Archives For Competitive Advantage

Last February I got to hear John Mackey give a speech about a better way of doing business. He’s a founder and co-CEO of Whole Foods, and he stopped in at a Raleigh Chamber of Commerce event to promote his book, Conscious Capitalism: Liberating the Heroic Spirit of Business.

John Mackey, Whole Foods CEO Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey, Whole Foods CEO
Photo Source: Joe M500, Flickr (Creative Commons License)

The book’s premise flies in the face of Milton Friedman’s argument that the business of business is business. While Friedman makes the case that the only purpose of a business is to increase value for shareholders (i.e., maximize profits), John Mackey says its obligations are better understood as a balance among five groups of stakeholders:  stockholders, employees, customers, suppliers and the environment.

Mackey actually takes it one step further. He says companies that serve the interests of all the stakeholders have a competitive advantage. They create more value and are rewarded by the stock market.

After his speech I had the opportunity to ask Mackey a question. “If conscious capitalism is such a good thing,” I asked, “why aren’t more companies doing it?”

He responded by saying, in essence, that it just needed a vocabulary, someone to give it a voice, a demonstration to the world that it is a better way of doing business. “I’m giving all of you a secret formula for building a successful business,” he continued. “It will be copied as others see you succeed with it.”

Whole Foods is meant to be the living example of this better model.

Fast forward to this morning. I’m enjoying coffee with a friend at my local Whole Foods. It seems a good time to reflect on Mackey’s secret formula. Since last year the Whole Foods Market stock price has been cut almost in half, dropping from $65 per share to around $37. It’s been a rough ride. Continue Reading…

Last night Larry Page, Google’s CEO, posted this entry on his Google+ account, “Google Self-Driving Car Project,” with the video below.


“Just imagine,” begins the company’s description a future with self-driving cars,

You can take a trip downtown at lunchtime without a 20-minute buffer to find parking. Seniors can keep their freedom even if they can’t keep their car keys. And drunk and distracted driving? History.

This is bold. It’s exciting. And it’s just one of several projects Google is juggling that could actually change the world. The company calls these “moonshots” and runs them out of its Google X division, an R&D skunkworks charged with making such bold – though calculated – bets on the future.

But the story here is one part fanboy awe over Google’s investments in ground-breaking innovation and one part befuddlement over how  little other corporations are putting into long-term R&D bets. Continue Reading…

My September books brought so many amazing learning experiences, not to mention the discussions they generated with family, friends, colleagues and even one of the authors.

Financing Our Foodshed by Carol Peppe Hewitt

Let’s start with the winner of the prestigious Most Dog-Eared Book of the Month Award. Thank you Carol Peppe Hewitt for writing Financing Our Foodshed: Growing Local Food with Slow Money, a collection of 22 stories on North Carolina food entrepreneurs (farmers, bakers, restaurateurs and the like) to whom Slow Money NC has introduced local financiers eager to fund sustainable local eating ventures.

IMG_20130929_124805Mainstream investing has become overwhelmed by the opportunity cost heuristic, guided by the simplistic question, where can I make the most money as quickly as possible with the least risk? 

This is not entirely bad, and I’m not quick to cast moralistic aspersions on using capitalism in pursuit of profits. There’s a place for that, and there always will be. But it brings to mind the notion of hypertrophy, this glitch in evolution’s system by which nature allows (for example) a male ibix to grow horns so large, its neck cannot support the weight. Yet those large horns have become a proxy for virility, and the females are programmed to mate with him whose horns spread widest. And so this glitch propagates through the generations with the genes of big-horned ibix begetting even bigger-horned ibix until an entire species is handicapped with antlers with all appeal but no function. I can imagine the big cat mountain predator eager for this easy prey. Given enough generations of reproducing those big horns, the hypertrophy glitch will bring doom to that gene pool.

It’s not that big horns are bad, but there is such a thing as too big.

So it is with capitalism and opportunity cost. It’s not that it’s bad, but there can be too much.

In chasing the biggest-dollar, fastest-bang, lowest-risk return, we put all our resources into high-scale enterprise that promises crazy riches while we starve our local entrepreneurs of the capital they need to get off the ground or grow. Herein lies a hypertrophy risk in our investing system. We chase the promise of the next Facebook (that big-horned ibix) while ignoring the small-scale businesses that create happier, healthier, more sustainable local economies.

The weight of that imbalance threatens to topple us. Continue Reading…

Business Gone Good

July 10, 2013 — 2 Comments

A musing on my recent mental captivity to conscious capitalism.

The Conscious Capitalism Pebble

Somehow, someway I was introduced to John Mackey’s 2007 manifesto, “Conscious Capitalism: Creating a New Paradigm for Business.” (1) That essay led to a book promoting the the notion that business can be done better and an organization to convene the like-minded around those ideals. (2)

And I can’t get enough of it.

