Book Notes: The 3G Way - An introduction to the management style of the trio who’s taken over some of the most important icons of American capitalism by Francisco S. Homem De Mello


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Book description (from Amazon)
The 3G Way is an introduction to the management style developed by three Brazilian entrepreneurs who took over some of the main icons of American capitalism: Anheuser Busch, Heinz and Burger King.
Amazon link
Goodreads link
https://www.goodreads.com/book/show/23594315-the-3g-way
Full notes link
Author(s)
Francisco S. Homem De Mello
Book in a tweet
The 3G Way is a mix of: people, big dream, culture, operations and picking the right industries.
Top takeaways
3G four investment pillars:
  1. Low-tech businesses: minimize the chance of being radically displaced by new alternatives to their products.
  2. Stable cash flow generation: make safer use of financial leverage, which in turn enhances investor returns.
  3. Strong brand: allow for the transfer of nonstrategic cost savings to strategic cost outspending.
  4. Poor (or improvable) management performance.
Who is the intended audience?
People who are interested in the 3G Way
Overall quality/satisfaction level (1-10, 10 being highest)
8
Difficulty/complexity level (1-10)
3
Top positive points
  1. Short
  2. Covers all areas of the 3G Way
  3. Curated content that are translated from the Portuguese
Top negative points
  1. None that I can think of

Key takeaways:
Section 1: People
  • A company’s biggest asset is good people working as a team, growing in proportion to their talent and being recognized for that. Employee compensation has to be aligned with shareholders’ interests. -The 3G Commandments
  • "Great people are what forms great companies." For a company to be great, the majority of its people have to be great: there is no other magical ingredient. It sounds incredibly simple. But it is not. In order to have great people, leaders must hire people who are as good as, or better than, themselves. This perpetuates the quality of the team.
  • According to Brito, great people like working for companies that have three key traits: they are meritocracies, where the best are recognized and the worst are driven out of the system; they are informal work environments, where hierarchy is not imposed, but earned, and where they can express their opinions openly without peer pressure and political concerns; and they are atmospheres in which people interact candidly with one another: there are no hidden agendas.
Chapter 1: Meritocracy
  • Meritocracy: a system in which the talented are chosen and moved ahead on the basis of their achievement. —Merriam-Webster Dictionary
  • What is merit? The person has to have the skills and work hard to apply them in a consistent manner.
    • Potential or talent: how far can this guy or girl go?
    • Hard work: how hard is he or she trying?
    • Achievement: is he or she achieving results?
    • Consistency: how consistent are his or her hard work and achievements? Is he or she full of ups and downs?
  • The main tool for a company to ensure meritocracy is the performance review.
    • First of all, the employee completes a document where he or she self-evaluates in relation to his or her goals and key attributes offered by the company.
    • After completing the self-evaluation, individuals (confidentially) evaluate their subordinates, their managers, and a subset of their peers.
    • These reviews are taken by managers to committees that have the responsibility of discussing individual performances, ranking individuals by peer group, and attributing theoretical shares of the unit’s bonus pool to every employee.
    • Finally, this forum is responsible for promotions and demotions (firings) .
    • After the business unit has assigned an employee’s rank, grade and compensation, decisions are submitted to the company’s management committee, which double-checks the decisions and builds its own company-wide performance curve.
  • Variable compensation via profit sharing
    • It is the main way the company signals to employees that their performance matters a lot, that it is going to be directly proportional to personal earnings, and that the system is enforced.
Chapter 2: Informality
  • An informal work environment fosters communication, meritocracy, hard work, and many other positive things. How do you create informality?
    • Open floor plans: Open setups enhance constant communication between different hierarchical levels
    • Casual wear: reinforces the value of open floor plans in that it also fosters equality between hierarchical levels. Bosses should not use their position or their clothing to impose respect; they should earn their team’s respect through example, performance, and argument.
    • Flat hierarchy: informal companies foster environments where argument, not hierarchy, drives decisions.
Chapter 3: Candor
  • "Everyone in the company can speak up as long as they are respectful and constructive," and "people know where they stand" in terms of their performance and the company’s plans for them.
Chapter 4: Growth
  • The most competitive companies in the world frequently boast about their "up or out" cultures: employees either move up, as a reward for high performance and a way to clear space for up-and-coming juniors, or leave the company altogether, spit out by the system. But in order for upward mobility to happen, the top positions of a company (which, because of the pyramid shape of organizations, are usually few) must be frequently recycled.
  • Since the 3G partners think their competitive advantage is management itself, they sought to chase growth by purchasing "mature businesses, with pulverized (and/or weak) ownership, strong, recognized brands and poor management," where "external and internal owners could make a difference,"
  • That is the upward mobility that enabled 3G to recognize armies of great talent with promotions, increased authority, and responsibility, without the much-feared turnover at the top of its ranks.
Chapter 5: People Processes
  • Trainee program: Goal: recruit at the base. How find talent that is fresh and can be molded into their way of doing business via a trainee program where a number of recently graduated young professionals are rotated among some of the company’s key functions, such as finance, marketing, sales, and operations.
  • Promotions: promotions only happen when the promoted individuals have already groomed successors to their jobs. Therefore, employees are required to plan their succession on a day-to-day basis by constantly coaching and training direct reports.
  • Performance reviews: should happen at least once a year. Two key topics are graded in these self-reviews: culture (the subject’s adherence to attributes important to the company), and the accomplishment of objective goals.
    • Employees fill out a self-review.
    • Employees fill 360-degree reviews for line manager, teammates, and reports.
    • Employees fill out voluntary reviews of anyone in the company.
    • Managers discuss grading and promotions.

