The Knowledge Project with Shane Parrish - Proven Strategies to Accelerate Growth, Productivity and Profits with George Stalk, Jr.

Episode Date: May 2, 2023

George Stalk Jr., business strategist and author of the book Competing Against Time, reveals the surprising ways companies can harness the power of time to blow past competitors, boost productivity, and send profits soaring. Competing Against Time is the ONE book that Apple CEO Tim Cook makes all his executives read. In this episode, you’ll learn the proven ‘hardball’ strategies that market leaders like Toyota use to win and discover the counterintuitive approach of paying more to ship and manufacture faster – and how those time advantages translate into unassailable market dominance. George shares eye-opening examples of how relentlessly reducing time and variance through the entire value chain creates an avalanche of competitive advantages nearly impossible for rivals to copy. But it’s not just about speed – it’s about building a fast-moving, low-variance organization primed to adapt, innovate, and seize opportunities others can’t even see. Whether you’re a business leader, entrepreneur or ambitious professional, this episode will give you a radical new lens for gaining an unbeatable edge in any industry. After listening, you’ll never think about business strategy or competition the same way again. -- Want even more? Members get early access, hand-edited transcripts, member-only episodes, and so much more. Learn more here: https://fs.blog/membership/ Every Sunday our Brain Food newsletter shares timeless insights and ideas that you can use at work and home. Add it to your inbox: https://fs.blog/newsletter/ Follow Shane on Twitter at: https://twitter.com/ShaneAParrish Our Sponsors: MetaLab: Helping the world’s top companies design, build, and ship amazing products and services. https://www.metalab.com Aeropress: Press your perfect cup, every time. https://aeropress.com Learn more about your ad choices. Visit megaphone.fm/adchoices

I think the one-sentence description of time-based competition or competing as time is giving your customers what they want, when they want it, where they want it, faster than your competitors can do it. It starts with a customer and says, how do I get what they want to the faster? Then competitors, that's the essence of Kaviga's time. 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. Check out the show notes for a 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. 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? I wrote this book called Hardball. The subtitles, Are You Playing to Play or Playing to Win? And I wrote it out of frustration and maybe anger because I thought the business press was misleading, mainly MBA students and middle managers. thinking that business could be played nicely.

Co-optition was one of the big words at the time. And the Europeans were masters of co-optition. I might also call a collusion, but the notion was cooperate with your competitor. Don't fight them. 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 in Nissan. And there is no time to stop, set back and take your breath and relax. It's a continuous battle. So the book had 12 strategies that always worked. But there are hardball strategies. And they were based around clients' experiences.

I think almost all of them we had the client's 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 their market shares. What are some of those strategies? What are the ones that are most valuable? The one that always works is know your cost better than your competitors, know their cost? because most people don't know the cost. They think they do.

They know the cost that gets between the revenues and the profit law. And those are all averages, and they don't go behind the averages. And if you go behind the averages, 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. And if you know your costs better than your competitor, though their cost, you could do nasty things. gain market share because you would understand how the costs work, your cost work and not what the volumes mean. So what may appear to be a less profitable customer is actually the high volume customer, produces

a whole bunch of economies of scale and reduces cost. But that all gets lost in the averages. So 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 rest of the auto industry. It's a BMW Mercedes. Hardball M&A was another one, buying companies to round out a competitive position. or extend one of the one client was in the medical devices business of second best competitor was beginning to grow and so they just bought them out now there are people in washington and in Canada that are paid to stop that kind of stuff from happening and indeed the clients that we've worked with that do do that usually have to justify it pretty carefully but at least

people should start thinking about that. They shouldn't assume that they can't get away with it. So it was things like that, but it required a mindset that says, we got to win. These are 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 sort of have this notion that the workplace is like a family. That's part of the softening of business. I mean, the flips, I mean, an analog to family is as a tribe and people understand what part of what organization they're a member of. And I can tell you, people at Caterpillar know they're competing with Kamatsu. Kamatsu has a sign that says Maru capital.

Excuse me, Maru Kat, over its headquarters door. Baru Kat means encircle Caterpillar. And that becomes part of the culture. It doesn't, does it become the whole culture, but it becomes a very good part. I think Amazon is a good example. or Jeff Bezos says, your gross module is my target. 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 and all the things they moved into. What surprised me about Amazon, though, is they haven't gotten into the ticket masters business. I still don't understand that because the margin at ticket masters are huge. And the business is available to the internet. But that creates a culture. Do you think that cultures are the ultimate source of competitive advantage? I would say yes and no. On the yes part, if one's losing in part because one's culture is not competitive to an opponent's, trying to make the culture competitive is really difficult.

And I've been caught in situations like that where from the tactical 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. But it's not the starting point. I think it's necessary to bring it, bring culture into the equation if there's a transformation process going on that one needs to cement the outcome. At Federal Express, Fred Smith came up with this phrase called the World on Time. And so FedEx thinks a lot about time. And the organization thinks a lot about time.

And ideas for improving time performance come from all over the organization. That's a cultural effect. But he was able to start that culture because he'd already had a culture that was oriented around speed the next day delivery. How do you think about sort of a culture that you mentioned sort of competing with Caterpillar and encircling Caterpillar, which is outwardly focused, focused on the competition 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 that relative to the competitors, they can do that. People often use these descriptions of the culture without any quantitative representation. If the culture is not being responsive, have been, one of the fastest way to make them responses 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. And that's usually a big wake-up call. If people observe that wake-up call and take the actions and follow-through, they can produce pretty dramatic results. But that's not an easy path I just described. We had a case with a company of Wausau paper. And Wausau Paper is based in Wausau, Wisconsin. Small paper bill, basically owned by a family trust, underinvested in the equipment, and ended up in the wrong place of the paper business. And that places too many small, narrow, slow machines and a high-cost position and chronic loss of money. But no turnaround plans for that.

And it was a trust that brought us in because they were afraid. we'd have to close the bill. And the last thing they wanted to do was close the mill that created the trust. So they said, can you find a way to fix this thing? And we did. The way we found a way to fix it is we made this company able to make specialty papers and small volumes and deliver them next day within the greater Midwestern area. The new Mitsubishi Outlander brings out another side of you.

Your regular side listens to classical music. Your adventurous side rocks out with the dynamic sound Yamaha. Regular U owns a library card. Adventurous U owns the road with super all-wheel control. Regular side, alone time. Adventureous side journeys together with third row seating. The new outlander. Bring out your adventurous side.

