Have you ever wondered what management top CEOs use to run their companies? Or do you need advice on how to implement them? What are the best business strategies?
In The Outsiders, William Thorndike outlines some of the management practices common amongst “outsider” CEOs: top CEOs that clearly succeeded far beyond their competitors. These CEOs all had unorthodox business strategies and practices, and their management practices led to growth and profits.
What Are the Best Business Strategies?
The Outsider CEOs ran their businesses in unorthodox ways. These CEOs focused on metrics beyond the usual profit and loss data, and often chose to conduct business strategies based on capital allocation. Beyond capital allocation, these top CEOs had several best business strategies in common that solidified their success.
Best Business Strategy #1: Decentralization
In their management of people and business units, outsider CEOs were relentlessly decentralized. They hired entrepreneurial operators for their business lines and left them alone. They kept a skeleton staff at headquarters, which reduced overhead and anxiety about office politics—the way to get ahead in the company was to outperform in your business unit.
- Teledyne employed over 40,000 people but had fewer than 50 at its headquarters.
- 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. That’s why this is one of the best business strategies.
Best Business Strategy #2: 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.
Best Business Strategy #3: 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.
Best Business Strategy #4: Focus on Shareholder Returns
Typical CEOs let their egos get involved in strategic decisions. They enjoy empire-building and 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, making it one of the best business strategies.
Best Business Strategy #5: 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.
Best Business Strategy #6: 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.
Best Business Strategy #7: 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. Strong partnership is one of the best business strategies.
- 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
Best Business Strategy #8: 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.
Best Business Strategy #9: Personal Negotiations
The outsider CEOs tended to negotiate directly instead of through a layer of advisers.
- 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.
Best Business Strategy #10: 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.
Business leaders often disagree on the best business strategies for businesses of all sizes. CEOs in top leadership positions can follow the management practices of the top Outsider CEOs for results.
———End of Preview———
Like what you just read? Read the rest of the world's best summary of William N. Thorndike, Jr's "The Outsiders" at Shortform.
Here's what you'll find in our full The Outsiders summary:
- What great CEOs like Warren Buffett do that average CEOs don't
- How to master the art of capital allocation
- How to be a great manager that your team is excited to work with