Charlie Munger once asked me, how can someone give away 50 % of profits and make billions more than if he'd kept it all?
Before I could answer, he told me about Les Schwab, a tire shop owner who understood incentives better than almost anyone.
What Schwab discovered will change how you think about business.
Welcome to The Knowledge Project.
I'm your host, Shane Parrish.
In a world where knowledge is power, this podcast is your toolkit for mastering the best of what other people have already figured out.
This episode is for educational and information purposes only.
What Les Schwab discovered was deceptively simple.
Most businesses treat employees like expenses to minimize.
He treated them like partners to enrich. The math was shocking.
He gave away half his profits and built a multi -billion dollar empire.
Here's how it worked.
When people working in the tire centers made a share of the profits, they don't just change tires, they build relationships with customers.
When managers own real equity with skin in the game, they run stores like their family's future depends on it.
Because it does. Les documented his business lessons in his autobiography, Pride in Performance.
Keep it going. He rooted himself on a 40 -year -old typewriter because he wanted every entrepreneur to understand exactly how he did it.
No ghostwriter, no corporate polish, just the raw blueprint for turning a leaky shed into an empire.
Les proved that the most ruthless business strategy is radical generosity.
He turned employee loyalty into a competitive moat so deep that Walmart couldn't cross it.
This is his story. Before Les Schwab was the name on over 400 tire stores across the American Northwest, it was the name of a kid born into nothing.
Bend, Oregon, 1917.
His parents were desperate homesteaders fighting the high desert for a living.
His mother, Alice, taught him everything that mattered.
Then pneumonia killed her when Les was 15.
That left him with his father, Bishop.
A study in contradiction.
Gentle and hardworking when sober, a maniac when drunk.
Les spent his teenage years terrified that his father would show up at school drunk and humiliate him.
Poor but proud. That's how Les described himself.
That pride was armor.
A year after his mother died, they found his father's body outside of a moonshine joint.
Les was 16. He was now an orphan.
His relatives offered to take him in, but he said no. Instead, he rented a room in a boarding house for $15 a month, decided he was an adult.
The world had given him a hard education and an allergy to alcohol.
Most kids in his position would have taken the help, moved in with family, and stayed safe.
Les chose the harder path.
Well, it wasn't so much choosing the harder path consciously.
He just didn't feel he could rely on anyone else.
He wanted everything on himself.
I understand that. Choosing pride over comfort and independence over security shows in nearly everything he went about doing.
The lesson here is a bit counterintuitive.
The worst things that happen to you can become an advantage, but only if you refuse to let them define you as a victim.
Les could have blamed his circumstances.
Instead, he used them as fuel.
Les got his first paper route before his parents died.
However, this came with two problems. One, he couldn't ride a bike.
Two, he couldn't afford a bike.
So he ran every day for two months, running his entire paper route on foot to earn money for a used bicycle.
He had to do the job to afford the tool required to do the job.
One morning he couldn't find a customer's address.
Ten miles he ran on an empty stomach. He ended up collapsing in the street.
Les needed to work.
He had no choice. He had bills to pay and he needed a bike.
Nobody was going to hand him anything.
At the same time, he was also washing dishes at a restaurant, earning $3 a week plus meals.
Here's his schedule as a 16 -year -old orphan.
friend. Paper route in the morning, school all day, restaurant at night.
Then he started doing the math.
Selling newspaper subscriptions paid 50 cents each. He could make more in a few hours selling than a whole week washing dishes, so he quit the restaurant.
When he finally saved enough for a bike, he got a new route under Mr. Goldenberg.
Goldenberg was important because he taught him how to sell, not just deliver newspapers, but actually sell them, knock on doors, talk to people, persuade them.
Les doubled the route's numbers in a few weeks.
Goldenberg saw a potential, So he had an idea.
Start a Sunday route in farm country.
It's an underserved market, but a logistical nightmare.
Les would need a car.
During the depression, most 16 -year -olds saved for a baseball glove.
Les was saving for a 1926 Chevrolet with a box on the back.
$75 cash. Sundays, he'd drive the rural roads.
On weekdays, he was back to the bicycle because gas costs too much. He liked the car, but he liked money even more.
He signed up 80 % of farms in rural Bend.
That's when Les learned the principle that would define his business philosophy.
People don't buy your product.
They buy your service, your reliability.
They buy you. By his senior year, Les controlled all nine Oregon Journal routes in Bend.
He was making $200 a month during the Great Depression, more than his high school principal.
Out of 500 students, students, only Les drove a new car, a 1934 Chevrolet bought with cash.
His classmates thought it was showing off, but they missed the point.
The car wasn't about status, it was proof, proof that hard work plus smart thinking beats any disadvantage.
What stands out to me here is the compound effect of small advantages.
Les turned one paper route into nine through relentless execution.
A lot of people treat smaller jobs as stepping stones to bigger ones.
They're never fully present in what they're doing, never giving it their all.
Les gave 100 % of his effort to the work right in front of him all the time.
And that always led to more work and more opportunity.
As Charlie Munger said, the best way to get more work is to do the work right in front of you and do it well.
Les met Dorothy Harlan when they were both teenagers.
They married at 18 and he bought them a small house.
They barely had time to unpack.
His reputation as a newspaper paper salesman had spread beyond bend.
A paper in Eugene, Oregon offered him a district manager job.
The newlyweds packed up and hit the road, living out of motels while Les traveled his territory selling subscriptions.
They called him a circulation man, someone with an almost supernatural ability to boost subscription rates wherever he went.
