Chapter 8 - Pizza Tiger
Today’s Chapter is based on the book “Pizza Tiger” by Thomas Monaghan and Robert Anderson.
Buy it on Amazon here:
https://www.amazon.com/Pizza-Tiger-Thomas-Monaghan/dp/0394553594
Here’s what I have learned from the book:
The 80/20 Rule
“The way to create something great is to create something simple.”
— Richard Koch
Tom Monaghan is well-known as the founder of Domino’s Pizza. He first started his pizza career by purchasing a small pizzeria and made it into one of the largest pizza delivery company in the world. He did so by focusing on customer’s satisfaction similar to Sam Walton from Walmart.
“Most important though, we knew who our real boss was — the customer.”
— Tom Monaghan
His two core business tenets were:
Prepare pizzas with the freshest ingredients possible
Deliver pizzas to the customers within thirty minutes
“The idea of stressing thirty-minute delivery grew out of my insistence on giving customers a quality pizza: it didn’t make sense to use only the best ingredients in our pizza if the product was cold and tasteless when the customer got it.”
— Tom Monaghan
To make sure to run a profitable business while still satisfying its promises to the customers, Tom Monaghan used the Pareto Principle, also known as the 80/20 rule. This principle explains that 80% of outcomes are the result of 20% of inputs.
In Domino’s case, Monaghan quickly realized that even though he sold three different sizes of pizzas 80% of his sales came from 12-inches pizzas. Similarly, 90% of beverage sold were either Coke or Pepsi.
“Another concept I was eager to try was selling twelve-inch pizzas only. In Ypsilanti, at least 80 percent of the orders from dorms were for twelve-inch pizzas. So why have any other size?“
— Tom Monaghan
As such, he decided to reduce his products’ offering by selling only one size pizzas. This was a major revelation and breakthrough in Domino’s Pizza history. By doing so, the company was able to leverage its profits even further. It may seems counter intuitive that simplifying a business may increase its revenue, but here’s how Monaghan explains it:
“The main argument for having only twelve-inch pizzas was faster service. But quality would be improved, too. A pizza maker has to learn how to make each size pie. The twelve-incher is easier and larger ones are much harder. There would be fewer mistakes too both in taking orders and boxing them. With three sizes of pies and just two inches difference between them, it sometimes happened during a rush that a worker would ruin a large pie by trying to jam it into a medium size box. Then there were the saving we would make in purchasing. Having one size would cut our box inventory requirements by two-thirds.”
— Tom Monaghan
Power of incentives
“Never, ever, think about something else when you should be thinking about the power of incentives.”
— Charlie Munger
In his famous speech The Psychology of Human Misjudgment, Charlie Munger explains how powerful the power of incentives can be:
“Well, I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.“
— Charlie Munger
He mentions that to change behaviours, it is a lot more easier to change the incentives and to make sure it is aligned to the desired goal than to use reason. As Benjamin Franklin once said: “If you would persuade, appeal to interest and not to reason.”
In terms of business, Munger shared the following exemples from Federal Express and Xerox to show the power of incentives:
“The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work.
And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked.”
— Charlie Munger
“Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back to Xerox because he couldn’t understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Of course when he got there, he found out that the commission arrangement with the salesmen gave a tremendous incentive to the inferior machine.”
— Charlie Munger
Similarly, in the case of Domino’s Pizza, Tom Monaghan quickly realized the power of incentives when managing his franchisees and employees. For example, Monaghan realized that he had to appeal to the interests of its franchisees to retain the company’s best talents.
“The solution to our problem of retaining ambitious employees came into my mind. I’d create a sponsorship program whereby franchisees would encourage their best managers to open their own Domino’s stores. The company would share its royalties from the new franchise with the sponsor for a period of time. I got excited about this plan because it was good for all concerned. It contained a double benefit for franchisees because it not only gave them added income, it also provided them with a powerful new tool for their recruiting efforts. The kind of young person the sponsorship program would attract — the individual with strong entrepreneurial interests — is precisely the type who tends to learn our system quickly and is most likely to have the makings of a store manager.”
— Tom Monaghan
Furthermore, Monaghan viewed management as setting goals to achieve for Domino’s as a business and for his employees.
“The basic building block of management, for me, is goal setting. You must have a goal in order to know what direction to take. Whether you’re managing a company, your own career, or a household, if you decide to just go through the motions and wait for something to turn up, you’ll find your toes do it first.”
— Tom Monaghan
In terms of managing his staff, Monaghan established Domino’s Job Planning and Review System where each employee is asked to list his goals for the coming period with a description on how he intends to achieve them and a date by which they are to be accomplished. This allows the employee to take credit for his achievements and it helps in building pride and self-esteem. And just to make it fun, Monaghan loved to come up with incentives to motivate his people. He would have sales contests and made it a Domino’s tradition to make awards of things he was wearing.
“A franchisee asked what he had to do to get that watch from me, and I told him, “Turn in a seventy-thousand-dollar sales week.” He did it, and for the next few years I gave away several Seikos and, after that, hundreds of $800 Rolex watches.”
