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Charlie Munger in Praise of Multidisciplinary Thinking

A multidisciplinary approach involves drawing appropriately from multiple disciplines to redefine problems outside of normal boundaries and reach solutions based on a new understanding of complex situations.

'Charlie Munger The Complete Investor' by Tren Griffin (ISBN 023117098X) From ‘Charlie Munger: The Complete Investor’ by Tren Griffin

No one can know everything, but you can work to understand the big important models in each discipline at a basic level so they can collectively add value in a decision-making process. Simply put, Munger believes that people who think very broadly and understand many different models from many different disciplines make better decisions and are therefore better investors.

Multidisciplinary thinking offers a schema or a philosophical template within which thinkers can find an intellectual connectedness to decompartmentalize their approach and face the new intellectual horizons with a broader perspective. Single disciplines are too narrow a perspective regarding many phenomena.

Human thought, as it has evolved in detached disciplines, and the physical systems within which we live exhibit a level of complexity across and within systems that makes it impossible to understand the important phenomena that are affecting humans today from the perspective of any single incomplete system of thought. Thus interconnected systems and high levels of complexity yield a situation in which multidisciplinary tactics to understanding and problem solving produce the real growth industry in the next generation of scholarly thought.

Disciplines develop their own internal ways of looking at the phenomena that interest them. Become broadly knowledgeable about any particular phenomenon as possible before constructing theories and asserting truth assertions. Problems arise from the lack of a viewpoint from which one can understand the relationship between various disciplines.

'Conceptual Foundations for Multidisciplinary Thinking' by Stephen Kline (ISBN 0804724091) In ‘Conceptual Foundations for Multidisciplinary Thinking’, Stanford’s Prof. Stephen Jay Kline expounds the necessity of multidisciplinary discourse:

Multidisciplinary discourse is more than just important. We can have a complete intellectual system, one that covers all the necessary territory, only if we add multidisciplinary discourse to the knowledge within the disciplines. This is true not only in principle but also for strong pragmatic reasons. This will assure the safety of our more global ideas.

Producing and applying knowledge no longer work within strict disciplinary boundaries. New dimensions of intricacy, scale, and uncertainty in technical problems put them beyond the reach of one-thought disciplines. Advances with the most impact are born at the frontiers of more than one engineering discipline.

Multidisciplinarity refers more to the internalization of knowledge. This happens when abstract associations are developed using an outlook in one discipline to transform a perspective in another or research techniques developed in one elaborate a theoretic framework in another.

To get the most out of their R&D workforce, many organizations seek persons who comprehend a range of science and engineering principles and procedures to guarantee that work will be advanced even if a specific expert were not always available.

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Posted in Hobbies and Pursuits Mental Models and Psychology

Customer Satisfaction Begins with Employee Engagement

The quickest ticket to customer satisfaction is through dependable, excellent service. As companies contend for competitive advantage, many find that refining service quality and customer satisfaction can be intangible. The first step to realizing both is to raise employee engagement.

'180 Ways To Build Employee Engagement' by Brian Gareau, Al Lucia (ISBN 193553792X) All organizations benefit from having an engaged workforce. But for those whose success pivots on delivering excellent customer service, a superior kind of employee engagement, customer-focused engagement, has an even tougher effect. Customer- focused engagement occurs when employee work groups are committed to (and passionate about) producing excellent service to their customers.

Employees won’t become engaged with service quality just because you demand them to. It takes time and effort to nurture an environment where engagement can set in and grow. With the right leadership, resources and information, you can shape the environment to engage employees and focus their efforts where it matters most—on customer satisfaction.

Correlation Between Employee Satisfaction and Customer Satisfaction

Evidence for Employee Engagement for Customer Satisfaction

Will an investment in employee engagement pay for itself through increased customer satisfaction?

We gauged satisfaction levels of 50 firms using the American Customer Satisfaction Index (ACSI). To measure customer-focused engagement, we probed employees to rate elements like, “We help customers beyond what is required,” and “The norm here is to help customers.”

'The Employee Engagement Mindset' by Timothy R. Clark (ISBN 0071788298) When we charted the employee survey results for each company against ASCI score for that company, we discovered that the higher the level of customer-focused engagement, the better the score on customer satisfaction. Actually, we see an absolute correlation between employee engagement and customer satisfaction. When you enhance customer-focused engagement, you will increase customer satisfaction.

Companies whose employees are highly engaged with customer service are rated the highest in customer satisfaction. Raising customer-focused employee engagement translates into dollars on the bottom line, possibly a lot of dollars. A mere one-point rise in your ASCI score can boost your ROI by an average of 11.4 percent!

What Gets Measured Gets Attention

Prior to you can increase engagement, you first must gage it. An precise measure of employee engagement requires a special survey—not the employee satisfaction survey. There is a distinction between employee satisfaction and engagement.

  • Satisfied employees feel enjoyable, satisfied, content, and comfortable. And they tend to have low absence, low turnover, and low substance abuse. But they may be neither engaged nor driven to expend extra effort in their work or for customers.
  • In contrast, engaged employees perform in ways that enhance the customer experience. They go the extra mile in the interest of service quality and customer satisfaction. When your customers receive superior service every day, it can have a spectacular impact on your financial health.

Engaged employees (focused on customers) feel fervent about providing excellent service, energized by helping customers, involved in their work, trusting of their manager. They feel safe to make decisions, take risks, or speak up with worries. They are committed to the goal of providing service excellence. They create relationships with customers, not just fill orders; anticipate customer needs; support coworkers so that they can provide service excellence; take initiative to ensure consistent service; and find answers to customer questions.

