The Weekly: Edition #51 - June 26th, 2020
Culture of Ownership
Here at Permanent Equity, we want to be long-term owners. We stress the importance of thinking, strategizing, and acting in the long-term best interests of our family of companies. With that in mind, we would like to highlight an article this week that illustrates how a culture of long-term ownership lends itself to flexible, adaptable strategic approaches.
In J. Peter Scoblic's Harvard Business Review piece on formulating strategy in the face of uncertainty, he makes the case for generating multiple scenarios for how the future may play out, and planning organizational strategy accordingly. This takes creativity, imagination, and the ability for executives to think expansively about what the future may hold. This assumes, however, that an organization has the ability to pursue different strategies in different future scenarios with maximum flexibility.
If the pandemic has revealed anything, it has laid bare the inability of many companies to respond flexibly in an economic downturn of this magnitude. Flexibility is required when attempting to adapt company strategy to a new reality. Those with the flexibility and will to adapt will flourish in the recovery.
To adapt, you must first have the ability to adapt, which comes through a long-term owner-oriented management approach. This almost certainly means low leverage, deep trust in the organization's team members, strong relationships among all partners, and aligned incentives across the board. Of course as a collection of messy people, no organization is perfect and there will always be friction. But the ideals should remain front and center.
While our portfolio companies haven't been immune from the recent turmoil, we are able to scenario plan with maximum flexibility due to our low amount of leverage and long-term outlook. We’re grateful that we’re allowed to think long-term while other organizations are forced by the current circumstances to think short term and focus on survival. Optionality, if you can plan for it, is a beautiful thing.
The invisible moat (Chris Mayer)
+ The culture of a company's ownership can be a moat that is nearly impossible to replicate, because it is fundamentally unique: "The Congdon family has continuously run the company since ODFL’s founding in 1934, retaining Board and management presence and a 13% stake in ODFL shares [John Congdon (Chairman; 4.3%); Earl Congdon (Executive Chairman; 2.7%), David Congdon (CEO; 5.8%)]... Two salesmen I spoke with a few years back had their entire 401(k)’s in Old Dominion stock and conveyed that Old Dominion stock is widely held among rank-and-file employees. ODFL shares comprise over 20% of employees’ 401(k) assets. A significant portion of service center managers’ quarterly bonuses are directly tied to profitability and service levels. Old Dominion’s employee turnover, at 10%, is the lowest I’ve come across in the industry and the labor force, unlike those of most LTL peers, is union free."
Emerging from the crisis (Harvard Business Review)
+ "The most recognizable tool of strategic foresight is scenario planning. It involves several stages: identifying forces that will shape future market and operating conditions; exploring how those drivers may interact; imagining a variety of plausible futures; revising mental models of the present on the basis of those futures; and then using those new models to devise strategies that prepare organizations for whatever the future actually brings."
How to build an enduring, multi-billion dollar company (Sarah Tavel)
+ While this piece may apply directly to startups, there is one key principle that applies to all businesses: Your business's advantage comes from saving your customers time or money, or providing higher quality for similar price.
How the Walmart-Shopify alliance helps both companies win against Amazon (Modern Retail)
+ "The rationale behind the deal was to put both leverage both companies’ expertise. Millions of online merchants are already on Shopify, and this partnership allows them to list their items on Walmart’s online marketplace without using new external tools. Jeff Clementz, vp of Walmart Marketplace, wrote in a blog post that the integration is aimed at :third-party sellers who are interested in growing their business through new, trusted channels."
Pepsi's $32B typo caused deadly riots (Sean Kernan)
+ "The number “349” was the $40,000 winning number. Pepsi had explicitly told its vendor factories not to print this number at all. The two bottles with that number would be specially manufactured and sent to the Philippines by Pepsi themselves. So here is Pepsi, churning along each month, not knowing they accidentally sent $32 billion worth of winning caps to the Philippines. Meanwhile, everyone in the Philippines is going bananas for this promotion, buying up all the soda bottles. This disruptive campaign increased Pepsi’s market share from 4% to 24.9% in just two months."
The hierarchy of marketplaces: part I, part II, part III (Sarah Tavel)
+ Sarah Tavel of Benchmark has written an in depth 3-part synopsis on what it takes to strategically and successfully grow a marketplace business. While this is geared directly towards technology startups, the series contains valuable strategic insights for all business owners as well.
Are employees more productive in a pandemic? (New York Times)
+ "Some individuals have had a harder time than others working from home, but many companies say productivity has remained at pre-pandemic levels, or even gone up. Without long commutes, small talk with colleagues and leisurely coffees in the break room, many workers — especially those who don’t have to worry about child care — are getting more done. Companies, too, are discovering that processes and procedures they previously took for granted — from lengthy meetings to regular status updates — are less essential than once imagined."
Why sports stadiums are suddenly full of cardboard fans (The Hustle)
+ "So, Müller contacted a local printer and a team to build a portal where fans could upload photos of themselves. For a sum of €19 ($21 USD), he’d print out each photo on a cardboard cutout and install it in the stadium, with the permission of club owners. Originally, he anticipated between 500 and 2k orders. So far, 21k+ people have purchased a cutout. All the proceeds go back to charities associated with the team, including a portion to fans impacted by the pandemic. Now, Müller has received inquiries from sports teams in “at least 15 countries,” including Sweden, Colombia, China, Russia, Serbia, and Austria, about setting up their own cardboard fan project. He’s even decided to apply for a Guinness World Record."
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