Les negotiated a new job with better pay, but he had one question that revealed how he thought about the world.
Who's my boss? The owner said he'd be Les's boss.
Simple enough. But within weeks, Les had three different managers giving him contradictory orders.
So he went straight back to the owner and laid out the problem.
The owner immediately straightened out the other two managers.
The lesson here is if you don't know who you're accountable to, you're accountable to everyone, which is the same thing as being accountable to no one.
Clear lines of authority offer clarity and purpose.
bus. He was young and talented and perhaps even a bit cocky, but he had pulled himself up from nothing, outworked almost everyone else, and learned through trial by fire.
When Les took over the paperboy program, he discovered it was hemorrhaging carriers.
20 % of carriers quit every month, so he got creative.
First, he obtained lists of every 7th and 8th grader in local schools and recruited them personally.
Then he did something radical for the era.
He hired girls. They turned out to be more reliable than boys.
But his real genius was the honor carrier program.
Each month, one carrier won based on sales, service, and bookkeeping.
The prize? $25 and their picture in the paper.
This was Les' first real experiment with incentive design, and he was learning how much they matter.
One of my favorite Mungerisms is show me the incentive and I'll show you the outcome.
If you reward the behavior you want, you'll get more of it.
The lesson here connects directly to building any organization.
Les understood that unclear reporting structures create chaos.
Everyone thinks they're in charge, so no one really is.
He also grasps something most managers miss.
Recognition often matters more than money.
That honor carrier program cost $25 a month but transformed retention.
These weren't just newspaper tactics.
They were blueprints for building a multi -billion dollar business.
At 33, Les Schwab was consumed by a single ambition, to own his own business, to be in control of his destiny.
The newspaper world suddenly felt too small.
He joined every business club he could find, the Jaycees, Toastmasters, Chamber of Commerce, anything that smelled like business.
He was terrified of getting old, of falling into a rut that he'd never escape.
And then he saw it, a tire shop for sale in Prineville, Oregon.
again. Les knew nothing about tires, but he did know sales and he figured that was what mattered.
His brother -in -law offered to partner with him, then got cold feet and backed out.
Racked with guilt, he came back and offered to fund Les, but no partnership.
Les would be on his own.
The shop was an okay rubber welder's franchise.
New tires, retreads, flat repairs, hard, dirty manual work.
In order to purchase it, he'd need to go all in on himself and sell his house and and borrow against his life insurance, and borrow from his brother -in -law.
Les scraped together money from every corner of his life.
Everything he'd built, everything he'd saved, it went into this one bag.
On January 1st, 1952, at 34 years old, Les Schwab walked into his tire shop as the new owner.
It was a leaky 1 ,400 square foot shed with no running water and no indoor plumbing.
It had one employee.
The annual sales for the year before were $32 ,000.
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While Les knew nothing about tires, he knew a lot about selling and being able to outwork other people.
His first taste of real business, one he owned and controlled, was about to begin.
On his first day, a customer walked in wanting two six -ply tires mounted.
counted. Les got right to work.
There was just one problem.
He had no idea what he was doing.
He'd always taken flats to a service station, and now he was the service station.
Using hand tools on a cold concrete floor, he made a complete mess of it until his lone employee arrived and saved him.
That first month lested $2 ,800 in sales, about what the previous owner had done.
But by By June, something had shifted.
Sales hit $10 ,000 a month.
By year's end, he'd done $150 ,000 in revenue, five times what the previous owner managed.
Growth created the best kind of problem.
He needed help. Les appointed himself outside salesman and told his one employee to hire someone.
The new hire was, to put it charitably, no good, so he fired him.
Then something interesting happened.
A man named Frank Kennedy walked in off the street asking for work.
He and his wife had just moved to Prineville.
He was looking around town and decided he wanted to work for Les.
Les checked his references.
Frank took to the work like he was born for it.
This became a pattern.
The right people kept showing up, drawn to something they couldn't quite name but could feel.
Les was creating gravitational pull for good, hardworking people.
Good people can sense when something real is being built.
It's the same energy a lot of of people feel at startups today.
But Les was learning just how rigged the tire business was.
The major rubber companies had what Les called phony pricing.
A truck tire might cost him $100 wholesale, but he'd visit competitors and find them selling that same tire for $90.
He'd call his supplier furious.
They'd say, for that deal, we'll sell it to you for 90 and give you a 5 % commission.
It was such a shell game.
Months of paperwork and bookkeeping, floating expenses, expenses all to arrive at the same 5 % margin every dealer got.
The entire system was designed to prevent real competition.
Les wrote down his philosophy in a fury of anger.
Never take advantage of a customer.
Never take advantage of an employee.
But take all the advantage you possibly can of the rubber company because they are not being fair and honest. The constraints forced him to innovate.
Big dealers had fleets of $6000 service trucks visiting commercial accounts.
Les had one store and no capital for trucks, so he flipped the model.
He put an ad in the paper with a simple message.
You know the wholesale prices the big guys get?
Come to my shop and I'll give them to you directly.
No middlemen. His competitors visited customers once a week.
Les was at his store six days a week, a permanent fixture.
Best service, best prices, but you had to come to him.
It was asymmetric warfare.
He had low overhead.
It was was a simple value proposition, and it worked.
People came in droves.
What fascinates me here is how constraints can become advantages.
Les couldn't afford to play by industry rules, so he invented new ones.
He couldn't compete on the supplier's terms, so he competed on transparency.
He couldn't go to customers directly, so he gave them a reason to come to him.
