Tag Archives: Business

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

No Way to Run a Railroad: The Untold Story of the Penn Central Crisis by Stephen Salsbury

Summary
  1. Behind the scenes look at what really happened in the collapse of one of America’s largest business failures, the bankruptcy of Penn Central in 1970. Because railroads are America’s oldest large scale business, organizations observing what has happened to them has great value in understanding fundamental issues facing American businesses in the 1980s.
Key Takeaways
  1. David Bevan, CFO, warned the chief executives of the merging companies, the Pennsylvania and the New York Central, of many of the troubles which eventually came to fruition. The leaders did not fully appreciate the terrible result from the inadequately planned merger and huge capital expenditures involved
  2. This greatest bankruptcy in world history, one that lead to government entrance into what had previously been a privately owned industry, illustrates ills to which very large corporations are sometimes prone: ineffective top managers, unchecked by knowledgeable representatives of stockholders on the Board of Directors; lack of proper information through accounting of what was going on in the operations; government interference with corporate efforts to find new avenues to profit; and over optimism regarding future expenses in relation to sales
  3. Railroads in the early to mid 1900s had become slow, bureaucratic, and became less profitable because of it. Some suggested that new technology and business practices were the way to go but others saw mergers as the solution to all problems. However, they did not associate mergers with any managerial reforms
  4. Reasons for failure: managerial structure and practices were backward when compared to other large American enterprises; no planning before the merger at crucial operating or managerial levels; it failed operationally; top management rejected advanced planning and modern concepts of business management (budgeting and forward financial planning); diversification did not cause the bankruptcy
  5. Railroads were innovative and revolutionary when they first began, from finance and cost accounting methods, to trade unions, to creating legal corporate entities, to new managerial styles, but they began to ossify in the mid 1900s. Because the capital requirements were so large they cannot be financed as the textile industry had been, by single individuals or small group, and needed investment bankers, stock exchanges and even a financial press. They fostered all these things
  6. One of the mistakes made by the Penn Central top management, which escalated operational confusion, was the failure to decide whether to operate the consolidated railroad on a centralized or decentralized basis
  7. Due to monopoly concerns, railroads were often hindered from investing or helping build other transportation industries. The Pennsylvania was instrumental in founding the predecessor of TWA but was not allowed to move much further than that.
  8. Bevan, Saunders and Perlman were not able to work together effectively although they had great pedigrees and track records. The differing opinions on innovation versus lowering capital expenditures were too great and none realized how small their margin for error truly was. The current management was reluctant to change their managerial and financial/accounting practices and the only thing more painful than changing is the pain that comes from not changing
  9. Railroads most efficient at moving bulky, low value commodities great distances and worst in light weight, high value products. The expansion of trucks and roads ate away at the transportation of high value products from rails
  10. Railroad’s meager earnings and high operating costs meant the stock market weren’t a great option so if they wanted money, they had to sell bonds or issue equipment trusts. Their debt grew to all time highs and low operating profits made paying them off increasingly difficult and any long term planning or investing very hard to do. Bevan had a very tough time in reducing the Pennsylvania’s debts and updating its accounting and managerial practices
  11. After the collapse, Bevan was made the scapegoat and his ties with an investment fund he founded with others called Penphil and his association with Executive Jet Aviation were studied but in the end he was not deemed to have done any wrong
What I got out of it
  1. The Penn Central was the largest business failure in the US up to that time. In retrospect, it is clear that it had very poor returns relative to the industry and coupled with inadequate cash and large debt loads, it’s bankruptcy should not have been a total surprise. Different approaches to management (centralized vs decentralized), top officials leaving, government favoring other modes of transportation, accounting and data processing taken from Bevan and given to Perlman, breakdown of reliable information about the general state of the railroad, there was no margin for error and Saunders (the CEO) never appreciated that fact fully, all contributed to its downfall

The Schlumberger Adventure by Anne Gruner Schlumberger

Summary
  1. The story and people behind the incredible success of drilling and surveying giant Schlumberger. “Conrad was a physicist, idealist, dreamer, man of ideas, and Marcel an engineer, pragmatist  inventor, man of action. They complemented each other perfectly. Together they were able to orchestrate time, talent, and opportunity to put science to work for mankind. In the interest of identifying the hiding places of the world’s storehouse of minerals, they devised ways to measure the earth’s interior parameters in new and effective ways. Their discoveries and inventions made possible and practical the modern industry that now explores for and produces petroleum. In fact, it is fair to say that much of the world’s oil and gas reserves have been identified by methods the Schlumbergers pioneered. Likewise, and not incidentally, their work revolutionized the science of subsurface geology. Their findings, the fruit of their technology, resulted in a quantum leap in scientific understanding of how the earth is constructed and composed. The same technology that has explored the earth’s crust has since given rise to other technologies that have helped to make possible the exploration of space.” Both Conrad and Marcel possessed qualities of leadership that inspired others to follow gladly and meet willingly the most awesome challenges in the interest of their cause
Key Takeaways
  1. Schlumberger made its mark by surveying land for potential oil sites. The black box, or potentiometer, was their breakthrough. It made geophysical measurements based on electrical properties. The grains that made up the rocks might act as insulators, but the electrical conductivity of the rocks was in proportion to the grater or lesser degree of salinity in the water that impregnated them. Therefore, the map of potentials could show significant contrasts even when sub-surface contained no conductive deposits. As the resistivity of porous rocks impregnated with oil or gas was greater than the resistivity of those rocks filled with water, the bore could distinguish between different kinds of strata – this was the birth of “electrical coring”
  2. Schlumberger motto: “Wherever the drill goes, Schlumberger goes” and “First in the field, first in research.”
  3. If the convergence of the scientific and commercial viewpoints is too difficult, it is better to opt for the viewpoint of science. What is essential is that you keep your strength and your serene confidence in the results already acquired and which you must not let go. Science is a great force for peace, for the individual as well as for humanity.
  4. Conrad’s job as a professor was perfect as it gave him plenty of long vacations to read, think and experiment
  5. Father’s involvement: “I agree to disburse my sons Conrad and Marcel the funds necessary for research study in view of determining the nature of the subsurface, in amounts not exceeding five hundred thousand francs. On their part, my sons will agree not to disperse their efforts, and to abstain from research or inventions in other fields  The field of activity is vast enough to satisfy their inventive genius by its investigation: they must devote themselves to it entirely. The scientific interest in research must take precedence over financial interest. I will be kept informed and will be able to express my opinion as to important directions and expenditures to be made or not to be made. The sums disbursed by me are a contribution on my part to primarily scientific and secondary practical work which I consider to be of the highest value and in which I take an interest. Marcel will bring to Conrad his remarkable competence as an engineer and his common sense. Conrad, for his part, will be the wise physicist. I will support them.”
  6. Like Carnegie, the Schlumbergers hired specialists early on that their competitor’s thought were worthless/superfluous. “There were too many parasitic currents, too many disturbing elements; the task was to understand them and to eliminate their interference. IN this situation, an increase of personnel would have been superfluous, and as for employing a full-time geologist, that would have seemed like an uncalled for expense.
  7. Prospecting the salt domes in Alsace was the Schlumberger brothers first success
  8. Between the two brothers a process of osmosis produced a continuous communication
  9. Marcel had amazing focus and passion – “When he finally saw the machine – his machine – finished, there was a kind of joy in the way he took possession of it, examining it with almost amorous care. More than once I saw him, surrounded by his crew, crouching beside some new apparatus for half an hour, even an hour; and when he straightened up to his full height, his young assistants (who, out of deference, had crouched along with him) unfolded their limbs as if stricken with rheumatism
  10. Gained respect through publications in specialize journals, by omission they lied a little. Early on, “our modesty would kill us,” Marcel said. Process, quality, reliability where of utmost importance early on, never growing too fast
  11. In a factory or office, team spirit dwindles as the work is fragmented and the task of each worker becomes more limited; the pleasure of contributing to a common task is seldom found there. But our equipment was so uniquely conceived and built that, on entering this ill-defined market, it did not lose its individuality. The tie between the equipment and the man who made it was never cut. Because everyone contributed on a footing of equality, and because the discussion of ideas, methods, and techniques was given free rein without the constraints of a hierarchy to stifle spontaneity, a rare cohesion welded “thinkers” and craftsmen, “administrators” and prospectors, into a solid unity. The prospectors, coming back from Alsace or the ends of the earth, could go straight in to the “bosses,” tell them about their work and experiences, voice their criticisms, make their personal problems known. T Hey communicated to the engineered  technicians, and secretaries a feeling of the wide-open spaces – of adventure. What added to that cohesion, I think, was the low ratio of workmen to engineers – four or five to one – whereas in industry it was from fifty to two hundred to one. And if, as was true, my father and my uncle quite naturally practiced an “enlightened” paternalism, it was just true that the company was a shop unlike others. It was different, in fact, even in the day to day work. Everything went along as if fun and laughter were part of even the least likely tasks.
  12. Marcel and Conrad filled their time by “observing tiny details” others would typically miss or ignore
  13. Every creative effort is in itself a small revolution
  14. Russia was an early supporter but it was dangerous, primitive. The present  They rejected it. The future? They no longer believed in it
  15. Nobody saw the revolution that electrical “logging” would have on the oil-producing industry
  16. Nothing succeeds like success. One success brings on another
  17. Schlumberger changed its contract from fixed annual payments to one of unit of operation. Because of the nature of the process, speed was of the essence. In the US, the client alerted Schlumberger center, read off his coordinates – well, depth, type of operation – and within half an hour the crew was on its way. As soon as the site was reached the truck was backed up to the well, the various pieces of equipment put in place, the sonde attached to the end of the cable, and the operation was begun. Velocity was of the essence which is why the labs were mobile and near the drilling operations
  18. The men were commonly working t the absolute limit of their strengths. A recruitment policy, adequate material resources, and a large degree of autonomy were urgently needed.
  19. Success – the much talked of opportunity – is nothing but work and more work
  20. Marcel – “Finance is no tour business and I don’t believe in it”
  21. The success of Schlumberger is due largely to the belief – originated by the founders – that reservation and engineering are the lifeblood of any
What I got out of it
  1. Fun to learn more about Schlumberger – research/science/engineering always more important than the financials focus on velocity, serve a niche and serve it damn well – who knows how large the market can become, be a hands on manager who is involved in the day to day

Am I Being Too Subtle: Straight Talk From a Business Rebel by Sam Zell

Summary
  1. Sam Zell discusses what has made him successful in building his commercial real estate companies as well as launching the trillion dollar real estate investment trust and other companies in energy
Key Takeaways
  1. Willing to be gruff in order to be direct. Has a sense of urgency and doesn’t understand why others don’t
  2. Willing to sacrifice conformity for effectiveness. Listens to everyone but is willing to do what makes sense to him. No assumptions and willing to act
  3. Sam lives and breathes risk. Always be deeply respectful of risk
  4. In any business, it is all about long term relationships, trust, transparency, always leaving something on the table, sharing the risks,
  5. Reputation is your most important asset
  6. Always keep learning, thinking for yourself and making your own decisions
  7. Sam and his parents escaped Poland just before the Nazi’s took over to settle down in Chicago
  8. Where there’s scarcity, price is no issue
  9. You learn so much from seeing people in their own environments – spend the time and money to travel to meet people on their turf
  10. Being comfortable with rejection is fundamental for entrepreneurs or anyone pushing the limits. However, can only push the limits and go against convention if you know the rules
  11. Started off developing housing in Ann Arbor and after some initial success he expanded to other second tier cities where he had pricing power and limited competition
  12. Jay Pritzker became a mentor and good friend who taught him how to evaluate and think through deals and how to understand risk
  13. Use simplicity as a strategy. Organize your thinking, break each step and decision down to its core and determine what the key is
  14. Bet on people over project
  15. In deal making, speed and certainty are superpowers. Often more even than price paid.
  16. Never underestimate the power of optionality
  17. The essence of an entrepreneur is someone who recognizes a problem and provides a solution
  18. Saw there was a huge oversupply if real estate in the 1970s so began accumulating capital in order to buy properties once the timing was right. In an inflationary environment he got a fixed rate return through his non recourse debt
  19. You can be a genius but if you’re in too competitive a market it won’t matter that much. Spend your time in areas with weak competition
  20. Don’t rely on people unless you understand their motivation and your interests align with theirs
  21. Leaders have to find ways to delegate and find ways to keep level headed. Especially during difficult times
  22. Liquidity = Value
  23. Sam describes himself as a professional opportunist and doesn’t care about external opinions. This was clear when he took over manufactured home corporation which made trailer homes and RVs. People called him names and wouldn’t invest because of the stigma of the industry but he goes to where the opportunities are. MHC, later renamed ELS, has been one of the most consistently profitable companies in the space
  24. Sam has been known as “the grave dancer” after an article he penned with the same title. This refereed more to him giving valuable but rundown assets new life rather than dancing on the graves of dying companies or industries
  25. Didn’t found but helped establish and build up the REIT industry – making it a central holding of most large portfolios and making brick and mortar buildings liquid assets
  26. In real estate, replacement costs are the most important metric because this determines the price of future competition
  27. Mitigating risk comes from understanding all angles and knowing which factors will make or break you
  28. 2-3 years before a country becomes investment grade is when they’re the most disciplined and is the best time to invest in them
  29. Hire people based on whether they’d fit the culture and not on a job description or resume. Once they have the basic skills, you can teach them the rest
  30. Keep your eyes and mind open. Read voraciously, meet with a broad range of people, experience different things, travel and try new things
  31. Do the right thing. When you’re in it for the long haul, there is no other way to act. Deals with a winner and loser rarely are truly successful and likely won’t lead to another deal between the parties in the future
  32. Prize loyalty above all else in self and others
  33. Be able to laugh at yourself and maintain perspective and humility
  34. Search for and make people owners as this makes them go all in and always search for better ways to do something, new opportunities
What I got out of it
  1. Working hard, following your gut, not worrying about what others think about you and having the courage to act on your convictions is key in any pursuit. Always be deeply respectful of risk