Creating Employee Engagement for Customer Satisfaction

Creating Employee Engagement for Customer Satisfaction

Engaging employees is not simply a matter of telling them what to do. The way to change someone’s work performance is to first change the way they feel about their jobs. Tailor your programs around six areas:

  1. Job design. When jobs are thought-provoking and allow employees to use all of their talents, they feel involved. Time passes quickly, and effort required to do the work is easy to give. Engagement is high when employees are working to achieve detailed difficult goals—goals they accept as judicious and attainable, but ones that also provide a “stretch.”
  2. Immediate managers. Managers play a big role in how employees feel about their jobs. Impartiality and trust shown to the employees by their managers will create a culture of engagement in the work group, ensuring a collective, organized effort in serving customers.
  3. Service message. Most of the service message employees receive comes from cues from their immediate manager as to what is important. Managers must recognize and strengthen service excellence, ensure that obstacles to excellence are removed, and set goals for service excellence. Without everything employees experience focuses their efforts on service quality and customer satisfaction, customer satisfaction likely won’t emerge.
  4. Resources. When employees feel they have the resources they need to do their jobs well, they are more involved in their customer service.
  5. HR policies. Organizations that ensure their HR management systems promote customer satisfaction—who gets hired, how they are trained, what is measured in performance management—produce customer-focused engagement.
  6. Benchmarking. You need baseline knowledge about employee engagement levels and customer satisfaction before you make changes. Use surveys and other assessment tools to measure employee engagement occasionally to evaluate progress.

Employee engagement has become such a hot theme that great groups of consultants and authors are undeniably banging on your door as we speak, armed with sufficient action plans and PowerPoint presentations to make your head spin. When employees are satisfied and engaged, the outcome is deeper customer connections and an raised customer experience.

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Posted in Management and Leadership

Six Drivers of Creativity and Risk-Taking

Six Drivers of Creativity

It is not enough to want to become more creative and to take more risks. To do so means challenging yourself, your team, and the organization. Moving out of our comfort zones is something we rarely do. Yet when we do, we gain insights into our own character. We can then reshape ourselves to the way we want. This is also the case with organizations and teams. But it means changing the culture.

The culture is reflected in what the organization or team values and how it does its business, as well as its propensity for risk taking and creativity. How does your organization view risk taking? Does your culture punish or reward people for taking risks? How willing are you to take risks at work?

Your propensity for risk taking is, in part, a function of the culture. If your boss doles out punitive measures for anyone who fails at a task, you play it safe. Or, if eyes roll when you offer an idea at a brainstorming session, you think twice about offering ideas.

The creativity or risk taking in a culture is consistent with the characteristics of one of seven orientations: Challenger, Innovator, Drean1er, Sustainer, Planner, Modifier, or Practicalizer. This composite profile becomes the group’s norm. Changing the group norm is difficult.

We need to focus on what we can influence directly: our immediate work teams and ourselves. Our efforts in these areas can yield powerful results.

Use these drivers of creativity and risk taking to build innovative capacity:

  1. Creativity driver 1: Ambiguity and its opposite, predictability. Operating in an ambiguous situation means dealing with uncertainty and vagueness. Those who function effectively in ambiguous circumstances don’t require highly structured situations, goals, or objectives to accomplish or create things, ideas, services, or products. Growth in this area yields innovative solutions. Since dealing with ambiguity is challenging, many people try to control variables, chart alternative courses of action, and eliminate the impact of uncertainty. The opposite of ambiguity is predictability. People who demand predictability require structure, clarity, and definition.
  2. Creativity driver 2: Independence and its opposite, dependence. Independence means not being subject to the control, influence, or determination of others. People who are independent will not subordinate themselves to others. They don’t like to be managed by others. They are self-empowered. They don’t have to be given direction. They don’t like to ask for help, believing their way to be the best way. Dependent people need direction from someone. They do not take action without prior approval.
  3. Creativity driver 3: Inner-directedness and its opposite, other-directedness. Inner-directed people and teams feel a great sense of purpose. They often have clear vision of the future. People who are inner-directed believe that they are responsible for determining their own destiny, expectations, and norms. They are guided by their own set of values. They sometimes believe that no one really understands them. Often, they have difficulty reconciling personal agendas to corporate directives. People who are other-directed are always concerned about what everyone else thinks or is doing. Other-directed people don’t take the lead without input from others.
  4. Creativity driver 4: Uniqueness and its opposite, conformity. Uniqueness is appreciating and valuing differences. People and teams that value uniqueness look for creativity in themselves and others. They foster it. They first look for the differences, not to accentuate them, but appreciate and take advantage of them. The opposite of uniqueness is conformity, acting in ways that conform to current styles, norms, or expectations.

Six Drivers of Risk-Taking

  1. Risk-taking driver 1: Authentic and its opposite, political. Authentic means being what you purport to be. Authentic people and teams live by their core beliefs; they mean what they say and say what they mean. Their actions are congruent with their espoused values. They “walk their talk” and “tell it like it is.” They take stands on issues. They are true and genuine. Its opposite is being political. Political people don’t communicate with others directly. They are always navigating or positioning for self-advantage.
  2. Risk-taking driver 2: Resiliency and its opposite, rigidity. Resiliency is the ability to rebound, adapt, and learn, even in the face of adversity and stress. Resilient people pick themselves up after being knocked down. They believe that something good always comes out of a bad experience. They create options. They persevere. They get the job done, sometimes by the force of their will. Its opposite is rigidity or inflexibility in response to change, rejection, or setbacks.
  3. Risk-taking driver 3: Self-acceptance and its opposite, victimization. Self-accepting means to be approving of one’s own behaviors or actions. Self-accepting people like themselves and their situations. They exhibit self-confidence. They are unlikely to say they’re sorry about much, because they have few regrets. They don’t try to be perfect. They like themselves, in spite of themselves sometimes. Its opposite is victimization. Victimized people complain and blame others.

If everyone on your team cultivated these drivers, your innovative capacity would accelerate rapidly.

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Posted in Mental Models and Psychology

Create Partners, Not Employees or Followers

People want to succeed. The vast majority want to feel good about themselves and their work. Nevertheless, sometimes, it is tremendously difficult to balance day-to-day duties with the emotional needs of your employees.

There are no quick fixes or simple formulas for generating a culture that unleashes the competency of people. It occasionally requires intervention into a number of dimensions of organizational life: challenging management philosophy and practices, communicating and aligning everyone to the business strategy, cultivating processes and systems, providing training in social and business skills, etc.

Whom would you rather have at your side in a tough spot? A partner who shares full responsibility for decisions and their outcomes? Alternatively, a subordinate who does just what you say and shuts up about ideas he has that may be better.

Rationally, you want the former; emotionally, you may choose the latter. Leaders bow to a multitude of short-term pressures: severe demands for quarterly earnings, risk aversion, distress with uncertainty, resistance to change, linear extrapolation from past experience, and reluctance to cannibalize established businesses.

