Lessons from “The Profit”

I’ve learned a lot about industrial organization watching The Profit, a reality-TV show on CNBC featuring businessman Marcus Lemonis. In each episode Lemonis buys into a failing small-to-medium-sized business and works to turn it around. Lemonis doesn’t invest in a random sample of businesses nor even in a random sample of failing businesses. Nevertheless, the lessons that The Profit teaches are consistent with the new literature on management which has increased my confidence both in the show and the literature.

Image result for the profitIn the perfectly competitive model, price is equal to average cost and firms operate efficiently at minimum cost. Yet, Syverson finds that in the typical US industry a firm at the 90th percentile of the productivity distribution makes almost twice as much output with the same inputs as a firm at the 10th percentile. It’s not easy to measure inputs or outputs, of course, but even firms producing very uniform products show big productivity differences.

How can firms that use inputs so inefficiently survive? In part, competition is imperfect which gives inefficient firms a cushion because they can charge a price higher than cost even as costs are higher than necessary. Another reason is that small firms eat their costs.

A typical firm on The Profit, for example, has decent revenues, sometimes millions of dollars of revenues, but it has costs that are as high or higher. What happened? Often the firm began with a competitive advantage–a product that took off unexpectedly and so for a time the firm was rolling in profits without having to pay much attention to costs. As competition slowly took hold, however, margins started to decline and the firm found itself bailing. But instead, of going out of business, the firm covers its losses with entrepreneurs and family members who work without pay, with loans which grow ever larger, and by an occasional demand shock which generates enough surplus revenue to just keep going.

The correct metaphor for competition isn’t a boxing match that knocks out the inefficient firm. The correct metaphor is a slow tide. Inefficient firms must scramble for a bit of high ground but as the tide ebbs and flows they can occasionally catch a breath when their head bobs above the profit line. An inefficient firm can survive for years before it inevitably sinks.

The second lesson from The Profit is that management matters and it matters in systematic and fairly easy to replicate ways. If mis-measurement explained productivity differences, Lemonis would not be able to successfully turn firms around. But he can and does. How?

One of the first things Lemonis does in almost every episode is get the numbers right so he can calculate which products are selling and which have the highest price-to-cost margin. Concentrate production on high-margin, big sellers. Drop the rest. Simple; but many firms don’t know their numbers.

Second, in episode after episode, Lemonis cleans up shop. Literally. He cleans the shop floor and gets rid of inventory that isn’t selling. He then arranges the floor to improve process flow (made easier by concentrating production on fewer products). He then creates an inventory system, tracks orders and the inputs needed to create those orders, and takes advantage of costs savings through economies of scale in input purchases.

Can it be so simple? To be sure, Lemonis is a smart guy but very little of what he does takes genius. We know this because we now have robust evidence from India and Mexico that better management increases profits and productivity and that such increases can be sustained over the long run. In the studies from India and Mexico, randomly selected firms were given access to a “management intervention” and their productivity and profits improved and stayed higher for years after the intervention ended.

Moreover, what were these management interventions? Did some bright Harvard grad recommend a complicated swap-options deal? A new chemical process? A new management form? No. By and large, the interventions were simple. Just like the Lemonis interventions.

Here, for example, are some pictures of the storage systems used in the Indian textile firms which were part of the management study (from Nick Bloom’s slides). This is exactly the kind of thing one sees on the Profit and the recommendations to create an inventory control system are exactly the same. Management 101.

This is the sense in which the lessons of The Profit are consistent with the new literature on management and increase confidence in both.

Another lesson from The Profit is that firm problems are personal problems. The son who can’t step out from the shadow of the father and the father who can’t let go. The two brothers who haven’t gotten over the death of their father and the problems this creates in the firm they have inherited. The siblings who are still fighting to get their parent’s attention. If Lemonis has a genius skill it’s in keeping his temper and working through bullshit problems to get to the real festering issues that are at the root of inefficiencies.

Now, in this case, there is surely some selection going on. Personal drama makes for good television but the general point strikes me as true and correct and important. It’s difficult to run a business like a business. The analytical mindset that can separate business problems from personal problems isn’t natural. Many people cannot separate business decisions from their own preferences and emotional biases, which is one reason why great business leaders are rare.

I’ve learned a lot about IO from watching The Profit but could business people learn about running a firm by seeing more reality-TV? Robin Hanson argues:

If one can learn….from just watching the inside story of real firms over several years, that suggests a big win: record the full lives of many rising managers over several years, and show a mildly compressed and annotated selection of such recordings to aspiring managers.

I agree with Robin, Reality-TV MBAs could offer a lot of value. The Profit is a good place to start.


Completely agree and yes the “case studies “on the profit are educational. It is a combination of sales, marketing, segmentation (products, customers profitability) and “lean”. The lean, as in lean manufacturing, which applies to all processes including sales, is what ties it all together.

Knowing and doing are not the same and the profit is doing.

When you’re already $500 Billion DOWN, you can’t lose!

great stuff

Cash flow cash flow and again,quintitize your cash flow at least monthly,that will show you where you are and where you are going

A lot of people seem to lead very disorganized lives, personally and in business. Friction keeps grindng away, countering entropy required constant attention. It would be interesting to see the place where the Indian textile manager lives.


And watch the fixed costs....

well, not so much "disorganized" -- but rather deeply "ignorant" of the nuts & bolts processes are in the business they are managing. Akin to a professional football coach who does not really understand the basics of football, much less the fine points of game strategy/tactics and training/execution. Senior executives in many big American corporations are now staffed by empty-suits; their business survives on the residual infrastructure built by good mangers in past decades, but the current 'managers' are merely caretakers of slowly declining enterprises.

