Isegoria

Captain Morgan was, of course, a pirate, but who was Johnnie Walker?

Clearly, the name has come a long way from John Walker, the Scottish grocer who never distilled a drop himself. At the beginning of the 18th century, the British wanted to tax Scottish whiskey. Instead of kowtowing to what they saw as an imposition on their native drink, local producers started operating like jungle cocaine labs — making small batches of the stuff in hiding and splitting before the red coats could find them. Quality suffered.

Enter John Walker, a grocery store owner from Kilmarnock. He was skilled at blending tea leaves from multiple suppliers; why not try mixing a variety of the coarse single-malts he carried in his store? He did, and the resulting blend — the first blended whiskey brand — proved popular.

If you look on a bottle of Baileys Irish Cream, you’ll find the signatures of R&A Bailey:

In 1970 the folks who sold Gilbey’s gin started working on a drink that reflected idealized Irishness. They came up with a rich blend of cream and whiskey, but it needed a name. The project team in Dublin enjoyed a post-work pint across at the Bailey Pub; the offices of the team in London overlooked the Bailey Hotel. Coincidence? No, convenience. The brain behind the brand, David Dand, looked at the company’s Gilbey’s gin bottle and saw the signatures of founding brothers W & A Gilbey. He changed the W to an R and the R & A Bailey signature was born.

So R&A Bailey were pure fiction.

How about Smirnoff?

The Smirnov brothers, Nicolai and Vladimir, made vodka for czars. Accordingly, the Bolsheviks took over their business, executed Nicolai and tortured Vlad. Vlad escaped, headed to France, changed the spelling of his name and started making vodka again. In 1933 an old friend visited from America with a plan to take Smirnoff to the States, but Americans didn’t bite. Enter John Martin, who bought the company in 1939, and exploited the emerging cocktail craze: Cases of his vodka were shipped with labels marked, “White Whiskey — No Smell, No Taste.”

From Behind The Booze Brands.

Martin Giles from The Economist interviews Ed Catmull, the president of Pixar:

[At Pixar] there is very high tolerance for eccentricity, very creative, and to the point where some are strange, but there are a small number of people who are socially dysfunctional [and] very creative. We get rid of them. If we don’t have a healthy group then it isn’t going to work. There is this illusion that this person is creative and has all this stuff, well the fact is there are literally thousands of ideas involved in putting something like this together. And the notion of ideas as this singular thing is a fundamental flaw. There are so many ideas that what you need is that group behaving creatively. And the person with the vision I think is unique, there are very few people who have that vision, but if they are not drawing the best out of people then they will fail.

We will support the leader for as long and as hard as we can, but the thing we can not overcome is if they have lost the crew. It’s when the crew says we are not following that person. We say we are director led, which implies they make all the final decisions, [but] what it means to us is the director has to lead, and the way we can tell when they are not leading is if people say, “We are not following.”

For a VC in NYC, Fred Wilson demonstrates a remarkably unsophisticated understanding of stock buybacks:

I don’t remember the exact details of the buyback at TheStreet.com but we started buying the stock and it kept going down. [...] Eventually the market came back and the stock rose. And the company started making money and its reported earnings per share were higher as a result.

But I don’t view that stock buyback as successful. It didn’t fundamentally change the company in any way. We just gave back a lot of cash to the investors.

Um, Fred, that’s the explicit goal of a stock buyback. If the firm can use the cash productively — on positive-NPV projects — then it keeps the cash to invest in itself. If it can’t, it returns the cash to its shareholders — via a dividend or a share buyback.

The dividend indiscriminately gives all shareholders some cash, while the stock buyback gives shareholders the choice of selling their shares for cash or holding their shares, which should appreciate in value, as the bought-back shares are retired.

Either way, it’s not the kind of thing a growth-oriented firm should be doing — which Fred didn’t realize at the time:

With our stock buyback we were signaling to the market that we had no good ideas about how to spend that cash. We were signaling that we didn’t see much of a future in our business. And smart investors bet against those kinds of companies, managements, and boards.

Smart investors realize that a stock buyback signals a lack of growth opportunities, which is a terrible portent for a tech startup’s future — but just fine for a mature cash cow’s.

