Thursday, March 26, 2015

Zero-based Budgeting Book

By the way, there is a lot of talk now again about zero-based budgeting because of the Kraft-Heinz merger.  Some view cost-cutters as people who just come in and blow-torch the place, take out short-term profits and destroy the business.  Maybe this was done in the 1980's.

But there is a lot more to it than that these days, especially when folks like 3G / Buffett are involved.  They want to create value in the long term.

Anyway, this book,  How to Double Your Profits in 6 Months or Less is apparently the 'bible' at 3G and is handed out to managers at their companies.  Zero-based budgeting is a lot older than this book, though, so the title of this post might be a little misleading.

It's an awful book title, like, How to Lose 50 pounds in Three Days! but it really is a good book.  It's a quick read too.

There are things that will make you cringe.  I don't agree with all of it.  Like not paying bills until you are billed for it twice and things like that.

But most of the other things are really sensible.

For employees, he doesn't advocate just firing everyone left and right and cutting salaries.  Fifer actually advocates paying productive employees more and paying less productive employees less (or getting rid of them).   He says that most companies pay based on seniority so the old guys are happy and the young, productive guys are unhappy.  You should do the opposite; make the young, productive guys happy and the old, unproductive guys unhappy.  This will lead to better results.

I've worked in a large, bloated, bureaucratic organization and saw this first hand.  Pay was based mostly on seniority and competence had nothing to do with anything.  So what happened?  The young, capable people left for higher paying jobs elsewhere (at companies that paid for performance), and the unskilled, unmotivated and not-so-competent stayed. And they got pay raises every year.  This continued for years until you had this huge, bloated middle of people getting paid a lot of money for doing nothing and an unhappy work force at the bottom who didn't stay long.

The funny thing about these companies is that since they don't like to fire people, and only one person can be CEO, the pyramid just keeps getting bigger and bigger.

I have seen first hand how someone gets old enough to become a head of a division, but all current divisions already have heads.  So what do they do?  They create another one.   And if more people reach a certain age and are eligible for a promotion to division or section head, they will just create another division or section.

And this goes on and on.

I imagine the big food companies like BUD, HNZ and KRFT are (or were) like this too; that's why it's so easy for outsiders to come in and boost margins by 8% in such a short period of time.   I bet the rest of the companies (KO etc.) are in the exact same position.

And it will usually take outsiders (I don't mean outsider in the Thorndike (Really Great Book) sense, but outsider in the sense of not being a lifer at the company).

Lifers and long-time employees can't do what 3G does.  If you work at a company for a long time, you know a lot of people.  You have mentors and mentees.  You've done favors and received favors from people in the company.  You've encouraged people to stay at the company.  Encouraged them to join.  Helped them start divisions and new businesses, supported new ideas which might have lead to creation of new sections/divisions etc.   You've been to weddings and bar mitzvahs.  You just know too many people.  So it will basically be impossible for a normal human being to make rational decisions.

Maybe someone can, but I think it's hard.

Anyway, it's a really good read.  Again, you won't agree with everything in there (but then again, when was the last time you read a book and agreed with everything in it?), but there are a lot of great ideas.  And you will see that what 3G is doing is not so one-dimensional and simple.  It's not just firing people for the sake of firing people.  It's not about cutting costs for the sake of cutting costs.  It's not either/or or a transfer of wealth from the middle class to the top 1% (which is the way the mainstream press likes to present these things).

Other Books I've Read Recently
I do read a lot but most of the time, I don't want to bother with 'reviewing' any book properly.  But I do mention books that I really like here.   If I had a lot to say about any particular book, they will be their own separate post, of course.  I've done that in the past.

But since this is sort of a book post, I thought I'd just mention some books I read recently:

Marissa Mayer and the Fight to Save Yahoo!
This was actually a lot better than I thought.  I only read it because of the current situation with Alibaba and Yahoo.  I've owned Yahoo for a long time (mostly as an Alibaba stub trade), but I wanted to get more of a sense of what's going on there in the Mayer era.

The book title is a little misleading as this book is almost a history of Yahoo and the internet itself.  It gives a really good, broad overview of the internet era.

