Scott Davis & Rob Wertheimer - Lessons from the Industrial Titans - [Invest Like the Best, EP.324]

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[01:31] antigus.co slash Patrick. [01:34] Before we transition to the episode, I want to highlight the Founders Podcast, which is part of our Colossus Network. David Senra, who hosts Founders, has devoted his life to learning from history's greatest entrepreneurs, and every week he distills the lessons of a different founder. If you want an entry point, I highly recommend starting with Episode 136 on Estee Lauder or Episode 288 on Ralph Lauren. [01:55] I hosted David on Invest Like the Best last summer, and it's hard not to walk away insanely energized after listening to any episode with him. [02:02] You can find a link to Founders and those episodes in the show notes of this conversation. You can also search all past transcripts on our website, joincolossus.com. [02:15] Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com. [02:42] and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

[03:12] My guests today are Scott Davis and Rob Wertheimer. Scott and Rob head up Mellius Research and are the authors of a great book called Lessons from the Titans. [03:21] The book explains what the industrial giants of old can teach the new generation of high-growth businesses how to survive and deliver shareholder value over multiple decades. Drawing on their experience as industrials analysts, they present case studies on businesses like Danaher, Roper, Honeywell, Boeing, and GE to reveal both what does and doesn't work when it comes to capital allocation and business strategy as a company enters a more mature phase in its life cycle. Please enjoy my conversation with Scott and Rob. [03:51] today, I'm really excited to dive into the many lessons that you've learned from industrial titans in business and stock market history. You mentioned before we hit record that your book, which isn't that old, has really been hitting its stride recently, probably because so many of these lessons have seemingly become more applicable, especially to the technology sector in the last year, year and a half or thereabouts. And I thought an interesting place to begin our conversation [04:21] lot of time on since the book sort of goes into the business history of all these great old industrial businesses. But instead, just to ask you what it's felt like to watch this technology drawdown, I'll call it, happen and start to think about the lessons from these industrial titans and how they may apply to... [04:39] to tech businesses. It seems like that intersection is just a really fruitful place to begin. So what's it been like to watch and what have you told people, especially in the technology sector?

[04:48] You'd love to say, I told you so. And I think that's an obnoxious way to start the interview. But I think that the reality is that we were watching the tech sector make so many of the same mistakes that the industrial world had made in decades prior and certainly had to manage around. [05:06] We were a little bit disappointed that the tech sector didn't take the lessons from our book, or I would just say the standard lessons from business historically, a little bit more to heart. I think there was a view within the tech sector of it's different this time, and it's different this time is a very dangerous way to run a company. So when we think about the three fundamental pillars of sustainable success, [05:28] operational excellence. Does the tech sector itself have operational excellence? [05:32] Culture. Is that culture supportive of the organization's mission? And then the last one, just capital allocation. [05:39] These companies are generating a ton of cash. And I think one of the most exciting things about tech overall, to us at least, wasn't necessarily the growth rates, which certainly have been exciting. But the cash flow generation within the sector was incredible. But how you deploy that cash is typically, at least historically, the difference between long-term sustained success and failure. [06:02] When the book was published, we felt like the tech industry was collectively flipping us the middle finger and saying, [06:09] Sure, we know these were once fun stories, but these guys are all dinosaurs and they don't matter anymore. So move on. I had a very nice message from Michael Dell, for example, that said that he found the book to be very instructive and interesting.

[06:21] I hope that more of his colleagues would pay attention, of course, to some of the successes and failures in the past of other companies. But when we talk about industrials, we're talking about companies that go back 100 years. I mean, you think about the survivor bias of the companies that have survived and made it this far have done so through tremendous challenges. [06:38] And honestly, with almost no government support, with the exception of certain industries like aerospace and defense, most industrial companies were really victims of globalization. They certainly weren't supported and encouraged by globalization. It made their lives twice as hard. And so when we just think about the companies that have made it through the abyss, if you will, there's just tremendous stories of success. And then think about all the failures. I mean, you go back 100 years, you're talking about hundreds of failed industrial companies. [07:08] those case studies and where the commonalities of those case studies. I think to us, that stuff is super exciting and history is a way of repeating itself and put a bow on your question a little bit. We look at what's happened in the tech sector. And of course, Rob and I lived through this in 2001, 2002. [07:24] We saw a lot of the same issues coming back 20 years later. We just wonder, why can't the world learn? [07:31] Why does every generation have to make the same mistakes over and over and over again? We just don't seem to be the learning society and the learning culture that we certainly would hope. [07:40] You've mentioned the three categories already, and I'm sure a lot of your answers will be somewhere within those three categories in terms of the types of errors that you see people committing. But maybe give a little inventory for us. As you watch technology companies today, and maybe even thinking back to 2000, you get this embarrassment of free cash flow or cash flow, like you said. And so when there's cash flowing, it's easy to hide a lot of mistakes. And then proverbial tide goes out. Things are different. What is the nature of those mistakes?

[08:06] If history just keeps repeating itself and great businesses for the first time face really challenging periods, what are the most common ways that you see them screwing up in the early stages of that transition? [08:18] The beginning of every failure has some sense of arrogance that creeps into the culture. And that arrogance normally is top down. [08:27] the worst three years of any CEO's tenure, the first year and the last two. And the first year, there's this period of everybody's frozen, trying to figure out what are the changes and little gets done. And if there's a new strategy or new plan, it takes a while to sell that new strategy, new plan. And so there's this little bit of paralysis that goes on in that first year. And then the last two years of the CEO's tenure, management team's tenure, tends to be the arrogant period where the successful ones will rest on their laurels a bit. And think about Jack Welch as a perfect example. [08:57] If you locked the last three years or at least the last two years off of Jack Welch's tenure and just stopped it before G Capital got to a certain size, you would have a different narrative, a substantially more positive narrative of his time period versus the more balanced, debated narrative that we have right now. I think it starts with arrogance. You start to lose a little bit of culture. I mean, culture is one of those things that we do a fair amount of board meetings and high level presentations, if you will. [09:27] Thank you. [09:27] at some level debating culture, because we truly believe that culture is not one of those things you come into an organization and you say, okay, well, here's our culture. You name five adjectives or 10 steps. Rob and I lived through this at Barclays after we left Morgan Stanley and new CEO came in and he had this index card and the 10 things that defined our culture. Well, frankly, none of those 10 were relevant to what we did day in and day out. Culture takes a very long period

[09:57] Thank you. [09:57] To your question about the commonalities of some of the failure, the arrogance in the organization leads to some sort of a cultural breakdown. Within that cultural breakdown, there's lots of different iterations of steps that companies take that kind of leads to eventual failure. And failure is the inevitable, by the way. I mean, if you think about in the last 20 years, 50 percent of the S&P 500 has disappeared. Of course, not every one of those is an epic front page Wall Street Journal failure. [10:27] merged into other organizations would have probably failed in some sort of epic form. So most companies are smart enough to sell themselves before it totally goes down the tubes. We think about this, 50% of the S&P 500 in the last 20 years, and the pace of change and disruption is actually increasing. So you can make an argument that more than 50% of the S&P turns over in the next 20-year period, and maybe it's more like 15 years, maybe it's even 10. Again, that's a lot of failure. [10:57] than success. And in fact, we saw a McKinsey study once that shown that only 7% of companies over time are able to go from operationally mediocre to operationally excellent. [11:09] while about 25% of companies will go from operationally mediocre to mediocre. [11:15] Really bad. [11:16] So almost three times, call it three times the ratio of companies getting worse than companies getting better. I mean, it's amazing when you think about that. You have a three times greater chance of becoming a worse company over time than a better company over time.