Mitsubishi Motors. Drive your ambition. TD Bank knows that running a small business is a journey. From startup to growing and managing your business. That's why they have a dedicated small business advice hub on their website to provide tips and insights on business banking to entrepreneurs. No matter the stage of business you're in, visit TD.com slash small business advice to find out more or to match with a TD small business banking account manager. In the end, that was maybe 20% of the effort. effort because even though the organization didn't have any any options, they couldn't bring

themselves to implement that strategy. So for example, that sales manager was not at all interested in changing his merchant relationships, the distribution relationships. And for this company to give up on the commodity papers and focus just on specialties, they had to have a broader distribution to produce the volumes they needed. So that scared the hell out of him. They didn't want to go find it. I mean, the hardest thing, the worst thing about finding a new customer is having to go back and tell your old customer that has been done.

The logistics guy hated it because we said, okay, the deal here is the truck goes out, whether it's full or not. Now, this is an industry that's been oriented at a cost. And so less the truck holds is not something to do. All trucks go out full. All trucks carry 40,000 pounds. That's a lot of paper. Most people don't buy 40,000 pounds of a specialty grade paper.

But we had to do that because 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 distributors economics. Because next day delivery meant they could operate with less capital. And 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. And they'd have to get their merchants to invest capital in their business that already been invested in ours.

Now, the logistics manager wouldn't do that. He would not send a truck code unless it was full because he's always measured on that. He just, we had to retire that guy. But it worked. Wausau paper for many, many years, created the highest shareholder value of any paper company in the world until it ran out of capacity. But it took a new CEO, it took a new sales manager. took a new logistics guy.

It did take a new manufacturing person because once the person understood, the manufacturing person understood that we would put the equipment in, he needs to be flexible and to be able to handle short runners, 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. It was like BCG never existed. It's in 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.

They would rather the certain doom than the uncertain potential of surviving. I mean, to a layman, to me, if you've run out of options 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. So the size of the price, that's been big enough for management to be willing to take on the organization, take on the culture. I had the experience of turning around a client's factory to prove that it could be made more flexible and much faster. It was hospital beds, making hospital beds than their competitors. In the end, 80% of management turned over because they couldn't handle the changes. they could run smaller batches they could more frequently schedule a facility they just didn't believe it would work 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 it needs to be changed to freeze the benefit of a new strategy but one can't start there I think it'd be very difficult to start but at Wausau paper and say we're going to be the most flexible company of the world, making the greatest product, greatest amount of specialty products and not being in the commodity business, which is exactly, every one of those things is against the mentality of anybody in the paper business. 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 relative between private companies and public companies?

What can private companies do that public companies can't? For the last 10 years, 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 are most worried about their reputation being smeared by not poor performance. That's their number one concern. The second concern in owners is how all my children do?

I mean, all of them are afraid of their children becoming playboys. And after that, it kind of trickled out a bunch of different things. But a few years ago, we did a project where we looked at family companies that were publicly traded and had publicly traded competitors. So like in Canada, Rogers Communications, the owners own that one share that owns 100% of the company, but there's a second or there's a class C stock that's owned by the public, but no voting rights. And so you could compare Rogers to a family company to a non-family media company. But you can do that at a bunch of industry like Nestle.

You compare a food company with Desley. And when you look at the literature about performance of family companies versus public, what people often say, first thing I'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 somebody will say they're public are more profitable than families. So we did a project where we said this is wrong, you know, people are doing this the right

way because what they're doing is they're looking at at a point in time. And it really should be looked at over the business cycle. In fact, we looked at it over two business cycles. And what was really interesting that came out of that was the family companies were not as high performing on profitability in the 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 behavior by management to exercise stock options that are driven by quarterly stock prices or yearly stock prices. You've got a culture that was based on, let's keep the business surviving and growing and being healthy. So if you take

those two curves, you take one curve, which is the public companies, it goes up really high and it goes out really low and then managing it's changed down here and a public company doesn't go up that high doesn't go that low and management doesn't change the area under the private company's performance is greater than the public companies so my answer of that respect is the private companies are more profitable and not because it's longer term but because they're very they're much more risk-averse than i see public companies the management of public companies being so i think that's the biggest for a public company against a private company is how could I manage the risk, how could I in a public company maintain a risk profile that's easy for a private company being taken

because I don't have to explain to anybody. One of the eye-opening examples I saw was a very large family company, no publicly traded shares, but the non-family management, which was like 99% of the population because the family had all taken their money and going to their vacation homes and things. They decided to put the 99% on a phantom stock performance plan, which converted them into a quarterly business behavior to meet their own internal goals to get their stock budget. So you can actually wreck a family company's orientation by making it behave like a private company,

excuse me, behave like a public company. And actually, I think if you, if one of the not very discussed things on business today, is if the number of companies traded in the U.S. stock exchanges that are public are down by half, half of these companies are gone in numbers, and they've been taken private by the LBO firms, so what people like to call private equity firms. That's the plight phrase that's leveraged buyout firms. And so the private model of ownership is becoming the predominant model of ownership. If one steps away from Canada in the U.S., the family ownership profile is, the most characteristic ownership around the world, not public companies. The closest to Canada

in the U.S. is England. I work a lot in Brazil. There's a public market, but the predominant wealth of businesses in Brazil are owned by families. And even those that are family controlled, sometimes they have this second stock trading. Go to Argentina, which I've done, very few public companies. They're all private. Go to Asia, the Philippines and Indonesia, there's very, very few public companies. It's all families. In Japan, Kikoban, a family-owned company is hundreds of years old. A lot of good things have to happen to last 100 years, not just being family. But it's rare to find public companies that last that long. There's a couple of things you said there that I want to follow-up on. And one of the observations I made as you were talking is it seems like during

the, you said two life cycles. Two business cycles. Two business cycles. On the upswing, private companies are always underperforming, underperform the public companies. And they can do that because they're private companies in a way. Exactly. I mean, nobody's insisting on ever greater returns, which will force the management of public company to, I mean, returns are a risk reward. And if one wants higher returns, one usually has to take more risk. And so when the management of a public company is rewarded for taking risk that produces returns, that works. But it usually comes from leverage. It usually comes either from financial leverage or leverage of management talent or financial risk.

