Episode 16 | Part Two: When More is Not Better

Gregory Shepard, an entrepreneur who's built and sold 12 businesses, a recipient of 4 private equity awards, TEDx speaker, and Forbes author. This is The Boss Podcast with Gregory Shepard.

I'm so happy to welcome you back to the second part of my discussion with Roger Martin, the author of When More Is Not Better. If you're liking what you hear, let us know what you think of the podcast. Just drop us a review on Apple, Spotify, or wherever you listen to a podcast. Roger, in part one, we talked about the dangerous decline that created an unprecedented state of economic disparity and why it would take middle-class families three generations to recover from this decline. So who's the bad guy here? If your book was turned into a Marvel superhero movie, you know who's the supervillain? Politicians, Wall Street, social media. I mean, what do you what do you think?

You know, I I actually think that that there isn't one. I think this is an accident. The most villainous people are the gamers, the ones who are out there exploiting the system that's been put in place completely for their own good without any concern about the resilience of the economy as a whole. So the people I like least in the modern economy, full stop, is activist hedge funds. I did just think they're the world's hyenas and they're sort of hyenas like in The Lion King, right? They leave devastation in their wake. But they didn't cause the current situation. It was efficiency-obsessed politicians.

So they're more the symptom.

Yeah. Yeah. So when we said we'll allow pension funds to lend stock to make a little bit of extra money, and they'll take that stock and lend it to short-selling hedge funds that jerk around stock prices and make companies more vulnerable, we allowed that. We enabled that. And just a bunch of hedge funds headed by completely bloody-minded people who have no interest whatsoever in the greater good said, hey, I can make billions doing this. And yes, I know I jerk around companies.

Yeah.

And yes, I know I'm ending up exploiting pensioners, but yeah, that I'm obeying the law and I'm not—

I hear that all the time.

Yeah, I hear that all the time. Hey, arrest me. Arrest me. Yeah.

Yeah. I mean, Trump said it all the time. He's like, you know, it's the law. I can take advantage of the law. It's there. So it's legal for me to screw everybody over. It makes you stand back and go, hold on a second here. So you're probably like me, right? You love democracy and capitalism, right?

But yes, are they Mutually exclusive? No, not at all. We showed for 200 years that you can make it work. Then we just pushed it too far. And I think we just got to pull back a little bit from the brink. I think there's 2 giant-sized risks to the US economy. One is we do genuinely get genuine socialism. And I don't mean Oh, there'll be sort of more redistributive taxation. Genuine socialism means government owning large swaths of the means of production. And I think we've got a shot of that. And the other big risk is that it gets demonstrated that because we do such a bad job on democratic capitalism, that another form of capitalism is shown to produce absolutely superior performance, and that's totalitarian capitalism, i.e., China, which is becoming ever more capitalist, but it is totalitarian. And so whereas we had a war of superpowers after World War II, it was America versus the USSR. It was democracy versus communism, and America triumphed. And I had lots of confidence America would. I just thought USSR was a sham, and it was turned, you know, turned out to be very obviously a sham. But a much, much more dangerous rival is China, because there are some things about totalitarianism that are, you know, that just make things easier to do.

Yeah.

But until such time as vast numbers of Americans are willing to give up their passport Not move to China and stay American. I mean, give up their passport and become Chinese. I'm going to say that the downsides to totalitarianism are so great that Americans don't want to contemplate that. But if we let them win and become the strongest economy, and we are messing around with socialism, that'll be bad because the dominant economy in the world will be China.

Yeah, I think of like social services, right? The idea of people that don't like health insurance. And I'm thinking, well, we have schools, police departments, we have people repairing the roads. There are social services and then there is socialism.

Yeah.

And I think that those 2 things are different. And then I also think about, you know, this concept of, you know, these things closing and the money just keeps going up, the money keeps going up. And then the people that are making the money are influencing the vote, which then propels this situation even worse, right? Yeah, it's not surprising.

It's not stable. Yeah, it's not stable. It's sort of a downward spiral.

