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The Market Discounts Proven Company Leadership Far Too Quickly

Posted on January 28, 2013  Comments (1)

Developing a strong executive leadership culture is not a short term effort. It isn’t based on one person. It almost never deteriorates quickly. Yet markets continually overact to minor blips on the long term success of companies. I think this is mainly due to a failure to appreciate systems and a failure to appreciate variation along with plenty of other contributing factors.

The market’s weakness does provide investment opportunities. Though taking advantages of them is much more difficult than spotting a general weakness. While excellent management almost never becomes pitiful overnight (regardless of how often talking heads would have you believe) business can change very quickly due to rapidly changing market conditions. Avoiding the purchases when the underlying business has sustained a significant blow that excellent management will deal with but which will reduce the value of the enterprise going forward is key to taking advantage of the market’s silly overreaction to bad news (or even calling things “bad news” that are not actually bad just not as awesome as some were hoping for).

My positive opinion of Toyota’s management has continued for a long time. A few years ago an amazing number of people were all excited about the “decline of Toyota” and wrote about how Toyota’s ways had to change. I wrote at the time was this is needless hysteria and if Toyota just focused a bit more on applying the Toyota’s management methods they would be in great shape. The problems were due to Toyota’s mistakes in practicing the Toyota Production System not in a weakness of those practices.

Looking at a chart of Toyota’s stock price from 2007 to today it peaks at about $137 in January 2007 and bottoms at $58 in early 2009 and now is at $96. Toyota’s stock price has been priced richly due to respect for management and consistently strong cash flow. As it fell below $75 there you no longer had to pay a premium for excellent management, but that management was still there. I like getting bargains when I buy stocks. One of the things I have learned I am too focused on bargains and I should be more willing to accept less of a bargain to get great management systems – so I have adjusted, and have improved my results. When I can get a great bargain and great management it is wonderful, though sadly a rare occurrence. Toyota’s price now seems reasonable, but not a huge bargain.

The market continually gets overly excited by either actual problems or perceived problems. I wrote about this happening with Netflix 2 years ago. Netflix made some mistakes and faced some tough business issues. The evidence of sound, sensible, effective management vastly outweighed the evidence for management failure – yet there were hundreds of articles about the pitiful failure of Netflix management.

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Continual Feeding

Posted on March 29, 2012  Comments (2)

I like growing things. I think it is part the connection to system thinking I have had since I was a kid. I like finding ways to leverage my effort so that I put in a bit of thought and effort and then get to enjoy the fruits of that effort for a long time. This idea also guides my investing approach.

I planted a vegetable garden in my yard a few years ago. My strategy was to find methods that gained me what I wanted (yummy food) without much effort required from me. I don’t want to deal with persnickety plants. Basically I composted leaves, grass and yard waste. I put that into the garden spot and put in some seeds and small plants to see what would happen. I watered things a bit early on and if we had very little rain for a long time. But in general my attitude was, if I could get success with some plants with this level of effort that was good. Only if nothing would grow would I bother with more involvement from me.

photo of wineberries

Wineberries in my backyard.

Luckily it turned out great. Lots of great tomatoes and peppers and peas and beans and cucumbers and more, and very little effort from me.

I actually even had more success with wineberries. I didn’t even have to plant them (some bird probably seeded them for me and I just let them grow). It was wonderful for several years. Then I had a huge area with huge amounts of tasty berries: it was wonderful. Sadly then birds started to eat them before I go them and I got far fewer good berries than before. The berries were so good I went to effort to keep the birds from devastating my reward (to some success but with much effort). Oh well, I didn’t really mean to get onto that – those berries were just so great.

Now I am living in Malaysia and growing plants on my balcony. It is wonderful in many ways but one of the issues is I have to continually water the plants. Even though we get a great deal of rain, not nearly enough reaches the plants (and also the dirt doesn’t retain the water well – especially given the small volume of the containers). So if I want the fresh vegetables I have to continually water the plants. This goes against my desire to plant seeds and let me sit back and enjoy the bounty of my limited efforts (ok it is still pretty limited).

