Chapter 90 - Les Schwab Pride in Performance: Keep It Going
Today’s Chapter is based on the book “Les Schwab Pride in Performance: Keep It Going” by Les Schwab.
Les Schwab was an American businessman who founded Les Schwab Tire Centers, a highly successful independent tire store chain in the western United States. Schwab came from humble beginnings and built his business from a single store in 1952 to hundreds of locations across multiple states, making Les Schwab one of the largest independent tire retailers in the country.
Here’s what I learned:
Employees’ Incentives
“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
At the heart of Les Schwab’s success in business is based on the belief in profit sharing as a mean to empower employees. In fact, Schwab firmly believed right from the beginning that when employees are treated as partners, they become more invested in their work. As such, Les Schwab first started by sharing 50 percent of the profits of each new store with its manager, and later on, they changed their profit sharing structure to share over 49.51% of their profits with employees working in the stores. The logic is simple; when workers see a direct link between their efforts and the company’s success, they are more likely to go above and beyond in their roles.
Les Schwab once said, "I never could understand why more business people don't share with their employees. What nicer thing can they do with their profits? You can't take it with you. Naturally you should look out for your family, but you can always come out better for your family if you look out for your employees first."
This approach not only fosters loyalty but it also creates a culture of accountability and motivation. By sharing profits with his employees Schwab cultivates an environment where employees feel valued and recognized for their contributions. This sense of ownership translates into higher productivity and morale, which ultimately benefits the entire organization. As he once said, “I encourage you to share profits with your employees. I encourage you in every way possible to ‘Build People.’ This is good for America, it is good for you, and it is good for your employees.”
“If you make people under you successful, what happens to you? Aren't you also then successful?”
— Les Schwab
Furthermore, while money is a strong incentive in itself, Les Schwab also made sure to build an environment where his employees could enjoy individual empowerment. As a matter of fact, he advocated for treating employees like partners, fostering an environment of open communication, and providing them with the tools and knowledge to make impactful decisions.
Les Schwab explains that "I really do think that young men who work for the Les Schwab Company for three or four years is almost as good as taking three or four years of business schooling. The reason for this is the complete openness of the company. Every employee in every store is encouraged to read and study the Profit and Loss Statement of his store. Each store has a monthly meeting around the P&L Statement. They are encouraged to ask questions."
This complete transparency on the company’s profits fostered a sense of ownership among employees. They were fully invested in the success of their store, their team, and the company as a whole.
This reminds me of how Paul Orfalea built Kinko’s through incentives. In fact, Orfalea realized that the workers behind the counter at Kinko’s were the true heroes of the company. Considering the fact that he was 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.”
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.
Customers’ Trust
“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
Another cornerstone of Les Schwab’s business philosophy is his unwavering commitment to customer service. Schwab explains that businesses should prioritize building trust with customers through service. As he once said, “People don’t buy tires on price; they buy from someone they trust.”
As such, this principle has guided Schwab in establishing long-lasting relationships with his clientele. He understands that exceptional service is paramount in retaining customers and fostering loyalty. As discussed, considering the fact that Schwab treated his store managers as partners rather than mere employees, he ensured that they were empowered to deliver excellent service to customers. Similarly, he believed that employees in the main office are solely there to support store employees to provide better services to customers.
“The truth is that the success is at the other end... The real job for the office people is to provide motivation, to create programs that make it possible for them [store managers] to be successful.”
— Les Schwab
This reminds me of the concept of “Inverted Management” we have learned from Bernie Marcus at The Home Depot. Marcus believed that the sales associates are the spinal cord of Home Depot as they are the ones interacting with the customers and building the image of the company. He once said that Home Depot’s employees are “the heroes of the company, the ones who create a cult among our customers. We're trying to make our customers bleed orange.”
As such, Marcus created a management structure similar to an inverted pyramid, where he was at the complete bottom. Similarly, the senior executives working at the main office are only there to provide support to the stores and its sales associates who are at the top of the pyramid. In fact, for Marcus, it was important for all senior executives to work in the stores to understand what happens on the sales floor.
“But what makes us so different from anyone else in our industry is that we take the inverted management structure so seriously. Hourly associates really do lead The Home Depot; every day, their decision making and independence makes our stores better, and that reinforces customer loyalty.”
— Bernie Marcus
Furthermore, Les Schwab believed that integrity and trust are fundamental in order to provide excellent customer services. As a matter of fact, he firmly believes that success is built on honest relationships with both customers and employees. His approach emphasizes on the fact that treating people well leads to long-term success. As he once said, “Never take advantage of a customer, never take advantage of an employee.”
