In this episode of Motley Fool Money, host Chris Hill and analysts Jason Moser, Andy Cross, and Aaron Bush discuss some recent market news. Microsoft (MSFT 2.44%) unveils plans for its next-generation Xbox. Adobe (ADBE 2.44%) pops to new all-time highs on earnings. Costco (COST +0.43%) blames lower-than-expected sales on the timing of Thanksgiving. Plus, updates from GameStop (GME 2.04%) and lululemon athletica (LULU 3.66%), as well as some cheesy listener mail. And, as always, the analysts share some stocks on their radars.
Stay tuned for an interview with bestselling author Bob Sutton about scaling a business effectively -- some of the big mistakes companies make, some advice for individuals, and much more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec. 13, 2019.
Chris Hill: We've got the latest earnings from Wall Street. We'll talk with best-selling author Bob Sutton about how successful companies scale their businesses. And, as always, we'll give you an inside look at the stocks on our radar.
But we begin with big retail. Costco's first quarter sales came in lower than expected. Management put part of the blame on Thanksgiving being so late this year. Andy, I'm not indifferent to how the calendar affects businesses, but I don't think Thanksgiving being late in the year had anything to do with Costco's website being slow this quarter.
Andy Cross: Well that is true, Chris. They did have a little trouble on their website during the Black Friday, Thanksgiving period. But big retailer is right, Chris. They're so close to 100 million card holders! They're at 99.9 million, up from 98.5 million at the end of the fourth quarter of last year. Overall it was a pretty nice quarter from my perspective. Total sales up 5.6%. Membership fee income up 6.1%. Renewal rates still very strong at almost 90% when you look across the world, about flat with last year. Their executive memberships are now at 21.4 million. That was up a little bit from the end of the year. Comp sales up 5%.
Chris, you mentioned the website. The Thanksgiving period did fall out of the comp period. But they also report monthly numbers, so we knew what they were looking at. And overall it was still the 5% to 6% of comp store growth. Some nice e-commerce business growth. But they did leave some on the table. They talked about on the call, their website problems did leave a little bit. E-commerce was up very nicely, but it could have been a little better had their website performed a little better during the holiday period.
Jason Moser: Yeah, I've always wondered -- I think Costco is a great example of one of those membership models that just has proven to be so successful over time. And over this past year, I can't believe this, we joined Costco for the first time ever. I mean, we were never Costco members. I'm sorry, Mac. But as I mentioned before, we're doing some bathroom renovations at home, and we thought maybe having that membership, we could shop around. It turned out, we didn't use it at all. So I'm going to be interested to see in a year, will we renew that membership? And really for Costco, that is the business, right? It is those members. So it's just going to be noteworthy to see not only those membership renewals, which they've historically just maintained so nicely, but also how high they can keep pushing that price, because it does seem like we're running into a world where even Prime memberships are coming under fire now for how pricey they can be perceived.
Cross: The other really interesting thing about the call is, they got asked the question about order online, pickup, especially with the success we've seen at Target and Walmart, for example. And they say it's just not something they're focused on. They look at it. The CFO actually said it's kind of a head scratcher to them, considering the way that people shop at Costco. So, they have no intention of going aggressively after that. They're just kind of watching it because of that experience, shopping at a Costco.
Moser: I feel like maybe in school, there's some secret class where they teach people how to be Costco shoppers. I'm just always astounded by how full those parking lots are, and how many people use Costco for their regular shopping. It's a wonderful deal, tremendous value, don't get me wrong, but I mean, you're not born knowing that, right? It's taught somewhere at some point, right?
Cross: Yeah, and people appreciate it, too.
Moser: Apparently.
Hill: Shares of software maker Adobe hitting an all-time high this week. Fourth quarter profits and revenue came in higher than expected. Adobe getting higher subscriptions in that core digital media business, Jason.