Kiewit: An Uncommon Story by Jeffrey Rodengen

Summary
  1. Kiewit Brothers Company was established in 1884 by Peter Kiewit and his brother Andrew but the main growth phase was under Peter Kiewit Jr. Growing from its roots of basic commercial building construction, after 125+ years it is now also in the transportation, mining, water resources, power, oil and gas, underground, electrical, and marine market segments, routinely completing projects for its clients, some in excess of a billion dollars, on budget and ahead of schedule. It is one of the most highly regarded contracting companies in the world because it remains faithful to the corporate goal set in 1946 by the late Peter Kiewit: To be the Best Contracting Organization on the Earth.
Key Takeaways
  1. Intro & Overview
    1. A system of broad-based employee ownership began under the leadership of the founder’s son, also named Peter. Kiewit is now owned by more than 2,000 employee-shareholders and has become a model for employee ownership. This has made the employees treat the firm as their own and has created significant security and wealth for these employee-owners
    2. “Peter Kiewit didn’t just build buildings – he built confidence and integrity. He built leadership. I’m convinced that Kiewit leadership benefited from a superior corporate ethic and a unique mentoring culture.” – Warren Buffett
    3. At Kiewit, you not only have to excel in a wide range of areas of construction and engineering, but you also have to identify, mentor, and prepare your own replacement, your successor.
    4. “The engineering and construction business has an enormous graveyard of competitors that never made the grade. If you set out to replicate the Kiewit Company, you could put as much capital into the business as it has. You could move into corporate quarters that rival Kiewit’s. You could even buy all its equipment and replicate its organizational structure. But, you would not be able to build a culture like Kiewit’s. That culture is the result of the vision of an extraordinary man, carried on and moved forward by extraordinary people. You could canvass the world, recruiting the top picks from Stanford, Harvard, you name it, and you would never replicate the magic and success that is the culture of the Kiewit Company. I am so very proud to be its neighbor.” – Warren Buffett
  2. Building a Foundation: 1884 – 1914
    1. “There is no progress without risk. You can’t hope to develop your maximum potential without taking some risks.” – Peter Kiewit
    2. Peter’s father, Peter, founded the company but it was the son who moved it forward. He didn’t care if the company was the biggest, but he wanted it to be the best. His legacy of hard work, moral integrity, employee ownership, safety, training, and quality endures today.
    3. Early years were difficult as there was much competition in Omaha. When the owner of a large project ran out of money, Kiewit was creative and moved the family into one half of the building, getting free rent and allowing the owner to save enough money to finish the project
    4. At 6, Peter got his first paper route along with his teenage brother, Ralph. Their mother, Anna, would wake them up at 3am to give them breakfast before their route started
    5. The father would include the whole family on the plans and discuss the construction business with them. He would walk his children through what he was doing and why. He was a great teacher to his children. Peter’s mother taught him hard work and resilience. Peter was often worried that if not cautious, companies could allow themselves to get fat, lazy and complacent, and lose out.
  3. Becoming a Leader: 1915-1930
    1. “Although Peter rose to unbelievable heights, he never lost the sense of being a working man. Instead, he reached out to all who would join him and gave them the capacity to help others.” – Rev. Matthew Creighton
    2. Peter created a cost-monitoring system that allowed the company to gage its weekly performance on each job. Peter asked the foremen to regularly submit a record of their actual costs. He then compared the actual costs to the original estimates, allowing him to gage the company’s profits accurately.
    3. “Pete had a fantastic capacity to organize the details. He was far better than I was. If he saw something wrong, he took care of it right away, whether a foreman wasn’t performing up to standard or some other change.” – Ralph Kiewit
    4. When Peter made up his mind he was tough. He would sledgehammer his way through the opposition
    5. Peter eventually acquired 25% of the business and created a new company called Peter Kiewit Sons’, Co. in 1931
  4. Surviving the Depression: 1931-1938
    1. “A business dominated by one man, who makes all the decisions, who is reluctant to deputize responsibility lest his assistants make mistakes, lacks the elements of a permanent organization because it denies men the chance to grow and be ready for the larger responsibilities, which eventually someone must assume.” – Peter Kiewit
      1. Peter’s phlebitis was in fact helpful to him and the company long-term as it forced him to hand over responsibility to other men
    2. “I’d like to remind you that the foundation of our company’s growth and expansion started in the early 1930’s when contracting opportunities in all types of work were minimal compared to what they are today. Intelligent, hard-hitting, no-nonsense policies and efforts separated us from our competitors then – and will in the future if we follow them enthusiastically.” – Peter Kiewit
      1. In 1931, the Great Depression was in full swing. Although many companies were cutting back on their workforce, Peter added to his employee base and took on new types of projects. Diving into highway work ensured the company’s survival during the Great Depression and propelled it forward
    3. “From the beginning I realized I was working for a man with great integrity, competitive drive, rare business and financial talent, and a gift for organizing and inspiring men.” – Homer Scott
    4. Early on Peter sold stock to valuable employees as a means for each worker to have a stake in the company’s success, with the understanding that they would sell their stock back should they leave the company. “One of the reasons our results are better than our competitors is that all of our stock is owned by employees – people who are actively engaged in our business. Each one is, in fact, a part owner of our company and is, in a sense, working for himself. Certainly this should, and I believe it does, provide a definite incentive to our employees and a corresponding benefit to the company.
    5. When it came to making bids for business, Peter told Armstrong, “I never want you to do anything but walk in the front door, plunk down your bid, and, if you aren’t the low bidder, walk out. Never employ that there might be something in it for someone if you get the bid. All of our street and roadwork will be on a hard-money basis, period.”
    6. “As I see it, personal success is being the best you can be. Often, the key to realizing your full potential is the willingness, and the courage, to take a calculated risk. I don’t mean a reckless, impulsive risk, but one in which the prize for success is high and the penalty for failure is not catastrophic. Even failure often contributes to your growth. Improvement is seldom made without reaching beyond your abilities and trying to do something you have never done before. Sometimes the effort fails, but it is the reaching, the striving, the divine discontent that generates greater strength and knowledge.” – Peter Kiewit
    7. In 1935, the company did not realize a profit. It did, however expand its equipment holdings, and, as Peter said, “More important, we hired, trained, and developed a number of able people – many of whom became valuable employees, officers of the company, and major shareholders.”
  5. Enlisting in the War Effort: 1939-1945
    1. Peter did not like yes-men, he wanted his men’s ideas
    2. Had great leadership abilities and temperament. During the Fort Lewis project, he told his men, “Just remember, a big job is no more than a lot of little jobs put together.” Peter, more than anyone, rolled up his sleeves and took action. He became familiar with everything that was going on, evaluating the performance of each supervisor, setting up incentive programs, recognizing outstanding performance, and patterning the rest of the operations after those who were getting the job done. He weeded out poor performers; he changed the entire feel of the job. Everyone knew what was expected of him. PKS earned a reliable reputation from the US government and received numerous contracts after the Fort Lewis project
    3. Reflecting on his desire to maintain a low profile, Peter quoted his father, by saying “When you harvest wheat, the tallest stalks – those that stick up their heads – are the ones that get the scythe.”
    4. As a leader, Peter stood behind his men when he believed they were right. Even when it was the US government he stood up against
    5. Peter had read about the building of a similar dock which needed very deep piling in a magazine. Using the article for reference, Peter hired several people who had worked on the previous dock. Dale Clark commented, “That was typical of Pete. He had the ability to prepare and to hire people who could prepare.”
    6. Peter lost 75 pounds from his heaviest and would later tell workers, “Good health is your most valuable asset, because without good health, little else has any significant meaning.”
  6. Branching Out in Peacetime: 1946-1956
    1. As the pressure of the war effort tapered off, Peter recognized that the company would be entering a period where, once again, highway and commercial building work would dominate its business. Another key trend was the growth and development of the western states and the western states needed water
    2. Key Kiewit philosophy:
      1. We improve as we learn
      2. How to secure work at the right price
      3. How to build work at the lowest cost
      4. How to staff our work with the right people
    3. Peter divorced his wife, Mary, of 28 years and 2 years later married Evelyn
    4. Peter always sought to make a point through action rather than words. He was always looking for a way to improve the company’s operations, a reflection of the personal pride he took in PKS’ work and his desire to train young engineers by example
    5. In all operations, safety has always played a crucial rule. Peter’s motto was “Think Safety,” and he became a leader in the industry for safety performance
    6. The PKS annual meeting began in 1944 and its purpose was to review the previous year’s operations, determine the causes for the satisfactory and unsatisfactory results, and improve the ability to estimate and build work
    7. It has always been our policy to fill vacancies by advancing qualified employees whenever possible. I’m happy to say that the number of occasions when we have had to bring people in from the outside for a particular job is negligible, and this should occur even less frequently in the future because of the fact that we are making headway in developing more and better employees.
  7. Growing at Home and Abroad: 1957 – 1979
    1. “I believe that a company cannot stand still for long – either it goes ahead or slides back.” – Peter Kiewit
    2. A key driver of the company’s growth during this period was the development of the Interstate Highway System
    3. Bob Wilson was named President in 1969 after Peter had led the company for nearly 40 years but, as Director Lee Rowe joked, “Bob had to arm wrestle Peter for the job each morning for the first several years.”
    4. On his death bed, Peter told his third wife, “I never dreamed that I would be able to accomplish so much in my life for myself and for others.”
    5. A plan put in place before Peter’s death called for PKS to be purchased and solely owned by employees
    6. Peter had an uncanny ability to listen to those who had problems and at the end of the discussion to put his finger directly on the solution
  8. Transitions in Leadership: 1979 – Present
    1. “Before you can go on to a position of greater responsibility, someone must be trained to do your job, unless the job you are doing is not an essential one. If any of you fellows wants to admit that your job is not essential, you do not need to do anything about trying to see that anyone else is trained for your job.” – Peter Kiewit
    2. Peter looked two successors ahead. He appointed Bob Wilson to immediately succeed him but his foresight in training Walter Scott Jr., 11 years Bob’s junior, came to bear when Wilson experienced heart issues and died soon after Peter
    3. Walter Scott made several major acquisitions, the biggest being Continental Group in a deal for $3.5b. At the time it was the largest public company to be taken private
    4. Scott always understood that if he picked talented people and gave them room to run, they would make the company successful
    5. In order to maintain liquidity for repurchasing stock from retiring or otherwise departing employees, Scott created two tracking stocks. Kiewit Diversified eventually spun off and became Level 3 Communications and Stinson remained head of the construction, mining and materials business
    6. Design-build was another area that Stinson built up. Prior to 1990 it made up less than 1% of the company’s business but after that, at times, has accounted for half of Kiewit revenues
    7. The power market also became a major portion of Kiewit’s focus during Stinson’s service
    8. The Board knows what the questions are and oftentimes know the answers and certainly don’t need to spend a lot of time on operational issues, which some boards do. This board has a good balance between reflecting on results and expectations. There’s a good amount of time spent on “how are we doing ” and on “what’s the backlog?” as well as the kind of projects we are working on, where we are making investments in new fields, and how to create future opportunities
    9. Board member Mogens Bay depicted Kiewit’s employee loyalty during the company’s 2003 Annual Meeting. He noted that Caterpillar provided the same construction equipment to every competitor as it did Kiewit, and there was no advantage from an equipment standpoint. The advantage that Bay found in Kiewit, however, was present in the employees’ collective experience, their passion for their work, and the company’s culture of employee ownership.
    10. Kiewit has long been recognized as without equal in their focus on the training and development of people throughout the organization
    11. In 2000, Bruce Grewcock decided to try to separate Kiewit from the competition through quality, adopting the motto “Right the First Time”
    12. Peter continually admonished his employees to train and mentor a successor. Taking that principle to heart has been a key to ensuring that the company always has employees ready to take up the mantle of leadership
  9. Investing in New Ventures
    1. The 1980s saw a period of diversification for Kiewit as it made significant investments in ventures outside its core business including MAPCO, CalEnergy, Continental Can, Level 3, Metropolitan Fiber Systems – eventually leading to a reorganization into Kiewit Construction Group and Kiewit Diversified
    2. The difficulty with acquisitions is that every company has its own history, its own traditions, and its own unique culture. A healthy corporate culture can be a magic intangible that makes the difference between a winner and a loser but it is hard to instill that in another company
    3. Kiewit invested in, grew and spun off several major companies in this time
  10. Building Places to Live, Work, and Play
    1. Kiewit diversified geographically as well as their construction focus – doing residence halls, hotels, offices and business parks
    2. Kiewit’s core competencies were fixed-price, low-cost and well-planned operations
  11. Expanding and Restoring the Transportation Infrastructure
    1. From the ’80s to the 2000s, transportation was the largest portion of Kiewit’s business – more than $37b in contract revenue
    2. Design build grew from less than 1% of business prior to 1990 to as much as half of Kiewit’s revenues by the 2000s. Clients were increasingly interested in having a single point of responsibility for all aspects of project delivery
    3. Titles are left at the door and we all do what it takes to get the job done
    4. Kiewit has constructed more lane miles of interstate, highways and bridges than any other contractor and the company’s capabilities are reinforced by the largest privately owned fleet of construction equipment in North America, which allows it to mobilize resources rapidly for any size project
  12. Clear and Abundant Water
    1. “The number one principle I follow is to treat people with respect. The second is to work closely with them to emphasize their strengths and to support them where they need training or support.” – Richard Geary
    2. Kiewit has built some of the most significant earth, rock-fill and roller compacted dams in the country, as well as reservoirs, transmission through pipelines and tunnels and numerous water and wastewater treatment facilities
  13. Meeting Society’s Needs for Energy
    1. Kiewit has grown their energy business drastically over the decades, focusing on geothermal, hydro, nuclear, coal, waste-to-energy, coal, gas and more.
  14. Developing Our Natural Resources
    1. Reclamation efforts have taken a front seat after a mine has run its course
  15. The Formula for Success
    1. “The “four legs of the table,” if you will, are the way we’re owned, the way we’re organized, the way we focus on the basics, and the way we focus on people.” – Ken Stinson
    2. The test of a strong cultural statement is its longevity. The imperative to be the best contractor on earth has survived virtually unchanged for more than six decades and is deeply embedded in the corporate culture
    3. Stock ownership is limited to active employees and they must sell it back to the company when they leave or retire. The basic book value formula for determining the year-end stock price has not changed since the late 1940s. Individuals purchasing stock do so at the formula price; there are no stock options or discount programs. When stock is sold back to the company, it is sold at the then-current formula price. For a stock program like Kiewit’s to be successful, annual growth in the stock value must be consistently better than other investments. Since the inception of the employee-ownership program, the company has not experienced a losing year. The average annual total return on Kiewit stock has significantly outperformed the S&P 500 for a long period of time.
    4. The company strives to ensure that each employee’s stock ownership is in line with his or her level of responsibility and performance and typically have 3-5 years of Kiewit experience before they are first offered the opportunity to purchase stock
    5. At the time of Peter’s death in 1979, there were 808 employee-owners. The wisdom of his belief in the importance of employee ownership to the success and survival of the company was validated upon his death. There were no issues of ownership transition. The owners were the employees, and Peter’s ownership interests were purchased by the company. There were no issues of leadership succession. The leaders were in place, were major stock holders, and had been groomed for their position.
    6. While district managers basically function as if they were running their own construction company, Kiewit’s approach to decentralization provides for certain business functions to be centralized at corporate headquarters in Omaha. These include tax, finance, legal, insurance, and other vital support functions
    7. Competition between districts is fierce. Each district manager begins the New Year with the resolve to “sit at the head table” at the next annual meeting. Because Kiewit is not dependent on any one single market, it has allowed districts to survive downturns without having to lay off personnel or accept unprofitable work. Another important advantage of a decentralized strategy is the ability for two or more districts to form an internal joint venture. Often, the best joint venture partner for large complex jobs is another Kiewit district. The districts share in the job results based on their level of participation
    8. Essentials of successful contracting: getting work at the right price, building work at the lowest cost, taking care of our assets
    9. Another significant element of Kiewit’s culture has been a focus on the basics, often referred to as “the fundamentals.” Like striving to be the best contractor on earth, the fundamentals are easy to understand but difficult to execute well. “The one interesting thing about the fundamentals for most businesses is that they’re not a secret. What Sam Walton did with Wal-Mart and what Peter did with our company is so basic that to the untrained eye, it appears anyone could have done it. What made them different is that they understood the importance of execution of the fundamentals – and the importance of having talented and motivated people.
    10. Taking care of assets was originally intended to mean conserving working capital and taking proper care of construction equipment. Peter would later expand that meaning, citing a contractor’s reputation as a valuable asset. However, through the years, he gave the greatest emphasis to people and their talents as the company’s most valuable asset.
    11. Kiewit is also admired for its organized and methodical care of construction equipment. The company has the largest privately owned construction fleet in North America. Its 17,000 units have a replacement value in excess of $2b
    12. Kiewit has long prided itself on the way it focuses on people. This has led to employee loyalty unusual for the construction industry, with employees often staying with the company for decades-long careers. Among the many ways the focus on people is expressed is in its safety program and its comprehensive training and development programs. “I don’t care if you’re a laborer or a general foreman, if you see something wrong with a task you’re doing, or you have a question, you stop. You’re not going to get terminated. You’re not going to get reprimanded. If it’s a safety concern, stop.”
    13. All Kiewit managers willingly accept training their people, both on and off projects, as one of their most important responsibilities. All managers are expected to mentor new employees and employees receive constant feedback and coaching
    14. Kiewit has never formally published a list of core values but the most commonly voiced are: integrity, broad-based employee ownership, caring for employees, development and mentoring of employees, quality, and continuous improvement
    15. From the beginning, Peter insisted that the company be known for its integrity and ethical business practices – a company with whom owners, suppliers, employees, subcontractors, and others would be proud to do business
    16. Kiewit’s framework for quality management focuses efforts on self-performed work, subcontractor work, supplier controls, and fostering owner involvement. Kiewit crews are trained to build work to the project requirements and meet or exceed the owner’s expectations, perform work right the first time, and monitor performance against requirements to ensure quality is always improving. Striving for excellence in quality has produced an additional benefit that probably should have been anticipated. The planning, organization, and management controls it takes to ensure quality at every step has helped instill quality into other aspects of our business. The disciplines involved in striving for quality has made us better contractors and a better company.
    17. The focus on continuous improvement can be summed up by Peter’s phrase: “pleased, but not satisfied.” Continuous improvement also requires learning from mistakes and as a company, they’re tolerant. “We’re quite tolerant of mistakes, and we’re very tolerant of people who make mistakes. Just don’t go out and make the same mistakes all the time.”
    18. In the post-World War II era, Kiewit has clearly been the most successful company in its industry. Its unparalleled record of sustained success is rooted in employee ownership, a decentralized organization, an unrelenting emphasis on the basics, and a strong corporate culture based on developing and valuing people. It’s a formula for success widely admired but difficult to replicate.
What I got out of it
  1. Broad-based employee ownership, followed by giving away ownership of decisions and responsibilities to those who bear them and best know (typically those on the ground, not in the offices), focus on training and treating employees right, continuous improvement, and, above all else, integrity. Finding and training your own successor also stood out

