy
  7. The emphasis was always on building our own machinery rather than purchasing it
  8. The large order that forced us into a new facility finally came in the summer of 1960. It was for an application that was totally unforeseen and was never to be duplicated
  9. Our staff is unusual in that each member knows he is closely identified with the success of the enterprise. It is the realization of this that is unusual. This realization has been brought about by a carefully considered program Carried out by the officers, managers, and supervisors. Important in this program is the profit sharing policy established by the Board of Directors. In this plan a sum is appropriated by the Board from profits and distributed amongst all employers in proportion to their gross pay for the period. Neither the period nor the sum is specified in the plan, but the principle of rewards in proportion to contribution has been established. Profit sharing by employees amounted to about 5% of gross pay over the past fiscal year. Our pay scales are minimum and all employees look to profit sharing as an important source of future income. Your management believes that the success of our business rests inescapably on the competence, diligence and loyalty of our people. This is the resource that sets both the limitations and potentials of the enterprise.
  10. Hosted open houses to show visitors their new buildings and products
  11. Action was prized. Gores attitude is to encourage any idea that could be tried relatively quickly and inexpensively which did not have a downside
  12. There was considerable informality and this lead to enhanced communication. We tried hard to fit the organization around an individuals capabilities and needs rather than remake the individual to a predetermined slot in a predetermined organizational concept.
  13. 5-year service anniversary pins have been handed out since the early days
  14. Every associate learned to exercise extreme control over intellectual property and pricing. Manufacturing operations were off limits to visitors and pricing was a very serious area where Bill exercised personal control insofar as he was able. He developed a value pricing model where he would price products for what they were worth in the marketplace not what they cost to manufacture
  15. An early vision of Bill’s was that the enterprise would last far beyond his life. He set up a trust which he transferred a significant portion of his shares so that there would be no ruinous estate taxes upon his and his wife’s death
  16. Established a big office in Flagstaff, AZ, far away from customers, source of raw materials and eastern support. However, it was along the Route 66 and a railroad went through it, making LA just an overnight trip away. They didn’t like LA because of the environment – too much traffic, high taxes, and people continually switched jobs. They sensed there was no permanence and little loyalty of the workforce to a company or a community
  17. There was fear of unionization at one point but after a head of a union took a tour through the plant, he determined that they would not have any trouble with unionization. It was the cleanliness, the good order, the pictures of people’s kids on the machines – the whole atmosphere showed the community and loyalty fostered at Gore. Culture is not all written in words, nor is it all spoken in words, but it is also expressed by our facilities, by a walk through the plant.
  18. Troubles with counterparties often stem from a lack of alignment, enthusiasm, and trust
  19. The biggest benefit of thinking in leaps and not incrementally is that it’ll throw off tons of other ideas that you otherwise never would have had
  20. In the immediate aftermath of our founding back in 1958 our sales organization has been established as a collection of independent third-party sales companies who represented us, each with an exclusive sales territory. The use of independent sales companies have been a financial necessity in the early start up days. This was away for Gore to be sure it’s flow of cash was in balance at all times since we paid the independent sales representatives only one there was income from the sales they had made. To keep their cash flow and balance the sales representative Natalie took the opposite point of view. They only wanted to concentrate on producing near term sales to earn near term commissions. They were reluctant to finance long-term, time consuming, and risky sales development efforts in hopes of earning sales commissions I would pay off only far in the future. Unfortunately, many of our products requires long term efforts and this had to be us and so over a period of years, we replaced independent sales representative companies with full time Gore people
  21. Gore dreamed of an enterprise with great opportunity for all who would join in it, a virile organization that would foster self-fulfillment and which would multiply the capabilities of the individuals comprising it beyond their mere sum
  22. Bill Gore was more interested in the organizational and philosophical portions of the company and his son, Bob, was more product oriented
What I got out of it
  1. Passion, hard work, genuine interest, caring, and a win-win mindset has helped make Gore a durable and successful company
More links and info on Gore:

I Love Capitalism: An American Story by Ken Langone

Summary
  1. This is Ken Langone’s love song to capitalism. Everyone can and should dream big – it works for anybody. “You want my whole philosophy in a nutshell? I want everybody to do well. The world is a lot more fun if we’re all rich instead of just some of us.”
Key Takeaways
  1. Background
      1. A parents’ main job: unconditional love, live the values you want to teach, stress hard work and education
      2. Ken came from humble beginnings but was taught the value of hard work from a young age and is proof of the American dream
      3. Always ravenous about learning – libraries on Saturdays when others were partying
      4. Out of army in 1963 which later saw a huge market crash. Counterintuitive at the time but he saw this as his opportunity to get his feet in the door at Wall St.
    1. Business lessons
    1. Loving what you do is one of the greatest joys in life. I learned early how essential it was to love the work I was doing. Sometimes I look back and wonder, how did all this happen? Then the answer comes. Shit, I know how it happened: I was at a place where I was having the time of my life! I still remember what Hudson Whitenight said to me 60 years ago: “If you really love your work as much as I think you’re going to, you’re going to be a big success. So, I’m saying to a kid, I learned that ex post facto; you should learn it in front!
    2. Great salesmen
      1. “How do you know I can be a great salesman?” I asked. “I can tell,” he said. “You listen. You’re sensitive to the person you’re talking to. You’ll know when to go in for the kill and when to back off. That’s something most salesmen don’t do – can’t do. They want to just charge, charge, charge in, and they wind up pissing everybody off.”
      2. My research background from the Equitable, plus the fact that I was teaching at NYU, put me a few cuts ahead of the typical salesman, because I could talk quite knowledgeably about what I was selling
    3. You have only one boss – the customer. You treat them right and you have nothing to worry about.
    4. Start with the negatives, the downside. Build trust, show honesty and that you’ve truly done the hard work
    5. “Think I can help you guys. But, first, tell me what your definition of ‘help’ is.” – have to agree on definitions and what you’re working towards or else you could be talking in circles
    6. Some guys who get to be wealthy like to brag about being self-made men. I can’t imagine they’re not leaving somebody out of that equation. The thing I can’t say and never will say is that I’m self-made. To make that claim would be to commit a grave sin against all the many, many people who helped me get to where I am; you could fill Yankee Stadium with them, and then some. That’s how I got rich. Not by myself: I’m just one guy. I like to think I have a skill for assembling outstanding people, but the fact is also that I’m a collage of many people’s efforts.
    7. Knowing what’s important is half the game. Told he only had 30 minutes with Perot when trying to convince him to use his firm for EDS’ IPO but Perot talked for 29 of those minutes so Ken said he should just leave and talk to him some other time. Perot told him to stay and wanted to get Ken’s honest opinion on what other banks were offering. Ken was honest and told him what Perot needed to know, not what he wanted to know, and they ended up talking for 13 hours and built a relationship, leading to Langone’s firms first IPO
    8. Always under promise and over deliver
    9. Customers much more likely to buy if they feel they have choices
    10. In your business, when people don’t want something you mark it down. In my business, we mark it up (difference between retail and banking)
    11. Always take on the difficult, not the impossible
    12. Never underestimate the power of a great product
    13. What a tech company needs to do during the precious period when it has product exclusivity is spend a lot of money to obsolete itself. That’s what IBM used to be the best at, but it lost its way through sheer arrogance.
    14. Nardelli (former GE exec who they hired to become the CEO of The Home Depot), was vengeful, closed minded, short-sighted, totally numbers based, not win/win, always felt like he was getting ripped off, him vs. the world, and all this pitted him against Ken and the rest of The Home Depot board.
    15. Frank Blake (chairman and CEO of Home Depot) not only has a superb intellect; he’s the best listener I’ve ever met, hands down. If he’s talking with a group of people and someone says something interesting, Frank will stop speaking immediately and give the floor to that person. He has the greatest quantity of humility I’ve ever seen in a man. I don’t need to tell you how rare that is in a CEO. When we first negotiated his salary, he had 3 stipulations: 1) he didn’t want his compensation to be such that it would be on the front page of the Wall Street Journal; 2) he didn’t want it to be an embarrassment to Home Depot sales associates – the kind of thing customers might bring up in a critical way; 3) he wanted 90% of his pay to be in stock. “When the shareholders win, I win” he said. Talk about having skin in the game.
  1. Negotiating and a Win-Win Mindset
  1. Early in his career, Langone approached his boss about changing incentives. “Mr. Brown, I want to do something, and I’d like you to agree to it. I want to allocate a certain percentage of those commissions to the R&D department for the analysts who helped bring in this business. Mr. Brown, these guys downstairs are great; I don’t think you understand the quality of talent you’ve got down there. They’re a lot better than alright. Maybe it’s how we use them that’s not all right. But I can tell you right now, I can take these guys anyplace and do a lot of business. Rather than giving them a bonus from my end, I have another idea. Let’s you and I pick a total dollar amount off the top of whatever I bring in from Standard-Jersey, or any other company going forward, for analyst bonuses. Now, you’re going to only have to pay 70% of it because I’m going to pay 30%. I’ll tell you which analysts are higher on the approval list at Standard-New Jersey, and you can decide how much you want to allocate to each analyst. It’s completely fair. He didn’t like that so I said, “I’m going to take a portion of Unit 15’s 30% and give it to them directly. It’ll cost you nothing.” Why would you do that? he asked. “Because, Mr. Brown, when I pick up the phone and call the research department, I want those guys to jump through the phone. I want these guys to keep doing as great a job as they’ve been doing, and I want them to be excited about it…
  2. Capitalism is brutal, but it’s rarely a zero-sum game. Both sides of any transaction should get something out of the deal. Valeant, the pharmaceutical company, had a whole roster of important medications, but when it got caught charging obscene prices for them, its stock went down 90%. The market spoke, and Valeant had to listen. I can’t think of one deal I’ve ever done where I couldn’t have gotten more out of it than I did. As I’ve made clear, I like making money. I’m not some Buddhist monk who wants to eat beans the rest of his life. But it’s amazing what you can accomplish when you look beyond sheer profit to getting buy in by other people. I’d rather own 10% of a billion-dollar company than 100% of a $100m company. The numbers are exactly the same but by owning a piece of the billion dollar company, I get the benefit of everybody else pulling with me, and that’s a huge benefit
  3. One of the most important lessons in my life is this; leave more on the table for the other guy than he thinks he should get. And one of the most important rules in capitalism is incentive. I didn’t get rich by accident. I’ve always been very conscious of terms and conditions and trading, and I bargain back and forth. But I never wanted to reach a point on a deal where the other guy feels he was had. I’d rather have him feel he got me than I got him. I can live with that. If the other guy does better than I do, there’s a good chance he’ll want to come back to me and make a number of deals. On the other hand, he has to be straight with me
  4. The human element
  1. Ignore the human element in any situation at your own peril
  2. Everybody talks about the bottom line, but as I’ve seen time and again, you ignore the human element of business at your peril. Most of the seven deadly sins can and do come into play, and chemistry between people – good chemistry or bad – always has an effect, sometimes a huge effect: in boardrooms, in executive offices, in sales meetings. I’ve had quite a few chemistry lessons over the years.
  3. The only problem was that Home Depot’s great strength was (and still is) its culture, and our culture isn’t about statistics. In our culture, you don’t measure the intangible value of a sales associate saying to a customer, “Can I help you?” or, “You don’t really need that. Come over here and look at this. It doesn’t cost as much, but you’ll be fine with it.” A customer was told to buy an 89 cent screw rather than replacing his whole sink for $200. A couple months later, the guy’s wife wants a new kitchen, and she wants to go to some foo-foo kitchen showroom place. The husband says, “Oh no, I want to go see my friends at the Home Depot.” They spent $100,000 on the job. There’s nothing like these people in our stores. They’re special. Now, how do you get special people? Well, you start by treating them special. You let them know they matter. You let them know you appreciate their opinion. You let them know if they think there’s a better way of doing things than the way they’re doing them, they have an obligation to tell us, and we have an obligation to listen. You also let them know that anybody can build a big store space and put all kinds of inventory in it; the glue that holds Home Depot together are these values. We don’t just say them. We believe them, and we practice them consistently
  4. Management teams that rack up great numbers but ignore the human equation will eventually have a problem on their hands. In business, good numbers can be like sunlight: blindingly bright.
  5. Arrogance is the enemy. For many years, Bernie Marcus and I never, ever went into a Home Depot store – never once – unless we were pushing carts in from the parking lot. I sued to pray I would see a piece of trash on the floor so I could pick it up. Why? Those are entry-level tasks for the kid who works in that store. When he sees the top guys doing them, he can say to himself, “If it’s not too small for them, it’s not too small for me.” The minute you take away all the artificial barriers between you and your people, you’re on your way to phenomenal success. But it takes a bit of humility. To this day, if I walk into a Home Depot and see a customer who looks lost and confused, I walk up to him and say, “I have something to do with this company; can I help you?” if he has a question that’s beyond me, I’ll go grab a kid and say, “can you help this customer?”
  6. We’ve never paid anyone minimum wage at Home Depot. We had a simple belief: minimum wage, minimum talent. We always wanted to have good kids who wanted careers and not feel they had to compromise their pay. We paid them two or three bucks an hour more than minimum. We reviewed them every six months. And from the beginning we were growing like a weed, so we created enormous upside mobility.
  7. If there’s anything I would take a bow for throughout this whole process, it would be this: never giving up, and thinking creatively, instead of just reactively, when the chips were down. It’s a style I recommend highly. You get to enjoy lemonade instead of the lemons God gives you, and chicken salad instead of the much less tasty alternative
  8. As I began my tenure at Home Depot, my first role was just to lift morale. It was a big lift. I decided to do some of the same things we did at Home Depot: hold town meetings, walk the halls, talk to the staff. Put my arm around people’s shoulders, tell them how much we appreciated them and what we were going to do for them – and deliver. In other words, don’t promise pie in the sky unless you’ve got the recipe to make it
  9. No grand plans
  1. You noticed I originally named my little-startup Invemed because I was so fascinated by the health-care field, and how here I was, in 1976, up to my ass in the home-improvement business. And happy to be there. Contradictory? Sure! Life is full of left turns, and I’ve taken quite a few of them, following my nose, which has very often pointed me in the right direction. The truth is I can’t help myself: I am a deal junkie. If the phone rings, I’m like the proverbial fire-house dog – off to the races. Who knows who might be calling? More often than not, it’s someone who has a very interesting business proposition. Doesn’t matter what kind of business it is.
  2. Life Lessons
  1. It wasn’t just wealth itself that put me in that position; a lot of it was sheer stubborn curiosity. Whenever I served on a corporate board, I was notorious for asking more questions than any other director on that board. I didn’t give a shit if my question showed how stupid I was. A lot of people are scared to ask questions because they don’t want people to know how dumb they are. I’ve never had that problem. A lot of people are also afraid of falling down and hurting themselves along the way. Capitalism works, but you’ve got to make the effort, and you’ve got to be able to take the lumps. You have to have the kind of stamina that, when you get knocked down, allows you to pick yourself up and brush yourself off and move on just as if you’d never been knocked down. When I almost went broke in 1970, when I fell almost overnight from the highest mountain to the lowest valley, when I’d go home every day at 4:00pm and weed the garden and cry, I managed to go on afterward
  2. Don’t be in awe of anyone – public and private personas differ greatly
  3. Nothing more important than the name I leave my kids
  4. The big picture depends on a lot of smaller pictures.
  5. Never count the money while the game is still going
  6. Too many people measure success the wrong way. Money should be at the bottom of the list, not the top. I woke up soon enough to realize that if the only way you can define my life is by the size of my bank account, then I’ve failed. Fifteen or twenty years ago, a guy asked me how much I was worth and I answered without thinking, “my net worth is what good I do with what I have.”
  7. What distinguishes the winners from the losers is the ability to turn adversity around: resilience and creativity.
  8. The beautiful thing is that as much as we give, it keeps coming back: we’ve made back all the money we’ve given away, and more. What Elaine and I can’t make more of for ourselves is time. We spend it, but we can’t get it back
What I got out of it
  1. A really fun read with some great stories and lessons. Main ones: in any deal, always leave more on the table; think longer-term and build relationships; add more value than you take away; do the hard work and prepare; be candid, truthful, honest, yourself