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Taking What You Don’t Deserve, CEO Style

Posted on December 8, 2011  Comments (5)

The excesses to which CEO’s and their board buddies go to in taking from corporate treasuries what they don’t deserve continues to amaze me. The level to which the bad behavior is accepted is apparent in the lack of progress at dealing with those that are taking what they have no moral right to. As shouldn’t have to be explained (but maybe does) leadership isn’t about avoiding being indicted. The levels to which these people take from the organization they are suppose to be leading is a very sad commentary on our leaders. They act as though the corporation exists to enrich them, and their friends, personally: and all the other stakeholders are just leeches on the system.

CEO’s deserve to be paid well. As they were in 1970. As their abuses (with the support of subservient boards) became greater and greater the outrage increased. Peter Drucker moved from defending highly paid CEOs (say 20 or even 30 times the median employee pay) to expressing dismay at the massively excessive pay packages in the 1990s (which were much lower than that taken by the current crop of self important leeches).

Taking such excessive amounts from the corporate treasury is innately dis-respectful to all other employees (though usually they through large amounts of cash at those they have to see often which bring them into the camp of those taking instead of the masses being taken from). Whatever nice words they use to try and give an illusion that they respect those they work with (or their stockholders, suppliers, customers, communities…) doesn’t change their disrespectful actions.

Company CEO 2010 Pay
5 year pay CEO % of 2010 Earnings total employees
UnitedHealth Group Stephen Hemsley $101,960,000 $120,470,000 2.2% 87,000
Qwest Communications Edward Mueller $65,800,000 $75,000,000 company lost $55 million *
Walt Disney Robert Iger $53,320,000 $147,080,000 1.3% 156,000
Express Scripts George Paz $51,520,000 $100,210,000 4.4% 13,170
Coach Lew Frankfort $49,450,000 $137,870,000 6.7% 8,200
Polo Ralph Lauren Ralph Lauren $43,000,000 $155,250,000 9.0% 24,000
Gilead Sciences John Martin $42,720,000 $204,240,000 1.5% 4,000

Executive pay from Fortune, annual earnings from Google Finance, employee totals from Yahoo Finance. * Quest was merged into CenturyTel and I can’t find Quest employee data.

This problem is far worse in the USA than anywhere else. Some CEO’s have become jealous and urged that they be allowed to take more so they can not feel so sad about how much less they make. And so companies from other countries are moving in the wrong direction. The USA continues to move so quickly away from any sense of propriety however that they seem to be gaining on the rest of the world for how badly we can do in this area. There are of course, companies in the USA that don’t believe in letting the CEO treat themselves to whatever they want. Costco is a great example of this. That CEO respects his fellow employees and customers. We need more outrage at those CEOs that refuse to lead and instead just seek to take whatever loot they can before they leave.

Related: Another Year of CEO’s Taking Hugely Excessive Pay (2007) – CEO’s Castles and Company Performance – Honda’s top 36 employees received $13 million total (2006)

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When Companies Can Treat You Like an ATM, Many Will Do So

Posted on August 29, 2011  Comments (1)

The End of Refrigeration

One small custom chip, some relays, a transformer, a couple of heat sinks, and a bunch of passive parts. Maybe a build cost of $20-30 or so? But GE’s price to me was $250, plus $150 for the 20 minutes it took to pull out the old one and swap in the new one.

Paying $400 for a big piece of physical gear plus a couple hours of labor didn’t bother me. Paying $400 for a primitive circuit board and a few minutes to plug it in does.
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Bottom line: $400 because a $2.02 Song Chuan 832 Series 30 A SPDT 12 VDC Through Hole General Purpose Heavy Duty Power Relay burned out.

This is a combination of companies 1) not being customer focused, 2) short term thinking, 3) very ologopolistic markets (very little competition). So when you are looking at this from the view of providing the best system, for in this case refrigeration, it is not a very difficult solution. You would want to minimize loss (have parts last) and in case they don’t minimize replacement cost. You would design the entire system so the parts that do burn out are easily replaceable and cheap and ideally notify you which part is broken (without the need for expensive contractor visits).

