June 10, 2020: Learning about Open Source with LEGOs, Illinois Tool Works’ decentralized business model, a Canadian box company that rewards cost savings with money, and Benchmark’s bottom-up investing approach to venture and using Gall’s Law as a model supporting it.

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Episode Notes:

What is Open Source explained in LEGO

• https://www.youtube.com/watch?v=a8fHgx9mE5U

The most decentralized company in the world - Illinois Tool Works

• 1999 Forbes article depicting a uniquely distributed company. It’s not a tech company but a machinery company that makes nails and all sorts of widgets. Reminds me of SEMCO

• A business that still generated mid-teens ROIC; they actually use after-tax ROIC + operating margins as part of executives performance compensation, though that is only 50% of long-term incentives

• The founder’s family owns ~7% through a trust

• "bans e-mail from the company's computer networks. "I want my guys to get their butts out of here and visit our operations," he says."

• "Farrell's only concession to centralized mantras is what he calls his "80-20" rule. By that he means he wants his managers to focus their efforts on the 20% of customers who make up 80% of the business."

• "When ITW acquires a company, it will frequently chop it into several units.” - When they purchased 2 welding companies, they broke it up into 20 business units

• Each business unit is run by a general manager with their own P&L. 

• "When a unit starts to outperform -- or underperform -- the competition, Farrell splits it into more pieces, usually along tightly focused product lines. This corporate mitosis, Farrell argues, acts to capitalize better on what's working -- or to isolate what's wrong. "When you separate the pieces, you can grow faster than if you keep them together, and that growth far outstrips the duplicate costs," he says."

• "You have to appreciate, we're all a little wacko here. We get turned on by nails."

• Farrell retired in 2005

• The company still says their unique decentralized system is their competitive advantage

• https://www.forbes.com/forbes/1999/0111/6301142a.html#3933c0978292

• https://www.itw.com/about-itw/how-we-work/

Great Little Box Company

• "A family-run business that stays true to its roots as it grows, GLBC rewards employees who figure out ways to save the company money."

• "One employee, for example, was paid $2,000 for correctly suggesting that GLBC could save money by readjusting the position of a cardboard cutting machine"

• https://www.tinypulse.com/blog/sk-worlds-most-unique-corporate-cultures

Looking into Benchmark

• A VC that looks at investing bottom-up

• "Our job is not to see the future, it’s to see the present very clearly."

• Accel vs. Benchmark: “At Accel I was taught, ‘we need to have a prepared mind’ at really thinking about a segment, a category, and its coherence. So I came to Benchmark and I didn't know if I agreed with that. And my partner said, "don't you do that shit here." Throw that crystal ball out, you can't predict anything. What you can do is recognize when lightning strikes.”

• The markets are a complex system with unpredictable outcomes. Hence "focus on companies that are adaptable, long-term focused, innovative, possess long-duration growth, and maximize non-zero-sum outcomes."

• Gall’s Law: "A complex system that works is invariably found to have evolved from a simple system that worked. A complex system designed from scratch never works and cannot be patched up to make it work. You have to start over with a working simple system.” - Look at the present. Is a new market created? Nevermind the small size, look at the quality of the market and the effect the product has on this new market.

• https://venturedesktop.substack.com/p/the-merits-of-bottoms-up-investing