So when it goes into the downturn, the price for taking those risks comes home to Roos. And as I bet you really does for the family companies, it just doesn't happen as deeply and as bad. 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, assuming that the environment won't change. Whereas I think of family companies

positioning for a broader range of possible futures and never sort of like putting all in on a certain particular future. My experience at family companies is from a business operation standpoint, the management and the owners of family companies behave like the management of public companies in many, many respects. It's the owners that demand the caution of not getting too, too extended. And it's the owners that bat down the hatches so things don't go as bad as quickly, 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. 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 non-family management. That's one of the big issues with family companies, is are we an operating 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, because Caterpillar are the right to,

to okay, change of ownership. And change in ownership is something that happens when somebody wants to retire. And it's true at Ford. It's two of a number of companies. Sherman Williams is like that. But the problem at Caterpillar right now is if your father is 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 deal, even though it's a pretty lucrative thing to do.

And so the families grow out of the business. And today's world is hard to commit to a 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 in caterpillar's case what they want their family ownership to represent is a value in the relationship with the customer and they want that the dealership as a family owner of dealership to put the customer first and not have to worry about uh reported earnings i mean there's a the largest non-family caterpillar deal in the world i think is toramont here in canada that's a rarity the rest are all family so they want that steady hand

i wouldn't call a long-term perspective it's called steady hand not too not too high return not too lower return in the business but 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. I want to go back to something you said about time horizons. Can you tell me more about that? Specifically as they relate to, say, public companies with professional management versus family companies,

perhaps with or without professional management. Well, I should clarify something. Family companies that bring in professional management fall into two groups. One is an involved owner group, one is a non-involved owner group and the involved owner group I may bring in non-professional managers but I'm watching them closely because I still own the business I still want to see the business do well and a non-involved ownership group I might just be very happy to let turn this whole thing

over that to person A and let them run run the business and I have to find a way to reward them to keep them from being hired away by a public company but it's doable in terms of time horizons, I think the family involved business expects to say the last more than one generation, expects the next generation to take out of the business. Would you say that one says the next generation, one's talking about 40 years? Because management generations are about 20 years. So you get at least 40 year time horizon. If you expect it to go a third or fourth generation, we're saying, how do we keep this thing going?

for 60 to 80 years. And what that does translate into is I may want to invest in a certain type of business or asset because it will have that longevity. I think that's why you see so many family companies in shipping because these ships last 20 years. And their investment decisions that one makes to buy a ship that's going to be with you for a while. or you sell the ship. And so people expect to make their returns over the longer cycle.

And public companies, I would say with only a few exceptions, people's time horizon is about three years, managed for time horizons. The average CEO tenure is less than five years right now. And so they're looking for their investments to produce rewards that they can 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 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 that the disappearance of the public company is so important because the business aren't going away because the ownership is changing. And for many years, I always thought if my client had a competitor that did an LBO, that was the time to pound on the competitor because they'd be paying off debt.

They have limited financial flexibility. and it's easy to fight somebody that can't fight back because they don't have any flexibility financially. But today's world, I think the private equity firms today actually do have a longer horizon than the ones did in the 80s, the 70s and 80s. And they're willing to stick with the business longer. So if somebody goes private and I'm public,

I'm going to have a competitor that's got to make investments that I might not make. And these investments could conceivably hurt me. 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 that starts to take over is, you know, if I've been a public company, who am I working for myself or the company? Now, in the family-involved ownership model, the family's watch to be pretty carefully.

And we're talking a lot. So we could prevent the non-family management from going off in their own direction to me, their own financial goals because we can you 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 50 years because more you know more and more companies are private now not necessarily family on but private than our public just within the the fortune 500 or the fortune 1,000 now in general is there's frankly as the The family ownership model is the predominant worldwide ownership model. You know, it is the ownership model that people have to compete with, ultimately.

Toyota is a family company. It's also a public company. But when things go wrong at Toyota, the family gets involved. It's not the whole family. But it's usually somebody with a T and their name. It sounds like 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. And you can take a 10, 20, 30 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. And shareholders have 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, you know, Clayton Christensen, who's a professor at Harvard, is dead now, unfortunately,

made some really strong arguments that you perform to the shareholders you want to satisfy. And so if the shareholders I want to satisfy are willing to trade my stock on a moment's notice, I have to have a short-term performance orientation. If they're gonna buy and hold, I need to understand that so I can have a longer term view of the business. Now what is longer term?

Japan stands out in its own category. And profitability is companies are something, once the company's profitable, 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 a bigger amount later, it's because I believe I can grow the company,

I can bring my cost down and increase my margins and 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 60s, 70s and 80s and 90s with Japan is the Japanese didn't want to be profitable right now. Well, they wanted to be profitable, we don't have to grow the business, but they want to be profitable at an obscene level. And you butt that up against a system that has public shareholders.

They want their profits sooner rather than later or they're going to trade the stock. The two systems were perfectly well together because the Japanese take to get the growth, they invest to get the growth. And the public, usually American companies, give it up. And eventually they become less profitable. and the Japanese become more profitable. So that model, I don't see very often else we're in the world where people say, I can take my money now or I can take it later.

And if I decided to take us later because I expected to be a bigger pot later. But family companies are perfectly positioned to make that decision. I mean, I would say half the family companies I work with take very little out of the business that keep a lot in. In fact, I'm always amazed at look at some of these companies, is that the level of the wealth exhibited by the family members doesn't match the dividend flows. So not sustaining a lifestyle on dividends. What they're really doing is taking advantage of the wealth creation that will happen over time.

Now, a dark side of the family business is rarely seen in the literature. In fact, it's only seen in the literature I've helped write with my colleagues is that family, families grow exponentially. Businesses don't grow usually exponentially. And so there's many cases where the pie gets bigger, but the per person share of the pie actually in absolute terms goes down because the business isn't growing fast enough to take care of the family. That's a challenge that family companies face if they want to have ownership distributed on what people inherit. Now, they don't have to do that. Your business doesn't have to to go to your two children, it doesn't have to go to their eight children. It will, most

what side will go like that, but it doesn't have to. And you can begin to say, no, we're going to split the ownership group into two parts, one that keeps the ownership concentrated, one that has an economic play in the business, but it doesn't have any ownership to try to break that motor. Or we can try to grow faster. But you basically have to grow about 50% faster than the the family's growing to keep the pie big enough. I want to 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? Well, I think we touched on it a moment or two ago is that the managers of public companies are being compensated on current performance. Sometimes they're compensated on multi-year performance, but not very often, where the family companies are compensated on current performance, but there's a big chunk compensation waiting to be taken in the future through inheritance or sale of the company. And so that puts people in two different time horizon plays right away.