However, if your goal is to maximize company profit it is easy to see how you would develop a system that rips off the customer (very expensive part replacement, huge text messaging fees…) and attempts to capitalize on very little competition in the marketplace and customers that cannot reasonable analyze the system to see how they will be penalized by choosing your very expensive to maintain equipment. It is what they seem to teach in business school – take as much advantage of your customers as you can get away with. I prefer the Jeff Bezos school of thinking

There are two kinds of companies, those that work to try to charge more and those that work to charge less

It is a vastly different mentality to try to charge customers less as Amazon does (rather than say the practices of: Verizon, Bank of America, AT&T or Comcast). Your organization has to focused not on your quarterly profit (and if you are think kind of company, probably your personal bonus targets) but in serving your customers well, and in continually improve the value you provide to customers. And the company takes a share of the value just as all other stakeholders do (customer, employees [not just those in the c-suite)], suppliers, society…). Not only do I want to be a customer of this kind of company, I want to be a stockholder.

Related: Drug Prices in the USA – Worse Hotel Service the More You Pay – Customer Service is Important – $8,000 per gallon printer ink – new deadly diseases (often companies rely on bad “intellectual property” policies to restrict customer options)

6 New Kiva Loan to Manafacturing Entrepreneurs

Posted on July 28, 2011  Comments (0)

I have been a big fan of Kiva for quite some time, and have written about it previously: Kiva – Giving Entrepreneurs an Opportunity to Succeed, Thanksgiving: Micro-financing Entrepreneurs. I made 6 new loans today to manufacturing entrepreneurs in the USA (and Mexico); Tajikistan; Nicaragua; Armenia; and 2 in El Salvador. The webcast above shows Armen Tsaghikyan in Armenia. It does seem like his process maybe could use a benefit from a bit of application of lean manufacturing ideas.

It is great to be able to help out people whether it is providing useful information (like I hope my web site and blog do) or a small loan of capital that allows some capital improvements. Many of the loans through Kiva amount to providing a loan to get additional supplies (often they have very limited capital). But my favorite loans are those that allow for purchases of new equipment that will make them more efficient.

It is easy to help out yourself; you can loan as a little as $25. The 10 members of the Curious Cat team have made 292 loans for a total of $12,000. Comment with the link to your Kiva page and I will add a link on Curious Cat Kivans.

Related: Kiva Fellows Blog: Nepalese Entrepreneur Success – More Kiva Entrepreneur Loans: Kenya, Honduras, Armenia… – 100th Entrepreneur Loan

Warren Buffett’s 2010 Letter to Shareholders

Posted on March 3, 2011  Comments (1)

Warren Buffett has published his always excellent annual shareholder letter. His letters, provide excellent investing insight and good management ideas.

Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
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At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish. And their wishes do differ: There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.
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Cultures self-propagate. Winston Churchill once said, “You shape your houses and then they shape you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. (As one wag put it, “You know you’re no longer CEO when you get in the back seat of your car and it doesn’t move.”) At Berkshire’s “World Headquarters” our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment – you name it – totals $301,363. As long as Charlie and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.
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At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.

I don’t agree with everything he says. And what works at one company, obviously won’t work everywhere. Copying doesn’t work. Learning from others and understanding what makes it work and then determining how to incorporate some of the ideas into your organization can be valuable. I don’t believe in “Our trust is in people rather than process.” I do believe in “hire well, manage little.” Exactly what those phrases mean is not necessarily straight forward. I believe you need to focus on creating a Deming based management system and that will require educating and coaching managers about how to manage such a system. But that the management decisions about day to day operations should be left to those who are working on the processes in question (which will often be workers, that are not managers, sometimes will be supervisors and managers and sometimes will be senior executives).

Related: Too often, executive compensation in the U.S. is ridiculously out of line with performance. – Management Advice from Warren Buffet – Great Advice from Warren Buffett to University of Texas – Austin business school students – 2004 Warren Buffet Report
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Six Sigma Interview with Jack Welch

Posted on October 4, 2010  Comments (0)

The short video includes some interesting points by Jack Welch on six sigma. GE was a huge company and did plenty of things that could be criticized. But often those criticizing take it much to far and disregard the sensible things GE understood and was doing well.

Quotes by Jack Welch: “variation is evil” “Will six sigma companies get more valuation in the marketplace? Not unless they produce results. You can’t put up a slogan that says we are a six sigma company and think the pe is going to move.”

Related: 3M CEO on Six Sigma – Management Advice Failures – New Rules for Management? No! – Has Six Sigma been a failure?