Sol Price: Retail Revolutionary and Social Innovator by Robert Price

Summary

  1. Robert Price, Sol Price’s son, recalls his father’s history, personality and journey founding FedMart and The Price Club. “Sol always said that luck plays a big part in what happens during one’s lifetime. This is undoubtedly true. Sol was lucky. His parents emigrated from Russia to the United States well before World War II. He was born with a brilliant mind. He was in good health for most of his life. His family moved from New York to California, which led to his love affair with and marriage to my mother. What Sol added to his good luck is what this book is all about.”

 

Key Takeaways

Sol’s Business Philosophy & Practices

  1. Sol’s core business philosophy was simple: drive operational efficiencies to save on costs; pass these savings onto customers; provide the best possible value to customers; excellent quality products at the lowest possible prices; pay good wages and provide good benefits, including health insurance to employees; maintain honest business practices; treat suppliers better than anyone else; make money for investors.
  2. Discount stores appeared in 1948 and FedMart followed the Fedco template in most every way including membership, concessionaires and a warehouse building. Perhaps the most significant difference between Fedco and FedMart was that Fedco was operated purely as a not for profit whereas FedMart was a not for profit combined with a separate corporation, Loma Supply, which operated as a for profit corporation. Customers would have to pay a minimal fee to become a member, hours were convenient for business owners, products were displayed and sold on makeshift fixtures rather than in display cases and most products, other than jewelry, were self-service, and the selection was limited. Most products were paid at a central register area in cash or with a check, no credit except for purchases of furniture or appliances. The products offered for sale included mattresses, clothing, luggage, furniture, power appliances, hardware, large and small appliances and liquor. Some of the departments were operated by concessionaires, while others were operated by FedMart. In addition, FedMart refused to stock products from manufacturers who enforced Fair Trade laws – companies such as Samsonite Luggage and Gillette Razor Blade Company.
  3. 20 years after founding FedMart, Sol sold control of FedMart to Hugo Mann in 1975 but the relationship quickly soured, inspiring Sol to later found Price Club. Happiest when challenged and new business was a clear slate – thought through all lessons learned and tried to wipe clean all assumptions. He settled on a wholesale business selling to a cross section of small businesses. The Price Club idea was finally conceived sometime in the middle of January 1976 – a wholesale business selling merchandise to small, independent businesses. The business owners would come to a large warehouse, select the products from steel rack displays, pay either by check or cash, and take the products back to their stores, restaurants, or offices. Instead of each business owner purchasing products from various suppliers who specialized in specific product categories, hundreds or even thousands of small businesses would pool their buying power by shopping at our wholesale warehouse. The warehouse would also serve as a storage facility for the various business owners so they would not have to buy and store large quantities of merchandise at their stores or offices. In effect, we would be their warehouses. The wholesale warehouse would buy directly from manufacturers and pass along the savings generated from volume purchasing directly to the store owners
  4. The word “club” was selected because customers would be required to purchase a membership. The customer would be a member of a club, a club that sold merchandise. Thus, the name Price Club was chosen. There were a number of reasons for charging a membership fee of $25, a significant amount of money compared to the rather nominal $2 membership fee that members at FedMart had paid. The most important reasons was to use the membership money to lower prices by including the fee in the calculation of merchandise gross margins. We assumed that, on average, each member would spend $1,000 a year in purchases at Price Club. The $25 membership fee was equivalent to 2.5% of $1,000. When included in gross margin, the prices of merchandise were reduced as shown in the following example:
    1. Example 1 – no membership fee:
      1. Product from supplier: $10.00
      2. Product selling price: $11.12
      3. Margin: 10.5%
    2. Example 2 – $25 membership charged
      1. Product from supplier: $10.00
      2. Product selling price: $10.86
      3. 8% markup plus 2.5% membership fee = $10.5%
    3. The $25 membership fee also operated as an incentive for the member to purchase more as a way to leverage the membership fee as a percent of purchases. In addition, the membership concept helped reduce operating expenses for the business because the membership psychologically tied the member to Price Club and eliminated the need to advertise
  5. Sol always said that teamwork is the key to success
  6. Was a very tough negotiator. He was not afraid to be tough when he felt it was necessary. He was willing to fight for what was right, even if it meant potentially losing, although Sol rarely lost. People wanted Sol in their corner because they knew he had integrity, he was smart, and he was strong. Sol’s experience as an attorney representing clients, and his own moral code, became a foundational feature of the FedMart business. Sol described his business approach as “the professional fiduciary relationship between us (the retailer) and the member (the customer). We felt we were representing the customer. You had a duty to be very, very honest and fair with them and so we avoided sales and advertising. We have in effect said that the very best advertising is by our members, the unsolicited testimonial of the satisfied customer. This fiduciary relationship with the customer was similar to the Golden Rule; the way Sol put it – if you want to be successful in retail, just put yourself in the place of a cranky, demanding customer. In other words, see your business through the eyes of the customer.
  7. Our first duty is to our customers. Our second duty is to our employees. Our third duty is to our stockholders
  8. By reducing merchandise acquisition costs for retailers and other businesses, everyone would win. Small businesses would pay less for their wholesale goods and supplies, retailers could charge lower prices – in turn improving their ability to compete against chain stores, especially the growing number of discount stores that were underpricing small businesses.
  9. Expert Fallacy – “Fortunately most of us had backgrounds that were alien to retailing. We didn’t know what wouldn’t work or what we couldn’t do.” If Sol had been an experienced traditional retail executive, he probably would have focused FedMart’s expansion in Southern California and Arizona, thereby solidifying FedMart’s market dominance in that region. Instead, Sol made his decisions from the point of view of his own experience: the fact that he was an attorney and not a retailer, and that he was an entrepreneur and not a chain store executive. He was never driven by the need to have the most stores or the most money, but by the desire to give the customer the best deal and to provide fair wages and benefits to FedMart’s employees
  10. Of course, everyone wanted to work at FedMart. The fact that Sol was concerned about giving decent wages to employees was one thing, but why would he require FedMart wages to be twice as much as the competitors? FedMart was paying industry-best wages per hour in San Diego and Phoenix. The wage decision in San Antonio was simple: employees in San Antonio worked just as hard and as well as other FedMart employees. FedMart had excellent profits in San Diego and Phoenix while paying good wages, why not apply the same wage philosophy in San Antonio?
  11. Sol always believed real estate was a good investment and the financial characteristics of the business made it a cash flow machine, allowing for easy, fast expansion
  12. Touching the medium – As The Price Company prospered, Sol focused much of his attention on the numbers, daily sales, and monthly financial operating results – the balance sheet and cash flow. He would ask someone from the Morena Price Club or a new Price Club to call him at home every night and tell him what the final sales were for the day. He was intrigued by the Price Club financials, especially how different they were from the financials at FedMart. Comparing FedMart’s financial results for the fiscal year ending August 1969 with Price Club’s financial results for the year ending August 1979, the first major difference was the cost of sales (merchandise markup). FedMart had a 30% markup compared to Price Club’s 11.7% markup. FedMart’s total operating expenses were 17% compared to Price Club’s 9%. Moreover, Price Club’s sales were approaching $1,000 per square foot, at least twice as much as a typical FedMart store. The FedMart/Price Club balance sheet comparison provided other interesting insights. In 1969 FedMart had $20m in inventory and accounts payable of $12m, a 60% payable to inventory ratio. Price Club had $8m in inventory and accounts payable of $7m, a nearly 90% payable to inventory ratio. By the end of the fiscal year in 1981, Price Club’s accounts payable ratio had increased to over 120%. In short, Price Club’s suppliers were financing The Price Company’s business
  13. FedMart developed a line of private label merchandise. It was usually sold with the label FM, or for liquor, with the names of company executives. FedMart purchased these products with specifications and standards as nearly equivalent to the national brands as possible and stocked the FM brand next to the national brand to demonstrate the savings. FedMart’s low price merchandise, limited selection, yet breadth of product offerings had a major impact on the retail world. The challenge would be to operate a geographically widespread business successfully and respond to the competition that was sure to come
  14. Sol really wanted all FedMart employees to think about and understand why their jobs were important to the success of FedMart. He was not a big fan of procedures and training manuals because he believed that manuals were a substitute for thinking
  15. As the number of FedMart’s grew, Sol concluded that FedMart would be well served with central merchandise distribution facilities.
  16. Sol’s emphasis on teaching was expressed in the phrase “alter ego,” a rather simple concept He used the following example. If the owner of a store was able to do all the jobs himself – greet customers, order and receive merchandise, do the accounting, sweep the floors and clean the bathrooms – he would. But the reality is that normally the owner can’t do all the work himself. Therefore, he must hire people to perform their jobs as well or better than he, the owner, would if he had the time. As a corollary, the owner of the store needs to use his time to do the highest-skilled work and to delegate less-skilled work to his “alter egos.” In that way, the owner will devote his time to “managing” the business and making sure that his “alter egos” are doing their jobs and doing them well. The “alter ego” was the management component of a much more comprehensive philosophy that Sol taught to FedMart’s management team and, in fact, to all employees. Sol taught by example and he taught by engaging people in challenging discussions, demanding that they use their brains. Many people, who would later become successful in their own right, learned by following in Sol’s footsteps.
  17. Sol believed in building a long-term relationship with customers. He described his business philosophy as the professional fiduciary relationship between the retailer and the customer. In his words, “If you recognize you’re really a fiduciary for the customer, you shouldn’t make too much money.” The underpinnings of this fiduciary relationship were consistently high quality merchandise and consistently low prices. Sol infused FedMart’s employees with the belief that they were representing the interests of the customer. Sol’s sense of duty to FedMart members was punctuated by FedMart’s return policy: “Everything we sell is guaranteed unconditionally. We will give an immediate cash refund to any customer not completely satisfied with a purchase made at FedMart. No questions asked.”
  18. Sol’s approach to FedMart employees mirrored the relationship he had with FedMart members. He felt a responsibility – a fiduciary duty – to provide excellent wages, benefits, and working conditions for employees. In a bulletin to FedMart employees, Sol said: “You must feel confident that you are working for a fine and honest company. Somehow we must make this mean to each of you that you will be permitted, encouraged, and sometimes even coerced into growing with the company to the limit of your ability. We believe that you should be paid the best wages in your community for the job you perform. We believe that you should be provided with an opportunity to invest in the company so that you can prosper as it prospers. We believe that you should be encouraged to express yourself freely and without fear of recrimination or retaliation. We believe that you should be happy with your work so that your occupation becomes a source of satisfaction as well as a means of livelihood.”
  19. Nothing demonstrated FedMart’s commitment to business integrity more than the pricing of products. According to Sol, FedMart was not a discount store. He described FedMart as a “low margin retailer.” Discount stores set their prices in relationship to a percentage off the manufacturer’s suggested retail price. FedMart priced merchandise starting with the cost of the product and taking as small a markup as possible – consistent with covering expenses and a small profit while giving the customer the best price. Sol also had a rule against pricing any product below cost, the traditional “loss leader.” His reasoning: if some products are sold below cost, other products must be sold at very high margins to make up for the losses. In fact, when grocery stores were selling items such as sugar or coffee below cost, Sol told FedMart managers to place signs next to FedMart’s display of sugar or coffee advising customers to purchase these products at those grocery stores.
  20. The trusting relationship with members was reinforced by FedMart’s unique merchandise selection – limited selection and large pack sizes. Sol proved that it was possible to do more sales with fewer merchandise items (stock keeping units – SKUs). He pioneered large package sizes as a way of lowering prices. One of the more intriguing questions is: why does limited selection result in higher sales? Part of the answer lies in what Sol called “the intelligent loss of sales.” Conventional wisdom in retailing is to stock as many items as possible in order to satisfy every customer’s needs and wants. The “intelligent loss of sales” turns that theory on its head, postulating that the customer demand is most sensitive to price, not selection. And low prices are possible only if there is integrity in the pricing combined with being the most efficient operator. What does limited selection have to do with efficiency? Because payroll and benefits represent approximately 80% of a retailer’s cost of operations, pricing advantage follows labor productivity. Fewer items result in reduced labor hours throughout all of the product supply channels: ordering from suppliers; receiving at the distribution center; stocking at the store; checking out the merchandise; and paying vendor invoices. Put simply, the cost to deal with 4,500 items is a lot less than the cost to deal with 50,000 items
  21. The reality of Sol’s FedMart/Price Club compensation approach was more complicated that simple generosity. Sol was committed to the idea that paying good wages and befits would attract better employees who would remain loyal to FedMart. Providing excellent compensation and treating all employees as part of the team would also result in better job performance, loyalty and honesty. The success of FedMart and later Price Club had a lot to do with being the lowest-cost operator but low operating expenses were never achieved by short changing employees. Because such a large portion of the expense structure in retailing is employee compensation, how is it possible to provide excellent compensation and still be the lost cost operator? Employees who are paid well and treated fairly perform better. In addition, paying high wages puts a focus on continued improvement in labor productivity. As productivity improves, the resulting expense savings are reflected in lower merchandise prices. In return for providing a great workplace for FedMart employees, Sol asked only two things of his employees: that they work hard and that they think. In order to assist employees in thinking about their work, he created a management tool that he called “the Six Rights.” He summarized his ideas as follows: I believed the business broke down into three categories – personnel, product and facilities – and that the same six rules applied to them all. You’ve got to have the right kind, in the right place, at the right time, in the right quantity, in the right condition, at the right price. Along with The Six Rights, Sol insisted that FedMart stores have low displays and wide aisles. Sol had two inviolable rules: the 54-inch height rule and the six-foot aisle rule. His reason for these rules was to make shopping more comfortable for the FedMart member by giving the shopper the feeling of an open and uncluttered shopping environment. When Sol toured the stores, he would quickly spot any infractions.
  22. Nearly everything was wrong with Price Club when first opened – “The Six Rights are all wrong.” For the most part the product selection was based on the incorrect assumption that hardware and variety stores would be major purchasers when, in fact, there weren’t many independent hardware and variety stores left in San Diego. Most products were sold by the case, but the mom-and-pop store owners wanted to purchase in less than case-load quantities. The assumption that most members would want to shop early in the morning was wrong. The choice of Morena Boulevard for a merchandise business was wrong too. The site was difficult to get to and was located away from traditional shopping areas. And, many business owners were just not willing to give up the convenience of sales people calling on them, delivery, and credit in exchange for lower prices. Eventually decided to open up to Credit Union members. They were not charged a fee but had a 5% markup on all items. This turned the business around quickly
  23. Sol had an inner compass that steered him to honest business practices. Obeying the law was foremost in Sol’s mind. Nevertheless, when he thought the law was wrong – Fair Trade laws, separate bathrooms based on race – he had the courage to find a way to get what he knew was the right answer. He was courageous and tenacious
  24. Sold would not permit FedMart buyers to knowingly do business with suppliers who treated their employees unfairly
  25. Sol placed the highest priority on delivering the best possible deal to the consumer and providing excellent wages and benefits to employees. He said that the customer comes first, the employees second and the shareholders third. Yet, throughout his business career, Sol was remarkably successful in making money for people who invested in his business deals. Sol’s concern for investors played out in the success of the publicly traded stock of companies he launched, and in the private business partnerships he created for his friends and family. Sol developed a reputation for making good business decisions.

 

On Charity & Giving Back

  1. An underlying theme of Sol’s life was his generosity and concern for others
  1. A good businessman has to find the time to take care of being involved with his family and charity; it gives him balance. If you’re lucky, you have the obligation to put a lot back into the pot.
  2. He believed that people give charity for one or more of three reasons: ego, guilt or emotion. Sol said that his main motivators were guilt and emotion, not ego. Sol’s “guilt” was related to his realization of the capriciousness of his life, his having such good fortune compared to those who were not so fortunate. For Sol, sharing his advice and financial resources with someone in need was his way of trying to right a wrong and even out the playing field. With regard to ego, Sol maintained a low profile in everything he did. He never sought publicity or recognition. His and Helen’s names were not usually attached to the gifts they made. Sol did have an ego, and a strong one at that. His ego was defined by his existential sense of the meaning of life – the idea that he always had to be thinking and doing, functioning at the highest performance level to find the right answers, whether in business, in making someone’s life better, or in improving society
  3. As a point of reference, he often cited Andrew Carnegie: “The man who dies rich…dies disgraced.”
  4. The logic for rich people to give back personally and through taxes took two paths – fairness and political pragmatism. Sol believed that fairness was a moral imperative. He would say that rich people often think that they gained their wealth on their own when, in fact, their success was the product of their teachers, along with government workers, service providers, and the employees in their companies. He believed that a just and fair society provides good wages and benefits to the working people who are, fundamentally, partners in wealthy people’s success.
  5. It is much easier to make money than deciding how to best give it away
  6. Through his philanthropy, Sol became social innovator, especially in San Diego

 

Sol’s Legacy

  1. The remarkable thing about Sol was not just that he knew what was right. Most people know the right thing to do. But he was able to be creative and had the courage to do what was right in the face of a lot of opposition. It’s not easy to stick to your guns if you are swimming against the current of traditional thought when it comes to wage and compensation plans for employees. His lessons and philosophy – that business is about more than making money and that a company also has an obligation to serve society – are still valuable reminders for many of us in business today. The fact that he instilled these concepts in so many who were around him is, in my mind, his greatest legacy.
  2. What greater legacy could there be from a father to son than leaving the gift of life skills necessary to carry on?
  3. Unlike many people who retreat into themselves as they age, Sol continued to engage with a broad range of friends, young and old. Sol’s conversations with friends were rarely retrospective. They talked about politics, ethics, the latest books they had read; they told stories and shared jokes. Sol seldom talked about his past accomplishments
  4. Even more than his willingness to fight for what he believed in, Sol never compromised his values. Sol’s retail success was grounded in an absolute commitment to bringing the best value to his customers. Just as importantly, he insisted on paying high wages and good benefits, including health care, to his employees. He had a real conscience satisfied only by giving the best deal he could to just about everyone
  5. Whatever I [Robert] have learned about business I learned from my father – everything – from how to read a financial statement to management to good judgment and fair dealings. My father taught me how to think and how to question and not to fall into the trap of assuming rather than checking things out for myself. He also taught me to be humble, to appreciate the unpredictability of life, to care for people, to remain hopeful, and always to be there for people who are in need.
  6. Many people who worked for my father were afraid to speak up, although, in truth, he always listened carefully to what other people said
  7. What really made our relationship special was the trust that we had in each other and the knowledge that, beyond the arguing, there were shared values and a loyalty and love that would endure
  8. People often have good ideas. Sol was inspired to make his good ideas happen. Sol’s actions were rooted in a value system that he learned early in life and from which he never strayed, a belief that life can and should be lived with purpose, and lived in the right way. Sol’s life was a testament to the truth that success can be achieved by acting in the right way.

