OMD's ABCs #273: Notes on Rolex & Transdigm Culture, Flying as Antidote to Radical Individualism...
Hello! This week starts with a medley (two really) of podcasts that gave fascinating insights into top businesses in different fields (luxury watches and aerospace parts). They were both quality podcasts. I particularly liked the Rolex one just because of how beautiful the company’s discipline for quality sounded like. If my takeaways were interesting, I’d recommend you listen to the full episodes!
The essay this week is something I wrote whilst flying around this past couple of weeks. The travel meant I wasn’t able to carve out much focused time to consume and think about Art (hence nothing for it this week). But it gave me some food for thought and led to a fun essay on individualism based on the sense of awe and humility I felt on one of my flights. I hope you enjoy!
The ABC’s of the OMD learning function are below. Feel free to pick and choose the segments that interest you and I hope they make you think about something you didn’t before, raise an eyebrow, or leave you satisfied.
Art: Books, Movies, Creations
Business: Investing, Systems, Work
Culture: People, Self, Observations
Art: Books, Movies, Creations
Nothing here this week.
Business: Investing, Systems, Work
Rolex’s Culture of Quality
The following podcast on Rolex, the world’s top luxury watch brand, was a delight. It was remarkable to learn about the company’s obsession for quality from its process, marketing, brand to everything it did. The entire company just oozed purpose in its action.
Here are some takeaways I had:
Owned and operated by the Hans Wilsdorf Foundation, set up by Rolex’s founder (Hans Wilsdorf). It’s a nonprofit run by a handful of families and they’re all very private…close to 0 public interaction. A sense of humbleness about it.
No.1 watch company by sales and they sell about a million watches a year but they don’t share any numbers.
Rolex doesn’t market its story or its process. Like the people that run the foundation, everything about them is secretive and backed in privacy. While most luxury companies try to scream out why they’re special, Rolex doesn’t say any of that. They just execute and let the products speak for themselves. While watch companies would brag and market using new manufacturing techniques like LIGA, it was discovered that Rolex had been doing it years ago but they never spoke about this evolution in their own watches. A testament that true luxury and wealth is quiet and not in your face. Even their offices, which appear to be 5 floors, have 5-6 floors underground to give the appearance of being small.
Control & Vertical Integration: Rolex went from 27 suppliers to 4 to owning all of them today. The extent to which Rolex will go to control its quality goes further into how they own their own foundry to make their own steel and gold. Every part of the Rolex is made in house. They even make their own machines to test the machines that make the watches. They also invested millions of dollars to build their own gemstone sorting machine because 1 in 10m diamonds is of “poor” quality.
Rolex makes (not sells) watches. They only own one retail store and their business model is selling their watches at wholesale to retail partners.
They focus on quality of sponsorship/marketing as well. They stay focused on a few events like tennis (Wimbledon/US Open), golf, motorsport (F1), sailing and equestrian. Rolex was a sponsor of golf before it became a global sport.
Rolex focused on luxury during the 70s/80s because the Swiss watchmakers lost to the Japanese on precision watches. The Japanese watches had the quartz technology to show far more precise time and instead of competing against that Rolex went another way to define themselves as high quality luxury items. Lots of Swiss watch companies struggled during this period when it appeared that everyone needed to make quartz watches. Most ended up being bought up by conglomerates or consolidating and that’s how many came into forming the Richemont company today. But Rolex held firm.
Transdigm’s Value Creation Culture
Following up Rolex is one of the OG’s of high performing conglomerates: Transdigm. In case you aren’t familiar with the company, they are a holding company that owns ~50 businesses that make nearly every part that goes into an airplane (outside of the engine). Boeing and Airbus might actually manufacture the plane itself but many of the parts are sold by Transdigm’s businesses. Transdigm was one of my early investments when I was cutting my teeth as an investor in people and I became a fan of the tight ship Nick Howley, the CEO, appeared to run. But thanks to the internet and podcasting, I got to listen to an extended interview with him and William Thorndike, the author of the Outsider, whose book actually started me down the path of investing in people (i.e. management teams). I wouldn’t have ever imagined this would happen 5-6 years ago when I read The Outsiders and bought Transdigm stock months after.
Here are some takeaways I had:
Transdigm’s culture focuses everyone on three value drivers: price, cost and new business. You either get this or you don’t. Howley mentioned culture fit and belief in Transdigm’s value focus to be the most important thing for the business. He mentioned his biggest mistakes were not firing those who were not culture fits and the greatest ROI for the company was taking the time to bring in the right culture fits and putting them through the culture/value training program (something that is retaught over the years).
Transdigm’s strategy is simple and straight forward. They acquire niche, often proprietary, airplane technology/equipment companies that will be able to generate a levered IRR of 20% by Year 5.
To achieve this, they have set playbooks and over the 80 acquisitions the company has completed, they haven’t had a botched acquisition. This is impressive given 3/4 of corporate M&As are considered to be value destructive. But the company focuses on a specific niche and deploys a set playbook.
Post-acquisition, the existing management team is often taken out and Transdigm will put in their own head of sales & marketing and president. Sometimes they will put in their own head of engineering or finance as well. But the focus in the first two years is to increase prices and acquire new customers. Those are often the inefficiencies existing in niche engineering businesses as Howley learned that many underpriced their products because these companies anchored their price to costs instead of the value of the switching cost the customers had.
