PDF Summary:The Outsiders: Eight Unconventional CEOs, by William N. Thorndike
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If you’re asked who the greatest CEO of the last century was, one name might naturally come to mind: Jack Welch. Sure, he achieved great financial return and is trumpeted by the press. But is Jack Welch really the greatest CEO of the century? According to the author of The Outsiders, no—not even close. There are CEOs who performed better during worse economic periods.
Studying companies broadly, the author ended with eight CEOs and companies with standout performance during the 20th century. Looking deeper into their management practices, he found virtually identical patterns to their management style and capital allocation decisions. These strategies were unorthodox but directly caused their outsized results. These CEOs and their management practices are the subject of The Outsiders.
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- Warren Buffett of Berkshire Hathaway rarely expects managers of his portfolio companies to contact him unless they have questions.
In contrast, typical companies tend to bulk up headquarters, featuring layers of vice presidents and MBAs. Not only does this increase overhead, but it also encourages office politics.
Decentralization also came in the form of spin-offs and tracking stocks. Instead of being buried within a large conglomerate, spin-offs gave individual business units more autonomy and better-aligned incentives with management.
Frugality
To outsider CEOs, cash was vital to the business, since it could be redeployed in their capital allocation strategies. Therefore, outsider CEOs cut operating expenses to a minimum. They avoided typical corporate perks like private cars and airline seats and kept headcount lean and efficient. When they acquired companies, they instilled this lean culture into the new company.
Focus on Cash Flow
Outsider CEOs resisted focusing on reported earnings, which present a muddled reflection of company performance because of capital expenditures, acquisitions, and other accounting artifacts. Instead, they focused on cash flow and then-innovative metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization). This affected their operations deeply, from how they financed acquisitions to their compensation schemes for employees.
This relentless focus on cash flow also allowed them to avoid counterproductive distractions, such as costly acquisitions for the sake of growth that would later prove unprofitable.
Focus on Shareholder Returns
Typical CEOs let their egos get involved in strategic decisions. They enjoy empire building, growing revenue and headcount without concern for profit or long-term outcomes.
In contrast, outsider CEOs focused on shareholder value as their top priority. Having low egos, they didn’t hesitate to shrink the size of the company if it meant better returns to shareholders. For instance, Henry Singleton of Teledyne actively spun out businesses, believing they would independently perform better than under one large umbrella. This reduced the size of Teledyne but improved total shareholder performance.
Minimal Interaction with Investors
Outsider CEOs saw investor relations as a waste of time. They spent little time talking to Wall Street and managing expectations. Instead, they preferred to spend their time on the business. Most of the companies were situated outside the financial Northeast, in places like Omaha and Denver, where they would be insulated from the conventional wisdom of Wall Street.
No Particular Stroke of Luck
Outsider CEOs outperformed because of how they managed their businesses, not because of idiosyncratic strokes of luck, like intellectual property advantages or groundbreaking new ideas. Other than management, they didn’t have any discernible advantages over their peers, and so their outsized performance can be attributed directly to their management and capital allocation strategies.
In contrast, some high-profile CEOs like Steve Jobs or Mark Zuckerberg had highly unusual circumstances. They had powerful new ideas taking advantage of technology trends, and they executed the ideas relentlessly. These situations are unlike those facing most business managers, and so lessons of a Steve Jobs or Zuckerberg are rarely generalizable to the business community at large.
Strong COOs as Partners
Among outsider CEOs, there was a pattern of having COOs who focused on day-to-day operations, while the CEO focused on long-term strategy and capital allocation. In essence, the COO generated the free cash flow, and the CEO spent it.
Examples:
- Capital Cities Broadcasting: Tom Murphy was CEO and the capital allocator. Dan Burke was COO and managed their media stations.
- Teledyne: Henry Singleton was CEO and the capital allocator. George Roberts was President and enforced results at its portfolio companies.
- Washington Post: Katharine Graham was CEO. Dick Simmons was COO and demanded operational excellence from its newspaper and media properties
Flexibility
Outsider CEOs tended to be strategically flexible, changing company strategy as the circumstances required. Rather than adhering to a preset strategy, outsider CEOs evaluated all possible options at each point in time, then chose the option that was best.
