Proven Strategies to Accelerate Growth, Productivity and Profits with George Stalk, Jr.

0:00 I think the w the one sentence description of time based competition or competing is time. Is giving your customers what they want. When they want it. Where they want it.

0:09 faster than your competitors can do it. It starts with the customer. And says, How do I get what they want to the pastor? Ten competitors. That's the essence of Kabiga's time.

0:38 Welcome to the Knowledge Project, a podcast about mastering the best of what other people have already figured out, so you can apply their insights to your life. I'm your host, Shane Parrish. If you're listening to this, you're missing out. If you'd like access to the podcast before public release, special episodes that don't appear anywhere else. hand edited transcripts, or you just want to support the show you love. You can join at fs.blog slash membership.

1:03 Check out the show notes for link. Today, my guest is George Stock Jr., a senior partner in the Boston Consulting Group who focuses on helping companies create sustainable competitive advantages using time. George first came on my radar when Tim Cook told all Apple executives to read his book Competing against time, how time based competition is reshaping global markets. After reading the book, I wanted to know more, so I reached out, and here we are. In this conversation, we go beyond the book and explore what it means to compete against time, the relationship between cost and time, speed and complexity, the Hardball Manifesto, and so much more. You'll learn how to speed things up and use time as an effective tool that's surprisingly hard to compete against.

1:51 This interview took place at our studio in Ottawa, Canada. It's time to listen. And learn. You said that winners in business play rough and don't apologize for it. That's right. Where does that come from and what does it mean?

2:13 I wrote this book called Hardball. And it was the subtitles Are You Plain to Play or Playing to Win? And I wrote it out of frustration and maybe anger. 'Cause I was I thought the business press was misleading.

2:26 Mainly MBA students and middle managers into thinking that business could be played nicely. Co optition was one of the big words at the time. And they

2:36 Europeans are masters of co optition. Most of collusion. But the notion was cooperate with your competitors, don't fight them. Well, all my clients who either Winning.

2:46 And trying to preserve their winning position. Or there were having trouble. maybe even losing and trying to survive. So that was a very very much a survival mode, whether they were winners or losers. So as I mentioned

2:59 Boeing. Depending on the year, is either number one to Airbus or number two to Airbus. So to them competition is Day to day. Komatsu versus Caterpillar.

3:10 Ford versus Toyota. To it versus Hanna and Nasan. And there is no Time to stop. Set back and take your breath and

3:20 Relax. It's a continuous battle. So the book. Had uh I

3:25 twelve strategies that always worked. But they're hardball strategies. And we just they were based around a clients. Experiences and Oh I think I'm

3:34 Almost all of them we had the clients' permission to use their names. And these companies. Put the edge in competition. And the results showed terms of their bottom line their growth. And their market shares. What are some of those strategies? What are the ones that are most valuable?

3:49 Oh, the one that always works. Is know your cost better than your competitors know their cost? Because most people Don't know the cost. I think they do. They know the cost that gets between the revenues and the profit line.

4:02 And those are all averages and they don't go behind the averages. And if you go behind the averages, what what What People will discover. Is that some things cost more than they thought they did and some things cost less.

4:13 And some customers are more profitable and some are less profitable. Um And if you know your costs better than your competitor, though their costs you could do nasty things. Gain market share. Uh because

4:26 Oh. you would understand how the costs work, your costs work and not what the volumes mean. So what may appear to be a a Uh less profitable. Cl customers actually

4:36 The high volume customer. Produces a whole bunch of economies of scale. reduces cost, but it that that all gets lost in the averages. So that's a that's a big winner. One That works very well is be faster than your competitors at providing your customers

4:50 What they want. when they want it and where they want it. And If a company can do that. Two or three times faster.

4:59 Than its competitors. It'll usually grow Two to three times faster, it'll be twice as profitable. And that was the story of Walmart versus Kmart for many years. That's the story of Taroto versus most of the rest of the auto industry. It's a BMW Mercedes.

5:13 Hardball MA was another one. buying companies that To round out a competitive position. Or extend one after One client.

5:22 Uh was in the medical devices. Business's second best competitor. Uh, was beginning to grow. And so they just bought'em out. No.

5:31 There are people in Washington and in Canada that are paid to stop that kind of stuff from happening. Uh And indeed the clients that we've worked with that do do that usually have to justify it. Pretty carefully. Uh

5:44 But at least people should start thinking about that. They shouldn't assume. Uh. that they can't get away with it. Uh so it was it was things like that. But it required a mindset that says.

5:55 We gotta win. There's not things you can do. In a relaxed way. As you're saying that I'm thinking sort of about corporate culture too, and we we sort of have this notion That the workplace is like a family.

6:08 That's part of the softening of business. I mean The fli I mean uh An analogue to family. Is

6:15 A tribe people understand What part of it the what part of what organization They're a member of. Uh And I can tell you people at Caterpillar know they're competing with Kamatsu.

6:27 Kamatsu has a sign that says Baru Capital. Excuse me, Maru Cat. over it's uh Headquarters Dart, Baru Cat means in circle caterpillar. And that becomes part of the culture. It doesn't

6:38 Does it? become the whole culture. Um but becomes a very good part. I you know, I think Amazon's a good example. Or Jeff Bezos says. Uh your Gorce Bajit is my target.

6:49 And people are expected to find businesses where They can basically reduce the gross margin. Grow by. fewer prices and move in. That's why they've moved out of books, all the things they moved into.

7:01 What's spice me about Amazon, though. is they haven't gotten into the ticket master's business. I still don't understand that. 'Cause the margin at ticket ticket masters are huge. And the business is amenable too. Uh the internet.

7:12 Um but that that creates a culture. Do you think that's Cultures are the ultimate source of competitive advantage. I would say yes and no. Uh

7:22 On the yes part, it's hard if you're if one's losing in part because One's culture is not competitive to And opponents. Uh. Trying to make the culture competitive is really difficult.

7:32 I've been caught in situations like that where From a technical standpoint, I know how to beat the number one competitor. With the organization. doesn't have the culture for doing that.

7:41 In that situation we the the CEO decided to sell it. Um But it's not the starting point. I think it's it's necessary to bring it

7:51 Bring culture into the If there's a a transformation process going on. uh that one needs to cement. The outcome.

8:01 Uh Federal Express uh Fred Smith. The world on time. And so FedEx thinks a lot about Time.

8:10 And uh The organization thinks a lot about time. And ideas for Yeah.

8:16 Improving time performance come from all over the organization. That's a cultural effect. Um But it you know, he was able to start that culture. Because Add a culture that

8:28 Was already at around speed. The next day delivery. How do you think about sort of a culture that Um you mentioned sort of competing with caterpillar and encircling caterpillar, which is outwardly focused, focused on the competition.

8:42 Versus one that's inward focused, which is maybe serving the customers the best. And letting that take care of itself. If somebody says my culture is built around serving the customer best. And I'm working with this company, they have to prove to me.

8:57 But relative to competitors they can do that. Uh, people often use these Descriptions of the culture without any quantitative representation. If the culture's not being responsive and Uh

9:09 So one of the fastest way to make them response is to do the competitive Comparisons. And demonstrate to people that somebody is doing what they think they're doing well. Much better than they're doing it.

9:19 And that's usually a big wake up call. If people Observe the wake up call and take the actions and follow through. Uh they can produce pretty dramatic results.

9:29 Uh but that's not an easy path I just described. Wait. Way yeah. had a case with a company called Wassaw Paper. Yeah, wash up paper.

9:37 Based in uh Wallsaw, Wisconsin. Uh small Paperbill. Basically. Uh the

9:44 Owned by a family trust. underinvested in the equipment. and ended up in the wrong place of the paper business that places. Too many small, narrow, slow machines. in a high cost position.

9:57 and chronic loss of money. Um, but no turnaround plans for that. It was a trust. They brought us in because they were afraid. We'd have to close the bill. And the last thing I wanted to do was

10:09 Close the mill that created the trust. So they said, Can you find a way to fix this thing? And we did. Uh the way we found a way to fix it. is we made this company able

10:20 to make specialty papers in small volumes. and deliver'em next day. Within the greater. Midwestern area. In the end, that was maybe twenty percent of the effort.

10:32 Um, because even though the organization didn't have any Any options. Oh they couldn't bring themselves To implement that strategy. So for example, the sales manager

10:44 Uh was not at all interested. And Changing his merchant relationship. There's distribution relationships.

10:52 And for this company to give up on the commodity papers and focus just on specialties, they had to have a broader distribution. to to produce the volumes they needed. So that that scared the hell out of him. He didn't want to go But I mean the w hardest thing the worst thing about finding a new customer is having to go back and tell your old customer

11:08 That has been done. The logistics guy hated it. 'Cause it We said okay. Uh the deal here is

11:16 The truck goes out, whether it's full or not. Now this is an industry that's been already at a cost it, so less the truck holds is is not something you do. All trucks go out full. All trucks carry forty thousand pounds. That's a lot of paper. Most people don't buy. Forty thousand pounds of especially great paper.

