The Exchanges

Q 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?

A In Caterpillar's case, what they want their family ownership to represent is a value in the relationship with the customer. Um, and they want the, the, the dealership is a family owner dealership to put the customer first and not have to worry about, uh, reported earnings. I mean, there's a, the, the largest non-family Caterpillar deal in the world, I think is Tormont here in Canada. That's a rarity. The rest are all family. So they, they want that steady hand. I wouldn't call it long-term perspective. It's called steady hand, not too, not too high return, not too low return. In the business. But to, to, to return to the problem, the problem is getting the offspring to do it. By the third or fourth generation, the offspring often loses interest in the business.

AI assessment note: “what they want their family ownership to represent is a value in the relationship”

Q What are some of those strategies? What are the ones that are most valuable?

A Well, the one that always works is know your cost better than your competitors know their cost. Because most people don't know their cost. They think they do. They know the cost that gets between the revenues and the profit line. 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. And some customers are more profitable, and some are less profitable. Um, And if you know your costs better than your competitor, know their costs, you could do nasty things. Gain market share, uh, because, uh, you would understand how the costs work, your costs work, and not what the volumes mean. So what may appear to be a, a, a less profitable customer is actually the high volume customer produces a whole bunch of economies of scale and reduces costs. But that, that all gets lost in the averages. So that's, that's a big winner. One that works very well is be faster than your competitors at providing your customers what they want, when they want it, and where they want it. And if a company can do that two or three times faster 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 Toyota versus most of the…

AI assessment note: “the one that always works is know your cost better than your competitors”

Q Where does that come from and what does it mean?

A I wrote this book called Hardball, and it was, the subtitles, Are You Playing to Play or Playing to Win? And I wrote it out of frustration and maybe anger, because I was, I thought the business press was misleading, mainly MBA students and middle managers into thinking that business could be played nicely. Cooptition was one of the big words at the time, and the Europeans were masters of cooptition. Might also call it collusion, but the notion was cooperate with your competitors, don't fight them. Well, all my clients were either winning and trying to preserve their winning position, or they were having trouble, maybe even losing and trying to survive. So, that was very much a survival mode, whether they were winners or losers. So, as I mentioned, 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. Ford versus Toyota. Toyota versus Honda and Nissan. And there is no time to stop, sit back and take your breath and relax. It's a continuous battle. So the book had, uh, uh, 12 strategies that always worked, but they're hardball strategies. And we just, they were based around clients experiences of, I think almost all of them had clients permission to use their names. And these companies put the edge in competition and the results showed in terms of their bottom line, their growth and …

AI assessment note: “I wrote this book called Hardball... out of frustration and maybe anger”

Q You mentioned earlier that Walmart sort of attacked Kmart with velocity. Can you tell us that story?

A Walmart story as it was described, uh, early in the years of Walmart. Was about, uh, a local five and dime competitor, uh, grows in boondock markets, has greeters at the door to make people comfortable and help find their way around the store, uh, has a Daryl product offering, and that's their success. That's just the tip of the iceberg. What was Walmart was doing. Uh, Walmart was, uh, Actually a logistics company. They concentrated on how fast can we move product from when our supplier gets it to us to when it leaves our store. And they organized around that, how to be faster. And they did that by having their own trucking, not outsourcing it. They did that by scheduling, uh, uh, deliveries once a week instead of once every two weeks or once a month. Uh, they did that by incenting their suppliers to, uh, deliver to a very strict and ornerous schedule 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 its model on store size, uh, because people, they found that big stores were lower cost and people were willing to drive 30 miles to get lower cost. They're not willing to do that today. Actually, it's more expensive to do that today. So behind the scenes was a whole different model at play. I don't think Kmart actually ever figured it out. They began to see some o…

AI assessment note: “They concentrated on how fast can we move product from when our supplier gets it”

Q 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?

A Well, give you an example. Uh, we've done this quite a bit with chemical companies. So when I say chemical companies, you imagine big production facilities, a lot of steam coming out and everything. Uh, We've taken that, we've looked at the company at cost, of course. We've looked at the company quality, of course. We've looked at the company at time, how to deliver. But one of the interesting things that we often do is look at something called working capital productivity. And I just, let me define working capital productivity. It's accounts receivables, uh, plus accounts inventories, minus accounts payables. So cash isn't in there. But actually I use something called absolute working capital productivity, which is accounts receivables plus inventory plus payables, because people can get their productivity of capital up just by delaying payment to their suppliers. So I don't give them credit for that. So I put the three numbers together. 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? Uh, cause it's not all parts of the product order are available. So we have to hold the order till they're available. And so once there's digging into this layer at a time through the…

AI assessment note: “finds opportunities to do things that are balance sheet related, that improved productivity”

Q 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. They would rather the certain doom than the uncertain Potential of surviving.