I read Mackey’s essay nearly a year ago. It’s been like a pebble in my shoe since. Its slight, nagging presence won’t let me forget it; won’t let me ignore it. Its themes have dominated my recent essays, hijacked my reading stack, and overwhelmed my thinking.

So, why? Why this fixation on doing business in a better, more conscious way? Continue Reading…

An essay in which I consider Whole Foods CEO John Mackey’s response to my question, “if Conscious Capitalism is such a good thing, why aren’t more companies doing it?”

John Mackey, Whole Foods CEO Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey, Whole Foods CEO
Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey Speech in Raleigh // Conscious Capitalism // Asking Why?

John Mackey stares at the running faucets in the men’s room just moments before his talk. He shakes his head incredulously, muttering to no one in particular, “That’s an awful lot of wasted water.”

The co-CEO of Whole Foods is a man of medium height and possesses a slight build. A tight haircut has tamed the unruly locks of curled hair I’ve seen in so many of his media headshots.  He’s in Raleigh this chilly February morning for a breakfast talk sponsored by our chamber of commerce. Mackey is promoting his new book Conscious Capitalism: Liberating the Heroic Spirit of Business.(1)

He looks around for an air dryer for his wet hands and finding none seems to ponder briefly whether to just slide them across his tan slacks. He opts for a single paper towel instead. Those who want to greet him this morning with a handshake will just have to endure his damp fingers.

Moments later Mackey is giving his spiel before an attentive crowd, a set of remarks unburdened by notes, spilling freely from a mind that has spent much time mulling over the subject. Then he opens the floor for questions. I sneak one in just at the end. It went something like this:

If Conscious Capitalism is such a good thing, why aren’t more companies doing it? Continue Reading…

Bill SpruillPhoto Credit: Bill Spruill

Bill Spruill
Photo Credit: Bill Spruill

When an investor believes he has an edge, he’s supposed to stay quiet. He’s supposed to focus his energy on exploiting his advantage, not on trying to teach others the methods behind his approach. That’s conventional wisdom anyway.

And yet here I find Bill Spruill, an angel investor who backs software startups (and a stranger to me just a few months ago) explaining his investing strategy in painstaking detail. It’s the day before Thanksgiving, and we’re sipping warm beverages at the Whole Foods café near my home in Raleigh. We’ve rendezvoused at local coffee houses since September, and at each meeting – despite knowing I’m both an investor looking for ideas and a writer likely to tell my readers all that I learn – he reveals a little more about what we’ve come to call the Spruill Theorem for Reasonable Angel Returns.

In a calm and thoughtful manner befitting a college professor, Bill presents case after case for me to consider. This morning he pushes a folded copy of the day’s Wall Street Journal across the table and points to an article about a high-flying social media venture attempting to raise a fresh round of funding. Its prospects are a bit dimmer than the last time it went looking for cash. “What’s going to happen to the early investors,” Bill asks me in his Socratic style of teaching-by-interrogation, “if this effort fails? What’s going to happen to other promising startups looking to get off the launch pad?”

Those two questions signal the reasons Bill wants to tell me and other prospective angel investors about his insights. What we think we know about the risks of these investments may be misguided. And sticking to conventional wisdom carries with it consequences not only for individuals but for the larger dynamic between investors with cash and entrepreneurs with their creative visions.

It’s bigger than Bill’s portfolio.  It’s bigger than any one startup. It’s an ecosystem issue. And Bill believes that debating the ideas of the Spruill Theorem will make for better informed angel investors and ultimately a healthier ecosystem of software startups in our Triangle community.

“Angel investors are heeding the wrong models,” he tells me. “We’re trying to copy the huge successes, thinking we’ll get the same outcomes. But these stories can be dangerous. These models rarely work for angels.”

He pauses for a moment before adding, “We need new models to follow.”

Continue Reading…

lucyThe Case for Conscious Capitalism

Next week Austin will play host to a group of executives that label themselves “conscious capitalists.” [See consciouscapitalism.org.] John Mackey, founder and CEO of Whole Foods, will provide the keynote address and suitably so. In 2007 he loaned his influential voice to this movement by penning the missive “Conscious Capitalism: Creating a New Paradigm for Business.”

It’s worth the read, and you can download it here. [pdf] The gist is this:

There is a longstanding prejudice that businesses exist for the enrichment of shareholders. While this is technically true, the notion has been interpreted to mean that corporate managers have the fiduciary responsibility to grab profits whenever they are available for the taking, all other constituencies be damned. It is the investor dominated viewpoint, often ignores the other stakeholders in a business, and it can be obscenely myopic. (See my related article, Whom Does Management Serve?)