Yeah, yeah, it's definitely not sustainable, right? You, you can't just keep taking money away from the majority of the population. At one point, people are going to get really upset and say, okay, I've had enough. Yeah, I think we've seen some of this activity there. It's just, it's just focused wrong, you know? But you can see that people are like, oh, I've had it, I'm working my ass off here and I don't have any money. What's going on?

And it may be an apocryphal story, but I think the reaction to a greater and greater extent is blow it up, right? So it's maybe an apocryphal story, but supposedly the number one search term in the UK on Google the morning after the Brexit vote was, what is the EU? So were Brits making this very reasoned, oh, there is something better kind of deal we have struck with the EU and it can be superior No, it was, I don't like how things are working and we're gonna blow it up. I honestly think that there was a decent part of the Trump 2016 vote was a blow it up vote.

That's what I think too. People are just like, throw a hand grenade in there and let's see what happens.

Because apparently, like, as I understand, there were kind of lots of, you know, people going out and surveying Trump voters after the election saying, Did you really think he was going to do X? You know, bring back coal jobs or bring back you know da da da da da. Did you really think he was going to do that? And the and the answers were no, no, no, no. We just wanted to blow it up, or we wanted to drain the swamp. So so and I'm not saying anything certainly bipartisan. Yeah, I'm not I'm not saying anything that's pro Republican or Democrat on this topic. But but When we have people resorting to decisions such as let's just blow it up without a without a clear contemplation of their plan for after the blowup, you've got a problem.

Or even what their outcome is, right? Just blow it up.

No outcome.

No no like reckoning. You know.

Yeah, because because I mean you you you could say that that's what Germans said in 1936, right? You can say that's what happened in in Russia in 1917. It's like. We don't like what's going on, so let's just blow it up. And then, and then you end up with something that you say, holy smokes, did we really, you know, want to go to war with the world? You know, you know, you know, kill 6 million innocent people, have half of our young men die on the battlefield, and then suffer ignominious defeat, right? You know, I think a bunch of Germans would have said, Like we didn't like what they subjected us to after World War I. We had hyperinflation. It was miserable and everything. But no, we didn't want to, quote, blow it up.

Yeah.

And so I just— I don't want us regretting getting to the point of blowing it up. I want to see it kind of slowly, slowly walked back. Walk back from the cliff. And I think it's doable, right? My book is optimistic. I am optimistic. It is doable. We just got to do it, right? I mean, there is time.

So to that point, right? I mean, you're doing something, right? You're educating us. What can I do? These entrepreneurs are the future. In the '90s of the percentage of jobs happen from these entrepreneurs, right? The majority of the jobs. So if you— I think it's like 94% or something like that. And then you look at these jobs that come from the entrepreneurs working with other entrepreneurs and so on. So we're talking to a group of people that have the ability to impact, but I think they ask the same question that I ask all the time, which is, what can I do? Can I play a role? What can I do now besides making sure that I'm voting with my money and I'm paying attention to what— what can I do now? How can they get started and how can their company help them help us?

Sure. Well, one of the things I would say to any entrepreneur is Try to figure out how you can get the most value out of every employee, not how can I make sure I can get that employee for the lowest cost possible. So I like companies like Costco. Costco competes in a super, super competitive, you know, club store. You got to have sharp pricing, and they pay their workers their lowest paid workers in excess of $20 an hour in an industry that's full of people making minimum wage, whatever minimum wage happens to be. And some retailers get lauded for saying $15 an hour, raising everybody to $15 an hour. Well, that's still only 70% of the starting wage at Costco. How can Costco be so successful? They're way more— they're one of the most successful, if not depending on your measure, the most successful retailer now in America. Sales per square foot, profit per employee, blah, blah, blah, all of those measures. Well, it's by taking a view of the employee that says, we will figure out how to make them so valuable that we will be delighted to pay them 20-plus bucks an hour, as opposed to saying, my job is to make sure that I keep my labor costs as low as possible. It turns out when we try to turn people into robots, they make really crummy robots. When we challenge and enable people to be as human as they can be, and humans are creative, they're resourceful, they're social, they will be way more valuable. And we've gotten into a mode of, of saying labor is to be minimized. You know, get rid of excess labor, get rid of excess labor hours, you know, kind of bid down wages. And that's having a damaging effect on the economy. And it's not— I'm not asking them for charity. Like, you know, Costco is not a charity case. Costco is a massively, massively successful company. But they have said Our massive success is going to be built on the idea of getting the most from our employees and operating a system again, not thinking narrowly. What's our labor labor cost per hour? But it's hmm. How is it that you get customers to come into your store in droves and buy lots of stuff and then keep coming back? What role do employees have in that? Oh. Having them be resourceful, helpful, enough of them to make sure you always help every customer who's in the store. All of that stuff ends up with super high revenues, which pays for those labor costs easily. Absolutely easily.