[11:30] Yeah, it's interesting how there's business entropy, right? The natural state for the story of all these things is to eventually die. Remembering that can cut through some of that arrogance, probably, when you're riding high. When you think about the businesses that you studied for the book, [11:43] And for those that haven't read it, it's the story of the most famous industrial companies, industrial conglomerates like GE, like Boeing. Honeywell was one of my favorite chapters in the book that's been around since the late 1800s. And these companies really have stood the test of time. When you think about... [11:59] the graceful, even though it's a small probability, transition from maybe not operational excellence that some of these technology companies have been operating under to operational excellence. What examples from your historical research stand out? [12:14] as the best exemplars of making that transition well, that maybe companies today could read about, learn their history, and learn from. [12:21] I'm glad you referenced Honeywell because Honeywell in 2003 was effectively dead. [12:25] It was a negative cash flowing company with asbestos liabilities, environmental liabilities, massive cultural problems because the merger of Honeywell and Allied Signal. [12:36] Pretty much anybody with half an ounce of talent had already quit the place because GE was taking it over. That acquisition, Honeywell acquisition, was eventually turned down by the EU, by Mario Monti, in kind of famous form. Before that decision was even made by the EU, the lion's share of Honeywell executives had already left. Once that marriage was disallowed, Honeywell had to stand on its own again.

[13:06] people problems, major customer issues. Boeing was an unhappy customer, and there were many more on top of that. It's the start of a very, very quick death. And so when you think about the complexity of turnaround, and this is why I had so much fun writing this chapter, the complexity of turnaround that Cody was the most unlikely guy on the planet to turn around a company like Coneywell. And I love this quote. Dave Cody saw this. He was actually on an airplane, and he saw [13:36] Dave Cody getting the job at Honeywell. And one of the personalities said, I don't know if anybody can turn around Honeywell, but I'm pretty darn sure that Dave Cody is not that guy. And I think it energized him that he was the underdog. And he had to go out and he had to exercise this incredibly complex turnaround because he had to go out and hire externally. He had to somehow stop the bleeding and keep them alive long enough to be able to turn things around. And so there was all [14:06] happy while he was working the underlying operating improvements, which really was a factory by factory thing. [14:13] I think one of the main takeaways in the book is that almost every situation of success that we've seen over time is that some sort of business system or process attached to it. And lean manufacturing was a fantastic focusing tool. When you're doing bottoms up turnarounds, I think something that needs to be engineered to that extent, there's bottoms up and tops down. Working together and meeting in the middle over time, the bottoms up part of it. [14:35] if it's led by lean manufacturers, it takes a very long time. Almost every lean expert will tell you that it's seven to 10 years to do a real lean implementation. Seven to 10 years. Well, Cody has

[14:45] Two. He had two years to fix this thing. He needed to implement lean. He needed to fix the underlying operations. He needed to make his customers happy. He needed to start investing in R&D again. And they basically missed 10 years. So how do you catch up on that? There was so much that he had to do. And he engineered one thing after another after another over the course of, call it door-to-door turnaround, I would say it was probably an eight-year timeframe. [15:15] probably year three. But the first two years, he'd probably tell you if he was on here, they were probably the hardest because you had to keep the company alive. [15:22] That in itself was extremely difficult. And I know Dave was one of those guys who was just working nonstop. And so it took a very unique, I think, personality and a very unique person to do it. I think it's really interesting that you said any company that has really worked over the long term has had some sort of business system. [15:40] at its core, maybe we could spend a chunk of time on the concept of business systems, because I think it means something very different than like, this is our 10 cultural values or something. It's an actual operating system for how the business makes decisions, makes products. I think a lot of people will be familiar with something like lean manufacturing. Maybe the Danaher business system is one to explore. It hasn't gotten as much attention. But just talk a bit about [16:04] at an abstract level, the value of a business system, what they share in common, how different they can be from each other. If the key for this batch of younger, big technology companies to survive 100 years like some of these industrials have is to establish one of these things,

[16:19] What would you teach them? What would you focus on to installing one that can lead to successful results? [16:24] I'll kick it off by just saying that [16:27] There's a certain level of cult following that you get in a business system that – [16:32] At the very end, the purpose of a business system is to keep people focused. [16:36] The worst thing you can have in an organization is folks coming in [16:40] and not knowing what they need to accomplish in any given day, not knowing what good looks like. So when you walk in a really, really impressive factory where you see the scorecard, the Kanban board, and all the other stuff that's together, the green lights and the yellow lights and the red lights, all of that at the very basic level is to keep focused on during that particular shift – [17:03] Are they on track? Is the volume there? Is the quality there? Are they having problems? Where are they having problems? All of these things, I think, at the factory level are, [17:12] Lean is an incredibly enabling tool. The Danaher business system itself is a collection of lots of tools. [17:18] If they were here on this podcast, I don't think they could actually tell you how many there are. I think they would tell you, well, there might be a dozen, there might be a hundred. There's a lot of smaller micro tools, and they've adopted tools from acquisitions that they've done over time. If a company comes in and they have a particularly really good way of doing something, let's just say it's managing the R&D pipeline or managing the new product launch or managing the sales funnel,

[17:48] and that'll become a new tool for them. When you think about every function within the organization, within the Daner organization, every single function has a tool. At the very least, [17:58] a commonality of that toolkit will be visual management. [18:02] What you can't see, what you can't measure, you can't fix. So the visual management part of it is, I think, a really important part. And then the next part of the data in our business system, which I'll just bring up kind of randomly, is this whole concept of common sense vigorously applied, which none of what they do is particularly important. [18:21] Difficult. [18:22] A lot of it is strangely simple. [18:25] And I think that's the beauty of it is that if you come in, whether you come in and you're [18:29] a factory worker or you're an executive, the simplicity of the to-do list of what you need to accomplish to stay on plan, it's just very tangible. And it just yields tremendous results. And so I would say every company has their own version. Does a particular tech company need to adapt a business system? They certainly need to adopt [18:51] A focusing tool. I mean, I think some of what we've seen coming out of the news headlines lately and folks who've been let go or quit from some of these organizations and say, yeah, I actually didn't do anything last six months. That stuff doesn't happen at the Dan Hurds of the world. [19:04] The businesses aren't so profitable that they can afford to have a lot of people doing very little. [19:09] And then the last point I'll just bring up is that [19:11] When you read business books, you're [19:13] There's this incredible focus on... [19:16] Finding stars...