 

Other

  1. Sol had a knack for putting together seemingly unrelated facts to form clever solutions
  2. Sol was more creative, enjoying the brainstorming and conceptual part of starting businesses whereas his son, Robert, was more operations-focused
  3. My father expected to be informed, fully, openly and honestly, even if he didn’t like what he heard
  4. Sol was a really smart man but what set him apart was his exceptional wisdom. A wise person is someone who knows what’s important. Moral reasoning, that is, the ability to judge right from wrong; compassion; kindness and empathy; humility; altruism; patience; successfully dealing with uncertainty. My dad’s life encompassed all these qualities
  5. Sol’s social conscience was molded by his parents’ beliefs and by their actions. He would later apply the lessons he had learned at home to all aspects of his life, the practice of law, the operation of his businesses, and his personal generosity to family, friends, and society.
  6. “I’m not a great student of the Bible. I can’t rationalize giving God credit for mercy and all the good things that happen – who takes the responsibility for the bad things?…It would be very easy for me to be an atheist except for two things: No. 1 – I’m unable to understand or cope with infinity, and No. 2 – over the years there have been many smart people – much smarter than I – who have wrestled with the concerns I have stated above and who end up – in spite of that – believing. What am I missing?”
  7. Learned the value of reputation and trusting relationships as a lawyer. Did a lot of pro-bono work for Jewish charities when he was a lawyer
  8. Incredible work ethic – taking advantage of every hour
  9. Exemplars – Always had an older person as a mentor
  10. Balance – Although Sol was intense when he was dealing with FedMart businesses, he always found time during his business trips and other travels to have fun
  11. Throughout his legal and business careers, Sol believed that he was given too much credit for his success because he felt that people did not always recognize the role luck played in his life. “Most of life is luck [and] much of what is referred to as genius…is luck.”
  12. Skin in the game – Sol personally invested in Loma Supply because he believed that FedMart would be successful. He would never ask anyone else to invest unless he invested, and Sol was willing to take some risks. This willingness to take risks was to be an important factor in his life.
  13. Sol and his companies changed consumer habits, especially with respect to pharmaceuticals and gasoline
  14. Wasn’t afraid to fire people and act boldly if he thought the company was headed in the wrong direction
  15. Influenced by Dutch chain Makro – pallets, “passport” membership, massive warehouses
  16. Sol felt that before investing a lot of money and hiring people, it would be a good idea to do some market research contacting as many small store owners, restaurant operators, and professionals as possible to confirm that the concept would work. Contacts were made with liquor store operators who sold cigarettes and candy, convenience store owners, hardware and houseware store owners, restaurant owners, and lawyers and accountants. The questions were always the same: Where do you buy your merchandise? Which products do you spend the most money on? How much are you paying? What do you like about the way you are purchasing? What don’t you like? There were some consistent threads in their answers: a few of their products represented a large proportion of total purchases; and they preferred the traditional wholesale system; which involved salesman calling for orders, truck delivery, credit and billing; and they thought that the prices they were paying were high. When asked whether they would be willing to give up some conveniences in exchange for lower prices, most seemed mildly interested but some were not interested at all. Even though the market survey was not all that encouraging, we made a decision to give the wholesale idea a try
  17. Rick was the head buyer and little by little created what would become the opening product assortment. He asked: How do we secure a location? Where to begin? Where should the warehouse be located? How big should it be? How much parking area?
  18. Sol was averse to debt for financing his business, for his customers and personally
  19. Respected velocity – Sol’s motto – “Do it now.”
  20. Sol always said he was lucky and that luck was a huge part of his success
  21. Sampling of products was a major hit. The buyers would showcase new products they liked and human’s inclination for reciprocity when they receive something free made them buy more
  22. Even though Price Club had tried to stay under the radar, people in the retail industry were taking notice. In 1978 Bernard Marcus, soon to be the founder of Home Depot, came to see the Price Club and to visit Sol. Sol inspired dozens of similar concepts – Costco, WalMart, Home Depot, Target, etc.
  23. True believer in competition because lead to better results for the consumer – gave away many secrets and best practices
  24. Having pioneered the warehouse club concept, The Price Company had lost the initiative to competitors. Rather than sticking to a well-planned business strategy, many decisions were being made reactively in response to what the competition was doing. The Price Club was like a sports team that comes into the game with a pre-planned, well thought out strategy, but once the game starts the other team has its own strategy, so the first team gets confused and does not stick with its game plan. Sol admitted he made mistakes in not franchising fast enough and being reluctant to add fresh food departments, allowing Costco and Sam’s Club to rise and expand quickly
  25. Price Club and Costco merged in 1993. Price Enterprises later spun off which Robert, Sol’s son, ran

 

What I got out of it

An inspiring man! Sol was so innovative and caring – his intentions seemed pure as he truly wanted to help the customer. He revolutionized shopping and inspired a new era of retailing. Be as efficient as possible and pass those savings on quality products to customers; no advertising, no superlatives, everyday low pricing, honest and fair dealing, win/win decisions, pay employees well and treat suppliers a step up. Good advice for any business!

My Life and Work by Henry Ford

Summary

  1. Henry Ford recounts his life and the business philosophy which helped him create one of the most innovative and dominant companies of all time. “The essence of my idea is that waste and greed block the delivery of true service. Both waste and greed are unnecessary. Waste is due largely to not understanding what one does, or being careless in doing of it. Greed is merely a species of nearsightedness. I have striven toward manufacturing with a minimum of waste, both of materials and of human effort, and then toward distribution at a minimum profit, depending for the total profit upon the volume of distribution. In the process of manufacturing I want to distribute the maximum of wage – that is, the maximum of buying power. Since also this makes for a minimum cost and we sell at a minimum profit, we can distribute a product in consonance with buying power. Thus everyone who is connected with us – either as a manager, worker or purchaser – is the better for our existence. The institution that we have erected is performing a service. That is the only reason I have for talking about it. The principles of that service are these:
  1. An absence of fear of the future and of veneration for the past. One who fears the future, who fears failure, limits his activities. Failure is only the opportunity more intelligently to begin again. There is no disgrace in honest failure; there is disgrace in fearing to fail. What is past is useful only as it suggests ways and means for progress.
  2. A disregard of competition. Whoever does a thing best ought to be the one to do it. It is criminal to try to get business away from another man – criminal because one is then trying to lower for personal gain the condition of one’s fellow man – to rule by force instead of by intelligence.
  3. The putting of service before profit. Without a profit, business cannot extend. There is nothing inherently wrong about making a profit. Well–conducted business enterprise cannot fail to return a profit, but profit must and inevitably will come as a reward for good service. It cannot be the basis – it must be the result of service.
  4. Manufacturing is not buying low and selling high. It is the process of buying materials fairly and, with the smallest possible addition of cost, transforming those materials into a consumable product and giving it to the consumer. Gambling, speculating, and sharp dealing, tend only to clog this progression.”

 

