When investing for the long run, there are many factors that require your focused thoughts and due consideration. I will not be covering the "common" factors in this article such as PE, PEG, Revenue growth, Debt, Cash Flow, same stores sales etc.., although I do use and value those factors. The unique factor I will highlight here is a strength of three successful CEOs -- Steve Jobs, Alan Mulally and Jack Welch.
So what do these three Icons of Business have in common? I say it is their uncanny ability to "simplify." This includes virtually everything from communicating ideas to how they structure their organizations to the number of unique product & parts across their portfolio. Each of these Leaders used or uses simplicity as the cornerstone to their companies success. The impact of this simplification on Apple (NASDAQ:AAPL), Ford (NYSE:F), and General Electric (NYSE:GE) along with their performance for shareholders follows:
Steve Jobs & Simplicity:
As many know, all of Apple's products are created with the unrelenting requirement to simplify the user interface to help create a more enjoyable customer experience. Examples include the mouse, ipod click wheel, ipad touch screen and now iPhone's Siri. Less well known is the intense effort Apple undertakes to simplify virtually everything else behind the scenes. This effort is the backbone to creating their astonishing and growing profitability.
All you need is the ability to count to validate the incredible power of simplifying as a key differentiator. If you look across all of Apple's product lines and count the number of products, you will see this is in the low double digits. If you did the same for Samsung, Hewlett Packard (NYSE:HPQ), Cisco (NASDAQ:CSCO), or Dell (NASDAQ:DELL) you would be counting hundreds or thousands in many cases. If you take apart their products(or view the apple tear-down results) you will also see this theme as apparent... less screws, uni-body machined construction etc.
Confirmation for how important simplicity was to Steve Jobs can be found throughout his biography by Walter Isaacson. In it he crystallizes his guiding principle as follows:
"So that's our approach. Very simple, and we're shooting for Museum of Modern Art Quality. The way we're running the company, the product design, the advertising, it all comes down to this: Let's make it simple. Really simple."
Another corroborating excerpt just as telling is his advice to Larry Page, Google's (NASDAQ:GOOG) CEO, when asked for mentorship:
"Figure out what Google wants to be when it grows up. It's now all over the map. What are the 5 products you want to focus on? Get rid of the rest, their dragging you down. They're turning you into Microsoft (NASDAQ:MSFT)".
Whether Larry takes his advice is unknown but certainly it can be said it is surprisingly sincere advice given to a fierce rival. Upon Steve's triumphant return to Apple he did exactly this when he killed mediocre products including Newton, Cyberdog and OpenDoc.
As any present or former manufacturing product planner can attest to; the product count reduction, part count reduction, supplier count reduction and single location production which Apple employs is as important to their massive profits as anything else. Many companies have huge revenues, but unfortunately they get there with much lower profitability due to excessive complexity. Apple's simplifying approach creates inherently lower cost. Today, the benefits of this approach are being further amplified by their economies of scale as they sell an identically constructed product (software notwithstanding) into totally different end markets.
Steve Jobs shareholder Legacy (AAPL vs S&P500):
Alan Mulally & Simplicity:
When Alan Mulally took over at Ford they had lost $17B the prior year and were rapidly heading toward bankruptcy. The Strategic Leadership, which Alan implemented, was vast and all encompassing. These efforts were rooted in simplifying all that Ford was doing and as a result allowing leadership to focus on fewer things. A list of just a few key changes Alan made to reverse the nearly 40year decline of Ford shows the elevated value he places on simplification:
1) He simplified the product line by immediately eliminating most all-non Ford Brands such as Aston Martin, Jaguar and Land Rover. More recently he pruned further with the jettisoning of the Volvo & Mercury brands. Ford stock was below 8 just prior to the August 2009 Barron's article quoted him as follows " We are bringing global cars to North America, starting with the Fiesta in 2010. By 2013, at least seven Ford brand nameplates -- 80% of our production -- will be on global platforms. That means common parts and large cost savings. This is dramatic: When I came to Ford three years ago, we had 97 nameplates. Now we have just 59. Can you imagine what that means in terms of being able to focus efforts?"
2) He simplified the dealership network by eliminating the marginal dealerships and focusing on the remaining dealerships. In the same article the words Alan uses are "We are rightsizing the dealer network". A controversial and difficult topic, his word choice is appropriately not "reduction, elimination etc. But the end result of "rightsizing" is unmistakable. It's smaller, simpler.
3) He simplified the supply base. A focused "project quark team" was tasked specifically with shrinking the supplier base. A complex task to say the least but the impact will be felt for decades.