[19:19] and keeping stars. [19:21] As we were interviewing... [19:23] HR folks across these different organizations in the process of doing our work to write the book, what we were finding was that the best HR organizations were actually tremendously good at getting average people to perform a little bit above average. [19:39] And they were a little bit less concerned about the stars. The stars find a way of standing out. You don't necessarily have to motivate the stars. 99% of the time, they're self-motivating people. And I think the other conclusion that we came to in these conversations is that it's not a barbell curve. [19:56] There's not an equivalent number of stars... [19:59] and destructive people. [20:01] There's this giant fat middle of people, and it might be as much as 80% of your employees. And then there's this little microcosm of stars, and let's just call it 5% of your employees. And then there's this 15% of your employees of what we'll call destructive people. [20:15] And so the best cultures and the best business systems are really good at finding that 15% that are destructive and getting rid of them. [20:24] Because that's the part that just ruins a company, just destroys the culture, the fabric. And what ends up happening is if you have a star that reports to one of those destructive people, that star ends up leaving. What we found fascinating going through the process is that [20:38] So mathematically, if you get the 80 percent fat middle of your organization to perform 10 percent better, that's an 800 basis point improvement, kind of apples to apples. If 5 percent of your employees are stars, if you got them to perform 50 percent better, which is impossible, I think.

[20:54] That would be a 250 basis point. [20:56] increase the productivity in the organization. [20:58] And the destructive people, I don't think you can ever get them to be anything other than destructive. You have to get rid of them. So whatever business system you employ has to help you filter out. [21:08] Who are the really bad actors? [21:10] And then, [21:11] The stars actually find a way to the top, I think, much easier than most think. And then that business system enforces some level of transparency and accountability that really helps take that. [21:23] Average middle average. [21:24] group of folks and make them [21:27] meaningfully better. Is it 5% better? Is it 10% better? Is it 20% better because they're more productive? All they need to do is be better than your competitors. [21:35] So if your competitor isn't employing a system that's really focusing people, but you are, and it's making your people more productive, it really can be incredibly powerful. And I hope at least that's a takeaway of the Daner chapter. It's not that they invented something that no one else can use. There isn't anything particularly notable or special or even actually brilliant about it. So much of it is very, very, very simple. So that's my long explanation. I know Rob has a strong view here, too. [22:00] So when we were writing the book, we had a lot of [22:03] talk and debate about this exact issue. Should everyone have a business system? Is it a book about business systems and how they can make companies better? [22:10] And the answer is not really, in that, as Scott has noted, a business system is really a focusing tool at its best. And so just saying we have the X business system is not the answer. People might look to a company like Danaher, which has absolutely crushed it for decades, and say, well, DBS, Danaher business system, is what we should emulate. But just having one isn't the full answer. Mike Weatherhead is an exec at Ingersoll Ram, which is a rising company that's building a really effective execution engine, a really impressive company.

[22:40] just love called a movie set. If you look at it across industrials, people have seen Dan or her, people have seen some of the successful other companies and they'll say, well, we have X business system. [22:50] And the question is, do you look at it and do you see a movie set? Meaning there's an appearance of it, there's a front, there's a desire, there's a goal to do all these things, but it's not deeply embedded in the culture. And so one of the things we talked about when writing the book is it's more about culture than it is about systems. [23:05] And it's more about, again, that focusing tool, driving down and driving daily actions. [23:10] So you can ask anybody at ITW, how do you manage the business? And they'll say 80-20. That's a focusing tool. That's a way of running things, focusing on the most important and leaving the rest aside. And so really what drives excellence and success is having everyone... [23:26] Doing, as God says, you walk in, you know what you're supposed to be doing that day and you do it. And we've seen some common lessons. So what are you really trying to do? You're trying to find out if there are problems and fix them. People like to hide problems. Nobody likes to say, hey, I'm completely not really underperforming here. Can you just bring a spotlight onto me? [23:42] But a good, effective business system or a good, effective culture will have a mechanism, a systematic way of doing that. So at Ingersoll Rand, they have a quarterly sprints with a weekly meeting. You have a couple minutes to say, here's what I'm working on. Here's what I'm doing. Here's what's going well. Here's what I'm not able to do and I might need help on. And you bang, bang, bang. You just go through multiple teams doing that. [24:03] and you raise problems. If you raise a problem, you can fix it. And so bad news traveling up is a core thing. [24:09] component of a culture and or a way of operating that we found to be tremendously important.

[24:14] One of the things that Danaher does well and others do well is measuring. You can't figure out what you're doing wrong if you don't measure it. So you're trying to measure things and then identify problems, develop a feedback loop to bring that up and solve them. [24:27] And so anyway, in answer to your question, it's not simply the fact of having a business system. It's trying to make sure that that's ingrained in every daily action you do and how to bring that about. I love the idea of there being a couple questions or heuristics for saying, okay, can you solve this kind of problem with the system you use to run your business or not? You mentioned two there, the first being, can you systematically sort of prune the 15% of people that are toxic in the business? [24:51] You mentioned measurement. If you had to build a list of questions, let's say you're walking into a new business. It's not a young business. It's an established business that's got a product people buy. And your job as a consultant or something was to say, okay, I'm going to ask you eight questions. Can you do X, Y, or Z? And use that to determine how healthy your business system is. In addition to the, can bad news travel up? Can you prune the 15%? How do you measure things? What else would be in that list of questions or points of evaluation for whether or not a company [25:21] Thank you. [25:21] Our clients are professional investors, and we have this conversation a lot, particularly with the newer investors who say, hey, I'm going to go out and visit XYZ company. What questions should I ask? And how do I know if they're on the right track or the wrong track? And I love Rob's movie set example because I think to the untrained eye – [25:40] it can appear equivalent. I had this happen to me actually explicitly. I was working on an IPO about

[25:45] 15 years ago, and this company... [25:48] had a Danaher executive on its board. [25:51] and made a comment that they were adopting the best... [25:55] parts of the Daner business system. And I heard that. I'm like, oh, okay. Yeah, that makes sense. And the CEO was saying, he talked all around it. He's like, here are the things I like about the Daner system and the ones that I find applicable to us. And he was literally taking pieces of lean manufacturing, being like, well, I like this part of lean, but I don't like this part of lean. And to make a long story short, the company was a total fail. [26:19] And it was a total movie set. You can't bring in a lean consultant and set up a lean organization and tell people, oh, don't listen to that part of it. That's nonsense. But listen to this part. They give up on all of it. I do think that the numbers have to match the narrative. And so I do think that when you're going in and you're meeting with a company and they talk about... [26:40] all the successes that they've had, [26:42] If you don't see it in margins... [26:45] and you don't see it in cash flow, [26:47] I don't think it's actually a thing. That's one way to kind of uncover the movie set. [26:52] There's all kinds of excuses that companies will make of, well, that's not fair. You can't look at our performance during COVID. That doesn't count. Or I had a company that recently came out and showed their performance excluding recessions. We're really good at up cycles, but don't focus on the down cycles, which would be the same as a professional money manager saying, exclude all my negative years. Exclude the high volatility and the high beta and all this other stuff in my bad years and just focus on the good years. So I do think the numbers have to match the narrative.