It also creates, Mackey argues, a zero-sum game that pits investors against managers, employees, customers, vendors and all other stakeholders. By spending more on employee pay and benefits than absolutely necessary, for example, you’re taking earnings off the table that are the rightful property of investors. If employees win, investors lose.

The Conscious Capitalist movement argues for a different framework for understanding the game of business. Rather than a zero-sum dynamic, it suggests viewing it as a system of interconnected parts. By investing more in employee benefits, Mackey says, you get happier employees who better serve the customer…who then buys more products…which leads to higher profits…which can be shared with investors. Treat all stakeholders in a fair manner and the whole system is hoisted ever higher in a virtuous cycle. The sum of the parts, working in unison, become much more valuable than the individual components.

Continue Reading…

Tom Pirelli ESI Baby

I caught Tom Pirelli on his mobile phone one morning last week. He was near his house in Jupiter, Florida preparing his thoughts for an afternoon meeting about his latest venture, (something to do with using therapeutic lasers to manage chronic pain). He immediately strikes me as a man overflowing with energy, though he is not so young anymore.

I learn that he made a noble attempt at a leisurely retirement after selling his software company, Enterprise Systems, 15 years ago. But it would seem retirement did not fit his constitution. He has since started an ambitious foundation to provide better affordable housing options to impoverished communities in Mexico and Haiti. He has worked with USA Rugby, and took great pride in seeing his favorite sport included on the roster for the 2016 Olympics in Rio. And, of course, he has involved himself deeply in this new laser therapy business.

Tom is a success through and through with the sort of bona fides that might just turn a less humble man into a braggart. Yet despite his litany of accomplishments, this is the picture for which Tom is best remembered:

We’ll return to that later…

Continue Reading…

Exceptional Business Pic

I’m testing a theory here, the driving question of which is What are the cardinal traits of exceptional software and technology businesses?

The term “exceptional” is as qualitative as it gets. Perhaps we’ll give it more definition as we proceed, but for the time let’s be comfortable with former U.S. Supreme Court Justice Potter Stewart’s threshold test for obscenity: I know it when I see it.

I’m suggesting four criteria and using them as a framework for evaluating various businesses in different stages of development, as early as start-ups and as late as technology that has been retired from companies that have long since moved on. The application for what we learn will resonate most, I think, with young businesses either in their fledgling stages or otherwise still able to mold their cultures and their values.

My early thesis is that the exceptional software and technology companies share some combination of the following traits summarized below in very rough form:

Continue Reading…

The Little App That Caused So Much Trouble

I have this little app on my smartphone called Amazon Price Check. I can take it into Target, scan the bar code of any item I’m thinking of buying, and Amazon will check its catalog to let me know if it offers the same thing at a better price. If so, I make an instant decision whether to walk out of Target with purchase in hand or wait for Amazon to deliver it to my doorstep, exercising some patience in exchange for saving a little cash.

This is a ruthless test of how well stores are maintaining the protection of the convenience barrier; how well “have it now” is holding up against the customer decision to delay gratification and wait for delivery.

The real melee from this little app came last Christmas when Amazon went right for the stores’ jugular. Not only could you conduct the price check, but Amazon would subtract an additional five percent of the purchase price if you bought it from them on the spot. Vicious!

Continue Reading…

Amazon has stated over and again that it wants to be THE place where shoppers can find anything being offered on the internet. It wants to go as far down the long tail of selection/demand as it possibly can, offering products even in the deepest niches being purchased by the fewest customers.

The objective is clear: Amazon wants no excuses for shoppers to go to competitive sites to peruse potential purchases. And if Amazon can press its growth levers to the extreme – offering the best convenience, the widest selection, and the lowest prices – why would shoppers even bother looking somewhere else? For that matter, why would they even bother running a Google search when they can just go straight to Amazon and save an extra step?

In short, Amazon wants to be ubiquitous.

Having the widest selection possible is crucial to achieving ubiquity. Amazon can offer a wider selection than Walmart by virtue of escaping the tyranny of physical space. Well, mostly escaping that tyranny anyway. It can pack a wider selection into its 70 or so fulfillment centers than a traditional retailer could ever imagine stocking in its stores. But those warehouses – as big, efficient, and cheap to run as they may be – are still constrained by their four walls.

Continue Reading…

The Long Tail

Chris Anderson of Wired.com popularized this metaphor with a thought-provoking piece in 2004, The Long Tail. He followed it up in 2006 with a well-received business book of the same name. Both are worth reading.

(We introduced the idea in the last article, Walmart’s Selection and Long Tails.)