Moser: Yeah. I think oftentimes, investors will overlook bigger companies. They feel like maybe the companies have grown so big that the low-hanging fruit has been picked, the returns aren't there for investors, and it's not a worthwhile investment. I think Adobe is a great example of a company that just blows this idea completely out of the water. I mean, when you look at a lot of the numbers that they're chalking up, it's really just astounding for a $140 plus billion market cap. Quarter four revenue was up 21% from a year ago. Non-GAAP earnings per share up 25%. I'm really excited about the Adobe Arrow platform they're developing for augmented and virtual and mixed reality. It was really neat to see how much focus on the Document Cloud there was in the call, though. Document Cloud revenue for the quarter of $340 million. That was up 31% from a year ago. $1.22 billion for the year. That was up 25%. We talk a lot about DocuSign on this show, and we talk about their competition in the space. Adobe is one of their big competitors. Very similar-sized businesses when you talk about what they're focusing. DocuSign revenue was up 40% for the quarter last year, for context. So there's clearly some jockeying going on there in that space. I'm making my bold, reckless prediction right here, right now, for you three around this table, and all our listeners. I think 2020, Adobe buys DocuSign, because that would give them access to the small and medium-sized businesses that really have taken to DocuSign's product offerings so early.
Hill: Well, in a couple of weeks, we'll have our preview show for 2020. You'll need to come up with a different reckless prediction for that.
Moser: I'm sure people will probably forget what I just said anyways and I can just use it again, right?
Aaron Bush: This is a comment that's less about Adobe and more about software in general. I told Jamo this a couple times. I keep on forgetting that Adobe is like a $150 billion business. Isn't that just nuts? To me, it's a good reminder that some software companies are just going to be massive. When we look out across a lot of the other smaller players -- DocuSign is a $10 billion business or so. A lot of these businesses that a lot of investors are saying are overvalued are actually going to turn into multi-baggers because companies like Adobe are showing that it's possible. So, that's exciting to me.
Cross: It's not just a software company, but it's an exceptionally profitable software company, with margins near 30%, returns on capital close to 30%, too. This is a business, like you said, Aaron, that sometimes doesn't get the respect they deserve because, while it's been around a long time, the way they've totally changed their business and really focused on the cloud and new innovations is going to drive that business forward.
Moser: Yeah, the reliability of the subscription revenue, and the focus on their market, that creative market that they focus on. As long as they keep investing in bringing new and awesome products and services for people to use, people are going to keep re-upping. They're going to recognize a little pricing power as time goes on. This investment should just continue to really perform, I think, for Foolish investors that take that long-term view.
Hill: Same-store sales for GameStop fell 23% in the third quarter. Coincidentally, that is roughly the same amount that the stock fell this week. Aaron, the video game industry is booming. This is a video game retailer. How is it this bad?
Bush: I'm about to go off right now, so bear with me. This situation is so bad that in a lot of ways, you can't help but laugh at the absurdity of what's going on. Let's set the stage. The future of video games is going to be entirely digital. GameStop is a physical store that sells mainly physical goods. Red flag. They have over 5,000 stores -- which, for those counting, is more than a number of Chipotles and Chick-fil-As combined. And every attempt to pivot they've ever taken -- buying a mobile phone company, buying an in-browser gaming business -- they've all emphatically failed. Oh, yeah, and their net debt is 3X their market cap right now. So yeah, that's setting the stage.
There is some cyclicality in the gaming business. Obviously, when your same-store sales go down some 20%, that's a bit more than cyclicality. I'll also say that GameStop has gone through a pretty insane executive turnover. It's not getting better. The most recent CEO, the current one, George Sherman, who started in April, is acting like he has absolutely no clue how to run a business. Check this out. Since July, GameStop has repurchased a third of the company's stock.
Hill: Well, it's cheap now.
Bush: [laughs] I don't know, just, George, what the heck are you doing, man? Are you trying to kill your own company? You're getting paid millions of dollars [laughs] to just buy back your stock? And this is something like all investors, all activists, all board members, need to hear -- this company is overextended. It's on the wrong side of history. It's over-leveraged, and instead of putting their cash flows to work to save the business, they're not even handing it out in dividends to shareholders anymore. They're literally just lighting money on fire to repurchase shares of a business that will die unless they spend that money some other way.
So yeah, maybe at this point, they can't save themselves. They've shot themselves in the foot a while ago and are already bleeding out. It's just so bad. If they want to save themselves, they've got to get rid of this guy as quickly as possible. They need to close down their underperforming stores as quickly as possible. And they need to start experimenting with alternative floorplans as quickly as they possibly can to become a place that doesn't just sell gaming goods, but sells gaming experiences. Whether that means partnering with, like, amateur eSports leagues, start-ups that are doing cool location-based VR type stuff. Essentially, they need to do everything they can to make their locations, build communities, showcase the future, and in the simplest terms, just be a place where people want to be. They're just failing, and it's so abysmal.
