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John Emerson
John Emerson
Articles (106) 

Philip Fisher's Investment Series: Practical applications of People Factors and Kirby Vacuums

May 26, 2011
"Success is not counted by how high you have climbed but by how many people you brought with you." Wil Rose

I used to own and operate a tiny home improvement business, a profession that requires one to spend countless hours sitting in sales booths which are set up to acquire leads at various home shows and fairs.

A number of years ago, I attended a very small spring home show which drew a modest crowd and supplied me with only a few leads. However, it provided me with a learning experience which I will never forget. Specifically, it taught me the power of a great sales pitch and how certain properly trained individuals can turn an ordinary business into an extraordinary one, a perfect example of the "people factor" as defined by Philip Fisher.

My booth sat adjacent to one which was selling overpriced cookware; promising buyers a lifetime of tasty cuisine, healthy living, and money-savings, the last cookware set that one will ever need to purchase. Such booths are common at home shows and while they frequently draw a good audience, which is facilitated by free samples at the end of the demo, they generally record relatively few sales. This one was completely different, the demonstration was shorter, the crowd was standing rather than sitting, and the salesman required an assistant to help with sales following the demonstration.



To my astonishment, not only was the salesman almost never "skunked" after giving his demo, he was recording sales to at least one third of his audience. Literally hundreds of sets of cookware went out the door during that small show. The pitch was perfectly written and flawlessly executed by the seller, a masterpiece of design and execution, delivered by a tall slender man donned in an immaculate chef's uniform.

When the master pitchman left for lunch or to take a short break he was replaced by his assistant. The assistant stumbled through exactly the same presentation but the poor man "could not have sold hack-saw blades at Sing Sing." His only hope was a lay-down (a pushover who buys anything from anybody).

The only real difference between the two individuals was their appearance and the delivery of the sales pitch but those two distinctions made all the difference. One pitchman was a viewed as a creditable professional, selling a product that the audience perceived to be of high value, while the helper offered exactly the opposite perception to the crowd.

Philip Fisher recognized the value of the people in the success of an ongoing business. If the business was to prosper and continue to grow in the long term it must adhere to certain principles which he referred to as "people factors.” The requirements included far more than merely a top level management which exuded an entrepreneurial vigor, for a business to grow into a titan, that vigor needed to permeate throughout the entire organization. Fisher felt it was a necessary condition that all employees be treated with dignity at all levels of the business, including the lower level blue collar workers who needed to feel that the company was an excellent place to work.

He also believed that the organization must be dynamic rather than static in its approach to conducting business, regularly reviewing it policies and being willing to listen to the grievances of all employees. He looked for businesses with unique and innovative ways of conducting operations.

Today's discussion will focus specifically on the sales organization, a unique business model know as direct sales, and how they relate to Fisher's concept of people factors.



The Sales Organization and Direct Sales

" A company might be an extremely efficient manufacturer or an inventor might have a product with breathtaking possibilities, but this was never enough for a healthy business. Unless that business contained people capable of convincing others as to the worth of their product, such a business would never really control its own destiny." Philip Fisher

Fortunately for the aforementioned cookware business they had at least one salesman who was capable of convincing the audience of the value of the frying pans. The business employed direct selling which likely reduced its G&A and advertising costs to the bare bones, but what if the company had only one master salesman and he decided to part ways with the company?

Any business which is relies upon a few key individuals for its sales is putting itself in extreme peril. "Crackjack" sales personal are difficult to retain for a number of reasons; when the "buzz" of the high commissions wear thin, frequently so does their motivation to sell. Essential sales personal can become "burned out," bored or develop an attitude that is not conducive to the long-term profitability of the business.

To ensure that a continual stream of competent salesman are freely available to sell the products of the company, a direct sales company must possess an extensive sales training organization which continually churns out top-flight sales personal.



Direct sales involves bypassing all typical sales channels and selling ones products or services directly to a consumer, frequently in their own home.