'It's Okay to Be the Boss' by Bruce Tulgan (ISBN 0061121363) Reflect on your career. Have you ever kept quiet when superiors were creating problems? What caused you to withhold your counsel?

I guarantee you they were being “the boss.” Everything about their tone, body language, verbal language, and behavior was indicating you that they were the boss and you were the subordinate. Chances are you learned from them what a boss looks and sounds like. Whether you admired their style or not, some of it rubbed off on you.

When you act as a superior, you will have subordinates. Act as a partner, and you will have partners. Yes, you may be the senior partner, but they are still partners, not underlings, or subordinates.

One key dissimilarity between the behavior of a “boss” and a “partner” is the way you talk. You talk differently to partners. It is not just what you say, but how you say it. To a subordinate, you might say, “This client wants his order fulfilled now. Make it happen.”

What is the message? It is not just “Get the order done now,” but it is also “I’m the boss; this is what I want—and there could be outcomes if I don’t get it.” It does not require a dramatic act to make the point that the receiver is your subordinate. Are you aware of how often and in how many ways you send similar messages?

This is not how you would talk to a partner. You might be just as clear about what you want and when; however, your delivery would create partnership, not subservience. You might ask, “How can we do that?” Alternatively, “Can you make it happen?” You would seek the individual’s knowledge, responsibility, and mutual obligation. When employees are seen as partners, they will understand that their leaders do not simply see them as the means to achieve their own personal targets.

You talk differently to folks below you than to folks across from or above you. So what? The higher you go, the less direct experience you have of customers, stakeholders, and problems. It is harder to get a real feel for what is happening. You become more reliant on on good information and insight from those who are in touch. So, they need to feel invited to tell you the reality they see, especially when it differs from the one you believe is out there.

You likely think that you already extend this encouragement, but you may discourage people from giving you inconvenient information. Unless you make an effort to discover in what ways you do this, you will continue to do so.

Create Partners with Your Subordinates

Create Partners with Your Subordinates

To create partners and have your employees’ best interests in mind, try this exercise:

  • Start every meeting with a question: “Is there anything I’m not getting about this issue that you think I should?”
  • Whatever the answer, respond with interest and ask, “Can you tell me more about that or give an example to help me understand it better?”
  • Ask questions until you have clarity on the points. Do not argue. Do not cross-examine—just clarify.
  • Thank the individual or group making these points.
  • Incorporate what makes sense into the decisions.
  • If no one spoke up, after the meeting ask the individual who is likely to be forthright, “What am I doing that keeps everyone from talking?”
  • If this individual gives you insight into how you dissuade feedback, convey your gratefulness. Find a way to reward the honesty.
  • Invite this truth-teller to sit in on more meetings and after each one gives you feedback on anything you did that made others act as subordinates.

Simple Ways to Build Trust With Your Employees

Build Trust with Your Employees

Trust is established when even the newest rookie, a part-timer, or the lowest paid employee feels important and part of the team. This begins with management not being reserved, as well as getting out and meeting the troops.

'The 27 Challenges Managers Face' by Bruce Tulgan (ISBN 111872559X) By doing this you will have the self-awareness to create partners. You will also have earned their trust. They will give you their best advice and devotedly support decisions that are based on reality.

By creating this environment where your employees are treated as partners working toward a shared purpose, you will foster in your employees a sense of ownership not simply to their job, but to the whole process. This will inspire not only partnership between the company’s divisions/teams, but it will also help nurture innovation as employees are stimulated to look beyond what they usually work on or how they approach their job.

Good partners invest time and energy in making cognizant judgments about who their leaders are and what they espouse. Then they take the appropriate action.

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Posted in Management and Leadership

Best Practices for Corporate Boards & Governance

Best Practices for Corporate Boards & Governance

In the wake of many business failures, we have criticized every player in the system except the one charged with insuring that these failures do not occur: the board of directors. They are elected by the shareholders as the ultimate governing body and charged with preserving the company and building it long term.

Many boards have abandoned the legal and fiduciary responsibilities. They have become more responsive to the CEO and the management than to the shareholders. In so doing, they abandon their governance role to get the company’s stock price up. They stop asking the hard questions about how the company achieves its numbers, whether it makes adequate investments to build for the long-term and whether its strategies are still valid and effectively implemented.

Our systems of governance must be reformed. This begins with having a “bright line” between governance and management. Boards have ceded their governance responsibilities to the CEO. Now they must reclaim it.

Here is a 10-step program to improve board governance:

  1. Create principles of governance. The independent directors of the board need to establish principles of governance that describe the functions of the board and how the board will conduct itself. The principles should be published for all shareholders to see, and each year the board should report to the shareholders, evaluating the effectiveness of these principles.
  2. Have truly independent directors. This is essential to effective governance. Boards need directors who have had no prior association with the company. To measure their independence, no director should receive any compensation other than standard board fees. Nor should any interlocking directorates be permitted between the CEO and any member.
  3. Select board members more for their values than their titles. Too often we choose directors for the positions they hold, rather than their commitment, availability, and competence as board the many member. Let’s take advantage of executives who have the time and inclination to serve on boards. Let’s also assess the diversity of backgrounds and experience we need on the board to provide sound guidance.
  4. Establish a Governance and Nominating Committee composed solely of outside directors. This committee maintains the principles of governance, nominates people for election to the board, evaluates existing directors, conducts the evaluation of the chairperson and the CEO, and develops a succession plan for the CEO, including the selection of new CEOs. This committee is charged with organizing the board and its committees, identifying independent directors to chair them.
  5. Elect a Lead Director. If one person is both chair and CEO, the independent directors must elect a lead director to organize them, insure their independence, and advise the CEO. I prefer that the lead director be the chair of the governance committee, as these functions are closely aligned.
  6. Corporate Boards oversee governance and management Qualify members of the Audit and Finance Committees to insure the veracity of the financial statements. These committees should meet privately with external auditors, the CFO, and internal auditors. Outside auditors should not receive any additional consulting fees from the company.
  7. Hire an independent compensation consultant. Neither the CEO nor any member of management should be involved in setting the CEO’s compensation, or board fees. My big concern with executive compensation is the grants made by compensation committees to executives who do not perform or who are terminated. These moves destroy the integrity of incentive systems. At the executive level, it should be “pay for performance.” Period.
  8. Meet regularly in executive sessions. This works best if the board meeting begins in executive session with the CEO, and concludes with an executive session without the CEO present. These sessions are much more open and often lead to rich discussions of the most vital issues. Of course, the lead director must convey the essence of the discussion to the CEO.
  9. Seek the right Board chemistry. Board members should respect each other, but not hesitate to challenge each other, the CEO, and members of management. At times, a single director must stand against management and the rest of the board if he or she feels that the company is headed in the wrong direction. Board knowledge and chemistry can be enhanced with off site visits to company locations and one extended meeting per year, preferably off-site, to review the company’s strategies in depth. These longer sessions give independent directors deeper insights into the business, and build relationships that are vital in crises.
  10. Reestablish the bright line between governance and management. Directors must step up to their responsibilities and establish that bright line between governance and management. Will this reduce the power of the CEO to manage the company? No. The best CEOs want to have a strong, independent board, and look to the board for advice and counsel, not just approval, on important matters. Having a clear line between will keep the board from usurping the CEO’s prerogatives just as it will constrain management. This will help restore the balance to decision-making and ensure stability.

