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

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

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  I think the one-sentence description of time-based competition or competing against time is giving your customers what they want, when they want it, where they want it faster than your competitors can do it. It starts with the customer and says, how do I get what they want to the faster than competitors? That's the essence of competing against time.

• 0:38Shane Parrish?

  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/membership. Check out the show notes for a link. Today, my guest is George Stalk Jr., a senior partner in the Boston Consulting Group who focuses on helping companies create sustainable competitive advantages using time. George

• 1:18Shane Parrish?

  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.

• 2:05Shane Parrish?

  You said that winners in business play rough and don't apologize for it.

• 2:10Speaker 00

  That's right.

• 2:10Shane Parrish?

  Where does that come from and what does it mean?

• 2:13Speaker 00

  I wrote this book called Hardball and it was the subtitles, are you playing to play or playing to win? And I wrote it out of frustration and maybe anger because I was, I thought the business press was misleading.

• 2:26Speaker 00

  Mainly MBA students and middle managers and the thinking that business could be played nicely. Co-optician was one of the big words at the time and the Europeans were masters of co-optician. Might also call it collusion, but the notion was cooperate with your competitor, don't fight them. Well, all my clients were either winning and trying to preserve their winning position.

• 2:49Speaker 00

  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 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 they're hardball strategies.

• 3:29Speaker 00

  And we just, they were based around clients, experiences of, I think almost all of them had the client's permission to use their names.

• 3:38Speaker 00

  And these companies put the edge in competition and the results showed in terms of their bottom line, their growth and their market shares.

• 3:46Shane Parrish?

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

• 3:49Speaker 00

  Well, the one that always works is know your costs better than your competitors know their costs. Cause most people don't know their costs. They think they do. They know the cost that gets between the revenues and the profit line.

• 4:02Speaker 00

  And those are all averages and they don't go behind the averages. And if you go behind the averages, what, what, what people will discover is that some things cost more than they thought they did. And some things cost less and some customers are more profitable and some are less profitable.

• 4:18Speaker 00

  And if you know your costs better than your competitor, know their costs, you could do nasty things. Gain market share because you would understand how the costs work, your costs work and what the volumes mean. So what may appear to be a less profitable customers, actually the high volume customer produces a whole bunch of economies of scale. And reduces costs, but that all gets lost in the averages. So that's, that's a big winner. One that works very well is be faster than your competitors at providing your customers what they want. When they want it and where they want it. And if a company can do that two or three times faster than its competitors, it'll usually grow.

• 5:03Speaker 00

  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 and A was another one, buying companies to, to round out a competitive position. Or extend one of the one client was in the medical devices business, the 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.

• 5:37Speaker 00

  And indeed, the clients that we've worked with that do do that usually have to justify it pretty carefully.

• 5:44Speaker 00

  But at least people should start thinking about that. They shouldn't assume.

• 5:48Speaker 00

  That they can't get away with it.

• 5:51Speaker 00

  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.

• 6:00Shane Parrish?

  As you're saying that, I'm thinking sort of about corporate culture too. And we, we sort of have this notion. That the workplace is like a family.

• 6:08Speaker 00

  That's part of the softening of business. I mean, the flip side, I mean, an analog to family is a tribe and people understand. What part of, what part of what organization they're a member of.

• 6:23Speaker 00

  And I can tell you, people at Caterpillar know their competitor in Komatsu. Komatsu has a sign that says Maru Capital, excuse me, Maru Cat over its headquarters door. Maru Cat means encircle Caterpillar. And that becomes part of the culture. It doesn't, doesn't become the whole culture.

• 6:41Speaker 00

  But it becomes a very good part. I, you know, I think Amazon is a good example where Jeff Bezos says, your gross budget is my target.

• 6:49Speaker 00

  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've moved into. What's surprising about Amazon, though, is they haven't gotten into the Ticketmaster's business. I still don't understand that because the margin at Ticketmaster's are huge and the business is available to the internet. But that that creates a culture.

• 7:14Shane Parrish?

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

• 7:19Speaker 00

  I would say yes and no. On the yes part, it's 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 a 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, we 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

• 7:59Speaker 00

  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, you know, he was able to start that culture because he'd already had a culture that was oriented around speed, the next day delivery.

• 8:31Shane Parrish?

  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?

• 8:50Speaker 00

  If somebody says my culture is built around serving the customer best.

• 8:54Speaker 00

  And I'm working with this company. They have to prove to me that relative to competitors, they can do that. People often use these descriptions of their culture without any quantitative representation. If the culture is not being responsive, and it's one of the fastest way to make them responsive 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 could produce pretty dramatic results. But that's not an easy path I just described. We, we had a case with a company called Wausau Paper. And Wausau Paper

• 9:37Speaker 00

  is based in Wausau, Wisconsin. Small paper mill, basically owned by a family trust, under invested 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, no turnaround plans for that. And it was the trust that brought us in because they were afraid they'd have to close the mill. 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 in

• 10:21Speaker 00

  small volumes and deliver them next day within the greater midwestern area. In the end, that was maybe 20% of the effort. Because even though the organization didn't have any, any options, they couldn't bring themselves to implement that strategy. So for example, the sales manager

• 10:45Speaker 00

  was not at all interested in changing his merchant relationships, his 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, to produce the volumes they needed. So that, that scared the hell out of him. He didn't want to go buy. I mean, the hardest thing, the worst thing about finding a new customer is having to go back and tell your old customer that it's 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 cost. And so less the truck holds is not something you 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 especially great

• 11:30Speaker 00

  paper. But we had to do that because we're promising people next day delivery. And the reason we're promising them next day delivery is we could change their economics, we could change the merchant or distributor's 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 the their merchants to invest capital in their business that had already been invested in ours. Now, the logistics manager wouldn't do that. He would not send a truck load unless it was full. Because he's always measured on that. He just we had to retire that guy.

• 12:14Speaker 00

  But it worked. Wassa 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, it 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 be able to handle short run nights, he was happy. So one has to take on the culture. And now Wassa, 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.

• 12:52Shane Parrish?

  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.