Kiva – Giving Entrepreneurs an Opportunity to Succeed

Posted on April 3, 2010  Comments (1)

photo of a Kiva entrepreneur

Tony, a Kiva entrepreneur in Pennsylvania, USA looking to manufacturing specialty cars.

I really like Kiva. Kiva lets you lend small amounts of money to entrepreneurs around the world. My latest loan is to a manufacturing entrepreneur in the USA.

When Tony’s 6’0 6″ body could not fit in the traditional supercars, he built his own in 1990. Tony says, “If one door closes I just look for another opening; I don’t give up.” With much patience and hard work he continues to expand his business and hopes to make it a full-time job. With his ACCION USA microloan he has hired two designers to work with him part-time and has purchased a laptop.

I must admit I wouldn’t take this as an investment. It seems a very risky and doesn’t seem that likely to pan out, to me. But I see my loans through Kiva as a way to give people a chance to pursue their dreams. This loans is probably the one I find less compelling from a business point of view (to me), but I like to provide some loans in the USA so I decided to give Tony a chance.

I do try to select loans that look promising and seem to provide the entrepreneur an opportunity that will help them. By which I mean I love finding loans where, for example, they will buy equipment that will improve their productivity or take on new business. Very often loans are to buy raw materials or supplies, which is also fine but the potential gains are often less than something that improves the efficiency (it seems to me). Often this allows the entrepreneur to buy more and grow their business.

I have made nearly 200 loans now. The top country has been Togo (at 12%). I don’t target Togo but I do pay attention to the loan costs to the entrepreneurs (part of my assessment of the good business case for the loan) and some of the micro finance organizations offer good terms to entrepreneurs. Some of the microfinance organizations are more charitable (they may use donations to fund significant parts of the operating expenses, instead of profits from interest on the loans). Read more details on how Kiva works. It also used to be a bit difficult to find loans I really thought were great. It is getting easier to find more options so my guess is that the top few countries now will see declines in their percentages.

So far I have lent to 37 countries. Cambodia is 2nd at 7.7% of my loans, Viet Nam 3rd at 6.7%, Tanzania 4th at 5.1%, Nicaragua 6th at 5.1% along with Kenya, and Ghana and Boliva are 8th at 4.6%. The United States now makes up 2.6% and Mexico 1.5%. The sectors the loans are categorized in are: Services 25%, Food 18%, Manufacturing 17%, Retail 14%, Agriculture 12% and various others. Though the sector categorizations are pretty weak in my opinion (they seem to be fairly inaccurate – so it gives you an idea but it isn’t exact).

The default rate on my loan portfolio is 2.1% (3 defaults). One was in Kenya where $71.50 out of $75 was paid back and then huge civil unrest took place and it defaulted. The other 2 are from the same microfinance bank in Ecuador that was closed down due to mismanagement. In that instance I lost $87.50 out of $100 lent. 94 loans have been fully paid back and 94 are being paid back now.

I would love it if more Curious Cat readers joined Kiva and helped other entrepreneurs. If you do let me know your Kiva page and I will add you to the Curious Cat Kivans page. Also join the Curious Cats Kiva Lending Team.

Related: 100th Entrepreneur Loan – Thanksgiving: Micro-financing Entrepreneurs – Using Capitalism to Make the World Better – Kiva Opens to USA Entrepreneur Loans – MicroFinance Currency Risk

Short Term Investing Focus

Posted on February 17, 2010  Comments (3)

Buffett’s New CEO Shows Analysts, Hedge-Fund Managers to Door

Buffett’s Berkshire Hathaway Inc. completed the buyout yesterday after winning the approval of Burlington Northern investors. The deal, valued at $100 a share, allows Rose to hand out returns of nearly 300 percent, plus dividends, to investors who bought stock the day he was named CEO in 2000. The problem, he said, is that shareholders with that length of commitment are dwindling in number and influence.

“When I started as CEO 10 years ago, the typical investor had a time frame of three to five to seven years,” Rose said in an interview. “Year-by-year, that’s gotten shorter.”