— Tom Monaghan
Defensive Management
“Offense wins games. Defense wins championships.”
— Bear Bryant
As the owner of the Detroit Tigers from 1983 to 1992, Monaghan was an avid baseball fan. As such, he loved to make sports analogies while running his business. In sports, it is often said that offense wins games, but defence wins championships. And so, he was a strong believer in defensive management, a term coined by Mark Latvala, a Domino’s area franchisee in western Pennsylvania.
”We use a lot of sports analogies at Domino’s because what we do in the pizza-delivery business is very much like playing team sports. We frequently use sayings like, the team with the best defence wins. It may be cliché but it’s true. I’m a strong believer in defensive management.”
— Tom Monaghan
Defensive management is defined as taking care of your business’ current existing customers. Monaghan believed that if you take care of every single customer, a business can grow by 50 percent a year. In Domino’s case, it was simple: make sure that every pizza gets there in thirty minutes and make sure every one is good — no burned pizzas and no raw pizzas.
Monaghan gives the example below to explain how making a pizza delivery late can lose future customers:
“Suppose a store is delivering 95 percent of its pizzas within thirty minutes. Sounds pretty good. But let’s look at that 5 percent of orders that are delivered late. Let’s say it comes to fifty late orders per week. We know that more than 10 percent of late deliveries result in lost customers, which means that this store is losing, at minimum, five customers per week. If you multiply that out for the year, then multiply that by twenty-six, which is the average number of times a customer buys from us during the year, you get 6,760 lost orders. It would take a lot of time and money spent on advertising and promotion to bring in that many orders. And there’s no way to atone for bad word-of-mouth from the disgruntled customer.”
— Tom Monaghan
This thought process is similar to Charlie Munger’s idea on how to attract more clients as an attorney: “It’s the work on your desk. Do well with what you already have, and more will come in.”
Furthermore, Monaghan was a firm believer of keeping a business as simple as possible with his defensive management approach. As such, Monaghan had a philosophy of concentrating on the operating of pizza delivery shops and to not get sidetracked into areas he knew nothing about.
“It amazes me how often owners of a restaurant will fail to exploit a successful business in favor of something different. I’ve seen it happen many times: A business is built up over a period of years and becomes a great restaurant. Then, instead of paying attention to all the details that made that restaurant great and building on them, the owners begin to look for other things they can do. They go into sideline businesses or start building other restaurants that drain attention and energy away from the first one.”
— Tom Monaghan
As such, even when thinking of investments he made outside of the company, such as buying the Detroit Tigers baseball team, Monaghan always thought on how the purchase could benefit Domino’s through synergism.
“Ideally I’m looking for synergism, a term I learned from Adizes, which he defines in one of his training manuals as: “cooperative action between two different organizations in which the total effect of the combined effort is greater than the sum of the two parts operating independently.” The way I put it is: “Synergism is when two plus two equals five.””
— Tom Monaghan
“To me, a prime example of synergism is the connection between Domino’s and the Detroit Tigers. It was a great day for me personally when I bought the team, but it was also a home run for Domino’s in the synergism league. There was no doubt in my mind that my connection with the Tigers would sell pizzas, and it has.”
— Tom Monaghan
This idea of synergism is definitely not new to entrepreneurs. Sam Zell often used this “1+1=3” approach where he could maximize the value of his holding overall with a sum of parts.
Decision Making
“Imagine someone comes along who demonstrably has slightly better judgment. They’re right 85 percent of the time instead of 75 percent. You will pay them $50 million, $100 million, $200 million, whatever it takes, because 10 percent better judgment steering a $100 billion ship is very valuable. CEOs are highly paid because of their leverage. Small differences in judgment and capability really get amplified.”
— Naval Ravikant
Making decisions that are consequential and irreversible must be made methodically and with great deliberation. I believe that Monaghan’s decision making process is one that we can all learn from:
“There are some personal approaches in management that I don’t think I could have learned from a book. My method of making decisions is one of them. I don’t know that it would work for anyone else. But here, for whatever it’s worth, is how I do it: I reach decisions by making lists on my yellow legal pads. Down one side of a page, I’ll write all the reasons I can think of in favor of a given course of action. On the other side, I list every reason I can think of against it.”
— Tom Monaghan
“Thinking of arguments for and against a decision is where my ability to dream comes in handy: I imagine the decision has been made. I see in my mind’s eye how it affects people and the way they react.”
— Tom Monaghan
More importantly, by imagining the decision being made, Monaghan was able to identify all the unintentionally consequences his decision could of created. This is often called second or third-order thinking. As a matter of fact, problems are not always as simple as they appear, and it is important to take into account the long-term consequences of our decisions as it could end up creating a worse problem.
“Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.”
— Ray Dalio
“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.”
— Howard Marks
Second-order thinking is difficult and can be time consuming, but doing so is an easy way of outsmarting others.
Beyond the Book
Read "Leverage: Gaining Disproportionate Strength" by Farnam Street
Read "Incentives: The Hidden Forces That Shape Behavior" by Farnam Street
Read "Second-Order Thinking: What Smart People Use to Outperform" by Farnam Street