A sad truth about most traditional b2b marketing, from Seth Godin:

“People who don’t care, selling products to people who care less.”

Tony Hsieh explains why he sold Zappos to Amazon — the second time they came calling:

As before, our plan was to stay independent and eventually go public.

But our board of directors had other ideas. Although I’d financed much of Zappos myself during its early days, we’d eventually raised tens of millions of dollars from outside investors, including $48 million from Sequoia Capital, a Silicon Valley venture capital firm. As with all VCs, Sequoia expected a substantial return on its investment — most likely through an IPO. It might have been happy to wait a few more years if the economy had been thriving, but the recession and the credit crisis had put Zappos — and our investors — in a very precarious position.

At the time, Zappos relied on a revolving line of credit of $100 million to buy inventory. But our lending agreements required us to hit projected revenue and profitability targets each month. If we missed our numbers even by a small amount, the banks had the right to walk away from the loans, creating a possible cash-flow crisis that might theoretically bankrupt us. In early 2009, there weren’t a lot of banks eager to give out $100 million to a business in our situation.

That wasn’t our only potential cash-flow problem. Our line of credit was “asset backed,” meaning that we could borrow between 50 percent and 60 percent of the value of our inventory. But the value of our inventory wasn’t based on what we’d paid. It was based on the amount of money we could reasonably collect if the company were liquidated. As the economy deteriorated, the appraised value of our inventory began to fall, which meant that even if we hit our numbers, we might eventually find ourselves without enough cash to buy inventory.

These issues had nothing to do with the underlying performance of our business, but they increased tensions on our board of directors. Some board members had always viewed our company culture as a pet project — “Tony’s social experiments,” they called it. I disagreed. I believe that getting the culture right is the most important thing a company can do. But the board took the conventional view — namely, that a business should focus on profitability first and then use the profits to do nice things for its employees. The board’s attitude was that my “social experiments” might make for good PR but that they didn’t move the overall business forward. The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes.

On some level, I was sympathetic to the board’s position. The truth was that if we pulled back on the culture stuff, the immediate effect on our financials would probably have been positive. It would have reduced our expenses in the short term, and I don’t think our sales would have suffered much at first. But I was pretty sure that in the long term, it would have ruined everything we had created.

By early 2009, we were at a stalemate. Because of a complicated legal structure, I effectively controlled the majority of the common shares, so that the board couldn’t force a sale of the company. But on the five-person board, only two of us — Alfred Lin, our CFO and COO, and myself — were completely committed to Zappos’s culture. This made it likely that if the economy didn’t improve, the board would fire me and hire a new CEO who was concerned only with maximizing profits. The threat was never made overtly, but I could tell that was the direction things were going.

It was a stressful time for me and Alfred. But we’d gotten through much tougher times before, and this seemed like just another challenge we needed to figure out. We began brainstorming ways that we could get out from under the board. We certainly didn’t want to sell the company and move on to something else. To us, Zappos wasn’t just a job — it was a calling. So we came up with a plan: We would buy out our board of directors.

We figured to do so would cost about $200 million. As we were talking to potential investors, Amazon approached Alfred about buying Zappos outright. Although that still didn’t seem like the best option to me, Alfred sensed that Amazon would be more open than last time to the idea of letting Zappos continue to operate as an independent entity. And we felt that the price Amazon was talking about was too large for us to ignore without potentially violating our fiduciary duty to our shareholders.

In April, I flew to Seattle for an hourlong meeting with Jeff Bezos. I gave him my standard presentation on Zappos, which is mostly about our culture. Toward the end of the presentation, I started talking about the science of happiness — and how we try to use it to serve our customers and employees better.

Out of nowhere, Jeff said, “Did you know that people are very bad at predicting what will make them happy?” Those were the exact words on my next slide. I put it up and said, “Yes, but apparently you are very good at predicting PowerPoint slides.” After that moment, things got comfortable. It seemed clear that Amazon had come to appreciate our company culture as well as our strong sales.