Against the Odds: An Autobiography by James Dyson

Summary

  1. Dyson wants to tell his story to inspire other inventors and to share his unorthodox business philosophy – no gimmicks, simply a better product. “The best kind of business is one where you can sell a product at a high price with a good margin, and in enormous volumes. For that you have to develop a product that works better and looks better than existing ones. That type of investment is long term, high risk, and not very British.”

 

Key Takeaways

  1. Dyson was in debt and it took years and thousands of failures but he eventually had his breakthrough with the Dyson Dual Cyclone. He never lost faith but it took years even after that to convince others he had something revolutionary
  2. On Mentors
    1. Some of Dyson’s heroes include Isambard Kingdom Brunel, Buckminster Fuller, and Jeremy Fry (his mentor).
    2. There was in Brunel, a level of conditioning. His father had been an engineer of almost equally gargantuan vision, building the first tunnel under the Thames and planning one under the Channel, too. For Isambard there was that doubled-edged Oedipal desire both to impress and to outdo his father. It is what the literary critic Harold Bloom calls the Anxiety of Influence, and the need for a figure to be ‘slain’ was paramount in the creation of originality – and genius. My father was dead, and his achievement, anyway, was as a classicist. External figures had to count for a father. It is why a man called Jeremy Fry became so important to me, and Sir Hugh Casson, and Anthony Hunt. But they had to be overcome before I could move forward. If I was to push further there had to be new fathers. There had to be Buckminster Fuller, and Brunel.
    3. Jeremy Fry
      1. He was a man who was not interested in experts. He meets me, he thinks to himself, ‘here is a bright kid, let’s employ him.’ And he does. He risks little with the possibility of gaining much. It is exactly what I now do at Dyson Appliances – take on unformed graduates to throw youthful ideas around until they have given all they can and are ready to move onto new things. The attitude to employment extended to Fry’s thinking in everything, including engineering. Like Brunel, he did not, when an idea came to him, sit down and process it through pages of calculations; he didn’t argue it through with anyone; he just went out and built it.
      2. The root principle was to do things your way. It didn’t matter how other people did it. It didn’t matter if it could be done better. The Ballbarrow was not the only way to make a wheelbarrow that didn’t get stuck in mud – but it was a way. The trick is not to keep looking over your shoulder at others, or to worry, even as you begin a project, that it is not going to be the best possible example of its kind. As long as it works, and it is exciting, people will follow you
      3. There were times when he was wrong. In business you will be wrong, by and large, 50% of the time. The trick is to recognize when you have gone wrong and correct the damage – not to worry, at the moment of making the decision, whether it is the right one
      4. Jeremy later took me to France and had me designing first a pedalo, and then a pair of “Jesus floats” which could enable his daughter to walk on water. As a novice designer, as a novice anything I suppose, you are like a sponge looking to soak up mentors and models, and in Fry I had an ocean of experience to absorb. Like Brunel, he operated empirically. He had no regard for experts from other fields (always teaching himself whatever he needed to know as he went along) and he was an engineer interested in building things that derived not only excellence from their design, but elegance as well.
  3. Entrepreneurial and Business Principles
    1. Anyone can become an expert in anything in six months
    2. Now, with a hindsight that proves I was right, those faults of mine seem less criminal. And perhaps that is the nature of “vision”: when all has come right, the kind of man who persisted despite constant ridicule from the controlling forces will be said to have possessed vision. In my case and for all inventors, “vision” might equally read as “stubbornness”. This fastidiousness of mine was to prove my strength in the long-term
    3. Don’t overanalyze! Just go out and build it. With enthusiasm and intelligence, anything is possible. The root principle is to do things your way
    4. Never underestimate the role of beauty in design
    5. Selling the Sea Track was quite easy because I really believed in what I was pushing. You find out what your man wants, and when he comes to you he is buying it as soon as he starts talking, before you even start to sell. It is not about the right adjectives, or shouting your mouth off. It is about discovering a need and satisfying it. Not creating a need, by the way, as many of your cynical marketing men would have it. I have seen many of our own salesmen (I should say ex-salesmen) trying to sell things in meetings, showing the buyer things he couldn’t possibly be interested in, making him feel like a sucker, and cocking everything up. Without exception, the best agents were the ones who, quite irrespective of their business or financial sense, saw the boat for what it was, and loved it for it. While the temptation (and board pressure) was to hire established boat distributors, who knew the market and would order vast numbers, I was determined to choose people who were mad keen on it. They were the only ones who would be able to overcome all the obstacles and difficulties of selling an entirely new concept, and make a real business out of it. Best of all, I decided not to sign up any agent unless he would undertake to buy one boat ever year. Having twigged that we were wasting a lot of time signing up distributors who never ordered a thing, I realized that not only would it be infinitely easier for our agents to sell if they had a model to demonstrate, rather than just a brochure and a standard patter, but that if they had bought it already, then they would be doubly determined to sell it. Of course, I sold the concept to the agents as being entirely about demonstrability, but in fact it was far more to do with motivation. That, and the fact that with all the publicity we were getting and the hundreds of enquiries from potential distributors all over the world, I realized that we could make good business just from opening up new markets. Anytime we were short of sales, in fact, we would simply set about looking for new markets.
    6. The British obsession with the quantum leap holds back our country. We always want to create something new out of nothing, and without research, and without long, hard hours of effort. But there is no such thing as a quantum leap. There is only dogged persistence – and in the end you make it look like a quantum leap. Just ask the Japanese
    7. Working and aligning with first principles – “It is a law of physics – don’t ask me why, I don’t make these laws – that when a particle with mass makes its first turn around a curved wall its speed is multiplied three times. You can see it happening when the ball is spun in a roulette wheel, or better still when you shoot a ball in a pinball machine and it accelerates around the corner. Now, the reason that the cyclone is cone shaped is that when you reduce the diameter around which your object is travelling it will accelerate again, by about 50%. In this way the cyclone in the vacuum cleaner, for example, accelerates the dust particles from 20MPH to 600MPH and then to 924MPH, or about 324,000RPM. You need to think of the whole caboodle, dust and air, as being like a long sausage. As it enters the top of the cyclone it is being pushed round and round the walls until it comes to the bottom. The dust and rubbish, which has this great weight, is not enjoying the journey, adjust as when you drive your car hard at a bend it wants to keep on going straight and you have to exert pressure on the steering wheel to keep the car on the road. The air, which has no mass, doesn’t have this problem, and rather than straining at the walls, which would ultimately blow the whole thing up, it can get to the center of the cyclone, and take the easiest possible exit. So, at the top of the cyclone, in the middle is a chimney. The air happily escapes out of the whole; the particles cannot. Thus, the only thing that can get out is pure air, so no expelled dust, and no smells. Like so many industrialists, the particle has an insurmountable sheep mentality
    8. You have to take the Edisonian approach: test, and test, and test until it works best. I made hundreds of cyclones in the early years, and then thousands of them. Testing all the different styles, I found that the important thing was the entry point that it should enter peripherally, and at a pure tangent. I tried it with one entry and with two entries, I even made one with 140 entries, just in case it was better, but you only ever got one flow of air. Slow, slow, slow. These things cannot be hurried. When you develop a prototype you have to change only one thing at a time. If you are really going to improve things, and that is what inventing is all about, then you are going to have to be patient, very patient.
    9. Innovation requires builders, not bean counters. You need them, just not in the top spot. However, the British instead go with spending millions with big advertising or PR consultancy to persuade the public they were better than everyone else, and were in some way new and exciting. It never occurred to them to invest the money in the research and development of something genuinely, and tangibly, new and exciting. That, I am afraid, is the only way to achieve long-term growth, wealth, and stability. Slow, boring and initially expensive it may be, but the cataclysmic boom and bust of the years that followed were the price we paid for excitement.
    10. The best looks come out of following the engineering
    11. Design / Invention Philosophy
      1. No one ever had an idea staring at a drawing board – Francis Bacon always got his ideas from walking in the country-side and observing nature, rather than sitting in his study. SO get out and look at things, and when an idea comes, grab it, write it down, and play with it until it works. Don’t sit and expect ideas to come.
      2. Every day products sell
      3. New technology – the thing about truly new technology is that it makes your invention patentable. And then no one can copy it.
    12. One of the most crucial business lessons of my life: to stint on investment in the early stages, to try to sell a half-finished product, is to doom from the start any project you embark on.
    13. My big mistake had been presenting the same craft to each customer and telling them, ‘this can be adapted to suit your needs.’ If someone wanted a diving boat I would explain that it could be fitted with compressors, heaters and a very slow diesel engine. If an oil company wanted a crew bus, I would tell them that suitable seating and a faster engine could be fitted. To the military I said I would bulletproof the sides and engine. To constructors in search of a bridging tug I said, special buffers? High power engine? No problem.’ I convinced not a single one of them. People do not want all-purpose; they want high-tech specificity. So, out with the universal modular craft. In with, ‘I have just the boat for you, my dear sir: a purpose-built diving boat/bridging tug/assault craft/etc….’ For each function Deirdre designed a brochure, and they began to sell. And it all seemed so obvious: you simply cannot mix your messages when selling something new. A consumer can barely handle one great new idea, let alone two, or even several. Why tell them this thing was universally adaptable when universality mattered to the individual consumer not a whit? It was for the same reason that when I put the Dual Cyclone on the market I kept more or less stumm about its potential as a dry-cleaning tool. How could I expect the public to believe this was not only the best vacuum cleaner ever made, but also something completely different? And so, with a quite respectable product to present, I set off around the world to start selling it properly. It was time spent away from designing, but it was to teach me, above all else, that only by trying to sell the thing you have made yourself, by dealing with consumers’ problems and the product’s failings as they arise, can you really come to understand what you have done, to bond with your invention and to improve it. Conversely, of course, only the man who has brought the thing into the world can presume to foist it on others, and demand a heavy price, with all his heart
    14. I enjoyed selling to the military because they were never interested in cost, only what the thing did, and how well it did it. A fantastic situation for a young engineer or designer to be in
    15. One of the strains of this book is about control. If you have the intimate knowledge of a product that comes with dreaming it up and then designing it, I have been trying to say, then you will be the better able to sell it and then, reciprocally, to go back to it and improve it. From there you are in the best possible position to convince others of its greatness and to inspire others to give their very best efforts to developing it, and to remain true to it, and to see it through all the way to its optimum point. Total fruition, if you like
    16. Only way to make any real money is to offer the public something entirely new, that has style value, as well as substance, and which they cannot get anywhere else
    17. When salesmen and accountants become king, all risk goes out the window, and with it, all experimentation, trial and error, innovation, difference, and beauty
    18. Don’t trust in experts, hire smart, unformed youth who can throw ideas around and give all they can until they want something new
    19. Dyson’s desire for simplicity and his moral code led him to never bribing or taking bribes which greatly helped him in the long-term although the immediate benefits could have been great
    20. The establishment of a client base by word of mouth is what gives a product integrity and longevity
    21. Sidney Jacob could see the negotiations only from his point of view, and had no inkling that I, like any businessman, needed to be motivated into doing the deal too. That combination of charm and steel is very nasty indeed to encounter. It leaves you feeling utterly shafted and unwilling to do a deal. So I didn’t.
    22. In dealing with Japan and the importance of dogged, incremental progress over a very long time frame – “But they retain those key elements in their psyche that made them such ideal partners for someone like me, and a product like mine. They are not inventive, in the way that we, the British, like to think that we are. They do not bumble along in the hope of making it big when some bright new idea dawns on the horizon. They believe in progress by stages, in the interactive development that I have described as Edisonian, the persistent trial and error that allows them to wake up one morning, after many, many mornings, with a world-beating product…And all their success is born out of a theory of gradual development that is the very antithesis of the British obsession with the quantum leap. The Japanese always took the opposite view in that they never put any faith in individualists, and lived an anti-brilliance culture. And that was healthy. They know full well that quantum leaps are very rare, but that constant development will result, in the end, in a better product. And that is the mindset I share with them. I am not a quantum leaper. I produced something only after gradual and iterative development.”
    23. Always respect the creatives. I am constantly amazed at the way businessmen seem quite happy to treat designers in this way, an approach they would never take with, say, accountants or lawyers. They seem to perceive design as some sort of amateur indulgence, a superfluous frippery in which everyone can chuck in their opinions and to the hell with the designer.
    24. Out of town lawyers hardly ever win their case in America
    25. The importance of a unified team – “This was not a collection of underlings with me bossing them about, by any means. We were a band on a mission to design a vacuum cleaner that could challenge the world, and it was bloody exciting.
    26. Has always depended on raw, young graduates to bring in new blood and fresh eyes
    27. Manufacturing is about making things people want, which work well, and look good
    28. Dyson End of Life Recovery (The Recyclone) – “It seemed terrible, after all that had gone into each one, that they should just be thrown on a landfill when they die, and so it occurred to me that we should offer to take back all our vacuum cleaners at the end of their lives, and recover whatever is recoverable. And then it occurred to me that everything should be recoverable. And so we did, and it is. All you have to do when your Dyson dies – which should not happen for a very, very long time – is to call the hotline number on the handle and we will send round the undertakers free of charge
    29. After the soon to be launched DC-03, 04, and 05, there will be other and different products. But they will not be ‘copycat’ products – that is no principle by which to work. We are in the business of developing new technology and new products, and of recruiting bright young graduates to help us do exactly that, so nothing will come out that is not both innovatively designed and conceived around a brand new invention. It is an ambitious attitude for us to take, and is bound to slow down our growth, but though it is slower, it will send our roots deeper than the quick development of a huge portfolio of old technology that we have merely redesigned. And it will be much more satisfying for body and soul.
