My first real start-up job was at the end of 1999 and start of 2000. The company was founded by a few Ivy League MBAs and they hired a bunch more. I found them intimidating a bit and they made sure the relationship stayed that way.
We had a lot of meetings with a lot of SATish words thrown back and forth. We had meetings about how to have meetings and on and on...
Fast forward the Internet bubble burst, we were ruining out of cash fast and had to downsize. One-by-one the MBAs left and we got more creative, more nimble. I went from a snobed -out engineer (it had a non-leadership connotation at that place) to running engineering and then the product team. We sold the company (not a huge exit but everyone got something) and stayed a year until got fed-up with the labyrinth of our parent company (ran with bunch of sales and MBAs).
Here's what I learned from my experience. Many MBAs make good consultants. They can analyze and write a report for you. They're mostly not creative nor can creat anything (or they'd be doing that instead of spending $100,000 in school ). Because they can't creat anything, they have to show their value. Which means a lot of analysis, meetings and meetings about meetings. Resulting in slowdown, reduced innovation and increase in politics.
Yeah, the secret of Costco is that they don't hire MBAs.
If you actually want to go learn Costco's "secrets" of their basic business model, inventory management and staffing, go read Megan Mcardle's article comparing them to walmart:
Sadly, the "secret" of $SUCCESSFUL_COMPANY is almost always far more boring than we'd like. I really wish there was a news source that would actually write articles like this which discuss staffing levels, supply chain management and the like.
That piece seems wildly insincere and misses the point, as does anything that just compares Wal Mart to Costco.
Usually what people compare is Sam's Club to Costco. Sam's Club is the direct Costco competitor that is also owned by the Waltons.
Of course Wal Mart is a different beast than Costco, everybody knows that. But that doesn't mean that Wal Mart couldn't treat its employees better. If anything the facts of McArdle's piece prove that point. (They are making plenty of profit, a lot of which could be reinvested in employees.)
This is bullshit disguised as economics. It's an MBA's analysis of why they're not allowed in the club, and it's because "it's not cool enough for us."
Costco follows TQM: their business model is integrative and process-based, and takes into account the quality of their product, market, shopper experience, employee experience, and management. This is key. It cannot be ignored or glossed-over or simplified, and any doing so is indicative of an ignorance of the process.
"The true definition of quality control is the stabilization and maintenance of a process to produce consistent output. The key to Costco's ability to maintain their low prices and quality is because of good wages and benefits." This is an astute recognition of the importance of the workforce in the quality control process. This is, quite simply, the truth.
The blog post also goes into other use of TQM and process control, including statistical analysis of transportation, use of data on a large scale, and using product quality control methods to ensure good final consumer satisfaction. This is all essential to quality, which is essential to their business model.
You can look into details of all aspects of their business, but they will always be secondary to their overarching TQM model—everything is inherited from that. Asking for details about this is like asking what type of screws were used on the Space Shuttle and claiming that's why it actually got to space.
This is not simply a coincidence of market position and product segmentation. It is all a deliberate, controlled process that is repeatable. Most importantly, other businesses can use all of these concepts to also get a repeatable, predictable process-controlled output.
To me, this is not boring or trivial at all. It is paramount to the success of the organization, and an important paradigm shift for all American business. This is something you need to pay attention to. TQM, and more fundamentally Deming are things you should look into and understand, because they are more correct and provable than your standard run-of-the-mill boring old business theory. Even software companies can reap the rewards in process theory and management theory.
The secret of this successful company is actually different, and it's on a high level. You can't just reduce it because you don't like the high level part. Pay attention.
"Asking for details about this is like asking what type of screws were used on the Space Shuttle and claiming that's why it actually got to space."
One interesting interpretation is if you focus on failure, you'll focus on how the shuttle failed to get into space one time because the elastomer in a solid booster joint was required for political reasons because the segments needed to be shippable, and the specific elastomer had acceptable to excellent high temperature performance but epic failure at cool outside temperatures.