Hill: We have some other news in the industry this week, and that is, we got some more details on Microsoft's next generation Xbox. Which, to this point, had been referred to as Project Scarlet. What details are most exciting to you, and why do we have to wait a year for this? Because that was the other thing I noticed. We got some more details, and it's basically December 2020.
Bush: Both the new Xbox and the new PlayStation, PlayStation 5, will come out around holidays next year. Typically, console cycles are pretty long anyway, so it's not that surprising that people are starting to talk about things earlier than normal. But I also think, with consoles, we're going to start seeing them start to reflect more like phone plans, where you have upgrades and you start paying them off monthly. And what they're doing, they're framing this up as the Series X. And I expect, in the same way that they launched the Xbox One, and then had the Xbox One X and One S, this will be a series that gets updated slowly over time so that people won't have to wait so long to get the next version going forward.
Hill: Well, if he wants, Microsoft CEO Satya Nadella can just go through his furniture, find some change, buy GameStop, and then they'll have a showcase for the new Xbox!
Cross: I think Satya's a little smarter than that.
Hill: Stitch Fix on the rise. The company broke even in the first quarter, but Wall Street was expecting a loss, so that was good enough to send the stock up 10%, Andy.
Cross: Yeah, a little different than last quarter, when we saw the reverse. The stock was down pretty big on the day of their announcement. Active client counts up 17%. That's one number I watch pretty closely. It's been right around there for the past couple quarters. That's good. Net revenue was up 21%, which I think has gotten a lot of people excited.
The big innovation they've been pushing over the last few quarters are these direct buy initiatives. Shop Your Looks, Shop Your Colors. They continue to see some nice results with these tests as they go out, so it allows people not necessarily to have to always depend on these shipments that they get from their stylist, but actually they can go on, and through some improved algorithms, make these purchases directly. And that's starting to have a little bit of an impact. They raised some guidance for the year after this quarter. The stock really had not performed very well in the last few months. We saw that rebound this quarter.
Hill: Lululemon's same-store sales in the third quarter were up 17%, but that just wasn't good enough for investors, Jason, and the stock down 4% on the report. Lululemon is getting it done!
Moser: Well, yeah, we wouldn't have said this probably a couple of years ago, certainly a few years ago, but the biggest risk for a stock like this right now is valuation, because when you look at the business, it really is firing on all cylinders -- hey, Ron, how you doing? The valuation doesn't leave a lot of room for a hiccup. And we know in this space, that's likely to come at some point. But I don't think that's anything that owners of the business should be worried about today. When you look at the numbers that they continue to chalk up there. Top line growth up 23%. Comps up 17%. Direct-to-consumer now represents 27% of total sales. They did pull back on top line guidance for the year just slightly, which probably led to a little bit of the market's trepidation. And I did notice, inventory levels are creeping up there a little bit. It's nothing terribly concerning, but we should keep an eye on it as we watch the margin picture continue to unfold.
But for now, I think this is a business that just continues to impress. Like Under Armour, we talk about, they've got great products. This is what happens when you have great products and you run a great business. Kevin Plank, why don't you take some notes?
Hill: [email protected] is our email address. Question from Rob in Massachusetts. He writes, "I'm 33 years old. I've been investing for a little over a year and really enjoying myself. Recently, I came across some amazing numbers in regard to the aging population in the U.S. and the number of people who need or will be needing some sort of incontinence product. How do I invest in this market opportunity? Thanks for all the great shows. I'm a cheesemaker and The Motley Fool podcasts keep me well occupied during the long hours of washing cheeses."
Thank you for a great question, Rob, and thank you for making cheese. One of the great products in the world. What's the move here, Andy?
Cross: Yeah, sticking with probably the big large consumer product goods companies like Kimberly Clark, I think that's one. That's probably the play. It's definitely a market that's getting more and more attention to help older citizens. So I think it's probably bigger on the consumer side, on the big players like Kimberly Clark.