• 13:07Shane Parrish?

  Potential of surviving.

• 13:09Speaker 00

  I mean, to a layman, to me, if you run out of options and the remaining options 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 process be big enough for management to be willing to take on the organization, take on the culture.

• 13:31Speaker 00

  I had the experience of turning around a client's factory to prove that it could be baked 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 couldn't run smaller batches.

• 13:54Speaker 00

  They couldn't 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.

• 14:08Speaker 00

  It needs to be changed to freeze the benefit of a new strategy.

• 14:15Speaker 00

  But one can't start there. I think it'd be very difficult to start by that Warsaw paper and say, we're going to be the most flexible company in the world, making the greatest product, greatest amount of specialty products and not being in the commodity business, which is exactly, every one of those things is against the mentality of anybody in the paper business.

• 14:33Shane Parrish?

  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?

• 14:50Speaker 00

  For the last 10 years, my client work has almost been exclusively for owners of family companies. So I've been 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 will my children do? I mean, all of them are afraid of their children becoming playboys. And after that, it kind of trickles out a bunch of different things.

• 15:26Speaker 00

  But a few years ago, we did a project.

• 15:30Speaker 00

  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, a family company, to a non-family media company. But you could do that a bunch of industry, like Nestle, you could compare a food company with Nestle. And when you look at the literature about performance of family companies versus public, what people will often say, first thing they'll say is family companies have longer time horizons. I'll come back to that.

• 16:16Speaker 00

  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.

• 16:24Speaker 00

  So we did a project where we said, this is, you know, people are doing this the right way because what they're doing is they're looking at it at a point in time.

• 16:31Speaker 00

  And it really should be looked at over the, a 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, were not as high performing on profitability in the up turns of the market.

• 16:50Speaker 00

  But nor were they as poor performing as public companies in the downturns. So we didn't have a lot of this, this behavior by management to exercise stock options that are driven by quarterly stock prices or yearly stock prices. You 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 goes up really high and it goes out really low.

• 17:15Speaker 00

  And then management has 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.

• 17:38Speaker 00

  Then I see public companies, the management of public companies being. So I think that's the biggest challenge for a public company against a private company is how can I manage the risk? How could I, in a public company, maintain a risk profile that's easy for a private company to maintain because they don't have to explain it to anybody?

• 17:56Speaker 00

  One of the eye opening examples I saw was a very large family company.

• 18:00Speaker 00

  No publicly traded shares. But the non family management, which was like 99% of the population because the family had all taken their money

• 18:11Speaker 00

  gone 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. 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.

• 18:34Speaker 00

  And actually, I think if you, if one of the not very discussed things in business today is the number of companies traded on the US 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 polite phrase, that's leveraged buyout firms. And so the, the private model of ownership is becoming the predominant model of ownership. If one steps away from Canada in the US, the family ownership profile is the most characteristic ownership around the world, not public companies. The closest to Canada, the US is, is England.

• 19:19Speaker 00

  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. And Japan, Kikoban is hundreds, a family owned company is hundreds of years old.

• 19:50Speaker 00

  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.

• 20:00Shane Parrish?

  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.

• 20:12Speaker 00

  Two business cycles.

• 20:14Shane Parrish?

  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.

• 20:28Speaker 00

  Exactly. I mean, nobody's, nobody's insisting on ever greater returns, which will force the management of a public company to, I mean, returns are a risk reward.

• 20:40Speaker 00

  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, for taking risks that produces returns, that, that works. But it usually comes from leverage. Usually comes either from financial leverage or leverage of management talent or financial risk. So when it goes into the downturn, the, the price for taking those risks comes home to roost.

• 21:09Speaker 00

  And as I bet sure it does for the family companies, it just doesn't happen as deeply and as bad.

• 21:13Shane Parrish?

  So it's almost like they're trading a little bit of tomorrow or.

• 21:16Speaker 00

  That's a better way to put it. The family companies will trade performance today for long-term performance in the face of adversity.

• 21:24Shane Parrish?

  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 a family company's positioning for a broader range of possible futures and never sort of like putting all in on a certain particular future.

• 21:47Speaker 00

  My experience with family companies is from a business operations standpoint.

• 21:54Speaker 00

  The management and the owners of family companies behave like the management of public companies. In many, many respects, it's the owners that, that, 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.

• 22:16Shane Parrish?

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

• 22:22Speaker 00

  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, their, their, their non-family management. That's one of the big issues with family companies is, is are we an operating family or are we an owner family only? And that uses 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.

• 23:03Speaker 00

  And Caterpillar's dealership franchise gives them, gives Caterpillar the right to, to okay, change of ownership. And change of ownership is something that happens when somebody wants to retire. And it's true at Ford, it's true at a number of companies, Sherman Williams is like that. But when, the problem at Caterpillar right now is, is if your father's a Caterpillar dealer and you want to be a lawyer, the last thing you want to do is stop being a lawyer and go be a Caterpillar dealer, even though it's a pretty lucrative thing to do. And so the families grow out of the business.

• 23:45Speaker 00

  And today, in today's world, it's hard to commit to continuous family ownership of the business.

• 23:50Shane Parrish?

  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?

• 23:57Speaker 00

  In Caterpillar's case, what they want their family ownership to represent is a value in the relationship with the customer.

• 24:07Speaker 00

  And they want the dealership, as a family owned dealership, to put the customer first and not have to worry about reported earnings. I mean, there's the largest non-family caterpillar deal in the world, I think, is Tormont here in Canada. That's a rarity, the rest are all family. So they want that steady hand. I wouldn't call a long-term perspective. I just call it steady hand, not too, not too high return, not too low return in the business. But to return to the problem, the problem is getting the offspring to do it. But the third or fourth generation, the offspring often loses interest in the business.

• 24:47Shane Parrish?

  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?

• 25:06Speaker 00

  Well, I should clarify something. Family companies that bring in professional management fall into two groups. One is an involved owner group and one is a non-involved owner group. And the involved owner group, I may bring in non-professional managers, 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 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 still, in terms

• 25:47Speaker 00

  of time horizons, I think the family-involved business expects to see in the last more than one generation, expects the next generation to take over the business. When you say that, when one says the next generation, one's talking about 40 years, because managed 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?

