Chapter 51 - Copy This!: Lessons from a Hyperactive Dyslexic who Turned a Bright Idea Into One of America's Best Companies
Today’s Chapter is based on the book “Copy This!: Lessons from a Hyperactive Dyslexic who Turned a Bright Idea Into One of America's Best Companies” by Paul Orfalea, founder of Kinko.
Here’s what I have learned from the book:
Drive Thy Business
“Drive thy business or it will drive thee.”
— Benjamin Franklin
Paul Orfalea, having dyslexia, mentions that he had to compensate for his reading difficulties by learning from the world itself directly. To do so, he had to rely on his sense of observation and to rely on other people. This “disorder” of his turned out to be a gift. Here’s why:
Firstly, Orfalea explains that “doing life alone is not second best, it’s impossible.” In fact, when he founded Kinko’s, not only did he had to rely on his copy machines to operate his venture, he also had to rely on other people to manage the stores, to run the company’s real estate ventures and investment opportunities. Orfalea’s motto in life is "Anybody else can do it better."
Orfalea elaborates that many people, often those that succeed in school, make the mistake of thinking they need to do everything by themselves. This is especially false in business. He once said, “Every major success I've had in my life has come about because I knew that somebody, often anybody, whether it was my wife, friend, or business partner, could do something better than I could.”
Secondly, by relying on others, Orfalea had more time to focus on the big picture at Kinko’s which allowed him to be “on” his business rather than “in” it. He explains that “Being “on” your business and your life means having enough detachment every day that you are constantly reassessing your direction, thinking creatively about your overall strategy, and scrutinizing your competitors' tactics. It means relying on others to attend to most of the details of the day-to-day operations and employing a system of checks to verify that you are on the right track.”
As such, by being on your business rather than in your business, you have a lot more time to sit back and think creatively about where you can improve on your business. In Orfalea’s case, he would take this extra time “to scrutinize our competitors' tactics and concoct strategies for beating them. It gave me a chance to mull over the innovations coworkers in different stores had created. It gave me perspective.”
“Staying "on" your business and not "in" it is a question of timeframe. Ask yourself where you are right now. Are you living in the past, the present, or the future? One of the most important things you carry with you is your frame of reference. Being constantly busy means you are too wedded to the past. When you're that busy, you can't see the present, and forget about the future.”
— Paul Orfalea
As Orfalea would say, the goal of going into business is to make money while you are asleep. However, if your business is too dependent on you, then you won’t have much free time and instead of owning your business, it is your business that owns you.
In addition of finding great partners to delegate the operation of his stores, Orfalea would often put himself as inaccessible as possible in order to stay “on” his business. As such, he was rarely at the office and would often spend a majority of his time traveling different parts of the country and in different regions in the Kinko’s network.
Finally, this concept of staying on one’s business instead of being in it made Orfalea realized the importance of thinking hard over working hard. He explains that “the best thinking reduces the hours you have to work.”
This reminds me of the concept of “labour of thinking” that we have learned from Harvey Firestone. Firestone explains that it is quite difficult in business to have some time to yourself to think as numerous things come up every day that will need your attention. However, thinking is primordial in making good decisions and to run a successful business in the long run.
In his book, Firestone provides the example of Henry Ford, the founder of Ford Motor Corporation. While Ford is known for making business decisions quickly, but in reality, “He reaches his decisions slowly and alone; he does not jump at anything, and so, when the time comes for execution, everything moves with marvelous rapidity because everything has been previously thought through and planned.“
As a matter of fact, Ford was a master of delegating executive duties to others and made sure to have enough time on his own to think, and to plan and to watch. He would make sure to never assign any executive duties to himself and to have no social obligations.
“He has had the time to do this thinking and planning because he has used his time himself instead of permitting others to use it for him. And he is certain that plans will be executed for him, because he knows how to let men go when they grow too rich and lazy to execute.”
— Harvey Firestone
Power of incentives
“Never, ever, think about something else when you should be thinking about the power of incentives.”
— Charlie Munger
In 2003, Charlie Munger gave a speech on “Academic Economics: Strengths and Weaknesses, Considering Interdisciplinary Needs” at the University of California in San Barbara. In this lecture, he discussed how incentives are superpowers.
