Nikola Tesla, Sheldon Cooper, Inventors & Entrepreneurs, Compromise & Tradeoff, Theoretical & the Practical, GM and Hostess

Posted by PITHOCRATES - December 4th, 2012

History 101

Geniuses strive for Theoretical Perfection which often doesn’t work in the Market Place

There have been a lot of brilliant inventors that gave the world incredible things.  Nikola Tesla gave us the modern world thanks to his work in electromagnetic fields.  Giving us the AC power we take for granted today.  Electric motors.  The wireless radio.  Etc.  But as brilliant as Tesla was he was not brilliant in making money from his inventions.  He died broke and in debt.  And, some say, insane.  Though he was probably more like Sheldon Cooper on The Big bang Theory.  As one character on the show called him, “The skinny weirdo.”  Tesla had an eidetic memory (often called a photographic memory).  And probably suffered from obsessive-compulsive disorder (OCD).  Which when added to genius can be mistaken for crazy genius.

So Tesla and the fictional Sheldon Cooper have some things in common.  Genius.  And some odd behavioral traits.  As well as something else.  Neither was rich.  Their genius did not make them rich.  Which is a common trait of all brilliant inventors.  Their genius gets in the way of practicality.  They strive for theoretical perfection.  Which often doesn’t work in the market place.  Because perfection is costly.  And this is what separates the theoretical geniuses from practical engineers.  And entrepreneurs.

The internal combustion engine is a technological marvel.  It has changed the world.  Modernized the world.  It gave us inexpensive modes of transportation like cars, trucks, ships, trains and airplanes.  But the engine is not theoretically perfect.  It is a study of compromise and tradeoff.  Providing a final product that isn’t perfect.  But one that is economically viable.  For example, pistons need to compress an air-fuel mixture for combustion.  However, the piston can’t make such a tight seal that it can’t move up and down in the cylinder.  So the piston is smaller than the cylinder opening.  This allows it to move.  But it doesn’t contain the air-fuel mixture for compression and combustion.  So they add a piston ring.  Which contains the air-fuel mixture but restricts the movement of the piston.  So they add another piston ring that takes oil that splashes up from crank case and passes it through the ring to the cylinder wall.  The heat of combustion, though, can leave deposits from the oil on the cylinder wall.  So they add another piston ring to scrape the cylinder wall.

Selling a ‘Low Price’ is a Dangerous Game to Play Especially if you don’t Know your Costs

Every part of the internal combustion engine is a compromise and tradeoff.  Each part by itself is not the best it can be.  But the assembled whole is.  A theoretical genius may look at the assembled whole and want to add improvements to make it better.  Adding great costs to take it from 97% good to 99% good.  While that 2% improvement may result with a better product no one driving the car would notice any difference.  Other than the much higher price the car carried for that additional 2% improvement.

This is the difference between the theoretical and the practical.  Between brilliant inventor and entrepreneur.  Between successful business owner and someone with a great idea but who can’t bring it to market.  The entrepreneur sees both the little picture (the brilliant idea) and the big picture (bringing it to market).  Something that a lot of people can’t see when they go into business.  The number one and number two business that fail are restaurants and construction.  Why?  Because these are often little picture people.  They may be a great chef or a great carpenter but they often haven’t a clue about business.

They don’t understand their costs.  And because they don’t they often don’t charge enough.  A lot of new business owners often think they need to charge less to lure business away from their competition.  And sometimes that’s true.  But selling a ‘low price’ instead of quality or value is a dangerous game to play.  Especially if you don’t know your costs.  Because as you sell you incur costs.  And have bills to pay.  Bills you need to pay with your sales revenue.  Which you won’t be able to do if you’re not charging enough.

If Business Operations can’t Produce Cash a Business Owner will have to Borrow Money to Pay the Bills

The successful small business owners understand both their long-term financing needs.  And their short-term financing needs.  They incur long-term debt to establish their business.  Debt they need to service.  And pay back.  To do that they need a source of money.  This must come from profitable business operations.  Which means that their sales revenue must make their current assets greater than their current liabilities.  The sum total of cash, accounts receivables and other current assets must be greater than their accounts payable, accrued payroll, accrued taxes, current portion of long-term debt, etc.  And there is only one thing that will do that.  Having sales revenue that covers all a business’s costs.

