[0xbadcafebee]

> how a handful of companies (like Costco[..]) have successfully been structured to resist gravity

"I came to (Jim Sinegal) once and I said, ‘Jim, we can’t sell this hot dog for a buck fifty," Jelineck recalled[..]. "We are losing our rear ends.’ And he said, ‘If you raise the effing hot dog, I will kill you."

That's not structure, that's leadership. They were about to change the price, but one guy at the top with authority and an opinion said no. You could say "it's structure" that there was one guy at the top with authority, but it still depends on him having the right opinion. You need both a good structure and an unwaveringly idealistic (and correct) leader.

[eries]

I love that you asked this question, although, of course, you didn't actually phrase it as a question, because this quote is literally in the book. I addressed this particular misconception as it relates specifically to Costco, because I myself once fell victim to the same misconception.

If you think Costco has endured only because of leadership, because of its strong ethos and its immense size, because you think it's just too big for Wall Street to mess with, you are not correct. My friend, nothing is too big for Wall Street to mess with. Wall Street has tried many times to dismantle Costco's ethos, and every time the unique structure of Costco is what has allowed them to resist.

[minkzilla]

The parent comment didn’t say anything about size or wall street. It said leadership is what has preserved it.

Which it doesn’t seem you have refuted in any meaningful way. You just restated what the parent comment is responding to with no further reasoning as to why leadership doesn’t account for it.

[eries]

I honestly don't understand your comment, so let me try and recapitulate what I think you're saying and what I think I was saying, and then you can tell me where I missed the mark.

What I hear you saying is that the original comment simply said that leadership by itself is enough to preserve the Costco ethos. It didn't say anything about size or Wall Street or anything else. Is that right?

The reason I responded the way that I did is that the claim that something by itself is enough has to explain why most companies are able to be destroyed, even though they have really good leadership. I think the common answer when people ask about Costco is that the reason why, for them, leadership was enough when it hasn't been for other people, is something like they're so large. Does that make sense?

Either way, in order to say that leadership by itself is sufficient, we have to figure out why Costco has been able to endure as a gigantic public company when, for most companies, the larger they become, the more valuable they become as a target. Meaning that Wall Street or other financial forces will intervene to change their values.

And the answer, which I lay out in the book (not in my original comment), is that Costco is protected by a very distinctive thing I call a "governance fortress." This fortress (and not merely their leadership) is the reason why they have been able to endure for forty years.

In fact, the predecessor company of Costco, spiritually speaking, was a company called FedMart that had the leadership and ethos but did not have the fortress. I'll leave it to you to read to find out what happened to them.

[lmm]

> the claim that something by itself is enough has to explain why most companies are able to be destroyed, even though they have really good leadership

I think most of us are happy to believe that most companies simply have bad leadership, that leadership quality really is the axis on which Costco differs from others. If you want us to believe that other (destroyed) companies' leadership is just as good as Costco's, you need to make that case.

> Costco is protected by a very distinctive thing I call a "governance fortress." This fortress (and not merely their leadership) is the reason why they have been able to endure for forty years.

Can you sketch out your actual argument here (I think doing so would help rather than hinder your book sales, though of course that's a biased judgement)? What is this "governance fortress", and why should we believe that that, rather than the personal qualities of this one guy, is the reason they kept the hot dog?

[eries]

Sure, happy to. This is a very common source of confusion, so definitely worth clarifying. We agree that Costco's difference is due to its superior leadership. The question is why has the company been able to maintain this leadership advantage over multiple generations of managers, when other companies have not.

In the book, I give dozens of examples of companies that were well-lead and then suddenly destroyed, often by outside actors who found a way to profit from their destruction. This often happened at the governance layer, while leadership watched helplessly from the sidelines.

So why hasn't this happened to Costco? I don't think it's a coincidence that Costco has a variety of "bad governance" provisions, such as a super-majority (of all shares, not just votes) provision threshold for shareholder votes, as just one example. When activists, analysts and other Wall Street actors have tried over the years to force Costco to change, its leadership has been insulated from this pressure. I think that is a structural factor that is important.

Again, structure does not _cause_ ethos. It protects it. My argument in the book is you need both.

[PandaRider]

> ... Costco has a variety of "bad governance" provisions, such as a super-majority (of all shares, not just votes) provision threshold for shareholder votes

Do you believe there's a fundamental tradeoff between structural constraints (i.e. the 'democratic' model, where dispersed shareholders and markets have a voice) vs. insulated leadership (i.e. the 'benevolent dictator' model, where competent leaders are shielded from short-term shareholder pressure)?

Also, thank you for your quick replies.

Somewhat related: https://en.wikipedia.org/wiki/Benevolent_dictatorship

[fsloth]

"I think most of us are happy to believe that most companies simply have bad leadership"

I don't believe this for a second.

I don't know if this makes me the minority or not though!

It trivializes forces influencing large public companies.

Yes - there can be good and bad leadership - and bad leadership is just bad.

But good leadership can be totally helpless in a public company.

Not recognizing this is a huge gap.

The other forces that incluence a company:

- Board

- Shareholders (via board)

- Banks. Lots of companies have loans. The banks generally have the companies by the balls and can dictate many things when things go south - either due to leaderhip or just prevailing market winds

As an example of shareholder/board direct and rapid influence: an activist purchases shares. Installs board member. Causes rapid change in one or more aspects of business structure or strategy to support _their_ portfolio strategy (of course aligned with interests of other shareholders).

etc.