Still, I had plenty of concerns. Jeff’s approach to business had been very different from my own. One of the ways that Amazon tries to deliver a great customer experience is by offering low prices, whereas at Zappos we don’t try to compete on price. If Amazon gets a lot of customer service calls, it will try to figure out why — maybe there’s something confusing about the product description — and then it will try to fix the problem so that it can reduce the number of phone calls, which keeps prices low. But at Zappos, we want people to call us. We believe that forming personal, emotional connections with our customers is the best way to provide great service.

But as I talked to Jeff, I realized that there were similarities between our companies, too. Amazon wants to do what is best for its customers — even, it seemed to me, at the expense of short-term financial performance. Zappos has the same goal. We just have a different philosophy about how to do it.

I left Seattle pretty sure that Amazon would be a better partner for Zappos than our current board of directors or any other outside investor. Our board wanted an immediate exit; we wanted to build an enduring company that would spread happiness. With Amazon, it seemed that Zappos could continue to build its culture, brand, and business. We would be free to be ourselves.

Scott Adams (Dilbert) recommends betting on the bad guys:

Apparently BP has its own navy, a small air force, and enough money to build floating cities on the sea, most of which are still upright. If there’s oil on the moon, BP will be the first to send a hose into space and suck on the moon until it’s the size of a grapefruit. As an investor, that’s the side I want to be on, with BP, not the loser moon.

Perhaps you recommend the obvious alternative, Investing in Well-Managed Companies?

When companies make money, we assume they are well-managed. That perception is reinforced by the CEOs of those companies who are happy to tell you all the clever things they did to make it happen. The problem with relying on this source of information is that CEOs are highly skilled in a special form of lying called leadership. Leadership involves convincing employees and investors that the CEO has something called a vision, a type of optimistic hallucination that can come true only in an environment in which the CEO is massively overcompensated and the employees have learned to be less selfish.

Apparently most CIOs are not held responsible for energy costs, even though IT departments use colossal amounts of electricity:

Most CIOs don’t see utility bills, but eBay lumps its power bills in with its IT budget, and as a result the company has been very aggressive in cutting power consumption. Nelson said that eBay’s newest data center, a $287 million facility in Salt Lake City, was “paid for by the cost savings we’ve achieved [elsewhere] within the last two years.”

In essence, eBay’s IT department is “self-funding” new spending by being more efficient, he said.

Nelson said the IT department changed its metric for vetting technology investments from transactions per second to transactions per watt. That switch led to an increase in virtualization and a decision to move non-mission-critical applications out of Tier 4 data centers, which cost two to four times more to operate than standard data centers.

This reminded David Foster of something Peter Drucker observed at Ford:

Describing the dysfunctional management culture of Ford Motor Company during the later years of Henry Ford, Peter Drucker observed that a Ford foundry manager was not allowed to know the cost per ton of the coal being used in his furnaces. This was a function of the secretive and very controlling personality that Mr Ford had developed by this time, aided and abetted by his thuggish sidekick, Harry Bennett.

The failure to assign costs properly isn’t limited to IT:

A couple of years ago, I was at a Borders store in south Florida. Although the day was very hot, the front door was propped open for a prolonged period of time, which didn’t make the task of the air conditioning system any easier. Somehow, I suspect that the general manager of the store wasn’t being charged for power in his budget.

Shannon Love boasts that he can beat Drucker’s story — and he’s right:

Back in the early 90s Apple was under completely different management than now. Apple sold extended warranties. The VP of service came to do a communications meeting with the people who managed the warranties. Thinking they were warning the VP of a costly flaw in the system, they brought to her attention that the company was issuing warranties on machines five years old and older which was obviously a bad idea has they had entered the end of the hardware’s statistical operational lifetime. (This would be like issuing a full new car warranty on 10+ year old car with high milage.)

The VP just smiled and with no apparent consciousness of how delusional she sounded, said not to worry about it because all warranties were pure profit! After the obvious WTF response from the audience she delusionally explained that ALL the revenue, not just profits, from warranties booked to the service division whereas all the cost of warranties booked against the manufacturing division. Therefore, the all warranties were pure profit for service.
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It was like a ship in which each water tight compartment was a different division and as the ship took on water the crew in the on compartment lowered their own water level not by pumping water outside the ship but instead into other compartments.