A contributing factor of success for this conglomerate has been its decentralized structure. What’s fascinating is that Howley and his partners had a strong belief in the need for decentralization since the start of Transdigm. It was obvious to them that to have employees think like owners, they needed to be treated and paid like owners. They also learned that most head office staff added 0 value (often detracted value) in engineering-focused companies. This leads credence to how most of the best niche industrial companies have tiny head office headcounts.
Alignment in compensation was another important factor for Transdigm’s success. Howley mentioned that the EVPs and Leadership team were the culture carriers of the business and how important they were for enforcing the Transdigm culture into the ~50 businesses and the ~150 product lines. In the early years, Transdigm acquired many young people who had a culture fit but not the right “pedigree” and gave them opportunities. Many of them have become the EVPs of the company today and Howley mentioned that they never lost a person they didn’t want to lose once they were put on the leadership equity program. This program is a pay-for-performance program. Transdigm doesn’t pay exorbitant salaries. Instead, they pay a lot in equity but the equity only vests when the intrinsic value per share of the entire business increases at least 10% per year. By picking the per share value at the company level it also creates cohesion in the entire leadership team and allows for succession and movement throughout its business units based on need and skill instead of creating infighting between the operating managers.
It sounds like an aggressive culture focused on deploying its three value creation strategies and aligns its leaders to think like partners. This also results in the system rejecting under performers as well. It’s not for everyone but it’s done a wonderful job in creating a value accretive business.
Before going public, Howley mentioned that he had been the sole person doing M&A at Transdigm while he had operating leaders go in and fix up the acquired companies. But for the business to scale, he had to build out a proper M&A team. He mentioned how the M&A function resembled a sales function with the need to go out and acquire leads and build relationships with prospective targets. I thought it was remarkable that Howley was able to evolve from being a one-man M&A team to building out a function that could scale without him. So few seem to be able to achieve this.
Culture: People, Self, Observations
Flying as Antidote to Radical Individualism
Staring out the oval-shaped airplane window—a tad larger than my too-big-for-hat-head—I was hit with a feeling of serenity. A town with thousands looked about the size of my thumb. Their existence was but a tiny speck in the vast landscape I saw before me. It was easy to grasp the insignificance of our individual form in this state.
It was humbling to think about the opportunity I had to see the context by which our lives could be seen from a great distance. Astronauts probably feel this effect magnified 10,000x as they look at Earth as a speck in amidst the vast darkness.
Flying is that wonderful opportunity for individuals to experience such feeling of wonderment, humility, and admiration that only the vastness of nature itself can teach through sheer existence. I can only hope that enough humans get to experience this. It’ll be one more benefit to society to have a few more humbled into the realization that our individual existence and freedoms pale in comparison to that of the ecosystem. Feelings of superiority don’t have a place in this tiny vessel in the sky.
I’m not saying the individual isn’t important. My personal drive and philosophy around societal development rests on the importance of enabling individuals so that the Übermensch can elevate us all. But it’s worth pointing out an individual acting on their own freedom is only permissible so long as it doesn’t harm another. If the last part is forgotten, then the violator is a mere everyday-asshole, not some freedom-fighting libertarian they might imagine themselves to be.
Freedom of will and action should only be touted so long as it is considerate of others. It can’t harm another’s way of life for the sake of executing it for the self. Those unable to understand this have failed to learn the valuable skill of harmony, which often manifests on the human capacity to be considerate of another. This is a lesson some cultures have forgotten to teach their young—sometimes at the expense of touting extreme examples of individualism.
A cure for such oversight could be to send such children high up in the airplane and show them how small everything is. Let them realize that this privilege to look down below is not a right. Let them see that they too will return to the ground and be tiny specks of insignificance by others who take flight. Actions speak louder than words and nothing speaks louder than seeing the vastness of life itself.
Now, some may think that such an experience of one’s own insignificance will lead to nihilism. But that ignores the joy and freedom of accepting one’s starting position as one that doesn’t matter. It’s to free the self. I don’t say this to side with the nihilist. I say this to side with the optimist.
The optimist will see how unremarkable the individual existence is and realize there’s something greater to be done with this small bit of insignificance of the self in its base form. The individual shouldn’t take the self so seriously. The individual failure doesn’t matter as long as it leads to recovery and growth. More mistakes and failures provide greater opportunities for growth. That’s a virtuous cycle.
The individual is not meant to be put above the herd. No person is above the law. To believe so would mean a totalitarian system and this would be in contrary to a democracy—even libertarianism exists in the greater constraints of a democracy.
I tell you. It’s a blessing to have that burden of self-importance be lifted upon looking down at the vast world. It shifts the focus to what the individual can do for others and something greater than the self. This doesn’t mean helping the world. It can even mean helping one more person besides oneself.
It’s a shift in mindset over a technical definition. It’s only when the desire to do more for others becomes something intrinsic that everything comes back full circle to the self, quite like the ouroboros snake. Only now, the focus on the self comes from the realization that to help others, one cannot do so effectively without being aware of the protocol and systems by which the self is best suited to operate in.
Only by knowing that personal programming and understanding it can the self utilize the proper levers to pull towards the meaningful direction. But this time, the focus on the self has a purpose greater than that of self-preservation or something far worse, like seeking approval from others to define self-worth.
OMD's Journal in June
Investing
Powerlifting