#business

Joe Pinsker on a unique strategy employed by Herb Hyman, the owner of Coffee Bean & Tea Leaf:

He determined his shops’ proximity to Starbucks to be such a boon that he began opening locations close to established Starbucks—a sly reversal of the national chain’s strategy. “We bought a Chinese restaurant right next to one of their stores and converted it, and by God, it was doing $1 million a year right away,” Hyman is quoted as saying in Starbucked.

Rather than run and hide from the big guy, or be terrified of his arrival into town, Coffee Bean started doing the opposite. And they thrived — undoubtedly because it helps to be next to Goliath when you’re trying to get people to pull for David.

(Also interesting data on small boards versus big boards — which makes total sense.)

Ariel Schwartz:

Gum’s turn in the spotlight may be ending, however. In a report, Nicholas Fereday, executive director and senior analyst of food and consumer trends for Rabobank, has surveyed the state of the gum market and discovered some surprising data: The $4 billion gum industry has gone into freefall, with sales down 11% and volume down 20% in the past five years. No type of gum is immune—everything from sugar-free gum to bubble gum is experiencing the drop in sales. What’s going on?

Insert “Bubble” joke here. Also, this is really odd. I used to chew gum all the time. I never do anymore. Not really sure why. I just stopped. But I didn’t think everyone else did too.

Tony Schwartz:

Many retailers, for example, seek to save money by understaffing. The result is rushed, overworked and mistake-prone employees and higher turnover, which leads to unhappy, antagonized customers. The counterintuitive solution, Ms. Ton says, is to increase “slack” — meaning to have more employees available than are absolutely required at any given time of day.

QuikTrip, in contrast with most of its competitors, purposely overstaffs stores so that they can accommodate employees with emergencies or who are sick or on vacation. The result is happier employees and better-served customers. Ms. Ton cites one study of a 500-store retailer that found that every additional $1 spent on employee salaries resulted in an increase of anywhere from $4 to $28 in sales.

Funny that.

Megan McArdle on the tendency of companies, especially large ones, to choose not to hear dissenting opinions — or worse, to silence them:

Why did they try to shoot the messenger instead of listening to the message? One answer is that’s what organizations do—especially dysfunctional organizations. As a young IT consultant, I sat through more than one meeting where we, or someone, tried to stop a client from doing something obviously crazy. Usually, the result was that the client did something crazy, and that someone went looking for another job.

Doctor No, that grating in-house critic, can be your most valuable employee—if you can make yourself listen. That’s surprisingly hard to do. Organizations exist for the purpose of doing stuff. That’s what their staff is hired to do. The guy who says maybe we shouldn’t do that stuff—or the stuff we’re doing isn’t working—is not very popular. There’s a large body of literature on dissenters, and it mostly tells you what you already know if you’ve ever been to a project meeting: Nobody likes a Negative Nancy.

Which is too bad. I’ve argued before that every company should be forced to have such an employee — and ideally one who is very high-ranking.

McArdle goes on:

You don’t want to let the perennial Voice of Doom kill every project. But if you listen carefully to the Voice of Doom, you’ll find he’s giving you something extremely useful: a list of almost everything that can possibly go wrong with your plan. Think of the VOD as your defensive coordinator, identifying all the holes you need to plug, and backup plans you need to have in place, before you launch. Instead of ostracizing your Doctor Nos and asking them to kindly shut up, why not give them a designated role on the team, telling you what’s likely to go wrong, and then pointing out when it is?

Exactly. There is no downside to hearing the negative view. But there is potential upside. And there is plenty of downside in not hearing it.

"Back to the Brick"

"The company almost collapsed … having drifted for years, diversifying into too many areas, producing too many products…"

A newly appointed leader comes in an “decreed that the company must go ‘back to the brick’: focusing on its core products, forgetting about brand-stretching…”

He also imposed “stricter management controls, for example reducing the number of different” products…

"But at the same time it must resist the sort of undisciplined innovation that almost ruined it."

"Can the company continue its winning streak? Its growth is slowing: its net profits grew by 9% in 2013 compared with 35% in 2012, and its revenues rose by 10% compared with 23% in 2012"

"When the company is getting bigger and the market isn’t growing, it’s a pure mathematical consequence that growth rates will have to reach a more sustainable level."

"…Relatively late in making its China play—jumping in when some other western firms are jumping out with nothing but regrets to show for it."

If I made you guess which company the quotes above are about, I assume you’d pick Apple. And understandably so. But you’d be wrong.

It’s actually Lego.

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Warren Buffett in the summer of 1998 (from the brilliant joint interview with Bill Gates that I linked to the other day):

They’ve asked us to start out talking, the two of us, about what got us here, but then it’s on to your questions. How I got here is pretty simple in my case. It’s not IQ, I’m sure you’ll be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output—the efficiency with which that motor works—depends on rationality. A lot of people start out with 400-horsepower motors but only get a hundred horsepower of output. It’s way better to have a 200-horsepower motor and get it all into output.