The successful business owner knows how much to charge.  They know how much their revenue can buy.  And what it can’t buy. They make the tough decisions.  These business owners stay in business.  They see the big picture.  How all the pieces of business fit together.  And how it is imperative to keep their current assets greater than their current liabilities.  For the difference between the two gives a business its working capital.  Which must be positive if they have any hope of servicing their debt.  And repaying it.  As well as growing their business.  Whereas if their working capital is negative the future is bleak.  For they won’t be able to pay their bills.  Grow their business.  Or service their debt.  Worse, because they can’t pay their bills they incur more debt.  As they will have to borrow more money to pay their bills.  Because their business isn’t producing the necessary cash.

Those restaurants and construction companies fail because their owners didn’t know any better.  Others fail despite knowing better.  Like GM, Chrysler, Hostess, just about any airline, Bethlehem Steel, most print newspapers, etc.  Who all entered costly union contracts during good economic times.  Costs their revenues couldn’t pay for in bad economic times.  Which was most of the time.  As they struggled to pay union labor and benefits they run out of money before they could pay their other bills.  As their current liabilities exceeded their current assets.  So instead of producing working capital they ran a deficit.  Forcing them to incur more debt to finance this shortfall.  Again and again.  Until their debt grew so great that it required an interest payment they couldn’t pay.  And now they are no longer with us today.  Having had no choice but to file bankruptcy.

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LESSONS LEARNED #72: “Moms are a lot like CEOs. Only with more responsibility, longer hours and less pay.” -Old Pithy

Posted by PITHOCRATES - June 30th, 2011

A Genius may have a Brilliant Idea, but it’s an Entrepreneur that brings it to Market

A CEO is a lot like an entrepreneur.  They’re both a cut above the rest.  And can do what few can do.  Bring two worlds together.  The theoretical world inhabited by great thinkers and inventors.  And the practical world inhabited by people who act.  Who take the things the great thinkers and inventors create and give them to us.   There is a difference between the people that inhabit these worlds.  And most can only live in one or the other.  But CEOs and entrepreneurs can live in both.  That’s what makes them special.  Thinkers and inventors possess a genius of theoretical creativity.  But they can do little with their idea.  The action people can build great things (cars, airplanes, buildings, power plants, cell phones, etc.) but only from a construction plan.  Someone else has to have an idea and think and create the construction plan before they can build.  These are the two worlds.  The genius.  And the builders.  And it is the CEO and entrepreneur that bring these two worlds together.

Nikola Tesla was a genius.  A brilliant theoretical thinker.  He created the world in which we live.  But do you know who he is?  What he created?  Probably not.  Unless you’re a Croat.  Because there are probably a lot of statues of him in Croatia. Because he was born there to Serbian parents.  He eventually moved to America.  Got a job with a guy name Thomas Edison.  Who didn’t appreciate his genius.  Or his one particular ‘crazy’ idea.  But George Westinghouse did. 

That ‘crazy’ idea is the AC power we use today.  Thomas Edison was building DC power plants and a DC electric grid.  Despite all the failings of DC distribution (DC power doesn’t travel far requiring lots of generating plants, different voltages have to have their own generating plant, large power loads require very thick and expensive copper wires, etc.).  There was already a DC electrical infrastructure.  And it was Edison’s.  Which he wanted to expand because it would pay him well.

But Tesla’s AC system was better.  Because it could use transformers.  One power generating plant could provide power at a variety of voltages.  You just needed a transformer to get the voltage you wanted.  Also, electrical power is the product of voltage and current.  High power, then, requires either a high voltage or a high current.  High currents require thick, expensive copper wires.  So high voltage was the way to go.  It allowed power to travel farther over thinner wires.  Therefore, it required fewer generating plants.  And a single electric grid (not one for each voltage).  AC power was much more economical than DC power.  And George Westinghouse saw that.  And took Tesla’s brilliant idea and built the AC power generation and distribution system we use today.

The Business of Beautiful, Estée Lauder

You see, Tesla was at home in the lab.  He was a scientist.  Not a salesman.  That’s why he wasn’t an entrepreneur.  Because, just like being a CEO, you need sales skills to be an entrepreneur.  Because you are the number one sales person in your business.  And Edison and Westinghouse were great salesmen.  That’s why they brought a lot of Tesla’s great inventions to market.  And why Tesla did not.  He was just not a sales person.