So if you fixate on failure, the way you "fix" Walmart, or America in general, is by copying one or a couple small details, like the painting scheme at Costco or the peculiarities of their payroll system or something. If on the other hand you fixate on success, then an analysis looks a heck of a lot like your post, more or less.
Or more generally, you fail because of details, but you succeed because of bigger issues, like using TQM Deming or other paradigms.
Flailing about for better numbers works in a sea of incompetence, but usually doesn't work if your competitors actually know what they're doing...
The point of TQM, or Deming, is not to focus on failure or success, in fact, but on process. The process is supposed to account for all the details.
The reason the Space Shuttle didn't fall apart at every single joint was due to engineering and construction process-based quality control. This is the same, but extended to business.
The point is to fixate on the process, not the success or failure, and not to do it piecemeal. Implement process at all levels.
Another example: the reason Japanese cars are such high quality (especially when compared to US manufacturers a few decades ago) is not due to just parts or engineering, but also fundamentally management style. Few US CEOs would reach this conclusion. This was Deming's fundamental point: the workforce is part of the process; every part is important to the end result.
I feel as if you meant to respond to someone else. McArdle's post didn't discuss MBAs at all, why or why not they might not be let into the club. The washington monthly article also doesn't discuss TQM.
You might be right about TQM. This may enable Costco to have an effective process. But neither article under discussion, nor the articles you cite, actually provide any useful information on this.
But yes, this is exactly what I'd love to see. A discussion on using statistics to improve transportation efficiency, details of quality control methods, etc. Those "boring" details are how you build a successful business. They just don't give good linkbait titles.
He was using an article to note that the sort of high-level strategy discussion was boring or not useful, and that he wanted to see more low-level details into how to run such a business.
However, thinking to those details, I believe that Walmart and Costco actually do a lot of similar things on that front, managing the supply chain and transportation extremely effectively. I think they've no doubt come to the same conclusions on those points. If you want to know them, you could go to any successful large-scale distributor and look at best practices, and I'm sure Walmart and Costco would also be great sources.
However, where costco differs, and where they are special and highly un-boring, is exactly what the original article is about. This is why I felt that asking for the level of detail McArdle requested was not a valid criticism of the article. I felt I was founded in responding to that point.
After reading the article I found the most important information of all:
Quote from Costco:
"It cultivates employees who work the floor in its warehouses and sponsors them through graduate school."
So, the article could change the title to: Secret to Costco's success, hint, it doesn't pay market wages for MBAs by recruiting employees internally and paying for their education.
I honestly have no idea which strategy is more cost effective. I deeply respect companies who promote within over pulling from outside but it is clear that they value graduate business education or they wouldn't be paying for their employees to go to graduate school.
[Added] And, maybe they are sending their students to CS graduate programs, but I think we can all agree that likely they meant business school when they said graduate program and the author of the article seems to just gloss over that huge detail while bashing a curriculum they don't understand.
I think you miss a big point by concluding that Costco is just looking for a way to save on MBA wages. I see the internal recruitment as a way of ensuring that management is comprised of individuals who deeply understand the mechanics of the company. Someone like that, who then goes on and learns a number analytic techniques/philosophies as an MBA is more likely to apply them with insight to where they break down vs reality.
Personally, I'd be terrified if a new engineering graduate who might have excelled on designing structures in a CAD program, went directly into leading a bridge building project. But, I think that's the track that some MBA's follow - especially from well regarded business schools.
I agree with you. I didn't state it out right, but you are definitely correct. Most MBAs (something like 60+% have substantial business experience prior to applying to B-School. The remaining 40% have substantial experience in unrelated fields to business like engineering. (assuming we are referring to top ranked schools).
I'm not sure whether they save or not on their MBAs, but they likely do.