Bush: Yeah, I have absolutely no idea how to capitalize on this trend. Never thought about it before. Andy's probably right. But I sense it a deeper, darker conspiracy here. Does anybody find it ironic that a cheesemonger, the creator of one of the least lactose-friendly foods, is curious about profiting from products that will only benefit from lactose intolerance? I don't know, I'm thinking that Big Cheese is trying to profit on both sides of the digestive system here.
Hill: I'm not going to sit here and let you bad mouth cheese. The fact that I'm in Big Cheese's pocket has absolutely nothing to do with that.
Let's get to the stocks on our radar this week. Our man behind the glass, Steve Broido, is back, and he's going to hit you with a question. Andy Cross, what are you looking at this week?
Cross: Steve, a hot IPO this week. bill.com, BILL, came out and the stock did really well, up 60%. It's now valued more than $2 billion. They provide business processing for small and midsize businesses, invoicing, payable, that kind of stuff. Really interested in this business. Cloud-based, very friendly, and there are a lot of small and medium-sized businesses out there who continue to use paper-pushing initiatives and they need to move into the digital space, so bill.com can help them do that.
Hill: Steve, question about bill.com?
Steve Broido: That's a pretty clever URL they got. What do you think they paid for it, just out of curiosity? I'm assuming some Bill somewhere bought bill.com, and they had to buy it from him.
Cross: [laughs] Maybe true. I don't know, Steve-O.
Hill: Jason Moser, what are you looking at this week?
Moser: A new one for our universe here, a company called Trimble (TRMB 3.79%), TRMB. At its core, Trimble build software that connects the physical and digital world. Clearly right up my alley. It does serve a number of different markets, from construction and engineering to energy, aviation, and beyond. Specifically, it's Trimble Connect that has me interested. That's their mixed reality platform. They've partnered with companies like Microsoft and Neurable and Magic Leap, among others. CEO Steven Berglund has been there since 1999 running the show. I like to see leadership that's been there for a while. This is one that's on the watch list here for our augmented reality service.
Hill: Steve, question about Trimble?
Broido: What company are they trying to disrupt in this space?
Moser: Very much similar to what we're seeing from Dassault Systems and from companies like Autodesk.
Hill: Aaron Bush, what are you looking at this week?
Bush: I'm looking at Monster Beverage (MNST 0.21%), MNST, which is a super easy business to understand. They sell energy drinks. They make lots of money selling cans of liquid. The stock has underperformed over the past five years or so. But I think now, it's finally at a point where it'll start outperforming again. The brand dominates in the U.S. They partnered with Coca-Cola to be able to tap into their global distribution system. That's clicking into gear. Both Europe and Asia clocking in over 40% growth. I think this is a business that will be able to do double-digits EPS growth going forward, and where the price is at, I think it looks pretty compelling.
Hill: Steve, question about Monster Beverage?
Broido: Seems like the world is trending healthier. Is Monster or a healthy drink?
Bush: [laughs] No. But, believe it or not, energy drinks are still growing something like 10% as a trend around the world. So I'm not too worried about people shying away from Monster right now.
Cross: You're more worried about cheese eaters.
Bush: Yeah, I'm really worried.
Hill: Trimble, Monster Beverage, bill.com. You got a stock you want to add to your watch list, Steve?
Broido: I think Trimble. Let's go with Trimble.
Hill: Alright. Jason Moser, Aaron Bush, Andy Cross, guys, thanks for being here!
For more than 30 years, Bob Sutton has taught at Stanford University. He's the author of several best-selling books, including Scaling Up Excellence: Getting to More Without Settling for Less. Last month at The Motley Fool's annual meeting, I talked with Bob in front of a live audience about what works and what doesn't work when it comes to scaling.
Let's get into some of the things in the book. One of the points that you make pretty quickly on is the idea that if you're looking to spread excellence around, one of the most effective ways to do that right off the bat is to find the things that are negative and subtract those.
Robert Sutton: There's a famous management book, some of you may have heard of, I think the best-selling of all time, perhaps, Good to Great by Jim Collins. Our mantra is the opposite, it's bad to great. When you look at situations where you want to spread something good, the first order of business is to get rid of bad stuff. If you want to go to some of the basics, social psychology, think of some of the elements of your life. First of all, let's start with your personal relationships, because that's a good place to start. There are great long-term studies that show that -- the studies happen to be of long-term heterosexual married couples, but I think this works for everybody -- if you go below five-to-one -- so, every time you have a bad interaction with your partner, you don't make it up with one good interaction -- things aren't going to last. So, just as somebody who's been married and living with the same woman virtually forever, as soon as I heard that research, I say to myself, "If I've been bad, I have to be good five times in a row." So, that five-to-one rule is very powerful.
