Price is Right, Part 2: Proof of Theory

February 12th, 2015

If the owner is gifted and the company is not producing results consistent with the gift, then something or someone is in the way.  It is not money.  It is not risk: these owners always move to reduce risk.

It is the pressure to conform.  Since they are seen as erratic and undisciplined, then they must, for their own good, be rationalized.  So goes the argument.

We do not agree.

We work for these supposed erratics.  What we agree with and how we deliver our services is the idea that they, by gift, know what the educated, the expert, and the credentialed cannot know because their training chains them to what is already known.  They find that difficult.  Not only do people of lesser education know what they [the experts] don’t, but worse, their own processes have long been detached from the underlying knowledge.  They do not respect because they cannot respect themselves.

So the conflict.  (The owner surely felt this conflict; what if our work led to big positive differences, making the preceding years look like failures through fault and neglect?  He moved ahead nonetheless.)

And so we pitched an owner who was gifted with a management team that was educated.  He [the owner] was in his 60s.  He was not articulate.  He knew nothing– or little–about business.  He was receptive, explosive, and dominating.  He was a surprise.  He was what could be called a true entrepreneur.

For the management team, this project was a re-introduction of uncertainty, yet another “risk”, and a reduction in their power and influence.  What would happen to the pillars of management — order, quantification, and proven solutions?  Where were the time efficiencies of their rules of thumb (“best practices” in more recent terms)?  That is how they saw it.  They did not respect themselves, which is why they had to see the owner as stupid.  That’s an actual quote from a conversation I had with him:  “Everyone around here thinks I am stupid.”

After my pitch he said to me, “We’re going ahead, and I don’t think it will work.  But we have to try, we don’t know what’s going outside my business.”

If you don’t find answers inside, then what?  As the late, great Peter Drucker said, inside is all about cost.  Profit is outside.  Inside can only order, quantify, and prove what is known (history).  It cannot capture, consider, understand or act on that which is not (the future).

Sorry about that.  This kind of reasoning drives orderly management-types nuts.  At least it does until they realize that we all, to a sufficient degree, are capable of it.

And yet, we started inside.  We did by a tour of him, so to speak.  We started with this thought: if the company were successful (it clearly was) and yet fell short of the owner’s standard, and that owner was entrepreneurial, then the shortfall is a pricing problem.  We worked to eliminate other factors.  I won’t walk through the list or the techniques; they amount to how does this company compare.  By elimination, if all other factors don’t explain it, then pricing must be the cause.

A pricing problem is also a reliable hypothesis because of how companies set their prices.  Their methods of pricing don’t capture the speculative value of giftedness.

This client–recall his original statement–needed more, something direct, something that would show that his prices were lower than the competitions.  If so, they were underpricing.  It sounds obvious, but it is anything but simple.  There was no public market price.  We were able to create synthetic price discovery.

Bang!  We got direct evidence.  Over 10 years, our chart showed about 30 degree upward ramp in the industry and flat line for our client.  Incidentally, this further proved to us his relentless, insistent demand for a much better product was producing lower costs, which as Buffet observed, tend to get passed on to the customer.

Next time: Sensation vs. Reality of Risk