🎧 01:28:06 - 01:40:01 (11:54)

David Rosenthal talking about the Mars Five Principles, starting with Quality.

David Rosenthal: And this here in Slough in England is really where the principles, literally the principles, Mars calls them the five principles of the company today. But just the culture of Mars gets set. Oh yeah, you found the original ones, right? Yes. So if you talk to anybody who works or worked at Mars, they will quote the principles at you religiously. It's

Ben Gilbert: like the Amazon leadership principles. Totally.

David Rosenthal: It's like, oh, that's principle number five, freedom. Or, oh, that's principle three, mutuality, et cetera, et cetera. I think how these started, maybe even back in England, Forrest started a document called The Mars Way where he was like codifying all this. And I think after he retired and the business passed to his sons and the next generation, I think that's when they sort of adapted that document into the Mars principles. But it's really interesting. It's worth going through them all. So number one, the first principle is quality. Forrest was completely obsessed with quality on every dimension. You know, the ingredients that are going into the candy bars, the candy bars themselves, the wrappers, the shelf placement displays. He was way ahead of the curve on all this stuff. He knew the candy was an impulse purchase and like the way the product actually looks, how it's displayed, what the packaging is, what the placement is in the shelf in the retailer. How consistent it is. How consistent it is. These were like big, big drivers of purchases. And

Ben Gilbert: there's, of course, the famous story about he, you know, finds a defect in a wrapper and then he calls his executives into a room and he hurls it at the glass and says, you know, yeah, it's his temper and his obsession with quality all combined into one.

David Rosenthal: Yeah, I'm laughing. You say famous story. I'm like, which one? I think there are a million of these stories. But even here in the 30s in the UK, he basically implements the Toyota production system in the Mars factory. This is long before the Toyota production system exists. Any employee in the factory could stop the line for any reason at any time. If there's anything that's out of place, anything that could impact quality, you know, anything is dirty, anything is not perfect, every single worker in the entire facility can stop the whole line and

Ben Gilbert: he also if something had a defect he would throw out the whole batch right yes as like a let's scorch the earth around the defect yep

David Rosenthal: i'm sure he wasn't thinking about it in these terms but he really wants to instill this as a cultural norm in the company so anytime if there was a mistake that forrest then found that hadn't been caught on the line, he would just berate whoever should have stopped the line and be like, you needed to have stopped and fixed this. You cannot let this get into the finished product. The other aspect of the quality principle, though, much like Ikea, it's not just quality for quality's sake. It's quality for money. It's quality at a given price, value for money. You know, we've already been talking about how this is like the ultimate scale business and scale economies business in candies. Forrest knows that if you can offer a higher quality for a given price than your competitors, you're just going to build a lead and compound forever and ever and ever in this business. So quality principle number one, most important. Two, this is awesome. Responsibility is the second principle. And you might be like, oh, responsibility, like, okay, whatever. For all of his crazy intensity, Forrest was not a micromanager. He wanted to like know how to do everything in the business, including making chocolate. But he knew that if he was going to scale, like he wants to be DuPont here, you know, he wants to be General Motors. He needs the best people working the hardest in charge of everything. Like he can't be around telling them how to do their jobs. So the question then is when you're starting up in a new country, tiny factory, how do you get the best people? How do you incentivize them? He's like, well, I'll just pay them. I'll just pay them a lot. So for years and years, the standard within Mars was that you should make three to four times the normal salary for your job. That's

Ben Gilbert: so insane. And I think that's come

David Rosenthal: down over the years. It's now like 2x, but it's still true. I

Ben Gilbert: even saw numbers that say they try to pay their employees a minimum of 10% higher than other companies in the industry.

David Rosenthal: Interesting. But definitely in those early days, it's like, no, we're going to pay you three or four times the amount that you would make elsewhere. I

Ben Gilbert: also know they try to tie pay aggressively to the performance of the company. So high bonuses rather than high salaries, which also means in tough years, they would just cut. It's not quite having equity in the company, but it's much more akin to being a partner in a business than it is to being an employee. Exactly.

David Rosenthal: Okay. So, you know, I said salaries. It's not salaries, it's bonuses. This is what your take-home pay should be. Everyone's salary in the company, again, starting in the earliest days there in Slough, tied to overall company performance and hitting overall company metrics. There is no, at least in the early days, individual element to your bonus, except for one thing. Do you know what the one thing is? The one individual performance metric? Did you show up on time? You get a 10% bonus if you are never late in the entire year. And it's everybody from Forrest himself on down. Everybody has a time card. You punch the time card when you go in. I'm

Ben Gilbert: pretty sure this is still true that the CEO of Mars today has a time card and they punch in and out every day. And a 10% bonus is contingent on not being late. So

David Rosenthal: even more, I don't think this terminology starts until they get back to America, but everybody in the company is an associate. Obviously, people are in charge of different things and have different external titles. But internally, everybody is an associate. There are no perks for anyone. So there are no executive parking spaces. There's no executive offices. Boy,