And it also positions them completely different, right? So if your company has a lot of capital in the public market, that might be considered like a bloated balance sheet. 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. You know, one of the phrases I hear a lot in family companies by rarely here in public companies is we've got to keep our powder dry. And when I hear that phrase, what they're really saying is, I got to keep money in reserve for contingencies, both positive and negative contingencies. That's so interesting to me because if you look at history, I mean, most of the successful

companies, if you go back to Carnegie or Rockefeller, they were always playing offense. 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 they knew they were coming. And so they would build up their balance sheet. Then they would go all in during the downturn. They'd build 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 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 to bring all companies up because they do invest in the long term. Because to develop an oil field, who can take a decade. Now, they may rate it at some point, but they are unusual in that factor. They're longer-term investments. Well, especially now because you have a five-year planning cycle, I would imagine, for a lot of these assets, do you even get online? For now in the energy business, that's true.

Yeah. But the Irvings in Canada are in the petroleum business. It'll be interesting to watch how they play out. I think what's implicit what we're talking about is I think public companies are underinvested understanding how private companies compete. And therefore, they're vulnerable to private companies behaving differently than they do because they have a view of the world or they have the possibility because of the dry powder to take advantage of circumstances that public companies don't.

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

It was, to my knowledge, is the only book that Tim Cook has recommended all of the Apple executives read. And I'm wondering, can you talk to me a little bit about competing against time? What does that mean? I think 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 faster than your competitors can do it. It starts with a customer and says, how do I get what they want to the faster than competitors? That's the essence of Kaviga's time. Then there's a whole

bunch of fallout from that. Most people, I would say more so 10 years ago than today, if I was to go through an annual report, the only time I would see in the annual report would be the time of the income statement, start and stop, and the date of the balance sheet. There may be a lot of yakking about responsiveness, but they're not really managing time. If one introduces time as a man, something can be managed alongside a cost, then a whole bunch of things pop out, gain visibility that don't when time is not included as a variable. And those things can be things like the price preview of a customer will pay for faster delivered.

The, as it turns out, the lower capital requirements that resulted, if 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, has higher productivity and lower cost. And people get to that point because they've looked at cost and time. It's not time and set of cost. It's cost and time. In fact, it's cost time and quality because if it was looking at organization through the lens of time, one will see where the quality problems are.

Because anytime one has a quality problem, whether it's manufacturing or in an information business, It means rework. And any time we have rework, it means lost time. And so for people to be faster to the competitors, they have to be higher quality because they don't get to speed. Reading, playing, learning. Stellist lenses do more than just correct your child's vision.

They slow down the progression of myopia. So your child can continue to discover all the world has to offer through their own eyes. Light the path to a brighter future with stellar lenses, for myopia control. Learn more at slur.com and ask your family eye care professional for SLR Stellas lenses at your child's next visit. I remember talking to the CEO of Motorola, who was one of the earlier users of time as a weapon. He says, we sell the organization on quality, but we're actually taking time out, which is true. You know, a lot of people say,

whoa, why do I have to do things faster? And they assume doing the faster is walking faster. completing things quicker. It's actually just taking out all the dead time. Most organizations, if we look at the time required to produce an output, either an insurance policy or a manufacturer 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, 95 percent of the time and more is wasted.

And people don't see that unless they start measuring. time. And in that 95% is a whole bunch of costs that go away if one starts taking time out. So time is a very powerful lens to look at how productive one can be. And the outputs are just astounding when you get a fast competitor up against a slow competitor. What are some of the things that get in the way of velocity in organizations? There's a long list. Let's see. The most obvious ones are I do things in batches.

Batches usually thought of as manufacturing. It can also be in white color, in a knowledge business as well. I manage a business on a set cycle. Batches are the result of what people consider to be 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 isn't being 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, one goes through cycles of batches faster, batch A, B, Caps faster if there's smaller batches. And you can't do that unless one organizes the factory floor or the back office to handle small batches. But when one can do that, that last third of the time, which is managing the flow of batches throughout the organization, it goes away.

So I went to Tokyo for BCG in 19, probably 1981, a long time ago, 1980. Just before I went, the founder of BCG 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. good factories at Ford with good factories at Mazda and Toyota. And there was one chart in particular where the Japanese factory was a third the size of the Ford factory,

had three ties of product variety, and was twice as productive. And Bruce said, if we can't explain that, we're not giving our clients 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 scale produces a continuum reduction in variable cost and focus removes complexity and overhead. So the focus factory, the focus factory that's big was the winning factory. And in this example, we had a Japanese company, a factory that was not as focused as the American factory, didn't have the volume in the American factory, and was taught.

is productive. They said, this does not compute. We've got to find out why. And what was really interesting, that this isn't in the early 1980s, people attributed the Japanese productivity advantage to their culture and to the worker management relations. And if I looked, what we did, I looked into the numbers. All the productivity advantage was an overhead. It wasn't in the line workers. And it wasn't just a little bit, though. It was a lot in overhead. It was like one-tenth the overhead. So these companies were simpler to manage, even though they were smaller and more complex.

And so very often the bulk of the productivity advantage a Japanese factory might have comes from overhead productivity. It doesn't come from direct labor. There is some direct labor productivity. And so that got us to say, you know, we got to understand this. And what we did when we got to Japan. when i got to japan is i figured out how they did it um and if one if one this you know facilitates small batch production you have to have short setup times uh you have to have limited

material movement you have to have on the floor scheduling um and if you can put all those things together a whole bunch of costs come out and how much working capital comes out and it produces the basis of somebody that could be a time-based competitor. One doesn't become a time-based competitor just by taking time out. You become a time-based competitor when I use my time against a competitor. And that's when the fund starts because the competitor doesn't know what's happening to them. In the case of Wausau, I saw it happen. It took 10 years for the leaders of the paper company, paper industry to understand what Wausau was doing. In part, as you mentioned earlier, They were too inly focused.