11:32 Um, but we had to do that'cause we're promising people next day delivery. And the reason we're promising the next day delivery is we could change their economics. We could change the merchant or distributor's economics. 'Cause next day delivery meant they could operate with less capital. Yeah. Yeah, you you

11:47 But you talk about competitive advantage. At that point for a competitor to knock us loose. They would have to Be as fast as we are. Um

11:56 And they have to get the The the uh Their merchants too. invest capital in their business that already been invested in ours. Um

12:04 Now to logistics manager. Wouldn't do that. You would not send a truck called unless it was full. 'Cause he's always measured on that. He just w we had to retire that guy. But it worked.

12:15 Wallsaw Paper. for many, many years created the highest shareholder value. Of any paper company in the world. Until it ran out of capacity. But

12:22 It took a new CEO, it took a new sales manager, it took took a new logistics guy. Uh it did take a new manufacturing person because the once the person understood Yeah. The manufacturing person understood. that we would put the equipment in he needs to be flexible.

12:37 And be able to handle short runner notes. He was happy. So one has to take on the culture. And now also If you read their annual report. I mean they got it.

12:45 It was like BCG never existed. It's in their it's in their their genes at the moment. How hard is it to take an existing culture that's headed for certain doom in this case? and then pivot that to an uncertain future. It sounds like a lot of people were holding on.

13:03 They would rather the certain doom than the uncertain potential of surviving. I mean to a layman to me. If you run out of options. And the and the remaining options of bankruptcy. You'd think

13:16 There should be no argument here what we do on Monday, but there is. People just can't bring themselves. To make that change. Um So the size of the prize has to be big enough for management to be willing.

13:27 To take on the organization, take on the culture. Um I had the experience of turning around. a client's factory to prove that. uh it could be made more flexible and much faster.

13:39 at m it was hospital beds, big hospital beds and their competitors. Um in the end Uh. Eighty percent. Management turned over.

13:48 'Cause they couldn't handle. The changes. They could run smaller batches. um they could mo more frequently schedule a facility. They just didn't believe it would work. Oh.

13:59 And that's another example. A comp company was On the edge of going out of business with a Canadian company, by the way. The culture's the hardest thing to change. It needs to be changed. Um It needs to be changed.

14:09 to s Two Freeze. the benefit of a new strategy. Um, but one can't start there.

14:16 I think it'd be very difficult to start but that Walsaw paper and say We're gonna be the most flexible c company in the world, making the greatest product. Greatest amount of Specialty.

14:26 And not being in the commodity business, which is exact every one of those things is against the the the the mentality of anybody in the paper business. I wanna talk a little bit more about time based competition later on before we get to that. What are some of the advantages

14:42 Um relative between private companies and public companies. What can private companies do The public companies can't. Uh

14:53 My client work has almost been exclusively for owners of family companies. Sub in deep. Deeply immersed. With the families. Any hours.

15:02 The owners of family companies uh are most worried about their reputation beard. smeared by not poor performance. That's their number one concern.

15:12 The second concern in owners is How am I? Children do. I mean, all of them are afraid of their children becoming playboys.

15:21 And after that kind of trickles out to a bunch of different things. Um But a few years ago. Uh we did a project. Oh.

15:30 Where we looked at. Uh family companies. That were publicly traded. and had publicly traded competitors. So like in Canada, Rogers

15:40 uh communications. Yeah. The owners own that one share that owns a hundred percent of the company. But there's a second second or or the class C stock. uh that's owned by the public, but no voting rights.

15:52 So you could compare Rogers to a A family company too, a non family. media company. But you can do that a bunch of industry. Like Nestle, you compare a a food company with Nestle. And when you look at the literature.

16:06 about performance of family companies versus public. Well, people often say First thing I'll say. His family companies have longer time horizons. I'll come back to that.

16:16 The second thing they'll say is Family companies are more profitable than public. Or somebody will say there. public are more profitable than families. So we did a project where we said

16:25 This is wrong you know, pe people are doing this the right way'cause what they're doing is they're looking at it at a point in time. Yeah. It really should be looked at over, though. A business cycle. In fact, we looked at it over two business cycles.

16:37 And what was really interesting that came out of that. was the family companies. Well we're not as high performing on profitability.

16:46 Any up. Turns of the market. But nor were they as poor performing as public companies in the downturns. So we didn't have a lot of this sh this behavior by management. To exercise.

16:59 stock options that are driven by quarterly stock prices or Your early stock prices. You got a culture that was based on Let's keep the business. Surviving.

17:07 And growing and being healthy. So if you take those two curves, you take one curve, which is the public companies, goes up really high and it goes out really low. Um And then managing its change down here. And a public of it. Does it go up that high, does it go that low, and management doesn't change.

17:21 Uh the area under the Private companies. Performance is greater than the public openities. So my answer. Oh, that respect is the

17:28 private companies are more profitable. Yeah. Not because it's longer term. But because they're very they're much more risk averse. uh than I see public companies.

17:39 uh the master of public of his being. So I think that's the biggest challenge for a public company against a private company. Yeah. How could I manage the risk? How could I And a public company maintain a risk profile.

17:51 That's easy for private company may take'cause they don't have to explain to anybody. One of the eye opening examples I saw was a very large family company. Uh no publicly traded shares. But the non family management.

18:04 Which was like Ninety nine percent of the population'cause they're the family all taking their money. gone to their vacation homes and things. Yeah.

18:14 They decided to put the ninety nine percent. I see. a Phantom Stock Performance Plan. Which converted him into a quarterly business behavior. to meet their own internal goals to get their stock buttons. So you can actually wreck a family companies.

18:27 orientation by. Making it behave like a private company. Should be like a public update. And actually I think if you if what are the Not very discussed things on business today.

18:39 is you have the number of companies traded And the uh US stock exchanges that are public are down by half. Half of these companies are gone in numbers.

18:49 And they've been taken private. by the LBO firms, or what people like to call private equity firms. That's the polite phrase. But leverage bio firms. And so the the private model of ownership is becoming the predominant model of ownership.

19:02 If one steps away from Canada in the US. The family own ownership profile. Yes. The most characteristic ownership. around the world.

19:12 Not public companies. Closest to Canada, the US is Is England. Um I work a lot in Brazil.

19:21 Uh there's a public market. But the predominant wealth Uh. uh businesses in Brazil are owned by families. And even those that are family controlled sometimes have this second stock trading.

19:34 Go to Argentina, which I've done. Very few public companies. They're all private. Go to Asia. the the Philippines and Indonesia, there's very, very few public companies. It's all families.

19:44 In Japan, Kikoban is hundreds of the Family own company's hundreds of years old. A lot of good things have to happen to last a hundred years. Not just being family. Oh.

19:56 But it's rare to find public companies that last. That wall. There's a couple of things you said there that I wanna follow up on. And one of the observations I made as you were talking is It seems like

20:10 During the the you said two life cycles. Two spizer cycles. Two business cycles on the upswing. private companies are always underperforming. underperform the public companies.

20:23 And They can do that because they're private companies. In a way. Exactly. I mean nobody's it nobody's insisting on ever greater returns. Which will force the management of public company to

20:36 I mean Returns are a risk reward. And if one wants higher returns, one usually has to take a bit more risk. And so when the management of a public company is rewarded for for

20:48 Taking risk that produces returns. That that works. Um but it usually comes from leverage. Usually comes either from financial leverage or leverage of management talent. Um

20:59 Or Financial risk. Uh so when it goes into the downturn. The the price for taking those risk comes home to Rus. As I but sure it does for the family companies, just doesn't happen as deeply and as bad.

21:13 So it's almost like they're trading a little bit of tomorrow or That's a better way to put it. The family companies will trade performance today for long term performance. In the face of adversity. And it almost seems like public companies try to predict the future. So they maximize for like going all in. on what's working right now.

21:32 Assuming that the environment won't change. Whereas I think a family companies positioning for a broader range of possible futures. And never sort of like putting all in on a certain particular

21:46 future. My experience at family companies. Is From a business operation standpoint. The management and the owners of family companies behave like

21:58 the management of public companies. Um In many, many respects. It's the odors that Yeah.

22:04 Yeah. Demand the caution. I'm not. Getting too too extended. And as he owners it.

22:12 uh bat down the hatches so things don't go as bad as quickly. Um, not the management. So if a family has an external manager. they're going to behave differently, but the family acts as a counterbalance. Yes. If the family has an external manager. They still own the company.

22:28 Uh and the manager Unless we have this Phantom Stock program going on. The managers working to build wealth for the family. And the family if they're smart.

22:36 Most of them are will reward their There and their their non family management. That's one of the big issues with family companies is is Are we an operating

22:46 Uh family or we An owner family only. Uh And that usually is a a debate that occurs By the third or fourth generation.

22:56 Do people want to be in the business or not? You want a caterpillar's biggest problems right now. is most caterpillar dealerships are family owned. And caterpillars. dealership franchise gives them gives Caterpillar the right.

23:09 Two Two Okay, change of ownership. And change ownership is something that happens when somebody wants to retire. And

23:20 It's true at Ford. It's true of a number of companies. Uh Sherman Williams. Just like that. Uh but when

23:27 The problem at Caterpillar right now is Is If your father's a caterpillar Dealer. And you want to be a lawyer, the last thing you want to do is

23:36 Stop being a lawyer and go be a a caterpillar is a pretty lucrative thing to do. And so the families Grow out of the business. Yeah.