For example, General Dynamics aggressively sold business lines like Cessna during one phase of the company’s turnaround, then decades later reversed course and acquired large businesses like Gulfstream when the environment had changed.
Likewise, at one time, share buybacks might be the best use of cash; in another time, using high-priced stock to buy companies might be preferable.
Personal Negotiations
The outsider CEOs tended to negotiate directly instead of through a layer of advisers.
Examples:
- When running Ralston Purina, Stiritz made his acquisitions through direct contact with the sellers, avoiding auctions whenever he could.
- Warren Buffett avoids auctions for businesses. Instead, he prefers that owners call him and offer a price, with Buffett returning his answer within 5 minutes.
Focusing on the Important Factors
When making capital allocation decisions, outsider CEOs avoided complicated financial models and pages of analysis, which they knew to be imprecise. Instead, they tended to simplify understanding of a business down to a handful of key assumptions—market growth trends, competitive dynamics, and cash flow. This allowed them to make fast decisions when an opportunity appeared.
Personality and History
The outsider CEOs also showed patterns to their personalities that informed how they ran their businesses.
Independent Thinkers
Outsider CEOs preferred to come to their own conclusions instead of following conventional wisdom. They were analytical and rational about their businesses. All were quantitative people, with more having engineering degrees than MBAs.
This independent thinking often led to unorthodox practices, such as buying back shares when none of their peers were, or ignoring traditional measures of value like reported earnings and book value. But even when observers were skeptical, outsider CEOs cared little what others thought. This iconoclast personality allowed them to avoid the peer pressure of imitating other CEOs.
They were also broad thinkers, familiar with a variety of industries and disciplines, which translated into new perspectives and approaches. Using the metaphor of a “hedgehog,” who knows one thing very well, or a “fox,” who knows many things, the outsider CEOs were foxes. For example, Bill Stiritz of Ralston Purina had an unusual blend of marketing acumen and financial astuteness.
New to the Job
The CEOs featured in the book were first-time CEOs, with little management experience. Only two had MBAs. In fact, many were new to their industries. This inexperience might have helped their management, as they were unbound by conventional wisdom and built their practices independently, from first principle.
Understated
Outsider CEOs were humble and did not seek the spotlight. They avoided magazine covers and public talks. They weren’t considered charismatic. They were not household names in business, and so few people other than sophisticated investors and company fans know about them. They lived seemingly boring lives and were happily married. They were patient and tolerated waiting long periods of time for compelling opportunities to arise.
Again, this did not mean timidness. When outsider CEOs saw a great opportunity, they acted boldly and decisively.
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PDF Summary Introduction
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The author investigated CEOs like Henry Singleton who had outlier performance compared to the rest of their industry and the market. He found 8 CEOs whose companies showed remarkable financial performance over the course of decades. Furthermore, he found uncannily strong patterns among the outsider CEOs that distinguished them from typical CEOs. These CEOs and their management practices are the subject of The Outsiders.
PDF Summary Chapter 1: Tom Murphy and Capital Cities Broadcasting
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When Smith died in 1966, Murphy became CEO of Capital Cities. Murphy in turn promoted Dan Burke, a Harvard MBA he had hired 5 years earlier, to COO. They had a clean division of labor—Burke would focus on the day-to-day operations, while Murphy was responsible for capital allocations and acquisitions. In essence, Burke generated the free cash flow, and Murphy spent it.
At the time, Capital Cities had revenues of $28 million. Over the next few years, Murphy made large acquisitions.
- In 1967, Murphy bought a Houston ABC affiliate for $22 million, then the largest acquisition in broadcast history.
- In 1968, he bought Fairchild Communications, a trade magazine publisher, for $42 million.
- In 1970, he bought broadcaster Triangle Communications for $120 million.
At the time, the FCC allowed a company to own a maximum of five VHF TV stations, and Capital Cities had reached this maximum. Thus they turned to newspaper publishing, which had a similar business model as broadcasting. Once again, he had an appetite for acquisitions, buying newspapers for values in the high 8-figures in the 1970s. In 1980, he entered cable television by buying Cablecom for $139...
PDF Summary Chapter 2: Henry Singleton and Teledyne
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Singleton took advantage of these dynamics. In 8 years ending in 1969, he purchased 130 companies in a wide range of industries, including specialty metals and insurance. Most companies were purchased using Teledyne stock.