• 26:20Speaker 00

  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.

• 26:49Speaker 00

  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. Management time horizon, 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.

• 27:13Shane Parrish?

  Which increasingly puts them trading tomorrow for today.

• 27:18Speaker 00

  Exactly.

• 27:18Shane Parrish?

  Right. It's like when a new coach takes over a team, they'll often trade away players in like 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.

• 27:45Speaker 00

  Now, this is where I mentioned that the disappearance of the public company is so important because the businesses aren't going away, it's the ownership that's changing.

• 27:55Speaker 00

  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, 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 LBO, excuse me, the private equity firms today actually do have a longer horizon than the ones did in the eighties, the seventies and eighties. 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 going 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

• 28:41Speaker 00

  and my own wealth creation. So what people like to call the agency problem starts to take over is who, you know, if I'm in a public company, who am I working for, myself or the company? Now, in the family-involved ownership model, the families watch me pretty carefully. And we're talking a lot.

• 28:58Speaker 00

  So we could prevent the non-family management

• 29:02Speaker 00

  from going off in their own direction to meet 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-owned, but private.

• 29:21Speaker 00

  Than our public.

• 29:24Speaker 00

  Just within the Fortune 500.

• 29:28Speaker 00

  Or the Fortune 1000.

• 29:31Speaker 00

  Now, in general, there's, frankly, the family ownership model is the predominant worldwide ownership model.

• 29:39Speaker 00

  You know, it is the ownership model that people have to compete with. Ultimately. Toyota's a family company.

• 29:47Speaker 00

  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, it's usually started with a T in their name.

• 29:59Shane Parrish?

  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.

• 30:41Shane Parrish?

  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.

• 30:51Speaker 00

  Well, Clayton Christensen, who's a professor at Harvard, he's dead now, unfortunately.

• 30:59Speaker 00

  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 my stock on a moment's notice, I have to have a short term performance orientation. If they're gonna, you know, buy and hold, I need to understand that so I can have a longer term view of the business.

• 31:23Speaker 00

  Now, what is longer term? You know, Japan stands out in its own category. And, you know, profitability is a company's are something, once a company is profitable, they can decide when they want their 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?

• 31:43Speaker 00

  And if I want a bigger amount later, it's because I believe I grow the company, I can bring my costs down, increase my margins, 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, want to grow the business, but they want to be profitable at an obscene level. And you butt that up against a system

• 32:11Speaker 00

  that has public shareholders, they want their profits sooner rather than later, or they're going to trade the stock. The two systems work perfectly well together because the Japanese take to get the growth, they invest to get the growth, and the the public, usually American companies, give it up.

• 32:29Speaker 00

  And eventually they become less profitable and the Japanese become more profitable. So that model, I don't see very often elsewhere in the world where people say, I can take my money now, I can take it later. And if I decide to take this later because I expect it to be a bigger pot later. But family companies are perfectly positioned to make that decision.

• 32:48Speaker 00

  I mean, some of the, I would say half the family companies I work with.

• 32:52Speaker 00

  Take very little out of the business. They keep a lot in. In fact, I'm always amazed at looking at some of these companies, the level of wealth exhibited by the family members doesn't match the dividend flows.

• 33:08Speaker 00

  So that's 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 that is rarely seen in the literature, in fact, it's not seen, it's only seen in literature I've helped write with my colleagues is that 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 at absolute terms goes down. Because the business isn't growing fast enough to take care of the family. And that's a challenge that family companies face if they want to have

• 33:53Speaker 00

  ownership distributed on what people inherit. Now, they don't have to do that. I mean, your business doesn't have to go to your two children. It doesn't have to go to their eight children. It will, most, what's, it 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, that model, we can try to grow faster.

• 34:25Speaker 00

  But you basically have to grow about 50% faster than the family's growing to keep the pie big enough.

• 34:33Shane Parrish?

  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?

• 34:49Speaker 00

  Well, I think we touched on it a moment or two ago, is that the managers of private, of public companies are being compensated on current performance. Sometimes they're compensated on multi-years performance, but not very often.

• 35:05Speaker 00

  Where the family companies are compensated on current performance. But there's a big chunk compensation waiting to be taken in the future.

• 35:14Speaker 00

  Through inheritance or sale of the company.

• 35:18Speaker 00

  And so that puts people in two different time horizon plays. Right away.

• 35:23Shane Parrish?

  And it also positions them completely different, right? So if you're, if your company has a lot of capital in the public market, that might be considered like a bloated balance sheet.

• 35:33Speaker 00

  Yeah.

• 35:33Shane Parrish?

  But in the private market, that's positioning for multiple possible futures. If we have a lot of cash on the balance sheet, we can go where the wind's going instead of be forced into positions.

• 35:44Speaker 00

  You know, one of the phrases I, I hear a lot in family companies, but I rarely hear in public companies is we 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.

• 36:02Shane Parrish?

  But 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.

• 36:21Speaker 00

  And then go.

• 36:22Shane Parrish?

  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 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.

• 36:44Speaker 00

  It's interesting you bring all companies up because they do invest in the long term. Because to develop an oil field can take a decade.

• 36:53Speaker 00

  Now they may rate it at some point, but they are unusual in that factor. They're longer term investments.

• 36:59Shane Parrish?

  Well, especially now because you have a five year planning cycle, I would imagine for a lot of these assets to even get online.

• 37:05Speaker 00

  If we're now in the energy business, that's true.

• 37:06Shane Parrish?

  Yeah.

• 37:07Speaker 00

  But the Erbings 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 under invested in understanding how private companies compete.

• 37:24Speaker 00

  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.

• 37:47Shane Parrish?

  It's almost like any disruption is good if you have dry powder and any disruption is bad if you don't.

• 37:53Speaker 00

  Yeah, now's the time to be in the housing market if you've got money.

• 37:56Shane Parrish?

  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?