23:46 Today in today's world's hard to get to commit to a p continuous family ownership of the business. Is it important that those are family operated and owned, or why wouldn't Caterpillar just take control and like hire somebody to run those stores? what they want their family ownership. to represent as a value in the relationship with the customer.

24:06 Oh. And They want the the the dealership is a family owner dealership. To put the customer first.

24:14 And not have to worry about Oh Reported earnings. I mean The the largest non family

24:21 Caterpillar deal of the world, I think is Tormont here in Canada. That's a rarity. the rest of our family. So they w they want that. Steady hand. I wouldn't call it long term perspective, I just call steady hand, not too not too

24:33 High return, not too low return. In the business. To to return to the Problem. The problem is

24:40 Getting the offspring to do it. But the third or fourth generation, the offspring often loses interest in the business. I wanna go back to something you said about time horizons. Can you tell me more about that? specifically as they relate to um say public companies with

24:56 Um Professional management. Versus family companies Perhaps with or without

25:04 Professional management. Well I should clarify something. Family companies that bring in professional management. Fall into two groups. Oh.

25:12 One is an involved owner group. And one is a non-involved owner group. And the involved owner group. I may bring in non professional managers.

25:22 But I'm watching'em closely'cause I still own the business. I still want it. See the business do well. And a non involved ownership group, I might just Be very happy to let Turn this whole thing.

25:33 to person A and let them run run the business. Uh Yeah, I have to Find a way to reward them. to keep them from being hired away by a public company.

25:42 But it's still. Um In terms of time horizons. I think the the family involved.

25:52 Is this Expects the thing to last more than one generation. Expects the next generation. to take over the business d would you say that But one says the next generation one's talking about

26:04 Forty years. 'Cause managed generations are about twenty years. So you get at least forty year time horizon. Um If you expect it to go a third or fourth generation or saying how do we keep this thing going?

26:16 For sixty to eighty years. Um And what that does translate into is uh Is I may want to inv invest in a certain type of

26:27 business or asset. Um Because it will have that longevity. I think that's why you see so many family companies in shipping. 'Cause these ships last twenty years.

26:39 Um And their investment decisions. uh that one one makes to buy a ship that's gonna be with you for a while. Or you sell the ship. Um

26:50 And so people expect to make their returns over the longer cycle. And public companies. I would say with What Only a few exceptions.

26:59 People's time horizon. It's about three years. Major time rises. The average CEO tenure is less than five years right now.

27:06 And so they're looking for the their investments to produce rewards that they could be compensated for under a shorter time horizon. Which increasingly puts them. trading tomorrow for today. Exactly. Right. It's like when a new coach takes over a team. They'll often trade away.

27:24 um players in like um or trade away draft picks to get players to win now, but they're setting themselves up for the future, or they'll sign free agents. At incredibly lucrative contracts in order to boost the performance of the team next year, but they're setting themselves up for an increasingly difficult position. Over the life of those contracts. Now this is where I mentioned it.

27:47 The disappearance of the public company? It's so important because The businesses aren't going away. is the ownership just changing. And for many years I always thought

27:56 If if my client Had a competitor that did a did an LBO. That was the time to pound on the competitor. Because they'd be paying off debt. They have limited financial flexibility.

28:07 Um And it's easier it's easier to fight somebody that can't fight back. 'Cause I don't have any flexibility. Financial.

28:13 Financially. But today's world I think the LBO for excuse me the private equity firms today. Actually do have a longer horizon than the ones that in the eighties the seventies and eighties.

28:24 And they're all in the steckle the business. So if somebody goes private. And I'm public. I'm gonna have a competitor that's gonna make investments that I might not make. And these investments could Do we hurt me?

28:36 And if I try to do something about it, I could conceivably hurt myself in terms of compensation. And my own wealth creation. So what people like to call the agency problem starts to take over is who you know, if I'm in a public company, who am I working for? Myself or the company? Now in the family involved ownership model. The family's watch me pretty carefully.

28:55 And we're talking a lot. Uh so we could prevent the non family management. Uh Should go.

29:03 often their own direction to meet their own financial goals. Uh, because we can we know we control it. We can decide. Now the world's becoming more like what I just described than it has been. In the last fifty years. He has more. You know, more and more companies are private now.

29:18 Not necessarily family owned, but private. Uh Than our public. Just within the the the Fortune five hundred. Oh, the Fortune One Thousand.

29:30 Um No, in general is There's Frank is it The family ownership model is the

29:35 P predominant worldwide ownership model. Um you know, it is the ownership model that people have to compete with. Ultimately. Do it as a family company.

29:47 It's also a pu you're a public company. But when things go wrong at Toyota, the family gets involved. Not the whole family. But is it the it's usually something with a T. And their name.

29:59 It sounds like what what's really happening in a lot of cases, not all cases, is that You're matching the timeline expectations of the shareholder to the management. So if you take a company private, you can take a longer horizon and by the nature of the investment vehicle and being a shareholder, it's harder to exit. There's almost very little liquidity. So you can lengthen the time horizon that management has to operate.

30:25 And you can take a ten, twenty, thirty year view. Whereas with a public company, like you said You're operating on these cycles of quarterly, but if you're a new CEO, you know you have maybe two years. to start showing results before the pressure starts building.

30:41 And shareholders have a an increasingly even short. time horizon where they're expecting management to make these investments that last 10 or 20 years, but they're holding shares for like a week or two. Well, Clayton Christensen. Professor. Uh Harvey's dead now, unfortunately.

30:58 Um made some really strong arguments that that You perform to the shareholders you want to satisfy. And so if the shareholders I want to satisfy.

31:08 are willing to trade my sh my stock. On a moment's notice. I have to have a short term performance. Orientation. If they're gonna

31:15 You know, buy and hold. Uh I I need to understand that so I can have a longer term. View of the business. Um now what is longer term? Japan stands out.

31:26 in its own category. And you know. Profitability as a companies. Or something. Once the company's profitable.

31:33 they can decide when they want the profits. Do I want them now? Or do I want them? Do I want a certain amount now or do I want a bigger amount? Later. And if I want to bigger them out later, it's because I believe I can grow the company, I can bring my cost down, increase my margins.

31:48 uh make more money in the future than I can make now. So I'll forego it now to take it in the future. And what happened in the sixties, seventies and eighties and nineties with Japan. is the Japanese didn't want to be profitable right now. Well they wanted to be profitable not to grow the business, but they want to be Profitable.

32:05 at at an obscene level. And you butt that up like it's a s system Uh that as public shareholders they want their profits sooner rather than later. Or they're gonna trade the stock.

32:17 The two systems work perfectly well together. T. To get the growth. They invest to get the growth.

32:23 And then The Public usually American Cup has given up. Um

32:29 And eventually they become less profitable and the Japanese become more profitable. So that model I don't see very often elsewhere in the world where people say I can take my money now or I can take it later. And if I decide to take us later because I expect it to be a bigger pot later.

32:44 But family companies are perfectly positioned to make that decision. I mean some of the I would say half the family companies I work with Mm. Take very little out of the business. The keep a lot in.

32:57 fact I'm always amazed at look at it that Some of these companies are. The level of wealth exhibited by them. The family members. Does it match the dividend flows?

33:06 Um So not sustaining a lifestyle. on dividends. What they're really doing is is taking advantage of the wealth creation. That will happen over over time.

33:18 No. A dark side of the family business that Yeah. rarely seen in the literature. It's only seen in Literature I've helped write.

33:27 With my colleagues. Is it? Families grow. Exponentially. This is

33:34 don't grow usually exponentially. And so there's many cases where the pie gets bigger, but but but the per person share of the pie actually in absolute terms goes down. 'Cause the business isn't isn't growing fast enough to take care of the family. Oh that's a challenge.

33:49 that family company's face. If they want to have ownership distributed but on what people inherit. No, they don't have to do that. I mean.

33:59 Your business doesn't have to go to your two Children. Does it have to go to their Eight children. Oh.

34:06 It will, most what side of it will go like that, but it doesn't have to. And you can begin to say no. We're gonna split the ownership group into two parts. keeps the ownership concentrated. One that has an economic play in the business, but it doesn't have any ownership.

34:21 To try to break that. That more we can try to grow faster. But you basically have to grow about Uh fifty percent faster than The family's growing.

34:31 To keep the pie big enough. I wanna go back to something you said there about how a lot of the family run companies aren't taking out as much capital as they could be taking out. in order to compound it. Why do you think that that philosophy exists in private companies, but not necessarily in public companies?

34:49 Well, I think we touched on it. a a moment or two ago is that the the the managers or of private of public companies Are being compensated on. current performance. Sometimes they're compensated on.

35:01 Multi years. performance, but not very often. uh were the family companies. are compensated on current performance. Uh, but there's a big chunk composition waiting to be taken in the future.

35:14 uh through inheritance or or sale of the company. And so that puts people in the in two different time horizon plays. Oh, right away. And it also positions them completely different, right? So if if you're uh if your company has a lot of capital in the public market that might be considered like a bloated balance sheet. Yeah. But in the private market, that's positioning for multiple possible futures. If we have a lot of cash on the balance sheet, We can go where the wind's going instead of be forced into positions.