The lesson isn't that you need resources to win.
It's that you need to see the game differently than everyone else is playing it.
Les was ready to expand.
The nearby town of Redmond needed a tire store.
He bought land, put up a building, invested $10 ,000 total.
Now he had two stores, both okay rubber franchises.
But there was a problem.
He'd bitten off more than he could chew.
Running between the two stores was killing him.
So Les made his star employee Frank Kennedy a win -win deal that would become the foundation of his empire.
Here's how it worked.
Frank would advantage the Redmond store.
He'd pay Les $200 monthly rent and take $400 salary.
After that, they'd split all profits 50 -50.
But here's the genius part.
Frank had to leave his share of the profits in the business until his stake equaled Les' initial investment.
That was real skin in the game.
Sit with that for a second.
Frank had zero upfront risk.
Les put up all the capital.
but every day Frank ran the store well, he owned more of it.
The better he performed, the faster he'd build equity.
It was his store in every way that mattered, except Les kept half the upside.
Les even added another twist. If Frank wanted a raise, he can give himself one, but the store's rent would increase by the same amount, giving Les a raise too.
A self -balancing system.
People thought Les was crazy.
Why give away half your profits?
Les saw it differently.
If I share half the profits, I still have half.
And if Frank makes more money, he'll work harder to make the store more successful.
And if the store is more successful, my half is worth more than the whole used to be.
It was pure math, but it was also more than math.
It was an understanding of human nature.
Les remembered running his paper route on foot because he couldn't afford a bike.
He remembered how the honor carrier program had motivated those kids.
He knew what it felt like to want something to be yours.
The Redmond store turned profitable immediately.
Frank ran it like he owned it because increasingly, he did.
The arrangement with Frank became the template.
Every Les Schwab store would follow this model.
Every manager would be a partner, not an employee.
This is one of the most elegant business solutions I've seen.
Les solved multiple problems at once.
He couldn't manage multiple locations himself, so he needed to retain talent.
And he needed managers to think long -term.
The solution aligned everyone's interests perfectly.
Frank couldn't get rich without making Les rich. Les couldn't expand without making Frank rich. Les stumbled onto his next innovation by accident.
His Primeville store was bursting.
Retreading equipment and tires cluttered every square inch of the sales floor.
They were working in what amounted to a filthy garage.
By now he had two stores.
Les saw the problem differently.
Why should customers shop in a dirty garage?
Why not separate the dirty work from the selling?
He bought a small carpenter shop nearby and moved all the retreading equipment there.
Suddenly his stores looked like actual stores.
Places where people might want to shop, not just get their tires fixed.
With retreading centralized, he could exploit the economies of scale.
One set of equipment serving multiple stores.
The savings would compound as he grew.
Time for store number three.
Les set his sights on Bend, his old hometown.
But there was a problem.
Bend already had an OK Rubber Welders franchise.
This should have stopped him.
Franchise territories are kind of sacred.
But Les had learned there's always a deal if you're creative enough.
of. He pitched the OK district manager something unprecedented.
What if Bend had two OK stores, and he'd pay royalties to the existing operator and run a second location?
The manager, probably thinking Les was crazy, agreed.
And it was messy from the start.
The two stores' managers couldn't get along.
Les' managers quit, leaving him with an empty building and a lease.
At this point, most people would have admitted it was a mistake and moved on.
Les, however, was not most people.
He'd been planning to start his own brand anyway.
He'd already been advertising as Les Schwab OK Rubber Welders to get his name out there.
Now seemed like a perfect time to cut loose.
When he told OK Rubber Welders he was going independent, they said he couldn't do that.
Let's not argue, Les replied.
I just wanted to be open about it.
He needed a name. Tire Center was too generic.
Tire Service Center wasn't much better.
He was thinking bigger than one store.
He settled on Les Schwab Tire Center, with his name initially in smaller print.
Then something interesting happened.
Customers started asking for Les Schwab tires, not Goodyear, not Firestone, Les Schwab.
What strikes me here is how Les bounced every time he hit a wall.
No space, centralized operations, franchise territory taken, create a new model, manager quits, Perfect time to go independent.
But the real insight was discovering that customers trusted him more than they trusted the tire brands.
In a commodity business, the seller's reputation matters a lot.
Store number four came from an unusual source.
Gordon Priday worked at the Prineville store and every morning, he'd walk in with the same greeting.
When are we going to open in Madras?
Not good morning. Not house business.
When are we going to open in Madras?
Madras was another small Oregon town.
Gordon saw opportunity there and wouldn't let it go.
Problem was, Madras already had an OK Rubber franchise.
Les figured if he was already fighting OK Rubber and Bend, he might as well make it a proper war.
He drove to Madras and found a bankrupt fruit stand for sale.
$10 ,000 got him the building and the land next door.
The fruit stand had a small apartment in the back.
Gordon moved his family in immediately.
Let that sink in. This man believed so strongly in the opportunity that he moved his wife and kids to the back of a converted fruit stand.
The family kitchen table sat steps away from the tire racks.
When customers left for the day, Gordon was still there.
When they arrived in the morning, he was already there.
This wasn't a job. It was a mission.
And it existed because of the profit sharing deal.
Gordon knew that every tire he sold was building his own wealth.
Les and Gordon ran the numbers.
They'd break even at $2 ,000 a month, make a small profit at $25 ,000 and do pretty well at $3 ,000.
In year one, they broke even exactly.
In year two, $800 profit, split 50 -50.
And here's the punchline.
Another tired dealer opened in Madras around the same time.