• 38:17Speaker 00

  I think the one-sentence description of time-based competition or competing against time is giving your customers what they want, when they want it, where they want it faster than your competitors can do it. It starts with the customer and says, how do I get what they want to them faster than competitors? That's the essence of competing against 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, you know, start and stop, and the date of the balance sheet.

• 39:02Speaker 00

  There may be a lot of yakking about responsiveness, but they're not really managing time. If one introduces time as a management, something can be managed alongside a cost, then a whole bunch of things pop out and gain visibility that don't when time is not included as a variable. And those things can be things like the price premium a customer will pay for faster delivery.

• 39:33Speaker 00

  The, as it turns out, the, 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.

• 39:50Speaker 00

  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 one's looking at organization through the, through the lens of time, one will see where the quality problems are.

• 40:07Speaker 00

  Because anytime one has a quality problem, whether it's manufacturing or in a, an information business, it means rework. Anytime you have rework, it means lost time.

• 40:19Speaker 00

  And so for people to be fast to the competitors, that, you know, they have to be higher quality. Cause they don't get, they won't, don't get to speed. 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."

• 40:38Speaker 00

  Which is true. You know, a lot of people say, "Whoa, you know, why do I have to do things faster?" And they assume doing the faster is walking faster, you know, completing things quicker.

• 40:49Speaker 00

  It's actually just taking out all the dead time. Most organizations, if you, if we look at, at the time required to produce an output, either an insurance policy or, or a manufactured product, if they're not looking at time as a management variable, value is only being added between a half a percent and 5% of the time. 95% of the time and more is wasted.

• 41:14Speaker 00

  And people don't see that unless they start measuring time. And then that 95% is a whole bunch of costs that go away if one starts taking time out.

• 41:24Speaker 00

  So time is a very powerful lens to look at how productive one can be. And then the outputs are just astounding when you get a fast competitor up against a slow competitor.

• 41:38Shane Parrish?

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

• 41:44Speaker 00

  There's a long list. Let's see, the most obvious ones are I do things in batches. Batches usually thought of as manufacturing can also be in white collar, 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 that's wasted, about a third of it goes to being in a batch. About a third of it goes into being in a batch that hasn't been worked on yet. It's been scheduled. And a third of it goes into managing all the batches. And so if one shrinks the batch time, one goes through multiple, goes through cycles of batches faster.

• 42:26Speaker 00

  Batch A, B, C happens faster if they're 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 goes away. So I went to Tokyo for VCG in 19, probably 1981, a long time ago, 1980. Just before I went, the founder of VCG guy, Bruce Henderson, pulled me aside. We need to know something about Japan that we don't understand, George. I said, what's that? And he said, he pulls out this paper and it's done by the Ford Motor Company, it's

• 43:08Speaker 00

  done by Ford Europe, actually, comparing good factories at Ford with good factories at Mazda and Toyota.

• 43:18Speaker 00

  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.

• 43:33Speaker 00

  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 of the American factory and was twice as productive. So this does not compute, we got to find out why.

• 44:14Speaker 00

  And what was really interesting, this is in the early 1980s. People attributed the Japanese productivity advantage to their culture. And to the worker management relations. And if I look, what we did, I looked into the numbers. All the productivity advantage was an overhead. It wasn't in the line workers.

• 44:38Speaker 00

  And it wasn't just a little bit overhead, it was a lot of overhead, it was like one tenth the overhead. So these companies were simpler to manage, even though they were smaller or complex. And so very, very often, the bulk of the productivity advantage. A Japanese factory might have comes from overhead productivity, doesn't come direct labor. There is some direct labor productivity.

• 45:03Speaker 00

  And so that got us to say, you know, we got to understand this.

• 45:08Speaker 00

  And what we did, we got to Japan, when I got to Japan, is I figured out how they did it.

• 45:13Speaker 00

  And if one, if one facilitates small batch production, has to have short set of times.

• 45:24Speaker 00

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

• 46:09Speaker 00

  They really didn't see what was happening. Or they dismissed it as a sideshow. That's another great strategy for Hardball. That's what we call anomalies. Anomalies are things that happen in the business that management explains away. Because 90% of the business doesn't behave that way. An anomaly might be, the anomaly in Wassa's case was Wassa 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 went and talked to the sales guy. Remember, I mentioned this guy earlier.

• 46:49Speaker 00

  His response was, well, the salesman in Chicago has a great relationship with the paper merchant. Remember, we're in turnaround situations. So, great relationships are not useful in turnarounds because they take a while to build. So, we 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 at my dock tomorrow morning, we're friends. If the truck isn't at the dock, we're not friends. And that was the beginning of understanding, whoa, there's a fast satisfaction cycle here that we could take advantage of. Or can we scale it across the whole company? And we could.

• 47:33Speaker 00

  But it was hidden in 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.

• 47:47Speaker 00

  Another anomaly was one, it was an office products company

• 47:53Speaker 00

  that had its own service force. And one customer insisted on all service being done between midnight and 6:00 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.

• 48:18Speaker 00

  And in those situations, this client had a higher share of the business. In a medical device business anomaly was

• 48:27Speaker 00

  the European competitor always had a sales, a SCUB always had a service representative onsite at the hospital. It's 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 onsite

• 48:48Speaker 00

  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. Doesn't make sense, but if we start 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.

• 49:12Speaker 00

  And the question at Wausau is could we make it big? It's tough to answer that question.

• 49:17Shane Parrish?

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

• 49:24Speaker 00

  Walmart's story, as it was described

• 49:30Speaker 00

  early in the years of Walmart,

• 49:33Speaker 00

  was about

• 49:35Speaker 00

  a local five and dime competitor

• 49:40Speaker 00

  grows in Boondock markets, has greeters at the door to make people comfortable and help find their way around the store. Has a Daryl product offering, and that's their success. That's just the tip of the iceberg, what was Walmart was doing.

• 49:57Speaker 00

  Walmart was

• 50:01Speaker 00

  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.