35:44 Yeah, one of the phrases I I hear a lot in family companies, but I rarely hear in public companies. Yeah. We gotta keep our powder dry. And

35:53 When I hear that phrase, what they're really saying is I gotta keep money in reserve. Four. Contingencies. Both positive and negative contingencies. But so interesting to me because if you look at history

36:05 I mean, most of the successful companies, if you go back to Carnegie or Rockefeller They were always playing offense, so they always had dry powder. They always went into negotiations with a lot of money. They inevitably waited for downturns and then took advantage of them. And then go. And they knew they were coming. And so they would build up their balance sheet. Then they would go all in during the downturn. They've built up their balance sheet and go all in during the downturn, but we don't seem to be able to do that today. Oil companies would be a great example, right? We know.

36:36 This commodity changes prices, and yet during the good times we distribute all the cash flow, and during the bad times We cut distributions. It's interesting, bring bring all cops up. Oh, companies up because they do invest in the long term. Because to develop an oil field can take a decade. Now they may rate it in at some point.

36:56 But they are unusual in that factor. They they're longer term investments. Well, especially now,'cause you have a five year planning cycle, I would imagine. for a lot of these assets to even get online. If we're now in the energy business, that's true. Yeah. Uh but the Irvings

37:08 In Canada. are in the petroleum business. It'll be interesting to watch how they play out. I think W what's Implicit what we're talking about is I think

37:17 Public companies are underinvest in understanding how private companies compete. Uh And therefore they're vulnerable. to private companies behaving differently than they do because

37:30 They have a view of the world or they have possibility because of the Dry powder. to take advantage of circumstances that public companies. Uh don't.

37:39 Uh. If they see it, they don't want to act on it because they can't. afford to take the personal risk. financially that it would take to act on it. It's almost like any disruption.

37:49 is good if you have dry powder and any disruption is bad if you don't. Yeah, now's the time to be in the m housing market if you got money. Yeah. You you wrote a book. This is how we ended up getting connected. You wrote a book called Competing Against Time. It was

38:04 Uh to my knowledge, it's the only book It. Uh Tim Cook has recommended. All is All of the Apple executives read.

38:13 And I'm wondering, can you talk to me a little bit about competing against time? What does that mean? I think the the one sentence description of time based competition or competing against time. Is Giving your customers what they want. When they want it. Where they want it.

38:27 Faster than your competitors can do it. It starts with the customer. And says how do I get what they want to the pastor? Ten competitors. Um

38:36 That's the essence of Kabiga's time. Uh, then there's a whole whole bunch of fallout from that. Most people Um I would say more so ten years ago than today.

38:48 If I was to go through an annual report. The only time I would see in the annual report. Um would be They

38:57 the time of the income statement. No start and stop. the date of the balance sheet. There may be a lot of yakking about responsiveness, but they're not really managing time. Uh

39:07 If one introduces Time. as a man something can be managed alongside a cost. Uh that a whole bunch of things Pop out.

39:16 Gain visibility. That don't when time is not. included as a variable. Um And those

39:25 Things can be things like uh uh the price premium a customer will pay for faster delivery. Um The I as it turns out the

39:35 The lower capital requirements. that result in Well I compare two factories, one that is twice as fast as another factory. The one that's twice as fast usually has faster working capital turns.

39:46 has higher productivity. And lower cost. And people get to that point because they've looked at Cost and time. It's not time instead of cost, it's cost and time.

39:56 In fact, it's cost time and quality. Because if one's looking at an organization through the l through the lens of time. one will see where the quality problems are. uh because any time one has a quality problem, whether it's manufacturing

40:11 R and A. Uh. an information business. It means rework. Anytime you have rework.

40:17 It means lost time. And so for people to be fast as competitors, that you know They have to be higher quality. They won't don't get the speed.

40:27 I remember talking to the CEO of Motorola. was one of the earlier users of time as a weapon. He says. Oh. We sell the organization on quality, but we're actually taking time out.

40:38 Which is true. You know, a lot of people say, Whoa. Go, why do I have to do things faster? And they assume doing the faster is walking faster. Yeah. Completing things quicker.

40:48 Um It's actually just taking out all the dead time. Most organizations. If you if we look at Uh.

40:56 at the time required to produce an output. either an insurance policy or or a manufactured product. If they're not looking at time as a management variable. Value is only being added between a half a percent And five percent of the time.

41:10 Ninety five percent of the time when more is wasted. And people don't see that unless they start measuring. And in that ninety five percent is a whole bunch of cost. that go away if one starts taking time out. Um

41:25 So time is is a very powerful lens. To look at how Uh.

41:31 productive one one can be and then and the outputs are just Astounding. uh when you get a fast competitor. Up against the slow competitor. What are some of the things that get in the way of velocity in organizations?

41:44 It's a long list. Oh let's see the most obvious ones are I do things in batches. batch is easily thought of as manufacturing can also be uh in white collar in it in a knowledge business as well. I uh I manage a business on a set cycle.

41:57 Um batches are the result of what people consider to be economic water quantity. And of that ninety five percent of the time it's wasted. About a third of it goes to Being in a batch. About a third of it goes into being in a batch that hasn't isn't being worked on yet.

42:11 It's been scheduled. And a third bit goes into managing all the batches. And so if one s shrinks the back the batch time. Uh One one goes through multiple but goes through

42:24 Cycles of batches faster. Bash A B C gaps faster. If they're smaller batches. And you can't do that unless one organizes the factory floor. Or the back office.

42:35 uh to handle small batches. But when one can do that. Uh that last third of the time. which is managing the flow of batches throughout the organization goes away. So

42:48 I went to Tokyo. For BCG in nineteen Probably nineteen eighty one, long time ago. Nineteen eighty. Just before I went.

42:57 The the oh. The founder of B C guy, Bruce Henderson, pulled me aside. We need to know something about Japan that we don't understand, George. I said, What's that? So he pulls out this Paper. Yeah, it's done by the Ford Motor Company. It's done by Ford Europe, actually.

43:10 Comparing Uh Good factories at Ford with good factories at Mazda and Toyota. And there was one chart in particular. Where the Japanese factor was a third the size of the

43:24 Um The Ford factory. Uh three times the product. Variety. And was twice as productive.

43:33 And Bruce said. If we can't explain that. We're not giving Our clients.

43:39 Good advice because at the time we were telling clients There's two things you need to go for. You need to be go for scale. And you need to stay focused. Because uh scale produces a continual reduction in and variable cost.

43:52 And focus. removes complexity and overhead. So the focus factory. The focus factor that's big. was the winning factory.

44:01 And in this example we had A Japanese c company. A factory that was not as focused as the American factory. Didn't have the volume in the American factory. It was twice as productive, yeah.

44:10 So just does not compute. We gotta find out why. And what was really interesting. This isn't In the early nineteen eighties. People attributed

44:21 the Japanese productivity advantage to their culture. into the worker management relations. And if I looked well, we did, I looked into the numbers. All the Productivity advantage was an overhead.

44:34 It wasn't in the line workers. And it wasn't just a little bit overhead, it was a lot overhead. It was like one tenth the overhead. So these companies were simpler to manage. Even though they're smaller, more complex. And so

44:47 Ver very often the pr the the the bulk of productivity advantage. a Japanese factory might have. comes from pro it comes from overhead productivity. It doesn't come from drug. Direct labor. There is some direct labor productivity.

45:01 Um And so that got us To say, you know, we gotta understand this. And what we did when we got to Japan. When I got to Japan is I figured out how they did it.

45:12 Um And if one If one This you know. Facilitates

45:19 No. Small batch production. You have to have short set up times. Uh you have to have limited uh material movement.

45:28 You have to have On the floor scheduling. Um And if you can put all those things together. whole bunch of costs come out.

45:35 And all how much working capital comes out. And it produces the basis of somebody. That can be a time based competitor. One doesn't become a time based competitor just by taking time out. You become a time based competitor with when I use my time against a competitor.

45:50 And that's when the fun starts. 'Cause the comparative user doesn't know what's happening to him. Uh in the case of Wassau it took I I saw it happen, it took ten years. To the leaders of the paper company. paper industry to understand what Wassaw was doing.

46:05 In part this. As you mentioned earlier. Yeah. They were too innerly focused. They really didn't see what was happening. Or they dismissed it as a

46:12 As a sideshow. That's another great strategy. Four. Uh for hardball. It's what we call anomalies. Anomalies are things that happen in the business.

46:22 that management explains away. Because ninety percent of the business doesn't behave that way. An anomaly might be an anomaly in Wassau's case. Was Uh

46:34 who also had a fairly high share. of its paper business in Chicago. And with one particular merchant. And that didn't Compute.

46:45 And so we wouldn't talk to the merchant. Oh, we wouldn't talk to the sales guy. Remember I mentioned this guy earlier. His response was well The salesman in that in Chicago has a great relationship with that paper merchant. Remember, we're in turnaround situations. So great relationships. Or not.

46:59 useful turnarounds'cause they take a while to build. So he went and visited the merchant. And we said. Tell us why are we doing so well with you here in Chicago? We're told that our salesman has a great relationship with you.

47:13 And the guy says, Yeah, it's a great relationship. I tell the salesman If there's a truck at my doc tomorrow morning, we're friends. If the truck isn't at the dock, we're not friends. And that was the beginning of understanding, oh There's a pass.

47:24 S uh Oh. satisfaction cycle here that we could take advantage of. Or can we s can we scale it? across the whole company. And we could.