    30. Short-termism is such a national illness that it could be called short-termitis. And yet nobody does anything about it. That, if anything, is the recurring theme of this book. Let us please invest in R&D for future profit. And let us reduce our spending on advertising, so as to refocus on business, and make it into something product-oriented, and R&D driven
    31. Debt, you see, is a terrible thing for a small company. It fosters a bizarre reverse psychology that comes from the darkest depths of the human psyche and makes you even more inclined to overspend. The reason for this, is that when you have no money and are in debt you start thinking about all the things you could do if you had money, and that sets you to dreaming up all sorts of schemes and projects, which lead you into further debt as you try to realize them. When you have money, on the other hand, you tend to be more careful, largely because the occasion does not arise where you sit around desperately trying to think of ways of making money. You just get on with your life without thinking up hair-brained schemes you couldn’t possibly carry out. Thus, without an overdraft you are not only freed of the interest burden, but your mind is freed to think more clearly and you can negotiate more effectively with both suppliers and customers, because they can see that you are not stretched financially and desperate to make a deal.
    32. What we were attempting to offer was a panacea to all your gardening troubles. But, rather as had happened with the Sea Truck, consumers were simply not able to grasp so many improvements in one fell swoop. And the thing was too universal, too all-purpose. Had we begun it as, say, a greenhouse watering system, with a single timesaving benefit, thus appealing to a specific need, it would have bedded down nicely into the real market. We could then have gradually introduced the other ideas and made a real success of it
    33. As you suffer each rejection, you learn a little bit about your product, and what people want from it, and why – and you can sometimes justify your profitless ploddings that way, too
    34. In America, with a population 5x bigger than in Britain, each niche is 5x bigger, and since each person has about twice the spending power of someone in Britain, that niche is in real terms 10x bigger than it would be here, and the risk is thus reduced 10x
    35. The thing about inventing is that it is a continual and continuous process, and it is fluid. Inventions generate further inventions. In fact, that is where most inventions come from. They very rarely come out of nothing. So while it was the Dual Cyclone that was the basis of my first vacuum cleaner, as I went on to develop it over the next 12 years, and, crucially, in the nine months before bringing out the DC-01 (as it was to be called), dozens of other innovations were generated along the way.
    36. It was easier for us, as designers working apart from salesmen, to exclude the ‘bells and whistles’ because we were simply designing our won ideal product without worrying about marketing demands. When it came to talking to retailers, however, they always wanted to know where the height adjuster was. We would explain to them that we had designed a free-floating cleaner head that automatically adjusted to the pile of the carpet, or indeed to a stone or wood floor, but, for simple sales guff, I suppose the DC-01 appeared underequipped
    37. It is received wisdom in the appliance market that brand is important. But I knew that myth could be exploded. Brand is only important when two products are identical; it is not important if one of the products has better technology or a better design than the other. Hoover had traded on their name for too long, which was easy as long as all the products were the same – theirs was identical to the Panasonic or the Electrolux so why not buy it? That band dependence was quite simply shattered when the Dyson came along, because it gave the consumer, for the first time since men wore top hats in town and rode horses to work, the choice of something better. And suddenly the customer had something other than brand name to look at. We even went so far as to make our own brand name not very clear, which emphasized the point. If you are selling cornflakes or cola then branding is all important – it ought to mean nothing when you are selling technology.
    38. We also scooted to number one so silently because our profile was raised more by editorial coverage than by paid-for advertising. Apart from being cheaper, this is much more effective, because it carries more of the weight of objective truth than a bought space. But in terms of visibility it is less popularizing, while being more efficient in selling to those to whom it is exposed, because those prospectively in the market will be drawn to it. It is also out of your control – you cannot make journalists write about you, and I have never tried. And, when they have, I have never sought to influence what they write and have never asked to see their copy before publication. They take me, or the products, as we are, and I have to hope they like us. It is one of the virtues of having such a strange-looking product, however, that journalists are more likely to take an interest in it. Something genuinely different has a humanity, even a humor value, that another clone model from Miele or Panasonic will never have. A journalist’s job, particularly in the area of design and technology – but also in the field of business – is to find things that are going to be exciting in the future and then get there first, or as early as possible. They also seem to be unerringly good at it. And one story can generate a groundswell of editorial coverage that gives you the kind of accreditation that advertising never can. Advertising can only take you so far, you see, until the consumer realizes he is being sold something.
    39. And the fact is that they are not creative at all. They are doing the very worst thing you can do, which is to sit there staring at a drawing board trying to come up with an idea out of nowhere. You need dialogue to create. Of all the creative jobs I have encountered it is advertising people who make the most song and dance about creativity. And, you know, they are not creative at all. When I think of the real creation that my designers are involved in, and compare it with these “creatives” who are earning so much more to just sit around in the Groucho Club and be generally useless, it makes me vomit. I can’t go on supporting an industry like that, I’m afraid
    40. Why don’t we tell people how the machine dry-cleans, how it climbs stairs, how it has automatic hose action? The answer is twofold – you can’t sell more than one message at a time, or you lose the belief of the consumer, and we had to establish, beyond all question, that our machine overcame a problem that all other systems suffered from.
    41. Who is it that gets neglected? The inventor, that’s who. The designer, the engineer, the chemist, the brewer, the boffin. The people obsessed by the product; who willingly accept that the sizzle is important, but who get their kicks trying to make an even better steak. Car companies used to be run by people who loved cars. They knew how to make cars themselves, and were always trying to make them better. Retail companies used to be run by people who loved shops, and a hundred and something years ago, George Safford Parker was nutty about fountain pens. As business got bigger and more complex, these obsessive, impractical, product-driven enthusiasts couldn’t cope. They had to be helped by money men and lawyers and marketing persons with advertising agents. From that moment, the status of the maker in this country has been in decline. And the rise and rise of marketing persons, through no fault of their own, has done nothing to help…it might even be, I think, that the erosion of our manufacturing sector, and the rise and rise of our service sector, is in part connected with the de-coupling of making things from marketing things. In other words: if you make something, sell it yourself. And so we did. And absolutely nothing went bang. Except, of course, everyone else’s market slice
    42. Although there is usually a single great development at the core of any revolutionary design or invention, I am a great believer in the autogeneration of inventions out of each other, a kind of asexual reproduction of the product gene, if you like. It is usually when you actually come to design the product that some of the most interesting things happen. The thing that really excited everyone about the DC-02 for example and got it so much press attention, even after that of the Dual Cyclone had been pretty exhaustively covered, was its ability to sit on stairs, and even to climb them.
  4. Business and Design Philosophy
    1. As often as I am asked about my design philosophy, I am cross-examined as to how I run my business. People see the numerical and financial success of the product and want to know how it was done. It is never enough to say that it is down to the qualitative difference of the vacuum cleaner, and to be fair, there may well be more to it than that. But a business philosophy is a difficult thing to distill out of the daily workings of a company, because you never really know how you do it, you just do it. It’s like asking a horse how it walks. I thought, perhaps, if I tried to explain everything we do that other companies probably do not do, then people might be able to work out the philosophy for themselves:
      1. Everyone who starts work at Dyson makes a vacuum cleaner on their first day – the idea is that everyone understands the whole product, even though they may only be working on a small part of it
      2. A holistic design approach to design – open offices plans so everyone can communicate easily and feels part of the same team, graphics and engineering people are in the geographical center of the office and that reflects the centrality of design and engineering to the whole operation, no department boundaries, freedom of movement and of expression is total
      3. Engineering and design are not viewed as separate. Designers are involved in testing as engineers are in conceptual ideas
      4. Everyone is empowered to be creative and knowledgeable
      5. No memos – ever. Dialogue is the founding principle for progress. Talk to people, they listen. Monologue only leads to monomania. Memos are also tacky, soulless, and get lost. I would rather people did less, if it means doing what they do properly, and a memo, though quicker than a conversation, is far more likely to lead to a misunderstanding.
      6. No one wears suits and ties – every company needs an image. The smaller and less established you are, the more important the image becomes. I do not want my employees thinking like businessmen
      7. A cafe, not a canteen – create a social atmosphere at work where employees find it easy to get to know each other
      8. Encourage employees to be different, on principle – very few people can be brilliant. Those who are, rarely do anything worthwhile. And they are over-valued. You are just as likely to solve a problem by being unconventional and determined as by being brilliant. And if you can’t be unconventional, be obtuse. Be deliberately obtuse, because there are 5 billion people out there thinking in train tracks, and thinking what they have been taught to think.
      9. Don’t relinquish responsibility once the sale is made – it may sound like an expensive service for us to run, but real service, like real innovation, is what people want more than anything, and people are so delighted when they discover that we will immediately send them a new machine that their call of complaint becomes a call of gratitude
      10. Employ graduates straight from university – it’s easier to teach fresh graduates a different way of doing things and enable them to challenge established beliefs, than to retrain someone with ‘experience’
      11. Meet the staff as equals, because they are – clinics where staff can ask senior management anything and also have a suggestion box for those who are more introverted and make sure those letters are always answered personally. Feedback from the floor, when it concerns production, usually centers around the quality of components fed to the line by subcontractors. It is a crucial melting pot of ideas, that enables us to share with the assembly staff our management expertise and efforts with the subcontractors, at the same time as they describe the end results of our efforts. So useful is this proving, that we have arranged, in future, for subcontractors to attend the meetings. Hope they can take it
      12. The final assembly is done entirely by hand – allows for flexibility to lengthen or shorten the line when we need to, to add or remove people, or to add new liens at a moments’ notice, chance the assembly method, change the design of the product. It does mean that we rely more than others on the skill of our assembly staff but it allows us that “can do” attitude to change that is anathema to British manufacturing otherwise
      13. We pay our staff well – pay very well and on top of it, on a weekly basis, that is subject to full attendance, as a reward for reliable and loyal staff, pay a flat premium
      14. Japanese influences – we are always trying to improve our product, take any complaint very seriously, and solve the problem. Customer feedback is our way of foretelling and directing our future, and we spare no expense in acting on that feedback. We are fascinated, to the point of obsession, with the product. It is this that allows us to maintain ownership of our product, and without it we do not have a business.
      15. Dealing with suppliers – there are 4 straightforward requirements that we have of our suppliers: that they should provide (a) what we order, (b) at the time stipulated, (c) in the correct quantity, (d) to the quality stipulated. I wish.
  5. The Ballbarrow
    1. The wheelbarrow market was a very attractive one to me at that time. It seemed relatively unambitious market, where I would not be competing against any multinational giants as you do in, say, electricals. A kinder, gentler market altogether, or so I though. Furthermore, the fact that no one had contributed anything faintly new to it in 10,000 years (rather as the vacuum cleaner went unchanged over 100), meant that anything new, with major design improvements and innovations, would have enormous impact.
    2. The spirit of the thing, you see, was in the ball and the dumper shape – anything else would be gliding the lily. This principle is a crucial one. Just as the spirit of the Sea Track was in the flat hull, and the spirit of the Dual Cyclone is in the cyclone, so there was a simplicity about the Ballbarrow that displayed its newness and superiority and shouted its usefulness. To attempt other gimmicks might lead to a customer believing it was just the same old thing with something added. So, off came the dump facility and a twisty handle, a swift redesign, and we were ready to launch
    3. It was an interesting lesson in psychology, teaching me that the entrenched professional is always going to resist far longer than the private consumer. Many of the advantages, you see, were simply not perceived by the builder as advantages at all, for the reasons I mentioned earlier, and all the things that would make it so popular with gardeners were utterly irrelevant to him.
    4. It always seems to be journalists that are first to see the potential of a new invention, which is odd when you consider that they are not, in their nature, particularly commercially minded people. It is also the very best way of convincing the public. One decent editorial counts for a thousand advertisements. People are far more likely to believe someone who has tested something for themselves – and it is assumed that a journalist has done that. From that point on, and throughout my struggles to launch the Dual Cyclone, I made editorial comment the basis of all my thinking about publicity. As with the Dual Cyclone, so with the Ballbarrow: the establishment of a client base by word of mouth is what gives a product longevity and integrity, a sort of wise man building his house on the rock principle
    5. The Waterolla was a garden roller that instead of being a large metal drum full of concrete, was a large plastic drum full of nothing which could be filled up with water. It is the perfect example of making a product too good. Once one person got it, the whole neighborhood could easily use it and never bought another.
  1. It is in our engineers that we should place our greatest faith for the present, in that they determine the way our future will be
  2. Was a great runner when he was young and he trained differently than everyone else – he used the sand dunes in his home country to train and build his endurance. “In so many ways it taught me the most significant lessons in all my youth. I was learning about the physical and psychological strength that keeps you competitive. I was learning about obstinacy. I was learning how to overcome nerves, and as I grew more and more neurotic about being caught from behind, I trained harder to stay in front. It is a horribly labored analogy – and it is flavored with the fickle seasoning of hindsight – but to this day it is the fear of failure, more than anything else, which makes me keep working at success.” This later helped me build the confidence and the stupidity to start doing things differently not only in sports, but in academics and in business

