Accidents are the mother of invention

Here’s a nice piece on the invention of the Slurpee (via Marginal Revolution). An excerpt:

Knedlik’s [Dairy Queen] franchise didn’t have a soda fountain, so he began placing shipments of bottled soda in his freezer to keep them cool. On one occasion, he left the sodas in a little too long, and had to apologetically serve them to his customers half-frozen; they were immensely popular.

When people began to show up demanding the beverages, Knedlik realized he had to find a way to scale, and formulated plans to build a machine that could help him do so.

You never know what customers are going to like. Here’s a secret, kids,– they do not teach you how to figure that out in business school. There’s not a formula or process to follow to do it, other than trial-and-error.

I think executives who are trying to find ways to grow their company should consider using more low-cost, trial-and-error discovery .

Examples of how one company deals with the mountain of policy disincentives

Speaking of the mountain of disincentives we face from policy-makers past and present, this weekend’s Wall Street Journal features an interview with Carl’s Jr/Hardee’s CEO Andy Puzder.

Policy-makers act as if business managers will not respond to their disincentives and end up hurting the very people they are trying to help. Puzder illustrates one such action:

Mr. Puzder also expects fast-food restaurants to deal with ObamaCare by replacing workers with kiosks. “You’re going to go into a fast-food restaurant and order on an iPad or tablet instead of talking to a person because we don’t have to pay benefits for any of those things.”

While Mr. Puzder supports technological progress and the efficiency of tools like the iPad, he laments that “there’s a personal element that you don’t get from machines, and I think you’re going to lose that.” It’s also unfortunate, he says, because fast food is a “great level of job for people to enter the labor force.

The sci-fi geek in me wonders when they’ll come out with RoboCashiers. I’ve seen RoboBlackjack Dealers in Vegas. They are 3D animated ladies on big screen TVs that sense your movement and interact with you. Max Headroom, SIRI and Watson, for $500, can you run a cash register and make small talk? You could probably even program it so that the 3D image that appears would be one that the customer prefers.

I enjoyed Mr. Puzder’s comment on price strategy:

Mr. Puzder’s Journal visit comes while he’s in New York scoping out sites for new restaurants in the city. I ask him how he plans to deal with New York’s sky-high rents, a recent minimum-wage hike and labyrinth of regulations. “I went into a McDonald’s yesterday and a Big Mac combo cost $7.19 for a Big Mac, fries and a drink,” he says. “That’s how you deal with it.”

Here’s Puzder on why he doesn’t prefer building in California:

These days, California is one of the few states where the company isn’t looking to expand. “Like many businesses, we love California and would love to build more restaurants,” he says. But “California is not interested in having businesses grow,”

Consider how long it takes for one of his restaurants to get a building permit after signing a lease. It takes 60 days in Texas, 63 in Shanghai, and 125 in Novosibirsk, Russia. In Los Angeles, it’s 285. “I can open up a restaurant faster on Karl Marx Prospect in Siberia than on Carl Karcher Boulevard in California,” he says.

Mr. Puzder’s favorite California-bites-business story is a law that requires employers to pay general managers overtime if they spend 50% of their time on non-managerial tasks like working the register if they’re short-staffed, “which is what we pay and bonus them to do in just about every other state.” Since managers were filing class-action lawsuits against the company for not being paid overtime, “every retailer in the state basically has now taken their general managers and made them hourly employees.”

The managers hated the change “because they worked all their careers to get off the base to become managers…

A couple thoughts from Thomas Sowell

From Thomas Sowell’s latest Random Thoughts:

Everybody is talking about how we are going to pay for the huge national debt, but nobody seems to be talking about the runaway spending which created that record-breaking debt. In other words, the big spenders get political benefits from handing out goodies, while those who resist giving them more money to spend will be blamed for sending the country off the “fiscal cliff.”

I, too, am amazed at how spending gets a pass, even from folks like Warren Buffett who should know better.

Would Mr. Buffett give such a pass to a manager of one of his businesses who habitually spent 20% to 30% more than he took in and planned to do so as long as possible? In this case, would Mr. Buffett be so eager in volunteering his own income to continue to support such a manager so that manager could carry out his indefinite plan of spending beyond his means?

Here’s another good Thomas Sowell thought:

The more I study the history of intellectuals, the more they seem like a wrecking crew, dismantling civilization bit by bit — replacing what works with what sounds good.

I’ve seen the same with managers of successful businesses. New managers often ignore the actual success of the business they’ve been entrusted to run — what works — and change that business with their own ideas — what sounds good.

The typical outcome of that can be seen with JC Penney of the past year, where the new manager of JC Penney has made major changes to the business that sounded good, but have reduced the stock price by more than 50% against the S&P 500.

Intellectuals often have the same effect on society. For example, they may wish to ‘wage war on poverty’, but they ignore the best anti-poverty mechanism ever — innovationism (what works) — and instead seek to replace it with systems that sound good, but actually encourage poverty.

Ahead of my time :)

My business school professor: What is the number one goal of a firm?

I raise my hand.

My business school professor: Seth?

Me: To please the customer.

My business school professor: Wrong! To maximize shareholder value. You could please customers by giving your product away for free, but that wouldn’t please your shareholders.

Me: With all due respect, it wouldn’t please your customers for very long if you go out of business by giving away your product for free — especially if they value your product, now would it? 

My business school professor: [This-discussion-is-over glare] [Proceed to explain why maximizing shareholder value is the key goal of a firm].