> I see the internal recruitment as a way of ensuring that management is comprised of individuals who deeply understand the mechanics of the company. Someone like that, who then goes on and learns a number analytic techniques/philosophies as an MBA is more likely to apply them with insight to where they break down vs reality.<
People with direct, on the floor training are definitely valuable to an organization. As are people with outside or diversified experience.
My overall point in the first post was to state that the title was basically wrong and that Costco does value MBAs to a high level. That is proven since they pay for their educations.
Its a fact packed article and I assume the facts listed are true, although given later comments I do wonder.
However her opinion "But Walmart is not just a poor man's Costco." strikes me as being exactly opposite both in examination and analysis of the facts she provides and personal experience. She then spent most of the rest of the article explaining how reality is the exact opposite. Maybe this is a legendary epic editing mistake and she meant to write "Walmart is just a poor man's Costco." but the editing and/or ad sales team made her change it or perhaps just an honest mistake.
As a market positioning technique all you need do is find the bottom of the barrel, like Walmart, and position yourself as 10% better. Ta Da instant free positive press. You can make a 5000 word article about it, but this TLDR summary is just as good.
I also thought the juxtaposition of the article vs the delivery mechanism was weird. This is a website full of chewing gum for the mind. Linkbait. "Your Tango Finding Nemo: The 10 Most Ridiculous Nicknames For Self-Love". So they're intentionally aiming for the shallow end of the socio-economic pool. And thats perfectly OK. Weekly World News readers and high school dropouts need websites too, the world is big enough that everyone doesn't have to visit HN. However the article author is incredibly condescending to the website's audience and spends a lot of time making fun of their concerns and distancing herself and her twitter feed from what she apparently views as lower class scum, which probably would sound about right in an Economist article (LOL I looked and she does in fact write for the Economist LOL) but why you'd put someone like that on the Daily Beast, which kinda puts the lower in "lower class", mystifies me.
For me, It would have been a better article if it had maintained Sam's Club as a focus, rather than switching to Walmart after comparing shopping club employee wages.
One of the obvious benefits to promoting floor workers which is not covered in the article is that the former floor workers know the work realities. One of the biggest sins of hiring MBA's for management is that they don't know the floor realities and therefore they get an analytical view of the business which is simplified in the wrong ways.
One solution might be to hire MBA's as floor workers for a minimum of a year before promoting them to management. However, with student loans being what they are, that is not feasible today.
Target does something like this, when I worked in the corporate office it was a pretty regular thing to send employees to work in various parts around the store to get a feel. Though it was typically only for a week.
You know what Costco really needs? A fucking engineer to design a milk jug that is efficiently stored in bulk and doesn't spill milk all over the damn place when I'm trying to make oatmeal.
Source: I Just spilled half the jug all over the damn place.
They did come up with a more space efficient jug in 2008 and it was supposedly adopted by both Costco and Walmart. The same size shipping container would store 50% more milk. There is even a NYT article about it - http://www.nytimes.com/2008/06/30/business/30milk.html - but I only ever encountered milk in a container about half way between traditional and that design for one week a few years ago in my local Californian Costco.
Looks like a lot of people commenting didn't bother to read the article:
"Costco does not hire business school graduates—thanks to another idiosyncrasy meant to preserve its distinct company culture. It cultivates employees who work the floor in its warehouses and sponsors them through graduate school."
Note that they do not recruit from B-Schools, but they are happy to send their own employees to graduate school.
In the past, working your way up from the bottom in a large company, being sent for an MBA or MBA/JD combo was a relatively standard thing. Several of my professors/acquaintances have taken this track in Citi Group (I think they got renamed) and the like. Amgen, Boeing, Raytheon, Intuit, etc. (I live in SoCal.) have similar policies and practices where they encourage employees to get a graduate degree (be it Business or Engineering). This is not very groundbreaking and is well documented to be a solid strategy for employee development.
I don't think it's that Costco has a problem with MBA's. I think if you get on the management track at the company, they will sponsor you through business school.