Key Takeaways

On Business

  1. Business exists for service but the present system does not permit of the best service because it encourages every type of waste. It keeps many men from getting the full return from service
  2. The natural thing to do is work – to recognize that prosperity and happiness can be obtained only through honest effort. Human ills flow largely from attempting to escape from this natural course. I have no suggestion which goes beyond accepting in its fullest this principle of nature. I take it for granted that we must work. All that we have done comes as the result of a certain insistence that since we must work it is better to work intelligently and forehandedly; that the better we do our work the better off we shall be. All of which I conceive to be merely elemental common sense.
  3. As we serve our job we serve the world – Do your job! As you do anything, is how you do everything
  4. Business is never as healthy as when, like a chicken, a certain amount of scratching has to be done. Things cannot come too easily
  5. It is what a thing does, not what it is meant to do, that matters. For anyone to be required to use more force than is absolutely necessary for the job on hand is waste
  6. The principal part of the chisel is the cutting edge.
  7. Above all else, first find a good idea. Given a good idea to start with, it is better to concentrate on perfecting it than to hunt around for a new idea. One idea at a time is about as much as anyone can handle
  8. The way I have always worked is to draw out a plan and work out every detail of the plan before starting to build. Many inventors fail because they do not distinguish between planning and experimenting
  9. There was no way the Model T could not be successful for it was not made in a day. Every detail had been fully tested in practice
  10. There is an immense amount to be learned simply by tinkering with things. It is not possible solely to learn from books. Can get ideas from them but must use one’s brains to apply them
  11. I loved watching and almost went into the business but did not because I figured out that watches are not universal necessities and people generally would not buy them. Even then I wanted to produce something in quantity
  12. I read everything I could find, but the greatest knowledge came from the work
  13. No work with interest is ever hard
  14. It does not pay to hurry
  15. There was no demand for automobiles when I first started. There never is for new articles
    1. Early on, the general population only cared for speed. Although Ford thought that raw speed was a poor metric to optimize for, he knew his consumers and what they wanted. So, he built a car to beat the world’s fastest drivers and got press that way. He balanced what the consumers wanted while also keeping in mind and knowing what the consumer did not know they wanted.
  16. The most surprising thing I found about business was the large concern for finance and low concern for service
  17. Time spent fighting the competition is wasted – it had better be spent doing the work
  18. The man who has the largest capacity for work and thought is bound to succeed
  19. The whole progress of the company had always been financed out of earnings. Everything is being done out of earnings. That is our policy
  20. No stunt and no advertising will sell any article for any length of time
  21. Money is only worth what it will help you produce or buy. No more
  22. Worst of all advertisements is a dissatisfied customer
  23. The refinement and use of vanadium made the universal car possible as it was light and strong and it had to have these attributes:
    1. Quality in material to give service in use. Vanadium steel is the strongest, toughest, and most lasting of steels. It forms the foundation and super–structure of the cars. It is the highest quality steel in this respect in the world, regardless of price
    2. Simplicity in operation – because the masses are not mechanics
    3. I believed then, although I said very little about it because of the novelty of the idea, that it ought to be possible to have parts so simple and so inexpensive that the menace of expensive hand repair work would be entirely eliminated. The parts could be made so cheaply that it would be less expensive to buy new ones than to have old ones repaired. They could be carried in hardware shops just as nails or bolts are carried. I thought that it was up to me as the designer to make the car so completely simple that no one could fail to understand it.
    4. That works both ways and applies to everything. The less complex an article, the easier it is to make, the cheaper it may be sold, and therefore the greater number may be sold
    5. Power in sufficient quantity
    6. Absolute reliability – because of the varied uses to which the cars would be put and the variety of roads over which they would travel
    7. Lightness. With the Ford there are only 7.95 pounds to be carried by each cubic inch of piston displacement. This is one of the reasons why Ford cars are “always going,” wherever and whenever you see them – through sand and mud, through slush, snow, and water, up hills, across fields and road less plains
    8. Control – to hold its speed always in hand, calmly and safely meeting every emergency and contingency either in the crowded streets of the city or on dangerous roads. The planetary transmission of the Ford gave this control and anybody could work it. That is the “why” of the saying: “Anybody can drive a Ford.” It can turn around almost anywhere
    9. The more a motor car weights, naturally the more fuel and lubricants are used in the driving; the lighter the weight, the lighter the expense of operation. The light weight of the Ford car in its early years was used as an argument against it. Now that is all changed
    10. Any customer can have a car painted any color he wants so long that it is black
  24. Principles of assembly:
    1. Place the tools and the men in the sequence of the operation so that each component part shall travel the least possible distance while in the process of finishing
    2. Use work slides or some other form of carrier so that when a workman completes his operation, he drops the part always in the same place – which place must always be the most convenient place to his hand – and if possible have gravity carry the part to the next workman for his operation
    3. Use sliding assembling lines by which the parts to be assembled are delivered at convenient distances
    4. The net result of the application of these principles is the reduction of the necessity for thought on the part of the worker and the reduction of his movements to a minimum
  25. The laws of business are like the laws of gravity and the man who opposes them feels their power
  26. Very worst time to try to raise money is when bankers think you need it. And that is the danger of having bankers in business. They think solely in terms of money. They think of a factory as making money, not goods. They want to watch the money, not the efficiency of production. They cannot comprehend that a business never stands still, it must go forward or go back. They regard a reduction in prices as a throwing away of profit instead of as a building of business
    1. Adhering and honoring the power of the Red Queen Effect. If you are not moving forward, you are moving backward. As your ecosystem is continuously moving forward, if you’re simply standing still it is the same as falling behind
  27. This season demonstrated conclusively to me that it was time to put the new policy in force. The salesman, before I had announced the policy, were spurred by the great sales to think that even greater sales might be had only if we had more models. It is strange how, just as soon as an article becomes successful, somebody starts to think that it would be more successful if only it were different. There is a tendency to keep monkeying with styles and to spoil a good thing by changing it. The salesmen were insistent on increasing the line. They listened to the 5%, the special customers who could say what they wanted, and forgot about the 95% who just bought without making a fuss. No business can improve unless it pays the closets possible attention to complaints and suggestions. If there is any defect in serve then that must be instantly and rigorously investigated, but when the suggestion is only as to style, one has to make sure whether it is not merely a personal whim that is being voiced. Salesman always want to cater to whims instead of acquiring sufficient knowledge of their product to be able to explain to the customer the whim that what they have will satisfy his every requirement – that is, of course, provided what they have does satisfy these requirements.
  28. Everything can always be done better than it is being done
  29. With the tractor we followed the exact same course as with the automobile. Each part had to be as strong as it was possible to make, the parts had to be few in number, and  the whole had to admit of quantity production
  30. Ford bought the Detroit, Toledo and Ironton Railway in 1921 and applied “industry principles” – turned a terribly performing, unreliable line into a powerhouse. The railroads in general have broken down, and if the former conduct of the DTI is any criterion of management in general there is no reason in the world why they should not have broken down. Too many railroads are run, not from the offices of practical men, but from banking offices, and the principles of procedure, the whole outlook, are financial – not transportational, but financial. There has been a breakdown simply because more attention has been paid to railroads as factors in the stock market than as servants of the people. Outworn ideas have been retained, development has been practically stopped, and railroad men with vision have not been set free to grow. Will a billion dollars solve that sort of trouble? No, a billion dollars will only make the difficulty one billion dollars worse. The purpose of the billion is simply to continue the present methods of railroad management, and it is because of the present methods that we have any railroad difficulties at all.
  31. It is one of nature’s compensations to withdraw prosperity from the business which does not serve
  32. Being greedy for money is the surest way not to get it, but when one serves for the sake of service – for the satisfaction of doing that which one believes to be right – then the money abundantly takes care of itself. Money comes naturally as the result of service. And it is absolutely necessary to have money. But we do not want to forget that the end of money is not ease but the opportunity to perform more service. In my mind nothing is more abhorrent than a life of ease. None of us has any right to ease. There is no place in civilization for the idler
    1. I disagree slightly on his point about the idler. Some idle and leisure time has been a sure sign of progress and civilization throughout history. This “down” time is necessary for thought, innovation, breakthroughs, to gain perspective and see things differently. This cannot be the state of the whole population but it must exist for a select few.
  33. He is a wise merchant who would rather take less profit and keep business moving than keep his stock at high prices and bar the progress of his community. A man like that is an asset to a town. He has a clear head. He is better able to swing the adjustment through his inventory than through cutting down the wages of his delivery men – through cutting down their ability to buy
  34. I have heard it said, in fact I believe it is quite a current thought, that we have taken skill out of work. We have not. We have put in skill. We have put a higher skill into planning, management, and tool building, and the results of that skill are enjoyed by the man who is not skilled
  35. The factory keeps no record of experiments. The foremen and superintendents remember what has been done. If a certain method has formerly been tried and failed, somebody will remember it – but I am not particularly anxious for the men to remember what someone else has tried to do in the past, for then we might quickly accumulate far too many things that could not be done. That is one of the troubles with extensive records. If you keep on recording all of your failures you will shortly have a list showing that there is nothing left for you to try – whereas it by no means follows because one man has failed in a certain method that another man will not succeed. We get some of our best results from letting fools rush in where angels fear to tread. None of our men are “experts.” We have most unfortunately found it necessary to get rid of a man as soon as he thinks himself an expert – because no one ever considers himself expert if he really knows his job. A man who knows a job sees so much more to be done than he has done, that he is always pressing forward and never gives up an instant of thought to how good and how efficient he is. Thinking always ahead, thinking always of trying more, brings a state of mind in which nothing is impossible. The moment one gets into the “expert” state of mind a great number of things become impossible
