Chapter 5 - How to Build a Business Warren Buffett Would Buy: The R. C. Willey Story
This chapter is based on the book “How to Build a Business Warren Buffet Would Buy: The R.C. Willey Story” by Jeff Benedict.
Buy it on Amazon here:
https://www.amazon.com/Build-Business-Warren-Buffett-Would/dp/1606411160
Here’s what I have learned from the book:
Embrace change or die
“The secret of change is to focus all of your energy, not on fighting the old, but building on the new.”
— Socrates
Despite seeing scores of furniture stores come and go in Utah, Bill Child managed to keep R.C. Willey profitable year after year by paying attention to a statement that an old banker told him: There are three things you can count on – death, taxes, and change. Child said: “He was right about change. The world changes. Many of the furniture companies that have gone out of business because they failed to change.” A company’s need to change is driven by the fact that customers’ needs and expectations change. The competition changes too.
To keep the business vibrant, R.C. Willey made sure to always update what it offered customers in terms of merchandise. Child personally visited trade shows around the world, searching for the newest products that would satisfy customers’ desires. For instance, when exercise bikes became the rage, R.C. Willey didn’t hesitate to stock its stores with them, even though the store hadn’t previously carried exercise equipment in its inventory. The result was that the company sold more than 10,000 exercise bikes in one year.
At the same time, the store constantly changed its interior appearance. By hiring a highly accomplished interior decorator and giving him authority, R.C. Willey sent a signal that appearance and atmosphere were a top priority. As a result, the company didn’t fall into the trap that many furniture stores encounter, becoming beholden to a certain appearance and model. Child said: “Change can come gradually and sneak up on you. Many of our competitors kept doing the same thing, expecting the same results while the world was changing around them.”
The takeway here is that change is everywhere. Our business must always be ready to change and be constantly updated to the customer’s newest need to be able to fill it. We have seen this concept used on and on by other founders such as James Dyson (Chapter 3 - Against the Odds: An Autobiography by James Dyson) and Robert Iger. Also, by analogy, the best quality businesses are the ones that can resist and maneuver swiftly in the face of changes.
In her book “Lessons From Century Club Companies: Managing for Long-Term Success”, Vicki TenHaken has studied the unique management approach of companies that have prospered for over a hundred years. She mentions notably that century club companies are successful due to their ability to adapt and to implement change to survive the various challenges encountered during the years. However, there is a delicate balance to sustain between tradition and change and communication is the key to success:
“When change is necessary, leaders within Century Club companies take the time to explain the factors causing the need to change and what could happen to the company if they don’t.”
— Vicki TenHaken
“Leaders should be clear about the company’s core values and beliefs — those things that will not change — and then take the time to explain why other things (often some of the practices around those core values) must change.”
— Vicki TenHaken
Structured Growth
“Rapid Growth is not always better than slow growth if you don’t know how to scale your company.”
— Ben Horowitz
Eager to stay one step ahead of his competitors, R.C Willy continue to focus on growth. Bill Child hoped to build more stores. But first R.C. Willey had to change the way it delivered merchandise to its stores and to its customers through home delivery. The company’s transportation infrastructure simply wasn’t capable of handling more business.
So, R.C. Willey went to build a massive distribution center near their three retail stores. Bill Child mentions that the reason why the company had such great growth in those years, is because it had an infrastructure where it could receive and deliver merchandise. R.C Willy had space to store a big inventory and it could provide next-day deliveries. And more importantly, they had an efficient warehouse. They realized that it is important to generate sales, but it is equally important to maintain warehousing infrastructure to support those sales. It takes time to assimilate growth. The infrastructure and system must grow at the same level that sales growth.
Bill Child understood that he could not rest on his laurels, he needed to continue to grow and be the market leader to maintain his competitive advantage. However, the growth has to be a healthy growth based on sound foundations.
“Scaling up from the small to the large is often accompanied by an evolution from simplicity to complexity while maintaining basic elements or building blocks of the system unchanged or conserved.”
— Geoffrey West
This idea of structured growth in business reminds us of how important it is to be aware that growth in systems is often non-linear, which means that changing a single component might result in effects that fundamentally changes your system. For example, a small startup might be able to make decisions quickly and without much bureaucracy, but as it grows into a large corporation, decision-making processes might become more complex and slower. This is often called a butterfly effect which is the idea that small things can have non-linear impacts on a complex system.
“You could not remove a single grain of sand from its place without thereby … changing something throughout all parts of the immeasurable whole.”
— Fichte, The Vocation of Man (1800)
“We live in an interconnected, or rather a hyper-connected society. Organizations and markets “behave” like networks. This triggers chaotic (complex) rather than linear behavior.”
— Tom Breuer
This idea of thinking in scale is extremely important in business. As a matter of fact, scaling up the business may not always be the best solution as staying small and flexible could be a better choice. You may think of the multiple long-lived Japanese family-run companies as examples. By staying small, they have held on to their traditional values and they can maintain their durable and loyal customer relationships which are essential to their business models. It is not by chance that Japan has over 33,000 companies that have been in business for over a hundred year.
Beyond the Book
Read "Power Laws: How Nonlinear Relationships Amplify Results" by Farnam Street
Read "Chapter 3 - Against the Odds: An Autography" by Biography Nuts