🧗 Our Investing Journey (#5): The Power of Execution
Exploring the two sides of human ingenuity
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Ingenuity
Source: NASA
In 2021, NASA set aground the Perseverance rover on Mars. The vehicle took a short 293 million mile (472 million km) one-way trip to explore the Jezero Crater, a region of Mars where the ancient environment may have been favorable for microbial life. In other words, the vehicle was designed to probe the Martian rocks for evidence of past life. This outstanding machine substituted the Curiosity rover which had, for many years, explored the unknown cracks and crevices of the red planet.
Until I wrote this post, I never knew that the freaking helicopter-thing that traveled space with Perseverence for 203 days was called Ingenuity. The marvels of Google and NASA instructed me on this marvelous copter-thing (they call it rotorcraft, but I like my version better). This device can, allegedly, climb to a max altitude of 40 feet (12 meters), hover for 4.5 seconds, and then start an explosive descent at a max speed of 3.3 feet per second (1 meter per second). Oh, if only Enzo Ferrari knew about this incredible piece of modern engineering…
Ironically, the day it launched, communication with the machine cut off. The $80 million experiment climbed an impressive 3 feet (1 meter) above the surface before shutting down. Bravo NASA! The following day, communications were reestablished and more information about the flight was relayed to ground controllers at NASA JPL. Imagery revealing damage to the rotor blade arrived several days later. To date, the entire saga is - still - being investigated.
This short story perfectly illustrates today’s two-faced theme: execution is everything
Btw check out NASA’s page if you want to learn more about Ingenuity or you want to play around with a weird 3D copter model
Coke Armageddon
On the one hand, we must take out a page from the history books of execution going terribly wrong. We’ll use the 1985 development of what is probably the worst product ever created: New Coke
What do companies do when they can’t innovate, they are led by bureaucrats and they feel under attack. Well, in most cases, they diworsify (a term popularized by Peter Lynch and defined as failed diversification). This is exactly what happened to Coke after management saw its market share steadily decrease with the entrance of new competition. In the 1950s, Coke concentrated at its peak 60% of the market, but by the early 1980s, its share had fallen to less than 25%.
In April 1985, the Coca-Cola Company decided to innovate by releasing New Coke, later rebranded Coke II, a sweeter version of the traditional soft drink aimed at competing directly with Pepsi. The new product was geared towards mass market retailers (Walmart, Costco, other supermarkets) where its competitors and white brands had proliferated. Roberto Goizueta, Coke’s CEO was on a mission to return the brand to its former glory. He repeatedly told investors and employees there would be no "sacred cows" in how the company did business. Once the product was launched, he went over to describe the new flavor as “bolder”, “rounder”, and “more harmonious”.
New Coke quickly took over a portion of the competitors’ share at the expense of partially cannibalizing Coca-Cola’s core product. Within 6 months, the new product had a (not so captive) average of 3% of the market, peaking at 4%. In the following years, this number would decrease to a stable 2% of the market despite all the money and effort put into marketing.
Preliminary surveys, conducted prior to release, indicated an estimated 75% approval rating. However, the public was not exactly enthused with the new product. The company received thousands of letters and calls complaining about it. The rejection was widespread. Comedians and late-night show hosts made a habit of pointing out how much people hated it. And even Fidel Castro, who famously enjoyed Coke, called it “a sign of American capitalist decadence”.
Pepsi used the new brand’s mishap to give form to marketing campaigns like “Now I know why Coke did it!” and the “Cola Wars” to capitalize on the hate. Their efforts were also unsuccessful, but their failure pales compared to the millions lost in R&D and tens of millions in unsold inventories that the Coca-Cola Company had to deal with.
New Coke was discontinued in July 2002.
To me, it seems like management forgot what they were selling. Sure, a retail brand can expand its product catalog, but there are correct and incorrect ways of doing so.
For instance, a whiskey brand can start selling water. Taste and preferences are different for people who demand these. One will be requested during dinner, while the other will be requested after the meal. Distribution will be easier because they already have the agreements in place. One could even argue that whiskey and water can be complementary, where to avoid a hangover (dehydration) from an alcoholic drink, one may request bottled water.