47:34 But it wasn't an anomaly. So anomalies are always a great opportunity to find a new way of doing business. But most management teams don't take the time to understand anomalies, they explain them away. Another anomaly. Well,

47:49 Uh one what it was it office products company. Uh that that had its own service for us. And one customer. insisted on all servers being done between midnight and six AM.

48:01 That's an anomaly. 'Cause that's not the way we schedule service. But for this company. The local people did that. And it turns out.

48:08 That company that wanted Overnight service. wanted because they didn't want their production interrupted. Or the use of the equipment interrupted. Um

48:18 And in those situations. This client had a higher share of the business. in a medical device business, Adobe was Uh The European competitor

48:29 Always had a sales I could be always had a service representative on site at the hospital. Symmetrical devices. That looked like a high cost thing to do. We didn't do that.

48:38 Our client. had a service force that was moved around hospitals as needed. But it turned out the uptime. For the equipment that this on site.

48:47 Uh Uh service person. Was taken care of. was higher. And it turns out that

48:53 the the share Of new business. uh that this competitor got. was higher. So we have an anomaly here, you know, he's doing something.

49:02 Doesn't make sense but start looking at the numbers, it does start to make sense. So Anomalies are a great way to find a new way to do business, a great way to find growth. 'Cause usually they're small. And the question at W is could we make it big? It's stuff to answer that question.

49:17 You mentioned earlier that Walmart. sort of attacked Kmer With velocity. Can you tell us that story? One more story.

49:26 As it was described. uh early in the years of Walmart. was about Oh. A local

49:37 Five and nine. Competitor. Uh Grozen. Boondock markets.

49:43 Has greeters at the door. To make people comfortable and help by their way around the store. Uh as a narrow product offering. And that's their success.

49:53 That's just the tip of the iceberg, what was Walmart was doing. Uh Walmart was Uh Actually a logistics company.

50:02 They concentrated. How fast can we move product from wood or Supplier gets it to us. to when it leaves our store. And they organized around that.

50:12 How to be faster. And they did that by having their own trucking. No. Not outsourcing it. They did that by scheduling uh uh deliveries once a week instead of once every two weeks or once a month.

50:24 Uh they did that by incenting Their suppliers. Two uh delivered to a very strict and ornerous schedule.

50:33 By paying the suppliers faster than their competitors paid it. They did it by having very big stores. Um in fact it wasn't until recently. that Walmart began to change his model on store size. Uh, because people they found that big stores were lower cost.

50:49 And people will in the drive. thirty miles to get lower costs. They're not willing to do that today. Um Actually it's more expensive to do that today. So behind the scenes was a whole different model at play.

51:02 I don't think I can actually ever figured it out. They be they begin to see s some of the the The surface differences. But they never they always outsource the trucking. They underinvested in IT.

51:13 Doesn't have a day, but Walmart used to have the store managers. Fly into Bentonville every two weeks. And Talk about what's going on in the business so they can make adjustments. Kmart did its you know, I think Troy, Michigan.

51:24 you know, back in Michigan they decided what was going on inside the stores. Walmart was able to change its mix of product much more quickly. to local market conditions. K mark is it. It came out, you had to go. Up the hierarchy.

51:37 Get some decisions, come back down the hierarchy. In Walmart the hierarchy was dispute. Just flat and distributed. into the store managers.

51:44 And then Walmart went into uh Oh. Warehouse stores. Sam's. Is there a version?

51:52 And warehouse stores. Or actually Like what most people thought Walmart was, which is a it's a A narrow offering. Oh.

52:02 Very high velocity. Uh but the big difference in in uh Warehouse stores is is the way they Get paid. Because

52:11 Yeah. Their their customers either pay cash or credit. And so you get almost instant accounts non existent cost receivables. In fact you get negative working capital. Um

52:23 And that was part of the model that Walmart. Oh. Discovered. going in is that they could have a negative work capital business.

52:34 But so could the other competitors as well. Yeah it's interesting watching them today'cause you 'Cause you have Walmart versus Target. I think Target has found a way to move itself. to the side. I think very much.

52:45 If the if there's an allergy in Canada. It would be Loblaws versus Sobies. Well, I think Sobey's just positioned itself as slightly More upscale. Sorry.

52:57 More of a Uh A specialty retailer shopping experience at a laws? I don't know the business well enough to say. Which one's a winning strategy in effect.

53:07 They're probably both gonna be winning strategies because I think Target will find a way to coexist with Walmart. I think Walmart's biggest competitor problem right now is with Amazon. How would you compete with Amazon? I do know for a fact that People tried to compete with Amazon.

53:21 In the obvious way. Which is okay, Amazon is l uh logistics for a I'm first you order online. Second, then the logistics systems kicks in. And now

53:35 If you're Walmart trying to catch up with the distribution system of Of Amazon. I can't really use much of my current distribution system'cause it's made up for dealing with large volumes. selling large volume stores. Um and I have to come up with a distribution system that has

53:50 much more distribution centers. I don't know if you've noticed but How many distribution centers there are, or Around small towns and Or Amazon distribution centers.

54:00 That's a very expensive thing to replicate. Wha what's the relationship between focus and time? Well it's a very direct relationship because Imagine two factories. One factory has ten product line and one factory has fifty product lines.

54:14 So one factory is much more focused than the other. If I'm gonna speed Spear. Both factories. So it'll be twice as fast.

54:23 It's actually More It's more doable. in the ten product line factory that it is at the fifty product line factory.

54:30 There's more complexity than the TR. Productly effect. There's more batches. is more distinct processing. Uh steps. Uh and so a focus factor is always

54:42 More easily made faster. more focused organization because factors are basic organizations like People tend to think. Yeah, factory, non manufacturing. In both businesses you have people.

54:53 Running businesses. And so people running the ten ten product line business have a uh easier job than people running A fifty product line business. So most of our

55:05 Are very successful. Time based competition. situations. One has to start with focusing. The organization.

55:14 Siding which products. We wanna focus well, also we decide we're gonna focus on specialties. We could have decided to focus on C commodities. You would have gotten killed.

55:24 And the paper you know, the big paper companies that Wallsaw was getting killed by. uh we're quite happy to focus on the commodity business. That's why they it took him ten years to figure out what What I was up to. 'Cause I didn't like that business.

55:35 The was I was going after. And I suspect with Amazon. the the winning form is gonna be Mm. Picking up part of the business set.

55:45 Uh Amazon doesn't really want to have. So automatically. Once Set himself up up for a smaller business. But there's something funny about retailing.

55:56 And It's something we call the heavy spender phenomenon. And the heavy spinner phenomenon is that twenty percent of the customers at a retail store. Account for eighty percent of the volume. And

56:05 What's so special about those customers? Uh it turns out those customers have a different need. than the eighty percent of the customers that cap for twenty percent of the volume. Uh. Those twenty percent of the customers.

56:19 That account for eighty percent of the volume. Want more choice? They want more understanding of the product. Uh they want a positive touch. Feel.

56:29 With the consumer. And if I can do that. Um I attract what we call the heavy spender. And every retail category has heavy spider. What's your hobby?

56:39 This. Yeah, your hobby. Oh, this. Oh, doing this. Doing this. I mean, what do you spend your money on then? Uh let's say ski equipment. Ski equipment. Yeah. Is there a special place you shop? Yeah.

56:50 Are you a preferred customer of that? At that place? Yes. So you're probably in that twenty percent that Counts for eight percent of that. Outlets probably and they know how to take care of you. Yeah. And they know your name when you walk in and they yeah.

57:03 And I doubt you buy your scarecrow from Amazon. No. No no. Do you even look at Ski Club on Amazon? No.

57:10 I don't either so I don't know if they have any. I my reckless spend of money is on model airplanes I I build these. Gigantic. Radio control airplanes.

57:20 Each plane costs thousands and thousands of dollars. And so there's only a few places I can find the stuff I want. And I buy a lot from them. So I'm a heavy spender in that category. I had a woman that worked for me that was heavy spinner in shoes. This is very very

57:34 About twenty percent of the women account for eighty percent of the shoe sales in Nordstrom. Or the day. Those people have the needs I just described. They uh they do selection. uh the d

57:45 To be the product explained to them so they're buying it for the right reasons. Uh they need to be treated well. Uh which means if they bring me off the shoes, it's not a it's not a grief. Driven.

57:56 Experience. It's a pleasurable experience. Exactly. Remind me. It's one woman who's a big spinner she she spent twenty percent of her disposal income on shoes.

58:07 She said, George you know. I was interviewing her about this'cause I when I heard about it, I said, Here's the happy spinner, I wanna know more. She said if I uh if I'm in a bar. And some guy walks up to me. She's a pretty woman.

58:18 And says, I love your shoes. He gets an automatic twenty minutes. Yeah. Most guys are send away right away. So she was a big part of her life.

58:28 And So you can think of all sorts of retail cat cosmetics. Shoppers has been so successful with cosmetics'cause they actually set it up. For uh the heavy spender probably the middle income category.

58:41 On cosmetics. It's been very successful for him. Automotive parts another one of heavy spedters. I virtually every category. as Abby Spinner segment.

58:53 And that's probably the you know, the my air my model airplanes, which are have a huge amount of electronics at them. I'll look at the electronics on Amazon, but I don't buy it from Amazon. Right. 'Cause you want somebody to talk to.

