The Interesting Times: Out of the Crisis

Hey there,

I wrote a thread last week on why the common advice of "concentrate to get rich, but diversify to stay rich" isn’t necessarily the best advice. It’s not necessarily bad advice, but I do think people tend to misinterpret it in some ways.

At Mutiny Funds, we talked with Zed Francis, co-founder and CIO of Convexitas, about why people are still focused on buying the dip, the housing market, inflation affecting correlations, and cash efficient portfolios.

If you enjoy or get value from The Interesting Times, I'd really appreciate it if you would support it by forwarding it to a friend or sharing it wherever you typically share this sort of thing - (Twitter, LinkedIn, Slack groups, etc.) You can read past editions here.

The Best of What I've Been Consuming

Out of the Crisis [Book]

W. Edwards Deming

Out of Crisis is a classic of the quality movement that the Toyota Production System was borne out of. Deming was really one of the founders of that movement and one of the first people to somewhat intuitively grasp the complexity of modern businesses and what that required from management to adapt.

Though this book (written in 1982) is clearly directed at physical manufacturing businesses, it's pretty easy to see how they apply to pretty much any business.

A simple but profoundly true example:

Defects are not free. Somebody makes them, and gets paid for making them.

Low quality means high cost because consumer expectations don’t change, they want the same quality. If you mess it up, then you pay for rework.

This seems obvious in manufacturing but considers this example from a retail business:

I ordered from a bookstore one case of twenty-four count inch ring notebooks. Instead, twelve came.

On complaint, the bookstore sent the other twelve. I inspected every notebook and found one where the rings were stationary in the open position, useless to me. Twenty-four notebooks qualified me for a discount. The store charged me the full price, with the explanation, when I mentioned this, that the girl that took the order was new.

This is an all too common experience that I bet everyone has had. The business owner and or employees give the gold ole "we were trying our best and it’s not our fault." However, the customer doesn’t care. They overpaid for poor service and that's going to leave a bad taste in their mouths and it destroyed the profit on the order.

But the fact remains that the correction of the error in the bill, and replacement of the defective notebook, must have wiped out the profit on the sale and left the customer with a resolution to try some other stationer on future orders.

This is a good example because it seems like such a little thing, the kind of thing that would go unnoticed by most people. But, these issues tend to be systematic in my experience. The business that has the issue is likely to have many other similar ones. As the saying goes, there is never just one cockroach in the kitchen.

Does this business have SOPs for taking orders? A training process for new employees? A streamlined order fulfillment system? Probably not.

To restore quality, Deming lays out his 14 points that companies must follow. One of my favorite is 5:

Improve constantly and forever the system of production and service

…

Putting out fires is not an improvement of the process. Neither is discovery and removal of a special cause detected by a point out of control. This only puts the process back to where it should have been in the first place

This was known in the Toyota Production System as kaizen, continuous improvement. It is an essential operating principle, every time something goes wrong you need to identify it and do a root cause analysis until everyone in the business understands that this will be how things always work.

Another personal favorite, point 9:

Break down barriers between staff areas ... Servicemen learn from customers a great deal about their products. There may unfortunately be in some companies no routine procedure for use of this information. In one instance, the service department, in response to frantic calls from customers, had routinely cut off a tube that conveys abrasive material to a downward outlet, and reversed the auger beyond the outlet.

The problem was that the auger jammed the material into the end of the tube. The manufacturing department kept right on making the auger as always before, while the service department, on a call from a customer, routinely made the correction. The management was unaware of the lack of teamwork between manufacturing and service, and of the loss.

This is, in a sense, a continuation of the same point. It is essential as a company scales that they have processes and a culture for any time something goes wrong that it gets communicated to someone that can solve the root cause. Putting out fires gets you zero points, a well operating company requires that you must be a fire prevention specialist.

Deming, and the quality movement more generally, was in some way a reaction to the authoritarian high modernism of Taylorism which tried to reduce all business down into spreadsheets.

The notion of quality, the things that cannot be measured, is an essential counterpoint that is still broadly underapprecaited.

The most important figures that one needs for management are unknown or unknowable … but successful management must nevertheless take account of them.

Examples:

1. The multiplying effect on sales that comes from a happy customer, and the opposite effect from an unhappy customer. ...

2. The boost in quality and productivity all along the line that comes from success in improvement of quality at any station upstream.

To quote Drucker, "not everything that matters can be measured."

The first five chapters of this are excellent and broadly applicable to all businesses. I found the later parts of the book didn’t age quite so well and were more directed at more traditional businesses.

Cars Manufacture the Modern Middle Class

The Diff

One of my favorite topics is the interplay between what we might call "hard" technology - things like combustion engines, steam power, blockchains, or microprocessors and social technology - the 8-hour work day, suburbs, and the nuclear family.

One of the best examples of this is the way in which the development of the internal combustion engine and affordable cars ultimately led to what we today consider the modern Middle Class.

Famously, Henry Ford offered a $5/day wage to any of his employees so they too could afford a car. This is remembered as a generous and benevolent act, but it turned out that there were some footnotes:

The wage was available to married men, and to men under 22 and any women if they were supporting dependents.
Workers were strongly advised not to buy consumer products on installment plans, other than horses and cars.
Workers' families would be interviewed to ask about their saving and drinking habits.

Henry Ford didn’t just want to pay people well, he wanted to mold the culture in a way that fit the emergence of the automobile industry.

An important part of middle-class existence is being highly respondent to institutional cues: showing up at work, getting paid a steady salary, and paying bills on time basically define the economic side of the middle-class ideal.

The car industry created a middle class out of its customer base both by creating a set of high-paying jobs which, during the heyday of the unions, had high job security and by getting tens of millions of people used to the idea of making monthly payments on a big capital asset that gave them access to work as well as leisure.

New technologies tend to form what historian Carlotta Perez called techno-economic paradigms that ultimately impact culture. The logic of technology led to combustion engines which led to Ford which led to the social technology of the new job system which shaped workers into the Organization Man we now associate with the mid to late 20th-century worker.

Here are a few more things you might find interesting:

Newsletter Past Editions: Read past editions of The interesting Times Newsletter.

Interesting Essays: Read my best, free essays on topics like bitcoin, investing, decision making and marketing.

Consulting & Advising: Are you looking for help with making decisions around scaling your company from $500k to $5 million? I’ve been working with authors, entrepreneurs, and startups for half a decade to help them get more out of their businesses.

Internet Business Toolkit: An exhaustive list of all the online tools I use to be more productive.

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