[27:22] questions that can be asked that are pretty simple. And quite frankly, maybe the simplest one is, who do you benchmark yourself against? [27:30] actually pretty good at their jobs who quit because he was a psychopath. [27:33] What are you benchmarking yourself against? I mean, what does good look like? And one of the things we've gone out to our industrial companies with is that it's not good enough to just benchmark yourself against industrial companies. Why aren't you benchmarking yourself to best in class tech? Why aren't you benchmarking yourself to best in class health care or best in class consumer or other sectors? Because investors have choices. They don't have to invest in technology. [27:55] X, Y, and Z. They don't. They can go somewhere else. And I think that's one of the hardest conversations that we have with new CEOs. They feel like they're relevant, and they're [28:03] They've lived in this microcosm of internal relevance for such a long period of time that it's very hard for them to look beyond the tunnel that they're in. And so one of the charts that we show in our board presentations is the daily volatility of, [28:19] In tech. [28:20] daily volatility [28:21] is more than most market caps, entire market caps. [28:26] of most companies that we follow. [28:28] And I'll play devil's advocate sometimes with our corporate executives and say, if you're a portfolio manager and you can spend your time on the 10 largest [28:36] tech and healthcare companies, and you get the timing right. I mean, look at the swing up that Facebook had in the last couple months. [28:43] Just think about the alpha generation potential if you were able to time buying and selling Facebook appropriately over the last 12 months or two years or whatever time period you want to use. And then just think about an average company that Rob and I cover is a 50, 60, 70 billion dollar company. A 20 percent move in one of those companies may only be 10 billion dollars of total alpha generation potential.

[29:06] So that context is really important. So I think one of the questions to ask is that, what do you benchmark yourself? What does good look like? Okay, you have 20% margins. [29:14] 20 years ago, I remember sitting down with the CFO at 3M, and I asked him a question about, [29:19] Where's the upside of margins? And he said, well, I'm already earning a 20% margin. Why would I need to earn higher than that? [29:25] I was flabbergasted at the conversation. I'm like, God, you've got to be kidding me. You're not trying to be a little bit better every year, which means culturally as an organization, they were backing into the pricing strategy would be around earning that margin as opposed to maximizing your profits and having like a value-based pricing mechanism. I think the entire organization was pricing around 20% margin because that particular management team thought that, wow, that's pretty darn good. [29:55] companies in the S&P 500 that were earning margins well above that. [29:59] And many companies that had humble roots just like 3M that were gravitating up that curve. [30:05] I think there's lots of interesting questions to ask, and I'll let Rob chime in here. But if the numbers don't match the narrative, there's probably not a story there. That's probably a movie set. [30:17] I want to say two things to that. For one, I 100% agree numbers match the narrative. We've heard this from a lot of high executing executives. So if your job, your goal is to drive up [30:27] organic sales growth by increasing your leads by 10%, increasing your conversion by 50% on those, you've either achieved that or you haven't. If you haven't, you now have a feedback loop and you can go back and fix it. If you have, it comes out in numbers. If it doesn't come out in the numbers, something's fundamentally wrong.

[30:42] But to answer your question in a different way, [30:44] One of the things Scott's really good at is if you go and meet with investors and you talk for a whole hour, you haven't had a very good meeting. You need to learn to listen sometimes. A person needs to listen. And so if you listen to companies, I don't think it's possible to come away from a meeting with Dan or her without hearing about how they run the company in DBS. I don't think you can sit in a meeting with Toyota and not hear the words continuous improvement over and over again. That's just how they think. That's how they do everything. [31:09] The same thing with other companies that follow ITW and IDEX and AD20. I mean, if companies really have the systematic approach to management, it comes through in the numbers and it comes through in the words and actions they do when they speak to you. [31:23] One of the things is ask some simple questions. And if you listen to the answer, what do you hear? [31:28] Is it a focus on daily management? Is it a focus on continuous improvement? [31:33] is to focus on, as God has said, benchmarking so that you can [31:37] figure out what you're doing right and wrong, and then generate a feedback loop around it. If you listen for those things and if you hear those things, I think it's incredibly positive. I think they just shine out from the companies that are doing them regularly. [31:48] I was asking a friend who's exclusively a software investor who recommends your book that everyone read it as to why he thought it was so valuable at this point in time. And I want to just read a short segment of his answer because it allows us to talk about how to think about value creation in a lower growth environment. [32:05] This is a couple months stale, so the numbers may be a bit different. But he said, Honeywell trades at a 30% premium to Salesforce on enterprise value to sales multiple.

[32:14] Honeywell has a 30% gross margin. Salesforce has an 80% gross margin. Salesforce's revenue is entirely recurring. For the most part, it has no serious competitive threat. Honeywell grows at 5% organically in a good year. He said, this is effing insane to me. But Salesforce does not have a mature framework for value creation. Like so many of these companies, they've created value through... [32:35] first and foremost, revenue growth. I would love to just talk about [32:40] Again, in the same way you've given us lessons on the importance of a business system, I'd love you to talk about the lessons you learned from... [32:47] These companies which reach a maturity, which perhaps some parts of the technology sector are reaching now, where they don't get to enjoy... [32:55] Amazon Web Services doesn't get to grow at 50% every year from now until infinity. [33:00] What are the key ingredients to value creation, sustainable value creation in a lower level? [33:07] revenue growth, more mature, [33:09] environment that you've learned from studying these companies. [33:12] First of all, [33:13] If your growth rate's not very high, then clearly you need to capture every bit of operating leverage off of that growth that you possibly can. One of the things that we've always loved about Honeywell... [33:24] is that culturally they are a firm that mandates, of course, through incentives, et cetera, that fixed costs never grow, never expand. Rob and I were talking about before this podcast interview, we were talking a little bit about the stories. And over the course of Dave Cody's tenure, one particular measurement period where we looked at where revenues doubled and headcount was flat.

[33:46] And returns on capital grew substantially because that was a company that was very stingy with its capital, that understood these were not incredibly high growth businesses. So you don't want to throw a ton of capital at them. You need to continue to invest in them. You can't just let them die. There's optimum levels. But you need to capture that operating leverage. And just explicit with that is free cash flow, right? [34:16] Thank you. [34:16] to a better return and a better place, which was the next point I was going to make is that what's incredibly powerful about many of these stories is the pivot. When you think about Dan Hur started as a building products company, and then it was a tools company, and then it was an industrial company, it was a healthcare diagnostic company, and then it was a healthcare slash life sciences company. Through that entire process, [34:41] multi-decade pivot [34:43] There were spinoffs, many of which have been tremendously successful, or at least have been reasonably successful. There were spinoffs in getting to the point like the Rails brothers, who were the founders of Dana, were certainly not empire builders if they were willing to grow. [34:59] by elimination. Okay, we want to pivot away from building products and tools. How do we do that? Well, we need to sell those businesses or we need to spin off or we need to exit. What's the most tax efficient way? Of course, how do we engineer that? My favorite story is at least from the early Jack Welch days that I think obviously a lot of debate on Jack overall. But when he traded the TV business for NBC...

[35:22] GE was one of the best [35:24] TV, television, television. [35:27] makers in the world. [35:28] And this was, I believe, 1986. [35:31] And TVs, obviously, were growing. [35:33] But Jack looked at it and said... [35:36] This is a high growth area and the barriers to entry are just not that high. [35:41] And there's a tremendous amount of low-cost competition coming in, in particular at the time from the Japanese. So he was able to exit that business. [35:49] at a certain price, and he was able to buy NBC, [35:53] Apple's apples, they actually ended up with NBC for free. But at the time, the headline... [35:57] sale of the TV business and then the purchase of NBC was basically an equal swap. It was basically, you take TVs, I'll take NBC. It was an equal swap. No loss of economic value from either side of it, at least on that day, in theory. When you compare and contrast that to Jeff Amell, who was running GE, of course, when it fell apart, he traded NBC. He sold NBC for a grand total of 10 times EBITDA, and he traded that effectively for Alstom. [36:26] this crappy French power company for a multiple way higher. So his pivot was just a bad pivot. [36:33] I think the whole concept of trading assets and moving your portfolio around, sometimes there's this concept of activity equals achievement. I don't want to go down that path. But what I would say is the successful stories, whether it be Honeywell, whether it be Danaher, very, very active with their portfolios, very quick to exit things where they saw secular decline or some sort of a challenge coming into the business that perhaps wasn't fully recognized by the marketplace.