59:05 selection and reliability because they're niche, right? So they also have They have all the things that you're looking for. Probably answer the phone when you call too. Yeah. Talk to me about cost and time. How does that how do those two things relate?

59:19 Uh well if you come back to the Japanese and Ford example. Yeah, Japanese factory that What Uh Three times as complex.

59:28 Half the size and twice as pro Productive. Um The I didn't mention the time to mention. The par the product went to that factory.

59:35 Ten times faster. than through the Ford Factory. Ten times faster. You know the twenty percent productivity advantage was about About a twenty percent cost advantage, which is a big number.

59:48 for automotive component. But the time it did manage was ten times. That's what triggered our thinking about strategy. 'Cause up until then B C was Predominant strategies were based on cost. How do I have lower cost in your

1:00:01 How to help you have lower costs than your competitors. And that j that as I mentioned drove us to scale and focus. Uh But here's time. Here's a next

1:00:12 Another dimension people aren't managing. What could you do with Ten times the speed. That was the question we started asking. How can you compete with that?

1:00:21 Wallsaw was one of the early applications of that, which I can compete. Uh with next day delivery. versus Thurry every two weeks. And if I

1:00:30 can have next day delivery to the merchants. that allowed the merchants to order more frequently and operate with less capital. That's how that's where the advanta kicked in. And so that's where cost and time worked out. We had We added cost to the process to get time out the other side. But the time benefits were so overwhelming.

1:00:48 uh that the cost didn't really matter. Anymore. But most often. What we see. Is that if you could

1:00:55 Speed up a factory. Or any kind of process by a factor. Four. In other words, I take twenty percent of the time, twenty five percent of the time I used to take. Productivity is about

1:01:05 Uh cost position is about. Uh twenty percent lower. 'Cause I take out overhead. Over it doesn't speed things up, over it slows things down. But

1:01:15 Overhead comes out because I'm being intelligent about how I manage not because I'm just slashing the overhead. But it is uh these factories are simpler to manage. Yeah. even though they're more complex because the management's pushed down onto the floor.

1:01:29 There's a lot of autonomy pushed out of the floor. Because it's it's organized and managed to run by itself. There is central Scotty, but it's not a big department. And a traditional factor there's a big

1:01:40 Scheduling department, it tells every single piece. of the factory, what to do when? And I Total factory. That schedule is pushed out of the floor. So the the

1:01:51 By producing one product. Another part of the factory discover is the need to replenish. So Oh, where it comes out of Koska. And so people have a cost problem.

1:02:02 We often introduce the the dimension of time. To figure out. how the processes could be set up differently to take time out. And usually what?

1:02:11 What is it? Eliminate cost of doing that. Almost always. In fact, the cost

1:02:17 almost always enough to pay for whatever it takes to get the time out. Is there a way to use your balance sheet strategically to create a time advantage. And what I'm thinking by that is maybe Uh you sell commodity parts. And those

1:02:32 Those parts are to spec and they're widely available. Uh but most people don't have the inventory um select so the depth going back to your model airplane, they don't have all the components. So if you had all the components and you had them in stock. Your balance sheet's gonna be bloated because you're gonna have a huge inventory level. But you're probably able to sell them.

1:02:51 Uh, even if they're not high velocity parts, but you could sell them at a huge premium. Yes. Because you would be even if they're less frequent sales. Are there other ways to use the balance sheet to sort of compete with speed? Give you an example. Oh does this quite a bit with chemical companies. No, when I say chemical companies, you imagine Big.

1:03:11 production facilities. Mm-hmm. Steam coming out and everything. Um We've taken that we've t looked at the company.

1:03:19 At cost, of course. Oh, there's gonna be quality, of course. looked at the company at time as a deliverer. But one of the interesting things that we often do is like a something called working capital productivity.

1:03:32 And I just Let me define working capital productivity. Yes. Counts receivables. uh plus accounts inventories minus accounts payables. So cash isn't in there.

1:03:46 But actually I use something called absolute working capital productivity, which is accounts receivables plus inventory. Plus payables. Because people in Can

1:03:55 get their productivity of capital up just by Delaying payment to their suppliers. So I don't give him credit for that. So I put the two three numbers together.

1:04:05 And it turns out if you take a look at an organization's working capital productivity and find out where it's being dragged down. Almost always it'll have something to do with time. They can't ship the product on time. Uh Why can't they ship the product on time?

1:04:19 Uh'cause it's not. All parts of the product order are available, so we have to hold the order until they're available. And so one stars digging into this. layer at a time. through the lens of working capital productivity.

1:04:30 And fines. opportunities to do things that are balance sheet related. Uh that improved productivity, improved the performance of the balance sheet. But what if we don't want to improve the performance? We want to use the balance sheet strategically to improve

1:04:44 the business competitive position. Like an example of that would be Maybe I'm going to pay all my invoices in twenty four hours. And I'm gonna let my accounts receivable go out ninety days, instead of like trying to rein that in, I'm gonna actually lengthen it, which means I'm I'm requiring more capital to operate the business, but now it's harder to compete with me. You're dead on. I mean the example I described with Walmart.

1:05:07 Which is they pay the suppliers faster. And game art. We're paying them. And they were paying him. faster because they wanted a different level of performance from the supplier. Right. Which is exactly what you described.

1:05:19 And you would find that by looking at the work capital productivity. You could say, Well, jeez, you know Um I have all his inventory. Because here's here's my replenishment. uh standards.

1:05:28 Um But I can afford To pay them faster. If I can reduce the inventory. That's one way to use the balance sheet. Another way to use the balance sheet.

1:05:37 Yeah we we Skid it right on by it. is if if one's big and one's already low cost. One can carry more variety. Um

1:05:47 and a lower penalty on the balance sheet'cause the volume's there. So in your example of skis. Yeah. Local distributor. Ms.

1:05:55 retail stores big enough in the business. that you're interested in selling, they can actually have more more available. So their balance sheet You might say, Well, gosh, I have a lot of inventory laying around. Uh, but they're turning it a lot faster. 'Cause they're they're selling it to customers who buy a lot of stuff.

1:06:09 And buy it frequently. How does speed transfer from the factory floor to Software companies.

1:06:18 Let's talk about what's similar. What's similar is they're both people. And they have organizations. What's similar is they add value. What's similar is they take time to get things done.

1:06:32 uh what's dissimilar Is that factory I can see things happening. Um software. Can't see things happening.

1:06:41 'Cause it's all happening. Uh and And the ether. people thinking. Um

1:06:50 But I've done a lot of work. And speeding up. Suffer. Organizations. And for many many of the same reasons that

1:06:58 Factories are slow, software. Company's gonna be slow. Um They can be compartmentalized. Just like factories can have.

1:07:06 Uh Manufacturing centers based on process. Processes like a heat treatment. And stamping. Um

1:07:13 They have quality problems, which slow things down just like these have quality problems. Oh, they have batch problems, which is they they They say our development process is gonna be eighteen months when it really could probably be three, four month periods. In fact the whole agile thing. that's going on is very much of a version of time based competition at the factory.

1:07:31 Translate it to software. That's what I was thinking, because like so much of this planning and forecasting, like what the world's gonna look like in in, you know, eighteen or twenty four months, you have no idea. The further out you get, the less less certain you are. So if you're planning all that planning is just sort of Wouldn't say wasted, but it it's definitely not very productive. And then you have a whole cohort of people

1:07:53 who make a career out of planning and so then they justify the planning and they sort of And like the factory they're people. So that's why I've I I've never I've received over the years, people say, Well, we're a different business. We're not manufacturing. I think that's that's something I said to me.

1:08:11 Fact of the matter is Uh. A software f the development facility and software Very much behaves like it. operate a people operating system in a factory.

1:08:20 the the version of batching on software would be Um major changes do they offer it. That's that's the code of large batches. time based version of batching in software companies is is the agile version, which is how has minimum acceptable product.

1:08:34 And then improve on it. That's like small batches. Yeah, I think people get there the same way. If I look at Factory through the lens of time, I see a different Set of things that are important.

1:08:44 If I look at a software development process to the ledger time I see a different set of things that are important than people uh normally manage themselves too. I stop worrying about it. The differences of many, many years ago between

1:08:54 Factories. Non factors. Well, one of the advantages I would think to software is you can get Your feedback. The time from

1:09:04 Shipping to feedback can be instantaneous. Whereas with a factory, you gotta ship it, it's gotta go somewhere, the customer has to look at it, use it. Come back to you. It could be weeks, months. Before you're getting feedback that that part isn't good or the quality is not right. With software, you can get this feedback within seconds. I'm surprised you say that, because you know, most software releases. Are followed by another release.

1:09:27 And the second release is not instantaneous. Well the reason for that though is the variety Of devices that it's going to, which is one of the reasons I think that Apple has started to sunset some of their older devices because. uh you can't releasing an update that works across technology that was invented like twelve, fifteen years ago is really hard. And the testing cycle for that is inherently hard too, because each of these devices also has um their own unique configuration. So you're really testing a billion unique circumstances of which There's probably only 10 variables that really matter, but those that's I think that's why we we get some of these. Oh, here's another update, because here's an edge case that we didn't

1:10:08 see happening or plan on happening. But you're but you're actually talking about policy. Yeah. Upward compatibility is the phrase that's usually attached to that. And it's very difficult over the long term.