 

What I got out of it

  1. Really fun and well written book with some timeless business and entrepreneurial lessons –

Built From Scratch: How a Couple of Regular Guys Grew the Home Depot From Nothing to $30 Billion by Bernie Marcus and Arthur Blank

Summary
  1. The history and philosophy of The Home Depot from the founders themselves
Key Takeaways
  1. Goal of this book is to share what is learnable and shareable for their next generation of leadership as well as for other entrepreneurs
  2. Have to formalize and deeply instill the company‘s values from every level of the company from the bottom up to the top in order to stand a chance
  3. Early Days
    1. Marcus and Blank met while working at a hardware store called Handy Dan’s, based in Los Angeles. Ken Langone learned about the business and after talking to Blank and seeing how great of an operator he was and seeing how cheaply it traded, he started buying every share he possibly could. This worked out really well for him and he learned how good of an operator Blank and Marcus were and how great their business model for a future concept, The Home Depot, truly was. He would become a co-founder of The Home Depot in the future
    2. Pat Farrah operated a store in Canada and eventually beat Blank and Marcus to the punch by starting his own hardware megastore. However, he had no systems or financial plans in place and eventually he partnered with them in order to save his company and they started The Home Depot together
    3. Although they were desperate for cash in the beginning, they turned away several prominent investors because they didn’t believe they shared their values or would be good partners (Ross Perot)
    4. If a founder saw somebody leaving the store empty-handed they would pursue them to their car asked them what they were searching for and if they didn’t carry it they would say that they actually did and it were simply out of stock. Later, they would go buy the product the customer was searching for and hand deliver it to the their home and then start carrying that piece of merchandise in their stores
    5. Build in margin for error by having more capital then you think you’ll need and invest and resources before you need them so that you’re not scrambling and always try to hire someone who is over experienced for their initial position so that they aren’t always in fifth gear, have excess capacity and balance, can always take on new projects and tasks, and more
  4. Business model:
    1. From the beginning they focused on price, selection and customer service. They’d buy direct from distributors so they could charge customers less and they’d have more selection and count on increased volume to make up for it. Nobody understood this concept for a long time
      1. Excellent customer service
      2. Taking care of our people
      3. Building strong relationships
      4. Respect for all people
      5. Entrepreneurial spirit
      6. Doing the right thing
      7. Giving back
      8. Creating shareholder value
    2. Management principles: we are not that smart, we know we’re not that smart, and therefore have to be deeply involved and listen attentively
    3. 14 management principles
      1. The invisible fence – being decentralized allows us to be close to the customers and access the best knowledge in the field
      2. The 3 Bundles – non-negotiables, the entrepreneurial bundle, complete autonomy to make own decisions
      3. Hire people who are overqualified with a view toward growth in the future
      4. Have a financial conscience
      5. One-man shows don’t cut it with us – teach others as much as possible
      6. How would you like your eggs? – communication is vital and must let company know the logic behind our actions
      7. Bernie’s Test – eye contact, if the associates in new stores recognize him they have to first look him in the eye and this is vital for good customer service
      8. Gonna go ’round in circles – 360 feedback
      9. Establish ties that bind, and strengthen them – communication, trust, trips/events to build trust amongst senior ranks
      10. Shut up and show them what you want – sometimes best method of teaching is by doing and leading by example
      11. Kill bureaucracy
      12. Hire the best
      13. The inverted pyramid – the associates at the stores are the most important (after customers)
      14. Respect for the individual – top leaders have to be on the same page
    4. In every situation, aim to always surround yourself with people who are better and smarter than you are
    5. There is nothing like applying yourself fully
    6. They wanted the cash registers near the front so people walking in could see all the action and all orders went through the big front doors so people could see the big items leaving and that contractors paid the same price as customers. They wanted it to look like a warehouse and not a retail store. They wanted people to be amazed by the inventory and filled the store with empty boxes so it looked like they had even more than they really did. Nobody understood the one stop shopping idea at first and they were short on customers the first several months
    7. They put the lumber at the back of the stores so that customers had to hunt for it and stumble across all the accessories that they didn’t know they needed
    8. Pricing is one of the hardest yet most important aspects of any business
    9. Management lives what they preached. The tone was set at the top and carried through to every employee. They all had a great understanding of the culture and had real ownership over their individual stores
    10. Common sense was an overriding factor in their values
    11. The key is not to make a sale. The key is to cultivate the customer. They would rather show them how to fix the broken sink for $1 than sell them a new sink for $200
    12. During their opening an expansion into Florida they took a popular local magazine and highlighted everything that they carried. They also showed that they discounted all those items at 20% and had even more selection at even better prices
    13. The Home Depot has an inverted management structure. They have so many more sales associates than any other position and these are the people who interact with the customers every day, and because of this they have an intimate knowledge of customer needs and pain points so they responsibility and decisions down to them as much as possible.
    14. The single biggest reason for their success is how they treat their associates who in turn can do whatever they think is right to take care of their customers. Treat employees right, treat customers right and you’ll have all the business you need.
    15. Because they hire the best of it in the industry, they tend to pay higher than average wage and on top of that they give all salaried people the opportunity to become owners of the company through equity which they can buy at a 15% discount to the public. And, on top of that, they’re given more room to grow, to be entrepreneurial and are treated better there than anywhere else. So, why would they ever leave? Most don’t. Turnover at The Home Depot after one year is very low which is extraordinary for the home improvement business. If people make it for a year, they tend to stay because they can really see themselves building a career there.
    16. It is all about trust. With the right knowledge and shared values you can trust the lowest, newest person to make decisions to help care for the customer and this creates more customer loyalty and a better experience that could ever be dictated from one person at the top
    17. The future CFO was digging through the trash to see what they were throwing out and determined that much of it could simply be discounted and put on the shop floor because of some configuration but this turned a lot of trash and wasted money into new assets
    18. At the beginning their people were working too hard but not too smart so they created a new dictate that no employee was allowed to work past midnight and no more than 55 hours per week. If you’re not smart about it, a motivated team can fly right into the sun and having a more balanced life will, in the long term, give you better results than burning your people out
    19. It took a lot of focus and effort to establish the culture and make sure that new hires who came from competitors with different cultures understood how the Home Depot is run, how to care for customers, how to make it look like a warehouse and not a retail shop, and much more
    20. Good associates can come from anywhere and one successful outreach they had was with senior citizens. Nobody else would hire them but when the Home Depot did these people were so ecstatic that they would teach the new hires and work harder than almost anybody else
    21. The Home Depot gave out badges to people who got excellent customer service reviews so that they could place them on their aprons for all to see.
    22. As they grew and matured they had to change from a rowdy group of gunslingers who drank a lot into a more refined family-oriented culture where everyone felt comfortable
    23. Any senior-level person who was hired had to work in the store in order to get a feel for the products the customers the customer service and more even lawyers had to do this
    24. You have to look beyond the financials and metrics and to the person. You have to treat people as they’d want to be treated
    25. Sam Walton was a friendly competitor and convinced Blank and Marcus to switch from occasional fire sales to everyday low pricing. This was a tough change for managers to stomach because the spike after sales was an adrenaline rush but the consistency and trust established with everyday low prices brought a better mix of sales and more stable sales
    26. Essence of keeping the company great is it’s nonstop reinvention. If you’re in constant motion (in the right direction) nobody can catch you. Cannot stay still for any length of time
    27. The Home Depot build good relationships with their suppliers and not paying them in 30 days or even 15 days as usual but it five days and sometimes even overnight
    28. They are very weary of acquisitions but they did acquire the Home Depot of Canada and in order to bring everybody onto the same page, they did an exchange program where the Canadians went to some American stores for several months and vice versa
    29. Another key was understanding the vendors, what they wanted and what motivated them
    30. Store walks keep people deeply fluent on the business and visits are required – not only of senior executives but for board members as well
    31. Created a direct line to the highest ranking people for serious customer complaints under the fake name of Ben Hill. This allowed the senior executives to keep their finger on the pulse and the store managers know that they’d have to deal with them directly if a customer called and complained to this number
    32. Only become your best self with competition and if they didn’t have any direct external competitors in a region, they’d find a way to make a competitor internally. They sometime release ads just to rally the troops
    33. Uncertainty is a huge portion of many failures and is a breakdown of internal communications
    34. Bureaucracy is not questioning stupid things and just taking them for granted. People become scared to make decisions because they’re afraid to make mistakes so they start calling meetings and putting off decisions and actions for as long as they can
    35. Whatever you give to the community, you’ll get back ten fold
    36. There were many copycat Home Depots but none of them truly understood the culture, customer focus, and employee focus that Blank and Marcus had so were never truly able to compete. Can copy nearly everything except for culture. Execution above everything else
Summary
  1. An excellent book with a ton of operational, business, and philosophical gems. You get a great feel for how deeply the founders care about their people and their customers and that formula has led to a culture which seems impossible to steal and duplicate

Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies by Charles G. Koch

Summary
  1. Charles Koch describes his management philosophy, Market Based Management, how it has evolved over time, and how it has been put to use at Koch Industries. MBM emphasizes 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.
Key Takeaways
  1. Market Based Management
    1. Charles’ goal when he was young was to discover the principles that best enable people to flourish as they live and work together. He grouped his findings into what is now known as MBM. MBM is a reality based tools that helps employees problem solve without explicitly being told what to do and this requires a simple structure that is deeply understood by all. It’s goal is to create spontaneous order by providing a simplified set of guiding principles and mental models to guide their behaviors and decisions.
    2. The system must be set up so that everyone knows what the right thing to do is and wants to do it, without overly detailed explanations or rules. Enlightened-self interest gets people to do the right thing for others as it also helps themselves
    3. MBM prompts us to focus on understanding consumers’ unmet needs and finding ways to satisfy them. We strive to do this faster and better than existing and potential competitors. This requires that we continuously improve our existing capabilities, such as sales, marketing, operations, distribution, finance, technology, and R&D
    4. MBM guiding principles – integrity, compliance, value creation, customer focus, knowledge, change, respect, fulfillment.
    5. Companies must realize 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. They also need to constantly improve the way they’re organized, so they can innovate and eliminate waste better than their competitors. This is what MBM enables Koch to do.
    6. No one can decide which products and services a customer values better than the customer. Dedicating ourselves to satisfying what she values is showing respect for her. This is what generates good profit. Bad profit comes from disrespecting customers by making them subsidize our business with their tax dollars and higher prices, siphoning away the good profit other companies could have earned
    7. Over time, we have made changes, not only to our vision, but to our entire approach to recruitment and management, our internships, university relationships, junior military outreach, trade school relationships, compensation system, opportunity origination networks, methods for achieving environmental and safety excellence, and MBM training and application programs.
    8. MBM strives to create a spontaneous order of self-actualizing people by hiring, retaining, and motivating those who internalize and exemplify all ten Guiding Principles – those with integrity and humility who want to create real value. Toward this end, it’s important for leaders to understand the potential and the subjective values of their employees. This is impossible without establishing open and honest communication in order to know employees well enough on a personal level to do so. For some employees, non-financial incentives – such as being praised for a job well done – can be as important as financial incentives. But care must be taken to ensure that such praise is truly earned
    9. MBM is broken down into five core areas including vision, virtues and talents, knowledge process, decision rights, and incentives. These five areas lead to emergent effects as the whole is greater than sum of its parts and become mutually reinforcing. This is a never ending process of learning and improvement and just like the Red Queen Effect, stasis equals death. 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. It can be far more difficult to overcome success than adversity. I think often about a lesson my father impressed on me at an early age: “Often adversity is a blessing in disguise and is certainly the greatest character builder”
      1. Vision
        1. Determining where and how the organization can create the greatest long-term value. Koch’s is different than most as its focused on value creation and people, not product, industry, profit, or anything else. Koch must create real, sustainable value for its customers, for society, and for itself. It can only do so by inspiring and attracting customers, suppliers, and partners.
        2. Having a clear vision is critical to attracting the best talent. Understanding what a business is trying to achieve and how it creates value not only enables employees to focus and prioritize, it helps them develop and find fulfillment. Having a shared vision guides the development of roles, responsibilities, and expectations. That’s why getting the vision right, helping employees (especially leaders) internalize it, and updating it as often as necessary is essential. Because the future is unknown and unknowable, a company’s vision needs to be open-ended and to embrace creative destruction on a fundamental level. In our experience, a company tends to be better served when it is capability-focused rather than industry-focused. The breadth of a company’s vision should vary with the breadth of its capabilities. At the same time, a business must have a vision specific enough to guide its strategies, decision making, allocation of resources, and the roles, responsibilities, and expectations of all employees. Each vision also needs to be aspirational in order to expand the thinking of leaders and employees through the organization.
        3. Koch underscores that in order to achieve long-term success a business cannot rely on short-term profits but must accept the necessity of what economist Schumpeter calls “creative destruction.” This means that a firm must innovate at least as quickly as its most effective competitor. Building on these insights, Koch explains that at the heart of MBM is the understanding that the role of business is to help people improve their lives by providing products and services they value more highly than their alternatives, and to do so while consuming fewer resources.
        4. Koch’s vision is its north star and acts as a strategic guide which is constant and ever changing and drives the innovation culture and values of the organization
        5. Koch’s vision:
          1. Remain family owned, well-diversified, stable and financially conservative
          2. Grow organically faster than inflation, and achieve additional growth through acquisitions.
          3. Be an employer of choice through extensive team member development and engagement activities
          4. Have our portfolio businesses recognized as “best in class” within their respective industries
          5. Be model corporate citizens in the communities we call home
      2. ​Virtue and Talents
        1. Helping ensure that people with the right values, skills and capabilities are hired, retained and developed
        2. The company has a list of ten “Guiding Principles,” which include integrity, compliance, value creation, Principled Entrepreneurship, customer focus, knowledge, change, humility, respect, and fulfillment. Interviews are based around these traits and open-ended questions are used to discern a candidate’s probability of success in demonstrating the desired traits. Once interviews are completed, a challenge session among the recruiter, interviewers, and hiring manager is held to ensure the best knowledge is shared when making a hiring determination. Employee referrals have resulted in some of our best hires and we have also developed strategic relationships with external sources, including search firms familiar with MBM and our Guiding Principles. We invest heavily in college recruiting efforts and a well-developed internship program
        3. No matter how difficult the role is to fill, it is critical that we not lower our standards. A bad hiring decision is much more costly in many, many ways than is the delay in finding the right candidate
        4. There are many different kinds of intelligence and they should all be taken into account: interpersonal, intrapersonal, linguistic, logical-mathematical, spatial, naturalist, bodily-kinesthetic, and musical
      3. ​Knowledge Processes
        1. ​Creating, acquiring, sharing and applying relevant knowledge, and measuring and tracking profitability
        2. Knowing why something is profitable is often as valuable as knowing what is profitable.
        3. Benchmarking involves identifying, understanding, and adopting superior practices from anywhere in the world – internally, competitors, great businesses in any field.
      4. ​​​Decision Rights
        1. ​Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable. This should demonstrate an employee’s comparative advantages.
        2. The bestowal of decision rights upon an individual, moreover, should not be predicated upon that individual’s position in the corporate hierarchy.
        3. Many of the things that go wrong or opportunities that go unrealized in business are a result of the tragedy of the commons – shared areas with unclear (or nonexistent) demarcation of responsibilities. At Koch, we use decision rights to replicate the benefits and responsibilities of property rights in society. Just as we think of employees as entrepreneurs at Koch, we think of decision rights as property rights in the organization. Unless people have clearly defined areas of responsibility, it’s difficult – if not impossible – to elicit beneficial proactive behavior, or to hold people accountable when things go wrong. When no one has clear ownership of a resource, no one can be help responsible for its efficient use. In MBM, decision rights are synonymous with authority. If you have the decision rights to decide something, not only do you have the authority to decide it; you are responsible and accountable for it. ​
        4. Decision rights should reflect an employee’s demonstrated comparative advantages. An employee’s comparative advantages are evident in those activities for which she can create the greatest value compared to the opportunity cost of her time. When these are optimized among a group, the value it creates is maximized. Employees who focus on their comparative advantages and consistently make good decisions will have expanding decision rights, regardless of their role or position in the organization. Understanding and applying this 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.
        5. Competitively advantaged innovation requires working on the best opportunities, establishing a clear owner, having the right people in the right roles, effectively experimenting, rapidly and efficiently scaling up, and finding the balance between short and longer-term disruptive innovations. In other words, the very nature of innovation requires a dynamic approach to decision rights, with frequent reviews and adjustments. ​
      5. Incentives
        1. The first goal of incentives is to harmonize the interests of the individual with those of the company. This reinforces our individual employee’s desire to do the right thing and help the company prosper. Second, compensation should be consistent with the notion that no two employees are alike; thus, their compensation can vary considerably depending on the value of their contributions. As a result of difference in vision, desire, values, and ability, people vary in the advantage they take of the nearly limitless opportunities to create value. This is why two employees performing similar roles may well be compensated differently. Third, no limit should be put on an employee’s compensation, so employees will not put a limit on the value they create. Finally, incentives should be structured in such a way that the company can effectively attract, motivate, and retain principle entrepreneurs
        2. Rewarding people according to the value they create for the organization. There are several tools to accomplish this, including base pay adjustments, annual incentive compensation, spot bonuses, deferred compensation, and other incentives. A key role of managers is to retain and motivate employees who are adding superior value. By paying for value created, we help ensure the firm’s competitiveness
        3. Important to align incentives across business units so that there is no in-fighting
        4. The value of missed opportunities and avoidance of errors should also try to be estimated and included. Makes opportunity cost tangible by taking missed opportunities into account with bonuses and salaries
        5. Koch advises entrepreneurs to stay private no matter how big their company gets
        6. Incentives are incredibly important. Koch incentivizes its employees by paying on marginal contribution and value created in their unit and then based on their contribution. It will never be perfect but it must be directionally correct and the reasoning behind it must be explained as well. Must signal what is valued most highly and doing so in a principled manner. Must be financial and non-financial – meaning, challenge, competition, praise, belief in the mission, being part of a successful team, personal growth