[37:03] when they still look pretty darn good. [37:05] Otherwise, nobody would buy it. [37:06] So it starts with operating leverage. You have to be able to get a multiple on that growth and net income growth. You have to be able to generate free cash flow. Our best in class companies generate free cash flow, pretty darn close to 100 percent of net income. It's give or take a little bit here and there, but they're pretty darn close. And then with that cash flow, how do you engineer that pivot to a higher return? [37:26] less cyclical, more predictable, better place over time. And I do think that our best companies have been able to do that. [37:33] Rob, I'm curious if you have favorite examples of whether it's the pivot or just that kind of general concept where I want to talk about growth CapEx next and just CapEx and R&D and how companies that you studied approach these topics. And we're starting to see, you know, Facebook famously had however many billions of dollars outlaid for metaverse type research that feels kind of like Boeing's development of the 787 or something like that, that I think costs 20 billion. But as you think about companies that have to evolve, pivot, mature, you know, [38:03] Are there other examples that, again, if you're teaching a class or something to today's technology leaders, you would use as the prime case studies? [38:11] There's a couple I'd point out. And one of the points Scott just made is operating leverage. If growth isn't there, you're getting more efficient operations and you're getting better leverage on it. One of the chapters in the book is rentals, where effectively you have an industry, which is a rental industry. So you're renting out construction equipment or equipment from municipalities or maintenance, various things. But you're renting out something you bought from somebody else. And so it appears...

[38:34] at first blush, like there might not be the biggest competitive damage. [38:38] But as you grow and mature and as your operational expertise and your internal corporate wisdom grows and matures, you ought to be able to operate those assets better than anybody in the world. You've had years to do it. You've had years of continuous improvement. And so there shouldn't be anyone who can operate that better than you. And so we use that company as an example. And I actually think it's one of the most fascinating companies out there in the market. [39:08] ways. [39:10] But it's a business where people don't immediately see the competitive advantage. So once you've reached maturity, once you've gotten to a certain point where – [39:17] all right, this isn't a transformational technology anymore. [39:21] What you're trying to do is use, again, all your ingrained knowledge to operate those assets in a way that nobody can ever match and therefore gain yourself sort of a sustainable earned margin that really just can't be assailed. So that's one example, but not so much of the pivot, but how do you do it? How do you maintain your lead is you run it better and you run it systematically better. [39:40] If you think about growth CapEx specifically, let's bundle huge outlays of capital into [39:46] in the pursuit of new products, product improvements, whatever. [39:51] What have you seen from these industrial companies that have done this both very well and very poorly? And this is just nothing more than, I guess, the bucket three of capital allocation question. But when they're not doing it through M&A or doing something with the money like buybacks or dividends or something and plowing it back into the business, but into greenfield stuff, what are the great lessons of history over the last hundred years of these industrial giants that most stand out on both sides of the ledger, good and bad?

[40:16] The first kind of obvious answer I think I'll give is a centralized, what I'll call university-style research just does not work. I think we saw historically look at like an IBM or a Bell Labs, a GE, with these grandiose big ideas around solving problems, future problems, that quite frankly may not even be problems. And of course, our best companies, they absolutely do invest in R&D. I mean, new product innovation is absolutely critical to their future. [40:46] It's critical to their margin structures. It's critical to their competitive advantages staying over time. [40:52] Those success stories... [40:54] are more focused on solving today's problems. [40:57] What are the problems that their customers are having today? [41:01] When I think back on the learnings of Jeff Amell, one of the things that Jeff Amell did [41:05] said, [41:06] early on when he took over GE. That should have been a red flag. And I think at the time, I was probably too young of an analyst to really understand this. But [41:14] He said, I want my people working on big ideas. I want them... [41:19] to have a really long... [41:21] term, view... [41:23] of what the world's going to look like and how do we address the needs of that future world. All that actually on the surface sounds incredibly interesting. [41:32] I remember touring GE's R&D facilities in that time period, [41:37] And they had a particular lab that was working on nanotechnology. Then they had a particular lab that was working on some advanced security issues and technology. [41:46] Three years later, I was touring the lab again,

[41:49] And I was expecting to see all these new and different things. [41:52] It was the same exact thing. [41:53] This woman who was running this lab was like, yes, we're working on nanotechnology. And we're like, well, what are the applications? Well, we can make a paint where you never need to wash the car. That would be neat. [42:03] G, spending billions and billions and billions of dollars trying to solve problems that may actually not really be major societal problems. [42:11] You're guessing what tomorrow's problems are going to be. [42:14] And that itself leads to all kinds of issues. So another example we'll give is that I think 3M is a company, it's case studies not in our book. [42:22] Perhaps the second book, it'll make its way. But one of the challenges that 3M's always had is that their R&D, again, a little bit more centralized R&D function, lots of interesting innovations, of course, different. [42:34] If you look at the growth rate of 3M, you would say, where is this in the growth rate? And the growth rate just hasn't been there. So clearly, these innovations aren't that helpful. But people always point back to the post-it note. Well, the post-it note was invented by accident. [42:47] by a person who wasn't even actually working [42:50] On... [42:51] a project related to creating anything close to a post-it note. [42:54] It was an accidental invention. And then they were able to clearly utilize, and I think the base technology of adhesives has gone on for lots of applications. Well, if you're a scientist at 3M and you're looking and you're saying, well, that's what good looks like, it's too hard. You're trying to develop something that no one else has ever developed before. That stuff is hard. And so the point I just want to make. [43:16] Danaher's of the world. Of course, they would love to invent something new and brand new and breakthrough. But right now, what they're really focused on or what they were really focused on during COVID was helping people.

[43:28] get very high quality and predictive COVID tests out in the hands of people that needed them. [43:34] solving today's problems. [43:36] They couldn't think about and say, well, in 10 years, we'll have a great COVID test. Well, in 10 years, you'll need something else. They needed right then. [43:43] to be able to have a test kit that worked. And same in helping the vaccine manufacturers. You know, Daner was tremendously instrumental in helping the vaccine manufacturers to get vaccines out the door. They couldn't afford to have an R&D organization that was so focused on the long term that they weren't in the here and now of how do we help these life sciences companies to be successful in getting their product out the door, developing a product that works and getting it [44:13] people. That's real tangible stuff. And we found that across so many of our companies, solving today's problems, not looking grandiose stuff. [44:21] It's interesting how the existence of a quote-unquote whatever the company named Labs or Moonshots or whatever you want to call it just really never seems to produce much of anything. So Solve Today's Problems is a smart one. There's a nuance here that I want to make sure I understand, which is on the one hand, Danaher's solving today's problems. On the other hand, you told the story, but it's pivoted five times. It's major transitions from doing one thing to doing something else. Maybe Amazon is an interesting company to bring into the mix since it's like an industrial business. [44:51] an operational component to it. Web Services itself is similar. [44:55] when companies make these successful transitions well. AWS did not come out of Amazon Labs, but it was a drastic change of resource allocation inside of a retail business and has proven to be the company's primary story. So I'm just super curious to zoom in on these transitions, these pivots,