Section 2: Dream
Chapter 6: A Big Dream
  • A big dream is a very long-term goal that is not present on people’s scorecards, but should be present in people’s minds at all times. Big dreams provide cohesive purpose and encourage thinking big and striving high.
  • A big dream enhances teamwork and reinforces a sense of purpose among employees that is superior to financial incentives.
  • It provides an always-present framework for decision-making when everything else fails.
Chapter 7: The Importance of Gaps
  • A gap is the difference between what is expected from executives (teams and companies) and their comfort zones.
  • The idea of having a big dream—or a Big Hairy Audacious Goal, in Jim Collins’s terminology—is to have a common objective that is attainable, but which takes the company to the next level of performance.
  • According to Jim Collins, companies "must be prepared to change everything about themselves, except their basic beliefs, as they move through corporate life."
  • The big dream is the long-term goal of the company, and is the core responsibility of strategic planning. It must be unfolded into short-term, specific goals for every employee of the company, against which they benchmark their performance and set their sights. Goals, like dreams, have to be big.
  • Everyone has to have goals that stretch what they already know and are capable of doing. The magic figure is that 80% of a goal has to be within the person’s current capabilities. The remaining 20% must be a stretch, forcing the employee to learn a bit more, work a bit more, and achieve more than his or her status quo.

Section 3: Culture
Chapter 8: Ownership Mentality
  • Everything has to have an owner with authority and accountability. Debate is good, but in the end someone has to decide. -The 3G Commandments
  • Constant discontent, a sense of urgency, and zero complacency help ensure a sustainable competitive advantage. -The 3G Commandments
  • Thinking like an owner is one of the key attributes of the great people the 3G are looking for. Ownership mentality boils down to: Commitment, long-term thinking, hands-on attitude
    • Commitment/Long-term thinking can be enforced by issuing stock options that have very strict monetization guidelines.
    • Companies are built on the sum of the collective actions of all employees, so the 3G likes people who tackle problems with their bare hands and look for ways to solve them. To enforce this kind of hands-on attitude, the company has to give authority and autonomy to employees to chase solutions to their problems—obviously, within parameters related to their functions and seniority levels—and hold them accountable for these decisions, ensuring that the company learns with the outcomes.
Chapter 9: Client Focus
  • Client focus goes beyond the commonplace concept of products and services that meet customers’ expectations.
  • Clients also have to feel that the company gives back to what’s important to them.
Chapter 10: Leadership
  • Hiring people that are better than yourself, training them, challenging them, and retaining them is the main attribution of a manager. -The 3G Commandments
  • Leading through example is vital, both on the heroic gestures and on the simple actions of the company’s day-to-day. -The 3G Commandments
  • Leaders must "reach their goals with their teams and in the right way."
  • Another important 3G practice—and a natural result of having an internal talent factory—is always promoting in-house talent to management positions. This is what Jim Collins calls "homegrown management," and it ensures that the company’s leaders are ambassadors who will perpetuate the company’s culture.