        7. Incentives are as important for external counter parties such as customers, suppliers, contractors, shareholders, distributors, agents, trading partners, former industry employees, specialists, universities, technology developers, consultants, communities, and governments. Aligning incentives with performance is almost always effective but must take these external parties into account too. Must understand what each values and deliver on it. Communities want a good neighbor, who takes care of the area, protects the environment, operates safely, and provides good jobs
        8. Budgets are often useless and sometimes counterproductive if they perverse behavior through misaligned incentives
        9. Framework for determining incentive pay (never perfect but directionally correct and must be explained to the employee)
          1. Determine the value created by the employee’s business unit, facility, or service group to Koch, considering current earnings and return on capital, change in capabilities, competitive position, and the risk-adjusted value of innovations and growth initiatives – that is, the prospect for future earnings
          2. After thoroughly assessing all the employee’s contributions to the value the unit created (positive and negative), we compare this to the contribution necessary for her base compensation. To the extent that her contribution exceeds this amount, we award a bonus or other incentive compensation based on that difference
          3. Deductions are taken for any compliance or EH&S problems to which the employee has contributed. If such problems are serious enough, they could wipe out the employee’s entire award. Additions to, or subtractions from, the employee’s compensation will also be made if she has had a significant positive (or negative) effect on the unit’s culture
    10. Good Profit
      1. ​Good Profit is about providing value to the customer while also benefiting society and comes from Principled Entrepreneurship: creating superior value while using fewer resources and always acting lawfully and with integrity. It comes from contributing something to society. This is the vision of Market Based Management which Charles Koch began developing in the ’60s. It takes a win-win framework and allows Koch Industries to adapt and deal with change more effectively than others. They have prospered through the years with no government aid or external help because their focus is always on producing value. MBM, while simple, is not easy. The whole organization must understand the principles so deeply that they can adapt to any problems or circumstances
      2. Good Profit is what follows when long-term value is generated for customers, employers, shareholders, and society. MBM generates Good Profit
      3. Good Profit 101: providing the best hassle-free service to our clients at the lowest cost to them and attracting the best employees based on the opportunities we offered. Our goal was – and still is – to be the counterparty of choice to our customers, vendors, communities, and employees
      4. 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 just conduct
      5. Opportunity Cost – the true cost of any activity is the highest-value activity forgone
      6. Subjective Value – At Koch we also urge our salespeople to understand each customer’s subjective values and tailor the way we deal with them accordingly. Many public companies value steady, predictable earnings more than larger (on average) earnings that are more volatile, since steady earnings tend to result in a higher stock price. Because of this difference in subjective values between us and our customers, it can be mutually beneficial for us to absorb the price risk in our contracts, and for them to compensate us for it. Koch is always willing to do this kind of win-win business. Listen to partners particular needs and design structures that suit both parties well. Strive for speed, certainty, confidentiality, efficient and responsive deal screening, and to concede terms that are important to the seller but not as important to Koch.
    11. 8 steps in the Decision Making Framework
      1. Briefly describe the authority being requested
      2. Give the background and a summary of the value proposition
      3. Outline the objective with the strategic fit
      4. Prepare an economic summary with a base case, as well as other plausible scenarios that could make the project much better or worse
      5. Identify the key value drivers
      6. Describe the key risks and mitigants
      7. List the alternatives considered and why the one shown is best
      8. Project the timeline for future steps
        1. Decision traps – overconfidence, framing, anchoring, status quo bias, sunk costs, information / confirmation bias, confusing random events with patterns, allowing a leader’s past rejections to stop the consideration of good future opportunities, conservatism trap
    12. Ludwig von Mises (Human Action) was a big influence in Koch’s philosophy and management style (as was Polanyi’s Republic of Science)
      1. The more books I read, the more passionately I embraced the truth that widespread human well-being demands a system that clearly defines and protects private property rights, allows people to speak freely without intimidation or legal repercussions, refrains from interference with private parties’ agreements and exchanges, and allows human action – rather than arbitrary notions about how much things “should” cost – to guide prices. Allowing people the freedom to pursue their own interests (within the limits of just conduct) is the best and only sustainable way to achieve societal progress. For individuals to develop and have a chance at happiness, they must be free to make their own choices and mistakes, rather than be forced to accept choices made for them by others. As I digested this and went about my business, it dawned on me that these principles are fundamental to the well-being not only of societies – as I learned through my interdisciplinary studies – but also of organizations, which are essentially small societies. When encountering a challenge at work (such as sunk cost or competitive disadvantage), I began responding with the principles of a free society in mind. And sure enough, one concept at a time, I saw that that the principles that worked in society also worked in an organization.
      2. As a young man Charles spent his nights in Wichita Kansas reading every subject trying to understand what principle allows people to flourish. He took ideas from all disciplines such as physics and Newton’s Third Law of Motion regarding reciprocation. Came to understand that organizations are like miniature societies and what would benefit society at large would also benefit organizations
    13. Experimental Discovery > A Grand Plan
      1. ​Must have an experimental discovery mindset rather than a grand plan mindset. Must also know when you are experimenting and bet accordingly. The point is that progress – whether in business, an economy, or science – comes through experimentation and failure. Those who favor a “grand plan” over experimentation fail to understand the role that failed experiments play in creating progress in society. Failures quickly and efficiently signal what doesn’t work, minimizing waste and redirecting scarce resources to what does work. A market economy is an experimental discovery process, in which business failures are inevitable and any attempt to eliminate them only ensures even greater failures. For experimental discovery to work, we have to not only design experiments properly but also recognize when we are experimenting so we can limit the bet accordingly. Koch companies have suffered whenever we forgot we were experimenting and made bets as if the risks were small when they were not.
      2. Smith and Hayek demonstrated that prosperity can take place only through spontaneous order, an order that results from unscripted human action, not human design.
      3. The process of discovery begins when we observe, often vaguely, a gap between what is and what could be. Our intuition tells us something better is just beyond the range of our mind’s eye. To build a culture of discovery, we must encourage, not discourage, the passionate pursuit of hunches (no matter the origin!).
    14. Metrics
      1. Knowing why something is profitable is often as valuable as knowing what is profitable. For this reason, a business must also develop measures that help it understand the drivers of profitability. Prices and profit and loss tell us what people value and the best methods and resources to satisfy those values. They are also the primary indicators of whether we are doing the right thing as a company. In a true market economy, one in which prices are allowed to freely adjust, profit and loss is the market’s objective measure of the value a business is contributing to society. To succeed, a business must not only develop profit and loss measures, but also determine their underlying drivers, in order to understand what is adding value, what is not, and why. This knowledge informs its vision and strategies, leads to innovations, creates opportunities to eliminate waste, and guides continuous improvement
      2. The most valuable measures keep us on track in advancing our vision by enabling us to identify opportunities and problems, and by stimulating innovations,
      3. A successful organization 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
      4. When measuring, accuracy should always be emphasized over precision. As we use the terms, accuracy is the degree of correctness that creates value. Precision goes beyond that, to near perfection. Perfection, thus, is thus the enemy of progress
      5. Most decisions should be made using marginal analysis. This requires understanding the difference between costs and benefits that are marginal and those that are not, such as sunk costs. Only by making decisions on the appropriate margin will a business consistently enhance its profitability and eliminate waste. That margin will vary enormously depending on the decision.
    15. Other
      1. ​Charles father, Fred, founded what would later become Koch Industries. When Charles joined in 1961 it had a net worth of about $21 million and as of 2015 the number has reached an approximate $100 billion. Father always stressed integrity, humility, character and the fact that adversity is the best way to improve your character and to learn. His father put them to work full-time when he was young following that his son would never become a country club bum
      2. Since Charles took over, they have reinvested 90% if their profits and aim to double profits every 6 years (~12% annual growth)
      3. Their strong balance sheet insured their suppliers that they would pay in full and promptly. Their goal was always to be the counterparty of choice
      4. Corporate welfare is damaging because it limits competition, innovation, and customer options
      5. Koch makes acquisitions when they can provide additional value through their internal capabilities, can improve existing businesses or provide new platforms for growth. I often think of what we do as bricklaying. Or perhaps more precisely, stonemasonry. Once a stone has been carefully selected and set, it shapes a new space in which the mason can set yet another well chosen stone. Each stone is different, but they all fit together to create a framework that is mutually reinforcing
      6. Getting the right people was Charles’ main focus from day one
      7. Creative destruction, while painful for some, is a net positive for society while corporate welfare is a net negative
      8. The man who understands principles can apply his own methods, the man who tries methods, ignoring principles, is sure to have trouble
      9. Deciding the order in which to do things can be just as important in deciding what to do. Three step process: quantify, simplify, prioritize
      10. Hiring, retaining, teaching, and inspiring people is one of the most important functions of the organization. You should aim to always hire virtuous people regardless of open positions. Coach employees to be the best that they can and consider moving them around within the company if their skills aren’t lined up with their role
      11. Avoid entering into partnerships without an exit mechanism
      12. The apprentice model has been extremely effective at teaching newer hires. There are 4 stages – I do, you watch; I do, you help; you do, I help; you do, I watch
      13. Every organization has its own culture. If that culture is not created consciously and purposively, it will degenerate into a cult of personality or an anything goes environment. You can never think of yourself as too big or too good to fail. Koch’s culture comes from the framework of the free society, where innovation and productivity thrive – to the degree that the framework is upheld. The second category is the theories of philosophers and psychologists whose behavioral prescriptions strike me as refreshingly reality-based – thinkers such as Hayek, Polanyi, and Maslow. The third is my own life experience, which was spent working with all different kinds of people.
What I got out of it
  1. An amazing look into what has turned Koch from a $21m operation in the ’60s to an over $100b organization today. Simple (but not easy) principles which are scale invariant, win-win, sustainable, and adaptable. An organization is a mini free-society and what works at the largest level of society, works just as well at the level of organizations. Treat people as they want to be treated, be trusting, reward people for the value they create