• 50:11Speaker 00

  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 or once 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 were willing to drive

• 50:50Speaker 00

  30 miles to get lower cost. They're not willing to do that today. Actually, it's more expensive to do that today. So behind the scenes was a whole different model at play. I don't think I can ever actually ever figured it out. They began to see some of the the surface differences, but they never, they always outsourced their trucking. They under invested in 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 in the business so they could make adjustments. Kmart did this, you know, after 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 at

• 51:34Speaker 00

  Kmart, you had to go up the hierarchy, get some decisions, come back down the hierarchy. And Walmart, the hierarchy was just was flat, distributed into the store managers. And then Walmart went into

• 51:48Speaker 00

  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 had to pay cash or credit. And so you get almost instant accounts, non-existent accounts receivable. In fact, you get negative working capital. And that was part of the model that Walmart.

• 52:27Speaker 00

  Discovered going in is that they could have a negative working 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.

• 52:44Speaker 00

  But I think very much if there's an analogy in Canada, it would be Loblaw's versus Soobies.

• 52:52Speaker 00

  Or I think Soobies has positioned itself as slightly more upscale, slightly more of a

• 52:59Speaker 00

  a specialty retailer shopping experience than a Loblaw's. Now, I don't know the business well enough to say which one's the winning strategy. And in fact, they're probably both going to be winning strategies because I think Target will find a way to coexist with Walmart. I think Walmart's biggest competitor problem right now is with Amazon.

• 53:14Shane Parrish?

  How would you compete with Amazon?

• 53:16Speaker 00

  I do know for a fact that people tried to compete with Amazon in the obvious way, which is, okay, Amazon is logistics. First, you order online. Second, then the logistic system kicks in.

• 53:32Speaker 00

  And now,

• 53:34Speaker 00

  if you're Walmart trying to catch up with the distribution system of of Amazon,

• 53:40Speaker 00

  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.

• 53:53Speaker 00

  I don't know if you've noticed how many distribution centers there are around small towns and there are Amazon distribution centers. That's a very expensive thing to replicate.

• 54:01Shane Parrish?

  What what's the relationship between focus and time?

• 54:05Speaker 00

  Well, it's a very direct relationship because

• 54:09Speaker 00

  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, I want to be twice as fast. It's actually more it's more doable in the 10 product line factory than it is at the 50 product line factory. There's more complexity than 50 product line factory. There's more batches. There's more distinct processing steps. And so a focus factory is always.

• 54:42Speaker 00

  More easily made faster, more focused organizations. 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 on. Well, also we decided we're going to focus on specialties. We could have decided to focus on commodities. We would have gotten killed.

• 55:23Speaker 00

  And the paper, you know, the big paper companies that was always getting killed by were quite happy to focus on the commodity business. That's why it took them 10 years to figure out what was up to. Because they didn't like that business that was going after. And I suspect with Amazon, the winning formula is going to be picking up part of the business that Amazon doesn't really want to have. So automatically one's setting himself 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 phenomena is that 20% of the customers at a retail store account for 80% of the volume.

• 56:05Speaker 00

  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 a heavy spender. What's your hobby?

• 56:38Shane Parrish?

  This.

• 56:39Speaker 00

  Yeah, your hobby.

• 56:40Shane Parrish?

  Oh, this.

• 56:41Speaker 00

  Oh, you're doing this?

• 56:41Shane Parrish?

  Doing this.

• 56:42Speaker 00

  I mean, what do you spend your money on then?

• 56:44Shane Parrish?

  Uh, let's say ski equipment.

• 56:46Speaker 00

  Ski equipment?

• 56:47Shane Parrish?

  Yeah.

• 56:48Speaker 00

  Is there a special place you shop?

• 56:49Shane Parrish?

  Yeah.

• 56:50Speaker 00

  Are you a preferred customer of that, at that place?

• 56:53Shane Parrish?

  Yes.

• 56:53Speaker 00

  So you're probably in that 20% that accounts for 80% of that outlets.

• 56:58Shane Parrish?

  Probably.

• 56:58Speaker 00

  And they know how to take care of you.

• 56:59Shane Parrish?

  Yeah. And they know your name when you walk in and they, yeah.

• 57:03Speaker 00

  And I doubt you'd buy your SCAR equipment from Amazon.

• 57:06Shane Parrish?

  No, no, no.

• 57:07Speaker 00

  Do you even look at SCAR equipment on Amazon?

• 57:09Shane Parrish?

  No.

• 57:10Speaker 00

  I don't either, so I don't know if they have any.

• 57:13Speaker 00

  My reckless spend of money is on model airplanes. I build these gigantic radio controlled airplanes. Each plane can cost 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 a heavy spender in shoes. This is very, about 20% of the women account for 80% of the shoe sales in Nordstrom. Or the Bay. Those people have these needs I just described. They do selection. They need to be, the product explained to them so they're buying it for the right reasons. They need to be treated well.

• 57:52Speaker 00

  Which means if they bring me out the shoes, it's not a grief driven experience. It's a pleasurable experience.

• 58:01Speaker 00

  In fact, remind me, that's one woman who was a big spender. She spent 20% of her disposable income on shoes. She said, George, you know, I was interviewing her about this because when I heard about it, I said, here's how I be spending. I want to know more. She said, if I, if I'm in 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. She said, most guys, I send away right away. So shoes is a big part of her life. And so you could 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.

• 58:44Speaker 00

  It's been very successful for automotive parts, another one, heavy spinners. I virtually every category has heavy spinner segment. And that's probably, you know, my model airplanes, which are have a huge amount of electronics in them. I'll look at the electronics on Amazon. I don't buy it from Amazon.

• 59:01Shane Parrish?

  Right. Because you want somebody to talk 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.

• 59:13Speaker 00

  Yep.

• 59:14Shane Parrish?

  Talk to me about cost and time. How does that, how do those two things relate?

• 59:20Speaker 00

  If we come back to the Japanese and Ford example, we had a Japanese factory that was three times as complex, half the size and twice as productive. But I didn't mention the time dimension. The product went to that factory 10 times faster than through the Ford factory, 10 times faster. You know, the 20% productivity advantage was about, about a 20% cost advantage. This 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, PCG 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?