1:10:20 to maintain upward compatibility. And man and managing a transition. From one platform to another because I could no longer Make the up. the original platform upward compatible.

1:10:32 It's very hard to do. And it usually results in Oh. offering an older product right alongside of a newer product. And it usually happens with the new product being.

1:10:42 priced at a premium over the older product. So people don't abandon the oil product. All together. And then one's left with how do I help? people who are are stranded because they have the older product.

1:10:53 I'm going through this right now. Apple iPad. Oh, has lasted me years. And I just got a notice from

1:11:01 The Boscons Group IT department that. It's no longer. It's no longer for security reasons, it's no longer have upward compatibility. Yeah. And they're gonna cut me off the system. Go and the their answer is go buy a new apple. Yeah. My answer is how can I divide my world so I don't have to go buy a new apple. Yeah.

1:11:18 I'll probably not buy a new apple. So it's a policy decision. And and It's hard it's hard to do it in a way that makes the customer feel good. Not impossible. You know, the example I was thinking of.

1:11:29 Is up. Medical devices. T. Medical to robots. And you gotta

1:11:34 Mm. They New platform. Oh. So much more attractive that people pay higher price.

1:11:43 And the people that don't want to go to the new platform will feel like they're getting a good value. staying with the old platform. I'm still up with the downstream problems at some point. We don't want to support the old platform anymore. Then

1:11:54 Uh I think Apple sort of plays I don't really watch Apple that closely, but I think they have a trade in policy. Which means if I really go back to them and say I want to buy a new apple, but I have this perfectly Yeah, fourth generation one that's working fine. They'll give you something you feel good for it. Yeah. They'll feel good about it. So

1:12:11 It requires thinking this through. How do I make the customer feel like they're not being abused? And respecting them, right? They they purchased it, they put their money into it, and you're sort of nudging them to upgrade. And at time period they might not be ready for.

1:12:27 A couple of years ago. I had a project back called the ugly duckling of retailing. And the ugly duckling of retailing his returns. And Returns actually.

1:12:38 All right. It's like some online stores, I guess it's like twenty percent or something. Oh it's huge. But Oh that's where I was heading. Yeah.

1:12:48 Zappos is one of the first companies I ran across. Where they use returns. as a marketing opportunity. Whereas other people Like a yeah, at that at that point in time if you go to Walmart, look at their return policies.

1:13:01 Maybe It was astoundingly complex. And didn't look very Customer friendly at all. Zapos.

1:13:09 Was Why would you think you need and send the rest back. That was in a UPS store. In Palm Springs.

1:13:17 Upon beach. mailing something back to the office and I noticed that all the boxes behind the counter All the boxes behind the counter are about. Nine out of the ten of them are his apples boxes.

1:13:28 Going back. And so they found a way to use Oh. Uh returns is a way to To make the customer

1:13:35 Take the risk of buying. Online. Well now there's no uncertainty. Yeah. I know worst case, I just go back and I return them. And they have the return labels. And it's easy to do versus Walmart, where you you go and you stand in line for like forty five minutes to an hour. And so if you if you factor in a cost of time for you to return something, it's

1:13:54 I don't return it, I give it away. It's not even worth returning half the time. When I when I did the agricultural, there's a couple of interesting examples in Canada. Uh I interviewed a bunch of women. Uh about different kinds of products. And serious.

1:14:07 Which I never thought of as a woman's place to shop. Um was picked out as place these people like to go to because that a great return policy. Made it easy to return products.

1:14:20 Um Zapos was of that category. But we don't even do this on the internet now. Like you can buy a New York Times subscription in like three seconds online. But if you want to cancel it. Which is effectively like a form of return. It'll take

1:14:34 A week or like two hours on hold with customer service. Like It should be a click of a button. Like it's that separate. If you want it to click of a button, you should be able to get rid of it at a click of a button. Yeah. Well, hopefully somebody listening to this New York Times Can do that. But the point of the I I we docking work.

1:14:49 Yeah, how do I make returns a marketing advantage. And Zappos is one of the earliest examples of how to make it uh an advantage. But we have buy now. We could have cancel now. Like we could literally have one click cancellation. That would be a marketing advantage if you're the economist or the Wall Street Journal or the New York Times. But there's some mathematics that they're going through where they're like, you know, that would make sense to a certain cohort of customers, but Probably shit, it's probably two departments. Yeah. Just like two different parts of the factory. True. So it's not my department, so you gotta go to this department.

1:15:21 I hate it when they say that to me. Nobody's responsible. You'd like people to say, I own your problem. Yeah, or I'll fix it. Or I will take ownership of it and I'll get your resolution. Th there were The least expensive innovations I've seen is what people say, if you don't feel like wait waiting, leave a number.

1:15:38 That o that's almost satisfying. A call back number. The problem is I'm not always ready to answer my phone. Yeah. Like I wouldn't want to answer my phone right now. Yeah. So I'm not sure when I'm gonna get a call back. I did that once at Arcana. They called me at like three AM. Oh no.

1:15:51 I I wanna mix a few subjects together and and sort of like talk about this. Um in relationship to each other. So like uh lean manufacturing, just in time inventories. balance sheet, which we talked about and how it can be used as a weapon, and the supply chain. crisis that were sort of

1:16:09 currently undergoing and I'd love to hear your thoughts. Let me break that in a couple of parts. Lean manufacturing. And just in time. Are it

1:16:19 From my experience are describing the same phenomenon. The small batch. uh minimum material he had like self scheduling. um manufacturing process. Yeah, too.

1:16:31 pioneered in the fifties. And interestingly enough. It was a solution p to I had to come up with. To compete with Nasan. 'Cause in the fifties, Nissan was Japan's largest car company.

1:16:42 And Tyl was just getting in the cars. So it didn't ha to have scale, it didn't have the breadth of product line offering. So I had to figure out how to compete at low scale. And What

1:16:53 with more complexity that it might want to use. So it created the just in time system. Mm-hmm. Ford had the digital time system as well, but it was It was high volume. Focused model Ts, type of stuff.

1:17:07 So those two are very similar. The effects of them being together, uh the effects of them on the organization. do show up on the balance, if they show up on higher. Uh asset productivity. in the form of higher working capital productivity and higher productivity of plant equipment. So those are together.

1:17:21 I've been looking at supply chains. as a source of strategic advantage for about Fifteen years now. And I just finished the paper. The hard business review.

1:17:31 Uh That was originally titled How to Use the Supply Chain Crisis Against Competitors. And I'm going I'm explaining this because I want you to understand my perspective. I really don't care about the supply chain crisis. What I care about is how do I use the crisis.

1:17:44 In a way. Yeah. Puts my competitors at disadvantage. 'Cause I can't as a company.

1:17:52 Or an individual I can't fix the supply chain crisis. I have to figure out a way to live with it. and live with it a way that creates advantage for me. Uh and there are several ways you can do that. Uh

1:18:04 First one has to recognize that the supply chain crisis. is a system phenomenon. We have a very complex system. That was working fairly smoothly. And then it was disturbed.

1:18:17 uh disturbed government lockdowns. Um Yeah. When a system that's complex is disturbed. It has

1:18:26 Oh. A response is often called the bull whip effect. But basically all parts of the still start to oscillate. the the factory overproduces and underproduces.

1:18:36 inventories become stock outs and overstocks. Um And one can try to fight that on the ground. Or one can try to fight that. in the air.

1:18:46 And Body in the air says Um The way To minimize the impact of supply chain crisis on me. that results of me

1:18:56 being a higher performer than my competitor. are often things that people don't want to do. They look like they cost more. So for example, one thing I can do. Mm.

1:19:06 It's like an order more frequently. And pay whatever penalty it takes to get that. Um I can This has been happening. I can

1:19:15 Uh Uh except I could I could arrange containers that aren't full. So that the container's not waiting to be filled up before it comes. I'll pay the difference to the premium. I can pay a premium when it arrives.

1:19:27 to get off the ship first. I could pay a premium. To be loaded last. I could pay a premium to put the the uh The box.

1:19:35 Onto a train that doesn't stop. There are companies that do this. And it goes straight to New York without stopping. From the West Coast. That takes time out.

1:19:44 Yeah. It turns out. The time And the supply chain crisis is it's incredibly important because The longer

1:19:51 Is the supply chain time. the more exposed it is to these oscillations. And so If I can become more time based in my my supply chain. I did basically insulate myself.

1:20:05 Relative to my competitors. I still have problems. They're not as bad as my competitors have problems. Some of the things I describe Or with the existing supply chain. Air freight.

1:20:16 You know the the the the The the logistics cost Of a T V set. Um there is sh Ship buy it.

1:20:24 Ocean. To Best Buy. is about five percent. That's pretty damn good. Um

1:20:32 If I ship it by air, it's it's gonna cost me like twelve percent. Um If I have a stock out. on a flat screen TV. It could cost me fifty percent of my my margin.

1:20:46 If I have a overstock, it could probably cost me all my margin to get rid of the product. If I could find a way to make all that cycle happen faster. I'm less exposed to the supply chain. Oscillations. And therefore

1:20:58 I end up having higher ed stocks and fewer out of stocks. Um Which the customer likes. Uh but I make more money.