Cable Cowboy: John Malone and the Rise of the Modern Cable Business by Mark Robichaux

Summary
  1. Malone is considered the grandfather of the cable industry but many also saw him as a rapacious, Machiavellian bully. He skated close to securities laws violations and extracted a price for the progress he offered, much like industrial powers Andrew Carnegie or JP Morgan before him. He had the power to decide which cable networks survived, he defied regulators, and he crushed competitors. And all of this he did brazenly.
Key Takeaways
  1. Instead of taking a cushy job, Malone chose hardship and a pay cut to join TCI, an obscure company that had lurched from crisis to crisis for the preceding 20 years. Bob Magness, a former cottonseed salesman and cattle rancher used a wobbly foundation of brinkmanship, bald faced gambles, and abundant debt to build TCI into the fourth largest cable provider in the US. Malone had picked TCI because Magness, fatigued and running out of luck, was ready to relinquish power and let a new man run the entire show – and because, if Malone could make it work, he might become extremely wealthy. TCI, which had become a publicly owned company in 1970, might be a diamond in the rough. “I can’t pay you very much, but you’ve got a great future here if you can create it,” Magness told Malone. Malone was more of a treasurer than the president his first few years at TCI – fending off lenders, raising money, talking to analysts, and more.
  2. Malone started at TCI and helped make it a powerhouse through acquisitions and financial engineering. The structures of the dals were exotic, and his financial alchemy often befuddled Wall St. and investors. The flurry of complex mergers, acquisitions, stock dividends and spin-offs clouded the picture of the company’s true performance, which was phenomenal by one measure that counts in almost all business: shareholder value. A single share of TCI, purchased at the 1974 low of 75 cents was worth $4,184 by the end of 1997 – a 5578 fold increase. His shareholders got very rich alongside Malone. For Malone, it was a noble, if not moral achievement, the fruit of his enormous capacity to deduce and strategize
  3. Magness was a master at reading people – he got Malone on board by playing to his desire for control over his future and freedom to lead. His wife was also an astute business partner, cotton raiser and learned to listen rather than talk – reading what a person wanted in every negotiation
  4. Learned of cable antenna TV (CATV) and started it in Memphis, Texas. If pulled off, he would be able to charge his neighbors a monthly fee for the television service – which he would get free of charge, basically pirating the programming from the TV stations themselves without paying a cent. He directed the construction, climbing the poles himself to string wire, while Betsy deciphered the finances and took service calls at the kitchen table. He invested everything he had, and still he had to go into debt. He sold this operation a few years later at a handsome profit. Tax laws made it attractive to reinvest as cable operators could gradually write off the cost of their systems over a number of years, allowing them to reduce the leftover profits they reported as earnings and thereby sheltering a healthy cash flow from taxation. And once they had written off most of the value of a cable system’s assets, they could sell it to a new owner, who could begin the tax-eluding depreciation cycle all over again.
    1. Don’t need to be a genius if you can see and place yourself ahead of a wave
  5. Magness never wrote a memo but the headquarters in Bozeman were Spartan and this frugality never left Magness or Malone. By the mid-1960s, Bob Magness had realized the potential of community antenna to fill a vast need; he likened cable to the oil rush days in his native Oklahoma and Texas. It was genius, really, to anyone who took the time to figure it out. Cable TV systems generated bundles of cash from installation charges and monthly service fees. Most of the money was plowed back into the companies, with hardly anything going to pay dividends to shareholders. This high cash flow could service an immense amount of debt, which was used to buy more systems. The companies paid hardly any taxes because of the high depreciation on the equipment – the average cable system enjoyed a profit margin of 57%, far better than most businesses. Because of this structure, and the tax incentives, TCI had to keep expanding, no matter what, buying up new cable companies to start the write-off process anew and build cash flows. To fund TCI’s expansion, Malone courted companies with capital to invest and an abiding interest in cable – but no expertise. Malone used different classes of shares with differing voting rights. A standing joke around TCI was that if TCI ever did report a large profit, Malone would fire the accountants. Malone had to “teach” the street what was really important – there is a big difference between creating wealth and reporting income. A focus on cash flow rather than reported income was hard for most to accept and was controversial for decades but those who invested alongside Malone would come to benefit greatly. He always pushed a long-term mindset and time horizon.
  6. The next step from owning cable that delivered the programming, was to own a piece of the cable channels themselves, thereby sharing in a whole extra upside. This way, TCI could own both the pipe and the water flowing through it. Vertical integrating of companies would become an awesomely powerful and controversial tool in building TCI. TCI came to own parts of BET, MTV, the Discovery Channel, and many more
  7. Malone was able to be patient when things got too expensive, building up cash reserves, making smaller acquisitions, and waiting for prices to normalize after the buying frenzy dried up.
  8. Malone’s father was gone a lot, had very high expectations for John and John wanted to prove himself and gain his acceptance. He did this in school (especially math), through track and field, and other entrepreneurial adventures. His father always recommended “guessing at the answers” before he saw them. Guess before you figure them out helped him develop an intuition and make split second decisions and was an important weapon of his – allowing him to “see” the answers before others did.
  9. Malone worked for Bell Labs out of school and focused on economic modeling and proposed that AT&T to shift its debt-to-equity ratio, taking on more debt and buying back its own stock in the market
  10. When Malone moved to McKinsey, he started by interviewing everyone from the senior ranks to the new hires. What works? What doesn’t? How would you fix it? Over time, Malone found that if he interviewed 30 people or so and listened intently, themes would emerge. The best ideas were sometimes hidden, or they were lost on senior executives. By laying the patterns bare, studying in detail the disparate parts – not unlike disassembling a radio – he learned how big corporations don’t work. It was not rocket science, Malone realized, you simply take the best ideas from anyone who has them, polish tem, and serve them up to the chairperson. His mind was like a spread of glue – it held fast any concept or pattern it encountered.
  11. Main rule he ruled at McKinsey: listen intently
  12. Always ask the question, “if not..?”
  13. Loyalty is more important than anything else
  14. Malone’s strategy was simple: get bigger
  15. Malone, like Magness, didn’t believe in memos. No paper passed from his desk to his underlings. No executive sought to curry favor or engage in the sort of Kremlinesque politics that caused ulcers in so many midlevel executives. Communication was direct, effective, and efficient. Every Monday morning, Malone sat with his closest executives at a broad round table, to figure out a way to squeeze more out of TCIs growing cable kingdom.
  16. The TCI men were cable cowboys. Though the term was repeated in derision by the bankers and politicians who coined it, the TCI team wore the nickname like a badge
  17. Malone liked to use naval metaphors, such as bulkheads, to describe the setup. Large ships are designed to withstand battle damage because they have watertight bulkheads, separate and self-contained compartments that can be sealed off to prevent an injured vessel from capsizing. You can take a torpedo in any one part and still stay afloat. With each new system he bought the debt was secured by a TCI subsidiary, not by the parent company. So, if the cable system defaulted on a loan, only one subsidiary would be threatened. Another way Malone eased risk was to spread it out among an ever-broadening array of partners, thereby protecting TCI and enhancing its influence in the industry at the same time. Aside from the cable systems that were wholly owned by TCI, the company was a minority partners in more than 35 cable companies, all of which got the same price breaks in programming that TCI got – which amounted to as much as a 30% discount.
  18. Importance of courage
    1. In the early days, TCI was struggling financially and Malone met with the main lenders to ask them to bring down the interest rates because of the healthy cash flows. They countered instead by proposing to raise the rates and Malone told them they could have the keys and raise if the interest rates if they thought they could run the company better than he. They backed down and gave TCI some room to breathe
    2. Malone avoided acquiring at sky high prices during bubbles but once it burst, scooped in with a vengeance. Malone relished the role of bargain hunter amid the spoils of bad deals made by his competitors. Was able to wait without tiring of waiting
    3. Later on, Malone and Magness cut several deals that allowed executives to own cable systems privately, then eventually turn them over to TCI. For Malone, it was a way not only of compensating his top employees as the values grew but, more importantly, to teach them. “Guys will understand a cable system a hell of a lot better if they have skin in the game.” Critics may have judged the deal as enriching insiders, but Malone paid little attention. Malone’s attitude was: you don’t like the way we reward management? Don’t buy the stock
    4. By 1986, TCI was beginning to run the way Malone had wanted it to run – highly decentralized. He had cut the company into 6 separate operating divisions, each nearly autonomous, with its own accounting and engineering departments. When you’ve got it running right, when you’ve got it decentralized, when you’ve got it structured properly, it’s like flying the most powerful fighter jet in the world
    5. One of the hallmarks of Malone’s management style was to leave the founder in charge. If you buy a property and find a manager motivated by ownership in the company, keep him or her in power and trust him or her implicitly
    6. Forget about earnings: what you really want is appreciating assets. You want to own as much of that asset as you can; then you want to finance it as efficiently as possible. And above all else, make sure that the deals you do avoid as much in taxes as legally possible. And then some.
    7. Never sacrifice convictions  at whims of others, no matter what the price
    8. Instead of high salaries, paid in equity which helped align incentives
    9. The idea, Malone liked to think, was to collaborate with your enemies – especially your enemies – to avoid the large and costly fight of real competition. It’s like mutually assured destruction: both sides could really hurt the other if they did something really stupid. We have to treat each other with civility to avoid all-out nuclear war.
  19. Redstone’s motto: content is king
  20. Tough times in the industry created incredibly tight bonds among the people at TCI
  21. Cable franchise essentially a legal right to a local monopoly
  22. The Cable Communications Act of 1984, the first national legislation establishing government authority over cable TV, ushered in a new era of growth, opening up financial markets, programming ideas, and billions of dollars in untapped revenue to cable. The law also kept the giant phone companies at bay, forbidding them from owning cable systems in their service areas. Incredible bidding wars ensued between cable operators and telcos. While cable had a fatter pipe, phone companies could offer cable firms badly needed capital and world-class expertise in switched, two-way communications. The first big move by a Bell came just two weeks after Malone made his 500-channel pledge. Both cable and telcos wanted to deploy similar technology but over separate sets of wires: cable companies over their thick coaxial cable lines and telcos over their twisted-pair copper networks. Coaxial cables offered orders of magnitude more data to be sent than the high speed lines of phone companies.
  23. “Malone is the kind of guy you want to run through walls for”
  24. “I’d gladly give my life to save his” – Ted Turner
  25. Used scale, penetration to get discounts and ownership of channels. The more horses Malone bet on, the likelier his chances of winning – BET, MTV, QVC, CVN. By 1988, TCI generated $850m in cash. Though it had no earnings, it had more cash flow than ABC, CBS, and NBC combined.
  26. Malone’s incredible commitment and focus had a massive strain on his family life. He also made enemies because he was seen as a bully, as taking a disproportionate share of the wealth he created, was unrepentant and unabashed about his and TCI’s clout
  27. Set up Liberty to prevent regulation, anti-trust, but also to make him very rich as he had 20% ownership. Used tracking stocks often – an interest in the earnings of the company but don’t own the underlying assets.
  28. After the 1992 regulation, Malone came up with the “500 channel” vision and interactive TV
  29. Maine and his boat were Malone’s retreat. Escape is necessary. Getting away gives you a new perspective and makes you more human. When you’re running a large corporation, you’re not able to show your human side all that much. It’s just not productive.
  30. Don’t chase too many rabbits simultaneously – know your main goals and focus on them intently until you reach them or find a more important goal to focus on
  31. Malone believes his greatest weakness was allowing his loyalty to get ahead of performance.
  32. One of the TCI insider’s favorite analogies for TCI’s problems was that TCI was a gas station company acting like a pipeline company. Pipelines deliver fuel in bulk. But gas stations sell it to retail customers, a far more service-oriented business. Customer service would win the day, and no one could argue that TCI didn’t need to pay more attention to its customers. Running a pipeline business is a pretty easy business – you just turn on a pump. Running gas stations is a really hard business. Hindrey wanted to put marketing and purchasing decisions back in the hands of local operators. You market from the bottom up, and not from the top down. What works in Bozeman doesn’t work in Birmingham. He also demanded to see copies of customer complaints for weeks at a time
  33. In June 1997, Bill Gates became cable’s savior in one simple, decisive move: he had shocked Wall St. by having Microsoft invest $1b in cash in Comcast at the behest of Brian Roberts. Until then, cable had been left for dead; the reregulation effort had crimped cash flow, the industry faced huge investment to go fully interactive, and cable stocks were near all-time lows. Suddenly everyone wanted to know the answer to the question: just what does Bill Gates know that we don’t? Gates had bought on the cheap and though he would be involved in the coming years, Malone and others were careful not to let Microsoft get too ingrained by having their software become the default on cable top boxes.
  34. Malone had a “3-D chess” type of mind – truly has the hologram in the head
  35. If you can get scale economics, you can get the costs down. If you get the costs down, you get the scale economics. It becomes a self-fulfilling prophecy. If you get the scale economics you can develop applications that are really important to a lot of people. If you can get applications that are important to people, you get people to buy the boxes, and you’ll get more scale economics
  36. Malone almost always reached out directly to deal. He would pick up the phone and reach out to the other side and look for the common ground where he could put together a mutually agreeable deal – win/win
  37. Malone Family Foundation – to promote the secondary and liberal arts education of the most able young men and women of our society and train such individuals as future leaders of society; acquire and preserve land and open space, preserving forever Nature’s natural and pristine beauty
  38. Malone was a man who was fiercely proud of what he had accomplished. A man who believed that wealth creation was a noble, moral achievement and believed the definition was not freedom from obligation, but freedom to choose which of those obligations to take on, which roles to play in business and in life.
  39. TCI made wealth not by pretending to be the best cable operator but through investments and complex financial engineering.
  40. Once TCI was sold to AT&T, Malone wanted to created separate stocks for the stable, dividend paying business and the more growth-oriented businesses. He wanted, as Jack Welch had done at GE, to create autonomous units with a total delegation of operational parameters within budgeting controls. If you do these things, you’ll have a great company and you will maximize shareholder value. Malone had pulled off one of the largest sales in the history of telecommunications and the IRS had to treat it as a tax-free stock merger. Basically, Malone had exchanged his personals take of $1.7b in TCI and Liberty for $2.4b in AT&T and Liberty stock. Malone always paid as little in taxes and as late as possible. It is my job to save as much of shareholder’s money as I can
  41. Later, Malone got into raising cattle. He loved the inherent efficiencies in hybrid vigor, the known improvements in growth or yield in one generation of hybrids over their parents. The idea is to have a 1,000 pound cow producing a 550 pound calf at weaning. She is more efficient. The smaller the cow, the less grass she eats. If you get a 2,000 pound cow producing a 300 pound weaning calf, you are doing it the wrong way. He also bought a ton of land and the basic idea was to own land in pretty places that haven’t been ruined yet and to not develop it. The elements of success in cable could also be applied to buying land: scale, timing, and efficiency. Almost all of the land and ranch purchases by Malone had a single element in common: conservation easements, which allow landowners to take charitable tax deductions if they opt to never develop a property.
What I got out of it
  1. The innovation, courage, focus, and hard work Malone exhibits in building up his empire was fun to read about. How he was able to stay ahead of the game, know what the important things were and focus heavily on those, and waiting for the right time to pounce are all admirable. His hard-nosed, no bs fashion earned him many enemies and run-ins with government regulation

The Farmer From Merna: A Biography of George J. Mecherle and a History of the State Farm Insurance Companies of Bloomington, Illinois by Karl Schriftgeisser