"... the lessons of The Profit are consistent with the new literature on management..."

Empty rhetoric! What the heck is this mystery "new literature on management" ?
(I guarantee there is nothing whatsoever new under the sun about effective management practices)

Peter Drucker called from the Great Beyond...

Doesn’t anyone read my books anymore?


We now have

The Art of the Deal.

"What the heck is this mystery “new literature on management?" [SNIP]

Bingo, Metuechen. Ho, hum, Tabarrok must have been in short pants 28 years ago, with Anthony Harvey-Jones in the Morgan sports car factory:


"I guarantee there is nothing whatsoever new under the sun about effective management practices"


Nice article. One sticking point might be that the reasons to have a business in the first place aren't always that analytical - but even then some process might rub off the tv.

Yet, the only episode I ever watched (subtitled, I do not speak English) featured lots and lots of bad deals. I could do bad deals, too. As well as anyone, better than most.

"subtitled, I do not speak English"

I'm not sure I'll read anything more amusing today on the internet, but it's still early yet.

I'm not sure which scenario I most enjoy imagining:

* You have truly conquered Google Translate
* You submit your comments to Fiverr
* You are wandering around in a smoking jacket, dictating your comments to someone. Perhaps someone who loves Brazil even more than you do.

Your scenarios are all better than the sad truth, Thiago is the internet persona of some dude in Dayton, Ohio with a fetish for Brazil and huffing paint.

Sorry, but your imagination, though highly amusing, is inaccurate. I never huffed paint and I am from Southeastern Brazil.

I can read English and write some. But any linguist will gladly tell you that the real language is spoken form, not written content. Or do you really think the Mongols changed languages when forced by the Soviets to use the cyrillic script? The Turks when forced to use the Latin alphabet by Ataturk? The Vietnamese when they adopted an adapted Latin alphabeth devised by a French priest?! Do you think that Natives who knew no writing code had no language at all?? Do you think they were mute?

By chance, I’m sitting in Istanbul after speaking at a conference, and out of curiosity asked a Turkish university professor of Turkish social history whether the Turkish language also changed when the orthography was changed on Ataturk’s orders. To my surprise, he said yes, it did. The vocabulary changed much, from a mix of Farsi, Arabic, French and Turkic words to mainly Turkic and new words.

Thanks for the informarion. I concede that there must have been change, probably due to the specific Turkish circumstances. A higly nationalist, modernization campaign.

Portugal experienced the change from a mostly phonetic system to a etymologic system to a new phonetic system with surprisingly little linguistic chance. We still can read the old Portuguese texts even if some words have become archaic or got new meanings. Most words can still be traced to vulgar Latin, Moorish and Castillian influence and, later, among the elites, French influence. In the 21th Century, Brazil forced Portugal to adopt a more rational spelling system and the Portuguese vocabulary seems to be unchanged enough.

Maybe someone can tell how the Chinese simplification has worķed out. I still believe that the Mongols and the Vietnamese languages were mostly unaffected by the script change. Same for the Transnistrian Moldovans and for tribes who adopt foreign-created scripts for their originally scriptless languages.
My point, however, is more abstract: granted that nothing else changes, just changing the script you write with does not mean your language has changed.

To be fair, watching foreign language TV or listening to the radio requires quite a high degree of fluency. Reading & writing or person-to-person conversations are much less demanding. Our school-based language classes turn out students are quite proficient at reading and writing (at least briefly until they forget it all), who struggle in conversation, and are completely hopeless at watching foreign language TV without subtitles. And, in fact, that is probably true of most of the foreign language instructors as well.

Famous Brazilian physicist Lattes (who ended up discovering the pion particle) said he arrived in England able to read King Lear but struggling to buy onions.

But could he buy coffee?

He did not mention any coffee issues, so I think he could buy it. But Brazilian coffee is much better rhan most coffee one can get in another countries.

We’ve taken to turning on closed captioning when watching current day British TV, particularly anything with much regional dialect. It’s not exactly as clearly spoken as Branagh giving the St Crispin Day speech in Henry V.

Another good show in the same vein is Restaurant Impossible. It shows the exact same problems, not following basic best practices and personal issues seem to be the root of most of the restaurants problems.

Yep, it's a very good program where there's a focus on the very basics that are mandatory to run a restaurant that makes money: Every new ingredient you need to stock is a problem. Throwing away ingredients is bad, but using really crappy ones makes the food bad, and people don't come back.

The dark side of that program is that ultimately a majority of the restaurants end up closing quite quickly after the intervention, and the very same thing happens in clones of the program in other markets, for one important reason: The reason the inventory situation goes to hell is fewer visitors than expected, and few people manage the 3 meals eaten on each table per day plan that this whole thing is really built about. When people stop showing up at those levels, the old restaurateur has no idea of what to do, and they go back to square one.

Restaurant impossible sprung from Robert Irvine's dream of being a cut-price gordon ramsay in everything and making a kitchen nightmares rip-off. Kitchen Nightmares has an excellent first season based in england, then it just turned into people shouting at each other. Robert Irvine I think was fired for basically making up his resume out of thin air.

I think The Profit is better at handling the personal stuff (cutting through the BS/denial) than either Irvine or the guy on Bar Rescue (who yells way too much - he's a personal problem himself).

"In the perfectly competitive model, price is equal to average cost and firms operate efficiently at minimum cost. Yet, Syverson finds that in the typical US industry a firm at the 90th percentile of the productivity distribution makes almost twice as much output with the same inputs as a firm at the 10th percentile. It’s not easy to measure inputs or outputs, of course, but even firms producing very uniform products show big productivity differences.