There are a lot of interesting things about the previous CEO's too which to me were a little eye-opening.  Maybe not for some people who follow the industry closely.  But it was definitely interesting, with a lot of inside views too.  There is some detail on the interaction with Loeb and his involvement etc.

This is also a quick read and I found it definitely worth my time.

Setting the Table: The Transforming Power of Hospitality in Business
This is a book written by the Shake Shack founder Danny Meyer.  I am a sucker for books written by people who have done interesting things.   Think about it.  Most books are written by people who have never done what they write about.  That's not necessarily bad.  Journalists never do things they write about, but they write great books too.

Danny Meyer is someone who has created something really great, so it's great to hear what he has to say about his experience.   I enjoyed it.

Haunted Empire: Apple After Steve Jobs
This is a book that was widely panned.  I didn't have any interest in it either until, frankly, Tim Cook mentioned it.  That was when I decided I had to read it.  If a CEO is going to go out of his way to respond to a book, I figured, there must be something interesting in there.   If a book is really totally off and is nonsense, they are usually ignored.

The Amazon reviews, predictably, form a barbell shape.  They are either one star or five star.  If you love Apple, then you rate it one star.  If you don't like Apple it's five stars.

Some of the criticism is valid.  A lot of these stories are nothing new (labor practices in China), but there is plenty of other stuff in there that caught my interest.

My view on Apple hasn't really changed.  It's a great company with great products, but to me it's still a Steve Jobs company and Apple has been putting out iterations and updates to his creation.  I don't really have any faith that Apple will do anything as groundbreaking in any other area to the same degree.

This has nothing to do with my view of current management, which I think is as good as there is.  I wonder if even Steve Jobs can keep coming up with world-changing things.  At some point, no matter how innovative and earth-shattering, eventually you become the 'establishment'.  You become the target.

Apple will continue to innovate and make great products, I'm sure.  But what I don't have confidence in is that the next product will have the same sort of magnitude of growth for Apple that the others have had. If you look at how the iPod went to the iPhone, that's a huge leap.   The iPhone is a huge product.  The next thing has to be even bigger, or just as big just for Apple to stay in place.  This is the part I have a question about.

And sure, the iPhone upgrades may keep going for another cycle or two.  But at some point, as Clayton Christensen points out in the Innovator's Dilemma, the incremental improvement will exceed the needs of the consumer, at which point the product cycle will end (opening up an opportunity for alternatives).

But again, who the heck knows what will happen with Apple.

Netflixed: The Epic Battle for America's Eyeballs
This is also a great read on the story of Netflix, definitely a game-changing company.  Of course, one thing that sticks to me is how Blockbuster passed up an opportunity to buy Netflix early on for $40 million, I think it was.  Talk about an error of omission!

This is also a great read because it's not only about Netflix, but about business in general and how businesses can go wrong.   This book is almost as much about Blockbuster as it is about Netflix.  So it's almost a text book on "how to fail".

Blockbuster's mistakes are obviously being made today by many.  So it's good to learn about what went wrong there.


  1. Check out Power by Vicente Falconi (original consultant 3G used in their rise to significance as Brazilian powerhouses). I found it interesting as well as it is his first book published in English as opposed to Portuguese.
    But what I think is misunderstood about Fifer is how he talks more recently about how brash he was when he originally wrote the book. Talks about how his philosophy towards managing/cost cutting has been significantly refined over the years as he has gained more perspective. So I think that is worth taking into consideration as you read it. I've talked to Heinz a good bit while originally learning about 3G, and they preach culture fit an absurd amount -- strictly searching for employees who abhor costs. A culture like that makes zero-based budgeting pretty easy to implement as a repeatable process. Especially if you have a guy like Hees or Brito up top leading the way.

    1. Hi, Thanks for that. The Falconi book sounds interesting. And yes, I've heard something about that about Fifer.
      Thanks for dropping by!

    2. Sorry, the book is "True Power" had a Nietzschean slip there.
      I think Falconi is talked about a good bit in Dream Big, which is the 3G biography. Fifer's book is also talked about in there in reference to the comment below.