They really didn't see what was happening or they dismissed it as a side show. That's another great strategy for Hardball is what we call anomalies. Anomalies are things that happen in the business that management explains the way because 90% of the business doesn't behave that way. An anomaly might be, the anomaly in Wausau's case was, who also had a fairly high share of its paper business in Chicago and with one particular merchant. And that didn't compute.

And so we went and talked 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 Chicago has a great relationship with the paper merchant. Remember, we're in a turnaround situation. So great relationships are not useful in turnarounds because it 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.

And the guy says, yeah, it's a great relationship. I tell the salesman, if there's a truck up by dock tomorrow morning, we're friends. If the truck is it at the dock, we're not friends. And that was the beginning of understanding, oh, there's a fast satisfaction cycle here that we can take advantage of. Or can we scale it across the whole company? And we could. But it was hidden in 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 was one, it was an office products company that had its own service force. And one customer insisted on all service being done between midnight and 6 a.m. That's an anomaly. because that's not the way we schedule service. But for this company, the local people did that. And it turns out that company that wanted overnight service,

wanted it because they didn't want their production interrupted or the use of the equipment interrupted. And in those situations, this client had a higher share of the business. In a medical device business, Adomle was the European competitor always had a sales, A scobey always had a service representative on-site at the hospital. It's a medical devices. That looked like a high-cost thing to do.

We didn't do that. 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 service person was taken care of was higher. And it turns out that the share of new business that this competitor got was higher. So we have an anomaly here, you know, he's doing something. It doesn't make sense. But if what starts to look 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.

Because usually they're small. And the question at Wausau is, could we make it big? It's tough to answer that question. You mentioned earlier that Walmart sort of attacked Kmart with velocity. Can you tell us that story? The Walmart story, as it was described early in the years of Walmart, was about a local five-and-dime competitor, grows in Boondock markets, has greeters at the door to make people comfortable and help find their way around the store, has a Darrell product offering, and that's their success. That's just the tip of the iceberg, what Walmart was doing. Walmart was 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 deliveries once a week instead of once every two weeks. weeks or what's a month. They did that by incenting their suppliers to deliver to a very strict and onerous schedule by paying the suppliers faster than their competitors paid it. They did it by having very big stores. In fact, it wasn't until recently that Walmart began to change its model on store size because people, they found that big stores were lower cost

and people 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, there was a whole different model at play. I don't think I came or actually ever figured it out. They begin to see some of the surface differences, but they never, they always outsourced their trucking. They underinvested in IT.

It doesn't happen today, but Walmart used to have the store managers fly into Bentonville every two weeks and talk about what's going on to business so they get to make adjustments. Kmart did it's, you know, Troy, Michigan, 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 than Kmart because it came up the hierarchy, get some decision to come back down the hierarchy. And Walmart, the hierarchy was flat and distributed into the store managers. And then Walmart went into a, uh, uh, warehouse stores. Sam's is their version. And warehouse stores are actually like what most

people thought Walmart was, which is a narrow offering, very high velocity. But the big difference in warehouse stores is the way they get paid because their customers, they pay cash or credit. And so you get almost instant accounts, non-existent costs receivables. In fact, you get negative working capital. And that was part of the model that Walmart discovered going in is that they could have a negative work in capital business. But so could the other competitors as well. Now, it's interesting watching them today because you, because you have Walmart versus Target. I think Target has found a way to move itself to the side. But I think very much, if there's an analogy in Canada, it would be Loblaws versus Sobies.

Or I think Sobies has positioned itself a slightly more upscale. It's like more of a specialty retailer shopping experience in a lobloss. Now, I don't know the business well enough to say which one's a winning strategy. And in fact, they're probably both going to be winning strategies because I think Target will find a way to co-use this 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 in the obvious way, which is, okay, Amazon is a logistics, first you order online, second, then the logistics systems kicks in. And now if you're Walmart trying to catch up with the distribution system of Amazon, I can't really

use much of my current distribution system because it's made up for dealing with large volumes, selling large volume stores. And I have to come up with a distribution system that has much more distribution centers. I don't know if you've noticed how many distribution centers around small towns and Amazon distribution centers. That's a very expensive thing to replicate. What's the relationship between focus and time? 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, though it would be twice as fast. It's actually more doable in the 10 product line factory

that it is at the 50 product line factory. There's more complexity than the product line factory. There's more batches. There's more distinct processing steps. And so a focus factory is always more easily made faster, more focused organization. Because factories are basic 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 at 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 at Wausau was getting killed by were quite happy to focus on the commodity business. That's why they took them 10 years to figure out what Wausau was up to because they didn't like that business that Wausau was going after. And I suspect with Amazon, the winning form is going to be picking a part of the business that Amazon doesn't really want to have.

So automatically one setting itself up for a smaller business. But there's something funny about retailing. And it's something we call the heavy spender phenomena. And the heavy spender phenomenon is that 20% of the customers at a retail store account for 80% of the volume. And what's so special about those customers? It turns out those customers have a different need than the 80% of the customers that account for 20% of the volume. Those 20% of the customers that account for 80% of the volume want more choice.

They want more understanding of the product. They want a positive touch feel with the consumer. And if I can do that, I attract what we call the heavy spender. and every retail category has heavy spitter. What's your hobby? This. Yeah, your hobby. Do this.

Oh, you're doing this. Doing this. I mean, what do you spend your money on then? Let's say ski equipment. Ski equipment. Yeah. Is there a special place you shop? Yeah.

Are you a preferred customer at that place? Yes. So you're probably in that 20% that accounts for 80% of that outlets business and they know how to take care of you. Yeah. And they know your name when you walk in and they, yeah. And I doubt you buy your ski equipment. from Amazon. No, no, no. Do you even look at ski equipment on Amazon? No. I don't need this.

I don't know if they have any. My reckless spend of money is on model airplanes. I build these gigantic radio control airplanes. Each plane costs thousands and thousands of dollars. And so there's only a few places I can find the stuff I want for each of these airplanes, 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, about 20% of the money. women account for 80% of the shoe sales in Nordstrom or the bay those people have the needs I just described they know they do selection uh they need to be the product explained to them so they're buying up for the right reasons they need to be treated well

which means if they bring me out the shoes it's not a grief driven experience it's a pleasurable experience in fact remind me that's one woman who is a big it's been her She spent 20% of her disposal income on shoes. She said, George, you know, I was interviewing her about this because what I heard about it, I said, here's that if you spend her, I want to know more. She said, if I've been a bar and some guy walks up to me, she's a pretty woman and says, I love your shoes. He gets an automatic 20 minutes.