How can firms that use inputs so inefficiently survive? In part, competition is imperfect which gives inefficient firms a cushion because they can charge a price higher than cost even as costs are higher than necessary. Another reason is that small firms eat their costs."

Sigh. How did they miss automation as a factor? Do the people doing these studies actually talk to experts in the field?

It's common for highly automated firms (certainly the 90th percentile) to have a more efficient system that uses far less waste. However, all that automation costs a lot of money and requires skilled operators. So, the less efficient firm doesn't have to eat the entire cost on the difference in waste. Instead:

LowerMargin = Differential Cost of Waste - Differential Cost of Automation - Differential Cost of Labor

Those 2nd and 3rd factors are less than the Differential Cost of Waste, but they aren't 0.

And the automation isn't always a hugely complicated assembly machine with specialized packaging equipment, it might just be a tow truck with storage space and a driver. That type of "inventory control system" would immediately boost productivity in the plant pictured above.

"profit margin" as customarily used is a poor measure of whatever people think they are measuring

"Automation" is a vague term that does not 'automatically' equate to efficiency.

Plenty of lousy, overpriced and unreliable "automation" equipment out there. Not only need skilled, dependable operators ... but also skilled, dependable maintainnce personnel and an efficient logistics system. Skilled management is required to automate and keep it all running long term.

"Plenty of lousy, overpriced and unreliable “automation” equipment out there. Not only need skilled, dependable operators … but also skilled, dependable maintainnce personnel and an efficient logistics system. Skilled management is required to automate and keep it all running long term."

Yes, that was kind of the whole point of my post.

The 90th percentile plant has to pay all of the costs to support that infrastructure and the 10th percentile doesn't. The article just mentions inefficient markets and lower profit margins. However, the cost of that support structure, is probably larger than those two combined. I

Robots are a trap.

Ask Elon Musk.

'I’ve learned a lot ... watching The Profit, a reality-TV show on CNBC '

Yes, written by an illustrious member of the GMU econ dept. faculty, and also the seemingly proud occupant of the Bartley J. Madden Chair in Economics at the Mercatus Center.

'Can it be so simple?'

Ask Walmart, and why they left the German market after losing an estimated billion dollars. Because for a German company, the answer would be more along the lines of this is elementary, not merely simple.

'some pictures of the storage systems'

Sorry, those are not storage systems by any meaningful use of the term 'storage system.' Those are pictures of an absence of a functional storage system.

"Ask Walmart, and why they left the German market after losing an estimated billion dollars. Because for a German company, the answer would be more along the lines of this is elementary, not merely simple."

Speaking of elementary & simple. How do you make your diesel engines have a power to ratio better than the competition? Volkswagen discovered it was both elementary and simple, at least in the short run. You simply defraud customers, regulatory authorities and illegally pollute the environment. It looks like the total cost will exceed that $1 billion that Walmart lost. By quite a bit indeed.

"A federal judge in Detroit Friday signed off on what could be one of the last big developments in the Volkswagen diesel emissions scandal, ordering the German maker to pay a $2.8 billion criminal penalty negotiated as part of a settlement with the U.S. Justice Department last January.

The ruling now brings to around $30 billion the costs VW will incur after being caught rigging two of its diesel engines to pass U.S. emissions tests — a figure that includes the price of buying back almost 500,000 vehicles sold in the country."


The ethical collapse and disgrace of VW, and Toyota before it, is a hugely underappreciated case study for what it reflects about contemporary business culture, limitations, and incentives.

I owned a 2007 Toyota. For all the faulty parts, failing systems, shoddy work, and recalls great and small, it might as well be a 1980 Ford. Faulty and crappy in more ways than I can count, from the merely annoying to the potentially fatal. Both were rolling embarrassments to once-great firms.

'How do you make your diesel engines have a power to ratio better than the competition?'

Better alloys? Common rail direct fuel injection? - https://en.wikipedia.org/wiki/Common_rail

'You simply defraud customers, regulatory authorities and illegally pollute the environment.'

That had little to nothing to with power to weight ratio (and a lot to do with combustion profiles during recognizable testing situations), and the idea of cheating the EPA goes back more than 40 years, as has been pointed out repeatedly here - 'But for all this scandal in headlines, the whole debacle is not the first, or even the second, or even the third time the EPA has discovered automakers skirting emissions standards. And the EPA's rules and testing procedures are complicated enough that automakers have argued in the past that their defeat devices were legal because they solved performance problems on a car model while allowing it to pass the federally mandated tests. Often, car makers accused of defeating emissions control systems reach a settlement with the EPA or the Justice Department, but never admit guilt.' https://arstechnica.com/cars/2017/09/volkswagens-emissions-cheating-scandal-has-a-long-complicated-history/ Though as noted in the article, VW is a pioneer in this area.

'It looks like the total cost will exceed that $1 billion that Walmart lost. By quite a bit indeed.'

Absolutely. Yet oddly enough, VW (particularly its extremely profitable Porsche unit) has yet to pull out of the American market. On the other hand, both Aldi and Aldi owned Trader Joe's continues to do well in the U.S., while GM sold its German Opel unit to Peugeot/CSA last year.

'The ruling now brings to around $30 billion the costs'

Yep, the world's largest automaker is undoubtedly hurting - why, that impressive figure is 1/6 of its Porsche unit's profit alone in 2017. http://www.thedrive.com/news/19351/porsche-reports-record-setting-2017-sales-numbers

"why, that impressive figure is 1/6 of its Porsche unit’s profit alone in 2017"

from your cite:

"And finally, profits came in at $5.04 billion"

I don't think that is more than $30 billion. Maybe the VW diesel engineers transferred to the accounting dept.