  2. "I imagine the big food companies like BUD, HNZ and KRFT are (or were) like this too; that's why it's so easy for outsiders to come in and boost margins by 8% in such a short period of time. I bet the rest of the companies (KO etc.) are in the exact same position."

    Absolutely! Also being from the banking world and recalling all the people heading out the door during each downturn. But when does that happen for beer and ketchup? I can just imagine the lifetime employees that keep getting added, w/no serious pruning ever taking place.
    Separately this reminded me of WEB's letter this year, that in addition to all the other benefits of his hands off approach to BRK's operating businesses he has no emotional tie to re-allocating money (out of 1 company and into another). Of course he, and everyone, have been saying that forever, but the letter really hit me over the head with the behavioral benefits of the setup, in contrast to how divisions and departments at every company fight for capital, whether they need it or not.

    Thanks for the stimulating posts, as always.

    PS - a close friend was coming out of B-school and interviewing at one of the 3G companies late last year and said she mentioned Fifer's book to one of the 3G guys (I think Bernardo, but don't explicitly remember) and he responded that he was unfamiliar... Unsure of the context or if there's some qualifier, but fyi.

    1. Hmm... that's very interesting about your friend. I do wonder about that. My only source connecting 3G and this book is Fortune anyway. I tend to think Fortune is the best and most reliable of all of the business magazines so I didn't doubt it at all. But who knows with these things...

  3. This reminds me of a chapter in Bruce Greenwald's Competition Demystified ( about Wal-Mart. Most people think the reason Wal-Mart is so successful is because they lean on their suppliers harder than anyone else. But when Greenwald looked at Wal-Mart in the 70s and 80s, he called out that their gross margins (Rev - COGS) were actually worse than Kmart's. Thus, contrary to popular belief, Kmart actually drove a harder bargain (or had more purchasing power) than Wal-Mart.

    The area where Wal-Mart was able to shave costs was in SGA, and this seems to be where 3G/BRK are going to focus. Even shaving a few percentage points off SGA can drastically increase ROE so this makes sense.

    Not sure I agree with your sentiments about Apple as I see a lot of runway for growth (still a lot of the smartphone market left, Apple Pay will only grow over time, Macs continuing their slow and steady march in marketshare and profitability, and even the rumored car). Apple is a computer company, and while that started with PCs in the 80s, our concept of what a computer is has changed drastically since then, and will continue to do so.

    I think people often discount the market for "computing" as their view of what a computer is basically some combo of screen/keyboard. Apple plays the long game, and knows that "computing" touches nearly every single industry that exists; auto, banking, fashion, etc. I think they're well positioned to capitalize on a lot of these other industries where computing will increasing play a greater role. And contrary to popular opinion, they don't need to own 90% of the share to do well. Taking 10% of the share with most of the profits is totally fine for them, and should be fine for their investors too.

    Just my $.02, but will be interesting to see how it plays out in the coming years.

    1. Hi, that's interesting. But keep in mind that gross margin may not really tell us much about WMT's treatment of suppliers. I looked at something like this a while back when people were accusing WMT of pressuring suppliers and taking the money for themselves. What I figured was that they did keep their suppliers on their toes, but at the same time they lowered prices. That's how they got the share. Maybe K-mart just didn't pass through the cost savings. Everything I've read about WMT indicates that they worked hard to cut costs not to improve margins and profits, but to lower prices (which, of course, over time leads to higher profits).

      And yes, I know many disagree about Apple. There are a lot of people smarter than me on both sides of the argument and I am not qualified to tell anyone who is right.

      But I just look at it as a long term investor and notice that the dominant tech firms in 1970 were very different than the ones in 1980, which were also very different in 1990, and then 2000. 2010 too.

      I am reading a book about Nokia that came out when they ruled cell phones and it's quite scary. I read and wrote about Polaroid here in the past. So my view is more like that, not really Apple specific. And yes, I know Apple is way better and stronger than these other companies (Motorola too) for sure.

      But anyway, we'll see...

    2. Oh I'm not saying that WMT doesn't heavily lean on their suppliers, but just that all their success if often wrongly attributed to it. There are other factors, and their ability to streamline operations and lower prices to gain share certainly played just as great a role if not better. Once they became the dominant player, then they can pressure suppliers even more, creating a "lollapalooza" effect, to quote Munger.