He provided an interesting case study on how Les Schwab tire store was able to come out ahead despite competing with the bigger tire companies such as Goodyears and later on, with huge price discounters like Costco and Sam’s Club. How did he do so? Munger believes that a big part of this is due to the fact that he “must have a very clever incentive structure driving his people. And a clever personnel selection system, etc.”
Similarly, I believe Paul Orfalea also had a great incentive structure in place at Kinko’s which lead to the success of his company. In fact, Orfalea realized that the workers behind the counter at Kinko’s were the true heroes of the company. As a matter of fact, being in the retail copy centers business, Orfalea had plenty of competitors considering it is an industry with no barriers to entry.
As such, if he wanted to beat his competitors, he would have to make Kinko’s a great place to work; he would have to create an incredible corporate culture and make it a competitive advantage. This starts by setting the right incentives in place. In fact, Orfalea mentions that it is a lot easier to manage the work environment than the people in a store. He once said that “when people are properly motivated, they will essentially manage themselves.”
First, he started calling his employees as coworkers to remind himself that he didn’t want to “use” people, but to work with “empowered entrepreneurs”. To instill this sense of entrepreneurship among Kinko’s workers, the company gave a share of the profits of the store to everyone — partners, managers, and even workers behind the counter.
Orfalea mentions that initially, Kinko’s “gave each manager 25 percent of his or her store's profits. Later, we expanded the system of profit sharing when we started giving each manager 15 percent of the store's profits and earmarking the remaining 10 percent to be split among that store's coworkers.”
“At Kinko's, we were building a family together at the same time we were building a business.”
— Paul Orfalea
Second, Orfalea mentions that “people want to know they are contributing to society.” As such, other than monetary incentives, Kinko’s had to give a sense of mission to keep their workers both happy and motivated.
To do so, Orfalea set a flat organization at Kinko’s. Without having any hierarchy, every single member of the company were treated equally in the company and were part of the decision process. In fact, Orfalea mentions that the head office’s main purpose is to serve the stores. He implemented the “80/20” policy where managers were encouraged to spend 80 percent of their time on the floor of the stores with coworkers and only 20 percent of their time in their offices.
As such, Kinko’s empowered coworkers behind the counter to become autonomous thinkers. They would not be required to ask for permission for implementing new ideas for taking care of customers. As Paul Orfalea once said, “our original store was a hothouse of experimentation.”
“As we grew, we designed a structure for our company that would be as democratic as the services we were providing. For me, this was the true brilliance of the Kinko's we created.”
— Paul Orfalea
This reminds me of General Motors’ “co-ordinated in policy and decentralized in administration” that became a standard practice in the American industry that was created by Alfred Sloan. Sloan believed that good management comes from “decentralisation with co-ordinated control.” Here’s why:
For one, it provided an opportunity for individuals to shine through with their initiatives as if they were running businesses of their own and it provided the company the ability to pay them accordingly to their success. As a matter of fact, Sloan mentions that the Bonus Plan implemented by GM is strictly related to the policy of decentralization since it gave the executives the opportunity to be paid according to their accomplishments. This allowed them to attract and retain managerial talent.
Secondly, Sloan believed that decentralization allowed for better capital allocation for the company as it allowed GM to evaluate the rate of return of each divisions seperately. Notably, he wrote that:
“[It] Increases the morale of the organization by placing each operation on its own foundation, making it feel that it is a part of the Corporation, assuming its own responsibility and contributing its share to the final result. As to its bearing on financial control: . . .
[It] Develops statistics correctly reflecting the relation between the net return and the invested capital of each operating division—the true measure of efficiency—irrespective of the number of other divisions contributing thereto and the capital employed within such divisions. As to its bearing on strategic investment: . . .
[It] Enables the Corporation to direct the placing of additional capital where it will result in the greatest benefit to the Corporation as a whole.“
— Alfred Sloan
Know Your Customers
“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
— Sam Walton
As we have seen previously from other success entrepreneurs, knowing your customer is incredibly important. In Kinko’s case, Orfalea founded his business by noticing the need for a copy centre for both students or faculty members of the University of California at Santa Barbara where his girlfriend at the time was studying at.