He said, most of the guys, I send away right away. So shoes is a big part of her life. And so you can think of all sorts of retail cosmetics. Shoppers has been. so successful with cosmetics because they actually set it up for the heavy spender probably the middle income category on cosmetics it's been very successful for them automotive parts another one heavy spenders I virtually every category as heavy spinner segment and that's probably you know that my model airplanes which are have a huge amount of electronics at them I'll look at the

electronics at Amazon I don't buy it from Amazon right because you want somebody to talk to to selection, 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 to. Talk to me about cost in time. How does that, how do those two things relate? If we come back to a Japanese and Ford example, we had a Japanese factory that was three times as complex,

half the size and twice as productive. to, I didn't mention the time to mention. The product went through that factory 10 times faster than through the Ford factory, 10 times faster. You know, the 20% productivity advantage was about a 20% cost advantage, which is a big number for automotive component. But the time advantage was 10 times. That's what triggered our thinking about strategy.

Because up until then, BCG was predominant strategies were based on cost. How do I have lower costs in your, how do I help you have lower costs in your competitors? And that, as I mentioned, drove us to scale and focus. But here's time. Here's another dimension people aren't managing. And what could you do with 10 times of speed? That was the question we started asking. How can you compete with that?

Wausau was one of the early applications of that, which I can compete with next day delivery versus delivery every two weeks. and if I could have next day delivery to the merchants that allowed the merchants to order more frequently and operate with less capital. That's where the advantage kicked in. And so that's where cost and time worked out. We added cost to the process to get time out the other side.

But the time benefits were so overwhelming that the cost didn't really matter anymore. But most often what we see is that if you could speed up a factory or any kind of process by a factor four, in other words, I take 20% of the time, 25% of the time I used to take. Productivity is about, cost position is about 20% lower. Because I take out overhead. Overhead doesn't speed things up, overhead slows things down.

But overhead comes out because I'm being intelligent about how I manage, not because I'm just slashing the overhead. These factories are simpler to manage, even though they're more complex, because the management's pushed down onto the floor. There's a lot of autonomy pushed down to the floor because it's organized and managed to run by itself. There is central schedule, it's not a big department. And a traditional factor, there's a big scheduling department

and it tells every single piece of the factory what to do when. And a Toyota factory, that schedule is pushed out of the floor. So by producing one product, another part of the factory discovers the need to replenish. And so over it comes out, so costs come out. And so if people have a cost problem, we often introduce the dimension of time to figure out how the processes could be set up differently to take time out. And usually what we usually eliminate costs in doing that, almost always eliminate costs.

In fact, the costs 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 you sell commodity parts and those parts are to spec and they're widely available. But most people don't have the inventory, 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 going to be bloated because you're going to have a huge inventory level.

But you're probably able to sell them even if they're not high velocity parts, but you could sell them at a huge premium, 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? Well, give you an example. It does 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. We've taken that, we've looked at the company at cost, of course.

with the company quality, of course. We looked at the company at time as a 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 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 why can't they ship the product on time because it's not all parts of the product order are available. So we have to hold the order until they're available. And so once you're digging into this layer at a time through the lens of working

capital productivity and finds opportunities to do things that are balance sheet related that improve productivity and improve 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 the business competitive position. Like an example of that would be maybe I'm going to. going to pay all my invoices in 24 hours, and I'm going to let my accounts receivable go out 90 days. Instead of trying to rein that in, I'm going to actually lengthen it, which means 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, which is they pay the suppliers faster than Kmart, we're paying them. And they were paying them faster because they wanted a different level of performance from the supplier, which is exactly what you described. And you would find that by looking at the working capital productivity. You could say, well, geez, you know, I have all this inventory because here's my replenishment standards. 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 uses a balance sheet, and we skate it right on by it, is if one's big and one's already low cost,

one can carry more variety at a lower penalty on the balance sheet. sheet because the volume is there. So in your example of skis, if that local distributor or retail store is big enough in the business that you're interested in selling, they can actually have more available. So their balance sheet, you might say, well, gosh, they have a lot of inventory laying around, but they're turning it a lot faster because they're selling at the customers who buy a lot of stuff and buy it frequently. How does speed transfer from the factory floor to software companies. 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. What's dissimilar is that a factory I can see things happening. Software I can't see things happening because it's all happening and in the ether people thinking but I've done a lot of work in speeding up software organizations and for many of the same reasons that factories are slow software companies can be slow they can be compartmentalized just like factories can have manufacturing centers based on process processes like a heat treatment and stamping they have quality problems slow things down just like these have quality problems they have batching problems which is 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 that's what i was thinking because so much of this is planning and forecasting like what the world's going to look like in 18 or 24 months you have no idea and the further out you get the less certain you are so if you're planning all that planning is just sort of i wouldn't say wasted but it's definitely not very productive and then you have a whole cohort of people who make a career out of planning and so then they justify the planning and they sort of and like the factor they're people so that's why i've never i've received a

over the years, people say, well, we're a different business, we're not manufacturing. In fact, it's that somebody said to be a study. The fact of the matter is, a software, a development facility in software very much behaves like a people operating system in a factory. The version of batching in the software would be major changes to the offering. That's the code of large batches. The time-based version of batching in a software company is the agile version, which is how to have the minimum acceptable product and then improve on it.

It's like small batches. And I think people get there the same way. If I look at a factory through the lens of time, I see a different set of things that are important. If I look at a software development process to the lens of time, I see a different set of things that are important than people normally manage themselves to. I stop worrying about the differences many, many years ago between factories and non-factories. Well, one of the advantages I would think to software is you can get your feedback. the time from shipping to feedback can be instantaneous, whereas with a factory, you got to ship it,

it's got to go somewhere. The customer has you 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 most software releases are followed by another release, and the second release is not instantaneous. Well, the reason for that, there was the variety of devices that it's going to, which is one of the reason I think that Apple has started to sunset some of their older devices because you can't, releasing an update that works across technology that was invented like 12, 15 years ago is really hard. And the testing cycle for that is inherently hard too because each of these devices also has 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 I think that's why we get some of these, oh, here's another update, because here's an edge case that we didn't see happening or plan on happening. But you're actually talking about policy. You know, upward compatibility is the phrase that's usually attached to that. And it's very difficult or the long term to maintain upward compatibility. And managing a transition from one platform to another because they could no longer make the original platform upward compatible.