  36. That which one has to fight hardest against in bringing together a large number of people to do work is excess organization and consequent red tape. To my mind there is no bent of mind more dangerous than that which is sometimes described as the “genius for organization.” This usually results in the birth of a great big chart showing, after the fashion of a family tree, how authority ramifies. The tree is heavy with nice round berries, each of which bears the name of a man or of an office. Every man has a title and certain duties which are strictly limited by the circumference of his berry. Now a business, in my way of thinking, is not a machine. It is a collection of people who are brought together to do work and not to write letters to one another. It is not necessary for any one department to know what any other department is doing. If a man is doing his work he will not have time to take up any other work. It is the business of those who plan the entire work to see that all of the departments are working properly toward the same end. It is not necessary to have meetings to establish good feeling between individuals or departments. It is not necessary for people to love each other in order to work together. Too much good fellowship may indeed be a very bad thing, for it may lead to one man trying to cover up the faults of another. That is bad for both men.
  37. We make the individual responsibility complete. The workman is absolutely responsible for his work. The straw boss is responsible for the workmen under him. The foreman is responsible for his group. The department head is responsible for the department. The general superintendent is responsible for the whole factory. Every man has to know what is going on in his sphere
  38. The habit of acting shortsightedly is a hard one to break. What can be done? Nothing. No rules or laws will affect the changes. But enlightened self–interest will. It takes a little while for enlightenment to spread. But spread it must, for the concern in which both employer and employees work to the same end of service is bound to forge ahead in business
  1. Waste is prevented by far-sighted not by short-sighted men. Short-sighted men think first of money. They cannot see waste. They think of service as altruistic instead of as the most practical thing in the world. They cannot get far enough away from the little things to see the big things – to see the biggest thing of all, which is that opportunist production from a purely money standpoint is the least profitable. Service can be based upon altruism, but that sort of service is not usually the best. The sentimental trips up the practical.
  2. Capital that is not constantly making conditions of daily labor better and the reward of daily labor more just, is not fulfilling its highest function. The highest use of capital is not to make more money, but to make money do more service for the betterment of life. Unless we in our industries are helping to solve the social problem, we are not doing our principal work. We are not fully serving.
  1. More men are beaten than fail. It is not wisdom they need or money, or brilliance or “pull,” but just plain gristle and bone. This rude, simple, primitive power which we call “stick-to-it-iveness” is the uncrowded king of the world of endeavor. People are utterly wrong in their slant upon things. They see the success that men have made and somehow they appear to be easy. But that is a world away from the facts. It is failure that is easy. Success is always hard. A man can fail in ease; he can succeed only by paying out all that he has and is. It is this which makes success so pitiable a thing if it be in lines that are not useful and uplifting.
  2. Business should be on the side of peace, because peace is business’ best asset
  3. France has something to give the world of which no competition can cheat her. So has Italy. So has Russia. So have the countries of South America. So has Japan. So has Britain. So has the United States. The sooner we get back to a basis of natural specialties and drop this free–for–all system of grab, the sooner we shall be sure of international self-respect – and international peace. Trying to take the trade of the world can promote war. It cannot promote prosperity. Someday even the international bankers will learn this.
  4. You can hardly have too much harmony in business. But you can go too far in picking men because they harmonize. You can have so much harmony that there will not be enough of the thrust and counter thrust which is life – enough of the competition which means effort and progress. It is one thing for an organization to be working harmoniously toward one object, but it is another thing for an organization to work harmoniously with each individual unit of itself. Some organizations use up so much energy and time maintaining a feeling of harmony that they have no force left to work for the object for which the organization was created. The organization is secondary to the object. The only harmonious organization that is worth anything is an organization in which all the members are bent on the one main purpose – to get along toward the objective. A common purpose, honestly believed in, sincerely desired – that is the great harmonizing principle.
  5. I pity the poor fellow who is so soft and flabby that he must always have “an atmosphere of good feeling” around him before he can do his work. There are such men. And in this end, unless they obtain enough mental and moral hardiness to lift them out of their soft reliance on “Feeling,” they are failures. Not only are they business failures; they are character failures also; it is as if their bones never attained a sufficient degree of hardness to enable them to stand on their own feet. There is altogether too much reliance on good feeling in our business organizations. People have too great a fondness for working with the people they like. In the end it spoils a good many valuable qualities.
  6. We began to manufacture according to a creed – a creed which was at that time unknown in business. The new is always thought odd, and some of us are so constituted that we can never get over thinking that anything which is new must be odd and probably queer. The mechanical working out of our creed is constantly changing. We are continually finding new and better ways of putting it into practice, but we have not found it necessary to alter the principles, and I cannot imagine how it might ever be necessary to alter them, because I hold that they are absolutely universal and must lead to a better and wider life for all. If I did not think so I would not keep working – for the money that I make is in consequent.  Money is useful only as it serves to forward by practical example the principle that business is justified only as it serves, that it must always give more to the community than it takes away, and that unless everybody benefits by the existence of a business then that business should not exist.
  1. Progress comes from a generous form of rivalry. Bad competition is personal. It works for the aggrandizement of some individual or group. It is a sort of warfare. It is inspired by a desire to “get” someone. It is wholly selfish. That is to say, its motive is not pride in the product, nor a desire to excel in service, nor yet a wholesome ambition to approach to scientific methods of production. It is moved simply by the desire to crowd out others and monopolize the market for the sake of the money returns. That being accomplished, it always substitutes a product of inferior quality.
  2. All the wise people demonstrated conclusively that the engine could not compete with steam. They never thought that it might carve out a career for itself. That is the way with wise people – they are so wise and practical that they always know to a dot just why something cannot be done; they always know the limitations. That is why I never employ an expert in full bloom. If I ever wanted to kill opposition by unfair means I would endow the opposition with experts. They would have so much good advice that I could be sure they would do little work.
  3. My idea was then and still is that if a man did his work well, the price he would get for that work, the profits and all financial matters, would care for themselves and that a business ought to start small and build itself up and out of its earnings. If there are no earnings then that is a signal to the owner that he is wasting his time and does not belong in that business
  1. And I also noticed a tendency among many men in business to feel that their lot was hard – they worked against a day when they might retire and live on an income – get out of the strife. Life to them was a battle to be ended as soon as possible. That was another point I could not understand, for as I reasoned, life is not a battle except with our own tendency to sag with the down pull of “getting settled.” If to petrify is success all one has to do is to humor the lazy side of the mind but if to grow is success, then one must wake up anew every morning and keep awake all day. I saw great businesses become but the ghost of a name because someone thought they could be managed just as they were always managed, and though the management may have been most excellent in its day, its excellence consisted in its alertness to this day, and not in slavish following of its yesterdays. Life, as I see it, is not a location, but a journey. Even the man who most feels himself “settled” is not settled – he is probably sagging back. Everything is in flux, and was meant to be. Life flows. We may live at the same number of the street, but it is never the same man who lives there
  2. The public is wary. It thinks that the price cut is a fake and it sits around waiting for a real cut. We saw much of that last year. If, on the contrary, the economies of making are transferred at once to the price and if it is well known that such is the policy of the manufacturer, the public will have confidence in him and will respond. They will trust him to give honest value. So standardization may seem bad business unless it carries with it the plan of constantly reducing the price at which the article is sold. And the price has to be reduced (this is very important) because of the manufacturing economies that have come about and not because the falling demand by the public indicates that it is not satisfied with the price. The public should always be wondering how it is possible to give so much for the money. Standardization (to use the word as I understand it) is not just taking one’s best–selling article and concentrating on it. It is planning day and night and probably for years, first on something which will best suit the public and on how it should be made. The exact processes of manufacturing will develop of themselves. Then, if we shift the manufacturing from the profit to the service basis, we shall have a real business in which the profits will be all that anyone could desire.
  3. My associates were not convinced that it was possible to restrict our cars to a single model. The automobile trade was following the old bicycle trade, in which every manufacturer thought it necessary to bring out a new model each year and to make it so unlike all previous models that those who had bought the former models would want to get rid of the old and buy the new. That was supposed to be good business. It is the same idea that women submit to in their clothing and hats. That is not service – it seeks only to provide something new, not something better. It is extraordinary how firmly rooted is the notion that business – continuous selling – depends not on satisfying the customer once and for all, but on first getting his money for one article and then persuading him he ought to buy a new and different one. The plan which I then had in the back of my head but to which we were not then sufficiently advanced to give expression, was that, when a model was settled upon then every improvement on that model should be interchangeable with the old model, so that a car should never get out of date. It is my ambition to have every piece of machinery, or other non–consumable product that I turn out, so strong and so well made that no one ought ever to have to buy a second one. A good machine of any kind ought to last as long as a good watch.
  1. “How soon will Ford blow up?” Nobody knows how many thousand times it has been asked since. It is asked only because of the failure to grasp that a principle rather than an individual at work, and the principle is so simple it seems almost mysterious. Modern methods applied in a big way have not only brought the cost of axe handles down to a fraction of their former cost – but they have immensely improved the product. It was the application of these same methods to the making of the Ford car that at the very start lowered the price and heightened the quality. We just developed an idea. The nucleus of a business may be an idea. That is, an inventor or a thoughtful workman works out a new and better way to serve some established human need; the idea commends itself, and people want to avail themselves of it. In this way a single individual may prove, through his idea or discovery, the nucleus of a business. But the creation of the body and bulk of that business is shared by everyone who has anything to do with it. No manufacturer can say: “I built this business” – if he has required the help of thousands of men in building it. It is a joint production. Everyone employed in it has contributed something to it. By working and producing they make it possible for the purchasing world to keep coming to that business for the type of service it provides, and thus they help establish a custom, a trade, a habit which supplies them with a livelihood. That is the way our company grew.