Right. So the appreciation and optimization of these people and the outcome of that being Extra profit, that extra profit then gets reinvested into the people, which then propels the process.

Yeah, absolutely. And again, and it gets given to shareholders too, right? There's so much sloshing, there's so much profit sloshing around that that's what you want. And so that's what I say to all these entrepreneurs is, yes, I want you to make money and be kind of very, very successful. The way to make that money is to get the most out of people, not set up so that you can get the least out of them.

So is this what you mean by rejecting reductionism?

Yeah.

Yeah.

You think more holistically rather than saying, my measure is going to be labor costs per labor hour. And then you'll try and get the lowest priced employees as possible. If instead you say, well, actually I would like labor costs as a percentage of revenue to be low, that's okay because if your revenue is super high, so if you're an Apple Store and your sales per square foot is roughly on average 10 times the sales per square foot of any other retailer in the mall in question, It's 10x, right? What do you think your labor costs as a percentage of revenues are?

Infinitesimal.

Even though you pay them really, really well. That is taking a system-wide view rather than this reductionist view. It's the same as Southwest Airlines, right? Greatest airline in America, Southwest Airlines. Everybody thinks they're the low-cost carrier because they're non-union and pay low wages. It's just false and false, right? They're as unionized as a percentage of employees as American, Delta, United. That's just false. People assume it must be true, but it's actually false. And then if you ask what are their labor rates, if you look at their union contracts with the others, they're at the highest. And so you say, how the hell does that work? Well, the answer is we'll be really clever and And how we run the overarching system, what we'll end up with—we're going to use the same one kind of plane. We're not going to have interline baggage checking. We're not going to have advanced seat selection. Da da da da. A whole bunch of things. What we end up having is way fewer labor hours per passenger seat mile. Ah, interesting. That's the systematic metric, not a narrow metric. And so you have high employee costs because what they negotiate for in the labor. union agreements is we need flexibility in what you do. We can't have light bulb screwing in kind of laborers and we got wheelchair pushing laborers. You're all Southwest people and you'll do a variety of things. And by the way, you'll be happier doing a variety of things than just one thing all day, all day long. So it's good for you. So we'll pay you a lot, but we need flexibility so that—

Cross-functional. Sort of like cross-functional. Yeah.

Yeah.

And so, it's what you mean by embrace the reality that it is a complex adaptive system of highly interdependent human processes. And by over-optimizing this, you risk part of it alienating the people who are most engaged. And you mentioned Four Seasons Hotels and Resorts working on the principle That they should treat their employees as it wants their employees to treat their guests. And it sounds like everything that you're saying lines up with all of that.

Absolutely, right? Again, that is such a systemic view. This is connected to this, which is connected to this. And that's what I would say is the success model for entrepreneurs. Entrepreneurs are going to be more successful to the extent that that's what That's what they say. I mean, my father, you know, was a struggling entrepreneur when I was growing up and ended up being a very, very successful one. Although, you know, I grew up with— you know, I was 2 when he started the business. And I always asked him all sorts of questions. And he would say— I'd say— he'd say, we never sell off the price list, Roger. When the salesman goes to talk to the farmer, He hands the weekly price list to the farmer, and we will never sell off that price list for any reason ever in history. And the company's been around for 60-plus years now and has never once done that. There are volume breaks, but if you order 1 ton, this is the price. If you order 10 tons, this is your price, but it's all on the price list. And I was saying, Dad, like, what if somebody, your competitor, they get your price list and they just choose— they want to get a particular farmer, they choose to undercut your price on that farmer, you lose that business.