1:21:06 And as soon as I can get the thing to a point where I'm making more money than my competitors, I can use it against my competitors. And so much of the supply chain work I've been doing. has been around how to take time out of the supply chain. Oh

1:21:21 Yeah. very often the fight with management. is over. Oh. Not what the benefits are, but who gets the benefits. Shouldn't they just go I mean, if you put them to the customer, eventually

1:21:32 If most of them accrue to the customer, then it becomes as Um A flywheel almost, doesn't it? True. I the the the the answer the C the the executive concern starts with the customer.

1:21:44 Yeah, if I if I could Get so much time out of this process I produce. for my retailer fewer stock houses and few overstocks. That makes him Um

1:21:54 Happier. But that that there's a cost associated with that. And so where does that cost occur? And what uh some of those costs occur within my four walls. Some of them occur outside my four walls. That's where the problem starts to come up. Is um

1:22:08 Where the cost are. If one starts building into the profitability analysis of a product, The cost of overstocks and the cost of understocks. Yeah. Uh you can actually

1:22:17 Except the fact that I'm gonna pay more. For my step on the supply chain. So somewhere further down I get the benefit the benefit shows up. And I get a premium of some sort.

1:22:28 That's the hard part to get people to do that. I work for a woman's lingerie manufacturer. At one point. And It took them weeks to get the product from Asia where they searched it.

1:22:38 Two uh Uh their retail stores. The gross margins on these products. Or ninety to ninety five percent. On a woman's

1:22:46 Uh right. Yeah on ocean shipping cost. Terminal terminal. It's about a percent and a half. of sales.

1:22:56 They're afraid it's about. Four. Um So if I'm almost to Yeah.

1:23:04 Except Almost a factor of three increases my shipping costs. to avoid a ninety five percent cost of a stock out. I end up being a more profitable chain. And it's being pastor.

1:23:16 So that's what happened. They they went from twenty percent oh shit. I gotta have it right away. to put it on a plane. To ninety percent's always on a play now.

1:23:27 And so we we've taken on the ocean shipping down way down. And more because the the the benefits of avoiding stock outside overstocks. It's so high. We can afford to pay the cost of the air free.

1:23:38 There's so many ways to strategically use Your supply chain. your access to raw materials, all of this stuff. But it always in in the moment it usually never looks like the right decision because it's costing you more. Like if you're a manufacturing company. And say you had a year of raw materials.

1:23:56 On hand before Covet hit. You can keep pumping through, even though there's a supply change that you're the only one in business. You're gonna make more money. in that twelve months than that inventory ever cost you. Uh, to hold and acquire, but you don't want to do it because you have investors, they have a different timeline, it looks like bloat on the balance sheet, looks like inefficiency. How do you sort of like

1:24:18 weigh those things against each other. It requires that people look at the entire system. and and optimize the system performance first before they figure out what their portion of that. Optimization is

1:24:31 Yeah. that they're gonna keep. A crew. Stanley Black and Decker was one of the companies that early on And

1:24:38 Covid lockdowns put'em together. So lockdowns will produce the problem, not Covid. Well I can say COVID produced lockdowns. Um decided they were gonna stock up. And it paid off.

1:24:50 I miss it but it's a it's a bet. The longer the supply chain is. in terms of time. The riskier. It is

1:25:00 For the company and the Consumer. the source from it. An example Of using the supply chain against

1:25:09 A competitor would be Dell versus HP. And the um say the two thousand, two thousand and fifteen time period. Because their time Consumption of the supply chain was so much shorter than HP.

1:25:22 Uh Dell could be introducing products with More up to date technology will. Do well, H you're still trying to get products from the old through its supply chain.

1:25:32 Um And begin to make the H P products look old. Once your product was old, but the only way in high tech you could sell it. And at a lower price.

1:25:42 So that worked very well. But it does it it puts back to time, I think again. I don't Sound like I'm addicted to time, but it's just so powerful. That if one takes a look at supply chain.

1:25:53 Two. through time, one sees real opportunities to do a bunch of things. Differently than can be done if one doesn't take advantage of time. The one big unknown.

1:26:02 Which probably won't become. Prevalent management theory. For another ten years. Is What I call it.

1:26:11 Um Barence. Analysis. And Yeah, one less of supply chain.

1:26:17 That has A much faster flow through than a It has longer throw through. Not only is it faster, but it's less variable. Uh so there's less distribution of outcomes. in the supply chain.

1:26:29 Um If you take two supply chains. Uh One that has And eight week.

1:26:35 Time and one that has a Two week time. Uh the variability of the output.

1:26:43 at the One that's two weeks will be about. one eighth variability of the other. Um So there's a high variance advantage that's possible.

1:26:53 Oh. Uh just a a footnote on that. Is it Variance that comes from two sources. Uh it comes from changes in in the out world, outside world.

1:27:03 The case of Airlines it comes from a storm. Something like that. Airport closure. Mm-hmm. Or it can be self generated.

1:27:10 And it turns out. The supply chain that has a high high amount of time on high barriers'cause they always go together. Even w even if the outside world doesn't change very much at all, it'll generate its own Turbulence inside.

1:27:24 And that and turbulence equates to cost. And so a supply chain that's fast and low variance is much a higher performing supply chain that's It's slow and high variance. And again, I don't have to fix the splotchet problem, I just have to make mine Better than that.

1:27:39 to my competitors that I can do nasty things to them. Um I say it's gonna take a while to t to force you because Most people don't think they can manage the barriers in the supply chain. The answer is you can manage emergency question. Can I tar is a perfect example. They use something called flowcasting attire.

1:27:57 Which means on a daily basis they're looking at each element of their supply chain. And trying to figure out. How it's doing, where where the variances are and then Where they have problems and Throw people at it.

1:28:08 and get it fixed, even though they don't own that step of the supply chain. So managing variance is a mindset that's it's gonna be very challenging for people to achieve. if they haven't achieved a time mindset to begin with. But it's the it's the next I think it's the next wave.

1:28:23 And you're writing about that now, right? Am I writing about that? Yeah. Oh well, you know, such right. I took the work. Because a lot of people, for example The representative did the work.

1:28:32 Every time to it has a glitch. Uh the management press Trashes the Toilet production system. Mm-hmm. Now they've had it. Now they're gonna run out worldwide. J Val.

1:28:45 factory in Japan burned down. And it'cause it just is they supplied ninety five percent of the J valves, which are part of the brake system. of tomato cars worldwide. And they couldn't make cars. Yeah, you can't make cars. They're dead. Uh.

1:28:59 They had this thing up and running again in two weeks. Yeah. Wait. Don't care to take the time to explain how. They have a time orientation to you. They thought they they had ways to do it. They did it.

1:29:11 Uh never up in two weeks. At the same time that happened, there was an airbag factory in Ohio that burn down. Yes. Yes. company that owned the factory supplied ninety percent of the airbags to Ford.

1:29:23 Uh Ford ended up making cars at what the at the auto is they call put it against the fence. Semiconductors is your were missing. So people built cars without semiconductors and put them against the fence. And when you have the subductors you

1:29:36 Went back and fixed it. You know that's expensive. Oh. So four star. Doing this. The airbag factory that burned down and

1:29:44 Cleveland never came back on street. And the consequence of that was this particular supplier. Whose factory burned down? Went from supplying ninety percent of their bags to Ford to supplying like thirty percent. Because they had it.

1:29:56 Diversify the supply base. Yeah. So customers are very sensitive. Can be very sensitive to variance. No. So I did this analysis and showed that the determined production system recovers much faster.

1:30:08 From a disturbance. Than does. The traditional. supply chain manufacturing system does. I put all this work together. I took a two.

1:30:17 A company called WW Granger. Uh, W Granger is the leading industrial. Supply company. Basically a distributor of industrial supplies.

1:30:27 Huge range of offerings. from mops and gloves to electric motors and stuff. It's really amazing. So I was talking at the Hello, Granger. Canada. Except these guys got it.

1:30:37 Complex to sure. High performing business. And the notion that he could manage variants in a supply chain was just more than he could handle. It's a George Yeah. Like we're saying.

1:30:48 I know it's right. I can't do it. So So at some point somebody say, I like what you're saying. I know it's right. And I'm gonna do it.

1:30:55 Southwest Airlines. That's why I mentioned Airlines earlier. Um has very low variance. and its performance. Yeah. low variants and and schedules that have low variance and

1:31:07 And the planes they operate, they have low variance in the crew assignments. Uh They've taken a lot of the variants out. They recover from disturbances much faster than than the other competitors. So they're uh they're on the way, they'll figure it out. Um

1:31:20 But I don't think I'll in my lifetime to see a company step back and say, Okay, now I got cost. Call it. Time and variance. under under control.

1:31:29 Maybe Amazon, Walmart, and Toyota probably the only. three companies I can imagine they're even close to that being able to do that. But it's the next big one. To me, it's the next big wave is variants, but it's so far out.

1:31:41 Oh fact the Granger guy said come back in ten years or something like that. Which is about my favorite take. So I put it back on the shelf for a while. I'll send it to you and see it. Yeah, I would love to. That's a great place to end this conversation. I wanna thank you for your time today. I really appreciate it.

1:32:01 Thank you. Great questions. I enjoy them. Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts, and more. Go to fs dot blog slash podcast.

1:32:22 Or just Google the Knowledge Project. Until next time.

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