To transform our systems of government, businesses, and non-profits, we need courageous, authentic, and visionary leaders and directors, not just people who react to events.

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Posted in Management and Leadership

Starbucks CEO Howard Schultz Calls It a Day

Starbucks COO Kevin Johnson is the right replacement for CEO Howard Schultz

Starbucks CEO Howard Schultz has called it a day, and that’s causing some investors a bit of worry, primarily because the coffee giant struggled the last time Schultz left in 2000.

Starbucks COO Kevin Johnson Replaces CEO Howard Schultz

Kevin Johnson, the current president and chief operating officer of Starbucks, will take over as CEO. Johnson is a 30-year veteran of the tech industry held senior leadership roles for 16 years at Microsoft and a five-year stint CEO of Juniper Networks.

Johnson’s consumer technology background is impressive and is a key asset for Starbucks in expanding the company’s already-leading digital platform across channels and geographies in the years to come.

Former Starbucks COO Troy Alstead Quit in January 2015

When Starbucks’ longtime COO Troy Alstead quit, Schultz wrote, “Looking back on the 23 years we spent together side-by-side as Starbucks colleagues, I can recall so many memorable moments and accomplishments in which Troy can take pride in a job well done. Troy is a beloved Starbucks partner and has played an invaluable role in our growth as an enterprise and in the development of our culture as a performance-driven company balanced with humanity, which is unique for our industry. Troy’s humanity and humility will be missed and we wish him the best.”

Starbucks' Premium Roastery and Reserve Stores

Schultz Focused on Sustaining Revenue

For the last several years, Schultz focused on sustaining revenue growth by moving beyond his coffee house roots. In 2012, he purchased Teavana as another brick in the road, which has encompassed instant coffee, energy drinks, juice, a single-serve brewer and food to sell in its shops and in grocery stores. In 2013, Starbucks and yogurt-maker Danone, declared a plan to cooperatively create an assortment of specialty yogurt products in contributing Starbucks stores in 2014 and in grocery channels in 2015 as part of the coffee chain’s growing Evolution Fresh brand. With cafe-like atmospheres and a brand that evokes a high-quality customer experience, Starbucks appreciates pricing power benefits over nearly all specialty coffee peers. This will be expanded by the development of the Starbucks Reserve sub-brand to deliver exclusive, higher-end coffee blends.

While Schultz’s forethought and attention to customer experience have been significant motives that Starbucks has established one of the widest-moat and most consistent growth stories in the global consumer coverage universe, Starbucks has one of the deepest benches in the consumer sector. While most of the focus is technically on new CEO Johnson and his wide-ranging consumer technology background, Schultz will still be immersed with the development of Starbucks’ Premium Roastery and Reserve stores.

'Onward How Starbucks Fought for Its Life' by Howard Schultz (ISBN 1609613821) Don’t liken Schultz’s switch to that of 2000, when he undertook the chairman role and assigned Jim Donald as CEO. Schultz ultimately returned as CEO in 2008 in the wake of disappointing sales figures and a “watering down of the Starbucks experience”. In his turnaround memoir Onward: How Starbucks Fought for Its Life without Losing Its Soul, Schultz wrote “The merchant’s success depends on his or her ability to tell a story. What people see or hear or smell or do when they enter a space guides their feelings, enticing them to celebrate whatever the seller has to offer. Intuitively I have always understood this. So when, in 2006 and 2007, I walked into more and more Starbucks stores and sensed that we were no longer celebrating coffee, my heart sank. Our customers deserved better.”

How Starbucks Became Successful

How Starbucks Became Successful

Brand, channel, and technology advantages have positioned Starbucks for a long runway for growth:

  • Starbucks coffee is robust, and people get used to the taste, making it difficult for them to be content somewhere else, either to coffee chains such as Dunkin’ Brands, Tim Hortons, or McDonald’s. Joh. A. Benckiser’s amalgamation of Mondelez’s coffee properties (D.E Master Blenders, Peet’s, Caribou, Einstein Noah, and Keurig) are emerging as Starbucks’s noteworthy competitors. Despite the tenacity of the legend, Starbucks doesn’t really burn its beans. Nonetheless it uses two tablespoons of coffee per 6 ounces of water, which is beyond a lot of other places.
  • Decades ago, in many markets, the only place a customer could get a cappuccino was a restaurant, and there indeed weren’t any flavored or distinguished coffees anywhere. Starbucks was the pioneer in bringing those to the masses. There’s countless brand loyalty they’ve built up over the years. As good the coffee beans are a good amount of training goes in the way they make specialized drinks. Wet, dry cappucino, lattes in perfect ratios of coffee, milk and foam.
  • Starbucks has been known for being pretty generous to its employees, together with presenting full benefits to those working as a minimum 20 hours per week. That made customers feel good about buying coffee there.
  • Customers appreciate the consistency of Starbucks products. A customer can go to a Starbucks pretty much anyplace in the world, and know what they’re getting. A grande vanilla latte will be on the menu and taste the same whether in Seattle, New York, London, Istanbul, or Moscow.

The Recipe to Starbucks Success

The Recipe to Starbucks’ Success

Yet same-store sales have been decelerating, however from very high levels, and the company ran into difficulty the last time Schultz stepped back from the CEO role. Regardless of impressive growth plans, and commodity cost and foreign currency volatility, Starbucks can endure a 40%-45% dividend payout ratio over the next decade.