The increased focus on short-term results, fueled by real- time media and quarterly analyst calls, can be a distraction for a railroad executive who needs to buy locomotives that run for 20 years and put down tracks that last for 40, Rose said. Burlington Northern said last month it would commit $2.4 billion this year to capital projects, including track, signal systems and locomotives, about $240 million less than in 2009.

“The money I spend this year really won’t pay off for three, four, five or seven years down the road,” said Rose, 50. “There’s the advent of the hedge fund which has changed the time horizon of what satisfies the institutional investor.”
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“The speed of the news today I think has harmed, quite frankly, investors looking at long-term assets,” Rose told reporters in a news conference this week. A long-term perspective is “one thing that our country has kind of lost sight of, not just for the railroad equity investor but for a lot of investors.”

Decades ago Dr. Deming said short term focus was one of the seven deadly diseases of western management. Unfortunately we have made very little progress on the deadly diseases. The failed, health care system with it’s focus on a few special interests fighting to keep the broken system that does great harm to society but benefits the special interests is another a disease that has definitely gotten much worse.

Related: Think Long Term Act Daily – posts related to Warren Buffett – Goodbye Quarterly Targets – A Great Day for Georgia-Pacific

Zappos and Amazon Sitting in a Tree…

Posted on July 23, 2009  Comments (6)

Amazon is acquiring the unique company – Zappos: we have written about Zappos previously: Paying New Employees to Quit. Jeff Bezos uses the webcast above to talk to the employees of Zappos. Excellent job. The letter from Tony Hsieh, the Zappo’s CEO, to employees is fantastic. This is a CEO that respects employees. These are leaders I would follow and invest in (and in fact I am glad I do own Amazon stock).

First, I want to apologize for the suddenness of this announcement. As you know, one of our core values is to Build Open and Honest Relationships With Communication, and if I could have it my way, I would have shared much earlier that we were in discussions with Amazon so that all employees could be involved in the decision process that we went through along the way. Unfortunately, because Amazon is a public company, there are securities laws that prevented us from talking about this to most of our employees until today.
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Several months ago, they reached out to us and said they wanted to join forces with us so that we could accelerate the growth of our business, our brand, and our culture. When they said they wanted us to continue to build the Zappos brand (as opposed to folding us into Amazon), we decided it was worth exploring what a partnership would look like.

We learned that they truly wanted us to continue to build the Zappos brand and continue to build the Zappos culture in our own unique way. I think “unique” was their way of saying “fun and a little weird.” :)

Over the past several months, as we got to know each other better, both sides became more and more excited about the possibilities for leveraging each other’s strengths. We realized that we are both very customer-focused companies — we just focus on different ways of making our customers happy.

Amazon focuses on low prices, vast selection and convenience to make their customers happy, while Zappos does it through developing relationships, creating personal emotional connections, and delivering high touch (“WOW”) customer service.

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Toyota Posts Loss of $6.9 Billion in Last Quarter

Posted on May 8, 2009  Comments (1)

Toyota Posts Loss of $6.9 Billion in Last Quarter

For January-March, Toyota booked a $6.9 billion loss, in line with consensus estimates, and cut its annual dividend nearly 30 percent — the first cut since at least 1994, when it changed its reporting period.
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Toyota President Katsuaki Watanabe was more downbeat, stopping short of predicting when sales would pick up in major markets, or when the company would return to profitability as it remains saddled with excess capacity. “Of course the external environment doesn’t help, but we were lacking in the scope and speed of dealing with various problems and issues, and for that I am sorry,” he told a news conference.

For the year to next March, the maker of the Prius hybrid forecast an operating loss of 850 billion yen, more than double the average forecast in a survey of 20 analysts by Thomson Reuters. It sees an annual net loss of 550 billion yen based on the dollar and euro averaging 95 yen and 125 yen.

The bleak forecasts prompted ratings agency Standard & Poor’s to downgrade Toyota’s long-term debt ratings to AA from AA+, with a negative outlook.
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To return to profit, Toyota must sell more cars or cut costs further, Watanabe said. But he predicted the U.S. market would be around 10 million vehicles industrywide at best this year, down from more than 13 million in 2008.
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Toyota is bleeding overhead costs, with about a third of its global assembly lines working on single shifts. It will slash capital spending by more than a third this year to 830 billion yen as it puts expansion projects on hold, but it said it was not thinking of closing any production lines for good.