Ah, you are right in terms of clarity - Porsche profits alone in 2017 will cover 1/6 of that settlement cost.

Of course, that 30 billion also represents about 50% of the profit that VW booked in 2017 - 'Record sales of some 10.74mn vehicles worldwide helped the group based in Wolfsburg, Germany to boost revenues 6.2% year-on-year, to €230.7bn.
Operating, or underlying profits increased 94.5% to €13.8bn, even after subtracting some €3.2bn in one-off charges “related exclusively to charges...due to the diesel issue,” the firm said.' http://www.gulf-times.com/story/582787/Volkswagen-net-profit-more-than-doubles-to-14bn-in

So it will only take the better part of a decade to pay off the losses from this fiasco. Versus Walmart, where a billion write off will cost about 2 weeks of profit.

Why do you keep bringing up the Walmart write off in Germany from 12 years ago again? It seems as if Walmart realized it wasn't a cultural fit for Germany and pulled out. Which is an eminently sensible decision. On the other hand, VW deliberately committed fraud in order to keep the horsepower of it's engines high and gain a competitive advantage.

Is that the lesson you are pointing out; that German companies will lie and commit fraud to maintain their market position, but American companies will just give up and leave the market?

"Why do you keep bringing up the Walmart write off in Germany from 12 years ago again? "

He gets to dunk on an American company that elites [and wannabe elites] hate. Its twofer for him, American and "substandard".

How much did Daimler lose in its Chrysler fiasco?

Also around 30 billion, as a commonly cited number in this region goes. All of the Daimler employees I know consider it one of the dumbest decision ever made by Daimler's management, and the broad reason that is generally cited, both by people working on a Daimler assembly line and ion Daimler management, is that the very top management of Daimler was seduced by the possibility of being paid American level salaries.

Luckily, at least according to these people, Daimler was able to recognize the stupidity of such self-dealing at the highest levels of management, and thus escape at a straightforward monetary cost, as compared to suffering GM's long term fate. As for Chrysler being bought by Fiat, well, let us just say that no in Germany seems to feel that this latest merger poses any threat to the German car industry, unlike the disaster that Daimler buying Chrysler was.

I've seen several episodes of "The Profit", and I've always believed if I were in the position a lot of these people are in, I'd *pay* Marcus Lemonis to come and help me clean up shop. Meaning yes, he does invest money into those firms--often a much needed liquidity event in order to get their act together. But the value of his managerial advise far exceeds the value of his investment.

And he makes an excellent example of the value an active partner and participant in a business who knows what he is doing, as opposed to passive investment where you simply toss someone else some money and hope for the best. As a rule I believe after you factor out risk, the overall return on a passive investment should be no more than the risk-free rate of return (assuming you don't have a good eye for spotting talent)--but active investors who know what they are doing add far more value (and can get a far bigger return) than a passive investor.

I have never seen the show, but is it the case that his time is compensated? It maybe that his team as an expert professional could not be afforded by these companies if the TV company were not paying him. In which case it is less of a mystery why he can help, its sort of like hiring a master chef for your local greasy spoon, sure he will make the revenues go up but can you afford him?
But overall I agree with the idea, most small to medium sized firms are badly run, luck is a much more important feature of the business landscape than most people realize, perhaps the choice of location, or perhaps the particular product chosen makes the company initially profitable. What happens after that is a long long process of going bust slowly or for bigger companies a takeover. Most big publicly owned firms don't usually have the problem of being inefficient in their manufacturing, what they are prone to is agency problems big time. The only thing that keeps them honest is the ability for investors to easily compare firms but that can be a pretty slow process to operate.

He gets investment opportunities for peanuts.

But it is not only is know how, I don't think even mostly. The main benefit I see are his connections and reputation. He can make deals really fast and huge changes really fast, because he can get an audience almost anywhere, and has the name so people actually are excited to work with him.
Would every small 6-person business would have the same reaction? I don't think so.

"He gets investment opportunities for peanuts."

But where he gains his edge is the media. He brings media attention where other investors only bring money and expertise. So he can leverage more into the same struggling firms no one else would touch.

He seems to bring the whole package: a little capital, interpersonal skills, management/process analysis and recommendations, good intrinsic deal making skills, extensive connections, advertising/media attention.

He brings so much to the table it is little wonder that he gets scores of applicants, and that he gets investments for “peanuts”. He is giving the counter party a gift and they know it.

It is a great show, but don’t for a second believe that random venture firms bring anywhere near the same value.

"random venture firms"

Exactly, not unless they have a TV show with millions of viewers.

Lemonis is not only leveraging his media power to have a huge added tool in his turnaround toolbox, but he can take part of his pay in TV profits, so in the end, his ROI on the equity itself can be lower.

(Caveat: I have not ever seen the show, so I can't comment on his specific attributes, but it sounds like the TV profits allow him to take on companies other highly talented turnaround CEOs would not bother with, since they are limited to the risk/reward solely within the deal itself)

Tyler is too quick to discount the impact of access to capital. It is hard, if not impossible, for a struggling small firm to get access to fresh capital. They stay open for a period due to the ability to get free labor, but they are zombies. Hard to implement change when you can't meet payroll.

There is the possibility that fresh capital and Hawthorne effects could explain much of the improvement. However, an active investor who does not bring knowledge or expertise, but thinks they do, can be the worst path.

Continuing success for many small firms is finding a niche that doesn't attract new entrants. Sometimes large firms will ignore some segments as too small, without sufficient growth potential. If they are wrong, they can always buy it later. The market has many potential niches, but market conditions are dynamic and changing. What worked yesterday may not work today. The ability to deal with adversity and think clearly under pressure is a difficult skill to learn and best gained with experience.