[45:15] to understand the line between trying to discover the future in a lab versus major pivots in reality solving today's problems and see if there's anything else that comes to mind for you both. [45:27] around excellence there. [45:30] that you saw beyond Danaher and some of the other companies you studied? [45:33] Knowing that what not to do is start XYZ Labs. [45:37] I'll just talk about Roper a little bit because we haven't talked about it at all, and it was one of my... [45:41] favorite chapters to write. [45:43] I do think that the legacy of Brian Jelison, [45:46] is worth talking about. [45:48] Roper was constantly looking for [45:51] a [45:53] higher return algorithm. [45:55] Roper started buying software assets because software assets were mispriced by the marketplace, and they were incredibly high return prices. [46:02] assets where the market is, [46:05] didn't seem to understand [46:08] the full value proposition, [46:09] And so for Brian Jelson, like he was looking at his chops. He would look at a software business and say, oh, my God, this is a working capital negative business. The customers pay up front. That means I can take that cash and I can lever it up before delivering even a product to these guys. I'm already relevering those assets up to something else. [46:39] He didn't need to have synergies. Just the fact that you were able to borrow money, certainly not at levels of a year ago, but borrow money at not incredibly expensive rates and redeploy it in these really high returning assets, I think was just super exciting.

[47:09] the electronic tolling, you know, those are good businesses and the math made sense. But when he started looking at the deal models of software assets, he was like, wow, that's super interesting. Let's take another look here. And he did more work and he did more work. And eventually you look at Roper today. Roper is effectively a software company today. And so your Amazon question, I think, is fantastic because was Amazon founded with a vision around AWS? Of course not. [47:35] Of course not, but the brilliance of Amazon is that they found their way there. [47:39] And let's just assume they found their way there by being very opportunistic [47:43] about where's the growth, where's the returns, and what does the market not understand? And I think perhaps that was part of the process. I don't know, Rob, if you have a different view on that. [47:52] One of the companies we follow that's not in the book is Packar, which is the maker of Peterbilt and Kenworth Trucks, kind of iconic American trucks, if you look at them. And we've talked with them because the industry has a lot of major decisions and major forces to make. So you have autonomy coming to on-highway cars and then eventually to trucks, which could be major savings for customers, improvements in safety and so forth. You have powertrain changes where people don't want... [48:19] to envision a diesel future in 20 or 30 years. So you have to think about what's coming there. You have connectivity, which is a huge opportunity for a lot of industrials to help [48:28] run the assets better through monitoring and through fault management, figuring out what's going to go wrong before it goes wrong. [48:34] And we'd written a few notes on whether PACCAR was well-positioned to navigate all this because some of their competitors were bigger and more global and more integrated onto the technology. I've had dinner a couple times in the past six months with the press and the CEO. How do you navigate this? What's the magic? How do you do it? And it was a fascinating answer. I mean, his philosophy and PACCAR's philosophy for decades has been,

[48:55] the right investment at the right time. It's a little bit what Scott touched on. You see opportunities and do it, but in this sense, monitoring of watching, of making sure that you understand the technology, the ecosystem, the technology, [49:07] and where it's going, but not necessarily trying to jump in with both feet before you know where you're going. [49:13] One of the defining characteristics, I think, of successful industrial over the years is making the right investment at the right time. Sometimes making smaller investments as opposed to betting the whole farm on something. [49:23] And Danaher has been a little bit unique in its ability and the trust its investors have in being able to do that and making – [49:30] Again, if you have a diversified portfolio and you can make a number of smaller bets, just like with investors, that's sometimes a lower risk, higher profitability way of approaching the world as opposed to making big bets. [49:41] One of the things Danaher actually talks about that's fascinating is competing for shareholders. And so, Scott, this is something you talk about more than what I talk about, but [49:50] the trust and the willingness to stick with you that your shareholders have based on your track record and based on, [49:57] the confidence you have in the way you run the business allows companies to make bigger bets. That's more of an introduction than it is a conclusion of Scott. I love that concept of recruiting or competing for companies. [50:10] a great shareholder base. And in some of these companies, you see like unbelievably loyal, longstanding members of the cap table in public markets because you can track it. And I'm curious how you think the best managers do that well. Is it just a matter of clear... [50:24] open communication and expectations and doing what you say you're going to do? Is there something more to it than that? In the case of Danaher, for example, you go to try to Google Danaher, there's not a ton of publicly available stuff on the business or on the Rails Brothers or on the management. So what have you seen the very best companies do?

[50:42] Sorry to keep returning to this device, but thinking about it through the lens of advice giving to younger CEOs today that are making this transition. What have you seen the best companies competing for great shareholders do and not do? [50:54] I think there's a certain element of 80-20. I mean, you're going to have a lot of shareholders. You can't roll out the red carpet for all of them. In the case of Danaher, I think, [51:02] I think there was always a really big commitment [51:06] to [51:07] Capital, T. Rowe Price, and Fidelity. Three, the... [51:11] behemoths who at any given time owned... [51:16] Fairly substantial amounts of stock. So what does that mean in practice? Well, Dan would have their analyst day every December and I recall executives literally as soon as the analyst day was over going back down to D.C. and they were having breakfast the next day with T.R. Price, portfolio managers to talk to them about. [51:33] vision of the next year and such. And then they were jumping on an airplane to go see Capital out on the West Coast right after that. And presumably there was a trip to Boston probably right after that. So I think there's a certain element of let's make sure our top page one shareholders are [51:48] get what they need. And second thing, I will tell you, it's like on a personal basis, what I always loved about covering Danaher is that I could be traveling anywhere in the world. And let's just say, for sake of argument, I'm in Hong Kong and I have a dinner free. I could pay him, um, [52:01] and say, I've been opening up my calendar. Is there anybody that you have headquartered here who would be willing to grab a meal with me or a coffee or something? I'd say nine times out of ten, literally nine times out of ten, not only was the answer...

[52:14] Yes, we'll find out. It was yes, and they deliver somebody. I think what sold me on the culture is that I would travel around the world and meet with folks. I'd be pretty impressed by that particular leader, even if they were a mid-level leader, fairly impressed, but very impressed by... [52:28] at the messaging. [52:30] They didn't need to be coached ahead of the meeting. I mean, they would talk about the Daner business system. We would talk about lean within the facilities that they had, how they're managing their customer base and thinking about things like that. [52:41] There's some there, there. And then the last thing I would just say is that I love like the Dave Cote. Dave Cote, he had his own language that he spoke. It's just super interesting. But one of the things I wrote down that's in the book says, what you think, what you say and what you do shouldn't be three separate decisions. I just love that when you think about it, because again, the simplicity of it. But Dave would say that internally and externally all the time. And I do think when I would travel with Dave in the old days, I always the investor relations team would ask me like, all right, what do you want to do this upcoming year? And I was always say, I want to take Dave to the West Coast. [53:11] that is that I got to ride on the plane with him and pick his brand for five hours or four hours, right? [53:16] I loved that time. And Dave was the kind of person that he loved that time, too, because he would pick my brain the whole time. But the consistency of messaging, the integrity of messaging, we don't talk a lot in the book about ethics, but I think there's a certain implied integrity within these stories that over time, I think, just either comes out to the positive or the negative. I think that stuff is really important. As for the day in and day out mechanics of how you get there, I think it probably takes a little bit more time than most executives think.

