This book by Bob Fifer, is a no nonsense, practical guide on how to increase a company’s profits significantly in a short amount of time. The author is a management consultant who had plenty of experience in improving profits at Fortune 500 companies. I got to know about this book because it is reportedly the required reading for all the managers at firms controlled by 3G Capital.
3G Capital started as a private equity firm in Brazil, and is most famous for acquiring Brahma Brewery in 1989 and eventually owning the world’s biggest beer company after last year’s proposed merger of AB Inbev and SAB Miller, by acquiring other beer companies and applying good management practices.
The book, The 3G Way, is a good introduction to the culture and management practices injected by 3G into the companies they acquired to achieve excellence in a relatively short amount of time. This article by the Economist shows just how good the managers at 3G are.
Fifer suggests 78 ways to cut costs and increase sales in order to increase profits. About 80% of the book is dedicated to weeding out unnecessary costs and the rest is about increasing sales by challenging the conventional notions of salesmanship and pricing policies.
Each of the 78 ways has a short, concise chapter written for it, reflecting the efficient management style that is advocated by the book. The pertinent points of the book are for managers to energetically cutting non-strategic costs and having a bias towards decision making based on managers’ experience and judgement (as opposed to having meetings and studies to consider decisions).
In order to build a profit maximising, world class organisation, the culture of the company has to be set by example from top down. Go all out in reducing non-strategic costs to the bone, maintain spending on strategic costs and reward employees based on meritocracy, not seniority. That is pretty much the playbook of 3G Capital described in The 3G Way.
There are also a few lessons for investors such as myself. The most important takeaway is that while being by and large qualitative and therefore difficult to judge, management quality is paramount. The same company handled by mediocre management as compared to excellent management can produce astonishingly different results. Buffett is not only great at judging the quality of businesses, he is also excellent at judging character and managerial competence. Many of the deals he did were inked in short order after meeting the CEO/founder, and without the standard due diligence procedures. That is probably a skill that is developed over decades of business experience. Without the same access to top level managers, retail investors can only pass judgement by reading annual reports and interacting with management during annual general meetings.
Another lesson is that there are a lot of inefficient companies in different industries out there that can be optimised without causing an upheaval within the company, creating extra value for shareholders “out of thin air”. Contrary to my belief that it may prove too difficult to alter a company’s culture (especially at a big company) so dramatically that it may affect its usual functioning, Fifer claims that when new measures are applied correctly, employees can quickly adjust to the new norms. With what 3G has done, we can now see that this is achievable even in big companies such as AB Inbev and Kraft Heinz. Both companies have industry beating margins under the tutelage of 3G.
As a side point, when companies become successful and grow bigger, they usually become plagued by the ABCs of business failure (Arrogance, bureaucracy and complacency). As business conditions change, they become a victim of their own success and they are unable to adapt quickly enough to survive. Who Says Elephants Can’t Dance and Only the Paranoid Survive are excellent books written by the managers of IBM and Intel about facing tough, major decisions as the business environment changed.
For every successful company transformation like at IBM or Intel in their history, there are many more business failures. That is something to think about as a value investor when we say that we would like to hold an investment forever. Though they are not easy to judge, business conditions and management quality change over time, and those two factors significantly affect our potential investment returns.
I recommend this book for all business owners and managers as there is a good chance that their business results can improve after applying the principles in the book. It is also a good book for investors in building their overall understanding in how to judge management quality when assessing companies and thinking about the potential of creating value within existing companies just by being more efficient.
C is for Compounding 