Shiny new building, proper equipment, all the advantages that Gordon lacked.
That competitor went out of business in two years.
This story captures something profound about ownership versus employment.
The competitor had every advantage except the one that mattered, skin in the game.
Gordon Priday wasn't just managing a store, he was building his family's future.
That's what real incentive alignment creates.
People who live in the back of a fruit stand because they're not working for you, they're working with you.
They're not building your dream, they're building their dream with you.
But Les had a problem.
He was running okay rubber welder stores in Prineville and Redmond, but Les Schwab tire centers in Bend and Madras.
Two different from Brown's one owner, it was confusing for customers and open rebellion against his franchise agreement.
The corporate brass at OK had seen enough.
Five executives flew from headquarters to confront Les in a Redmond motel room.
We've come for your answer, they said.
Get out of Bend and Madras or else.
Les had been losing sleep over this moment for weeks.
He paced the floor at night, terrified they'd seize his equipment and destroy him.
him the timing couldn't be worse his largest customer was behind on payments that equaled his entire net worth if that customer went bankrupt and okay seized his equipment he'd lose everything but sitting in that motel room facing five corporate executives something snapped i don't want any more harassment from you people said less if you have anything more to say say it in court and then he walked out.
It was pure bluff. Les had no money for lawyers, no case to make.
For months afterwards, he lived in terror that the lawsuit would end everything.
The lawsuit never came.
Years later, Les figured out why.
OK had 1 ,100 franchises nationwide.
If they sued him and lost, it could set a precedent that would unravel their entire system.
They couldn't risk it.
By standing up to them, he'd accidentally found their weakness.
They needed the franchise system more than they needed to crush one rebellious dealer in Oregon.
Now Les moved fast. He repainted all four stores with Les Schwab Tire Center, prominently displayed one brand, one identity, one vision.
The franchise rebellion was over.
Les was free. This moment reveals something crucial about negotiations and power.
Les had no leverage except for one thing.
The cost of being wrong.
They could crush him, but if they failed, they'd create a precedent that threatened their entire business model.
Sometimes your only power is making the consequences of attacking you too expensive for your opponent to risk.
Les won not through strength, but by understanding what the other side feared losing.
He saw the whole board, not just his own pieces.
During the chaos of growth and franchise battles, Les would escape with Dorothy on long drives.
These weren't romantic getaways.
They were strategy sessions.
I'm going to build a small warehouse, he told her one evening on the Columbia River Highway, move my bookkeeper up there, buy the tires myself, do the advertising, price the tires, handle the books, maybe build six, seven, or eight stores someday.
He could see it all mopped out, a central operation supporting a network of profit -sharing stores, each manager thinking thinking like an owner because they were an owner.
He'd need scale to buy tires at volume discounts.
He knew advertising.
He knew promotion. Most importantly, he knew how to align incentives.
Six, seven, maybe eight stores.
That seemed wildly ambitious in 1956.
He would go on to build 410 before he died.
By the time Les had seven stores, a new problem emerged.
The stores were growing.
what started as one manager and a helper had become teams of four, five, six people.
Les wanted to extend profit sharing deeper into each store.
His solution was elegant.
Managers would appoint their best person as assistant manager.
That person would get 10 % of profits, 5 % from Les, 5 % from the manager.
The split would go from 50 -50 to 45 -45 -10.
The assistant manager would build equity in the store.
When a new location opened, They become the manager there, taking their accumulated profits with them.
It was a self -replicating system.
Every store would create its own successor.
The managers hated it.
They didn't want to lose the 5%.
This threatened Les' entire growth model.
Without succession planning, expansion would stall.
So Les wrote one of the most remarkable memos in business history.
He said this. If a bright, young, ambitious man joins our company and wants to make our company his his career?
Does he do it because he likes Norm or Gordy or Bob?
Do you men think that some little fairy sent you this man just to help you build your bonus?
This man is going to work for low pay year after year just so you can build your profit share into a nice fat nest egg?
No, I don't think so.
This man didn't join the company because of the store manager's future.
This man joined the company because of his future with less Schwab Tire Centers, not in you personally.
If you men block this man, you are being selfish.
Two of the seven managers appointed assistants and then Les dropped the hammer.
Effective immediately, all manager shares dropped from 50 to 45 percent.
If they appointed an assistant, that person got 10 percent.
If they didn't, the company kept the the extra 5%.
Suddenly, every store had an assistant manager, and the growth engine roared back to life.
This is leadership at its finest. Les understood something that his managers didn't.
Their wealth came from the system he created, not just their individual contributions.
When they hoarded opportunity, that violated the very principle that made them successful.
His memo didn't just shame them, it reminded them of their moral obligation to pay forward what they'd received.
But when moral arguments failed, he used economics.
The beauty is that once forced to share, the managers discovered what Les already knew.
Developing your successor makes you more valuable, not less.
Coming up, the moment Les discovered he wasn't really in the tire business at all.
That single insight let him charge premium prices in a commodity market it, and made his employees run, literally run, to serve customers.
If you think you know what business you're in, the next part will make you question everything.
Les had solved his incentive problem.
Now he turned to something bigger, reimagining what a tire store could be.
It was 1956. On a weekend drive, Les found himself studying grocery stores.
Customers wandered the aisles.
They compared prices.
They made informed decisions.
Then he'd pass a tire shop, same cramped waiting room, same dealer disappearing into the back to fetch whatever tire he felt like selling.
What if Les wondered aloud, we displayed tires like Safeway displayed groceries?
Think about how radical this was.