Some analysts and investors aren’t worried about the management change. Wells Fargo’s Bonnie Herzog acknowledged that while Schultz’s departure is “a loss, in our view the show must (and will) go on” and added, “While we acknowledge that Schultz is without question one of the strongest and most visionary leaders in the consumer/retail world, we believe the succession planning put in place several years ago assures the recent exceptional performance will likely continue.”

Starbucks Future Strategy for Invigorated Growth

Starbucks Future Strategy for Invigorated Growth

Speaking of how Starbucks’ invigorated food and beverage menu and store reformats have uplifted the Starbucks customer experience, pierced new markets and times, and enhanced unit-level productivity metrics, Herzog also wrote,

The leadership change announced today has been a long-time in the making, starting nearly 3 years ago with the shuffling of the senior leadership team, and subsequent promotion of Johnson in early 2015 to the role of President/COO. We believe that Johnson is a very capable leader, with strong experience working side-by-side Schultz for the past two years. Importantly Johnson has an exceptionally good relationship with Schultz, which should keep Schultz sufficiently removed to allow Johnson to lead effectively given his trust in Johnson, while also remaining sufficiently nearby to ensure the ship remains on course… We believe Johnson’s technology background positions him well to ensure SBUX’s mobile and digital initiatives—key to SBUX’s long-term success, in our view—will remain a primary focus of the company. Importantly, Schultz will remain focused on his ongoing efforts to premiumize the SBUX brand and experience through Roastery and Reserve stores, which should support accelerated innovation and allow the broader store network led by Johnson to continue to thrive.

Investors are also cheerful about Starbucks’ mobile, digital, and loyalty program collaborations across the various business lines, affiliations with Spotify, New York Times, and Lyft, and new payment technologies. Starbucks’ worldwide opportunities are undisputable–particularly in China, India, Japan, Brazil, and Eastern Europe–and Starbucks will apply its best practices from the U.S. to accelerate its growth aspirations.

Starbucks has organized an investor meeting next week, during which its leaders are expected to release news on current and future initiatives.

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Posted in Business and Strategy

Charlie Munger’s 10 Rules for Investment Success

Charlie Munger's 10 Rules for Investment Success When Charlie Munger talks, people listen— particularly if they want to know how to invest their money.

Munger, who is the vice-chairman of Berkshire Hathaway, has delivered instrumental guidance to Berkshire’s renowned founder, Warren Buffett, and many others. By means of what Munger identifies as “elementary world wisdom,” Munger’s technique weighs risk and reward, make the most of fact-based data and abating emotion.

Keeping it simple, Munger declares, “I observe what works and what doesn’t and why.” Like Buffett, Munger pulls much of his motivation from post-Great Depression era investor Benjamin Graham, a “value investor.” Graham sought “mispriced assets” with values greater than people think.

Charlie Munger has some advice for investors.

  1. Measure risk: All investment evaluations should begin by measuring risk, especially reputational.
  2. Be independent: Only in fairy tales are emperors told they’re naked.
  3. Prepare ahead: The only way to win is to work, work, work, and hope to have a few insights.
  4. Have intellectual humility: Acknowledging what you don’t know is the dawning of wisdom.
  5. Analyze rigorously: Use effective checklists to minimize errors and omissions.
  6. Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.
  7. Have patience: Resist the natural human bias to act.
  8. Be decisive: When proper circumstances present themselves, act with decisiveness and conviction.
  9. Be ready for change: Accept unremovable complexity.
  10. Stay focused: Keep it simple and remember what you set out to do.

Munger has argued that if “you’re investing for 40 years in some pension fund, what difference does it make if the path from start to finish is a little more bumpy or a little different than everybody else’s so long as it’s all going to work out well in the end? So what if there’s a little extra volatility.”

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Posted in Investing and Finance

Is Costco threatened by Amazon?

Is Costco Wholesale threatened by Amazon?

The North American retail landscape appears entirely different today than it did even ten years ago. The method that consumers make purchasing decisions has radically changed: they stand in stores, using their smartphones to match prices and product reviews; family and friends instantaneously chip in on shopping choices via social media; and when they’re ready to buy, an ever-growing list of online retailers deliver products directly to them, occasionally on the same day.

Brick-and-mortar retailers such as Costco simply focus on selling items that Amazon can’t beat them on. Some products do not lend themselves to package delivery since they are too big, heavy, cheap, fragile, or reliant on fitting properly. Likewise, lawn chairs, boots, thumbtacks, bags of cement, frozen shrimp, and thousands of other items are difficult to move via ecommerce channels.

Paradoxically, Costco is not one of the many companies that accuse Amazon for uninspiring growth or stagnation. Amazon can easily take bites out of the edges of Costco’s market share, and that’s all it takes to flatten out comparable sales, an important metric in the retailing industry.

Costco is remarkable at staying in stock on the goods it sells, but when it comes to general merchandise, you have to mostly grab what they have. Want Fancy Feast cat food? They’ve got it, but only in one specific flavor combination packet. If your cats don’t like it, so it goes. However, you can get precisely the flavors you want from Amazon, without waiting in lines.

Then there’s items like deodorants. While I’m happy to buy in quantity, I was unsure if Costco sells the brand I like. I ordered a four-pack from Amazon and it was here when I got home. Same with shaving cream. Women won’t find “Edge” shaving cream to have anything like a feminine smell. I bought it once. That was that: another item, gone to Amazon.

Costco established the warehouse club retail model, which depends on customer-friendly average markups on branded products (in the low double digits, compared to the high teens at WalMart and the mid-20s at most grocery stores), high throughput, bargaining power, a no-frills shopping environment, and supply-chain effectiveness.

Costco-Amazon Competitive Analysis

I still like Costco, and I’ll definitely continue re-upping my membership. The treasure hunt can be fun and the moveable feast is great. But quantity purchases of exactly the household items I want aren’t available often enough. It sells one kind of almond butter, two kinds of detergent. These are items that have forever left my Costco basket, and have actually caused a reduction in trips, as well.

Costco has lots of options left available to it. It rarely advertises. It can change that. It has been a real laggard in omnichannel retailing…any relationship between items on the website and items in stores is purely coincidental (or opportunistic). I think the company has to change that. There are some items that have to be touched and seen, even if the sale consummates on-line.