Profitable small firms, and sometimes large firms, will become lax at controlling costs as profits increase. Like gamblers, they see the early gains as a windfall that reduces restraint. Recognizing sunk costs in bad choices is difficult for most organizations. Accepting that you made a mistake and letting go is not natural for most people. It must be learned. An outside, objective voice helps.

You are rarely as smart as you think you are when things are going well, nor as stupid as you think you are when things are going badly. Perspective helps, and an outside party can help with that, sometimes.

(GM could have purchased Toyota, assuming regulatory approval, for much less then they spent trying to "improve" GM. Buying EDS, Hughes Aircraft, buying robots that worked poorly, In the very long term some of those investments turned a profit for GM, but investing in Toyota could have grown their core business and generated higher returns. Or GM management could have destroyed two companies.)

Walmart's initial success was finding a segment that many large retailers ignored. Then they were smart enough to improve efficiencies in distribution and kept management levels tighter than competitors as they grew. Walmart didn't worry much about fashion trends, etc. that are at the core of many retailers. Selling basic goods cheap in underserved markets isn't a shocking idea, but most retailers didn't want to serve those markets. Why? One suspects that some of it was a cultural bias. And perhaps they didn't see high enough margins and didn't think they could lower costs enough to cover their typical overhead. Walmart's international expansion has had a harder time identifying underserved markets; they don't have superior insight into international customers.

Generally agree. Don't discount Walmart's willingness to do so ruthlessly, and to radically disrupt every norm and piece of infrastructure they encountered. From wiping out Main Streets across the country; sinking numerous regions into gerbil wheel of tax/infrastructure bidding wars; maintaining a workforce living in poverty and uncertainty; and participating in the widespread diversion of US manufacturing, capital, technology and IP, and US jobs to what was at the time a communist rival national power.

This seems almost like a caricature of a mindless Walmart hater. Seriously, Walmart is just an efficient retailer, not a business front for Doctor Evil.

No, that's a summary of Walmart's impacts. Evil or not, it's an inventory of facts.

"it’s an inventory of facts."

No its not.

Ok Bob. Could I trouble you to disprove them specifically one by one?

Here, I'l lay them out in bullet form... Walmart's business model relied on, innovated in, resulted in, or participated significantly in:

(1) Destruction of rural main street economies, by moving retail centers to outskirts of town, cherry picking product lines to compete with established businesses, and was not above occasionally predatory pricing to do so, as a result many/most towns with a Walmart saw widespread decline in main street retail areas and incumbent businesses.

(2) Create infrastructure gerbil wheels, requiring public infrastructure (ie water sewer roads traffic control) and public service improvements (e police fire) and tax preferences that exceeded the net sales tax value put back in.

(3) workforce in poverty, ie working poor, with undependable and fluctuating hours and schedules, often sub full time, and sub-poverty level incomes as a result.

(4) Diverting us capital and manufacturing to China.

I am looking forward to your rebuttal.

"1) Destruction of rural main street economies, by moving retail centers to outskirts of town, "

The primary driver for that was the interstate system. Walmart (and most newer retailers) tend to build near interstates or major highways.

"(2) Create infrastructure gerbil wheels" No idea what the hell an infrastructure gerbil wheel is. Is that crazy talk for a shopping center?

"and tax preferences that exceeded the net sales tax value put back in."

This is laughable. Walmarts generate huge sales tax for the area. They don't put any more burden on an area than a Target or Best Buy does.

"(3) workforce in poverty, ie working poor,"

That's ridiculous. The average full time worker at Walmart makes well above the US Federal poverty level of $12K. Indeed, I think as of this year, the median Walmart worker will be making roughly $24K per year, which means a married couple working full time at Walmart would have a household income of $48K per year. That's far above the Poverty line.

"(4) Diverting us capital and manufacturing to China."

That's laughable cherry picking. All major retailers buy large amounts of manufactured goods from China.


(1) Nonsense. The interstate created a wave of rural decline in the 1950's and 1960s. Thirty and forty years later, Walmart did its own damage to community's that had reestablished equilibrium. Only Walmart has an "effect" names after it. The Walmart effect, an entire school of research around what Walmart does to communities.

Also, Walmarts tend to build where land is cheap and available in abundance, and preferably outside main street zoning. Why they do it is also besides the point. My point is that Walmart pursued this technique "on steroids" to devastating effect on many communities.

(2) How much sales tax Walmart generates is irrelevant, what is relevant is the NET NEW taxes they generate after the public pays for their infrastructure, and pays for the various subsidies and tax abatement, and after adjusting for lost retail elsewhere, not to mention net change in incomes and jobs. As with sports stadiums, the fully costed net is often negative. This sort of math should be not be foreign to you, I am sure you are familiar with it.

(3) The poverty situation of Walmart employees is well documented. You are being willfully ignorant here.

(4) What "all retailers" now do is irrelevant, and in fact indicates the success of the path that Walmart largely initiated, and certainly was the marquee leader in. When the US started shifting to China in earnest, Walmart was at the lead. This is not really in dispute, you are simply being obstinate or dumb.

You've had to resort to sophistry and making stuff up in your attempt.

Do Shark Tank next. I think it's good inspiration for people who can't imagine anything other than going to school for four years and then trying to latch on to an existing firm.

Right, the few times I've seen "Shark Tank," I've felt it would have done me a lot of good to watch it in high school and college to introduce me to a useful but normally rather hidden way of thinking.

