Scott Davis serves as Chairman and CEO of Melius Research, where he is also the lead research analyst covering the multi-industry sector. With 25 years of experience in industrials equity research, he has ranked in the top decile of Wall Street analysts, including being recognized as the number one multi-industry analyst by Institutional Investor six times. Davis also led elite research teams for more than two decades as Head of Global Industrials Research at both Morgan Stanley and Barclays.
Carter Copeland is the President of Melius Research, where he is also the lead research analyst covering the global aerospace and defense sector. He has 15 years of experience on Wall Street, is consistently ranked in Institutional Investor’s annual survey of top analysts, and was named the number one aerospace and defense analyst by Institutional Investor’s Alpha magazine. He previously served as Managing Director and senior analyst at Barclays and Lehman Brothers.
Rob Wertheimer is a founding partner of Melius Research, where he serves as the Director of Research and lead research analyst for the global machinery sector. He has two decades of equity research experience, and has been recognized as a top-three analyst by Institutional Investor. Prior to Melius, he led machinery coverage at Barclays, Vertical Research, and Morgan Stanley.
They are the co-authors of Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success, published by McGraw-Hill (July 2020).
* * *
Before discussing Lessons from the Titans, a few general questions. First, was there a turning point (if not an epiphany) years ago that set you on the career course you continue to follow? Please explain.
CC: When I was 8 years old, I had a particular curiosity about the stock tables in the newspaper and what they represented. I saw a commercial for the Wall Street Journal, specifically for a book titled “The Wall Street Journal’s Guide to Money and Investing,” and begged my mother to buy the book for me. When it came, I remember taking three days to read through it, likely only comprehending a small portion, but I was hooked. In the years that followed, during summer vacations I let CNBC run all day on the TV and I bought my first stocks at age 12.
SD: For my 16th birthday, my parents took me to NYC and my only requests were to visit the New York Stock Exchange (NYSE), have lunch in Chinatown, and dinner in Little Italy. For a boy from a small upstate New York factory town, the NYSE was the center of capitalism and New York City the center of a food offering I could only dream of. On that day I decided where I wanted to live and what I wanted to do with the rest of my life. I came to Wall Street after college and I never left.
RW: No specific turning point, but once I stumbled upon stock research in my career, I liked it a lot, and that has driven me for two decades to keep learning and getting better at it. Research involves reading, writing, learning a lot from contacts and companies, talking with clients and always being on your toes. It is a profession where you know you are going to be wrong half the time, or close to it, and that by itself forces you to be sharp. It can be hard to find a career that suits you; people think of the end market, or industry, but within any industry are positions that may fit better or worse than others. The lifelong learning of this one is a continual pleasure.
Who and/or what have greatest impact on the development of your thoughts about how to sustain organizational success? Please explain?
SD: Danaher in the Larry Culp as CEO era had the most influence on my thinking about process and repeatability of success. Larry was very shareholder friendly and took the time to teach. I admittedly didn’t know much when I first met him, and he likely knew that! … but over time, as I studied the foundation of the Danaher Business System – more explicitly its Lean manufacturing roots – I developed tremendous respect for it and believe it is one of the most compelling platforms for sustainable organizational success.
CC: Two people, my Wall Street mentor, Joe Campbell, and TransDigm CEO Nick Howley. Campbell was a real student of CEOs as leaders and why they made the decisions that they did, often questioning incentives/motives. I picked up a lot of the understanding of context of organizational success from him. Howley taught me value creation in its purest form with a real- life example in his company, which I’ve followed very closely since before it was listed as a publicly traded company.
From Michael Porter: “The essence of strategy is choosing what [begin italics] not [end italics] to do.”
SD: Lean principals focus employees on the work that needs to be done. Clear process informs strategy all the way into the C-level ranks. It’s cultural… the right culture may go down the wrong path for a short time but rarely for very long.
From Alvin Toffler: “The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.”
RW: This is something Stanley Black & Decker’s CEO spoke animatedly about. The pace of change has accelerated, the tools workers use change more rapidly, and companies need to get involved with keeping their workforce up to date, both through training and opportunity and by bringing in fresh ideas and talent.
Acceptance of diversity is a critical need for companies to embrace new skills and employees.
Here are a few of my favorite quotations to which I ask you to respond. First, from Lao-tse’s Tso Te Ching:
“Learn from the people
Plan with the people
Begin with what they have
Build on what they know
Of the best leaders
When the task is accomplished
The people will remark
We have done it ourselves.”
SD: Lean manufacturing empowers even the lowest and newest of employees. It creates an invaluable feedback loop. Managers who don’t listen well, usually don’t last long. The entire story of Danaher’s early success began with Lean, began with the people who knew a better process, and the continuous improvement culture that is encouraged. The people are why Danaher survived its rough early days and thrived in a new to America system.