However, what Coke did was replace its core product with an absurd substitute. A correct execution of this would be Diet Coke in 1982 or Coke Zero in 2005. These are branded as similar products that will adjust to your preferences (caloric intake, taste, etc.). What they are not is a new freaking Coke.
Musk-eteers
On the opposite side of the spectrum, we’ll take a peek at execution going exceptionally well with the help of none other than the Technoking himself.
In 2018, Tesla was afflicted by production problems and controversy. The two main issues the company faced were the battery pack bottlenecks in the Nevada factory and, our topic of discussion, the car-assembly processes in the Fremont factory.
In April 2018, the factory was producing 2,000 Model 3s per week. Elon Musk famously came out and promised to deliver 5,000 per week by the end of June. Tesla’s chief meme officer was so convinced that he preordered all materials (incurring high costs) and went on a full production reconstruction rampage.
Simultaneously Tesla was facing significant cash flow problems. Burn rates were high, cash was running out and investors were worried about the $12 bn debt repayment. Year-to-date, Tesla fell short of expectations with 100,000 sold and a net loss of $2.2 bn. To put things into perspective, in this same year competitor GM sold about 10 million cars and made 12bn profit.
The stock was a magnet for short sellers. The oversized promises led to a series of attacks and campaigns against the company and its leader. Some of the operations contained misinformation, but most campaigning was done in a very transparent and straightforward way. Short sellers had perfect information. A load of resources was spent in the form of coordinated drone flights over the production facility. There were also alleged disclosures of confidential material by employees. Regardless of how they got the data, what was clear was that they acted as if they had perfect insider information. A famous short-seller said:
“We think the deception is about to catch up to TSLA. Elon Musk’s erratic behavior suggests that he sees it the same way” - David Einhorn
To his point, Elon was tweeting a lot of stuff… partly concerned by the lack of support and partly outraged by some of the participant’s remarks. He was offered an unprecedented pay package that would lead to a $100 bn payout if the company achieved aggressive targets. To be precise, the max payout would be paid out if the market capitalization of Tesla got to $650 bn.
The predicament was simple. Money managers with infinite resources had an estimation of production capabilities with a margin of error of near 0. How could these speculators be wrong? In retrospect, they missed a crucial factor, a fanatical manager who would stop at nothing to achieve the impossible.
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Elon took his promise to heart with the edification of three key action pillars:
(24hr) Dedication
Deautomation
Devilishly fast adaption
The then-multimillionaire slept in the factory for weeks on end. He was a strong believer in learning through imitation and one of the key drivers for Tesla employees was the feeling that they were achieving the impossible. After extended periods this behavior would lead to burnout for many, but during times of need, it united designers, engineers, and blue-collar workers with the strength of 9.0 magnitude earthquake. An unstoppable force of nature.
Elon also famously admitted that he had fitted the factory with too many robots. Elon first went through the robot’s settings, changing parameters that were making them run at 20% capacity. Once these were done he started taking out machines and substituting them with humans who could carry out the processes at least an order of magnitude more efficiently. The robot removal process went along the lines of Elon grabbing a paint gun, and laughing along the production line spraying machines with orange Xs. The exhaustive process narrowed down to Musk asking the VP of engineering, Nick Kalayjian, the following question: “Go or stay?”. X for go. Hahahahaha X marks the spot.
On a brief side note, what with Musk’s obsession with X? (e.g. X.com sold to Paypal, Tesla models S3X, and now the Twitter rebranding).
The last major change was expanding the building with military tents. Musk needed more space to finish up the cars so he chose to install a few extra posts outside of the factory. He did so without the required permitting approvals, accepting the possibility of a fine but gaining much-needed efficiency. The facility was extended by 1,000 ft (300m) by 150 ft (5m) to accommodate a makeshift assembly adding to it a few “innovations” like opting for gravity instead of automation (conveyor belt) for moving car bodies.