Tires were ugly industrial products, heavy, dirty, technical.
Every dealer hid them in the back of the warehouse.
Why would customers want to see them?
But Les thought differently.
People buy what they can see and what they can understand.
he started converting his stores into supermarket tire centers massive showrooms hundreds of tires on display organized by type and size clear pricing educational materials let the customer browse let them compare let them touch let them choose when he opened the next store Les centered a company memo that read like a declaration of war this I vow we're going to have a supermarket supermarket tire store in every town that we have a Les Schwab Tire Center.
I hate to use threats.
It's against my policy entirely, but you can visualize what is going to happen in your town if you don't run a supermarket tire store because I'm going to have it regardless of cost. I sincerely hope I have made myself very clear.
I love you, but I love a supermarket tire store even more.
But displaying tires wasn't enough.
They were ugly. They had to be spotless.
They They had to be beautiful.
Les would visit stores constantly looking for the ideal place a person would want to buy tires.
The winners were always the cleanest. Tires waxed and gleaming, everything in its place.
He became obsessed with the details of tire presentation.
He found the perfect spray paint and lacquer to make tires look their best. He sent another memo to everyone telling every manager exactly what brand to buy and where to get it.
This is 40 years before Steve Jobs would have says over every detail of the Apple Store.
Les Schwab was applying the same thinking to truck tires.
The results were immediate.
Customers spent more time browsing.
They asked better questions and they bought more tires.
More importantly, they trusted what they could see.
In the 1960s, Les made a decision that would have seemed insane to other dealers.
He took down every tire manufacturer sign from his stores.
His sign maker asked what design you wanted for the new signs.
Les looked around and pointed to a standard oil station.
Put Les Schwab where they have standard and put tires where they have the Chevron logo.
Done. With that simple instruction, Les became the first major tire dealer in America to build his business around his own name instead of a manufacturer's brand.
No more Goodyear signs.
No more Firestone banners.
Just Les Schwab. He was betting everything on one idea.
People would buy tires, not because of who made them, but because of who sold them.
We don't have the blimp flying around like Goodyear, he'd later joke, but we've got something better.
The Les Schwab sign.
And in the Northwest, that's more powerful than the blimp.
The timing was perfect.
Foreign tire manufacturers were flooding into America.
The market was oversupplied.
For the first time since World War II, the big American tire companies had lost their stranglehold on pricing.
Les embraced the chaos.
I was so disgusted with the tire suppliers that I was willing to do most anything to help my company survive, he wrote.
I decided to take down all rubber company signs, to go straight independent, to buy tires like Safeway buys groceries, to buy the best possible tire, good quality, and at the lowest possible price.
Most dealers at the time stayed loyal to one manufacturer.
They'd get a good deal on one brand, but that's all they could offer.
Les bought from everyone.
one. Japanese manufacturers, European imports, anyone who made quality tires at the right price.
His scale gave him leverage.
Like Costco, decades later, he bought in massive quantities and passed the savings on to customers.
Here's how it worked.
Les always had one line of tires priced to match his lowest competitor.
But then he'd have three, four or five other options at different price points, all displayed beautifully in his spotless showroom.
Customers had no reason to shop anywhere He had the best prices, he had the best selection, and he had the best service.
The tire manufacturers had lost control of their own market.
This move reveals a profound insight about branding and power.
Schwab understood that in a commodity business, the relationship with the customer matters more than the product.
By removing manufacturer signs, he wasn't just changing decor, he was asserting ownership of the customer relationship.
relationship. The tire companies became his suppliers, not his partners.
It's the same playbook that Amazon would later use with book publishers or that Walmart used with consumer goods companies.
Control the relationship and you control the business.
By 1965, Les had 15 stores scattered across Oregon and Idaho.
He faced the classic scaling problem.
How do you maintain quality when you can't visit every store every week?
His solution was elegant.
He promoted his best store managers to become zone managers.
But here's the twist. They kept running their own stores while overseeing others nearby.
No extra salary, no corner office, just results -based pay.
Think about those incentives for a second.
If your zone thrived, everyone made money.
If it struggled, your own store suffered because you were spending time away from it fixing other people's problems. It was kind of self -regulating brilliance.
Bad zone managers would naturally step back to focus on their own struggling stores.
Good ones would lift every store around them and share in the profits?
Zone meetings became the company's heartbeat.
This is where they picked managers for new stores, debated expansion, shared what worked.
Less ran them like board meetings.
Every zone manager had skin in the game.
They'd all started changing tires and worked their way up through the profit -sharing system.
When a management position opened, it was like Shark Tank before Shark Tank existed.
Assistant managers would pitch for their shot at running a store.
less and the zone managers would interrogate them.
How much money do you have in your profit -sharing account?
What's your plan? Why should we bet on you?
The person with the most skin in the game usually won but not always, but it was never the smoothest talker.
This structure solved multiple problems at once.
It created a management depth without bureaucracy, it aligned regional interests with store -level execution, most importantly it ensured that decision -makers had lived the business from the ground up.
When you're picking Making someone to run a new store, who better to judge than people who've already succeeded at it?
Les didn't need consultants or personality tests.
He had a system that selected for proven operators with their own money on the line.
By 1970, Les had codified his profit sharing into what he called the 100 story.
For every $100 of store profit, $25 went to the manager, $10 to the assistant manager, $27 to the employee bonus and retirement fund.
The company kept 38%.
But here's the clever part.
The company didn't take its share until the manager had enough equity to start drawing theirs.