And then the other finding, more in the workplace, is there's good evidence in a small team, if you've got a deadbeat, a jerk -- I wrote a book called The No [...] Rule rule, so that's the word I use -- but if you've got one person like that in your team, it brings down the effectiveness of your team by 30% or 40%. There's two reasons. One is, bad behavior is really contagious. The other one -- maybe some of you have a bad team member in your team right now. What tends to happen is, you spend more time dealing with that difficult person, and less time actually doing the work.
So, if we fast forward to scaling situations, if you look at what some of the most effective scalers do -- we were talking about last night at dinner, Carlos Brito, who's the CEO of InBev, which has bought virtually every beer company in the world, just about now. Budweiser, Stella, and so on. His perspective is, the first order of business is to get rid of the bad stuff so you can make way for the good stuff.
So, yes, bad is stronger than good. And good is wonderful, but a little bit of bad can ruin a lot of good.
Hill: So, people can be fired.
Sutton: Yes.
Hill: What is the process for looking at a suite of products or services, and beginning to analyze, "OK, we're doing all of these things currently, should we maybe streamline these, get rid of some of these"? And that can apply to products, services, or even marketing messages.
Sutton: To me, there's two parts of it. One is getting rid of the bad stuff. Some of you may know this story -- when Larry Page took over as CEO, probably eight or 10 years ago, of Google, he actually went to the Wikipedia page to see all the different products. In the old days of Google, they were massively decentralized, and everybody could do whatever they wanted. They have some guardrails now. And he used the Wikipedia page to identify all the different products that Google had. Most of them were the walking dead, they were zombie products. And so that's just the notion of getting rid of pure complexity.
So, to me, there's two parts of that. One is just getting rid of bad stuff. If you have destructive people, you have products that are driving customers crazy, you've got bad processes, that's part of the bad.
And the other part -- and this is a big part of scaling -- is that pure cognitive load. We do all sorts of things in organizations to unwittingly put more weight on our mind. And the more weight that we have on our mind, the harder it is for us to do what we think is right just because we're dragged down by it. That's why Huggy Rao and I are really quite obsessed with organizational friction now.
Hill: You were talking before, you used the word guardrails. This gets into another part of the book that I find very interesting, and not just because I was raised Catholic, but the whole concept of Catholicism versus Buddhism is something that companies, as they grow, tend to wrestle with, shall we say. Whether it's, we've got one location and we're selling coffee, and we're looking to open up 500 locations. But I'm wondering if you can share a little bit about the struggles and the opportunities that companies have when they're wrestling with it.
Sutton The Catholicism versus Buddhism, let me describe where that came from. In every organization, we work with this challenge. It's always there. It never goes away. It's an ongoing decision for management and everyone else. The challenge is, do you do the same thing the same way everywhere? Or do you allow local variation? To tell you where the story came from, because it's got some investment twists. I'm one of the founders of something called the Stanford d.school, which teaches innovation at Stanford. It's a cross sort of university unit. And in the early days, there's a guy -- you can look him up. He's got an amazing web page. His name is is Michael Dearing. His company is Harrison Metal. His last job was, he was head of eBay North American, and then he got weird and realized he was really good at talking to three or four people, and figuring out how to fund them and get them to 20 people. And if you go down the list of companies, you can look at Harrison Metal, he sold five companies to Twitter, he did MasterClass, Harry's Razors, some you may use. He's been incredibly successful.
So we're sitting there with Michael in the early days of the d.school, and he looks at us and he says,
"So are you going to be Catholics or Buddhists?" And we look at him like, "What the hell are you talking about?" And he was raised a devout Catholic. And his point was, it's a constant struggle, do you allow people to do everything that they want and think is best for themselves and their team? Or do you for some conformity? And the answer to it in any one situation is, well, you have to figure out what works. All the evidence is that, at least if you want to scale fast in the beginning, at least having a playbook that people focus on -- this was key to the success of McDonald's in the early days, for example; certainly Home Depot and so on. On average, what the research shows is that starting out with a playbook, a way that we usually do stuff, and a few guardrails are really important, and then adjusting it as you go into new markets and hire new kinds of employees, then you've kind of got to change.