I never bought the ‘maximize shareholder value’ credo, or at least the moronic behavior it led to. I do believe it is the manager’s job to maximize shareholder value, but I never believed that was the goal. Rather, it is a result of pleasing customers.

I’ve seen too many short-sighted decisions come from the ‘maximize shareholder value’ mantra because the customer was left out of the equation.

 

I was pleased to see this article from Steve Denning on Forbes.com, The Dumbest Idea in the World: Maximizing Shareholder Value. Here’s a key snippet from the article:

Although Jack Welch was seen during his tenure as CEO of GE as the heroic exemplar of maximizing shareholder value, he came to be one of its strongest critics. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”

I remember one example of this short-sighted focus on shareholder value when I as an engineer for a utility company.  One of our big industrial customers — infected by the shareholder value mantra — approached us seeking to buy the electrical facilities at their plant. We delivered power to them at the low voltage they needed to run their equipment. We also had special switchgear at their site — that we owned — to provide the volume and reliability they needed. We charged them extra for this enhanced service.

They computed the simple math of the cash outlay to buy the equipment from us, the fees that would save them and the cost they thought it would take to maintain the equipment. I saw their analysis. On paper it looked like a good investment, one that would add to their shareholder value by reducing costs and increasing profits.

But, their experience was different. They quickly learned that the higher fees they use to pay us included something they didn’t have — expertise and opportunity cost. They realized that trying to figure out how to maintain electrical switchgear took time away producing the products they made for their customers.

They first hired us back to maintain the equipment and then eventually sold the equipment back to us and ‘got out of the business of maintaining electrical switchgear’ so they could again focus on delivering value for their customers.

In their initial analysis, they forgot to include their customers.

 

The Business Cycle

Stage 1: Entrepreneurs experiment and take risks to make things to satisfy customers.

Stage 2: When they discover something the consumer values — aka value proposition– the experiment turns into a going-concern, or a business, and the business becomes self-funding.

Stage 3: If that value proposition is strong enough, the going-concern grows and comes to generate a safe and steady income stream.

Stage 4: Eventually, the safe and steady income stream attracts bureaucrats who use it to satisfy their own desires to boss people around and self-importance.

The focus of the going concern shifts from satisfying consumers to satisfying bureaucrats.

Stage 5: And not just the bureaucrats that take residence in the corporate offices. Outside bureaucrats will come seeking to hook up their bureaucratic organizations to the safe and steady business streams generated by those successful customer value propositions.  These bureaucrats will come from government at all levels, non-profits, foundations, consulting groups, lobbying groups, industry associations, employer organizations, unions, education, self-governing bodies, franchise owners and regulatory agencies.

Stage 6: Fortunately, competition is there to continue to find ways to satisfy customers. And when they do so, they have an advantage to the organizations that are satisfying bureaucracies. Remember, a start-up need only satisfy customers. Big, successful businesses must satisfy its bureaucracies, often which is a higher priority to satisfying the customer, no matter what the bureaucrats in-charge pay lip service to the customer.

Stage 4: But, if competition is successful, it too will attract bureaucrats.

A company that has suffered deterioration in its attention to value proposition, sometimes is able to attract turnaround entrepreneurs and refocus on the customer. However, many of the outside bureaucracies will stay interested and impede progress as long as the business has the resources to help them, which usually causes further deterioration and continues to give advantage to start-ups.

“Experiments” Update

As noted in the sidebar, the photo at the top of this screen is titled “Experiments” and is from a 2010 post of mine with the same title.

I liked it because it represents what goes on around us everyday. Almost everything we do is a trial-and-error experiment. We find something that works and stick with it until we find something that works better.

If you tried a new bathroom cleaner, you are evaluating whether it does a better job than your regular cleaner and whether it’s worth the price.

Every new business and product is a trial-and-error experiment and I thought this photo was a good representation of it. Not only does it show drink makers experimenting with different varieties of drinks to find out what satisfies consumer preferences, but it shows the store management experimenting with how to use its space to offer the most value for its customers and drive the most sales.

Below is a picture of the same space, nearly two years later.

This refrigerated end-cap in a high traffic area of the grocery store use to carry health and sports beverages (see top of screen). It was recently converted to a “You Pick Six” craft beer cabinet.

Store management may have had several reasons to make the change. This end cap is close to the liquor section, so it may have made sense from a product placement.

They might also have six packs with broken bottle or two, and this might be a good way to get rid of the extra inventory.

The sports beverages may not have sold well here. They have been moved to another area of the store and the selection has been reduced to the best sellers.

From a consumer standpoint, this might represent a trend. It seems the latest trend in partying is to offer a variety of craft beers to choose from. This type of cabinet may allow smaller group of people to do just that without having to buy full six packs.

A happy, former Walmart employee

You don’t often hear this side of the Walmart story (H/T Carpe Diem). Here are a few of the things this former Walmart employee had to say:

I worked hard and came back during a break from college to be promoted to work in the photo lab (more responsibility, higher rate of pay). I also saw many full-time employees that I worked with move up to become department managers, assistant store managers, and even move on to the corporate office.

Every evening I would go to a meeting with the store manager, who would tell us the stock price, how much we had sold that day, and if there were other expectations before we left for the night.

I also saw the opposite end of the spectrum. Some fellow associates seemed content to do the bare minimum and didn’t go anywhere in the company because of it. In fact, they are still at the same level.

In my opinion, these are also the employees that you hear speaking negatively of Walmart’s employment practices. They want something for nothing from the company and they aren’t getting it.