Mm-hmm.

And my dad said, well, Roger, you know, you shouldn't try to win back that business, but if you know your costs are as good as your competitors, and we have the lowest cost in the industry for these reasons, what we need to do is do our homework to figure out who they're charging too much in order to fund charging this guy too little, and we'll go take that customer, right? And I say— and then I said, okay, okay, but why do you have to be so doctrinaire about it, Dad? And he said, well, you know, here's how I think about it. If they know they can negotiate price, 90% of the sales call is going to be about negotiating price. But we believe we've got the best service and the best feed quality, the best nutrition, The best kind of veterinary support for the animals that they're feeding. And so I want to have the salesperson spend 95% of the sales call talking about all those things. And if the price list is inviolate, the farmers will figure out it ain't worth talking about prices. You either— you're either going to like all the rest of it and say, yep, sell me that at that price or not. Those are all system dynamic things. The price list and our treatment of the price list determines what will be the nature of the conversation. And having a price list that's inviolate, you know, how you defend it is to get their high-priced customers away from them who they are using to subsidize the low price. Those are all system dynamic— views of business, not kind of a simple reductionist view. And the simple reductionist view would be, hey, if I can get an extra sale by giving a farmer a little bit off, you know, this week off the price list, then wow, my sales this week will go up. Yeah, but what will be all the other ramifications? You'll now spend all your time talking about price and not talking about quality and service.

I get it. Okay, I have to say this. So you were named The world's number one management thinker in ranking of the most influential global business thinkers. And so I have to say that because I think people need to pay attention to what you're saying and it's so valuable. But I actually have a question also. So what does it mean to be a management thinker and how can I get better at it? And the entrepreneurs and investors that are listening.

What I think brought me to their attention as that, shall we say, is that I looked at problems that managers would feel and thought about them, studied them, and came up with better ways for managers to think about whatever was the subject of the problem so that they came up with better answers. So what I'd say to you is rather than going to one extreme, which is, let's say you give advice to entrepreneurs, rather than each entrepreneur you say, okay, given your situation, here's what I think you should do. Oh, this entrepreneur, here's what I think you should do. Here's what I think you should do. Is to always pay attention to what patterns am I seeing across all those entrepreneurs that I talk to, and what lessons could I draw from that That I could say, rather than having to give advice to each one of them individually, to say, you know, actually there are some ways of thinking, all of you entrepreneurs, that I think would make this set of problems go away or be less problematic, etc. So it's stepping back from your experiences and abstracting from them the broad lessons. And that just takes effort. Like, in my view, I mean, I guess I have that accolade because I spend a lot of time trying to figure out why the things we're seeing, we are seeing. Why? And being able to come up with helpful ways of taking that understanding to make better decisions.

In closing, and this is the final question, in 2016, you bet a friend 10 grand that Donald Trump would win the election. And, you know, I'm old enough to remember that he was quite a long shot to win. And I only bring this up because I'm wondering if it means something that somebody like Donald Trump and his track record of— I mean, he's on every documentary for a scam artist. and a self-proclaimed billionaire was elected president in a country where 30 million Americans are going hungry every year is a sign. Or does this just go back to the idea that people are just sitting there going, just, you know, not even thinking about the future or what the outcome is of this, just saying, let's just throw somebody totally random in there, blow up the whole system. Like you said earlier, it just— it occurs to me, right, that maybe it says something that people are like, look, let's put a really, really wealthy person in there, egotistical person, and everybody is just standing by and watching this happen instead of voting for somebody who had earned their way up, which is sort of what I think America is, right? As people come here and, you know, they had the opportunity to create what they want like I did from nothing. And then electing somebody that is the, you know, inherited enough wealth that they can make mistakes their whole life and still have enough money while all these other people are just in poverty. Is that a message? I mean, what do you think about that?