In 1967, Singleton acquired Vasco Metals and promoted its president (and Singleton’s former roommate at the Naval Academy) George Roberts to president of Teledyne. As with Burke at Capital Cities, Roberts became the operating manager of Teledyne, freeing up Singleton to focus on strategy and capital allocation.
In 1969, Teledyne’s stock began falling in P/E ratio, and acquisition prices began rising. Realizing that Teledyne’s stock would no longer be profitable for acquisitions, he laid off his acquisition team and never made another material acquisition. Instead, they turned their focus to increasing margins at business units. Through the 1970s and 1980s, Teledyne saw remarkably high return on assets of 20% or greater.
This generated remarkable free cash flow, which was used by Singleton in a series of aggressive share repurchases. At the time, the conventional wisdom held that repurchases were done only by weak companies that lacked investment...
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Learn more about our summaries →PDF Summary Chapter 3: Bill Anders and General Dynamics
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In turn, his strategy for General Dynamics had three key ideas:
- The company would only stay in businesses where it could be #1 and #2 (a famous Jack Welch idea).
- The company would leave commodity businesses with low returns.
- The company would stick to its strengths. Namely, it would leave commercial businesses and stick to defense and government contracts.
In his three years as CEO, Anders implemented a rigorous focus on margins and generating more cash:
- He found that the mindset of the company was to make bigger, faster weapons to grow revenue, with little care for shareholders and financial performance. He moved to instill a new mindset of financial performance, emphasizing cash return on capital.
- He made large personnel adjustments. He replaced 21 of the top 25 executives, reduced headcount by 60%, and cut corporate staff by 80%.
- He promoted Jim Mellor, a business unit head known for enforcing results, to COO.
- He and Mellor tightened operations by reducing inventory and capital equipment. They found a systemic problem of excess inventory (for instance, having dozens of F-16 plane canopies in a facility that made just one plane a...
PDF Summary Chapter 4: John Malone and TCI
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- The cable industry was growing extremely quickly, with subscribers growing 20-fold over a matter of years in the late 1960s and early 1970s.
In 1970, one of his clients at McKinsey, General Instrument, made an offer to him to run Jerrold, its cable television equipment division. Within two years, he was made an offer by TCI to join as CEO.
TCI was founded in 1956 by Bob Magness and had gone public in 1970. In 1973, when Malone joined, it had 600,000 subscribers and was the #4 cable company in the US. It had taken on a troubling amount of debt—17 times revenue—and was dangerously close to bankruptcy.
1973-1977: Stabilization
Malone’s first priority was to keep TCI out of bankruptcy. He instituted a new lean culture focused on financial discipline, estimating that growing subscribers by 10% per year while maintaining margins would keep them out of bankruptcy. He maintained frugality at headquarters, keeping just a single receptionist and grouping multiple executives in the same motel room when traveling.
Characteristic of outsider CEOs, Malone had a COO, J.C. Sparkman, who enforced budgeting and cash flow benchmarks at the operating divisions. Managers who...
PDF Summary Chapter 5: Katharine Graham and the Washington Post
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In 1971, Graham took the Washington Post Company public to raise money for acquisitions. She started by buying the Trenton Times, which was a #2 paper in a competitive market and showed mediocre performance. This would teach her discipline in acquisitions going forward.
In 1974, a relative unknown began buying stock in the Post, ending with 13% ownership. His name was Warren Buffett. While her board counseled her to avoid the unknown, she met with him and found his advice indispensable, and she invited him to join the board. He would prove to be vital throughout Graham’s tenure, advising her around capital allocations.
In 1975, the Post faced a worker’s strike from the paper printers. Determined not to give in, Graham hastily hired a crew to man newspapers, publishing for 139 days before the printers conceded. Winning many favorable concessions, Graham made big improvements to the Post’s margins.
Around this time, Buffett advised Graham to repurchase Post shares, given their low prices. She repurchased 40% of Post shares, an unusual move that her competitors didn’t follow.
In 1981, the other major newspaper in Washington, the Washington Star, shut down. The Post became a...
PDF Summary Chapter 6: Bill Stiritz and Ralston Purina
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Unlike other outsider CEOs, Stiritz had been an insider at the company for over a decade. But he brought an unconventional plan that deviated from competitors. He knew that the consumer brands had attractive economics (high margins, low capital requirements), and focusing on this core would propel Ralston to new heights of profitability. When he became CEO in 1981, he implemented his plan decisively.