I'm impressed with the show as well. I assume some of the family drama is typical fake reality-TV fare, but still the level of dysfunction in so many small businesses that have survived for years or decades is eye-opening. People who ponder running a small business really ought to binge watch the whole series.

It's not just small business. Or family businesses. I have seen some doozie dysfunctional corporate environments. I continue, three decades in, to manage to get shocked by the human drama that stands stubbornly in the way of competence and profit.

There was a major disconnect between my academic education and my real world education. The formal focus is almost entirely on mathematical management problems, the actual requirement is almost entirely on human problems. I wish that Scott Adams had been around when I was a newbie. Because, really, Dilbert has more to offer as an insight than a stack of management books.

Seriously. The spreadsheet bit is the easy part. Getting your CEO, two competitive VPs, a counterpart in another country, and your team to buy in is the tough part.

One of ML's weaknesses appears to be marketing. One of his investees is Redbeard Coffee, with a logo that looks like Starbucks but instead of a mermaid it's a guy with a scraggly beard.
What is it about filthy body hair that makes me not want to buy coffee from this guy?

You prefer to buy coffee from a girl that smells strongly of fish?

Thanks for a well written article. The truth is, I end up learning more than the business owner. That’s the hidden jewel for me. It’s not easy but it’s part of my personal development as well. Patience, listening, compromise.... all of it

The article is very nice, as it is understood from this composition, it is very difficult to be bigger.

I'd be weary of drawing too many lessons from the show as it. In one episode I watched, Marcus was all set to do a deal with a company and invest in it. But the day before the deal, he ran to the courthouse to make sure there weren't any liens on the business. After spending hours at the courthouse searching through records, he found there were several liens on the business. He then angrily called the company demanding to know why they hadn't told him. It's ridiculous to believe that the CEO of a major company would do his own search of liens against a business. It also strains credibility that he would agree to invest in a company without doing due diligence to see if there were liens. But to make the show have conflict, he is about to sign the contract when at the very last minute he finds out there's liens on the business and he then proceeds to angrily call the company. This and so many of the antics that happen on the show are staged that I question whether any of it is real. It should be treated as styled facts or maybe a better description is stylized business case studies.

In other words, unwatchable, as I would fear I would have more knowledge of how the real world works destroyed than I would learn.

Harvard Business School case studies are a wonderful educational resource.

Problem is, the case studies are often a prisoner of the narrative that the particular person writing the case study has.

'Getting the numbers right' sounds a lot easier than it is in practice. Especially to economists who typically live and breathe numbers. Most accounting departments are staffed and run by people with middling intelligence - able to crank the basic required numbers for compliance reporting requirements but no real flair for interpreting them or fitting them into the big picture of what is going on with the company. A lot of time the basic information to determine which activities are working and which are dragging requires a major restructuring of the accounting/bookkeeping system from top to bottom. I suspect most of the really bright people who like numbers and money end up in finance or economics, and not as much in accounting as they did prior to the rise of investment banking in the 1980's.

The problem starts with that self-fulfilling mindset. Most entrepreneurs and businesses know they need good numbers, but tend to under-invest in accounting. They view it exactly as you said: a cost center run by technicians of average intelligence. Companies tend to view and treat accounting as a necessary but unwelcome block box - one part inscrutable, one part magic - and also as a task that "should" be easy. So as a result, they tend to marginalize the function. Then the business wonders why that's the results they get.

The magic part is important, many companies treat their accounting department like they treat their tax returns; they show up at the CPA's on April 13th, with a shoe box full of crumpled receipts, and get all bent out of shape that the accountant has some questions and is going to miss the deadline.

This is usually compounded by the problem raised in the OP. When done properly, accounting inevitably shines a light on dysfunction and waste, and tends to highlight the myths, magical thinking, fiefdoms and sacred cows, along with every single mistake made by operations and every single lie told by sales. So there's a huge institutional resistance to acknowledging that this information might be accurate.

I have long said that accountants by their nature tend to not be very good self-promoters, and so also rather than fight back they they tend to just roll their eyes at all the drama of the pompous horse's behinds in Ops and marketing management. In other words, where the savvy accounts go is not just finance, it's law. Both fields with higher pay and less actual accountability.

To continue: the companies I have been affiliated with that had the higher-functioning accounting departments all did the same thing: they beat up on the inputs (data provided to accounting) and outputs (reports coming out of accounting), and then they worked out the kinks, developed consensus around the assumptions and estimates, hashed out the disagreements about methods, etc until the entire management agreed that it was "close enough" and would be the standard against everyone would be held, and basis for all goal setting, performance evaluation, and bonuses.

In every case, the CEO was heavily involved in brokering and strong arming this working agreement. In every case, the CEO was hell-bent on getting good data, and then, and this is critical, on fully facing what it implied. In every case, it took several months of sustained attention.

Where most companies fail here is they don't beat up on the input side (after all, accounting is only as good as the data it is given). As a result, they are never able to achieve the consensus on the usefulness of the reporting.

Companies also struggle with similar dynamics between the promises made by sales and the limitations of logistics, or between the challenges created by design and the cost of production, etc. But for those issues, they have devised ways to reach consensus. For some reason, they do not approach accounting as the same sort of problem in a microcosm.

This is also pretty much the story for any non-accounting operational metrics.

"Non accounting metrics."

Absolutely. In fact, in the end, all metrics are accounting metrics. In other words, if you can't somehow tie it back to something real, then it's not real.

As an aside, many non-accountants stumble on the reality that accounting isn't black and white, and actually requires estimates and dealing with uncertainty. Even if you are literally counting beans, you end up needing to build a ruleset and deal with exceptions etc.