The company’s business model remains sound, but the assortment on certain items and sundries might have to broaden. No one wants to go on a treasure hunt for deodorant. That’s a seriously risky proposition.

In May 2016, UBS analyst Michael Lasser and team argued after Costco’s quarterly results that the quarter was so good that it “refutes the bear case that centers on the potential that Costco is losing customers to Amazon.com”:

We think this provides evidence that refutes the bear case that centers on the potential that Costco is losing customers to Amazon. Further, Costco’s op. margin was in line w. our expectations showing how well it’s managing in this tough environment. A lower than expected tax rate added ~$0.01 to EPS. While Costco’s sales slowed in 3Q, we think the deceleration was largely due to the pending transition of its credit card. We believe its sales will pick back up once the transition occurs on June 20. This provides a visible NT catalyst. Plus, there’s a secondary catalyst next year when Costco is likely to raise its membership fees. We think buying shares ahead of these catalysts is a prudent move.

Grocery One of Coscto's Advantages in comparison to Amazon

In July 2016, UBS analyst Michael Lasser and team explained why shares of Costco Wholesale soared after the company reported same-store sales for June:

While there was no mention of a disruption from the credit card transition, we believe it had some impact. So, the result would have been even better without this effect. Further, it’s probably too early for the shift to Visa (V) to have that much of a benefit. The gains should build in the coming months, driving an acceleration in Costco’s US comp. Even so, the company still generated a 3% increase in its global traffic. This type of performance warrants a premium valuation, in our view.

With the credit card switch in effect, spend/member is likely to pick up as private-label credit-card customers take advantage of the new card’s more attractive reward structure (2% cash back at Costco vs. 1% prior). Also, we think Costco’s reliance on grocery & gas sales (~2/3 of total sales) helps insulate it from Amazon.com (AMZN). These factors support our forecast of 4% core US comp growth in July, which would match its highest growth rate since Nov ’15.

Costco has long been known for giving higher wages and presenting more liberal benefits than its competitors —and producing superior sales per square foot, too. The benefits of the good old days are unreasonable because of rising costs and an aging population. Lifespan job tenure is obsolete and most people embrace workforce mobility. Yet in a consumption-based economy, workers must be able to afford more than the basics, and they deserve a certain measure of security.

Citing a recent report from Cowen’s Internet analyst John Blackledge, Cowen analyst Oliver Chen wrote that Amazon Prime members are expanding their shopping well beyond books, clothing and movies. Data shows that 22% of those Amazon Prime members shopping on the web site 3.5 times each month buy groceries on the web site.

As detailed in the Ahead of the Curve: Amazon Dominates “Prime” Time 50-page report by Cowen’s Internet Analyst John Blackledge), AMZN’s aggressive growth of Prime is both impressive and has wide ranging competitive implications given broad HHI, permeation across media and appeal among young consumers. How can bricks-and-mortar retail compete?

  • The key competitive weapon remains transformation towards a consumer-led supply chain which integrates physical stores to drive convenience—Buy online pick up in store, return in store, ship from store, and car pickup along store need to be utilized across chains;
  • proprietary relationships with vendors and vertical integration such as owning factories and direct sourcing capabilities;
  • frequency of store traffic based on inventory turns and product assortment;
  • emotional, brand-lead lifestyle contact;
  • categories which are not easily replicated online (jewelry, physical fitness); and
  • fashion & curation leadership.

Citi Costco Credit Card Citi’s new Costco Anyway card is significantly more appealing than Amex’s TrueEarnings Costco card. Costco’s management has stated that the terms Citi offered were too compelling for Costco to stay with Amex; to protect/ insure continued customer service levels in transition to Citi, there are significant and specific requirements associated with the portfolio.

Amazon.com Prime Compared to Costco Membership

Morgan Stanley’s Simeon Gutman and team conducted a survey and suggest five reasons that Costco Wholesale should remain Amazon.com-proof:

  • Amazon.com (AMZN) and Costco Are Not Mutually Exclusive. Of the 23% who are Costco members (628 respondents), 45% (285 respondents) are Amazon Prime members as well, which suggests the two retailers fulfill different consumer needs. Of the 33% surveyed who are Prime members (893 respondents), 32% (285 respondents) are also Costco members…
  • Grocery One of Coscto’s Advantages. 12.5%/11% of Costco members call out increased spending on packaged/fresh grocery, well ahead of the 5%/2% of Prime members….
  • Only 8% of People Shopping at Both Costco and Amazon Plan to Shift Dollars Away from Costco. Of the 14% (285 respondents) who shop at both, only a net 8% (32 respondents) plan to shift shopping away from Costco towards Amazon. This represents just 1% of total consumers surveyed.
  • Sticky Members with Higher Spend…with Amazon Scoring Higher on Multiple Qualitative Factors. 94%/95% of surveyed Prime/Costco members intend to renew their memberships, which speaks to high loyalty and low churn. Further, 49%/26% of Prime/Costco members indicated shopping more frequently over the past 12 months and 85% of surveyed members attributed “Retailer I Trust” to Amazon and Costco. It is also notable that Amazon scored materially higher than Costco in perceived prices, selection, convenience, quality of checkout and ease of navigation…which will be important to monitor going forward as these advantages could tilt Costco members’ toward Amazon over time.
  • Costco Members Younger than Perceived. The average Costco member is 49 years old vs. 44.5 for the average Amazon Prime member. This four-year gap seems insignificant, in our view, and is counter to the bear case that Costco does not resonate with millennials…

Implications: The survey results should be a positive step in alleviating the greatest investment debate for Costco, that the club model/Costco is at risk from Amazon.

Given that membership fees represent about 70% of Costco’s operating profit and renewal rates stand at about 90% in the U.S. and Canada, Costco’s long-term revenue and profit growth could stagnate. There is little room for additional household penetration because Costco by this time has around 80 million members; historic sales and earnings growth predictions may not be maintainable. Also, new club openings in current markets could cause cannibalization of sales from older locations. Not to mention of challenges in acquiring appropriate real estate choices for 140,000-square-foot warehouse clubs in urban regions.