• 1:00:04Speaker 00

  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 the speed? That was the question we started asking. How could you compete with that? Walsau 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 how, that's where the advantage kicked in. And so that's where cost and time worked out. We had, we added cost to the process to get time out the other side.

• 1:00:45Speaker 00

  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.

• 1:01:11Speaker 00

  Overhead doesn't speed things up, overhead slows things down.

• 1:01:15Speaker 00

  But overhead comes out because I'm being intelligent about how I manage, not because I'm just slashing the overhead. I just, 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 onto the floor because it's organized and managed to run by itself. There is central scheduling, it's not a big department. In a traditional factory, there's a big scheduling department that tells every single piece of the factory what to do when.

• 1:01:46Speaker 00

  And a Toyota factory, that scheduling is pushed out on the floor. So the, by producing one product, another part of the factory discovers the need to replenish. So overhead 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 cost is almost always enough to pay for whatever it takes to get the time out.

• 1:02:20Shane Parrish?

  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, those parts are just 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 is 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.

• 1:02:55Speaker 00

  Yes.

• 1:02:55Shane Parrish?

  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?

• 1:03:02Speaker 00

  Give you an example, we've done this quite a bit with chemical companies. So when I say chemical companies, you imagine big production facilities, a lot of steam coming out and everything.

• 1:03:17Speaker 00

  We've taken that, we've looked at the company at cost, of course. We've looked at the company quality, of course. We've looked at the company at time, how does it deliver? But one of the interesting things that we often do is look at something called working capital productivity.

• 1:03:32Speaker 00

  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.

• 1:03:46Speaker 00

  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.

• 1:04:05Speaker 00

  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 till they're available. And so once there's 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

• 1:04:35Speaker 00

  that improve productivity and improve the performance of the balance sheet.

• 1:04:38Shane Parrish?

  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 pay all my invoices in 24 hours and I'm going to let my accounts receivable go out 90 days. Instead of like 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.

• 1:05:03Speaker 00

  But you're dead on. I mean, the example I described with Walmart, which is they pay the suppliers faster than Kmart were paying them. And they were paying them faster because they wanted a different level of performance from the supplier.

• 1:05:16Shane Parrish?

  Right.

• 1:05:17Speaker 00

  Which is exactly what you described. And you would find that by looking at the working capital productivity. You could say, well, jeez, 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 to use 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

• 1:05:47Speaker 00

  at a lower penalty on the balance sheet because the volume's 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, you have a lot of inventory laying around, but they're turning it a lot faster. Because they're selling it to customers who buy a lot of stuff and buy it frequently.

• 1:06:11Shane Parrish?

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

• 1:06:18Speaker 00

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

• 1:06:32Speaker 00

  What's dissimilar is that factory, I can see things happening.

• 1:06:38Speaker 00

  Software, I can't see things happening because it's all happening

• 1:06:44Speaker 00

  in the ether, people thinking.

• 1:06:50Speaker 00

  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 processes, processes like a heat treatment and stamping. They have quality problems which slow things down, just like these have quality problems. They have batching problems, which is 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.

• 1:07:33Shane Parrish?

  That's what I was thinking because like so much of this planning and forecasting like what the world's going to look like in, in, you know, 18 or 24 months, you have no idea. And the further out you get, the less, 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.

• 1:07:59Speaker 00

  And like the factory, they're people. So that's why I, I've never, I've received over the years, people say, well, we're a different business. We're not manufacturing. In fact, I said, somebody said to me, I say, the fact of the matter is a software, a development facility in software very much behaves like an operate, a people operating system in a factory. The, the version of batching in software would be major changes to the offering. That's, that's the code of large batches. The time based version of batching in a software company is, is the agile version, which is how to have the minimum acceptable product and then improve on it. That'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

• 1:08:43Speaker 00

  that are important. If I look at a software development process through the lens of time, I see a different set of things that are important than people normally manage themselves to. I stopped worrying about the differences many, many years ago between factories and non-factories.

• 1:08:57Shane Parrish?

  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 to look at it, use it, come back to you. It could be weeks, months before you're getting feedback that that part isn't good, or the quality is not right. With software, you can get this feedback within seconds.

• 1:09:22Speaker 00

  I'm surprised you say that because, you know, most software releases are followed by another release. And the second release is not instantaneous.

• 1:09:29Shane Parrish?

  Well, the reason for that, there is the variety of devices that it's going to, which is one of the reasons I think that Apple's started to sunset some of their 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 those, that's, I think that's why we, we get some of these, oh, here's another update. Cause here's an edge case that we didn't see happening or plan on happening.

• 1:10:11Speaker 00

  But you're, 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 over the long term to maintain upward compatibility. And man, and managing a transition from one platform to another, because I could no longer

• 1:10:29Speaker 00

  make the up, the original platform upward compatible is very hard to do. And it usually results in offering an older product right alongside of a newer product. And it usually happens with a newer 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 a notice from the Boston Consulting Group IT department that it's no longer, it's no longer for security reasons, it's no longer have upward compatibility.

• 1:11:08Shane Parrish?

  Yeah.

• 1:11:08Speaker 00

  And they're going to cut me off the system.

• 1:11:11Speaker 00

  And their answer is go buy a new Apple.

• 1:11:14Shane Parrish?

  Yeah.

• 1:11:14Speaker 00

  My answer is how can I divide my world? So I don't have to go buy a new Apple.

• 1:11:17Shane Parrish?

  Yeah.

• 1:11:18Speaker 00

  But I'll probably end up buying a new Apple. So it's a policy decision. And, and it's hard, it's hard to do it in a way that makes the customer feel good. It's not impossible. You know, the example I was thinking of is a, a medical devices, uh, medical robots, and you gotta make the new platform.

• 1:11:39Speaker 00

  So much more attractive, the 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 with the downstream problems. 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, you know, fourth generation one that's working fine.

• 1:12:07Shane Parrish?

  They'll give you something.

• 1:12:08Speaker 00

  Give me a deal.

• 1:12:08Shane Parrish?

  So you feel good for it, yeah.