By fostering an environment of integrity, Schwab has built a reputation for being reliable and trustworthy among its customers. As he once explained, "People don't understand tires so they buy from someone they trust. Tires, if not properly sold and properly serviced, can be a danger to the buyer. Our people were becoming the 'Tire Professionals' and people liked to buy tires from these men. Again, we were growing through people. It's the right way to run a business."
However, in order to maintain integrity and trust among the company, Schwab insists that employees must take action whenever they witness dishonesty within the organization. He once said, “If any one employee sees another employee steal anything, they are a weak kitten if they don't report it.” This perspective reinforces the idea that integrity is a collective responsibility, and each individual plays a crucial role in upholding the company’s values.
This is eerily similar to the concept of “Fiduciary Relationship” from Sol Price. Price, the founder of FedMart and Price Club, believed in having a “professional fiduciary relationship with the customer.” In the long run, this would help bring in more business through satisfied customers.
“We felt we were representing the customer. You had a duty to be very, very honest and fair with them and so we avoided sales and advertising. We have in effect said that the best advertising is by our members... the unsolicited testimonial of the satisfied customer."
— Sol Price
Managers’ Innovation
"I believe in the value of paranoia. Business success contains the seeds of its own destruction."
— Andy Grove
In the ever-changing landscape of business, Schwab’s philosophy emphasizes the need for continuous improvement and adaptability. In fact, he believes that complacency is detrimental to a company’s success. As he once said, “We must guard against complacency... if we become complacent, brother it's all over with.”
Schwab’s commitment to adaptability is evident in his approach to business challenges. He believes that businesses should always be prepared to pivot and explore new opportunities. He shares, “Things, ideas, and people change. If we wait for things to happen, the right moment may have passed.” This proactive mindset encourages leaders to stay ahead of the curve and embrace innovation.
And, in order for the company to be updated on the operational landscape, Schwab suggests that leaders must constantly evaluate their strategies and seek feedback by visiting the stores.
“Stay out of a store 30 days and you've forgotten 50 percent of what you should know.”
— Les Schwab
Moreover, Schwab believes that enthusiasm is the driving force behind constant innovation. He once said, “Without enthusiasm, our company is dead.” This belief underlines the idea that a motivated workforce is more likely to embrace change and drive innovation. By fostering a culture of enthusiasm, Schwab has created an environment where employees are encouraged to take risks and explore new ideas.
In Charlie Munger’s “Academic Economics: Strengths and Weaknesses, Considering Interdisciplinary Needs” Speech, Munger explains how Les Schwab succeeded in becoming one of the largest tire store chain from a small tire store in the Northwest through innovative concepts. For one, while he first started, it was difficult for him to compete with the stores that were owned by the big tire companies that made all the tires, such as Goodyears. Obviously, the manufacturers gave favorable rates to their own stores and by consequence, they had a bit cost advantage compared to Les Schwab.
Ingeniously, Schwab decided to stop purchasing tires from these big American tire companies, and to start buying tires from Japanese tire companies who made cheaper and better quality tires. As he once said, he decided “to buy tires like Safeway buys groceries”, by focusing on buying the cheapest tires without restricting himself to only one or two suppliers. And that’s how Schwab is now with hundreds of millions of dollars in sales while competing with other huge price discounters like Costco and Sam’s Club.
“Now I’ll give you a harder problem. There’s a tire store chain in the Northwest, which has slowly succeeded over 50 years, the Les Schwab tire store chain. It just ground ahead. It started competing with the stores that were owned by the big tire companies that made all the tires, the Goodyears and so forth. And, of course, the manufacturers favored their own stores. Their “tied stores” had a big cost advantage. Later, Les Schwab rose in competition with the huge price discounters like Costco and Sam’s Club and before that Sears Roebuck and so forth. And yet here is Schwab now, with hundreds of millions of dollars in sales. And here’s Les Schwab in his 80s, with no education, having done the whole thing. How did he do it? (Pause). I don’t see a whole lot of people looking like a light bulb has come on. Well, let’s think about it with some microeconomic fluency.
Is there some wave that Schwab could have caught? The minute you ask the question, the answer pops in. The Japanese had a zero position in tires and they got big. So this guy must have ridden that wave some in the early times. Then the slow following success has to have some other causes. And what probably happened here, obviously, is this guy did one hell of a lot of things right. And among the things that he must have done right is he must have harnessed what Mankiw calls the superpower of incentives. He must have a very clever incentive structure driving his people. And a clever personnel selection system, etc. And he must be pretty good at advertising. Which he is. He’s an artist. So, he had to get a wave in the Japanese tire invasion, the Japanese being as successful as they were. And then a talented fanatic had to get a hell of a lot of things right, and keep them right with clever systems. Again, not that hard of an answer.”
— Charlie Munger
Beyond the Book
Listen "#330 Les Schwab" by Founders Podcast
Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street