Orfalea believes that the central goal of an entrepreneur should be to find a mean of helping people fulfill a desperate need that the marketplace has yet to even identify. Kinko’s could be the solution to respond the apparent strong demand of copy centers in universities’ campus around the United States.
As such, Orfalea went on an expansion plan which was inspired by his experience playing Risk as a kid. He elaborates that “In Risk, the object of the game is world domination, with 42 territories on six continents that must be conquered. Playing the game taught me there was no reason to expand in a neat geographic progression. In fact, we didn't need to respect geographic boundaries at all. We knew there was not just a strong, but an overwhelming demand for retail copy centers on college campuses. Our first couple of stores taught us that.”
Knowing your customer is a great way to assess and re-assess your business model. As a matter of fact, Orfalea, seeing the growing base of commercial customers, decided to rethink his business model at Kinko’s and to expand into non-academic market in order to cater to his new type of customers that were created due to new technology such as color copies, blueprint copiers, and high-speed faxes.
Furthermore, Orfalea explains that he always took the customer’s perspective when doing the layouts of every single Kinko’s location. He believed that customers needed to walk into a soothing environment, if they were to come back. He once said, “I was maniacal about the layout and appearance of each store. If the managers in a particular store got their business right at the front door, then I was convinced that they got everything else right, too. Retail is detail, I told them all.”
He was so obsessed with layouts that he studied other successful retail companies to see how they did it. One of the companies he studied was McDonald’s. In fact, he was able to convince the manager of their local McDonald’s to come behind the counter to learn firsthand how McDonald’s does it. He often told his coworkers, "Everything has a place and everything in its place." and McDonald’s was a good example of this.
“Try subordinating yourself to another person for a time. Walk in their shoes. We tried to build a company at Kinko's in which we subordinated ourselves to the needs and demands of our customers.”
— Paul Orfalea
Finally Orfalea mentions that knowing your customers is also about understanding their psychology which can be a powerful tool in business. As an example, Ofalea mentions that Coca Cola’s leaders understood customers’ emotion well. He elaborates that “Coke wouldn't be the global phenomenon it is today if the owners of the trademark didn't whip people into a frenzy of excitement over every can of pop.”
Similarly, he believes that Starbucks also understood emotion well. Orfalea explains that Starbucks’ business isn’t so much about coffee but about the concept of “taking a break and letting your soul catch up with your body.”
As such, in order to promote this concept of putting themselves in the customers’ shoes, Orfalea made it so that everyone at Kinko’s would be sitting outward toward the customers. He explains that “Facing outward enabled us to put the customer first, to constantly dream up new ideas, to innovate, and to experiment. This was a central concern because ideas were the lifeblood of the company.”
This reminds me of a concept we’ve learned from Steve Jobs. In fact, Jobs mentioned that he built Apple with one principle in mind: to build products that they would want to use themselves. As a matter of fact, this is how the iPhone got to be created; it was driven by the fact that they all hated their phones and wanted to build a phone that they could use.
“Steve gave a speech once, which is one of my favorites, where he talked about, in a certain sense, “We build the products that we want to use ourselves.” And so he’s really pursued that with incredible taste and elegance that has had a huge impact on the industry.“
— Bill Gates
Save and Invest
“Live within your income and save so that you can invest. Learn what you need to learn.”
— Charlie Munger
Another important that Paul Orfalea shares with us in his book is the idea of saving and investing. He explains that when he was a kid, his parents were much more interested in his saving accounts and his critical thinking skills rather than his grades. This concept of saving taught by his parents stayed with him in his adulthood.
In fact, he mentions that “the first secret I share with college students, and with partners for that matter, is one-word long: Save. Savings was the cornerstone of my life. I knew damn well I wasn't going to make it in life if I didn't have money.”
The importance of saving was also reinforced into Orfalea by his friend Alan Porter who once told him that “your integrity is directly related to your liquidity.” He reiterates that if you have some savings, you can afford to have higher values and to make better decisions in terms of ethic. For example, you don’t have to keep working for an unethical boss or you don’t need to work so much that you have to sacrifice time with important people.