It's very hard to do. And it usually results in offering an older product right alongside of a newer product. And it usually happens with the neuro product being priced at a premium over the older product so people don't abandon the older product altogether. And then one's left with how do I help people who are stranded because they have the older product.

I'm going through this right now because my Apple iPad has lasted me years and I just got to notice from the Boston Consulting Group IT Department that it's no longer it's no longer for security reasons it's not longer to have upward compatibility. Yeah.

And they're going to cut me off the system. And 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. But I'll probably not buy a new Apple. So it's a policy decision.

And it's hard to do it in a way that makes the customer feel good. It's not impossible. You know, the example I was thinking of is a medical devices, medical robots. And you've got to make the new platform so much more attracted to people pay a higher price. And the people that don't want to go to the new platform will feel like they're getting a good value by staying with the old platform. Now, you're still up for the downstein problem was at some point, we don't want to support the old platform anymore. then 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 fourth generation one that's working fine they'll give you something give me a deal you feel good for it yeah I feel good about it so it requires thinking this through how do I make the customer feel like they're not being abused and respecting them right they purchased it they put their money into it and you're sort of nudgy them to upgrade and at time period they might not be ready for a couple years ago I had a project I called the ugly duckling of retailing and the ugly duckling of retailing is returns and returns actually are are a very large part

of a retailer's business it's like some online stores I guess is like 20% or something oh it's huge but that's where I was heading is Zappos is one of the first companies I ran across where they use returns as a marketing opportunity. Whereas other people, like at that point in time, if you go to Walmart, look at their return policies. I mean, it was astoundingly complex and didn't look very customer-friendly at all.

Zappos was, buy what you think you need and send the rest back. In fact, I was in a UPS store in Palm Springs, Palm Beach, Florida, mailing something back to the office. And I noticed that all the boxes behind the counter, of all the boxes behind the counter, about nine out of the ten of them were his apples boxes going back. And so they found a way to use returns as a way to make the customer 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 go and you stand in line for like 45 minutes to an hour. And so if you If you factor in a cost of time for you to return something, it's... I don't return it, I give it away. It's not even worth returning half the time. When I did the architecture work, there was a couple interesting examples in Canada. I interviewed a bunch of women about different kinds of products. And Sears, which I never thought of as a woman's place to shop,

was picked out a place these people would like to go to because they had a great return policy, made it easy to return products. Zappos was in 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 a week or like two hours on hold with customer service. It should be a click of a button. Like it's that simple.

If you wanted to click on 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 ugly ducking work is how do I, make returns a marketing advantage. In Zappos is one of the earliest examples of how to make 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, you're the Wall Street Journal, 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. It's probably, you know, probably shade, it's probably two departments. It's like two different parts of the factory. True. It's not my department. So you've got to go to this department. 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. What I thought, what are the least expensive innovations I've seen is what people say,

if you don't feel like waiting, wait, waiting, leave a number. That's almost satisfying. A callback 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 what I don't get a call back.

I did that once at our Canada. They called me at like 3. am. Oh, no. I want to mix a few subjects together and sort of like talk about this in relationship to each other. So like 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 we're sort of currently undergoing. And I'd love to hear your thoughts. Let me break that in a couple parts. Lean manufacturing and just in time are from my experience are describing the same phenomena. The small batch minimum material I had like self-scheduling manufacturing process

that Toyota pioneered in the 50s. And interestingly enough, it was a solution to I had to come up with to compete with Nissan. Because in the 50s, Nissan was Japan's largest car company. And I thought it was just getting in the cars. So they didn't have scale. It didn't have the breadth of product line offering. So I had to figure how to compete at low scale and with more complexity that it might want to use. So it created the distance time system.

Ford had the distance time system as well, but it was high volume focused Model T's type of stuff. So let's do a very similar. The effects of them being together, the effects of them on the organization do show up the balance that show up in higher asset productivity in the form of higher working capital productivity and higher productivity of plant equipment. So those are together. I've been looking at supply chains as a source of strategic advantage for about 15 years now. And I just finished

a paper for the Harvard Business Review that was originally titled how to use the supply chain crisis against competitors. And I'm explaining this because I want 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 in a way that puts my competitors at a disadvantage? Because I can't, as a company or an individual, I can't fix a 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. And there are several ways you can do that. First of one has to recognize that the supply chain crisis is a system phenomena.

We have a very complex system that was working fairly smoothly, and then it was disturbed. It was disturbed by government lockdowns. And when a system that's complex is disturbed, it has a response is often called the bullwip effect. Basically, all parts of the system starts to oscillate. The factory overproduces and underproduces. Inventories become stockouts and overstocks. And one can try to fight that on the ground, or one can try to fight that in the air. And fighting in the air says, the way to minimize the impact is surprising crisis on me

that results of me being a higher performer than my competitor are often things that people will want to do because it look like they cost more. So, for example, one thing I can do is like an order more frequently and pay whatever a penalty it takes to get that. I can, and this has been happening, I can accept, I could arrange containers that aren't full so that the container is not waiting to be filled up before it comes. I'll pay the difference in premium. I can pay a premium when it arrives to get off the ship first.

I could pay a premium to be loaded last. I could pay a premium to put the box 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 it turns out the time and the supply chain crisis is it's incredibly important because the longer is the supply chain time the more exposed it is these oscillations and so if i can become more time-based in my my supply chain i did basically insulate myself relative to my competitors i still have problems. They're not as bad as my competitors have problems. So some of the things I

describe are with the existing supply air freight. You know, the the logistics cost of a TV set that is shipped by Ocean to Best Buy is about 5%. That's pretty damn good. If I ship it by air, it's going to cost me like 12%. If I have a stock out on a flat screen TV, it could cost me 50% of my margin. If I have an overstock, it could probably cost me an online margin to get rid of the product.

If I can find a way to make all that cycle happen faster, I'm less exposed to the supply chain oscillations. And therefore, I end up having higher in stocks and fewer out of stocks, which the customer likes but I make more money 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 and very often the fight with management is over 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, if most of them accrue to the customer, then it becomes a flywheel almost, doesn't it?