That 38 % stayed in the store as working capital, building the manager's stake.
This created wealthy managers through ownership, not salary.
By the mid -1970s, some of the store managers were making over $100 ,000 annually, more than most corporate executives in the 1970s.
The growth was relentless.
Seven stores in 1956, 35 by 1970, over 60 by 75.
But the real brilliance wasn't the growth rate, it was that each new store made the whole system stronger.
The central warehouse bought in ever larger quantities, crushing competitors on price.
Every store created assistant managers hungry to run their own locations.
And most remarkably, the expansion was was self -funded.
Managers left their profits in as working capital.
When they moved up to run a new store, they brought their accumulated wealth as startup capital.
Les had built a machine that financed its own growth.
This is one of the most elegant business models I've seen.
He solved the eternal problem of expansion capital by making his managers into bankers.
They funded growth not because they had to, but because they wanted to.
Their equity was building while it sat there.
Meanwhile, the company got interest -free loans from the very people most motivated to make those stores succeed.
Around 1970, Les made another counterintuitive move.
Instead of just building new stores, he started recruiting his competitors.
The pitch was simple.
Keep your independence, but join Les Schwab Network.
Get access to our buying power, our advertising, our system.
Buy tires at the same prices we pay.
Think about the elegance of this.
Every dealer who joined made Les's buying power stronger, which made his prices better, which made more dealers want to join.
It was a virtuous circle.
J .J. Stamper had been a Goodyear dealer for 40 years, barely scraping by.
After joining Les' network, he built four stores and hit $6 million in annual sales.
Within five years, 60 independent dealers had joined.
They added $50 million in annual sales without Les investing a dollar in real estate or inventory.
He turned competitors into allies.
His gravity alone was enough.
This is network effects before anyone called them that.
Les understood that in a commodity business, scale is everything.
Every dealer who joined made it more attractive for the next dealer to join.
Sometimes the best way to beat competitors is to actually make them partners.
As Les' empire scattered across multiple states, he faced a new problem.
How do you maintain personal relationships when managers are hundreds of miles apart?
His solution raised eyebrows.
He bought airplanes, first a Cessna, then a Piper, then eventually a Citation.
Les initially resisted, but he realized planes were tools that collapsed geography.
He could visit five stores a day, attend zone meetings, look managers in the eye instead of managing through reports.
The planes make all of our stores just one hour away, he said.
For a company built on relationships, that proximity was everything.
By 1975, Les Schwab had over 60 company stores plus 60 member dealers.
Revenue exceeded $130 million.
The investment bankers started circling.
Private equity firms made offers.
The numbers were astronomical, enough to make Les one of the wealthiest men in America.
But he turned them all down.
What would I do with the money, he'd ask?
What good is money beyond a certain point?
But it went deeper than that.
Les knew exactly what would happen if he sold.
Some MBA would look at his profit -sharing system and ask the obvious question, why do store managers make more than executives?
Les had an answer they'd never understand.
That's exactly why we're so successful.
We think the most important people in the company are the people on the firing line, he wrote.
The ones who sell, do the service work, and take care of the customer.
Most American corporations have fat salaries for the top people and treat the people at the end of the line as peons.
I guess that is why, if you're on the ball, you can beat them.
Any buyer would try to fix his inverted hierarchy.
They'd cut profit sharing to boost margins.
They'd pay executives more than store managers.
And they'd destroy everything that made Les Schwab work.
The results validated his approach. In an industry notorious for low margins and high turnover, Les Schwab's stores outperformed competitors by 30 to 50 percent.
Manager turnover was virtually zero.
Customer loyalty was legendary.
Most telling was by 1975, Les Schwab dominated the Pacific Northwest without acquiring a single competitor.
Every store was built from scratch or recruited as a member dealer.
They'd won through performance alone, not financial engineering.
Les understood something that money can't buy.
The real money is in the people and the system he created.
Selling would have made him rich, but it would have destroyed thousands of careers built on his profit -sharing model.
He chose legacy over liquidity.
In an era of quick flips and financial engineering, Les proved that sometimes the most valuable asset you can build is the one you'll never sell.
The irony is, by refusing to cash out, he built something worth far more than any buyer was offering.
By 1975, Les was approaching 60.
His model was proven, but in business, there's no such thing as the status quo.
The giants were coming.
Big box retailers looked at tires and saw opportunity.
It seemed perfect for their model.
It's a simple commodity product with a huge market.
It's ripe for customer disruption through bigger scale.
They had deep pockets.
They had massive stores and supply chains that had already crushed local hardware stores and grocers.
The big retailers bought tires by the train load and sold them cheap.
But they treated tires like toilet paper, stacked them high, priced them low, watched them fly off the shelves.
They had no service departments worth mentioning.
Most failed miserably.
Fred Meyer was typical.
They'd opened 16 tire departments across their stores and within two years they were hemorrhaging money.
So they approached less with a proposition.
Would he take over six of their freestanding tire centers?
Les took over five of them, and within a year, he had tripled the business Fred Meyer had been doing.
Here's what's remarkable.
He was selling the exact same tires at higher prices.
It's worth asking, how is this possible?
Les understood something the big retailers missed.
He said this, People don't buy tires on price.
They buy from someone they trust, and from someone who will smile, and from someone who will give service, and stand behind what they sell.
Fred Meyer thought they were in the tire business, but less knew he was in the trust business.
When your car starts shaking at 70 miles an hour, you don't want the lowest bidder.
You want someone who will make it right.
Big retailers had every structural advantage.
Scale, capital, real estate, supply chain, sophistication.