In my opinion these negative results are a sign of Toyota’s strength not weakness. The credit crisis and economic downturn has resulted in a poor economic environment. Toyota has managed to sustain the blow and hold firm to their principles and likely will come out of this downturn stronger as a company (mainly re-enforcing the importance of planning for bad economic conditions and not getting too excited about growth potential versus risks of growing too fast) and in a better position compared to their competitors. I continue to be an owner of Toyota stock and happily so.

Related: Idle Workers Busy at Toyota – Financial Market Meltdown (Oct 2008) – “2007 has been a difficult year for Toyota” – New Toyota CEO’s Views (2005) – Jim Press, Toyota N. American President, Moves to Chrysler

Build Your Business Slowly and Without Huge Cash Requirements

Posted on April 12, 2009  Comments (0)

Get Rich Slow by Josh Quittner

At no other time in recent history has it been easier or cheaper to start a new kind of company… These are Web-based businesses that cost almost nothing to get off the ground
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The term ramen profitable was coined by Paul Graham, a Silicon Valley start-up investor, essayist and muse to LILO entrepreneurs. It means that your start-up is self-sustaining and can eke out enough profit to keep you alive on instant noodles while your business gains traction.

“At this point, it would be hard for companies to get any cheaper,” Graham said. Since everyone already has an Internet-connected computer, “it’s gotten to the point that you can’t detect the cost of a company when added to a person’s living expenses. A company is no more expensive than a hobby these days.”

I see a great deal of truth to this and it provides interesting opportunities. Including being able to build a business slowly while still working full time. I have written about Y-combinator previously they have helped make this model popular. And the services these companies make seem to me to often be much more refreshing than ideas so watered down they lose much passion (so common from so many companies). Though some large companies provide great web sites.

Related: Some Good IT Business Ideas – Find Joy and Success in Business – Our Policy is to Stick Our Heads in the Sand – Small Business Profit and Cash Flow

Warren Buffett’s Letter to Shareholders 2009

Posted on February 28, 2009  Comments (2)

Warren Buffett published his letter to shareholders yesterday. As usual, it is of great interest to anyone interested in the economic, investing and management ideas.

In 1995, MidAmerican became the major provider of electricity in Iowa. By judicious planning and a zeal for efficiency, the company has kept electric prices unchanged since our purchase and has promised to hold them steady through 2013. MidAmerican has maintained this extraordinary price stability while making Iowa number one among all states in the percentage of its generation capacity that comes from wind. Since our purchase, MidAmerican’s Wind-based facilities have grown from zero to almost 20% of total capacity.
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Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).

Our record matches our rhetoric. Most buyers competing against us, however, follow a different path. For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators are contemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses.

Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a
bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage. Their new label became “private equity,”

Berkshire Hathaway is a very well run company. Warren Buffett is a great investor. He is also a great executive. He hires honest and able people and lets them do their job. He ensures managers retain constancy of purpose by focusing on the long term and not getting overly focused on quarterly results. And have you ever read an annual report that talks of so many employees with such respect (granted it is a rare situation – something similar in an annual report could well seem disingenuous if it were not Warren Buffett writing)?

Related: 2005 Annual Report from Buffett – Warren Buffett’s 2006 Shareholder Letter – Warren Buffett Webcast on the Credit Crisis – Berkshire Hathaway Annual Meeting 2008
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Printer Product Development Using Design of Experiments

Posted on June 29, 2008  Comments (0)

MEMS development in less than half the time by Christopher N. Delametter, Eastman Kodak Company

The traditional approach to optimizing a product or process using computer simulation is to evaluate the effects of one design parameter at a time. The problem with this approach is that interactions between design factors and second-order effects are likely to result in a locally optimized design that will provide far less performance than the global optimum. Kodak researchers use DOE to develop tests that examine first-order, second-order, and multiple factor effects simultaneously with relatively few simulation runs. The result is that the analyst can iterate to a globally optimized design with a far higher level of certainty and in much less time than the traditional approach.
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By using DOE to drive CFD, Kodak researchers were able to optimize the design of the printhead in considerably less time than competitors. The advantages of simulation were especially apparent late in the project when researchers discovered a more optimal ink formulation for one of the colors.