"Costco does not hire business school graduates—thanks to another idiosyncrasy meant to preserve its distinct company culture. It cultivates employees who work the floor in its warehouses and sponsors them through graduate school."
It seems like they just want people with experience working at its warehouses so they can get a perspective on how the day to day business operates.
It's not MBAs specifically. It's the business consulting mindset in general that MBAs are taught. Costco wouldn't want for MBAs to come in and do consulting on how to improve their operations because those guys wouldn't have the necessary respect for what Costco finds valuable, which does include their on-the-ground work and unique culture.
MBA pattern recognition and recommendations would work well (hopefully) when the situation fits the pattern. Costco is clearly a non-standard retailer, so the question is how MBAs would respond to such non-standard patterns, and whether their recommendations would be good for the long term of that business. Maybe they would offer up excellent advice, maybe not. Costco is just erring on the side of caution and preferring their "home-grown" MBAs, rather than "standard" MBAs.
I can provide you an interesting analogy that may (or may not) resonate with HN readers:
It turns out that hiring a guy who's an expert at optimizing I/O systems for databases, to optimize your massive multimedia streaming farm, doesn't usually work. Because one is hyper random access and the other is massively sequential, also typical block size for one is probably measured in K and the other typical transaction size is probably measured in G. And there's certain latency consideration. And probably others.
The real question is if costco is successful, why are b-schools charging $100K to churn out cookie cutters that don't cut it in the real world?
If costco were swirling down the drain, AND simultaneously rejected "MBA culture" (or HN culture, or 4chan culture, doesn't really matter) then it wouldn't be much of a story. The question is why MBA schools, despite all the worship of their holy paper credential, can't graduate people who apparently know anything about retail, or at least don't know how to be legendarily successful in retail.
It would be like a med school that charged $100K but simply decided to not teach their students anything about biochem and then no one seemed to care. "Eh, blood sugar and electrolyte levels, eh, that stuffs hard, lets skip it and do some extra anatomy studies". Or in engineering, "Well, I never really liked finite element analysis and you'll probably not be expected to successfully do it on the job, so here's a engineering degree anyway and best of luck to ya". And no one cares other than a successful, yet fringe industrial company, who doesn't hire eng school grads to do finite element analysis.
There are 25 theories because each one works on a different set of assumptions. As economists can't work with lab experiments, they have to go with lots assumptions using complicated statistical tools.
They can't ask businesses because if you go that deep you can't abstract away any useful info. You will get very detailed stuff that nobody will care about. Most of the times people want a petty theory that can be summarized in 10 words (read all the keynesian BS on this).
As for the MBA's. Start ups are picky, very picky. They want you to have a github profile, to have a phd, to be a god in what you do. This is mainly resource driven, but that's the fact. Thus, don't come telling me that start up culture is closer to workers because I will call 100 times BS on this. I have never seen a start up giving chances to somebody that does not have god skills, or somebody with a profile that does not involve years of coding or CS. On the other hand, my company took me straight from business school and is giving me the chance to grow from almost nothing (as I did not study finance).
If it's too hard to gather any data, and it's too hard to do any sort of experimentation to determine if your theories are correct, it isn't time to just wildly theorize... it's time to pack it in and go do something else.
Your defense is too powerful. Fortunately, the dismal science isn't actually that dismal... or at least, it doesn't have to be....
Thing is, I am constantly working on concepts to develop a SaaS that could free me from a paid job. I actually do code and do pretty much everything (python (flask...), databases, sql, javascript, css, html, the whole package), because nobody dares to join a "non technical" guy, I have to learn it all.
But you know what's the most difficult thing? The business. Oh yeah. I can code an app from scratch, but I still have to convince people to use it. I still have to plan the financials (by the way, how do start up plans look like? Guess-working?). I still have to market it. I still have to make profits.
Which brings me to the point. I can't stand this bashing of business people 360 degrees. There are bad business people as there are bad developers. There is bad culture in start ups ("you non technical piece of ...") as there is in business. It's all a matter of degrees and looking around.