[53:45] As far as why it's important, I will just tell a quick story. In 2008, I think it was early 2008, Dan and her bought Tektronix, and they needed to issue equities. And I was at Morgan Stanley, and I remember as soon as the market closed on Friday, I got a phone call from our investment bankers that just said, okay, well – [54:04] Dan Hearn needs to issue equity to help pay for this transaction. So they're going to do an equity deal on Monday. [54:10] We're going to do a one-day deal. They'll do a few phone calls with investors, and then we'll price the deal. And I remember saying to him, like, wait a minute, how much money are we raising? And I think it was a couple billion dollars. You're going to raise a couple billion dollars on a few phone calls? [54:23] Oh, my God, this is a train wreck. This can't be a thing. I mean, just put in context, Patrick, [54:27] If you're out raising $200 million for an IPO, it could be a two-week roadshow. That's $200 million. We're talking about raising billions. And by the way, we're not talking about raising billions in 2023, post-mortem looking at Daner and being like, this is an incredibly successful company. This is 2008. There was still a lot of debate on whether Daner was actually a great company or not at that time, and whether the valuation was worthy of that premium. I remember coming in early Monday morning, and I'm like, oh, this is going to be really hard. [54:57] their temperature. I went down to get a coffee. They came back to my desk and I'm about ready to hit the phones because I figure people are in their offices. And my phone rings. It's like 730 in the morning. It's a syndicate desk. And they call me and they say, yeah, don't worry about it. We're done. We're sold. [55:10] I'm like, what? Are you kidding me? You didn't even have the phone calls yet. Well, and the postmortem of it was the top shareholders came in and said, well, Dan is issuing equity to do a transaction that we're favorable towards. Sure. They've got our support. Here's the money. And it was that simple. So I think the point is that being that close to your shareholders, it enables the pivot. That pivot may come at a time. Early 2008 wasn't exactly the easiest time period to go out and raise capital. We were teetering on the edge of the world,

[55:40] The signs were already there. I would just iterate that you don't need those shareholder relationships when you trade at 50 times earnings and you're awesome. [55:48] But you will need them eventually. I always found that to be one of the fascinating lessons of Danaher is that as successful as they were, they never took their shareholder base or their analyst relationships and that ecosystem for granted. They always worked at it. [56:03] Another area that I found myself thinking a lot about as I was reading through these case studies was business model. I guess I'll invoke the Honeywell Salesforce comparison again. It's sort of universally accepted that like high margin... [56:14] software, high return on capital software business with incredible sticky recurring revenue is pretty darn good. Pretty good gig if you can get it. [56:22] But the reality is lots of these more mature companies had very different business models, non-recurring revenue. I can't remember if this was discussed in the book, but I remember thinking about John Deere, obviously sells equipment. But so much of what it does is through software, machine learning, computer vision, lots of the same technologies that the technology companies are charging for, but that they had a hard time. [56:42] transitioning their customer base to some sort of recurring revenue software model. They would rather just pay more for the tractor and get the stuff embedded in there. I'm just curious about business model, business model transition, and any lessons that have percolated from these industrial companies that not only have to pivot products, but also potentially pivot business models. [57:03] Again, we're just thinking about the change that John May, the CEO, has driven there. [57:08] If you look at the United Technologies chapter in the book, one of the themes is you run a certain playbook for a long time and your managers, your rising stars come up under that system and they're probably pretty good at running it. And then eventually, maybe the opportunity has been fulfilled and they should do something different.

[57:23] So Deere was a remarkable transformation where we were close to the company for a long time, and we'd spent a long time thinking about their inherent strengths and their strategy, which they have... [57:34] really a tremendous franchise where they have high market share in North America. They have a fairly fragmented customer base, which they service very well. And their strategy had been to try and port that [57:46] into the world. We were a little bit skeptical. We had to sell on the shares for a long time, [57:50] In part, just because in the US, you have these big farms that it took probably 100 years to consolidate. [57:56] land from small holdings to large ones. [57:59] playing to deer strengths in large tractors. And deer was looking at India and seeing tractor sales go up tenfold and saying, well, we need to be there so that we're there when India goes from two-acre average plots to 200 to 2,000 to 20,000. And that was a long, long, long path. [58:12] And we had this really remarkable meeting with John May and Ryan Campbell, the CEO and how to construction a deer and talked about strategy and sort of high level ideas of where you're taking the company. And a pivot emerged from that. And it was a fascinating one where. [58:26] What they saw as the opportunity, and this is just before John May officially took over as CEO, [58:31] was we can add value to farmers. We can do a lot. We can help them save chemical. We can help them save fertilizer, which has environmental benefits, carbon benefits, all sorts of things. We can help them save labor because small towns in America built around small farms have been emptying out. It's harder and harder to find labor. [58:46] And we can have a different kind of value creation at Deere. [58:50] And so they did this pivot, and they did it with a reasonably small acquisition of Blue River Technologies, which does AI-based learning of whether something is weed or a crop and spraying it differentially and, again, saving chemicals and also hopefully helping enhance yield. And they did it in a systematic and slow rollout way, but they had trust. So for one, they had to trust their farmers. And you did mention farmers are not eager to have somebody come and sell them a SAF model. Hey, you can pay for your tractor every year forever from now on.

[59:20] think about risk and wanting to own stuff and being lean and able to focus on the downturns. [59:26] But Deere probably spent five, six years working on the technology and then has been spending two or three years working on the commercial rollout. So they can say to a farmer, listen, here's why we think you should pay a subscription for this, because the weeds change every year. We spend a lot of time and effort identifying them and focusing in and we deliver to you differentiated value every year. [59:46] And therefore, it's an ongoing product. It's not something we can sell you once because it won't be any good because something will have changed and we have to provide an update. So when you think about a pivot, they had a deep trust and Scott just kind of talked about trust in your shareholders, which enables you, if you've cultivated your shareholder, explain to your shareholders what you're doing, where you're going, enables you to make bets when you need to. [1:00:05] And Deere had that trust or has that trust, I believe, from farmer base, which allows them to do that. But they didn't just count on it. They cultivated it. They worked on it. They showed it. One of the themes that kind of runs in the background of the book is just industrial companies have technology bets to make, too. There's changes that occur. And when do you do that and when do you not? And Deere has been an immensely successful example of leveraging that, again, that core base that you have of delivering values to farmers,