Hill: It seems like that would point to the importance of having a strong culture and also being very clear about the types of people that you hire.
Sutton: Yes, until it gets you to the point where you just keep replicating everybody over and over again, and the world changes. And you end up having the wrong sorts of people. And just to give you an example, with Google. One of my students, Shona Brown, this is what happens at an institution like Stanford. I've known Shona so long that I loaned her $500 once. She was number four at Google for 10 years. She has like $500 million. So, in the early days, Shona, who was actually kind of an uppity Stanford student, and she was a Rhodes Scholar and everything, which permanently infects her mind, and not always in the best ways -- if she was here, I would say this in front of her -- Shona was one of the big pushers in the early days of Google, because she has a PhD and was a Rhodes Scholar, that, "We're only going to hire absolutely the best top one-tenth of 1% of people at Google, especially people who have degrees from elite universities." And they kind of did this in the early days. So, they had a real clear mindset -- we're going to hire geniuses. And if you know about the early interview process at Google, they do 20 or 30 interviews, and then not give you an offer. They had a very bad reputation. So they do all this heavy screening. That worked great in the early days, at least well enough to build the company. But then they figured out two things, which is that you don't need a Rhodes Scholar, 4.0 genius from one of the three elite universities in the world to do everything in an organization. You really don't. And then, some of you may also know that Google has done a bunch of research where they have shown that there's no relationship between the grades that somebody gets as an undergrad and how good of a programmer they become. The correlation is zero.
Hill: One of the things you write about in the book, and you've written about more recently, is the thought exercise around time travel. It comes up in the book with the Bridgewater Academy. Just sort of the idea of stopping and trying to figure out, "This thing that we're doing right now, what does it look like when it's 50X, 100X times larger, or we have 50X or 100X times as many locations?" And it seems like, to the extent that you can pull that off, that's time well spent.
Sutton: Let me talk a little bit about time travel. There's a bunch of research that shows one of the great things about human beings is, we're capable of looking back to the past and also imagining what it's like from the future. One of the most effective decision-making tools is something called a pre-mortem. A pre-mortem is, you imagine it's a year from now, and in particular, you imagine that things are totally screwed up. And you figure out what happened. Instead of coming up with a list of, "Here's the things that lead to success. Here's the things that lead to failure."
Just to give you a specific example. For career stuff, my co-author Huggy has done a randomized experiment with a large software firm. And what he did with new hires was, he had him do a failure pre-mortem. And the failure of pre-mortem was, in six months from now, you're a member of this organization -- very successful, large software firm -- everything has gone wrong. You've been fired. You can't even get another job like. What went wrong? And they did success pre-mortems too. Turns out, failure pre-mortems are more powerful. This wasn't given to management or anything. But what happens when you look down the line a couple of years, a much larger proportion of people who did failure pre-mortems got really large raises, raises over 10% than the people who were in the control conditions.
So, the power of a pre-mortem when you're making a decision such as a merger, or rolling out new software stuff, is that you don't have all these excuses. You're just looking back from the future and trying to figure out what went wrong.
Hill: What has been the reaction to the book from different organizations that you've met with? The book came out five years ago, and I'm curious if it's been an ongoing parade of people saying, "Yes, everything that happened in this book is happening to us," or if you've gotten a reaction that surprised you.
Sutton: There are certain universal elements in the book. We've done talks and worked with everybody -- Google, the Girl Scouts, the Gates Foundation, lots of investment firms, lots of nonprofits. We've worked with every kind of organization, at least that I can think of. And the reaction is generally positive.
But one of the things that people will say, and I think this is worth talking about, is that they will talk about the notion that, "Oh, you present all these cases of organizations where it's so great, but in my company, or my nonprofit, we're actually screwed up. We're not great like that. Maybe I should move somewhere else and do something different." And one of the main bits of advice that I give here is that in general, if you go to another organization -- and I'm talking about organizations that are scaling well, not ones that are scaling badly -- on a day-to-day basis, things always seem screwed up to the people who are inside of it. We were just talking about Amazon. I would not want to work at Amazon. That's kind of a brutal place to work. Netflix, which is a company that works quite well, they're actually really, really hard on employees. They fire people without performance improvement plans. That's one thing they're really proud of.