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Books on Creativity Recommended by Ted Leonsis

Creative people often retain a capability to adopt a number of diverse stances or perspectives. When they look at their own work, they focus interchangeably on the technical aspects, the visual design, the ideas, and so on. They develop a set of standards or a checklist that leads their attention and helps them to scrutinize the creative process. Moreover, they master a lexis that enables them to assess their work in multiple dimensions, so that they can pass more qualified judgements than just ‘good’ or ‘bad.’

A multidimensional valuation gives students feedback, which helps them determine their strengths and detect areas in which they need to improve. The scores on such valuations can also help an educational program to review its results, contemplate its position and modify the course if necessary. Although creativity can only make the most of as originality, utility, and surprise all approach unity, the same description indicates that there are seven different ways that creativity can minimize. These alternatives were identified as

  • routine, reproductive, or habitual ideas,
  • accidental response bias,
  • irrational perseveration,
  • problem finding,
  • rational suppression,
  • irrational suppression, and
  • blissful ignorance.

According to conventional wisdom, creativity is somewhat done by creative people. Even creativity researchers, for several decades, seemed to direct their work by this principle, converging predominantly on individual differences: What are creative people like, and how are they different from most people in the world? Although this person-centered tactic yielded some important findings about the backgrounds, personality traits, and work styles of marvelously creative people, it was both limited and limiting. It presented little to practitioners related with helping people to become more creative in their work, and it virtually ignored the role of the social environment in creativity and innovation. In contrast to the long-established approach, the Componential Theory of Creativity assumes that all humans with normal capabilities are able to produce at least judiciously creative work in some domain, some of the time-and that the social environment (the work environment) can manipulate both the level and the incidence of creative behavior.

Books on Creativity Recommended by Ted Leonsis Ted Leonsis, the Internet entrepreneur, former AOL senior executive, and owner of the Washington Wizards and Washington Capitals recommends the following books on creativity.

  • Ed Catmull’s Creativity : 1970s computer animation pioneer and Pixar co-founder Ed Catmull‘s appealingly comprehensive explanation of how the studio he co-founded generated hits such as the Toy Story trilogy, Up, and Wall-E. Catmull closes that it is a leader’s responsibility to stop ambitious and perfectionist staff destroying their health and that of others. Aiming for zero mistakes is the worst possible goal for a creative project. He argues that a company has to appreciate the work of creativity and learn how to navigate the failures that will happen along the way.
  • 'Crossing the Chasm' by Geoffrey A. Moore (ISBN 0062292986) Geoffrey A. Moore’s Crossing the Chasm: Author Geoffrey A. Moore is managing partner of TCG Advisors, a consulting practice that delivers business and marketing strategy assistances to well-known high-technology companies. Moore declared that the greatest change in the marketing approach happens at the chasm—the organizations to the right of the chasm have meaningfully different opportunities than those on the left. Many ideas fail in the marketplace because their enthusiasts are not capable to cross the chasm.
  • Elmira Bayrasli’s From the Other Side of the World: Journalist Elmira Bayrasli posits that brilliant people around the world are conquering insoluble obstacles to build high-growth businesses that are driving wealth and building communities, regions and countries. By means of seven noteworthy stories, Bayrasli shows the next set of successful entrepreneurs could come not only from the as Silicon Valley but also from Nigeria, Pakistan or Mexico. She writes, “Entrepreneurs, by the very nature of what they do—disrupt and innovate—provide a necessary check and balance on government that no one else can—not businesspeople, not NGOs, not civil society organizations. They help remake the social order and help move progress forward, giving rise to new ideas, new industries, and new possibilities and forcing change. That is what has made them both heroes and villains that many in power feel the need to keep in check.”
  • 'Stop Playing Safe' by Margie Warrell (ISBN 1118505581) Margie Warrell’s Stop Playing Safe: When people confront a challenge, they often recoil into inaction. Drawing from the latest research plus dialogues with highly successful leaders and entrepreneurs, Warrell offers practical tools and inspiration needed to enjoy greater confidence, accomplishment and success in work and life. Outline your sense of purpose and engage in more inspiring goals. Circumnavigate uncertainty with clarity and be more decisive in adversity. Surmount the fear of failure and bounce back from setbacks with superior flexibility. Toughen your leadership ability and expand your influence regardless of position. Build a culture of courage in your office that advances bottom line results. As you strive to reach your goals, as you make those tough choices and take risks, look for your enthusiasm, find your power, and aim to make a difference. And know that this attitude—this mindset, this entrepreneurial way of looking at the world—runs though the lives of all successful people.
  • Linda A. Hill, et al.’s Collective Genius: The perpetual organizational challenge is to develop an organization capable of inventing over and over. Outdated, direction-setting leadership can work well when the resolution to a problem is known and forthright. The role of a leader of innovation is not to set a vision and stimulate others to follow it. It’s to create a cooperative spirit that is enthusiastic and capable to innovate. Collective Genius addresses (1) how leaders generate a willingness to do the hard work of innovation, and (2) how leaders can generate the ability to do the hard work of innovation.
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Posted in Management and Leadership Mental Models and Psychology

Costco’s Winning Business Model Strategy

Costco Logo: Costco's Winning Business Model Strategy

Costco has built a devoted foundation of customers with low prices and workers with high wages. The discount warehouse services industry is highly competitive. There are several warehouse operators across the United States and Canada that offer similar merchandise quality, selection, and price.

At the end of financial year 2015, Costco managed 480 membership warehouse clubs in the United States, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 11 in Taiwan, 12 in Korea, 7 in Australia, and one in Spain. Base and executive memberships cost $55 and $110 per year, respectively. The company operates 557 warehouse stores, 406 of which are situated in 40 U.S. States and Puerto Rico. The rest are in Canada, Mexico, Japan, Taiwan, Korea, and the United Kingdom.

The internet has made it immeasurably easier for shoppers to chase for the latest deal—and a lot more demanding for brick-and- mortar retailers to command customer loyalty. However, Costco has managed to resist the tendency—with only 3% of its retail sales occurring from e-commerce. In reality, it outclasses other retailers when it comes to dependably increasing sales from its millions of loyal shoppers.

At the warehouse stores, forklifts relocate pallets into racks such that the first time an item is actually touched is when the consumer contacts into the shelf to collect the item and places it into their shopping cart.

