In the Senate hearings yesterday a statement was made by Goldman sachs CEO Lloyd Blankfein that, to me, summarized the difference in thinking between the leadership of excellent companies, and the thinking of the business folks who cause so much damage to the companies they run, their employees, suppliers and communities in which they operate.
"'We do hundreds of thousands, if not millions of transactions a day, as a market maker,' Blankfein said, noting that behind every transaction there was a buyer and a seller, creating both winners and losers." It seems to me that there has to be a winner and a loser behind every transaction if the trend line of the investment is like this:
Or even if the trend line is like this:
But there does not have to be a winner and a loser if the value of the investment does this:
The role of these investment people is supposed to be to help investors find opportunities to put their money into business ventures that will increase in value. When that happens, it is not a zero sum game with a winner and a loser. It is a win-win proposition.
The big problem with Wall Street is that they are all consumed with the belief in this winner and loser mentality, and with increasingly complicated derivative schemes and travesties like the buying, selling and looting of Simmons Mattress seven times in twenty five years; they are putting all of their intelligence and a lot of people's money into making money from investments with no underlying value – or even draining the value to create money-making opportunities.
That mentality is not limited to Wall Street. The purchasing/sourcing function of the poorly managed companies is driven by the same thinking. Supplier selection and negotiation is based on winner-loser/zero sum thinking. Rather than collaborate with suppliers to create more value, the driving principle is to take money from supplier profits and add it to their own. No thought given to how to make that which is being bought more valuable. It is perceived as a static thing, and price negotiations are all about who will win and who will lose.
Same thing with pricing and dealing with customers … dupe someone into paying a little more without adding anything to the value of that which is being sold, and you win while they lose. It results in stories like the one in which the Proctor & Gamble customer learned that she had been paying $17 for a bottle of shampoo that was virtually identical to the one she could have been buying for $7. P&G had been playing the winner and loser game with her – they won and she lost every time she paid an extra ten bucks to wash her hair.
That upward trend line – whether it reflects the value of the company in which someone is investing, the value of material being purchased, or the value of the product being sold – requires hard work, deep knowledge, and often quite a bit of patience. Nobody gets rich quick in the value creation business. But guys like Warren Buffet, who epitomizes the long term "value investing" philosophy, prove that you can get very rich over time – and not end up in court or in front of a Senate panel having to explain how you did it.
Lean thinking is the wholesale rejection of the Goldman Sachs principle that there must be a winner and a loser behind every transaction. It is driven by the idea that good management creates a win-win for buyers and sellers, as the total cost of products and the value of investments continually reflects more value and less waste.