• 1:12:10Speaker 00

  I feel good about it. So it requires thinking this through. How do I make the customer feel like they're not being abused?

• 1:12:17Shane Parrish?

  And respecting them, right? They purchased it, they put their money into it, and you're sort of nudging them to upgrade in a time period they might not be ready for.

• 1:12:27Speaker 00

  A couple of years ago, I had a project I called the ugly duckling of retailing. And the ugly duckling of retailing is returns.

• 1:12:35Speaker 00

  And returns actually are a very large part of retailers' business.

• 1:12:41Shane Parrish?

  It's like some online stores, I guess it's like 20% or something.

• 1:12:44Speaker 00

  Oh, it's huge.

• 1:12:45Shane Parrish?

  It's huge.

• 1:12:45Speaker 00

  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 astoundedly complex and didn't look very customer friendly at all. And 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 10 of them were Zappos boxes going back.

• 1:13:30Speaker 00

  And so they found a way to use returns as a way to make the customer take the risk of buying online.

• 1:13:37Shane Parrish?

  Well, now there's no uncertainty.

• 1:13:38Speaker 00

  Yeah.

• 1:13:39Shane Parrish?

  I know, worst case, I just go back and I return them.

• 1:13:41Speaker 00

  And they have the return labels.

• 1:13:42Shane Parrish?

  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 factor in a cost of time for you to return something, it's.

• 1:13:54Speaker 00

  I don't return it, I give it away.

• 1:13:55Shane Parrish?

  It's not even worth returning half the time.

• 1:13:57Speaker 00

  When I did the ugly ducking work, there was a couple of interesting examples in Canada. I interviewed a bunch of women.

• 1:14:04Speaker 00

  About different kinds of products and Sears, which I'd never thought of as a woman's place to shop.

• 1:14:12Speaker 00

  Was picked out as a place these people like to go to because they had a great return policy. Made it easy to return products.

• 1:14:21Speaker 00

  Zappos was in that category.

• 1:14:22Shane Parrish?

  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.

• 1:14:40Speaker 00

  If you wanted to click a button, you should be able to get rid of it.

• 1:14:43Shane Parrish?

  Yeah. Well, hopefully somebody listening to this New York Times can do that.

• 1:14:47Speaker 00

  But the point of the deducting work is how do I make returns a marketing advantage? And Zappos is one of the earliest examples of how to make an advantage.

• 1:14:55Shane Parrish?

  But we have buy now, we could have cancel now. Like we could literally have one click cancellation. That would be a marketing advantage. If you're the economist or the Wall Street Journal, 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.

• 1:15:11Speaker 00

  But probably, you know, probably shade is probably two departments. It's like two different parts of the factory.

• 1:15:16Shane Parrish?

  True.

• 1:15:18Speaker 00

  It's not my department. So you gotta go to this department. I hate it when they say that to me.

• 1:15:22Shane Parrish?

  Nobody's responsible.

• 1:15:23Speaker 00

  You'd like people to say, I own your problem.

• 1:15:26Shane Parrish?

  Yeah, or I'll fix it, or I will take ownership of it and I'll get your resolution.

• 1:15:30Speaker 00

  What I thought, what are the least expensive innovations I've seen is when people say, if you don't feel like wait, waiting, leave a number. That's almost satisfying. A callback number?

• 1:15:42Speaker 00

  The problem is I'm not always ready to answer my phone.

• 1:15:43Shane Parrish?

  Yeah.

• 1:15:43Speaker 00

  Like I wouldn't want to answer my phone right now.

• 1:15:45Shane Parrish?

  Yeah.

• 1:15:46Speaker 00

  So I'm not sure when I get a call back.

• 1:15:47Shane Parrish?

  I did that once at our Canada. They called me at like 3am.

• 1:15:50Speaker 00

  Oh, no.

• 1:15:51Shane Parrish?

  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.

• 1:16:12Speaker 00

  Let me break that in a couple of parts. Lean manufacturing and just in time are, from my experience, are describing the same phenomenon.

• 1:16:22Speaker 00

  The small batch, minimum material, like self-scheduling manufacturing process that Toyota pioneered in the 50s. And interestingly enough, it was a solution Toyota had to come up with to compete with Nissan. Because in the 50s Nissan was Japan's largest car company. And Toyota was just getting into cars. So Toyota didn't have scale, it didn't have the breadth of product line offering. So I had to figure out how to compete at low scale. And with more complexity that it might want to use. So it created the just-in-time system. Ford had the just-in-time system as well, but it was, it was high-volume focused Model Ts type of stuff.

• 1:17:07Speaker 00

  So those two are very similar. The effects of them being together, the effects of the modern organization do show up on the balance sheet. They show up in higher asset productivity, in the form of higher working capital productivity, and higher productivity of plant and 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.

• 1:17:32Speaker 00

  That was originally titled, "How to Use the Supply Chain Crisis Against Competitors." And I'm going, I'm explaining this because I want you to understand my perspective. I really don't care about the supply chain crisis. What I care about is how do I use the crisis in a way that puts my competitors at 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.

• 1:18:01Speaker 00

  And there are several ways you can do that. First one has to recognize that the supply chain crisis is a system phenomenon.

• 1:18:10Speaker 00

  We have a very complex system that was working fairly smoothly, and then it was disturbed.

• 1:18:17Speaker 00

  It was disturbed by government lockdowns.

• 1:18:21Speaker 00

  And when a system that's complex is disturbed,

• 1:18:25Speaker 00

  it has a response that's often called the bullwhip effect. But basically, all parts of the system start to oscillate. The factory overproduces and underproduces. Inventory becomes stockouts and overstocks.

• 1:18:40Speaker 00

  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,

• 1:18:49Speaker 00

  the way to minimize the impact of the supply chain crisis on me,

• 1:18:55Speaker 00

  that results in me being a higher performer than my competitor, are often things that people don't want to do. Because they look like they cost more. So for example, one thing I can do

• 1:19:06Speaker 00

  is like order more frequently

• 1:19:09Speaker 00

  and pay whatever penalty it takes to get that.