Section 4: Operations
Chapter 11: Vicente Falconi and the Systematization of the 3G Way
  • Innovations that add value are useful, but copying practices that already work is usually easier. -The 3G Commandments
  • Some tools they use:
    • Kaizen: The foundation of TPS (and Falconi’s) method is the concept of continuous improvement (English for kaizen), in which the whole company is constantly committed to improving itself. The company continually aims to achieve perfection (and the difference is what we called gap). The aim of perfection must be rooted in all organizational levels down to the lowest machine operators, who are empowered and recognized for suggesting, testing, and executing process improvements in their day-to-day activities. This empowerment leads to a humanization of the workplace, lower employee turnover levels, and higher productivity.
    • PDCA (Plan, Do, Check, Act): This is an iterative methodology that embeds scientific reasoning into all aspects of the organization. Planning begins with formulating a hypothesis. Then, the work is performed, and the results are checked against the hypothesis. Depending on the results, a new standard is set up for the process, or a new hypothesis is formulated. Regardless, the cycle feeds itself in a constant learning process called continuous improvement.
Chapter 12: Costs and Budgeting
  • Being paranoid about costs and expenses—the only variables under our control—helps ensure long-term survival. -The 3G Commandments
  • Distinction between strategic and nonstrategic costs.
    • Strategic costs are those which are necessary to the company in the sense that they "clearly bring in business and improve the bottom line." Example: sales, advertising, R&D
    • Nonstrategic costs, which must be cut to the bone. According to the adage, costs are like nails: you have to cut them from time to time. These costs are necessary to run your business, but don’t contribute to the top line or expansion of the bottom line.
  • In order to maximize their efficiency, companies cut nonstrategic costs to save money and be able to outspend competitors on strategic costs—in both good times and bad.
  • The most comprehensive tool used by 3G companies to control costs is the zero-base budgeting process. A zero-base budget is different. Managers need to justify their plans from the ground up, with no reference whatsoever to the previous period’s benchmarks. Assumptions regarding what has worked or happened in the past not only don’t serve as a benchmark for future budgets, but lines have to be justified from scratch.

Section 5: The top-down view
Chapter 13: Picking Industries
  • "We like dumb businesses, with no glamour or sophistication" and "strong brands and competitive advantages"
  • Great brands are important because they take a long time and a lot of money to build. These long-standing brands are frequently found in the hands of old-line companies, which may be suffering complacency and lack of focus on shareholder value, a diffuse investor base and attractive prices, and/or being valued at depleted earnings multiples without consideration to "brand equity."
  • Simplicity is another essential trait of the companies 3G runs. Simple, old-line industries also minimize risks outside of management control.
  • Lastly, traditional businesses are also where technological innovations (radical innovation, as opposed to disruptive) are least probable.

3G Commandments
  1. A big and challenging dream makes everyone row in the same direction.
  2. A company’s biggest asset is good people working as a team, growing in proportion to their talent, and being recognized for that. Employee compensation has to be aligned with shareholders’ interests.
  3. Profits are what attracts investors, people, and opportunities, and keep the wheel spinning.
  4. Focus is of the essence. It’s impossible to be excellent in everything, so concentrate on the few things that really matter.
  5. Everything has to have an owner with authority and accountability. Debate is good, but in the end someone has to decide.
  6. Common sense is as good as fancy concepts. Simple is better than complicated.
  7. Transparency and information flow ease decision-making and minimize conflicts.
  8. Hiring people that are better than yourself, training them, challenging them, and retaining them is the main attribution of a manager.
  9. Leading through example is vital, in both heroic gestures and the simple actions of the company’s day-to-day.
  10. Luck is always a function of sweat. Work hard, but with joy.
  11. Things happen in the operation and in the market. You have to pound the pavement.
  12. Being paranoid about costs and expenses—the only variables under our control—helps ensure long-term survival.
  13. Constant discontent, a sense of urgency, and zero complacency helps ensure a sustainable competitive advantage.
  14. Innovations that add value are useful, but copying practices that already work is usually easier.
  15. Corporate and personal discretion are helpful. Showing off is only allowed when done with concrete objectives.
  16. Constant training and improvement have to be ongoing efforts and should permeate our routine.
  17. Name, reputation, and brands are precious assets that take decades to build and days to lose.
  18. Trickery and cheating can rot the company from the inside. Ethics pay off on the long run.