Here’s the link to Chapters 1-4

CHAPTER FIVE – Alignment of the Pillars

“Sunshine, when you were looking at Sam Walton’s 10 Commandments, you said you felt Wal-Mart was still being guided by 2 of them, but that the company seems to have abandoned the other eight. Do you remember what those 8 had in common?”

“Seven of them were about caring.”

“Explain.”

“It hit me when you were talking about the Rabbi, Poobah. Sam Walton’s actions proved that he cared about people. He cared about his customers, his employees, his suppliers.

1. Share your profits with your associates and treat them like your partners.
2. Energize your colleagues.
3. Communicate everything you possibly can to your partners.
4. Appreciate everything your associates do for the business.
5. Celebrate your success.
6. Listen to everyone in your company.
7. Exceed your customers’ expectations.

“I’m impressed you saw that, Sunshine.”

“Sam’s tenth commandent was about having a Culture of Innovation. Jeff Bezos appears to have picked up that torch when Wal-Mart dropped it.”

“What was Sam’s tenth commandment?”

“Blaze your own path.”

The old man sipped his coffee. “You’re right about Sam Walton, by the way.”

“How do you know?”

“John Huey sat at Sam’s bedside while Sam was dying and wrote a really amazing book from that experience called Sam Walton: Made in America.”

“I’ll have to read that.”

“You should.”

“Poobah, why do smart people do dumb things?”

“What do you mean?”

“Kodak abandoned the principles that built their company and it looks like Wal-Mart is doing the same. Why would someone quit doing the things that made them great?”

“Sunshine, smart people are good at rationalizing things they came to believe for non-smart reasons. Smart people able to brush off criticism since they’re convinced they’re right and, due to their superior thinking abilities, they can usually out-argue their critics even when the criticism is on target. This is how and why smart people often quit caring.”

“Are you talking about how Wal-Mart treats their employees?”

“Should I be?”

“Yes, I believe it’s worth talking about. Wal-Mart famously ignores the fact that their management policies abuse their employees and push them to poverty, but check out how Jeff Bezos responded when he was accused of pushing his people too hard and not being sensitive to their needs.”

“I’m all ears.”

The younger man looked at his screen. “In August of 2015, The New York Times published an exposé accusing Amazon of pushing its employees to far to achieve unrelenting ambitions. The article was titled, Inside Amazon: Wrestling Big Ideas in a Bruising Workplace.”

“So how did Bezos respond?”

“Instead of ignoring those accusations or explaining them away, Bezos immediately encouraged his 200,000 employees to read the story. He told them that he didn’t identify with the picture the exposé painted of Amazon, but that he would be making immediate changes to ensure that Amazon was the kind of employer it ought to be.”

The older man asked, “But when Jeff Bezos instantly embraced that criticism and made changes in his company, which of his four pillars did it align with? Was it Customer Centric because happy employees create happy customers? Was it Continuous Optimization in a Culture of Innovation? Or was it an expression of Corporate Agility, a willingness to change?”

“You know the answer, Poobah. It was all of those. Bezos took that action because it was the only choice he had that would align with all four pillars of Amazon.”

“And that’s why I call you Sunshine.”

“Did you know that when Rosenwald was alive, Sears was as powerful as Amazon is today?”

“But the next generation of leadership slowly abandoned the customer centricity that gave Sears its power. They developed a taste for marshmallows.”

The younger man said, “Sears ate its last marshmallow in January of 2017.”

“Craftsman tools?”

“Let me read this to you. Craig Fitzgerald said, “Sears, the legendary retailer that started out selling shovels and pickaxes to pioneers through its mail order catalog, announced today that it was selling the Craftsman brand for $900 million to Stanley Black & Decker… The trouble for Sears is that you can only do a deal like this once… For many consumers that have watched Sears degrade from a retail powerhouse to a slightly upgraded Dollar Store, the Craftsman brand was about the only reason left to ever enter a Sears location… Stanley Black & Decker sells tools everywhere, from the last few remaining mom and pop lumber yards and auto parts stores, all the way up to major retailers like Home Depot. As soon as consumers know they can purchase a Craftsman tool without entering the depressing husk of a once-proud store like Sears, they’ll shop elsewhere.”