4) He simplified Union work rules. In negotiating with the unions, Alan was able to gain important job code and title reductions thus allowing their employees and plants greater flexibility to efficiently manage production.
5) He simplified global platforms. Unlike points 1-4 above, there is an area that has yet to dramatically hit the bottom line as it is in the early stages. That is, the collaborative and brand building effort undertaken by Alan to create true global car platforms. This "auto manufacturer nirvana" has been talked about for many decades across the big three. Only now with an assist to the crisis along with Alan's leadership is it positioned to occur and hit the bottom line. Think about the improved quality and economies of scale when the same parts go into a Ford Focus targeted to USA as well as a German and Chinese Ford Focus! Alan's 2010 letter to the shareholders provides additional insight on this profitability lever.
Throughout his turnaround, Alan has relentlessly communicated, or more clearly - telegraphed, his simplifying approach. Those listening with a "simplicity filter" would have expected, not guessed what has now occurred. Unlike GM & Chrysler, Ford not only avoided bankruptcy, they are now well positioned for long-term success.
Jack Welch & Simplicity:
GE was a successful company when Jack Welch arrived as CEO in 1981. Though Jack still has his detractors, his real impact can be measured by the degree of "management copying" that occurred in the last few decades including his tenure while still at GE. Many fundamental, well known simplifying activities Jack undertook when remaking GE follow:
1) He simplified the organization structure by cutting the number of management layers in half from 9 down to 4-5. This may sound like a small deal but for many the sleep inducing "buffer" between you and the CEO was gone as Jack regularly spoke with employees 2 or 3 layers down.
2) He simplified how he wanted every employee to act daily. The message Jack instilled in all GE employees was the overriding importance of Speed, Simplicity, and Self Confidence. It's fair to say that simplicity on it's own helps drive the other two. Simplicity does drive faster decision making as there is less to consider; employees did gain increased confidence as they eliminated tasks and steps in their domain. This simplifying process was formally known as "Work-Out".
3) He simplified goals. One well known business requirement Jack initiated for all his business leaders was that each Business Unit leader was instructed to be either #1 or #2 in their Industry "or get out". Many businesses were eventually jettisoned as a result but others achieved greater heights with this simple and transformative goal.
4) He simplified how GE increased efficiency. Six sigma, a way to dramatically improve quality was initially developed at Motorola. Jack borrowed this approach and rolled it out across the globe. The impact paid dividends again and again as their quality improved and good managers began to use measurements to help guide their decision-making. As in any broad based tool, it can be overused. In the latter years it resulted in some managers unintelligently using this tool as a hammer as they went about banging not only nails but also screws, bolts and anything else that might show they're support for what they thought was Six Sigma.
An enlightening, caffeine charged read that helps piece together what was going on at GE during Welch's early years can be found in the book: "Control Your Own Destiny or Someone Else Will".
In summary, great leaders simplify everything they come in contact with. I recommend using this important screen to help determine whether a company's long term success is durable. If you see a CEO that exudes simplification in his words and deeds, take stock of their track record on execution and then act. Alan Mulally simplified at Boeing prior to doing the same at Ford and during his relatively short tenure thus far at Ford, the stock is up over 50% while the overall market is down. Jack simplified GE Plastics and others well before executing this philosophy across all of GE and during his tenure the stock was up 30X, about four times better than the index. Finally, Steve has always had the underlying belief in the power of simplicity as his guiding product design principle and though it is early, there are no telltale signs that Tim Cook believes otherwise. During Steve's second stint at Apple, the stock was up an amazing 100x while the S&P500 was up just over 20%.
The above example demonstrates the importance of Simplification as a key ingredient to creating shareholder value. It can be said that Jeff Immelt has taken a counter approach and created markedly different results for his shareholders. In practice, Jeff's evolving management approach reveals a mutating style that tends to confuse employees and shareholders. I will not be delving into the details here but the approach clearly is not benefiting his shareholders as compared to those CEO's using Simplification as a guiding principle.
Jeff Immelt performance for shareholders (GE vs S&P500)
The jury may still be out for some Immelt supporters, but if you look at his 10+ year track record it is clear: If you had invested in the S&P500 Index you would have beaten GE stockholders during Jeff's tenure thus far by roughly 300%.
I'll let each of you draw your own conclusions as to the importance of simplicity for the longer-term investor. In addition to Apple and GE, forthcoming articles will highlight company CEO's of a similar simplicity mindset.