Costco's Sustainable Competitive Advantage

Costco’s Sustainable Competitive Advantage

Costco’s objective has been to increase sales while cutting long-term costs (by trimming freight expenses, scaling its merchandise, negotiating prices with vendors, and reducing packaging) with the intention that it can pass those savings down to members. Costco has said that its “rule of thumb is to give 80% to 90% back to the customer.” Those efforts have paid off, with memberships reaching an all-time peak of 81 million members in 2015.

Shiny steel caskets exhibited amongst the stacks of snow tires and pallets of heavy applesauce, rose-scented toilet tissue, mentholated shaving cream, and mild-flavored salsa. However, in time, people may grow familiarized to the sight. By including these special deal items to the cart, the total spend at the cash register expands. This behavior diverges severely with the type of consumer who has the self-control to fill up on everyday consumables at everyday low prices. The latter type of consumer does win in the end even if the cost of the membership is factored into the equation. As one (rather demonstrative) instance, when reviewing the 1999 Kroger-Fred Meyer merger, the FTC vindicated this definition by asserting,

Supermarkets compete primarily with other supermarkets that provide one-stop shopping for food and grocery products. Supermarkets primarily base their food and grocery prices on the prices of food and grocery products sold at nearby supermarkets. Supermarkets do not regularly price-check food and grocery products sold at other types of stores and do not significantly change their food and grocery prices in response to prices at other types of stores. Most consumers shopping for food and grocery products at supermarkets are not likely to shop elsewhere in response to a small price increase by supermarkets.

What Makes Costco Successful

What Makes Costco Successful

Renewals of Costco’s $55 annual memberships stand at a remarkable 91%—a record high. On the word of financial analysts, the low price of memberships and a stable return of loyal members is what sets Costco apart from big box and department store retailers which persist to fight for market-share gains in a altering landscape of increased competition from online retailers led by Amazon. Costco’s ability to dependably drive increases in traffic is a key differentiator.

Everything at Costco is continually being evaluated for productivity. Costco manages a mix of distribution facilities to accomplish the overall objective of operating with an efficient supply chain. The company lately substituted the form of their milk cartons to get rid of the empty space at the top. They can fill thinner jugs all the way to the top, so they can get more gallons onto the same amount of space on a freight truck. The loss-leader abilities of Costco’s business model ought to endure to drive market share advances over the long term. However, it is possible that incumbent grocers could react to Costco, Sam’s Club, or Walmart Supercenter entry along one or more of these non-price dimensions, in which case their prices could continue unaffected or rise.

Costco’s philosophy is to provide its members with quality goods at the most competitive prices. It does not concentrate its efforts on maximizing prices in the short term, but instead focuses to maintain a perception among its members of “pricing authority,” or constantly providing the most competitive prices. This question is actually quite complex in that it has multiple answers that boil down to individual consumer behavior. The reality is that Costco has perfected a purchasing strategy known as the “treasure hunt” which means that there are always new items and tempting deals that extemporaneously come and go. The consumer who walks every aisle knows what I mean by this because they are subconsciously on the treasure hunt.

During the next 10 years, warehouse openings should move the number of primary cardholders to 65 million–75 million, up from 45 million in the most current fiscal year. In spite of having warehouses that spanned three acres, and piles of merchandise stacked to the ceiling, Costco carried only 4,000 carefully chosen products at a time. Three-quarters of the items were such “basic” products as batteries, laundry detergent, and instant noodles. Then there were the “high-end” name-brand products, which might be stocked at Costco one day and then gone the next.

Costco Employees Happier with Wages and Benefits

Costco Employees Happier with Wages and Benefits

While Walmart and Target just recently began increasing take-home pay for their employees, Costco has been an industry trendsetter for years. With starting hourly pay at about $11.50 and a company average of $22 per hour, Costco’s compensation costs beat the competition. Costco has asserted that paying employees well can be more advantageous eventually by keeping turnover low and capitalizing on employee efficiency. Actually, turnover stands at about 10% compared with the industry average of 55%. For employees who have been there more than one year turnover drops to just 6%. Employees rarely leave: The company turnover rate is 5% among employees who have been there over a year, and less than 1% among the executive ranks. Costco management has asserted that loyal employees bring about better customer service.

Costco purchases the majority of their merchandise promptly from manufacturers and routes it through a network of cross-docking facilities, which act as merchant consolidation points to move goods in full truckload volumes to the stores. Sam’s Club carries about 4900 items and Costco around 4000; by comparison, the normal grocery store carries approximately 50,000 and the average Walmart about 100,000. Furthermore, the shopping experience at warehouse clubs is unusual—members pay a fee for access to goods stacked high and sold in wholesale quantities in low-amenity environments. Warehouse clubs are very spartan in their accommodations. They do not bag consumers’ purchases, and a club employee checks all shoppers’ carts and receipts on exit.

Secret to Costco's Success Lies in Supply Chain Efficiency

The Secret to Costco’s Success Lies in Supply Chain Efficiency

Big-box retailers Costco, Sam’s Club, BJ’s Wholesale, and Walmart, along with full-service and fast food restaurants, are significant contributors to the nation’s obesity outbreak. Costco continues to productively increase its businesses, on account of its low prices and robust customer loyalty. Its ability to provide quality products, at a reasonable price, should appeal to most consumers in North America and around the world. While competition in the market remains ferocious, Costco’s leadership is taking the right steps to guide the company into the future. Over the years, Costco added departments, growing further than the traditional discount warehouse offerings. A large majority of the stores featured a drugstore, an optical-dispensing center, one-hour photo services, a food court, and the ever admired and low-priced hot-dog stands. More than half-offered hearing-aid centers and a handful were equipped with print shops and copy centers. More generally, not all big-box chains are created equal. The big-box retail literature has fixated almost exclusively on Walmart, examining its effects on a wide range of outcomes, including prices, labor market consequences, small business activity, time use, obesity, and social and cultural pointers.

Using city-level panel grocery price data matched with an exclusive data set on Walmart and warehouse club locations, customers find that Costco entry is associated with higher grocery prices at obligatory retailers and that the effect is sturdiest in cities with small populations and high grocery store densities. The competitive response need not be to reduce prices; conversely, as segmented-market models with a mix of brand-loyal and price-sensitive consumers have shown that in some cases incumbents can increase prices in response to a low-cost entrant.

The lesson to be learned from Costco for every manufacturer, distributor, or retailer, regardless of industry, is to figure out how to eliminate the fingerprints within the respective supply chain and within internal processes.

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