Actually it doesn't really matter because your argument pretty much encompasses all startups. Also I'm not really going to post names, because I didn't take the jobs.
Regardless, I live near Edinburgh. Startups here are almost always looking for good enough for the right price, which is how I imagine almost all well managed starups act, outwith a very small bubble.
The entity now called Costco was called PriceCostco after the 1993 merger. That they ultimately chose the Costco name doesn't change the dual heritage; founders of either have a fair claim to being founders of the combined entity.
But even further: key founder of pre-merger Costco James Sinegal got started in retail working at Sol Price's San Diego-based FedMart and Price Club. He then copied the PriceClub membership/bulk/employee-development model starting from Seattle. (A friend working for pre-merger Costco at the time described it as an almost-friendly rivalry, with each racing to expand the shared model from their home cities into the rest of the US.)
So the PriceCostco merger "got the band back together", Price Club was the older and model-foundation entity, but clearly both teams contributed enough to be credited as "founders" of the current behemoth.
Even in Mexico, there is a stark contrast between the feeling in the stores and employees treatment from a Costco vs Sam's Club. Also the quality of products sold is very noticeable
It is revenge of the nerds. I don't know if it is a good thing, bad thing, or it doesn't matter but it sure makes a lot of people feel better. And to be honest, the MBAs do have a lot of it coming to themselves, not all of it, but a lot.
An MBA is a powerful tool. It gives you an analytical view on business, coupled with at least introductory understanding of the full range of business activities.
However, as with many things in life, a little knowledge is more dangerous than no knowledge. Couple little knowledge with the feeling of self entitlement and you get a recipe for disaster.
My main message: Don't go discarding all MBAs just yet. Many are excellent people and magnificent professionals.
Actually, if I had to guess, I'd say it's domain expertise. A lack of MBAs is good, because MBAs turn your company away from getting good at what it actually does/sells and towards generic "being a good company" stuff.
"This week, I’m writing about Costco again because of this wonderful article about the company, on the cover of Bloomberg Businessweek. There’s tons of fascinating info packed inside, even stuff that I, who consider myself to be something of a Costco nerd, didn’t know."
I'm not informed on customer demographic differences between Costco and Walmart, but I'd think that a poor economy will disproportionately affect Walmart due to economically disadvantaged people won't be shopping at Costco in the first place and they tend to be the ones hurt the most in economic downturns. So "better" customers could be leading to better financials on the part of Costco, not just some anti MBA culture that resonates with the HN crowd.
I heard about the good pay and benefits for workers, and thought it would be great to join as a costumer and cancel my other membership. Just waiting for one to open close by to do this and support these sort of business models.
"We're America's holy frat boy paladins of corrupt crony capitalism inherently and forever above the lower class proles, entitled to adsorb the profit of all as our feudal reward." Um, well, OK then, nice to meet you too.
In the real world, turns out they need about a page of car TV ad style small print at the end, like "Not including $100K delivery fee. Not valid for retail sales companies; other exclusions may apply. Offer only valid for well qualified sociopaths. See your local student loan pusher and/or parole officer for further details"
We had a lot of meetings with a lot of SATish words thrown back and forth. We had meetings about how to have meetings and on and on...
Fast forward the Internet bubble burst, we were ruining out of cash fast and had to downsize. One-by-one the MBAs left and we got more creative, more nimble. I went from a snobed -out engineer (it had a non-leadership connotation at that place) to running engineering and then the product team. We sold the company (not a huge exit but everyone got something) and stayed a year until got fed-up with the labyrinth of our parent company (ran with bunch of sales and MBAs).
Here's what I learned from my experience. Many MBAs make good consultants. They can analyze and write a report for you. They're mostly not creative nor can creat anything (or they'd be doing that instead of spending $100,000 in school ). Because they can't creat anything, they have to show their value. Which means a lot of analysis, meetings and meetings about meetings. Resulting in slowdown, reduced innovation and increase in politics.