From Maya Angelou: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
SD: The only business books that ever sell are the ones that inspire people to think, to change, to take action. In Lessons from the Titans we tried hard to inspire. In our day to day jobs at Melius Research we seek to inspire our clients. This is hard. But we talk about it all the time.
Finally, from Peter Drucker: “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”
RW: We didn’t cover every one of the great industrial business systems, but this quote reminds me of 80/20, a management system employed very successfully by Illinois Tool Works, Idex, and others. Any portfolio grows stale over time, and rather than trying to optimize around something that might not need to be made, 80/20 as a system is a forcing mechanism that makes organizations look at the unproductive part of the portfolio, and decide whether it needs to be done at all.
Case New Holland is doing this with tractors and wheel loaders right now…80% of the sales come from the top 20% of models, from the top few really. Is the tail end of 100 or so variants really needed? Is the company charging for it, or just producing something that a customer asked for years ago, without checking in on why? Ingersoll Rand CEO Vicente Reynal has talked about a similar idea in R&D spending. While not using 80/20 as the focusing mechanism, he does point out that matrixed organizations have lots of handoffs in responsibility and projects, and over time an R&D organization might be running 100 initiatives where they should be focused on a top few. More activity is not more success; often it is less. Voice of the customer and de-layering are some tools that can be used to address this as well.
In your opinion, what are the defining characteristics of a workplace culture within which personal growth and professional development are most likely to thrive?
SD: Culture is very specific to the needs of the organization overall. Good might be one thing at Google but completely different at Honeywell. Having said that, personal growth and development is a common characteristic of “good.” And this is hard to enforce in many organizations. We find the best organizations limit promotion of managers if they haven’t developed clear replacements for not only themselves but for levels below. It’s quite powerful to say, “your promotion will not be considered until you have identified, trained, and developed an equally effective replacement for yourself.” This ripples through an organization and promotes personal growth at all levels.
Looking ahead (let’s say) 3-5 years, what do you think will be the greatest challenge that CEOs will face? Any advice?
SD: Over the last 10 years, companies have had to manage through 3 major recessions including the current pandemic, instability in foreign policy, and an incredibly high pace of disruption. We have no idea what the next 5 years will bring and won’t even attempt to forecast. Having said that, leaders will need to remain flexible and agile while keeping focus on long-term priorities. Whatever happens in the future, there is one thing we are convinced of… those who don’t invest in their businesses will fail.
CC: The pendulum is likely to shift in many areas that are integral parts of everyone’s lives… social awareness and influence, societal change, etc. The list of “deliverables” necessary to be successful is growing in size and complexity.
RW: I think the public markets are showing the way, technology is adding immense value to the world. If you are not a technology company, how do you incorporate new skills into your workforce, your compensation systems, your management approach? How do you capture the value, and not let Amazon or someone similar take it all? How do you add tech to your installed base, and manage it better, and not let a nimbler startup take it all?
Now please shift your attention to Lessons from the Titans. For those who have not as yet read it, hopefully your responses to these questions will stimulate their interest and, better yet, encourage them to purchase a copy and read the book ASAP. First, when and why did you decide to write it?
For the past 20 years, the Industrial sector has all but been ignored entirely by the majority of people. Instead, today’s stories of success and failure are focused only on the newest Technology, Media, Internet companies. As long time followers of this forgotten, yet critical sector where many of history’s most important inventions, technologies and solutions have come from, we felt compelled to share some of the stories that we have had the privilege of following in our careers.
The stories in Lessons from the Titans are timeless. But if we didn’t tell them, perhaps they would never be told. For companies like Roper, this would be tragic. Brian Jellison’s (the longtime CEO) story is the playbook for creating value through compounding and needed to be told. Danaher also gets little press and has an amazing past of re-creation and successful pivots. Honeywell is better known but still inspiring as a true turnaround story. GE was once the largest company on earth but became a tragic failure driven by arrogance that deserves a deeper look. The ups/downs of Boeing are similarly fascinating as the company struggled to find a balance in risk management. And each of the remaining stories, Transdigm, United Technologies, Caterpillar, and Stanley Black & Decker, are worthy of study.
Were there any head-snapping revelations while writing it? Please explain.
SD: How much we thought we knew about all of the companies highlighted. How little we found out that we knew. It was humbling, the workload was immense in order to fill in all the blanks that we discovered as we went through the process. I think we came out on the other side though with a deeper knowledge of our companies that also provided us with unique insights that have been helpful in our day jobs as well.
CC: The unravelling of Boeing happened simultaneously with the writing of the book. In fact, the first drafts of Boeing were modeled after a research report that I wrote in December of 2018 titled “The Risk is Risk Itself,” where we pondered if Boeing had forgotten what had made them so successful in recent years. This was just after the first MAX crash, within months everything was changing. It revealed a lot of the lessons in real time.