But Estée Lauder was.  She was always selling.  And creating.  She was the classical entrepreneur.  Her uncle was in the chemistry business making beauty products.  Which fascinated her from a young age.  He taught her the chemistry.  Taught her how to make the products.  How to use the products.  And she did.  Loved them.  And started selling them.  With a passion.

She started creating her own products.  Using her own kitchen as her laboratory.  When not tending to her two sons.  She demonstrated how to use her products.  Gave away free samples.  And sold.  She was always selling.  She started out small.  By herself.  From these humble beginnings she grew to dominate the industry.  She was relentless.  She worked herself to the premier counter space in department stores by redefining the way cosmetics were sold.  Starting with Saks Fifth Avenue in New York.  She visited each counter to ensure they were meeting her high standards.  She gave away free samples.  She demonstrated.  She touched.  Personally applying products on customers.  That’s why when you walk into a department store you’ll see the Estée Lauder counter first.  And you’ll see all the counters selling the same way.  Giving away free samples.  Demonstrating products.  Showing how to apply products.  The Estée Lauder way.

One Smart Cookie, that Mrs. Fields

Debbi Fields liked to bake cookies.  She married young at 19.  To a Stanford graduate.  And aspiring financial consultant.  And about a year later decided to go into the cookie business.  After an incident at a party with her husband and a lot of his snobby associates.  She apparently mispronounced a word.  Said ‘orientated’ instead of ‘oriented’.  A snob pointed out her faux pas.  Sending her home in tears.  Didn’t much like that experience.  And decided to be something more than a ‘just’ a housewife.  Not that there was anything wrong with that.  And she would love being a housewife.  She would raise 5 daughters.  And add another 5 stepchildren in a second marriage.  But the snobs in her husband’s circle did look down on that particular institution.  It was so old fashioned.  It wasn’t progressive.  It wasn’t what people in their circles did.  So they acted like real asses.

Yet they liked her cookies.  Loved them.  Her husband would take them to work.  Where they were a big hit.  Soft and chewy.  Gourmet.  They were different.  When she asked them if she should go into the cookie business, they said it was a bad idea.  The conventional wisdom said crispy cookies were the way to go.  People didn’t want to buy soft and chewy.  They said as they stuffed their mouths with soft and chewy cookies.  And there were others who told her not to do it.  Even her husband doubted her.  But he loved her.  And would support her. She had no business experience.  But she was a hard worker.  And believed in what she was doing.  She got a bank loan to open a cookie store.  Not so much because the banker believed in the business idea.  But because of the good character of her and her husband.  Whatever the outcome, the bank was willing to take a chance.  Because, success or fail, they knew they would repay the loan.

She opened her first store in a mall food court.  Did not sell a single cookie.  Until she used the Estée Lauder sales method.  She gave away free samples.  People tried.  And people liked.  Soft and chewy was a hit.  She grew the company.  Added more stores.  And made a lot of money.  She was very hands on to maintain the quality.  Again, like Estée Lauder.  She visited her stores.  To make sure they maintained her high standards.  Which is why she refused to franchise.  She was too worried about losing that quality.  Which is what made Mrs. Fields cookies better than the competition.  Her husband computerized her operation.  Adding a computer at each store.  All wired to the Internet and tied into her headquarters.  It was state of the art technology.  Allowing more growth.  While retaining full control.  The growth was fast.  Too fast.  The hands-on management didn’t work well with so many stores.  The debt started to pile up.  And then a recession hit.  Her expensive gourmet cookies became too expensive.  And people stopped buying them.  To save the company she had to sell 80% of it.  And the new owners changed the business model.  Franchised stores.  And bumped Debbie Fields from CEO.  But she remained chairman of the board.  And though only a minority shareholder, the business Debbie Fields created continues on.  Her only mistake was being so successful so fast.  And if you’re going to have a fault that’s not a bad one to have.  By the way, don’t forget that she did all of this while raising 5 daughters.  Which probably made the running of the multi-million dollar business the easy part of her life.

Entrepreneurs, CEOS and Moms

Entrepreneurs and CEOs.  They’re a different breed.  They can be both brilliant thinkers like Nikola Tesla.  And aggressive sales people like Thomas Edison and George Westinghouse.  Such as Estée Lauder.  And Debbie Fields.  These mothers dominated their industries.  And set the bar for everyone else.  Lauder built an empire that dominates still.  Fields use of technology to streamline operations is a model for business efficiency at Harvard Business School.  Two of America’s most successful entrepreneurs and CEOs.  And both were moms first.

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