“Now Google ‘Edward S. Lampert.’”

“Why?”

“Unless I’m mistaken, he is currently Reigning Emperor of the TLBs and King of the Marshmallow Eaters.”

“He turned Rosenwald’s beautiful dream into a nightmare,” the younger man said. Both men were silent a moment. “You never did answer my question, Poobah.”

“Sorry. Which question?”

“Why do smart people do dumb things?”

“Because dumb things produce immediate results.”

“Are you saying that immediate results are bad?”

“No. Immediate results aren’t always bad. They’re only bad when the action you’re taking to generate those results isn’t sustainable. Sunshine, when you’re doing the wrong thing, it will produce big results immediately, but it will work less and less well the longer you keep doing it. When you’re doing the right thing, it usually hurts a little at first. But it works better and better the longer you keep doing it.”

“Can you give me some examples?”

“When I got my drivers license at age 16, General Motors sold two-thirds of all the cars in the United States. It was the bluest of all blue-chip stocks. Chevrolet, Pontiac, Buick, Oldsmobile and Cadillac were 5 distinctly different brands and the car you drove said a lot about you. It let people know how you saw yourself. It let people know what you believed.”

“So what happened to Pontiac and Oldsmobile? Do they even make those anymore?

“No. In the mid-1970s, GM decided to boost profits by eliminating the design costs and re-tooling costs of maintaining 5 separate product lines. They figured they’d just build one car, hang some different chrome and change the headlights and taillights a little and cover the seats with a different fabric and badda-bing, badda bang, you’ve got yourself 5 different brands. GM was selling 5 different versions of the same car at five different prices by calling the first one a Chevrolet, the second one a Pontiac, the third one a Buick and so on.”

“So who was the genius that made that decision?”

“It was a guy named Thomas Murphy. GM immediately began making record profits, of course, because brand loyalties were deep and loyal customers aren’t quick to abandon their brand. In 1980, GM still had a 62.9% market share in the US.”

“But they were watering the soup.”

“Exactly. They added a little water to their fantastic soup and people still bought the soup. They said, “Hey, look! No one cares!” So they added more and more water until, one day, no one was buying their soup anymore. This is what happens when an executive uses ‘linear no-threshold thinking’ when examining data.”

“‘Linear, no-threshold thinking?’”

“If 72 out of every 100 motorcycle riders die when they try to take a corner at 100 miles per hour, linear no-threshold thinking will tell you that 7.2 riders will die if they try to take that corner at 10 miles per hour.”

“I get it. There is a mile-per-hour threshold at which the corner becomes dangerous.”

“Murphy was the classic, no-threshold accountant. So he started sticking Chevy motors in Oldsmobiles, Pontiacs and Buicks because he had surplus capacity on his Chevrolet motor factories. Keep in mind this was when the Olds Cutlass was the top-selling car in America.”

“This guy is not customer-centric.”

“He literally said, ‘General Motors is not in the business of making cars. It is in the business of making money.’ This little turd of an accountant was heralded from coast to coast as a business genius when he took customer loyalty for granted.”

“How did the public respond to having a Chevy motor in their Oldsmobile?”

“People were furious. They felt their car had been degraded.”

“What did Murphy do?”

“He sent some people $200. He sent other people $400.”

“He was still thinking like an accountant.”

“But wait. It gets worse. He then decided that GM would abandon its traditional once-a-year price increase when the new models were released each year and replace it with random price increases multiples times a year. Sometimes the price increases would be double-digits. This is when the term ‘sticker shock’ was born. The end result of all this blurring of the brands was that GM had to shut down Oldsmobile in 2004 and Pontiac in 2009. GM’s total market share had fallen to just 19.8%.

“Hang on a second, Poobah. You’re saying that GM fell from 62.9% market share to just 19.8% market share? Where did you get those numbers?”

“Google it.”

Moments later, the young man looked up from his computer. “You’re quoting Susan Helper, chief economist at the US Commerce Department, and Rebecca Henderson, a management professor at Harvard.”

“I don’t make this stuff up, Sunshine.”

