The Rebel Allocator

by Jacob Taylor

Progress that is barely noticeable here starts to really add real value over millions of burgers, fries, shakes, and customer interactions.”

every expense needs to be justified each year.

Will this expense go toward delighting our customer? If the answer is no, then we’re ruthless about cutting it.

We call these non-strategic expenses because they don’t advance our strategy of making the customer happy. We’ve found these expenses to be like fingernails; they always need trimming.”

“We also have something we call strategic expenses. These expenses advance our strategy of delighting the customer. For strategic expenses, we seek to outspend the competition by a long shot. Strategic expenses build a moat around our castle so the customer only wants to do business with us. We aren’t afraid to spend in those categories. We view them as investing in the happiness of our customers.”

“In order for a business to thrive, the value delivered to the customer, V, has to be greater than the price the customer is charged, P, which has to be greater than the cost of that good or service, C. V is greater than P is greater than C,”

anything other than C then P then V is not sustainable. Either the customer will stop buying, your business will go bankrupt, or both.”

It’s very easy to use accounting tricks to make C be whatever you want by shifting costs into different time periods. Always be wary and ask yourself does this represent every true cost? Don’t fool yourself. And don’t let others fool you with their projections.

It’s helpful to look at the price through different time periods. For instance, what if you sold something like a newspaper subscription where the customer kept paying every month. That first month’s price, one transaction, wouldn’t tell the whole story. Often it is better to look at the customer’s lifetime relationship to determine accurate costs and prices.”

if you have more than five competitors in your fishbowl, don’t expect to be able to control the price of anything.

in the long run, a mature market becomes a two-horse race. Usually an old, reliable brand versus an upstart battling it out. Think Coke and Pepsi locking horns in the Cola Wars.”

We all have wants and needs at different times. They vary with the condition you’re experiencing. If you’re drowning in a river, a glass of water isn’t of much use. If you’re stranded in the desert, it’s almost infinitely valuable to you. The value of something always depends on your individual context.”

think very hard about what would make the customer more happy. The obvious engineering answer isn’t always right due to the subjective nature of experience.”

“The people closest to the customer probably have the best gauge on how to fix a problem or what might delight the customer. If you’re at headquarters a thousand miles away and are making decisions in a vacuum away from your customers, how do you know if you are hitting the mark? How can you tell what is a strategic versus a non-strategic expense? You can’t--there’s no feedback when you’re so far away.”

“The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.”

“The customer won’t think they’re getting their money’s worth if the price they pay is more than the value they receive. They won’t end up buying. At least not for long--it’s unsustainable.”

general,” Mr. X continued, “there are three ways to make the brand triangle bigger. Be the cheapest. Be the most convenient. Or be the best. Good companies aim for at least one of those objectives. Great companies find a way to achieve two. Doing all three is a rarity.”

More businesses are providing a commodity than they realize.

it’s very hard to create and maintain a differentiated product for a long time. There’s simply too much competition vying to scratch our subjective human itches. It’s just a matter of time before you get disrupted.”

“How would you know if you’re providing a differentiated product then?” “The answer is surprisingly simple. You only have to answer yes to one question: If you wanted to, could you raise prices and not lose customers? If you can answer yes, you probably have a differentiated product. If the answer is no, you’re in a commodity business. It’s that simple.

if you can’t raise the price, you should focus primarily on controlling costs?”

“There are many commodity businesses that make a great profit because they are the lowest cost provider in their industry. They know they can’t do much to change value and price, so they become demons on lowering costs. It’s important to be strategic about where you are pressing your advantage.

You either have to be the lowest cost producer or build up a brand that lets you charge more if you want to earn higher returns.”

Remember the train from London to Paris that we talked about last time? Never forget to account for your customer’s perception.”

“I’d modify that to say the customer’s experience is always right. We look for ways to lower our expenses, but we do think there are some costs we incur that move the Value straw enough to justify the resources.

There’s a saying that no business plan survives first contact with the customer. And often, the customer can’t even articulate the value they’re feeling because it’s happening at deeply subconscious levels.

technology is just a tool to accomplish a human want or need.

general the longer we humans have been using a particular technology, the longer we are likely to continue using it in the future. There’s a persistence. It’s very likely that humans will be watching a basketball game on Mars someday, and they’ll still be sitting on chairs very much like these and using a fork to eat their food.”

“The more profit a company generates, the more attention they draw to themselves. Competition, government regulators, even customers who might start to suspect they might be getting overcharged.

True monopolies try to downplay their dominance and avoid looking greedy. Like slow-playing a winning hand in poker.”

the Price straw acting as a lever reminds me of the role of insulin in the body. This is oversimplified, but insulin is like a switch that tells the body to either burn fuel in your system now as glucose, or save that energy for later in the form of fat.”

depending on what you do with price, you create two options. You can decide to store the energy locally in the form of profits which are readily available to you, like glucose in your bloodstream. Or you can tuck the resource away as fat for later use in the minds of your customers as brand.

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.”

“No man ever steps in the same river twice, for it's not the same river and he's not the same man.”

this concept of spreading fixed costs is referred to as operational leverage or economies of scale.”

Each unit you add at the individual level increases the value for everyone at the global network level. So you bump up everyone’s Value straw at a faster rate than the costs grow. That’s a pretty neat way to widen the gap between Value and Price,

"While deals often fail in practice, they never fail in projections."

“The higher return a business earns on the capital that is invested in the business, the more cash it is producing and the more value is being created.”

“Growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Growth is simply a component...

for every dollar that’s put into the business for operations, how much comes out?” “That’s it?” I said. “Yes, sir,” he said. “So if you put a dollar into a business, and it throws off fifty cents of profit, what was your return on invested capital?”

“Typically for a public company, ROIC is measured in yearly increments,“

The historical ROIC in the U.S. is around 6%, but that can vary widely any given year and by industry,”

In spite of our desire for order, business usually doesn’t map well to one trip around the sun.”

a good strategy for us involves finding ways to better delight our customers or lower our costs. There are usually several projects that make up a strategy. Like a bundle,”

“A strategy is a direction you’re hiking, like east or west, and the projects would be the different paths through the woods you can take to get there.”

“We prefer to assess and fund strategies and not individual projects for several reasons. First, we’re aiming to succeed in the long term. A strategy is inherently more long term focused than a single project.”

it’s people who are coming up with these ideas. It’s easy to fudge the projections on individual projects and make the numbers work. Not due to any maleficence--it could be they’re simply enthusiastic. Humans tend to be overconfident and extrapolate in straight upward lines when they get excited.”

it’s harder to overestimate an entire strategy. So thinking in strategies keeps the numbers more honest and your team pulling in the same direction.”

“We pursue a strategy together, not pet projects that make an individual champion look good. Innovation is often best done in teams by combining ideas in novel ways.

thinking in strategies can open your eyes to new paths in the forest. Sometimes a great idea is staring you right in the face and you don’t see it until you look at your bigger strategy.”