Yeah, I mean, I think there's a lot of blow it up in the message, to be sure. I mean, the reason I made a bet is just— and I made a bet with— it was a good friend of mine. Actually, the bet was with the guy who wrote the foreword for my book, Jonathan Haidt. And he was just too Cocksure about something. I mean, his view was that Hillary Clinton was going to win for sure. I just couldn't help myself and just said, hey, you know, you want to put your money where your mouth is, let's bet $10,000 on that. And since Donald Trump was down by double digits at the time, I, you know, he was like, well, it's like taking money from a baby, but I will do it. I was just using kind of some of my general rules I have for competition, right? And that is when you stop taking your competition seriously, which I think the Democrats did not take Donald Trump seriously. It was like, we're gonna win this because, you know, because of all the things that you just said. Oh, you know, we're gonna win this. That's when you lose. That's what I saw happening. I saw the— there's a blow-it-up thing going on there. Hillary Clinton is the opposite of blowing it up. It's, you know, the most sort of, you know, stable choice possible, and they're not taking this seriously. And I also thought, I mean, if you want to get into the competitive strategy of it, that Trump had a very, very clever, if you will, selling line, which is basically, we've gotten into the situation we've gotten into now in America on the basis of politically correct politicians running the place.

Mm-hmm.

I'm a politically incorrect politician, and so that's what you need. And I was a politically incorrect business person, and look how successful I was. That was his pitch. I'm not saying whether it's true or not. Look how successful I was. And what the media did that was all supporting Hillary Clinton was keep on reinforcing how politically incorrect that Donald Trump was. And so it just reinforced his position of being the politically incorrect So it was for all those reasons that I bet Jonathan. I said, you know, he's going to win. And he did. And it didn't surprise me at all. And I do think that the only reason in my mind that the Democrats didn't suffer that fate 2 times in a row is they took him deadly seriously in 2020. They actually fought a deadly serious campaign against him.

Yeah. I mean, most of us thought it was a joke. At the beginning, you're like, there's no way this guy's— this is crazy. But yeah, I mean, it was just a certain eye-opener.

Just never, ever take your competitor for granted. Never.

Oh, that is a lesson. That is a lesson that you can definitely take to the bank if you're an entrepreneur listening is that— You never know. I mean, you think about it too, you know, MySpace was taken over by Facebook and Apple eventually overcame Microsoft. And this Tesla is just smoking everybody. And it's just, I mean, you really have to step back and say maybe the first mover advantage and ignoring your competitors is a bad idea, you know, especially considering they made the wheel and then you just kind of came up and made it better.

I always say in strategy, right, you kind of want to be Switzerland, where as long as you guard a few mountain passes, you can keep everybody out. But in many of these cases, Switzerland, rather than guarding the passes, puts up giant, giant neon signs pointing to, this is how you get in. This is, come here. This is how you get in. And then after the invading Mongol hordes are inside the mountains, you start to say, oh dear, oh dear, what's going on here? Well, you put up neon signs saying, come get me.

You say it so well. This has been a lot of fun. I mean, here's having this conversation with one of the most influential global business thinkers, and it's just a real delight. I want to thank you so much. For joining the podcast. I really appreciate it. Thank you, Roger.

You're most welcome. I thank you for taking the time with me, Greg.

That was pretty awesome. Roger's book, When More Is Not Better: Overcoming America's Obsession with Economic Efficiency, is available wherever books are sold, and you can find out more about him. Just go to rogerlmartin.com. And if you'd like to connect to me, you can hit me up anytime on LinkedIn. That'll do it for another episode of the BOSS Podcast. Until next time, namaste, my friends.

Learn more about the BOSS Business Operating Support System at bossstartupsience.com, or you can reach Gregory Shepard at gregoryshepard.com. This has been a production of Forbes Books.