But they were optimizing for the wrong thing.
They thought customers wanted cheap tires when what they really wanted was to never worry about their tires.
Les could charge premium prices because he wasn't selling rubber.
He was selling peace of mind.
The early 1980s tested whether the Les Schwab tire empire could survive without Les Schwab.
First, company president Don Miller suffered a heart attack.
Les, who'd been stepping back from daily operations, returned to run the company while Miller recovered.
Then on August 1st, 1983, Les himself suffered a massive heart attack.
Open heart surgery, a week in intensive care, and a long, uncertain recovery.
While Les was still hospitalized, Don Miller dropped a bombshell at the annual managers' meeting.
He was retiring. The timing stunned everyone.
The company faced a double crisis.
Its founder incapacitated while its president was departing.
From this chaos emerged Phil Wick, who'd started at the bottom and worked his way up like everyone else at Les Schwab.
He'd become president, proving the succession system worked even under the worst circumstances.
By 1985, Les had recovered and the company was positioned perfectly for the industry upheaval ahead.
The tire manufacturing giants were consolidating or failing.
Foreign competitors like Toyo were flooding in.
While other dealers picked sides, Les bought from everyone.
He'd built a massive warehouse in Prineville, the town where it all started.
325 ,000 square feet of pure buying power.
This let him offer customers the best tire for their specific needs, regardless of who manufactured it.
People kept asking Les why he didn't create his own Les Schwab tire.
He had the scale. He had the reputation.
He had the capital.
He had the know -how.
It seemed like the obvious move.
And Les had thought about it deeply and decided against it.
His reasoning was brilliant.
If we have a problem with the tire, we drop the tire, pick up another one, and continue to swim.
If he made less Schwab tires and they had a defect, he couldn't just drop the line.
He'd have to defend it, recall it, manage the crisis.
His people would have conflicts.
Selling, do I sell the less Schwab tire or do I sell the Goodyear tire instead of what is best for the customer?
By staying independent, he could always pivot to whatever served customers best. It's tempting to put your name on everything once you're successful but less understood by not making tires he could always offer customers the best option without defending a bad product in the long run what is best for the customer is best for the company the 1990s brought new threats costco started selling tires online retailers emerged industry experts predicted les schwab's high touch model was doomed it was too expensive of too slow, too old fashioned for the digital age.
The opposite happened though.
As competitors automated everything and removed human interaction, the Les Schwab experience became more valuable, not less.
Customers who could buy tires online still drove to the Les Schwab store.
They wanted someone to run out and greet them.
They wanted experts who knew their name.
They wanted the peace of mind that comes from dealing with a person they knew and trusted.
The company's decades of investing in people had created a moat that no amount of technology could cross.
The numbers by the late 1990s were staggering.
Revenue approached $700 million.
The employee trust fund hit $332 million, averaging over $65 ,000 per employee.
Store managers were earning over $200 ,000 annually, proving Les' belief that the people closest to the customer should make the most money.
At 80 years old, Les began stepping back.
He'd built something unprecedented, a billion -dollar company where thousands of employees have become wealthy alongside him, from a leaky shed in Primeville to over 400 stores across seven states, all maintaining the culture he'd established in the 1950s.
By 2000, annual sales crossed $1 billion.
But the real measure of success wasn't in the revenue.
It was in the thousands of families across the West who'd built middle class lives and genuine wealth through the Les Schwab model.
I can imagine Les saying something along the lines of, if people knew how profitable it was to pay your people well, everyone would do it.
What fascinates me here is how weakness became strength.
Everyone thought personal service would become obsolete in the digital age.
Instead, it became more valuable precisely because it was rare.
Will competitors race to eliminate employees?
employees, Les doubled down on his people -first bottle.
Les Schwab gave away 50 % of his profits and became richer than if he'd kept 100%.
By the time he died, Les Schwab Tire Centers was distributing over half of all profits directly to employees.
The employees' trust held $332 million.
Store managers routinely made $200 ,000 a year, and many retired as millionaires.
Meanwhile, Les paid himself $32 ,000 a year.
Charlie Munger studied Les Schwab's success and reached a simple conclusion.
He must have harnessed the superpower of incentives.
He must have a very clever incentive structure driving his people, and he must be pretty good at advertising, which he is.
He's an artist. But here's what I think Munger was getting at.
Les didn't just design a clever incentive system.
He designed a system that acknowledged how humans actually work.
Give people real ownership, not promises.
Share profits monthly, not maybe someday.
Promote from within, not from above.
When Les died in 2007 at age 89, Oregon's governor ordered flags flown at half -staff.
Think about that. A tire shop owner received the same honor as a fallen soldier or president.
Thirteen years later, when the family finally sold, the market value of Les Schwab's creation was over $3 billion.
Not proprietary technology, not for executive products, for a culture that turned tire changers into millionaires.
The tools haven't changed since 1952.
Trust, incentives, and the radical belief that ordinary people can build extraordinary things when you align their interests with yours.
Les Schwab asked himself a simple question.
What would happen if I treated my employees like partners instead of expenses three billion dollars later we have our answer wow what a force less was incredible he's somebody we can learn a lot from i haven't picked up this book in probably a decade or so and just flipping through it i was reminded of all my old highlights which are available for members in our learning community you can read through what i highlighted but reading all my old highlights it was interesting to me how some of the things that i didn't highlight i highlighted this time and some of the things that I highlighted last
time didn't make as much sense, but there's so much business wisdom in this book and his no -nonsense approach. I really loved reading this again.