 

On Simplicity

  1. My effort is in the direction of simplicity. Real simplicity means that which gives the best service and is the most convenient in use. Start with an article that suits and then study to find some way of eliminating all the useless parts. This applies to everything – a shoe, a dress, a house, a piece of machinery, a railroad, a steamship, an airplane. As we cut out useless parts and simplify necessary ones we also cut down the cost of making. This is simple logic, but oddly enough the ordinary process starts with a cheapening of the manufacturing instead of with a simplifying of the article. The start ought to be with the article. First we ought to find whether it is as well made as it should be – does it give the best possible service? Then – are the materials the best or merely the most expensive? Then – can its complexity and weight be cut down? And so on.
  1. Do not scatter energies over collateral objects
    1. Don’t make the marginal the core, nor the core marginal

 

On Hiring & Training

  1. Men of a more mechanical turn of mind, but with no desire for responsibility, go into the tool–making departments where they receive considerably more pay than in production proper. But the vast majority of men want to stay put. They want to be led. They want to have everything done for them and to have no responsibility. Therefore, in spite of the great mass of men, the difficult is not to discover men to advance, but men who are willing to be advanced.
  2. Whatever expertness in fabrication that has been developed has been due to men. I think that if men are unhampered and they know that they are serving, they will always put all of mind and will into even the most trivial of tasks
    1. Can only learn and accomplish certain things when everyone is all–in
  3. To produce, produce; to get a system that will reduce production to a fine art; to put production on such a basis as will provide means for expansion and the building of still more shops, the production of still more thousands of useful things – that is the real industrial idea. The negation of the industrial idea is the effort to make a profit out of speculation instead of out of work. There are short–sighted men who cannot see that business is bigger than any one man’s interests. Business is a process of give and take, live and let live. It is cooperation among many forces and interests. Whenever you find a man who believes that business is a river whose beneficial flow ought to stop as soon as it reaches him you find a man who thinks he can keep business alive by stopping its circulation. He would produce wealth by this stopping of the produce of wealth
  4. Not only is a title injurious to the wearer, it often has ill effects on others as well. There is perhaps no greater single source of personal dissatisfaction among men than the fact that the title-bearers are not always the real leaders. Everybody acknowledges a real leader – a man who is fit to plan and command. And when you find a real leader who bears a title, you will have to inquire of someone else what his title is. He doesn’t boast about it
    1. People will eventually flow towards talent rather than title. It is injurious when these two don’t align
  5. The health of every organization depends on every member – whatever his place – feeling that everything that happens to come to his notice relating the welfare of the business is his own job. Railroads have gone to the devil under the eyes of the departments that say: “Oh, that doesn’t come under our department. Department X, 100 miles away, has that in charge.”
  6. We do not hire a man’s history, all that he needs is the desire to work
  7. We do not, to repeat, care what a man has been. If he has gone to college he ought to be able to go ahead faster, but he has to start at the bottom and prove his ability. Every man’s future rests solely with himself. There is far too much loose talk about men being unable to obtain recognition. With us every man is fairly certain to get the exact recognition he deserves
  8. The will to be skilled is not general and even if it were, the courage to follow through with the training is not.
  9. Men tend to not like changes that they themselves do not suggest
    1. Against popular opinion, people tend to be fine with change if there is no prospect for loss. People never seem to mind change if it involves a promotion…
  10. I did a thorough investigation into every job at the plant to determine which could be done by the disabled. These bedridden or disabled men were often able to do just as well as the men in the shop and, in fact, their production was about 20%, I believe, above the usual shop production
  11. Suggestions for improvement can come from anywhere
  12. No man is independent as long as he has to depend on another man to help him. It is a reciprocal relation – the boss is the partner of his worker, the worker is partner of his boss. And such being the case, it is useless for one group or the other to assume that it is the one indispensable unit

 

 

On Wages

  1. There is nothing to running a business by custom – to saying: “I pay the going rate of wages.” The same man would not so easily say: “I have nothing better or cheaper to sell than any one has.” No manufacturer in his right mind would contend that buying only the cheapest materials is the way to make certain of manufacturing the best article. Then why do we hear so much talk about the “liquidation of labor” and the benefits that will flow to the country from cutting wages – which means only the cutting of buying power and the curtailing of the home market? What good is industry if it be so unskillfully managed as not to return a living to everyone concerned? No question is more important than that of wages – most of the people in the country live on wages. The scale of their living – the rate of their wages – determines the prosperity of the country
  1. If they see the fruits of hard work in their pay envelope – proof that harder work means higher pay – then also they begin to learn that they are a part of the business, and that its success depends on them and their success depends on it. The business limits the wages, but does anything limit the business  The business limits itself by following bad precedents
  2. There will never be a system invented which will do away with the necessity of work. Nature has seen to that. Idle hands and minds were never intended for any one of us. Work is our sanity, our self–respect, our salvation. So far from being a curse, work is the greatest blessing. Each social justice flows only out of honest work. The man who contributes much should take away much. Therefore no element of charity is present in the paying of wages. The kind of workman who gives the business the best that is in him is the best kind of workman a business can have. And he cannot be expected to do this indefinitely without proper recognition of his contribution  The man who comes to the day’s job feeling that no matter how much he may give, it will not yield him enough of a return to keep him beyond want, is not in shape to do his day’s work. He is anxious and worried, and it all reacts to the detriment of his work. But if a man feels that his day’s work is not only supplying his basic need, but is also giving him a margin of comfort and enabling him to give his boys and girls their opportunity and his wife some pleasure in life, then his job looks good to him and he is free to give it of his best. This is a good thing for him and a good thing for the business. The man who does not get a certain satisfaction out of his day’s work is losing the best part of his pay. When we are all in this business together, we all ought to have some share in the profits – by way of a good wage, or salary, or added compensation. And that is beginning now quite generally to be recognized.
  3. Such are the fundamental truth of wages. They are partnership distributions
  4. When can a wage be considered adequate? How much of a living is reasonably expected from work? Have you ever considered what a wage ought to do? To say that it should pay the cost of living is to say almost nothing. The cost of living depends largely upon the efficiency of production and transportation; and the efficiency of these is the sum of the efficiencies of the management and the workers. Good work, well managed, ought to result in high wages and low living costs. If we attempt to regulate wages on living costs, we get nowhere. The cost of living is a result and we cannot expect to keep a result constant if we keep altering the factors which produce the result. When we try to regulate wages according to the cost of living, we are imitating a dog chasing his tail. And, anyhow, who is competent to say just what kind of living we shall base the costs on? Let us broaden our view and see what a wage is to the workmen – and what it ought to be.
    1. Employees must have stability, a path to the dream, financial and non–financial recognition as well as a calm, secure, safe environment. Without these core attributes, they will never settle down and be able to focus fully on their job. There will be scarcity in the air and they will hoard their time, abilities, focus and more. There are certain things that can only be accomplished when people are all-in.
    2. Pay enough so a parent can potentially stay at home with their kids if they want. This can have knock on effects of better-raised children who become better contributors which can lead to a better society
  5. If we can distribute high wages, then that money is going to be spent and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales. Country-wide high wages spell country-wide prosperity, provided, however, the higher wages are paid for higher production. Paying high wages and lowering production is starting down the incline toward dull business
  6. The objection to a plan which pays out yearly profit sharing is that a man did not get his share until long after his work was done and then it came to him almost in the way of a present. It is always unfortunate to have wages tinged with charity
    1. Must respect the goal-gradient effect. Monthly incentive payments rather than yearly so that people are continuously motivated. People will have clear physiological changes when a goal is near and in sight. Marathoners can even begin to sprint at the sight of a finish line!
  7. We wanted to pay these high wages so that the business would be on a lasting foundation. We were not distributing anything – we were building for the future. A low wage business is always insecure
  8. If you expect a man to give his time and energy, fix his wages so that he will have no financial worries. It pays. Our profits  after paying good wages and a bonus – which bonus used to run around ten millions a year before we changed the system – show that paying good wages is the most profitable way of doing business.
    1. These kind of policies, though easily classified as “expensive,” don’t cost, but pay.
  9. The people, once paid enough and incented in the right way, make supervision unnecessary
    1. Once the employees become self-policing, you unleash an incredible amount of energy, time, industriousness, ingenuity, creativity that before was spent “managing” people, “politicking” and making sure others were doing their job. Now, you can hardly stop them from working because their self-interest is tied to the success of the company.
  10. Where does the money to make the wheels go round come from? From the consumer, of course. And success in manufacturing is based solely upon an ability to serve that consumer to his liking. He may be served by quality or he may be served by price. He is best served by the highest quality at the lowest price, and any man who can give to the consumer the highest quality at the lowest price is bound to be a leader in business, whatever the kind of article he makes. There is no getting away from this

 

 

On Poverty & Privilege

  1. Poverty springs from a number of sources, the more important of which are controllable. So does special privilege. I think it is entirely feasible to abolish both poverty and special privilege – and there can be no question but that their abolition is desirable. Both are unnatural, but it is work, not law, to which we must look for results.
  2. Any plan which starts with the assumption that men are or ought to be equal is unnatural and therefore unworkable. There can be no feasible or desirable process of leveling down. Such a course only promotes poverty by making it universal instead of exceptional
  3. The cure of poverty is not in personal economy but in better production. The “thrift” and “economy” ideas have been overworked. The word “economy” represents a fear. The great and tragic fact of waste is impressed on a mind by some circumstance, usually of a most materialistic kind. There comes a violent reaction against extravagance – the mind catches hold of the idea of “economy.” But it only flies from a greater to a lesser evil; it does not make the full journey from error to truth. Economy is the rule of half-alive minds. There can be no doubt that it is better than waste  neither can be any doubt that is not as good as use. People who pride themselves on their economy take it as a virtue. But what is more pitiable than a poor, pinched mind spending the rich days and years clutching a few bits of metal? What can be fine about paring the necessities of life to the very quick? We all know “economical people” who seem to be niggardly even about the amount of air they breathe and the amount of appreciation they will allow themselves to give to anything. They shrivel – body and soul. Economy is waste: it is waste of the juices of life, the sap of living. For there are two kinds of waste – that of the prodigal who throws his substance away in riotous living, and that of the sluggard who allows his substance to rot from non-use. The rigid economizer is in danger of being classed with the sluggard. Extravagance is usually a reaction from suppression of expenditure. Economy is likely to be a reaction from extravagance.
  4. Most men who are laboriously saving a few dollars would do better to invest those few dollars – first in themselves and then in some useful work. Eventually they would have more to save. Young men ought to invest rather than save. They ought to invest in themselves to increase creative value; after they have taken themselves to the peak of usefulness, then will be time enough to think of laying aside, as a fixed policy, a certain substantial share of income. You are not “saving” when you prevent yourself from becoming more productive. You are really taking away from your ultimate capital; you are reducing the value of one of nature’s investments. The principle of use is the true guide. Use is positive, active, life-giving. Use is alive. Use adds to the sum of good.
  5. The difficulty seems to be in getting to look beyond to the causes. More people can be moved to help a poor family than can be moved to give their minds toward the removal of poverty altogether.

 

 

 

On Charity

  1. I have no patience with professional charity, or with any sort of commercialized humanitarianism. The moment human helpfulness is systematized organized, commercialized and professionalized, the heart of it is extinguished, and it becomes a cold and clammy thing. Professional charity is not only cold but it hurts more than it helps. It degrades the recipients and drugs their self–respect.  Worse than this encouragement of childish wistfulness, instead of training for self–reliance and self–sufficiency, was the creation of a feeling of resentment which nearly always overtakes the objects of charity. People often complain of the “ingratitude” of those whom they help. Nothing is more natural. In the first place, precious little of our so-called charity is ever real charity, offered out of a heart full of interest and sympathy. In the second place, no person ever relishes being in a position where he is forced to take favors.
  2. Industry organized for service removes the need for philanthropy. Philanthropy, no matter how noble its motive, does not make for self-reliance. We must have self-reliance. A community is the better for being discontented, for being dissatisfied with what it has. I do not mean the petty, daily, nagging, gnawing sort of discontent, but a broad, courageous sort of discontent which believes that everything which is done can and ought to be eventually done better. Industry organized for service – and the workingman as well as the leader must serve – can pay wages sufficiently large to permit every family to be both self-reliant and self-supporting. A philanthropy that spends its time and money in helping the world to do more for itself is far better than the sort which merely gives and thus encourages idleness. Philanthropy, like everything else, ought to be productive, and I believe that it can be.
  3. In clearing out the need for charity we must keep in mind not only the economic facts of existence, but also that lack of knowledge of these facts encourages fear. Banish fear and we can have self-reliance. Charity is not present where self-reliance dwells. Fear is the offspring of a reliance placed on something outside – on a foreman’s goodwill, perhaps, on a shop’s prosperity, on a market’s steadiness. That is just another way of saying that fear is the portion of the man who acknowledges his career to be in the keeping of earthly circumstances. Fear is the result of the body assuming ascendancy over the soul. The habit of failure is purely mental and is the mother of fear. This habit gets itself fixed on men because they lack vision. They start out to do something that reaches from A to Z. At A they fail, at B they stumble, and at C they meet with what seems to be an insuperable difficulty. They then cry “beaten” and throw the whole task down. They have not even given themselves a chance really to fail; they have not given their vision a chance to be proved or disproved. They have simply let themselves be beaten by the natural difficulties that attend every kind of effort.
  4. There is no security outside of himself. There is no wealth outside of himself. The elimination of fear is the bringing in of security and supply. Let every American become steeled against coddling. Americans ought to resent coddling. It is a drug. Stand up and stand out; let weaklings take charity

 

 

On Thomas Edison

  1. No man exceeds Thomas A. Edison in broad vision and understanding. One time I managed to catch him alone for a moment and told him what I was working on. He was immediately interested. He is interested in every search for new knowledge. And then I asked him if he thought that there was a future in the internal combustion engine. He answered something in this fashion: “Yes, there is a big future for any light-weight engine that can develop a high horsepower and be self-contained. No one kind of motive power is ever going to do all the work of the country. We do not know what electricity can do, but I take for granted that it cannot do everything. Keep on with your engine. If you can get what you are after, I can see a great future.” That is characteristic of Edison. He was the central figure in the electrical industry, which was then young and enthusiastic. The rank and file of the electrical men could see nothing ahead but electricity, but their leader could see with crystal clearness that no one power could do all the work of the country. I suppose that is why he was the leader.
  2. Edison believes all things are possible. At the same time he keeps his feet on the ground. He goes forward step by step. He regards “impossible” as a description for that which we have not at the moment the knowledge to achieve. He knows that as we amass knowledge we build the power to overcome the impossible.
  3. Edison is easily the world’s greatest scientist. I am not sure that he is not also the world’s worst business man. He knows almost nothing of business.