The CEO’s overall leadership style led to questioning every requirement to achieve “impossible” results. He also applied rules from his previous ventures like the “idiot index”, which measures the cost of parts against the finished product. The key being most parts can be manufactured in-house at a fraction of the cost. A posterior display of this principle happened in 2021 when Tesla partnered with Italian company IDRA. The Bresciano company provided a casting machine that changed Tesla’s chassis assembling duty from a 300+ piece job to a single piece endeavor.
On one of his SpaceX emails, Elon would notably state the following
“Unless a sensor is absolutely needed to start an engine or safely stop an engine before it explodes, it must be deleted. Going forward, anyone who puts a sensor (or anything) on the engine that isn’t obviously critical will be asked to leave” - Elon Musk
Regulations and requirements for every part/process were questioned. Each had to be backed by a singular person who was accountable for the correctness of the decision. As you can imagine, hiring was fast and firing was even faster, but it led to great results. On all these changes, Elon is famous for underwriting that at least 10% of the processes that were ripped apart would later be reinstated. The underlying premise is that it takes destruction to progress.
Many employees criticized the entire process. They thought Elon was compromising safety and quality for efficiency, but in the end, the company was spitting out the 5,000 cars every week, just as Elon had promised.
The Principles of Execution
I learned a few lessons from both the New Coke and Fremont assembly stories. Firstly, you need to understand what you are selling regardless of whether it’s a product, service, idea, brand, or promise. Secondly, the limits of what’s possible are defined by fanatics and not by the numbers. Thirdly, listen to your critics and, more importantly, adapt. Lastly, incentives matter.
On this last point, coke had professional executives who were not owners vs Elon Musk who was awarded a $56 billion compensation package. Who do you think was more motivated?
Competence and integrity are the two things that matter with execution, and execution is everything.
Btw, I’m not saying that Elon Musk did not help the short sellers at times. His troll-like personal approach was distant from the relentless professional. For instance, he had a few infamous tweet exchanges that put him at the center of multiple controversies and, most notably, as a target for the SEC. After the entire production was done he went ahead with this one:
Source: @elonmusk on X.com
Even the best managers slip.
As a closing remark, I’ll leave you with the following summary by Walter Isaacson. He described Musk’s process as the algorithm and divided it up into the five commandments of efficiency:
Question every requirement. Each should come with the name of the person who made it. You should never accept that a requirement came from a department, such as from “the legal department” or “the safety department.” You need to know the name of the real person who made that requirement. Then you should question it, no matter how smart that person is. Requirements from smart people are the most dangerous, because people are less likely to question them. Always do so, even if the requirement came from me. Then make the requirements less dumb.
Delete any part or process you can. You may have to add them back later. In fact, if you do not end up adding back at least 10% of them, then you didn’t delete enough.
Simplify and optimize. This should come after step two. A common mistake is to simplify and optimize a part or a process that should not exist.
Accelerate cycle time. Every process can be speeded up. But only do this after you have followed the first three steps. In the Tesla factory, I mistakenly spent a lot of time accelerating processes that I later realized should have been deleted.
Automate. That comes last. The big mistake in Nevada and at Fremont was that I began by trying to automate every step. We should have waited until all the requirements had been questioned, parts and processes deleted, and the bugs were shaken out.
“The Algorithm” was sometimes accompanied by a few corollaries:
All technical managers must have hands-on experience. For example, managers of software teams must spend at least 20% of their time coding. Solar roof managers must spend time on the roofs doing installations. Otherwise, they are like a cavalry leader who can’t ride a horse or a general who can’t use a sword.
Comradery is dangerous. It makes it hard for people to challenge each other’s work. There is a tendency to not want to throw a colleague under the bus. That needs to be avoided.
It’s OK to be wrong. Just don’t be confident and wrong.
Never ask your troops to do something you’re not willing to do.
Whenever there are problems to solve, don’t just meet with your managers. Do a skip level, where you meet with the level right below your managers.
When hiring, look for people with the right attitude. Skills can be taught. Attitude changes require a brain transplant.
A maniacal sense of urgency is our operating principle.
The only rules are the ones dictated by the laws of physics. Everything else is a recommendation.
Source: Extract from Isaac Walterson’s Elon Musk (Chapter 46)
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Insightful!