So why do smart people do things that interfere with getting the output they’re entitled to? It gets into the habits and character and temperament, and behaving in a rational manner. Not getting in your own way. As I said, everybody here has the ability absolutely to do anything I do and much beyond. Some of you will, and some of you won’t. For the ones who won’t, it will be because you get in your own way, not because the world doesn’t allow you.

This point is almost seems too obvious and yet at the same time, too subtle. Both of which are undoubtedly why such a key aspect of life is often overlooked when talking about why someone achieves greatness.

Patrick J. Kiger on Lynsi Snyder, the 31-year-old president of In-N-Out:

And indeed, while Snyder has walked through darkness a few too many times for a woman seemingly born to a life of privilege, her fearless, thrill-loving race car driver side is balanced by an oddly incongruous caution when it comes to running the company she inherited.

“In the business world, I’m much more conservative, much more old-fashioned,” she says. “I’m not as much into taking risk. … On those personality tests, I come out as a choleric-sanguine, a combination of opposites: an organized, careful leader, but also fun-loving and free-spirited.”

Snyder’s conservative, risk-averse side, though, is a good fit for In‑N‑Out Burger, which has two core principles: 1) Don’t change anything, and 2) Concentrate on doing the same things you’ve always done, as well as humanly possible.

In other words, focus on what works.

Jay Haynes takes me to task on a point I made recently:

MG Siegler noted that Apple “wants to be the ones to disrupt themselves… But never with stakes this high…”. But I would argue the stakes were incredibly high when Apple decided to disrupt the Mac and the iPod (both about 100% of their revenue) at the same time. And history is a good indication that Apple is probably thinking about disrupting the iPhone, even now. A truly disruptive product to the iPhone might not emerge for years, but I can’t think of another company that would prepare for and execute a self-disruption strategy like Apple. It is in their culture to do it, as long as the new product is insanely great. As a result, Apple deserves a higher future growth rate than the market is currently giving it.

Sure, I guess what I meant was that the stakes have never been this high in terms of the revenue. Of course Apple wants to be the one to disrupt the iPhone and they’re thinking about it — I’m just not convinced it’s possible to replace such a high level or revenue. And that’s not a knock on Apple, I’m not sure anyone can. The iPhone is just that good of a business.

Another point Haynes makes that I absolutely agree with:

Microsoft made the mistake of targeting the “iPod market” with the Zune. But JTBD theory shows us that there is no such thing as an iPod market, just as there isn’t a cassette market, an LP market, or a CD market. Companies get disrupted because they define the market based on their product, not on the customers job-to-be-done, e.g. the markets for listening to music and discovering new music.

That’s exactly the right way to think about it. It’s the end, not the means.

Rob Fahey:

As a consequence of these things, Nintendo can continue to act and think like a toy company - a huge installed base is desirable, of course, because it makes the firm more profitable, but a smaller yet still profitable installed base is also fine. If Microsoft fails to get Xbox One into a huge number of households, it’ll be a major problem, since part of the reason for the system’s existence is to extend Microsoft’s dominance in the living room; if Sony can’t sell tens of millions of PS4 units pretty rapidly, that’ll also be a problem, since Sony (like Microsoft) relies heavily on third-party publishers supporting its console, and they won’t develop games for a system without a large addressable market. Yet Nintendo cares little about either of those factors, and could be reasonably satisfied with a “third-place finish” that still makes a handsome profit for the firm.

This is, in a nutshell, also the Apple argument (versus players like Microsoft or Android). The problem here is that, unlike Apple, Nintendo is no longer making these “handsome profits”.

I’ve yet to see an argument for how being last in sales with little-to-no profit makes for a good, sustainable business.

Dan Primack:

Twitter itself obviously wanted a bit of price pop for PR and employee morale purposes, but here’s something else employees could be thinking about today: Had Twitter priced at $45.10 per share and used the extra proceeds to give out holiday bonuses, it would have worked out to more than $580,000 per employee. How’s your morale feel now?

It is interesting that Facebook maximized the amount of money it made by going public, and it was viewed as a “failure”. While Twitter clearly left a ton of money on the table, and that’s viewed as a “success”.

This is a case where perception is reality. But let’s be clear, the real winners today are the same ones who were the real losers of the Facebook IPO: the bankers.

Eugene Wei:

One popular thesis among Amazon profitability skeptics is that Amazon can’t “flip a switch” and become profitable. The most common guess as to how Amazon flips the switch is that it will wait until it is the last retailer standing and then raise prices across the board, so Amazon skeptics argue against that narrative possibility.

But “flipping a switch” is the wrong analogy because Amazon’s core business model does generate a profit with most every transaction at its current price level. The reason it isn’t showing a profit is because it’s undertaken a massive investment to support an even larger sales base. How does Amazon turn a profit? Not by flipping a switch but by waiting, once again, until its transaction volume grows and income exceeds its fixed cost base again. It can choose to reach that point faster or slower depending on how quickly it continues to grow its fixed cost base, but a simple way to accelerate that would be to stop investing in so many new fulfillment centers. 

Right. It’s actually more like “not flipping a switch”.