“I’m sorry I doubted you. Give me another example of smart people getting short-term positive results by doing something really dumb.”

“Okay, here’s a related flashback. When I got that driver’s license and started driving my first car, no one was allowed to own more than 12 AM radio stations, 12 FM radio stations and 12 TV stations because the government didn’t want anyone to be able to buy up all the broadcast stations and control the news. But in 1996 that policy was repealed and Wall Street went on a buying spree. Investors would buy 5 radio stations in a city and dismiss 4 of the General Managers, 4 of the sales managers, and replace most of the announcers with a satellite feed that was customized to sound local. Payroll was slashed and profits skyrocketed.”

“That just sounds like efficiency to me.”

“There are two kinds of efficiency, Sunshine. The first kind of efficiency helps you serve the customer in the way the customer prefers to be served. The second kind just makes the product a little worse so that you can sell it a little cheaper, or even worse, sell it at the same price and make a larger profit. We’re talking about why smart people do dumb things, remember?”

“Watering the soup.”

“By 1999 these radio guys were making record profits. But cutting the fat is one thing. These guys were cutting muscle and bone. That announcer sitting in a studio in Los Angeles isn’t going to show up at the local concert or restaurant or car dealership in Cheyenne, Wyoming. Or even Charlotte or Chicago, for that matter. And a salesperson selling 5 different radio stations doesn’t have the passion or the confidence of a salesperson representing just one station. Back in those days, your automobile and your radio station were the robes and feathers of your tribe. When cars and radio stations became homogenized, people began to treat them like the faceless commodities they had become.”

“But some people would say import cars killed the domestic car business and the Internet made TV and radio obsolete.”

“Those same people would say Commodore Vanderbilt built his fortune on railroads.”

“But you say he built it on customer centricity.”

“Lots of people were going broke in the railroad business at precisely the same time Vanderbilt was becoming one of the richest men in the world. Success isn’t determined by the business you’re in, Sunshine. It’s determined by how you run your business.”

“So how did the radio thing turn out?”

“The biggest of the bunch accumulated more than 1,200 radio stations, 130 major concert venues, 770,000 billboards, 41 television stations, and the largest sports management business in America.”

“Why would they get into concerts and sports management?”

“I suppose it was the lure of cross-promotional efficiencies. When you control the media, you control the news, remember? The illusion is that you’ll have the power to make stars and break them, set up puppet kings and depose them.”

“So how did it turn out?”

“In 1993, their stock opened at $4.60 a share. In January of 2000 ­– just 35 months after broadcast ownership was deregulated by the government – that stock had soared to $95.50 a share. It looked like a rocket ship headed to the stars but really it was really just a company burning itself to ash, although no one realized it at the time. Investors were dancing in the street.”

“So how did it end?”

“Fifteen years later, a pale remnant of that company was $21 billion in debt and on March 30th of that year, its stock was selling at $1.01 a share.”

The younger man spoke quietly. “I know how that feels.”

The older man said nothing.

The younger man spoke as he typed.

ONE. Don’t water the soup. It’s dumb to do things that produce immediate profit when what you’re doing isn’t in the best interest of the customer.
TWO. Don’t fall into the trap of linear, no threshold thinking when looking at data.
THREE. For the love of god, don’t eat the marshmallow!”

The young man looked up with a bitter smile.

After a few moments of looking at each other, the old man spoke. “Jeff Bezos made peace with the fact that doing the right thing hurts at first because he knows it will work better and better as time goes by.”

The young man said. “We talked about what would’ve happened at Kodak if Bezos had been CEO, but how do you think he would have approached the car business and the radio business?”

“Bezos would have employed continuous optimization, but in a way that was customer-centric. No watering the soup. His organization would remain agile and foster a culture of innovation. He would have lifted those businesses to new heights and made them more beloved than ever.”

“Do you think Bezos is unique, Poobah?”

“Don’t be ridiculous. Lots of bright people are building companies on those four pillars. Like I said, even a lemonade stand can brand like Amazon”

“Give me some examples.”

“Put on your sunglasses, Sunshine.”

“Why?”

“You’re about to be dazzled and amazed.”

CHAPTER 6

© 2017, Roy H. Williams