The best example I have of this is, I gave a talk at a large law firm. King & Spalding is the name of the law firm. This isn't a secret. The way that large law firms work is, when they have a partner retreat, they have affinity groups, so they'll have a breakfast for, I don't know, the lawyers who went to Harvard, the gay lawyers, the women lawyers. This group had the grass is browner club. The grass is browner club is the people who quit King & Spalding and they came back because it sucked even worse at the place that they went to.
The point is -- and this comes from my dear friend, David Kelley, the founder of the Stanford d.school, the main founder and also an innovation firm called Ideo, he talks about the notion that when you're doing something original, life is always messy. There's always setbacks, it's always confusing. And it always feels worse in the moment. When you look back on it, or you look ahead, it might be better. So, that's one lesson that I think has come out. If you think that things are better somewhere else, it might be, but usually, it isn't.
Hill: To go back to your book, one of the things I was struck by, despite the fact that scaling up in an excellent way is a ground war, it can be a slog, it can take a lot of time, there can be a lot of friction within the organization, and yet there is this through line of optimism from the people in the book. As someone who is a fan of business and rooting for businesses, it was great to see that level of optimism from people, even when they are battling with significant challenges within their own organization. Did that surprise you at all?
Sutton: The optimism didn't shock me that much, but there's a nuance that I think is worth talking about. There's guy named Daniel Kahneman, who won the Nobel Prize for inventing modern behavioral economics. And Danny will argue -- he's really a pessimistic person, by the way. His co-author, Amos Tversky, he was the optimist. But Danny will argue that overconfidence is the worst thing that any human being can suffer from. That's the worst of all the cognitive biases. But what I would say is that the way that people who are good at scaling and organizational growth and leadership are is, they have strong opinions weakly held, or they're confident, but not really sure. What that means is that if you're around them, and they announce a new product, or, "We're going to open a new location," or something, that they're really, really optimistic, and get everybody all fired up about how they're going to do it; but at the same time, they're constantly looking for signs that things aren't going quite right and have to be tweaked. Or, they get rid of the whole thing all at once.
Andy Grove, who some people will say is the greatest Silicon Valley executive of all time, who really made the modern Intel, he was kind of famous for that, which was, he'd be completely optimistic, and until the moment he fired people or got rid of a product, he was just that sort of person. So, this idea about having strong opinions weakly held, or being confident but not really sure, that's the kind of thing that to me makes for great executives and great scaling. There's this restlessness, it's the hallmark of great filmmakers at Pixar, too. Yeah, it's going OK, but I don't want to hear about what's great about it, I want to hear about what's wrong and how I can make it better. And mindset of, yes, it's going to be great in the end, but right now, we have to fix this stuff in front of us to make it even better. To me, that's different than just, "We're all so brilliant, and I only want to hear good news." That's more nuanced than that.
Hill: We are all here for this event with the mindset of scaling up our company in an excellent way and our teams in an excellent way. So my final question is, what advice do you have for us as individuals?
Sutton: One of the things that happens in a company like this, I've worked with a lot of companies that scale really fast, Facebook and Uber were just insane in this regard. What ends up happening is, it ends up being difficult to have one us when you have a whole bunch of people coming and going constantly. One of the things that makes that worse in particular, this certainly happens where I work, is that the people who have been there for a long time and have worked together for a long time, they all tend to conglomerate, and they tend to cross their arms and look at the newcomers and say, "Who the hell are these people?"
So, I guess my basic advice is, try to talk to somebody who you don't know or don't know very well. Don't just stand and talk to the same people you always talk to. I know it's great to see old friends. But for your good and the good of the organization, I think that people who are the best learners, they talk to people who are different and people they don't know. Otherwise, when you talk to people you know, you just hear the same story, and nobody ever challenges your worldview. And also, for having one Motley Fool, I think that that's part of the interpersonal path.
Hill: Bob Sutton's book is Scaling Up Excellence: Getting to More Without Settling for Less. It's a best-seller for a reason so check it out when you get a chance.
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That's going to do it for this week's show. Our engineer is Steve Broido. Our producer is Mac Greer. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next week.