"Absolutely. In fact, in the end, all metrics are accounting metrics. In other words, if you can’t somehow tie it back to something real, then it’s not real."


In other words (perhaps putting it more succinctly): when done properly, accounting/reporting is a threat to waste, fraud, incompetence, bad ideas, and poor execution. It can be a powerful tool.

But too many companies fail to fully grasp the political capital and cultural requirements of putting a system like that in place and making it work. Not coincidentally, because it is often company management in particular who benefit from the wiggle room afforded by the collective delusions, myths, and gaps in information.

And/or management is vested in the necessity to obscure externally published information about performance. Since it is generally too overtly fraudulent to maintain both an honest unblinking internal reporting system, along with a fuzzy over-generous external reporting system, companies choose (consciously or not) to live with a mediocre set of information.

It is interesting to compare this with the navy’s current surface warfare / ship handling problems. The politics pressure to ignore reality is strong.

Re the navy

Indeed. The military is an apex example of an institution that doesn't REALLY want good accounting.

Thank you for these comments.

Accounting is not analyses. Accounting is ensuring you are compliant with regulations especially in regard to taxes. Accounts won't tell you if your business is long term profitable, but they will provide the raw data you need. You need someone like an economist to do analysis of the profitability of your business and whether it make senses long term.

Indeed. I was writing with the unstated premise that an accounting department provides the entire spectrum of services: bookkeeping, reporting, and analysis.

This is why larger accounting departments have roles for both technicians and analysts, including Controllers and a CFO to supervise the dual tracks of report preparation and report analysis/forecasting.

This is also a reason why smaller companies tend to struggle, they hire a bookkeeper when they need a financial analyst.

This is stage of followed by the Entrepreneur Peter Principle, whereby a business founder has reached a level of success base on their self-taught financial analysis skills, but then exceeds that capacity, yet is unable to let go and allow professional financial managers to do what they were hired to do. (This founder syndrome is not of course limited to accounting, but finance issues is an area in particular where self-taught founders tend to think of themselves as experts).

Why don't companies have a department of Econometric Accounting?

The Indian cases are typical of poor country situations where international firms that wouldn't be so wasteful are hampered or outright prohibited from competing in that country. Even in Europe, hostile takeovers are either illegal or highly constrained. In the US, cars.com's original business of selling cars online was killed by local legislation that disallowed sales in most states unless handled by local dealers. Detroit car companies cannot close many of their dealerships in leading cities because of domestic legislation that prevents or severely constrains this. So in many cases, lack of competition -- sometimes due to natural transactions costs -- but in other cases due to regulation explains why many firms can only be reformed from within and why a consultant can potentially arbitrage these problems.

The fetish of the successful business borders on idolatry. And the problem with idolatry is loss of scruples. We now know that the founders of Facebook lost their scruples long ago, yet idolatry continues to boost the company. The founder is scheduled to appear before a Congressional committee, where he will be sanctified by most and crucified by a few, not altogether different from when Apple's executives appeared before a Congressional committee to explain the company's creative accounting to avoid many billions in U.S. taxes while shifting jobs to China. The sanctifiers will far outnumber the crucifiers: that's what idolatry can do. In a refreshing departure from the usual, Tim Wu advocates letting free markets fix social media rather than regulating social media. Et tu, Wu? Wu believes Facebook is so corrupted that it can't be fixed, and suggests that free markets can create an entirely new social media using a different model that won't be subject to the same loss of scruples and corruption. It's not often that someone both praises free markets while acknowledging they aren't perfect (and sometimes result in a Facebook). I doubt that's a lesson one will learn watching television show with a fetish for business and idolatry. https://www.nytimes.com/2018/04/03/opinion/facebook-fix-replace.html

Great subject for a post, and it sounds like a good show.

Perfect competition won't drive out high-cost firms, though, if the low-cost firms can't expand because of decreasing returns to scale. The low-cost firms will earn rents to their superior "technology" (which may be business methods, etc.).

Also, as hinted at, if the costs are sunk, then the apparently high-cost firm should keep on operating as long as it can cover its variable costs. Accounting profits will be negative, but the firm will still be earning quasi-rents till the capital wears out.

Third, management talent is a cost. This TV guy has above-average talent, and it's valuable, so it's no surprise that he can go in and improve performance. Would it have been worth hiring him as a consultant if the company had to pay him? Maybe, maybe not. And an interesting problem is that the original managers, being untalented, can't recognize talent. Thus, they don't know who to hire, and would probably get cheated if they tried hiring a consultant on their own. This gets back to th idea of decreasing returns--- you have to have somebody smart in charge, but his energy is limited so the firm can't grow too much.

"Concentrate production on high-margin, big sellers. Drop the rest. Simple; but many firms don’t know their numbers."

The 80/20 rule. Only an academic would see this as a revelation...or believe that "firms don't know their numbers."

The low-margin poor-sellers are retained for reasons that have more to do with human psychology and company politics than with economics.

"Only an academic would see this as a revelation…or believe that “firms don’t know their numbers.”"

I disagree. Firms that can't get a handle on their own performance metrics, and who willfully cling to money-losers, far outnumber those that don't.
The concept is not a revelation. Acting on it remains out of reach for most.

You'd be amazed how frequently you can present information demonstrating a project is a net loser to the company and lose out to insistence the data is wrong because they 'know' it is a winner. BI tools have been great in getting executive buy in because you can now demonstrate that even though the micro might be wrong, it matches the macro result meaning the transactions are being accounted for, just not getting allocated correctly.

"meaning the transactions are being accounted for, just not getting allocated correctly."

Which is why worthwhile accountants have an annoying habit of insisting that, regardless of which set of allocations are used, they are used uniformly and completely.