      I do understand your concerns with Apple, and really only time will tell, but I just have trouble with the argument that "technology changes too fast" to intelligently invest. We point to past tech giants that have fallen as evidence of this, but I think this is a little shortsighted. Most of these companies were "cell phone" companies, or "PC manufacturers" or "search engines". For a time they're profitable and prolific, but as the industry and underlying tech evolves, they fall by the wayside because they've skated to where the puck is, not where it's going.

      Where I think Apple is different is they view themselves as a "personal computing" company. They're not beholden to a particular form factor or function, and have deftly navigated the evolution of computing from PC > Internet > Mobile Devices. And now we see them laying the groundwork for Healthcare, Fashion, Transportation, and Banking. While these industries have implemented technologies (getting on the web, using software to streamline operations, etc), "personal computing" has yet to really make inroads here.

      There are opportunities for personal computing in Fashion and Healthcare (Apple Watch) that didn't previously exist. It's just starting to impact transportation (Uber, Maps, Autos), and same goes for Finance/Banking (ApplePay). We're seeing all these industries gently being pulled into the orbit of personal computing for the first time, and while Apple may not emerge as the sole victor, I cannot think of any company better positioned.

    3. I can tell you how Apple can become a $1 trillion+ company tommorow: Buy Tesla and make Elon Musk the CEO. I bet Apple would double on that!

  4. KK,

    May I know your opinion about this new website Here is a link that shows what the site is about:

    The website shows the earnings releases, investor presentations, shareholder letters and 10-K/10-Q arranged in tables.

    1. Hi, It looks nice, and maybe convenient to have it all in one place. But this stuff is available at and company websites so I don't know what the value added of it would be. I guess if you archive it so that there is stuff there that is no longer on company websites, that would be good. Anyway, thanks for dropping by.

    2. KK,

      Yes, it was the convenience of having it all in one place.

      I am also working on a login/password feature so that users can create a list of tickers for e-mail alerts. If a new presentation or shareholder letter or earnings press release appears, interested users can get an email.

  5. KK,

    I had thought of archiving old stuff but had put it off because I thought it would be expensive. But my servers are really underutilized currently.

    So I started serving the annual reports of Burlington Northern, Wrigley, Lubrizol, Heinz myself. They can be found at

    I also saved the Salix Pharmaceuticals investor presentation just in time yesterday. Less than a day later the Salix IR website got wiped because the Valeant-Salix deal closed on April 1. That presentation can also be found at I guess I will also archive other companies in the process of getting acquired.

    1. Its quite interesting that Buffett could get only around 10% of Wrigley in 2008 while Mars took the rest. Wrigley seems to be a much stronger business than Heinz or Kraft.

      Wrigley seems to be like Coca-Cola, it just went up forever.

  6. KK,

    I got something you wanted.

    I put up the Coca-Cola annual reports since 1980 on You would have to enter "KO" in the ticker search box.

    1. Now we can see what Buffett saw in Coca-Cola before he invested in it. I remember you had found the 1988 Coca-Cola annual report some time ago. Now we have the whole kit.

  7. Looks like a nice read. I wonder if there's some quick metrics to identify bloated companies with lots of fat to cut?

    btw, I remember in one of your old posts, you mentioned that if an investor tries to hedge this and that risk, they often end up worse than not hedging at all. I've been thinking about that and here's an example when "hedging" actually gives you more risks

    (last section of my post here)

    1. Hi,
      I don't do it, but I'm sure the private equity / activist investors are always screening for stuff based on various ratios, SGA to sales etc. to see who stands out as unusually inefficient and whatnot.

      And yes, hedging is a little complicated. Over time, it probably nets out; you're cost of hedging will pretty much be similar to what you eventually lose anyway. So maybe it's simpler to just have a higher hurdle rate of return for non-U.S. stocks to compensate for the FX risk.

      I remember looking at the major currencies over the long term, like 10, 20, 30 years, and it ends up that the FX rate changes is sort of close to the interest rate differential over time, so whatever you tended to save you incurred in hedging cost.

      But that may not always be the case.


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