Related: Design of Experiments articles – Using Design of Experiments – Statistics for Experimenters – Why Use Designed Factorial Experiments? – Kodak Debuts Printers With Inexpensive Cartridges

Losses Covered Up to Protect Bonuses

Posted on March 24, 2008  Comments (6)

Does it surprise you to learn traders would cover up losses to protect bonuses? It shouldn’t, it happens over and over. Would it surprise you that almost any bonus (or quota) scheme increases the odds that the data will be doctored to meet the goals? It shouldn’t. Intelligent measures to make such doctoring difficult can help reduce the practice. But it is a likely risk of any such goal. As we have quoted Brian Joiner as saying: there are: “3 ways to improve the figures: distort the data, distort the system and improve the system. Improving the system is the most difficult.” So it is no shock that distorting the data is often the tacit people use (especially when the rewards are great or the punishment for missing is severe).

Of course the people that take unethical or illegal action are responsible for their actions. But managers that set up poor systems and then get poor results should not be surprised. You mainly read about the exciting distortion of data – but there is much more such distortion that doesn’t seem interesting enough for the press.

Traders at top investment bank ‘covered up losses to protect their bonuses in £1.4 bn scam’

A top investment bank said yesterday that some of its traders had tried to protect their massive bonuses with a £1.4billion scam. Credit Suisse was forced to admit it will pay the price for the traders’ ruthless scheming by sinking into the red. All the traders involved – some of them based in London – have been fired or suspended.

Shares in the bank, which is based in Zurich, tumbled 7.5 per cent yesterday. Credit Suisse admitted it had discovered intentional “pricing errors” by a small number of traders involved in complex investments linked to the mortgage market.

Related: Problems with Bonuses – Be Careful What You Measure – Measuring and Managing Performance in Organizations – Another Quota Failure Example

Management Advice from Warren Buffet

Posted on March 4, 2008  Comments (1)

As usual, Warren Buffett’s letter to shareholders is packed with wisdom. He is best know for his investing genius but his writing provides great thoughts for managers also: Berkshire Hathaway 2007 Letter to Shareholders:

We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula tied to earnings.
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This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s financial statements, employing no advisors and engaging in no nit-picking. I knew that the business would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
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Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%
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A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.
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Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time. (An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
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I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings’ with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.
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You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run.
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What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost until long after they retire.

Related: Buffett’s Letter to Shareholders (from last year) – Buffett’s Shareholder Letter (2006) – Overview of Warren Buffett – Annual Report by Warren Buffett (2005) – Hiring the Right People
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12 Stocks for 10 Years – Adding Danaher

Posted on February 5, 2008  Comments (0)

With Microsoft’s offer for Yahoo I am replacing Yahoo with Danaher in the 12 Stocks for 10 Years portfolio. Other stocks in the portfolio include Google up 137% since purchased, PetroChina up 132%, Amazon up 106% and Toyota up 44%. I have considered Danaher since creating the portfolio and now looks like an attractive time to make the change. Other stocks I like now are Google, PetroChina, Toyota and Tesco. The bias toward companies that practice what I discuss in this blog is very intentional – I believe this stuff works and believe companies that manage using the ideas discussed here will prosper.

Curious Cat Management Improvement Blog previous posts on: Danaher – Toyota, Tesco and Google.

Related: Curious Cat Investing Search – Curious Cat Investing Blog – 10 stocks for 10 years

Danaher Expands Lean Thinking One Acquisition at a Time

Posted on September 24, 2007  Comments (0)

Sybron Focuses on Operations

Nearly 18 months into becoming part of Danaher Corp., life is different at Sybron Dental Specialties Inc. “Sybron was really a sales and marketing focused organization … and operations (were) part of supporting that,” said Don Tuttle, president of specialty products for Sybron, which is moving from Orange to Anaheim next year. “What Danaher brought to us, and has been successful with, is bringing us an operations focus.”

Sybron has adopted principles known as Danaher Business Systems, which he called a “playbook” to make the company run as a more efficient team. It’s centered on “kaizen,” a quality improvement process that grew out of the teaching of W. Edwards Deming. The focus on manufacturing and operations, combined “with our sales and marketing expertise (has) made us a much stronger company,” Tuttle said.

