As I read about the return of Howard Schultz to the helm of Starbucks, I am reminded of the journey of almost every company as it moves from doing for customers to doing to customers. One of the reasons that I prefer company founders as CEOs of our portfolio companies is their non-MBA characteristics. In business schools, students are taught concepts, some of which are constructive and some of which are destructive. I view the most destructive concepts lie in the "profit maximization" area.
One portfolio manager describes the journey of companies as in three stages. Stage One is the Wow! stage - where companies seek to delight customers and, as a by-product, disrupt and change industries. Herein lies the reason why Jeff Bezos focused Amazon on everyday is Day One. Stage One is marked by rapid growth and often prohibitively high stock market prices.
Most of the time I simply watch these Stage One companies enviously. Starbucks in its early years was in this category. It was the place you could actually get a high quality espresso in the US. I actually chose my Dallas house location based on the fact that I could walk to four Starbucks stores.Tesla has always been in Stage One because its admirable CEO refuses to bureaucratize in his anti-social and probably anti-MBA style. When viewing Stage One companies, I find myself filled with love and admiration for capitalism and creativity.
Stage Two is the maturation stage - where markets get saturated and the companies seek to cross-sell products into their mature markets. Often, there are delightful customer improvements as the Stage One purism settles down. These Stage Two companies have attractive financials as the capex requirements settle down and business practices stabilize. The companies become quantifiably investable, because at this stage, companies are finally profitable. Without profits, ideas are unsustainable. However, this is also the stage in which companies start to wander out of doing for the customer into doing to the customer. The add-on services are usually chosen based on increased profitability, higher operating leverage and all those MBA concepts. The speed at which the company moves from doing for to doing to is a function of leadership and founder leadership is more likely to slow this inexorable journey.
For example, Starbucks finally started to get food products and juices in its stores. But because these cross-selling opportunities are not focal, they are usually inferior to the core offering. It's hard to believe that Howard Schultz could've spent time in Italian espresso shops with their fresh orange juice making and then sell the god-awful juices they put in their coolers. I've never had a Wow! moment in any of their cross-selling attempts - because I believe these attempts are directed financially. When Tesla starts to expand to more accessories, I will probably feel the same about their choices. When viewing Stage Two companies, I find myself filled with admiration for the efficiency and effectiveness of the large scale of services provided - in contrast to government services.
Finally, Stage Three is repugnant stage of screwing the trapped customer, utilizing every trick in the "profit maximization" catalogue. At this point, companies have managed to hold off competition or dominate it in such a way that taking advantage of the customer is a viable business model. Think Jack Welch and the culture he spawned. At this stage, the companies continue to increase profitability and are investable. I believe that owning Comcast today might be one such company. Investors become focused strictly on the "delta" as analysts cheer every clever trick and bemoan every attempt to reinvest in the business. Since the successes at the earlier two stages were strong, this allows flourishing as a Stage Three company. But the end is near as these dynamics set the stage for another Stage One founder to disrupt.
When Howard Schultz left leadership in 2017, the focal point was to reintroduce its premium branding and differentiate itself from a McDonald's-type drive through experience. Yet, his successor with a gaggle of spreadsheet running supporters managed to shut down such directives and scale into schemes to sell more stuff more quickly. Schultz's return may portend a return to at least Stage Two levels. Such changes do occur but require exceptional ability. That type of change occurred at Microsoft when Satya Nadella replaced Steve Ballmer. Steve Ballmer had been continuing to forcefully implement Bill Gates' Windows-centric model on the world. Satya Nadella did the unthinkable - reset the company on a cloud-based journey to meet the needs of its corporate customers.
When I view Stage Three companies, they fill me with a sense of disgust and even shame. Since all companies end up here, why not support other socio-economic models? My support for capitalism lies in its ability to renew. Much as older generations attempt to hold on to the past legislatively and culturally, they are inevitably replaced by a new generation. Mother Nature knows best. Capitalism and its profit-seeking behavior seems to best imitate Mother Nature's ability to effect the death of the old and the birth of the new.