Ben Gilbert: Forrest really wants to rebel against his father. There are

David Rosenthal: no offices, period, to this day at Mars. Is this the first open office company? So we said on the meta episode that we thought Facebook was the first open office. No, Mars was the first open office starting in the 1930s. So every building, entirely open floor plan. You get a black metal desk. Get this. This is how crazy it is. Again, even still to this day, there are just a small number of conference rooms in any given Mars office. Oh,

Ben Gilbert: yeah, because they hate presentations,

David Rosenthal: right? They hate presentations. They hate meetings. But like sometimes you have to have a meeting. The conference rooms do not have doors. There is no privacy allowed anywhere, which is the craziest thing, given that the company itself externally is incredibly private. no, internally, the culture is everything is open. Everyone is equal. There are no perks here whatsoever. And Forrest is doing this in the 30s. This is crazy. I

Ben Gilbert: was going to save this for later, but this is a fun time. I Google

David Rosenthal: mapped

Ben Gilbert: the recent factory that they built to make M&Ms. And it's like a corporate headquarters and manufacturing facility. And there's a bunch of pictures on Google Maps of the exterior and interior, just like you would expect from anything that's on Google Maps. And it's pretty dated. It's just a very boring, drop-sealing, fluorescent-lit, cheap office. And the real estate that it's on is near an Amazon fulfillment center. I mean, it's kind of off the highway in the middle of nowhere, inexpensive. But there are two big M&Ms waving at you out of the parking lot.

David Rosenthal: I think that's the standard decoration. Yeah, you can tell how pissed Forrest wasn't his dad about the Chicago factory specifically, but also just like how deep-seated this is. Yeah. Okay, so then principle number three is mutuality. So Forrest is like hyper competitive, but he also knows that this is an ecosystem that he's in and the retailers are super important. The suppliers are super important. Distributors are critical. Everyone

Ben Gilbert: needs to make money and everyone needs to be incentivized for the long term. And

David Rosenthal: as long as his partners are making money and making more money selling Mars products or supplying Mars than they are any of Mars's competitors, that's going to be a compounding advantage. Yep. So that's three. Four is efficiency. Okay, this is a really, really interesting one. Probably back to his whole mindset and time at Yale and studying DuPont. Forrest is crazy about studying business and management literature. Like, I don't think anybody was reading business management literature in the 1930s and 1940s. It's

Ben Gilbert: a good point. It's true both for management and for investing. If you think about the way that people were even investing back then, it was like stocks were gambles. You know, Buffett was one of the first people to believe the intelligent investor, oh, you can tell something about the quality of revenue and this intrinsic way to build to a value of a business. The investment mindset of quality and a discounted cash flow and the management mindset of there's a science to building an organization, these were pretty new ideas. Totally.

David Rosenthal: I mean, Buffett had to go study with Ben Graham to learn this stuff. Yep. So while he's in England, Forrest reads a textbook called Higher Control in Management by T.G. Rose. And the subtitle of this book is A Method of Producing the Facts and Figures of Industrial and Commercial Undertakings So that they can be used for the purpose of management. It's

Ben Gilbert: quite academic.

David Rosenthal: Yeah, business academia had not yet learned marketing about itself. So in the book, though, Rose argues that the primary focus of management should not be on revenue or profit or growth, but instead on a metric called return on total assets or ROTA. And again, if you talk to anybody in Mars today, ROTA, ROTA, ROTA, ROTA, everything is about ROTA. It's

Ben Gilbert: funny. I came across this researching. I had to look up the term. We've never studied it on an episode before. All

David Rosenthal: right. So what is return on total assets? It is net profit dollars divided by the total dollar value of the company's fixed assets.

Ben Gilbert: So it's effectively an efficiency metric of your profits divided by your fixed cost of your assets.

David Rosenthal: Yep. Now, the textbook way to do it is by the cost of your assets as measured on your balance sheet. The way Forrest does it, though, and the way the company still does it today is, no, that's insane. Like, whatever this is valued at on our balance sheet, whatever it cost us to build this factory 10 years ago, doesn't matter. What matters is, what is the value of it today? Oh, interesting. So they are constantly revaluing what the replacement cost is of all their fixed assets, all their factories, et cetera. Like, okay, if this factory disappeared. What's

Ben Gilbert: the market value if we were to sell this thing and get rid of it?

David Rosenthal: Exactly. so that way they're always making sure that they're like, hey, we're really efficiently using our assets. We're not just artificially being efficient based on what we paid for them 10, 20 years ago. It's

Ben Gilbert: fascinating. So for you and I, it'd be like the profit dollars of the business from sponsorship divided by the cost of our microphones and the very modest, tangible assets that we have in this business. Actually,

David Rosenthal: I think if we were to use this, we would divide our profit dollars by the value of the acquired brand, and we would value the acquired brand sort of as highly as

Ben Gilbert: possible. So you're basically wanting to say, per unit of fixed investment I've made, how much yield in terms of profit am I getting out of the fixed investment I've made?

David Rosenthal: Exactly.

🎧 02:33:18 - 02:33:29 (00:11)

David Rosenthal emphasizing the importance of vertical integration.

David Rosenthal: And if you really are serious about wanting to produce the highest quality products at a given price, you kind of need to control all the means of production yourself.

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