RW: CEO transitions are difficult times; investors worry about big bath earnings charges, whether the new team is good enough, etc. For me the United Technologies story is very clarifying…is the playbook that is being run the right one for the new era? If so, then continuing to excel might be just fine. If not, how should we expect managers who rose up in the system, running the system, to break free of it? That’s the question for new CEOs to answer, that allows the market to interpret risk better.
To what extent (if any) does the book in final form differ significantly from what you originally envisioned?
CC: The book started as a more formal analysis of the importance of robust business systems and their value, and it grew to become more substantial stories of success and failure. Personalities shined through and frankly it became more enjoyable to write.
SD: We wanted the book to focus on the importance of process in an organization. Our research uncovered more art and nuance in the success stories than we had expected.
RW: There is no simple common answer, but there is a simple theme, that feedback loops, measurement, and a systematic approach to management and culture work extremely well over time.
After selecting his successor as CEO, Reggie Jones told Jack Welch to “blow up GE!” In your opinion, to what extent (if any) is Schumpeter’s concept of creative destruction relevant to what the leaders of a Dow Jones Industrial (DJI) now face? Please explain.
SD: Jack Welsh also told Jeff Immelt to “blow it up” when he took over GE. Great leaders understand the importance of reinvention. New CEO’s have a window of opportunity and it’s smart to take advantage of it. In a complex company like GE, reinvention at the extreme is required. In simpler organizations it may not be. We don’t think there is a mandate to reinvent as much as it being opportunistic. The timing must fit the organization. The opportunities to do so must be present.
Different lessons can be learned from different companies. In your opinion, what is the single most valuable lesson to be learned from each of these? First, Boeing:
CC: Arrogance is an evil that often comes along with progress and success. Minimizing its impact is crucial to sustaining success, vision, conviction, and assembling great teams.
SD: Business systems work. They create focus and ensure repeatability of success.
SD: Hold fixed costs flat even as revenues grow and the impact on profitability can be amazing.
SD: The power of compounding is real. Warren Buffett taught us that, few listened. Brian Jellison at Roper did.
You discuss a number of outstanding leaders who have had a major impact on the sustainable success of their companies. However different they may be in most respects, what do they share in common?
SD: Some level of humility. The great leaders are often just ok talkers but fantastic listeners. And they are quite aware of their weaknesses.
Of all the lessons to be learned in the book from mistakes, which do you consider to be of greatest value? Please explain.
RW: We are analysts for a living, and we forecast for a living. Perhaps the biggest learning is an old one: forecasting is hard, and management teams matter. We might say management systems and cultures matter. Predicting the future is tempting and intellectually engaging, but what seems to be more rewarding is having corrective feedback loops, adjusting in real time, and maintaining breadth and diversity.
SD: GE’s lack of investment in its core businesses, notably its factories, was a fatal mistake. And easily avoided.
Near the end of the book, this statement caught my eye: “A commonality of most of our case studies is a lack of real-time popular appeal.” How do you explain that?
SD: Industrials were the original tech sector, but most have forgotten that. The great American industrial complex has been lost in the imagination of the average investor, who remains intoxicated by the promise of technological disruption.
Here are several of my favorite quotations to which I ask you to respond:
From H.L. Mencken “To every complex problem there is a solution that is simple, neat, and wrong.”
CC: The world increasingly desires to avoid complex/context/nuance and demands elegant explanations to complex problems – rarely do these exist. Problems, be it in business or anything else, need to be granularized to find the most effective, systematic, repeatable solutions.
SD: Simplicity as a business model was one of the most impactful research pieces that we have written and many of our most successful companies asked me to speak to their boards or executives about the findings. The report was simple. The conclusions were simple. Employees want simple direction. Shareholders want a simple investment thesis. There are no complex problems, just folks who like to create complexity as a way of making their jobs seem more important. Simplicity of business models is the only business model that sustains over time.
Which question had you hoped to be asked during this interview – but weren’t – and what is your response to it?
SD: “If you want to get something done, give the job to someone who is always busy.” – Dave Cote, former CEO of Honeywell, circa 2005.
CC: “Of the chapters you didn’t personally write, which one struck you the most?” The story of Roper and Brian Jellison. It still amazes me in a world with so much knowledge and so much capital that the market (and not just the stock market) can be so inefficient and there are still brilliant people out there to exploit that inefficiency.
RW: “What was fun about writing the book?” The chance to engage with management teams on a totally different level in researching this book was a wonderful opportunity. We often talk with CEO and CFO level executives, but in several cases, we re-worked our chapters after having gone levels deeper into studying a topic.
* * *
Scott, Carter, and Rob cordially invite you to check out the resources at these websites:
Melius Research link