[mattcwilson]

I think you’re right, however, I think the person you’re replying to may also.

And is shorthanding “everyone without direct experience of the influential power of market forces” into “most of us.”

I think it’s fair to say that the fact that more or most people _don’t_ understand that and _do_ think it’s “all just leadership” explains much of the sentiment about capitalism generally.

[minkzilla]

Thanks for responding, I do think you interpreted my comment correctly.

I see size as negatively correlated (maybe as a semi-direct cause) with preserving company mission. Hence why I was confused by you addressing it. It would never cross my mind to argue that size has protected Costco.

I haven’t read your book, just skimmed the post so I don’t know if it’s convincing. But I’d like to argue that those companies failing their mission is proof that they did not have good leadership. however, that makes the argument a little circular.

I’m aware of FedMart (Acquired podcast on Costco is very entertaining). I think Sol Price was a bad leader and selling out to Hugo Mann was putting profit above other things.

[eries]

I'd be very curious to hear what you think if you have a chance to read the book.

[anthuswilliams]

I read the comment as arguing that leadership is necessary, not that it is sufficient. That is, that no amount of governance could have prevented the change in the price of the hot dog; only the leader could.

[cubicmeter]

Interesting in that I wonder whether government organizations and in particular the highly qualified government members and their functions can be protected in a similar manner from political leaders elected in a democracy.

[clarkdale]

This reply genuinely reads like AI and I don't mean to insult you. Perhaps large language models have been trained too much on your books. Your first 2 to 3ish paragraph (explanation and rephrasing) is very characteristic of an AI when they're pressed (e.g. on why they recently hallucinated).

[abustamam]

I think it's kind of counterproductive to call out "this comment sounds like AI."

If you're right and it is AI, the comment only points out what many of us can already see. If you're wrong and it isn't AI, then the commenter you're responding to can either argue with you about how it's not AI or just say nothing because there's nothing of substance to say.

[unholiness]

> Your first 2 to 3ish paragraph (explanation and rephrasing) is very characteristic of an AI

What you're seeing in those paragraphs is patience and empathy. Let's not let LLMs have a monopoly on these.

[eries]

I assure you that I hand-wrote every word of this all-too-human reply. I'm sure an LLM could have done it better.

[rashidae]

That’s on you. If a person has good grammar and knows how to articulate his idea, it doesn’t make him an AI.

[elevation]

> That's not structure, that's leadership. [...] one guy at the top [...] said no.

Yeah, there's no rule structure that can't be skirted and subverted by new owners with different objectives. The most resilient way to preserve your values is to:

    Only take care, and keep your soul diligently, 
    lest you forget the things your eyes have seen, 
    and lest they depart from your heart all the days of your life.
    
    Teach them to your children and to your children's children.

Your successors don't need to be your literal children, but if you turn your company over to "strangers with money" you can't be surprised when they do what they want with their new possession.

[eries]

It is true that most companies fail the test of succession. Even in the comment that you've made here, we've left unanswered the question of who will decide who should be chosen as the successor? That is something that can be influenced, but only at the institutional or structural level of an organization. Obviously, more details in the book.

[gorfian_robot]

Acquired has an excellent episode on Costco: https://www.acquired.fm/episodes/costco

[genxy]

Are you using Vale? Or is this just default Fable?

[eries]

this made me laugh, thank you for brightening my day. this is not just humor -- it's therapy.

[iancmceachern]

And leadership that respects and "gets" it's customer base. Customers that feel respected and who genuinely feel like the company they are supporting is in their corner are the most rabidly loyal. If you build a customer base like that, and keep respecting them, the problem solves itself.

[madaxe_again]

So many businesspeople can’t tell the difference between a value-add and a profit centre.

It isn’t about being idealistic, it’s just about understanding what makes people tick, and how to best get them to part with their money - and understanding that a business is not one dimensional.

[raincole]

> We are losing our rear ends.’ And he said, ‘If you raise the effing hot dog, I will kill you."

It sounds like a really toxic working environment. I sincerely hope they made up this story as an ad about how cheap their hot dog is.

[smithkl42]

I'd be more likely to assume that it's a really great one, where folks like and trust each other enough that they can give each other crap like this and everyone understands and appreciates it, like good friends trash-talking each other on the basketball court. I've thought for years that the way you can tell acquaintances have become friends is if they start insulting each other.

Or, as you say, it could be a really horrible environment - but I don't think you can tell from one anecdote.

[eries]

Considering how many people love telling this story, both within and outside of Costco, I think it's more the former than the latter. One way you can tell is that the COO, who was cursed at in this story, later succeeded Sinegal as the CEO and, in fact, has gone on record defending that hot dog price many times.

[incompatible]

I'm curious about how the story ends, did they cut the cost of making the hot dog, continue losing money on it, or give up and raise the price?

[shever73]

They manufactured their own hot dog manufacturing plant:

> "What we figured out we could do is build our own hot dog-manufacturing plant (in Los Angeles) and make our own Kirkland Signature hot dogs. Now we are doing so much hot dog business that we’ve opened up another plant in Chicago. By having the discipline to say, ‘You are not going to be able to raise your price. You have to figure it out,’ we took it over and started manufacturing our hot dogs. We keep it at $1.50 and make enough money to get a fair return."

https://www.425business.com/news/costco-ceo-craig-jelinek-on...

[incompatible]

Ah, vertical integration.