A I mean, to a layman, to me, if you run out of options and, and the remaining options of bankruptcy, you'd think 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 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. It was hospital beds, big hospital beds and their competitors. Um, in the end, uh, 80% of management turned over because they couldn't handle the changes. They could run smaller batches. Um, they could more frequently schedule a facility. They just didn't believe it would work. Uh, and that's another example. A company was on the edge of going out of business with a Canadian company, by the way. The culture is the hardest thing to change. It needs to be changed. Um, it needs to be changed to S to freeze the benefit of a new strategy. Um, but one can't start there. I think it'd be very difficult to start by that Wausau paper and say, we're going to be the most flexible company in the world, making the greatest product, greatest amount of specialty products 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 t…

AI assessment note: “The culture is the hardest thing to change. It needs to be changed.”

Q How does speed transfer from the factory floor to software companies?

A 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. Uh, what's dissimilar is that factory, I can see things happening. Uh, software, I can't see things happening. Cause it's all happening. Uh, and, and the ether, people thinking. Um, but I've done a lot of work in speeding up software organizations, and for many, many of the same reasons that factories are slow, software companies can be slow. Um, they can be compartmentalized, just like factories can have, uh, manufacturing centers based on process, processes like a heat treatment and stamping. Um, they have quality problems, which slow things down, just like these have quality problems. Uh, they have batching problems, which is they, they, they say our development process is going to be 18 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 translated to software.

AI assessment note: “the whole agile thing that's going on is very much of a version”

Q Do you think that cultures are the ultimate source of competitive advantage?

A I would say yes and no. Uh, on the yes part, it's hard if you're, if one's losing in part because one's culture is not competitive to an opponent's, uh, trying to make the culture competitive is really difficult. And I've been caught in situations like that where from a technical standpoint, I know how to beat the number one competitor, but the organization doesn't have the culture for doing that. In that situation, the CEO decided to sell it. Um, but it's not the starting point. I think it's, it's necessary to bring it, bring culture into the equation. If there's a, a transformation process going on, uh, that one needs to cement the outcome. Uh, at Federal Express, Fred Smith came up with this phrase called the world on time. And so FedEx thinks a lot about time and, uh, the organization thinks a lot about time. And ideas for, you know, improving time performance come from all over the organization. That's a cultural effect. Um, but you know, he was able to start that culture because he'd already had a culture that was oriented around speed the next day delivery.

AI assessment note: “I would say yes and no. Uh, on the yes part”

Q So if a family has an external manager, they're going to behave differently, but the family acts as a counterbalance?

A Yes. If the family has an external manager, they still own the company. Uh, and the manager, unless we have this phantom stock program going on, the manager's working to build wealth for the family. And the family, if they're smart, most of them are, will reward their, their, their, their non-family management. That's one of the big issues with family companies is, is, Are we an operating, uh, family or are we an owner family only? And that usually is a debate that occurs by the third or fourth generation. Do people want to be in the business or not? I mean, one of Caterpillar's biggest problems right now is most Caterpillar dealerships are family owned. And Caterpillar's dealership franchise gives them, cause Caterpillar the right to, to okay change of ownership. And change of ownership is something that happens when somebody wants to retire. And it's true at Ford. It's true at a number of companies. Uh, Sherman Williams is like that. Uh, but when 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 stop being a lawyer and go be a Caterpillar dealer, even though it's a pretty lucrative thing to do. And so the families grow out of the business. And today, in today's world, it's hard to commit to continuous family ownership of the business.

AI assessment note: “Yes. If the family has an external manager, they still own the company.”

Q What are some of the things that get in the way of velocity in organizations?