True. The answer to the executive's concern starts with the customer. You know, if I could get so much time out of this process I produce for my retailer, fewer stockouts and fewer overstocks, that makes him happier. But there's a cost associated with that. And so where does that cost occur? and what some of those costs occur within my four walls some of them occur outside my four walls that's what the problem starts to come up is um where the cost are if one starts building into

the profitability analysis of the product the cost of overstocks and the cost of understocks you can actually accept the fact that i'm going to pay more for my step in the supply chain so somewhere further down i get the benefit shows up and i get a premium of some sort that's the hard part to get people to do that. I worked for a woman's lingerie manufacturer at one point. And it took them weeks to get the product from Asia where they sourced it to their retail stores. The gross margins on these products are 90 to 95 percent on a woman's lingerie. The on ocean shipping cost, terminal terminal is about a percent and a half of sales. the air freight's about four um so if i'm ones to accept almost a factor of three increases my shipping

costs to avoid a 95% cost of a stockout i end up being a more profitable chain and it ends up being faster and so that's what happened they went from 20% oh shit i got to have it right away to put it on a plane to 90% is always on a plane now. And so we've taken on the ocean shipping now, way down. And because the benefits of avoiding stockouts and overstocks is so high, we can afford to pay the cost of the air freight. There's so many ways to strategically use your supply chain, your access to raw materials, all of this stuff.

But it always, 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 on hand before COVID hit, you can keep pumping through even though there's a supply change 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 to hold and acquire. But you don't want to do it because you have investors. They have a different timeline. It looks like blow it on the balance sheet. Looks like inefficiency. How do you sort of like weigh those things against each other.

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 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. So lockdowns that produce the problem, not COVID. Well, they can say COVID produced lockdowns.

Decided they were going to stock up. And it paid off amissive. But 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, say, the 2000, 2015 time period, because their time. consumption of the supply chain was so much shorter than HP,

Dell could be introducing products with more up-to-day technology. Well, HP was still trying to get products from the old through its supply chain and begin to make the HP products look old. And once your product goes old, but the only in high tech you could sell it is at a lower price. And so that worked very well. But it does, it puts back to time. I think, again, I don't sound like a, sound like addicted to time, but it's just so powerful that if one takes a look at supply chain

through time, one sees real opportunities to do a bunch of things differently that can be done if one doesn't take advantage of time. The one big unknown, which probably won't become prevalent management theory for another 10 years, is what I call variance analysis. And if one list of supply chain that has a much faster flow-through than a supply chain that has longer throw-through not only is it faster but it's less variable so there's less distribution of outcomes in the supply chain if you take two supply chains one that has an eight-week time and one that has a two-week time the variability of the output at the one that's two weeks will be about one eight

variability of the other. So there's a high variance advantage as possible. Just a footnote on that is that variance that comes from two sources. It comes from changes in the outside world. In the case of an airline comes from a storm, something like that, airport closure, or it can be self-generated. And it turns out the supply chain that has a high amount of time on high variance because they always go together. Even if the outside world doesn't change very much at all, it'll generate its own turbulence inside. And turbulence equates the cost. And so a supply chain that's fast and low variance is much a higher performing supply chain that's slow and high variance.

And again, I don't have to fix the supply chain problem. I just have to make mine better than that to my competitors that I can do nasty things to them. I say it's going to take a while to fruition because most people don't think they can manage the variance in the supply chain. The answer is you can manage the variance in the supply chain. Canadian tire is a perfect example. They use something called flowcast, they get a Canadian tire, 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 the variances are.

And then where they have problems, they throw people at it and get it fixed, even though they don't own that step of the supply chain. So managing variances is a mindset that's going to be very challenging. for people to achieve if they haven't achieved a time mindset to begin with. But it's the next, I think it's the next wave. And you're writing about that now, right? Am I writing about that? Yeah.

Well, you know, that's right. I took the work because a lot of people, for example, there are reasons I did the work. Every time Toyota has a glitch, the management press trashes the Toyota production system. Now they've had it. Now they've got to run out worldwide. They had something called a J-val factory in Japan burned down. And because it just is this supplied 95% of the J-vals, which are part of the brake system of Toyota cars worldwide. And they couldn't make cars.

Yeah, so they can't make cars. They're dead. They had this thing up and running again in two weeks. And we can't take the time and explain how. They have a time orientation at Toyota. They found they had ways to do it. They did it. And they were up in two weeks. At the same time, that had a time. happened there was an airbag factory in ohio that burned down this this company that owned the factory supplied 90% of the airbags to ford uh ford ended up making cars at the auto city they called put it against the fence semiconductors as you're were missing so people built cars without semiconductors and put up against the fence and when you have the civic directors you went back and fix it you know that's expensive

so for started doing this the airbag factory that burned down and Cleveland never came back on the street. And the consequence of that was this particular supplier whose factory burned down went from supplying 90% of their bags of the Ford to supplying like 30% because they felt they had to diversify the supply base. Yeah. So customers are very sensitive, can be very sensitive to variance. Now, so I did this analysis and showed that the detector system recovers much faster from a disturbance than does a traditional supply chain manufacturing system does i put all this work together i took it to a company called w w granger a w w granger is a leading industrial supply company basically a distributor of industrial supplies

huge range of offerings from from mops and gloves to electric motors and stuff it's really amazing so i was talking to the head of granger's canada except these guys got it a complex distributor high performing business and the notion that he could manage variance in a supply chain was just more than he can handle he said george you know i like what you're saying 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 going to do it southwest airlines that's what i mentioned airline earlier um has very low variance and its performance they have low variance and schedules they have low variance and and the plans they operate, they have low variance in the crew assignments. They've taken a lot of the

variance out. They recover from disturbances much faster than the other competitors. So they're on the way. They'll figure it out. But I don't think I'll, in my lifetime, I'm going to see a company step back and say, okay, now I got cost, quality, time, and variance under control. At this point, I said that's only Amazon, Walmart, and Toyota are probably only three companies I can imagine they're even closer to that being able to do that. But it's the next big, to me, it's the next big wave is variance, but it's so far up. Oh, fact, the grand trick guy said, come back in 10 years or something like that, which is about, I figured it was going to take. So I put it back on the shelf for a while. I'll send it if you want to see it. Yeah, I'd love to.

That's a great place to end this conversation. I would thank you for your time today. I really appreciate it. 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.blog slash podcast. Or just Google the Knowledge Project. Until next time. Thank you.