The key points are these:

1. Store-based retailers fall victim to what Chris calls the “tyranny of physical space.” They are limited by real estate location and a finite amount of shelf space. As he puts it:

 

An average record store [for the young readers, this breed went extinct about two months after Chris wrote his article] needs to sell at least two copies of a CD [likewise extinct] per year to make it worth carrying; that’s the rent for a half inch of shelf space…retailers will carry only content that can generate sufficient demand to earn its keep. But each can pull only from a limited local population – perhaps a 10-mile radius for a typical movie theater, less than that for a music and bookstore…

With the sales tax story, equating Amazon to Brer Rabbit begging the fox to spare him from the briar patch, we put a fork in our review of the convenience growth lever. We’re now onto Selection, that second of three growth levers in which Amazon – by virtue of its web-based business model – has a clear and distinct advantage over traditional retailers.

But as I’m prone to do, we’ll pick some more on Walmart (the embodiment of traditional retail success) en route to making the larger points about Amazon’s business.

Back to the Broad Middle 

So far we’ve approached discussions of the broad middle exclusively from the left-hand entry point. This is where the right combination of investments in the growth levers (price, selection, convenience) will earn a retailer access to that middle part of the market. This is where the vast majority of customers reside, and it’s where they balance their overarching desire for low prices with their preference for convenience and a wide selection of products from which to choose.

Retailers that press the right combination of those levers win the patronage of the broad middle, increase their sales, and grow their businesses.

But there’s more than one way into the broad middle. There’s also a right-hand entry point. I’m saving the bulk of that topic for explaining the ways Zappos and Quidsi posed a serious threat to Amazon, but we’ll go ahead and take a sneak peak here to setup the Selection discussion.

To close out our discussion of Amazon’s convenience infrastructure, we turn now to current events and consider how collecting sales tax might be the biggest boon to Amazon’s retail business, a body blow to the stores, and the end of the convenience barrier.

Of Inflection Points

Andy Grove’s excellent 1996 memoir, Only the Paranoid Survive, injected the term “strategic inflection point” into popular business parlance. The former leader of chip maker Intel recounts the crossroads in his company’s history where the decisions he made led to momentous, industry-altering outcomes.

For example, since its founding, Intel had made its name by packing more space onto smaller wafers of silicone in the memory chip business. It did very well in this market until Japanese companies killed them on price and quality in the early-1980’s. They were at an inflection point. Market circumstances had changed. The dynamics of the industry had changed, and Intel simply could not compete. The company was hemorrhaging money and needed a different strategy.

Groves led his teams to the difficult conclusion that they must get out of the memory chip business altogether.  They threw themselves into becoming the leader of microchip processing technology. As the history books tell us, these decisions forever changed the trajectory of Intel as a company as well as that of the entire computer industry.

Such inflection points are hard to identify in the real-time fog of battle. When looking backwards, however, the events stick out; the specific decisions define the future of the organizations involved.

But every once in a while the variables line up in such a way that the outcomes seem all but inevitable. We’re now at one of those times with the retail industry…an inflection point that’s sure to force a dramatic shift in market share balance from shopping centers to online stores.

Continue Reading…

MadMen MBA

Doug wanted to get me watching the AMC hit series Mad Men and so proposed a series of case studies on companies featured on the show. He had me at case study. Thus was born the Mad Men MBA, a collection of articles exploring the strengths and weaknesses of the businesses being pitched by the admen at fictional Sterling Cooper Draper Pryce.  We conduct our analysis based on a four-part framework, (“for really understanding companies”) outlined here. In the end, we try to make this a practical exercise, estimating a reasonable price for buying the business and deciding whether it’s a worthy investment today.

Our first case is H.J. Heinz, Inc. (HNZ), the undisputed champ in today’s ketchup market and a key account Don Draper and crew were trying desperately to retain in season five of the show (representing the early-1960’s).  In episode five, At the Codfish BallJack Heinz is preparing to take his lucrative Heinz Baked Beanz marketing budget to another ad agency. Draper’s young wife catches wind of the defection while powdering her nose with Mrs. Heinz at a dinner meeting, relays the tip to her husband, and sets up a dramatic ad-man pitch to keep Baked Beanz with Sterling Cooper Draper Pryce.

Today baked beans is a big business for Heinz in the UK market but has much less importance globally. The big brand is Heinz Ketchup, providing over $5 billion of its $11.6 billion in 2011 sales and with a global market share close to 60 percent.

Doug sets up the case study in a recent email:

Heinz’s big challenge was defining itself after pure domination in the baked beans market. They were friends to the military and the ease of packaging their product for wartime solidified their position. But they also had the vision to know they needed to branch out into new product territory, especially in times of peace. Ketchup became their big push and more than the product their packaging became signature. Pounding of the glass bottle to get it started and even when it pours out, it is all good. You can never use too much ketchup.

That was the 1960’s, let’s bring it back to the Heinz of today using our four-part framework for understanding businesses.

Continue Reading…