A It was a long list. Uh, let's see, the most obvious ones are, I do things in batches. Batches are usually thought of as manufacturing, but also be, uh, in white collar, in a knowledge business as well. I, I manage a business on a set cycle. Batches are the result of what people consider to be an economic order quantity, and of that 95% 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 been worked on yet. It's been scheduled. And a third of it goes into managing all the batches. And so if one shrinks the batch time, uh, one, one goes through multiple, goes through cycles of batches faster. Batch ABC caps faster if they're smaller batches. And you can't do that unless one organizes the factory floor or the back office, uh, to handle small batches. But when one can do that, ah, that last third of the time, which is managing the flow of batches throughout the organization, goes away. So, I went to Tokyo for BCG in 19, probably 1981, long time ago, 1980. Just before I went, the, the, the founder of BCG, the 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. And it's done by the Ford Motor Company. It's done by Ford Europe, actually. Comparing, uh, good factories at Ford with good factories at Mazda …

AI assessment note: “the most obvious ones are, I do things in batches.”

Q What, what's the relationship between focus and time?

A Well, it's a very direct relationship, because Imagine two factories. One factory has 10 product line, and one factory has 50 product lines. So one factory is much more focused than the other. If I'm going to speed, speed up both factories, that would be twice as fast. It's actually more, it's more doable in the 10 product line factory than it is in the 50 product line factory. There's more complexity in the 50 product line factory. There's more batches. There's more distinct processing, uh, steps. Uh, and so a focused factory is always more easily made faster, more focused organization, because factories are basically organizations. People tend to think you have factory, non-manufacturing. In both businesses, you have people running the businesses, and so people running the 10 product line business have an easier job than people running a 50 product line business, and so most of our are very successful Time-based competition situations. One has to start with focusing the organization, deciding which products we want to focus on. Wausau, we decided we're going to focus on specialties. We could have decided to focus on commodities. We would have gotten killed. And the paper, you know, the big paper companies that Wausau was getting killed by, uh, were quite happy to focus on the commodity business. That's why they, it took them 10 years to figure out what Wausau was up to. Cause…

AI assessment note: “a focused factory is always more easily made faster”

Q supply chain that you're the only one in business. You're going to make more money in that 12 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. It looks like inefficiency. How do you sort of like weigh those things against each other?

A It's a difficult thing to do. It requires that people look at the entire system. And optimize the system performance first before they figure out what their portion of that optimization is, is that they're going to keep on a crew. Stanley Black and Decker was one of the companies that early on in COVID lockdowns, we've got to put them together as lockdowns that produce the problem, not COVID. Well, they can say COVID produced lockdowns, um, decided they were going to stock up. And it paid off immensely, but it's a, it's a bet. The longer the supply chain is in terms of time, the riskier it is for the company and the consumer to source from it. An example of using the supply chain against a competitor would be Dell versus HP. In the, um, say the 2002 thousand, a 15 time period. Well, because their time consumption of the supply chain was so much shorter than HP, uh, Dell could be introducing products with more up-to-date technology while HP was still trying to get products from the old through its supply chain, um, and begin to make the HP products look old. And once your product looks old, but the only way in high-tech you could sell it is at a lower price. And so that works very well, but it does, 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 through time, one sees real opportuni…

AI assessment note: “It requires that people look at the entire system. And optimize the system performance first”

Q I want to talk a little bit more about time-based competition later on. Before we get to that, what are some of the advantages, um, relative between private companies and public companies? What can private companies do that public companies can't?

A For the last 10 years, um, my client work has almost been exclusively for owners of family companies. So I've been deep, deeply immersed with the families and the owners. The owners of family companies Uh, are most worried about their reputation being smeared by not poor performance. That's their number one concern. The second concern on owners is how will my children do? I mean, all of them are afraid of their children becoming playboys. And after that kind of trickled out a bunch of different things. Um, but a few years ago, uh, we did a project, uh, Where we looked at, uh, family companies that were publicly traded and had publicly traded competitors. So like in Canada, Rogers, uh, communications is, you know, the owners own that one share that owns a hundred percent of the company, but there's a second, second, or there's a class C stock, uh, that's owned by the public, but no voting rights. And so you could compare Rogers to a, a family company, to a non-family. Media company. But you could do that a bunch of industry, like Nestle. You could compare a food company with Nestle. And when you look at the literature about performance of family companies versus public, what people will often say, first thing they'll say is family companies have longer time horizons. I'll come back to that. The second thing they'll say is family companies are more profitable than public, or some…

AI assessment note: “when you look at the literature about performance of family companies versus public”