[1:00:35] efficiency for them [1:00:36] into the next level and the right time to do that, where it's a technology overlay as opposed to mechanical overlay. [1:00:42] Are there any other major, as you kind of think about wrapping up here, do's and don'ts [1:00:47] that you think we haven't covered that are important [1:00:51] messages from the book that if everyone in business heeded them, the do's and the don'ts would produce better outcomes for them and for their shareholders that we haven't covered? [1:01:00] I don't think we've talked much about the flywheel. [1:01:02] There is a certain reality that [1:01:05] If companies are doing the right things, [1:01:07] And they get on that flywheel. [1:01:09] and they reinforce doing the right things, it's pretty hard to... [1:01:13] Drop off. [1:01:14] You're able to recruit better people. You're able to retain better people. The stars, if you will, that we talked about earlier, you're able to compensate them enough to keep them interested and you're able to create opportunities. You think about how many jobs and opportunities Danaher creates. It's grown and done so many interesting things that if you're a rising star in that organization, there's going to be opportunities for you. [1:01:37] to transition or move up the ladder every few years. And it's incredibly interesting. So I do think that flywheel concept that was perhaps introduced more directly in the book Good to Great, we try to kind of modernize in Lessons from the Titans, [1:01:52] I think that's a really important concept. To Rob's earlier point, incredibly hard to get on it. But once you're on it, [1:01:59] You're on it. Companies that didn't make it into our book, Train, for example, done this incredible job. Train used to be an incredibly mediocre company, and there's a number of things to get on the flywheel, including notably a big rollout of lean. And now they're on it, and they're crushing it, and the stock's revalued higher, and it's been tremendous outperformance. So when I think about should software companies trade online,

[1:02:23] at a premium to industrial company? Absolutely. Apples to apples, [1:02:27] A hundred percent. [1:02:28] But there's so many times where Rob and I look at each other and our colleagues internally here at Amelia's Research. We look at each other and say, wow, there's real returns here. There's real alpha generation year in and year out. [1:02:40] Why aren't people engaged more in this story? And so many times when we go out and we meet with investors, they're like, oh, that stock's already worked. Consensus view is possible. The consensus view has been positive on data for 20 years. [1:02:52] Or maybe it's a big positive amount for the next 20. I don't even know what that means anymore. [1:02:56] I think that's something that the whole flywheel concept is, I think, an incredibly important concept. And part of that, if you can get to the point of figuring out whether a company is a movie set or not, it's a real thing. I mean, Jack Welch, that was a 20-year run. [1:03:10] And Jeff Amell was nearly a 20-year unwind. He took him off the flywheel, and it was just a death by paper cut for a long period of time. Nothing happens overnight. These are long periods. [1:03:22] And maybe that's one thing for the tech industry to understand is that we make a point in the beginning of the book to talk about disruption and how everybody just talks about disruption. And we kind of laugh at it. I mean, we've been talking about electric vehicles since I was nine years old. Nine. Of course, I'm only 17 now. The point just being that most disruption that you see... [1:03:42] is pretty well telegraphed. [1:03:44] There's always some example of where we're wrong, but most of it is actually pretty well telegraphed. And so for the companies that aren't willing to pivot or aren't willing to gravitate their portfolios, the software thing, just getting back to Roper and Brian Jeltsin. I mean, Brian Jeltsin started making software acquisitions a long, long time ago. It took the marketplace a long time to understand that there was real gold in some of those assets.

[1:04:09] inherent in what we're saying all throughout is don't mistake a good moment or a good cycle or a good burst of success at a company for underlying sustainable success. And what Scott referred to on that flywheel, if you can drive your margins up, if you can drive your cash flow up, if you can effectively reinvest or get back, but reinvest that cash flow, you're driving repeatable success. If you can do that in a way... [1:04:33] that stems from your employees knowing what they're doing every day and managing and benchmarking yourself and then improving the things that you see yourself not having done well in that benchmarking. [1:04:43] That's sustainable success. Big theme of the book is trying to turn that initial moment of you've done something great and it's wonderful into you can do this repeatedly year after year for 20 or 30 or 40 years. And a lot of that we think comes from those hallmarks of continuous improvement. [1:04:59] I love the book. I think it's so full of lessons for all kinds of investors and, of course, maybe more than anything for operators, that there's nothing new under the sun. Things repeat themselves over and over and over again. And there's so much we can learn about hygiene. Like you said, the concepts for Danaher, for example, are not that complicated. The concepts in the book and that you've discussed aren't that complicated. Get a flywheel, have a business system, prune a culture, treat your shareholders. I mean, these are not crazy

[1:05:29] And I'm really appreciative that you're willing to share so many of the lessons from the book and from your research with us today. [1:05:35] I ask everyone the same traditional closing question. So I get to ask you twice. Maybe Scott, starting with you. What is the kindest thing that anyone's ever done for you? [1:05:43] Well, [1:05:44] And this is probably my wife not leaving me every day, but I'll go back. When I started in research, I was, [1:05:50] I wasn't very good at the job. [1:05:52] in the mid-90s, and Morgan Stanley was building up a research department and was hiring some tremendously talented people. [1:05:59] I worked around some tremendously talented people, and I'm incredibly grateful for that experience. But there were... [1:06:04] People specifically, there was a woman I sat next to in a cube next to me, her name is Rosanna Lee, [1:06:10] who is tremendously talented and [1:06:13] I had so many questions every day to ask her. I was just failing. I just think... [1:06:19] My first couple of years in research, I thought I was going to get fired every single day. I just felt so incredibly exposed and incompetent. And she was so incredibly helpful of helping me navigate how to do the job. Just so many skills to become a research analyst. You have to be able to model. And that's its own issue. Some companies are tremendously complicated. You have to be able to write and articulate a view and have a thesis and conviction around a thesis. And you have presentation skills. And quite frankly, I wasn't good at anything. I couldn't present. [1:06:49] write. I couldn't articulate a clear view. I'm not so sure I was all that good at modeling. And Rosanna was just incredibly kind and forgiving and accepting of my weaknesses and failures. And then Mary Clark, who was our global director of research, was the one who gave me my first real shot at carving out my own niche. And Mary is another one who was just tremendously helpful. And again, I would honestly, I think I was completely incompetent and they probably had

[1:07:19] off, worked my way through it. But Mary is this amazing person. And she gave me a shot and she believed in me. And I'm just incredibly grateful for that experience. I don't think we'd be here today, wouldn't be able to write this book, wouldn't have the experiences that we've had without really the support and the kindness of those early folks in my early career. [1:07:39] Wonderful. Thanks, Scott. How about you, Rob? [1:07:41] It's funny. I think one of the things Scott and I share, and we've worked together a long time, is a fundamental insecurity, which I suppose is a healthy character trait in a world where you're wrong half the time if you're good. [1:07:52] My answer would be somewhat similar. I have, by luck, stumbled into a job and a career that I absolutely love. I mean, we get to meet with people who are running wonderful companies. We get to meet with investors, have interesting conversations every day. The start of it, I've just been very, very lucky. I mean, some of it's privilege, some of it's network, etc. My first job in this world was as a consultant with a small firm in Minnesota, Matrix Associates. And my boss, Michael Fox, you think about a moment of kindness, or like Scott's described, [1:08:22] through. This is what business is. This is what consulting is. This is how you build a model. This is how you kind of interact with people. This is how you carry a meeting. That carried through to business school. And then I had a shot at Morgan Stanley as well. Is it a moment or is it just being willing to stick with somebody who may have a bit of talent and help them coach through? So it's been an extraordinarily fortunate life for me. I'm very appreciative. Wonderful. Scott and Rob, thank you so much for the nice long conversation on everything that you've learned. Hopefully lots of people out there can apply some of these lessons. I know I will.

[1:08:52] your time. Thank you very much. Thank you. Yeah, we're honored. Thank you very much. [1:09:22] Thank you.