Danaher continues to do a good job improving management practices one purchase at a time. I continue to eye Danaher as a stock to buy but have not bought yet.

Related: Danaher Practicing Lean Thinking – Lean Thinking at Danaher – Tilting at Ludicrous CEO Pay – lean manufacturing directory

Amazon’s Amazing Achievement

Posted on July 24, 2007  Comments (0)

I have mentioned I like the way Amazon, and Jeff Bezos, have been managing in several posts. Recently Amazon has added very strong financial results to that portfolio of things they do well. Amazon earnings announcement:

Net sales increased 35% to $2.89 billion in the second quarter, compared with $2.14 billion in second quarter 2006. Excluding the $46 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 33% compared with second quarter 2006.

Operating income increased 149% to $116 million in the second quarter, compared with $47 million in second quarter 2006. Net income increased 257% to $78 million in the second quarter, or $0.19 per diluted share, compared with net income of $22 million, or $0.05 per diluted share in second quarter 2006.

Pretty impressive. It seems Amazon might be able to begin delivering strong current financial performance (they have done so at least twice, and maybe longer depending on how you look at it…) and continue to build and innovate for the future. That is when a company really sets itself apart from the crowd. Previously, from the investing perspective, the argument was largely based on the belief that the steps taken today were building for the future (a fine thing, but risky – without the evidence of success actually making real profit it is often easy to make a good case for why the future will be good). In an investment it is more comforting when current earning provide some evidence the profits predicted in the future have some basis in reality.

Since the beginning of April Amazon’s share price has gone from $40 a share to $70. And based on the after hours trades today it is going to be in the $80s tomorrow (though after hours trades can often be misleading – there is some more confidence based on the large volume of hour trades in Amazon, but still…). I must admit this price does seem like it might be getting a bit ahead of itself but Amazon is making an impressive case for strong future performance.

Related: Amazon Innovation – 10 stocks for 10 years (April 2005) – 12 Stocks for 10 Years Update (June 2007) – Very Good Amazon Earnings – Bezos on Lean Thinking – Is Amazon a Bargain?

Google Exceeded Planned Spending on Personnel

Posted on July 19, 2007  Comments (1)

Often people have trouble understanding Dr. Deming’s disapproval of arbitrary numerical targets. What he was trying to prevent is what many see every day, such as managing to quarterly earnings targets. There are several problems with numerical goals but in here lets focus on one. The change from managing for what is best for the business to managing to hit a target. Google Profit Trails Analyst Estimates; Shares Slide:

The company hired more people than expected last quarter, Chief Executive Officer Eric Schmidt said on a conference call. Google added 1,548 jobs, mostly in sales, marketing and engineering, bringing its total to 13,786. “We overspent against our own plan on headcount,” he said. “We decided it was not a mistake. The kind of people we brought in were so good that we’re glad we did this.”

Great statement. And if more people could manage that way, one of the problems with numerical goals would be eliminated. But with so many organizations tying huge bonuses to meeting arbitrary numerical targets you will have a great deal of difficulty getting managers to hire 3 extra people this quarter, who will help the business, but will ruin their chance at a bonus. Or even if they just take a hit on their performance appraisal compared to the other managers that meet the headcount target – even if it meant turning away talent the organization could have benefited from greatly – and then the manager that missed their target loses out in the next promotion opportunity.

I am happy to own a tiny portion of Google and glad they are making decisions like this. Now just because I think there is a good case to be made for exceeding the targets that doesn’t mean that hiring more people is necessarily good. It is perfectly possible Google is hiring too many people and making a bad prediction about how these people will benefit Google in the long run. I am just saying I strongly support not tying yourself to short term numerical targets, if you predict a better decision requires taking actions that will cause the target to be missed.

Google increased profit by 28%, from the second quarter last year, to $925 million (and down from $1.0 billion in the first quarter of 2007). Lest you think personnel can’t really cost Google that much can it, just the stock based compensation in the second quarter reduced earning by $242 million in the quarter (an “expense” that wasn’t reported just a few years ago). Google had 13,786 full-time employees as of June 30, 2007 (up 1,548 in the quarter) – so that is over $17,500 per full time employee. If anyone at Google wants to talk I am open to considering an employment offer.

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