I want to mention a few of the quotes that I highlighted that didn't make it into the episode that I loved.
So one on open books, he said, we have no secrets in our company.
We have no secrets as to where you stand on your profit share arrangements as we put out a P &L every month, showing you exactly where you stand on frontline workers.
He said this too many corporations think the brains are in the main office and all the bonus money is paid to four or five high people.
All the others are peons and just numbers.
If you have a union that really makes them a number, the truth is that success is at the other end.
The office merely keeps their records and tells them how they are doing the real job for office.
People is provide motivation to create programs that make it possible for them to be successful, to be fair, to be open, to have a really open communication, to have no secrets, and to support them.
This, he went on to say, is an unusual way to run a business, but more businesses would be successful if they gave more attention to the people on the front lines.
Part of that quote made it into the episode, but I wanted you to get the full context of that one.
So on going public, he said this.
When we had 12 or 13 stores, I thought a lot about going public, partly to raise money and partly to expand faster.
I had the chance to buy a small public company that was nearly bankrupt.
It would have been an easy way to go public.
I'm so glad I resisted the urge to have our stock on the market.
I don't want a few investors around the country club asking about our business and questioning some of our decisions.
I thought that was really interesting.
That reminded me a lot of John Bragg and what he said in the episode and the Jimmy Patterson outliers episode.
And Jimmy Patterson sort of had the reverse experience where he was public, his shares got up to $42 and then down to his lowest, $0 .85, and he ended up buying them out.
On what less tells managers when they're coming in, the big thing that I think is going to hit you right between the eyes is that we expect you to run this door.
You are on your own and you will sink or swim according to your abilities.
It takes quite a man to be a store manager.
I've always said because you must have great manager abilities, sales manager abilities, service manager abilities, and above all, just plain old management ability.
And finally, on not being complacent.
He said this. We have great people and they do a great job, but we must constantly remind ourselves as to just why we are so successful and what we must do to continue to be successful.
Because if we become complacent, it's all over with.
All right, let's talk about some of the lessons you can take away from Les Schwab.
I have countless lessons from the book, but I'm going to talk about eight here that I want to highlight for you.
And the first is win -win, the math of generosity.
Les discovered that splitting profits 50 -50 with store managers didn't cut his wealth in half, it multiplied it.
His reasoning was pure math.
If I share half the profits, I still have half.
And if Frank makes more money, he'll work harder to make the store more successful.
successful. And if the store is more successful, my half is worth more than my whole used to be.
He gave away billions to make billions more.
You get rich by making others rich. Number two, skin in the game.
Make them owners, not employees.
Les didn't just share profits, he made managers earn their ownership with real money.
The deal, manage the store, take your salary, and get 50 % of profits.
But there's a catch. You can't withdraw your profit share until it equals the initial investment.
The result? Zero manager turnover.
Don't pay people to care.
Make them actual owners with skin in the game and real money on the line, and they can't help but care.
3. Think in decades, act today.
Investment bankers offered less astronomical sums to buy his company, enough to make him one of America's wealthiest men overnight.
He refused every offer.
What would I do with the money, he said.
The real answer? Selling would destroy the profit -sharing culture that made thousands of employees wealthy, new owners would fix his inverted pay structure.
Les thought in decades while acting with daily urgency.
By 2020, that patience had paid off.
The company was sold for $3 billion, preserving the culture even after his death.
Build something worth keeping, not just worth selling.
Four, all in or all out.
At 34, four, Les sold his house, borrowed against his life insurance, and scraped together $11 ,000 to buy a failing tire shop with no running water and no plumbing.
He never had changed a tire.
His competitors had decades of experience, but Les had something they didn't.
No backup plan. That total commitment forced him to figure it out.
One year later, he quintupled revenue.
Half measures guarantee half results.
Five, high agency. Everything is your job.
Les bought his first tire shop having never fixed a flat tire in his life day one customer needs tires mounted les fumbles with his hands on the cold floor making a complete mess of the situation until his employee arrives he insisted on being taught so the situation never repeated within a year sales jumped from 32 150 000 he treated every problem as his problem whether he knew the solution or not sometimes the only qualification you need is the willingness to figure it out Six, reputation works while you sleep.
In the 1960s, Les made a decision that seemed insane.
He removed all tire manufacturer signs from his store.
Back then, tire shops were essentially Goodyear or Firestone franchises.
The signs meant manufacturer support and co -op advertising money.
Les gave all that up to put his own name on every store.
He bet the customers would buy based on who sold the tires, not who made them.
Within a decade, Les Schwab became more powerful than any manufacturer brand in the Northwest. Your name is either making you money or costing you money.
There's no neutral.
Seven, go positive, go first. Les instituted free flat tire repairs for anyone, whether you're a customer or not.
Competitors called them crazy.
Why would you fix flats for people who bought tires elsewhere?
But Les understood reciprocity.
Humans are biologically wired to return favors, even unearned ones.
Those free repairs created a loop.
Strangers who owed him nothing suddenly owed him something.
Most businesses wait for the transaction before the service.
Consistently going positive and going first is one of the most powerful forces in the universe.
8. Dark Hours Every morning before dawn, Teenage Last ran his paper route.
Not biked, but ran.
For two months, he sprinted through dark streets on foot, saving for a bicycle.
His classmates were asleep.
He was earning. By senior year, Les owned all nine routes in town.
He'd wake up at four, deliver hundreds of newspapers, then show up to school.
Your competition is asleep from 4 to 7 a .m. That's three free hours to build your lead.
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