As such, Orfalea explains that to have control over your life, it is extremely important to save and to invest. As Naval Ravikant once said, “You must own equity — a piece of business — to gain your financial freedom.” Similarly, Orfalea gave himself a rule to use his profits from Kinko’s to purchase properties as investment vehicules. In fact, he mentions that “I made more money as a landlord in some years than I did selling copies.” Orfalea would himself that whenever the monthly rent was 1 percent of the purchase price, he would have to buy the property.
As mentioned above, the goal of every entrepreneur should be to make money while you sleep. This is only possible if one saves up and invest their savings to create multiple income streams.
“The idea is you want multiple income streams. You want to be bulletproof, with interest, dividends, rent, and liquidity.”
— Paul Orfalea
This importance set into saving can also be seen in the way Orfalea ran Kinko’s. As a matter of fact, he paid extremely attention to the company’s cash flow. He explains that “one of the things which I became proudest of is that I learned to manage our cash flow—as far as I'm concerned the most important financial measure of any business. When it comes to managing your personal finances, what is the first thing you look at? It's your bank statement, isn't it? Cash flow is the first thing I look for in a financial statement. I don't really care where the money was yesterday. I want to know where the money is today and where it's coming from tomorrow.”
As such, to make sure that Kinko’s always had sufficient cash at hand, Orfalea made sure that the company didn’t overextend when expanding their business. As a rule, he made sure that his business did not grow more than 30 percent a year. Not only would that make sure that their cash flow would stay manageable, it would also make sure to keep Kinko’s working culture intact.
So, how does one learn to invest? Orfalea mentions that the head of the Chicago Board of Trade once told him that the biggest predictor success for future traders were the amount of time they spent playing games such as poker and Monopoly. As a matter of fact, there are a lot of similarities between investing and playing games of chance with money. You can also learn business lessons from games.
For example, Bill Gates spent more time playing poker than attending classes during his stay in Harvard. He ended up dropping out of school and used the principles he learned from poker games to run Microsoft. Orfalea elaborates that “Love it or hate it, you've got to admit that Microsoft, and Gates, know how to play the cards to their advantage. Other well-known business, political, and legal minds play poker to sharpen their negotiating and deal-making skills—or just to make money.”
Monopoly is another great example. Orfalea mentions that Monopolgy is a great game to learn about business. In his opinion, “Marginal revenue and marginal cost are two of the most important measures in assessing the viability of any business.”
Here’s how Monopoly can help you learn the importance of these two concepts:
“Monopoly gives you a chance to watch marginal revenue in action when you build houses. If you buy Boardwalk, for instance, you pay $200 to build each house. For the first house, you get back only $200 in rent—not a great return. But the second and third houses pay you $600 and $1,400 respectively. Your marginal revenue on those two homes is the difference between the $200 you paid for them and what they produce in return: $400 and $1,200. (…) You see that an extra increment of expense gives you a disproportionate amount of income. This is a powerful lesson. But, for the most part, the students are too distracted to get it. They're too impulsive. They have a real rough time with the concept. They're "in" Monopoly and not "on" Monopoly. They haven't yet learned how to focus.”
— Paul Orfalea
This reminds of the importance of the advantages of scale that we have learned from Sol Price at FedMart. Price is well known for creating the Price Club concept which was conceived as a wholesale business selling merchandise to small, independent businesses. The idea was for business owners to “come to a large warehouse, select the products from steel rack displays, pay either by check or cash, and take the products back to their stores, restaurants, or offices.“
The major advantage to purchase at Price Club was obviously because the prices would be much more lower than traditional wholesalers who often offered extra services such as order taking and delivery. In Price’s mind, these extra convenient services would be offset by the fact that Price Club’s warehouse “would also serve as a storage facility for the various business owners so they would not have to buy and store large quantities of merchandise at their stores or offices.” This would be extremely helpful for small businesses to compete with the larger discount stores.
“By reducing merchandise acquisition costs for retailers and other businesses, everyone would win. Small businesses would pay less for their wholesale goods and supplies, retailers could charge lower prices—in turn improving their ability to compete against chain stores, especially the growing number of discount stores that were under-pricing small businesses.”
— Robert Price
Beyond the Book
Read "Daniel Kahneman: Some Thoughts on Thinking" by Farnam Street
Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street
Read "BUILD OR BUY EQUITY IN A BUSINESS" by Eric Jorgenson