• 1:19:12Speaker 00

  I can, and this has been happening, I can accept, I could arrange containers that aren't full.

• 1:19:21Speaker 00

  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.

• 1:19:38Speaker 00

  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 in the supply chain crisis is incredibly important because the longer is the supply chain time, the more exposed it is to these oscillations.

• 1:19:58Speaker 00

  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.

• 1:20:12Speaker 00

  So some of the things I described are with the existing supply chain, air freight. You know, the logistics cost of a TV set

• 1:20:22Speaker 00

  that is shipped by ocean to Best Buy is about 5%. That's pretty damn good.

• 1:20:31Speaker 00

  If I ship it by air, it's going to cost me like 12%.

• 1:20:38Speaker 00

  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 all my 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 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.

• 1:21:14Speaker 00

  And so, much of the supply chain work I've been doing has been around how to take time out of the supply chain.

• 1:21:21Speaker 00

  And very often, the fight with management is over not what the benefits are, but who gets the benefits.

• 1:21:28Shane Parrish?

  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?

• 1:21:39Speaker 00

  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 where the problem starts to come up, is where the costs 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.

• 1:22:23Speaker 00

  So somewhere further down, I get the benefit, 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 women'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% on a woman's lingerie. The on-ocean shipping cost, terminal to terminal, is about a percent and a half of sales. The air freight's about four.

• 1:23:02Speaker 00

  So if I'm one to accept almost a factor of three increases in my shipping costs to avoid a 95% cost of a stock out, I end up being a more profitable chain and it ends up being faster.

• 1:23:16Speaker 00

  And so that's what happens. They went from 20%, oh shit, I gotta 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.

• 1:23:38Shane Parrish?

  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, 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 blowed on the balance sheet, looks like inefficiency. How do you sort of like weigh those things against each other?

• 1:24:20Speaker 00

  The 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 that they're going to keep on a crew. Stanley Black and Decker was one of the companies that early on in COVID lockdowns, we've got to put them together, so lockdowns have produced the problem, not COVID, well, they can say COVID produced lockdowns, decided they were going to stock up.

• 1:24:49Speaker 00

  And it paid off immensely, but it's a, it's a bet. The longer the supply chain is, in terms of time, the riskier it is for the company and the consumer to source from it. An example of using the supply chain against a competitor would be Dell versus HP.

• 1:25:12Speaker 00

  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-date technology while 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 looks old, but the only way 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 addicted to time, but it's just so powerful that if one takes a look at supply chain through

• 1:25:54Speaker 00

  time, one sees real opportunities to do a bunch of things differently than can be done if one doesn't take advantage of time. The one big unknown, which probably won't become prevalent management theory for another 10 years, is what I call variance analysis. And if one looks at supply chain that has a much faster flow-through than a supply chain has longer flow-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

• 1:26:35Speaker 00

  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-eighth variability of the other. So there's a high variance advantage that's possible. Just a footnote on that is that variance, it comes from two sources. It comes from changes in the outside world. In the case of an airline, it comes from a storm, something like that, airport closure.

• 1:27:08Speaker 00

  Or it can be self-generated. And it turns out the supply chain that has a high high amount of time on high variance, because they always go together. Even 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 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 than 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 supply chain. Canadian Tire is a perfect

• 1:27:53Speaker 00

  example. They use something called flow casting at 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 is going to be very challenging for people to achieve if they haven't achieved a time mindset to begin with. But it's the it's the next, I think it's the next wave.

• 1:28:23Shane Parrish?

  And you're writing about that now, right?

• 1:28:25Speaker 00

  Am I writing about that?

• 1:28:25Shane Parrish?

  Yeah.

• 1:28:27Speaker 00

  Well, you know, since I took the work, because a lot of people, for example, there was 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're going to run it worldwide. They had something called a J-valve factory in Japan burned down. And because it just is this fly 95% of the J-valves, which are part of the brake system of Toyota cars worldwide.

• 1:28:54Shane Parrish?

  And they couldn't make cars.

• 1:28:55Speaker 00

  Yeah, so the press can't make cars. They're dead. They had this thing up and running again in two weeks. And we don't can't take the time to explain how. They have a time orientation at Toyota. They thought they had ways to do it. They did it.

• 1:29:11Speaker 00

  And they were up in two weeks. At the same time that 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. Ford ended up making cars at the auto city they call put it against the fence. Semiconductors this year were missing, so people built cars without semiconductors and put them against the fence. And when you have semiconductors, you went back and fixed it. You know that's expensive. So Ford started doing this. The airbag factory that burned down in Cleveland never came back on stream. And the consequence of that was this particular supplier, whose factory burned down, went from supplying 90% of the airbags to Ford to supplying like 30%

• 1:29:54Speaker 00

  because they felt they had to diversify the supply base.

• 1:29:57Shane Parrish?

  Yeah.

• 1:29:58Speaker 00

  So customers are very sensitive, can be very sensitive to variance. Now, so I did this analysis and it showed that the production 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 WW Granger. WW 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 Canada, except for these guys got it, a complex distributor, high performing business. And

• 1:30:42Speaker 00

  the notion that he could manage variance in a supply chain was just more than he could 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 gonna do it. Southwest Airlines, that's why I mentioned Airlines earlier, has very low variance in its performance. Low variance in 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 than the other competitors. So they're 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 under control.

• 1:31:29Speaker 00

  At this point, I said that's only maybe Amazon, Walmart, Toyota, probably only three companies I can imagine that are even close to being able to do that. But it's the next big, to me, it's the next big wave is variants, but it's so far out. Oh, in fact, the grain jerk guy said, come back in 10 years or something like that, which is about how I figured it was gonna take. So I put it back on the shelf for a while. I'll send it to you if you want to see it.

• 1:31:48Shane Parrish?

  Yeah, I'd love to. That's a great place to end this conversation. I want to thank you for your time today. I really appreciate it.

• 1:32:01Speaker 00

  Thank you. Great questions. I enjoy them.

• 1:32:10Shane Parrish?

  Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts, and more, go to fs.blog/podcast or just Google The Knowledge Project. Until next time.