First, he sold the non-core businesses such as Jack in the Box, the hockey team, and the agricultural operations.
Then he made two large acquisitions—Continental Baking (including Twinkies and Wonder Bread) and Energizer Battery, totaling over $2.2 billion and 30% of Ralston’s market capitalization. Both businesses had languished under their previous owners, due to neglect or insufficient skillset. Ralston quickly improved its performance by improving marketing (launching the Energizer bunny campaign), improving distribution, launching new product lines, and reducing costs. Over their lifetime at the company, Energizer would generate 21% annualized returns, and Continental 13%.
Over the 1980s, he continued executing the plan, adding acquisitions that would strengthen...
PDF Summary Chapter 7: Dick Smith and General Cinema
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Diversification into Beverages
By the late 1960s, he figured that theater growth would likely plateau at some point, so he began looking to diversify into other businesses. His ultimate goal was to have three legs in the company, each a strong business that wasn’t correlated with the others.
In 1968, he entered beverage bottling by purchasing American Beverage Company (ABC), the largest independent Pepsi bottler, for 20% of his company’s enterprise value. His work in theater concessions had given him an appreciation for the attractive market dynamics of beverage bottling:
- Beverage companies formed an oligopoly, representing high returns on capital and strong long-term prospects.
- Pepsi bottlers tended to be fragmented, compared to the larger Coca-Cola bottlers. Furthermore, since they served the #2 brand (Pepsi), they tended to have lower valuations. Thus, Smith could buy up bottlers for lower prices.
- ABC could serve as a platform company, to which new acquisitions of bottlers would be added to increase scale and profits.
Over the next decade, Smith purchased more bottling companies. Increasing scale allowed for ever more efficient operations, such...
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PDF Summary Chapter 8: Warren Buffett and Berkshire Hathaway
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In 1954, Graham finally offered Buffett a job, and Buffett continued researching underpriced public companies, which were often cheap, low-quality companies (Buffett called them “cigar butts”). When Graham closed his firm in 1956 to focus on other interests, Buffett started his own fund in Omaha, raising $105,000 (a bit under $1 million today). Over the next decade, Buffett continued investing by Graham’s value philosophy, achieving an average 30% annual return even without using debt.
Buffett Refines His Investing Style
But in the mid-1960s, Buffett began deviating from the value method, instead investing in high-quality companies that had a strong competitive profile and long-term prospects. His early investments in this style included Disney and American Express.
In 1965, Buffett purchased the textile company Berkshire Hathaway, a 100-year-old family business, through a hostile takeover. The company was only worth $18 million in enterprise value and was in a commodity business, but Buffett saw it as a platform to build his investments around. After installing a new CEO, who optimized operations, Berkshire Hathaway had $14 million of profit.
Buffett used this...
PDF Summary Checklist for Outsiders
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- Consider decentralizing your management. How can you reduce staff at corporate headquarters?
- Retain earnings only if you have projects that clear your hurdle rate. Otherwise, consider a buyback or paying dividends (always being mindful of taxes).
- If prices are high, consider selling businesses or stock.
- Close struggling business units if they are unable to produce acceptable returns.
PDF Summary Conclusion: Relevance of the Lessons
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- They enforced a company culture of frugality, returns, and low ego.
- The CEO Tillerson rarely interacted with Wall Street or industry conferences, avoiding the spotlight to focus on the business
Relevance for Everyone
What if you’re not a CEO of a large public company? Are the decisions relevant to everyday managers and business owners?
The author argues yes—what’s shown here is a rational approach to capital allocation: figure out the value of all the options available to you, then choose the most profitable ones, ignoring conventional wisdom and what your competitors are doing.
Here’s a realistic example. Imagine you own a single-location bakery, and you have more demand than you can service. You consider two possible options: 1) expanding your current store, 2) opening a second store in a new location.
Using the checklist of the outsider CEOs, work through the following steps:
- Determine your personal hurdle rate for investments. Say it’s a 20% annual return on investment.
- Calculate the costs of both options.
- 1) Expanding your current store might cost $50,000 for a new oven and $50,000 for renovations, for a total upfront cost of...