 

On John Burroughs

  1. Poverty springs from a number of sources, the more important of which are controllable. So does special privilege. I think it is entirely feasible to abolish both poverty and special privilege – and there can be no question but that their abolition is desirable. Both are unnatural, but it is work, not law, to which we must look for results.
  2. This was part of John Burroughs’ sanity – he was not afraid to change his views. He was a lover of Nature, not her dupe. In the course of time he came to value and approve modern devices, and though this by itself is an interesting fact, it is not so interesting as the fact that he made this change after he was seventy years old. John Burroughs was never too old to change. He kept growing to the last. The man who is too set to change is already dead. The funeral a mere detail.
  3. If he talked more of one person than another, it was Emerson. Not only did he know Emerson by heart as an author, but he knew him by heart as a spirit. He taught me to know Emerson. He had so saturated himself with Emerson that at one time he thought as he did and even fell into his mode of expression. But afterward he found his own way – which for him was better.
    1. Has moved beyond the ignorance paradox and gained deep fluency but gained mastery once he developed his own style

 

On Thinking & Education

  1. An able man is a man who can do things, and his ability to do things is dependent on what he has in him. What he has in him depends on what he started with and what he has done to increase and discipline it. An educated man is not one whose memory is trained to carry a few dates in history – he is one who can accomplish things. A man who cannot think is not an educated man, however many college degrees he may have acquired. Thinking is the hardest work any one can do – which is probably the reason why we have so few thinkers. There are two extremes to be avoided: one is the attitude of contempt toward education, the other is the tragic snobbery of assuming that marching through an educational system is a sure cure for ignorance and mediocrity.
  2. The best education can do for a man is to put him in possession of his powers, give him control of the tools with which destiny has endowed him, and teach him how to think. The college renders its best service as an intellectual gymnasium, in which mental muscle is developed and the student strengthened to do what he can. To say, however, that mental gymnastics can be had only in college is not true, as every educator knows. A man’s real education begins after he has left school. True education is gained through the discipline of life
  3. The only reason why every man does not know everything that the human mind has ever learned is that no one has ever yet found it worthwhile to know that much. Men satisfy their minds more by finding out things for themselves than by heaping together the things which somebody else has found out. You can go out and gather knowledge all your life, and with all your gathering you will not catch up even with your own times. You may fill your head with all the “facts” of all the ages, and your head may be just an overloaded fact–box when you get through. The point is this: great piles of knowledge in the head are not the same as mental activity. A man may be very learned and very useless. And then again, a man may be unlearned and very useful
  4. The object of education is not to fill a man’s mind with facts; it is to teach him how to use his mind in thinking. And it often happens that a man can think better if he is not hampered by the knowledge of the past
  5. One good way to hinder progress is to fill a man’s head with all the learning of the past; it makes him feel that because his head is full, there is nothing more to learn  Merely gathering knowledge may become the most useless work a man can do. What can you do to help and heal the world? That is the educational test. If a man can hold up his own end, he counts for one. If he can help ten or a hundred or a thousand other men hold up their ends, he counts for more. When a man is master of his own sphere, whatever it may be, he has also won his degree – he has entered the realm of wisdom

 

 

 

 

Other

  1. What we accumulate by way of useless surplus does us no honor
  2. There are two fools in this world. One is the millionaire who thinks that by hoarding money he can somehow accumulate real power, and the other is the penniless reformer who thinks that if only he can take the money from one class and give it to another, all the world’s ills will be cured. They are both on the wrong track. They might as well try to corner all the checkers or all the dominoes of the world under the delusion that they are thereby cornering great quantities of skill. Some of the most successful money-makers of our times have never added one pennyworth to the wealth of men. Does a card player add to the wealth of the world?
  3. I am not a reformer. I think there is entirely too much attempt at reforming in the world and that we pay too much attention to reformers. We have two kinds of reformers. Both are nuisances. The man who calls himself a reformer wants to smash things. He is the sort of man who would tear up a whole shirt because the collar button did not fit the buttonhole. It would never occur to him to enlarge the buttonhole. This sort of reformer never under any circumstances knows what he is doing. Experience and reform do not go together. A reformer cannot keep his zeal at white heat in the presence of fact. He must discard all facts.
  4. Our only advantage was lack of precedent
  5. We are often too wrapped up in the things we are doing – we are not enough concerned with the reasons why we do them. Our whole competitive system, our whole creative expression  all the play of our faculties seem to be centered around material production and its by–products of success and wealth
  6. It is not true that opportunity has been lost in organization. If the young man will liberate himself from these ideas and regard the system as it is, he will find that what he thought was a barrier is really an aid
  7. Our help does not come from Washington but from ourselves
  8. Business and government are necessary as servants, like water and grain; as masters they overturn the natural order
  9. There can be no greater absurdity and no greater disservice to humanity in general than to insist all men are equal. Most certainly all men are not equal and any democratic conception which strives to make men equal is only an effort to block progress. Men cannot be of equal service. The men of larger ability are less numerous than men of smaller ability; it is possible for a mass of the smaller men to pull the larger ones down – but in so doing they pull themselves down. It is the larger men who give the leadership to the community and enable the smaller men to live with less effort.
  10. Lack of knowledge is what is going on and lack of knowledge of what the job really is and the best way of doing it are the reasons why farming is thought not to pay. Nothing could pay the way farming is conducted. The farmer follows luck and his forefathers. He does not know how economically to produce, and he does not know how to market. A manufacturer who knew how neither to produce nor to market would not long stay in business. That the farmer can stay on shows how wonderfully profitable farming can be. The way to attain low priced and high volume production means plenty for everyone – is quite simple. The trouble is that the general tendency is to complicate very simple affairs. Take for instance, an “improvement.” When we talk about improvements we have in mind some change in a product. An “improved” product is one that has been changed. That is. It my idea. I do not believe in starting to make until I have discovered the best possible thing. This, of course, does not mean that a product should never be changed, but I think that it will be found more economical in the end not even to try to produce an article until you have fully satisfied yourself that utility, design, and material are the best. If your researches do not give you that confidence, then keep right on searching until you find confidence. The place to start manufacturing is with the article. The factory, the organization, the selling and the financial plans will shape themselves to the article. You will have a cutting edge on your business chisel and in the end you will save time. Rushing into manufacturing without being certain of the product is the unrecognized cause of many business failures. People seem to think that the big thing is the factory or the store or the financial backing or the management. The big thing is the product, and any hurry in getting into fabrication before designs are completed is just so much wasted time. I spent twelve years before I had a Model T – which is what is known today as the Ford car – that suited me. We did not attempt to go into real production until we had a real product. That product has not been essentially changed. We are constantly experimenting with new ideas. If you travel the roads in the neighborhood of Dearborn you can find all sorts of models of Ford cars. They are experimental cars – they are not new models. I do not believe in letting any good idea get by me, but I will not quickly decide whether an idea is good or bad. If an idea seems good or seems even to have possibilities, I believe in doing whatever is necessary to test out the idea from every angle. But testing out the idea is something very different from making a change in the car. Where most manufacturers find themselves quicker to make a change in the product than in the method of manufacturing – we follow exactly the opposite course. Our big changes have been in methods of manufacturing. They never stand still. I believe there is hardly a single operation in the making of our car that is the same as when we made our first car of the present model. That is why we make them so cheaply. The few changes that have been made in the car have been in the direction of convenience in use or where we found that a change in design might give added strength. The materials in the car change as we learn more and more about materials. Also we do not want to be held up in production or have the expense of production increased by any possible shortage in a particular material, so we have for most parts worked out substitute materials. Vanadium steel, for instance, is our principal steel. With it we can get the greatest strength with the least weight, but it would not be good business to let our whole future depend upon being able to get vanadium steel. We have worked out a substitute. All our steels are special, but for every one of them we have at least one, and sometimes several, fully proved and tested substitutes. And so on through all of our materials and likewise with our parts. In the beginning we made very few of our parts and none of our motors. Now we make all our motors and most of our parts because we find it cheaper to do so. But also we aim to make some of every part so that we cannot be caught in any market emergency or be crippled by some outside manufacturer being unable to fill his orders.
  11. It could almost be written down as a formula that when a man begins to think that he has at last found his method he had better begin a most searching examination of himself to see whether some part of his brain has not gone to sleep. There is a subtle danger in a man thinking that he is “fixed” for life. It indicates that the next jolt of the wheel of progress is going to fling him off. There is also the great fear of being thought a fool. So many men are afraid of being considered fools. I grant that public opinion is a powerful police influence for those who need it. Perhaps it is true that the majority of men need the restraint of public opinion. Public opinion may keep a man better than he would otherwise be – if not better morally, at least better as far as his social desirability is concerned. But it is not a bad thing to be a fool for righteousness’ sake. The best of it is that such fools usually live long enough to prove that they were not fools – or the work they have begun lives long enough to prove they were not foolish.
  12. The temptation to stop and hang on to what one has is quite natural. I can entirely sympathize with the desire to quite a life of activity and retire to a life of ease. I have never felt the urge myself but I can comprehend what it is – although I think that a man who retires ought entirely to get out of business. There is a disposition to retire and retain control. It was, however, no part of my plan to do anything of that sort. I regarded our progress merely as an invitation to do more – as an indication that we had reached a place where we might begin to perform a real service. I had been planning every day through these years toward a universal car. The public had given its reactions to the various models. The cars in service, the racing, and the road tests gave excellent guides as to the changes that ought to be made, and even by 1905 I lacked the material to give strength without weight. I came across that material almost by accident
  13. Nothing is more foolish than for any class to assume that progress is an attack upon it. Progress is only a call made upon it to lend its experience for the general advancement. It is only those who are unwise who will attempt to obstruct progress and thereby become its victims. All of us are here together, all of us must go forward together; it is perfectly sill for any man or class to take umbrage at the stirring of progress. If financiers feel that progress is only the restlessness of the weak–minded persons, if they regard all suggestions of betterment as a personal slap, then they are taking the part which proves more than anything else could their unfitness to continue in their leadership
  14. I have no quarrel with the general attitude of scoffing at new ideas. It is better to be skeptical of all new ideas and to insist upon being shown rather than to rush around in a continuous brainstorm after every new idea. Skepticism, if by that we mean cautiousness, is the balance wheel of civilization. Most of the present acute troubles of the world arise out of taking on new ideas without first carefully investigating to discover if they are good ideas. An idea is not necessarily good because it is old, or necessarily bad because it is new, but if an old idea works, then the weight of the evidence is all in its favor. Ideas are of themselves extraordinarily valuable, but an idea is just an idea. Almost anyone can think up an idea. The thing that counts is developing it into a practical product.
    1. “Out of very hundred new ideas ninety-nine or more will probably be inferior to the traditional responses which they propose to replace. So the conservative who resists change is as valuable as the radical who proposes it—perhaps as much more valuable as roots are more vital than grafts. It is good that new ideas be heard, but it is also good that new ideas be compelled to go through the mill of objection, opposition, and contumely; this is the trial heat which innovations must survive before being allowed to enter the human race. Out of this tension comes a creative tensile strength, a stimulated development, a secret and basic unity and movement of the whole.’’ – Will Durant
  15. Freedom is the right to work a decent length of time and to get a decent living for doing so; to be able to arrange the little personal details of one’s own life. It is the aggregate of these and many other items of freedom which makes up the great idealistic Freedom. The minor forms of Freedom lubricate the everyday life of all of us.
  16. The very young critic is much imbalanced
  17. Nature has vetoed the whole Soviet Republic for it sought to deny nature. It denied above all else the right to fruits of labor.
  18. Our help does not come from others but from ourselves
  19. No two things in nature are exactly alike
  20. Law of diminishing returns begins to operate at the point where strength becomes weight. Weight may be desirable in a steam roller but nowhere else. Strength has nothing to do with weight. The mentality of the man who does things in the world is agile, light, and strong. The most beautiful things in the world are those from which all excess weight has been eliminated. Strength is never just weight – either in men or in things. Whenever anyone suggests to me that I might increase weight or add a part, I took into decreasing weight and eliminating a part! The car that I have designed was lighter than any car that had yet been made. It would have been lighter if I had known how to make it so – later I got the materials to make the lighter car.
  21. I only want to know whether the greatest good is rendered to the greatest number
  22. Any successful system must check human nature; not depend on it
  23. What is desirable and right is never impossible
  24. You can never develop Mexico until you develop the Mexican
  25. A country becomes great when, by the wise development of its resources and the skill of its people, property is widely and fairly distributed
  26. It is the right act sincerely done that counts
  27. Those who shout loudest about democracy I think, as a rule, want it least

 

 

What I got out of it

  1. One of my favorite biographies and business books of all time. Extremely clear thinker, does what works rather than what others think is right, never accepted anything as true and questioned everything, sought simplicity in all that he did, was never “done”. He of course had some great flaws such which we should be weary of but we can absorb and incorporate his teachings while recognizing his faults.