I had this precise argument with a business owner once. He insisted that his model said the pricing was profitable. I eventually threw up my hands and said, fine, but your bank account says the company is not.

Consider a similar attitude on education costs and you'll get a similar result. Politics wins out over economics every time.

Fair enough, trust me, the nonprofit sector does too, with an even greater cultural resistance to integrating thought processes from the private sector.

But to be fair, education's privatizing reformers are every bit as guilty. And often when given control of the system, have shown themselves every bit as capable of deception and magical thinking.

Marcus's tips (from some episode or video last year):

don’t be an ass
make your employees number one
know what you don’t know
accept the crazy
be vulnerable
be authentic
be transparent
it’s all about follow-through
know your numbers
quit whining and start winning

Sorry the formatting didn't keep.

Another point worth noting:
It shows that good management skills can be taught, contrary to the popular belief that leaders are simply born, not made.

"the firm began with a competitive advantage–a product that took off unexpectedly and so for a time the firm was rolling in profits without having to pay much attention to costs."

Sort of like higher ed.

I haven't watched any episodes of this show, but I've been quite the fan of "Restaurant Impossible". It sounds like it's pretty much the same show, except it's Chef Robert Irvine, and he turns around a failing restaurant.

One of the recurring issues is that the restaurant owners don't know their numbers. They don't know their food costs per dish, or how to calculate the optimum sale price from that information. They don't know which items on their menu bring in the most revenue, and which are just eating up storage space. Sometimes money is disappearing in more nefarious directions such as "shrinkage" but that's not as common. So it's very common for Irvine to sit down with restaurant owners and go over basic cost accounting. It's not rocket science, but it matters.

'Lemonis is a smart guy but very little of what he does takes genius'

He is a pit boss, he manages the queues, keeps them stable. Another function is market maker, but greasing the market is queue management. We know, mathematically, what market making does from finance. One can take the concept and derive all of economics from the quarks to the Californians, and keep relative scale.

The post talks inventory, an interesting analogy is the trading pit and the stock room.

The trading pit is self organized such that trades get passed to the counterparty in the least number of hand offs. Think a bunch of crazed bald men passing trade slips from center to periphery. They organize, these bald men. They do it such that total value passed is done in the minimal number of passes.

That is how one does the stock room,sam principle. It is all a series of flows with congestion points, congestion points placed specifically to allow queue comparison and thus the pricing function.

The business manager says they generally got the wrong numbers. What happens is that the arrangement of the stock room and floor congestion points translate directly into balance sheet. He gets the minimal, valued configuration, on the floor. Any other representation of the firm will be an isomorphism of that original, minimal arrangement, We can prove this via conditions on entropy maximizing trades. We can look at a good floor arrangement and directly construct the balance sheet.

How many of these insights on how firms work can be found in the textbooks co-authored by you and Tyler?

Has everybody forgotten Liebenstein on X-efficiency? I suppose 52 years is long enough but I always felt he said it all on this topic.

There is a TV show called "Bar Rescue." It has the same concept as The Profit. But a bit more focused. The showman is requested to help a bar that is failing. He goes in, observes, interviews, and then starts to save the situation. Even puts his own money (the show's money) to help the turnaround.

Quite remarkable how badly managed so many bars are.

There is a more family friendly show (Restaurant Impossible) on the Food Network where a restaurant owner from Australia, Robert Irvine, goes to save failing restaurants. Some of the owners haven't even figured out how to comply with simple health code laws. And the cooks don't know how to cook.

I suspect that the Marxist orientation of so many in the academic humanities and social science departments have poisoned the topic. Capitalist-managers are considered parasites who drain away surplus value from exploited workers. But the reality is that capitalist-managers-entrepreneurs are the most vital input to production. It is time to appreciate their contribution. Workers are exploited by failing management, not successful management. Economies fail to develop from the absence of this input. McCloskey has written how modern economic growth started with a recognition of the dignity of commercial life.

Finally, you might want to investigate the writings on integrity in economics by Harvard's Michael Jensen.

"(1) Nonsense. The interstate created a wave of rural decline in the 1950’s and 1960s. "

The Original Interstate build out was a 35 year process from 1956 to 1992.

"October 14, 1992: The original Interstate Highway system is proclaimed to be complete with the opening of I-70 through Glenwood Canyon in Colorado. .. The initial cost estimate for the system was $25 billion over 12 years; it ended up costing $114 billion (adjusted for inflation, $425 billion in 2006 dollars) and took 35 years."


Granted, the bulk of the interstate system was finished by 1980. But still the idea that Walmart came around 30-40 years later (2020?) and destroyed small towns is absurd. Furthermore, there are plenty of mid-western towns that experienced the exact same effect in areas where Walmart had little to no presence.

Pigeon: Pigeon, any of several hundred species of birds constituting the family Columbidae (order Columbiformes). Smaller forms are usually called doves, larger forms pigeons. An exception is the white domestic pigeon, the symbol known as the “dove of peace.” Pigeons occur worldwide except in the coldest.

“the lessons that The Profit teaches are consistent with the new literature on management ...”

Very funny! Does anyone (aside from academics) really read “the literature”?

Although the interventions might be simple, the reasons they have not been implemented before are not. Desperate businesses are sometimes the perfect place to receive a disciplined and potentially difficult change, because they have no other choice.

These days, I feel, most people lack motivation, discipline and organization. Out of those 3, motivation is the worse one to not have, you have that one and the other 2 come with it. Both in business and one's day to day, people should be motivated to better themselves and move forward.

Hello Lessons from "The Profit" - Marginal REVOLUTION

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