Certain products are well suited to direct sales; products which are not perceived to be commodity type items and/or require a certain degree of training to operate are natural choices. Items which can be demonstrated and perceived to be high quality in nature are excellent candidates for direct sales. The perceived value of the product is enhanced if the product has an excellent reputation as a quality brand, that makes the job of the salesperson much easier. Kirby vacuum cleaners turned out to be an ideal product for this type of business model.

Buffett, Kirby Vacuum Cleaners, and the Scott Fetzer Company

Warren Buffett purchased the Scott Fetzer Company in 1986, at the time the company held 17 different businesses but Kirby and World Book Encyclopedia accounted for over half the company sales. Both businesses utilized a direct sales approach in marketing their products. Scott Fetzer had a long history of manufacturing vacuum cleaners having begun that line in the1920s. They typically sold the machines to individual distributors who trained and hired their own sales staff.

Many of the Kirby distributors employed a unique sales strategy which undercut the sales personal and effectively destroyed the entrepreneurial vigor and the spirit of its sales force; a direct violation of Philip Fisher's principles. The practice involved sending the sales force into the house in an attempt to sell the vacuum cleaners at an inflated price. If the salesman was unsuccessful, the company called back the customer and undercut the salesman's price; the salesman received no commission on call-back sales. Such practices not only destroy the morale of a sales force, they also make it virtually impossible to sell a machine in a home after a certain period of time, as potential customers steadily become cognisant of the practice.

Kirby management headed by Ralph E. Schey who became the CEO in 1974, put an end to that practice in 1980 when they rewrote all the dealership agreements, requiring all vacuums to be sold within the home. While the move enraged many of the dealers and damaged sales in the short term, this new salesman-friendly practice resulted in a significant increase in unit sales a few years later. In a classic Fisher-type move the company focused on extensive sales training and placed their top sales personal as new dealers. In essence, they were now focusing on the company as a sales organization rather than a manufacturer, creating a new stream of highly-train super-sales personal who possessed high entrepreneurial spirit, and a new found respect for the company. The sales force now began to view Kirby as an excellent place to work.



Nothing invigorates sales better than a high motivated and expertly trained sales force which is highly compensated in the form of fat commission checks. Kirby had created a new sales and business model which would be copied by home improvement companies for decades to come. Savvy investors such as Warren Buffett began to take note and Berkshire eventually won the right to purchase Scott Fetzer in 1986.

Kirby management had enacted point number of eight of Fisher's summary of "people factors" virtually word for word: "Management must be willing to submit to the disciplines required of sound growth. Growth requires some sacrifice of current profits to lay the foundation for worthwhile future improvement.” Further, Kirby management had embraced the Fisher notions that: "The entrepreneurial spirit must permeate the organization." "Every accepted way of doing things must be reexamined periodically, and new better ways sought." And, "People must feel they can express grievances without fear and with reasonable expectation of appropriate attention and action.”

Here is a summary of the history of the Scott Fetzer company. http://www.fundinguniverse.com/company-histories/Scott-Fetzer-Company-Company-History.html



Conclusion

One of the lessons of the above narrative is that investors must understand the business model of a perceived growth investment intimately before committing capital. In the case of Scott Fetzer, Buffett must of fully appreciated the efficient direct sales models of World Book and Kirby and their positive effect on the return on equity for the business as well as the sustainability of the business model. Merely assuming that a business will continue to yield large returns on equity because they have in the past is an erroneous assumption. Analyzing such a company in Fisher's exhaustive terms is essential if one wishes to be successful as a buy and hold investor.

Ironically, World Book which represented the largest part of the companies' sales, was soon forced to shift its business model drastically as the increasing popularity of the Internet would soon take a large bite out printed encyclopedia sales. To the credit of Scott Fetzer's management, they adapted again and efficiently changed their business model for encyclopedia sales just as they had done with Kirby a decade before. It seems that the management of Scott Fetzer had taken all of Fisher's lessons to heart. The company continues to generate significant profits for Berkshire and remains one the great American business success stories.

About the author:

John Emerson
I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

Rating: 3.6/5 (12 votes)

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