Episode Details

The Learning Leader Show with Ryan Hawk

Read my NEW BOOK -- The Price of Becoming - www.LearningLeader.com/Becoming

Eric Ries is the author of The Lean Startup, one of the most influential business books of the past 25 years, and the founder of the Long-Term Stock Exchange, the first new U.S. exchange to both list and trade multiple stocks since NASDAQ launched 50 years ago. His new book is Incorruptible.

Key Learnings

The more successful a company becomes, the more valuable it is as a target. Companies are worth stealing and taking over. Most founders are naive about this and don't understand what's coming for them. They've been following the so-called best practices about how companies should be built, structured, and governed. Most of those best practices are value-destroying.

Sol Price was a lawyer before he became an entrepreneur. He believed a lawyer had a fiduciary duty to put the client's interests before his own. So when he became a retailer, he asked: "Who's my client?" The customer. He treated the customer as the person he would rather die than betray. When competitors sold a product for less, he'd put up signs in his own store: "Don't buy this from me. You can get it cheaper somewhere else." He capped his margins at 14 percent. He paid above-market wages.

It is so much easier to destroy than to create. One day, Sol came into work and couldn't get into his office because the locks had been changed. Investors had pushed him out and forced Fedmart to practice retail best practices. Within seven years, they bankrupted the company. We've built an economy that rewards people for cost-cutting without holding them accountable for the consequences to trustworthiness, brand, or culture.

The origin story of Costco: Sol took two weeks off, then leased the office upstairs from Fedmart and started Price Club. One of the young guys who left with him, Jim Sinegal, had worked his way up from stock boy. Jim eventually started his own company using the Sol ethos. A few years later, their companies merged to form what we now call Costco.

Wall Street routinely calls Costco the exception to every rule. Wall Street analysts say things like: "At Costco, they take money that rightfully belongs to shareholders and instead invest it in the customer experience." As if that's a criticism. Costco endures because it's protected by a governance fortress. A series of worst practices that resist outside pressure structurally.

The $1.50 hot dog has been the same price since 1986. A McDonald's Big Mac was $1.60 in 1986. Today that same Big Mac in California is over $7. Costco sells more hot dogs than every Major League Baseball stadium in America combined. If they raised the combo to $7, it would be a billion dollars of extra net income. They could do it. They choose not to.

"If you raise the price of the effing hot dog, I will kill you. So figure it out." Jim Sinegal said it to his COO in 2008 when costs were rising. Figure it out. Costco vertically integrated the hot dog supply chain. They own hot dog production plants in multiple cities. They worked deals with soda vendors. They did all that extra work for the privilege of not making more money on the hot dog.

Harder is easier. "When you take the hard road, when you make a principled commitment, you get these almost unbelievable values. Because you're generating the most underrated and most valuable asset in all of business: trustworthiness."

"Easy choices, hard life. Hard choices, easy life." Jerzy Gregorek, Olympic weightlifter.

"Everybody wanna be a bodybuilder. Nobody wanna lift these heavy ass weights." Ronnie Coleman, eight-time Mr. Olympia. Everyone wants the outcome. Nobody wants to do the actual thing.

Culture and mission can be cultivated, not comman