Summary

  1. The life of George Mecherle and his founding of State Farm Insurance

Key Takeaways

  1. Mecherle’s ancestors were German farmers and immigrated to America, eventually settling down in Bloomington, IN. The rule of George’s household was integrity. It was their duty to become trusted members of the community. George showed early signs of being sharp, independent, a leader, a potential baseball star, a “doer” in whatever he was responsible for
  2. George was not content to do things one way just because that was the way his father, or anybody else, did them. He was always studying and reading about what the other fellows had done
  3. Left a couple jobs just because he didn’t like how his bosses ran the business. He wanted to use skills, his farmer mindset, and his connections to form a statewide auto insurance to the farmers of the state of Illinois, at rates which they could afford. He worked tirelessly to bring his farmers the lowest rates that could possibly be justified. George became so obsessed with his idea that he eventually became a “pest”, wanting to discuss all aspects of insurance with anybody that would hear him out.
  4. There were three provisions that were fundamental foundation-stones of State Farm which were diametrically opposed to the standard methods of automobile insurance: the clauses setting up the membership fee, the premium deposit, and the six-month term of insurance. The membership fee exempted people from further membership fees for similar vehicles. The premium deposit got the customers to lower their risk profile as they had some skin in the game. The six-month term of insurance allowed State Farm to adjust rates as needed, this allowed them to be more adaptive than other insurance companies who only adjusted annually
  5. Insurance was the third largest industry in the US in 1921
  6. He had, and this was what counted most of all, the faith and encouragement of his wife
  7. Mecherle had the ingenious idea of installing a theft and movable object collision clause which said that the policyholder would pay for anything less than $10 and State Farm would pay for anything above $10. It was his theory that if a farmer had to pay for minor repairs he would be more careful with his automobile. It also would save the company from a flood of petty claims each time a member scraped a fender or dented a mudguard
  8. From the very beginning, the agency force was the heart of the company. People who are “more than order takers, for the selling of our insurance requires a man of ability to create a demand, sell the insurance, take the application, and complete the whole deal in one call if he hopes to make a success of this business. These men seem to be a rare article.”
  9. In the early days, George sent out a list of 14 questions which helped him determine pretty accurately how the idea was being received around the state
    1. Don’t you think our proposition the best insurance plan for farmers that you have seen?
    2. What did your board of directors think of it?
    3. Would you like to save your friends and the members of your Farm Mutual Ins. Co. some money?
    4. Would you like to make some money for yourself
    5. Are your Farm Mutual members satisfied with Old Line or Reciprocal rates and their method of settling claims?
    6. Would you endorse our proposition if you found, after a thorough investigation, that it was worth of your endorsement?
    7. Will you write to Mr. SB Mason for his opinion of our proposition?
    8. Will you write for information concerning us?
    9. Will you write to Prairie Farm about our proposition?
    10. Did you see our advertisement in the April 29th issue of the Prairie Farm?
    11. How does the fact that Mr. JW Coale wrote 32 applications in two and one half days appeal to you?
    12. How much time could you devote to selling our insurance?
    13. If you had the time to devote to our proposition, could you do as well or better than Mr. Coale?
    14. How soon would you like to have our Special man spend a few days with you to explain the plan to your neighbors?
  10. Great companies always look different
    1. “During the years of its growth to the commanding position of the largest automobile insurance company in the US, the secret of State Farm’s success was a continual source of puzzlement to the insurance fraternity. The incontrovertible figures of its annual statements proved that it was a financial success, and the findings of the examiners for the insurance departments of the various states in which it was licensed to operate revealed no flaws in its method of doing business. But questions were forever being asked. What was the secret formula that allowed this company, almost alone of all automobile insurance companies, to undersell the market and still show such amazingly large figures on the right side of the ledgers? How did it actually work? One obvious answer to the first question was the organizational genius of the “super-salesman” who was at the head of all its operations. In George Mecherle, who had come to the business at a time in life when most men have long since reached the peak of their ability, State Farm owned a chief executive of exceptional talents. He had been at the forefront of every progressive move the company had made, and as the years went by he had chosen those capable associates who had worked so well under his all-seeing direction. Especially in the early years was it true in his case, as Emerson said in a rather larger conception that, “an institution is the lengthened shadow of one man.” But there was really more to it than that. There was, for one thing, the philosophy underlying the institution that was his lengthened shadow. State Farm was different than anything that had preceded it but, paradoxically, there was little that was original in its plan.”
    2. No companies previously had attempted to establish a basis for selective risks, based on geography, age, etc. By taking this information into account, State Farm was able to operate for nearly 40% less than its stock competitors. They charged its members every six-months which was easier for most people at that time to financially handle than the lump sum annual payment other companies required. They also required a smaller unearned premium reserve. And an inadequate, or excessive rate, could be corrected at the end of six months rather than waiting until the end of the year.
    3. Another feature that contributed to operational economy was the issuing of policies by the home office rather than by the agent in the field. Relieved of this clerical work, or of the expensive necessity of hiring someone to do the work for him, the agent could concentrate on selling. Since his income depended on sales, he could afford to work for less than the agent who had to keep an office force.
    4. State Farm policies, once written, were not rewritten and replaced each policy term. This greatly saved expense, work, and time. The same policy remained outstanding until the policyholder bought a new car – and, in those days of agricultural uncertainty, the farmer did not turn in his old Ford or Chevrolet for a new car each year, by any means – or made a major move or change of coverage. This feature was borrowed from the standard practice of life and accident companies; but it had never previously been tried out in automobile insurance companies before
    5. Also borrowed – this time from mail order houses – was another feature, one never before used in automobile insurance but one that had been found efficient in the operation of many accident and health and several life companies. This was the system of billing and collecting renewal premiums by the home office, or by branch offices after they were established. This relieved the agent of the task of collecting renewals, and thus obviated the necessity of compensating him for such collections. This, of course, resulted in a material saving in expense for State Farm, which was passed on to the policyholders. Agents were, however, paid fees and expenses for adjusting losses. This, at first, was on a per diem and mileage basis, but later was changed to a percentage of the premiums, largely for ease of administration.
    6. All premiums had to be paid in cash in advance, avoiding the expenses of establishing a credit system
    7. The most novel feature of the State Farm plan was the lifetime membership fee system. Any person who joined State Farm did so for life, or at least for as long a part of his life as he remained a “good risk.” His membership did not cease even if he should allow a policy to lapse for some time. State Farm’s advantage was that it charged the member the cost of solicitation and the sale of the insurance policy only once. Since State Farm renewal policies contained no provision for new business costs, this factor alone provided a large part of the price advantage which State Farm enjoyed over its competitors. This membership fee, it is interesting to note, was not a premium. It was, instead, an admission and inspection fee. It was not returnable. For this reason, no unearned premium reserve was set up on it. This allowed the company to not be burdened with reserves, typically a big issue for new businesses. But, in this case, new business was paid for by the new clients. The phenomenal growth rate of State Farm could not have been realized without this innovation, and yet the very plan that made this growth possible also provided a price advantage to create this growth
    8. The 80-20 plan was adopted from other insurance companies, where the policyholder assumes 20% of the risk and the insurance company 80%. The sound psychology of this lay in the fact that it gave the policyholder an interest in keeping his losses to a minimum
    9. Mecherle devised a system of classing all automobiles by list price into seven classes, from A to G, rather than having hundreds of different rates for each car. This system was easy to understand and to apply. In the first agent’s manual – a masterpiece of simplicity there was an uncomplicated formula by which anyone could readily determine the amount of insurance that could be written on any car, whether new or old.
    10. Another saving for the policyholder came about through lower average losses resulting from the careful selection of business. The restriction of those eligible to membership in State Farm, and such clauses as the drunken driver clause, not only appealed to farmers, with their more rigid code of morals, but also saved the company money.
    11. There existed no contractual obligation on the part of the company to pay any dividend to the policyholder at the end of the term. This system had the merit of favoring the continuing policyholders and discouraging lapses, much after the system of surrender charges generally in use in life insurance companies
    12. All of these economies, acting together, enabled State Farm to do business in the early days for nearly 40% less than the stock companies!
  11. Created an internal publication to get new policies and any other information across to the nation-wide network of agents and offices. It was directed mostly to the agents and sent them the company message, the news of what the various state agencies were doing, the pertinent facts, figures, and news of the entire organization. It was also a medium for the expression of George Mecherle’s messages – his inspiring talks.
  12. The goal had always been to build an honest insurance company, one focused on service and square dealing, giving to each member equal and just consideration; and to build the organization grounded on the principles of true equality and right-dealing as between men
  13. Even through the Great Depression State Farm continued to grow, thriving in tough times. “We have truly learned that what we really keep is what we give and that the returns are immediate. Therefore, under this new philosophy, the standard of success will eventually be the measure of service given.
  14. The service fee bonus gave each agent an opportunity to participate in that underwriting profit in his respective state in an amount not exceeding 25% of his annual service fee compensation, provided his own business was also profitable. It not only augmented the agents’ income but also provided an incentive for each agent to use care in the selection of drivers to be insured and to render efficient claim service. In placing a bonus fee along with the service fee it makes every agent careful of his record; if an agent secures unprofitable business it puts him on the spot as far as the rest of the agents in that state are concerned
  15. Mecherle was adept at picking high level employees. He demanded and got the same loyalty to the company which he himself gave. He established an esprit de corps that was remarkable and that left its imprint on the organization long after it had grown beyond his wildest imaginings. Most of the roots of the company came back to loyalty – loyalty to State Farm and loyalty to the “Chief”. In the eyes of most people the man and the institution were inseparable
  16. The paternalism of George Mecherle evolved into a scientifically controlled welfare program that approached its human problems on five fronts: physical welfare; financial welfare; morale of the workers; training and education of those who chose to make State Farm a career; other problems not connected with the others
  17. State Farm was the height of enlightened industrialism. The steadiness of employment, the lack of “unrest” among the employees, is traceable in good measure to this system. In a larger city, with more diversified amusements and cultural interests, it might not be as necessary to all concerned as it is in the flat prairie city of Bloomington where, without this self-interested setup, boredom could well result
  18. If needed to shrink, they would wait for employees to retire and then not replace them. “We have a responsibility to our present force. We wouldn’t do anything that would break that loyalty. The big factor in productivity is morale.
    1. Left a red rose on the desk of all employees on their birthdays
    2. Handed out pins denoting length of service in ceremonious presentations. Today, there are also cash bonuses for five-year periods, ranging from five to thirty years’ service
    3. Held “Coke parties” on each floor whenever an employee passes a ten-year service milestone, and all employees who have been with the company for fifteen or more years are honored annually at a special dinner party
  19. “As we have become more independent, we are becoming more conservatively minded. This – I am satisfied – is natural, and comes from maturity. It should be our greatest desire to build for permanency on a sound business policy rather than to attempt too great a volume from this time on.”
    1. Permanency through honesty 
  20. “Our plan is very simple when boiled down to its essence. It will consist primarily in establishing a contact and working agreement between local banks and our agents, so that the bank will finance the purchase of automobiles for deserving policyholders and will accept our policy, with proper safeguards on the loan. Such a plan, when carried to its utmost possibilities, will open the door to a vast new field of business, in view of the fact that two out of three sales of new and used cars are one deferred payment basis. Furthermore, we will be able to retain many policies which we are now losing when the policyholder trades in his old car one new one and finances the deal.
  21. As State Farm was not a factory, they could not be “converted” during WWII. Others said that they should focus on other lines but Mecherle turned a deaf ear. State Farm might lose as much as half its business, he stated firmly, but it would come out of the war as clean as a hound’s tooth and without resorting to diversification. This long-term mindset would pay off only years later when massive pent up demand for new cars, repairs, insurance, and more would be let loose once the war was over
  22. One of the keys to the growth was the fact that since establishment, State Farm paid losses promptly and satisfactorily. In the long run, Mecherle felt, this may have been the greatest factor – this and the confidence of the agency force in the company management
  23. When George was beginning to step away from the business he asked, “The only thing I insist upon is that you do not depart from the membership plan, the continuous policy, the six-month’s premium, and the happiness of our agency force. Those are fundamental. Beyond them there are no restrictions. So, go to it.” He would step away from the business, allowing the new generation to lead but still kept every detail of the business at his fingertips. He kept the facts and figures of State Farm up to the very last minute in his worn loose-leaf books. He knew what was going on in every department. In spite of the growth of State Farm, he still kept his interest in the individual welfare of the staff, and knew the names and personal histories of an incredibly large number of them.
  24. The secret to his success – “A man has to live and sleep with his business if he wants to make a go of it. You have to take it home with you at night, so you can lie there in the darkness and figure out what you can do to improve it. In fact, you have to become sort of a ‘nut’ about it, so that you become so enthused that you will bore your friends talking about it. You have to become a one-man crusade.”
  25. Good character above all else
  26. “An institution is the lengthened shadow of one man.” – Emerson
  27. The greatest troubles we have are what we bring on ourselves
  28. Remember this: every man who accomplishes anything worthwhile in this life will leave behind him many temples still unfinished when he departs this life
  29. From his associates on every level he demanded three things: willingness to work hard, faith in the organization, loyalty to the “spirit” of State Farm. Few were those who did not give him all three in good measure. In return he gave to his associates what he demanded from them. He was no swivel-chair commander, but the hardest worker of them all. His faith in the high purposes of State Farm as an organization dedicated to the service of its members was all-absorbing. And his loyalty to the men and women who were loyal to him and his ideals was legendary
  30. “Things do not happen – they are brought about by careful planning, diligence, application, and direction. The tiny seed planted in the year 1922, which has been nurtured by the sunlight of agency devotion and sustained by the life-giving waters of policyholder persistency, has grown in root and branch – spreading a mantle of service and protection throughout the nation – until today the ripened fruit of its many branches is falling as a benediction into the lives, homes, and hearts of our people.”

What I got out of it

  1. Slow book at times but learned a lot about the George Mecherle and the “honest-first” business he created. There are timeless business and overall life principles that we could all learn from and incorporate into our jobs and lives