Price, cost, new business

Hey reader,

Since 1993, TransDigm has returned roughly 1,750x its original equity, a 36% annual rate sustained for three decades. When founder Nick Howley explained the operating philosophy behind that on the 50X podcast, I expected complexity. What he described fits in a sentence:

You can get the price up, you can get the cost down, and you can generate new business. Almost everything else is tertiary.

The backstory is what makes it useful. Early in his career, Howley noticed that much of what happens inside large organizations has little to do with creating value. Programs, initiatives, reports: activity that feels like management but never touches what the business is worth. So he and his partner distilled the job down to the three levers that do, and made that the entire message. It was simple enough to teach a machinist and durable enough to survive scale. It worked at 350 employees and it worked at 20,000.

A few layers under the headline are worth pulling out.

The levers are self-regulating. If you cut cost so deep that quality and delivery slip, you lose pricing power and new business. If you chase volume at bad prices, you’ve won nothing. The framework forces balance without a single extra rule.

You can’t fix the market. Howley’s discipline was refusing to spend energy on what he couldn’t control. The market will cycle. The multiple will be whatever the world decides. But price, cost, and new business can be worked in any environment, and value created there eventually gets paid for. Even capital structure, in his words, only amplifies the intrinsic value you build; it doesn’t create any.

Simplicity is the strategy. This is the part I keep coming back to. In the businesses I’ve been around, the most common failure mode isn’t a lack of information. It’s the opposite: dashboards with forty metrics, meetings that review everything and decide nothing. Complexity feels rigorous. It’s usually a tax. The rare discipline is subtraction: deciding what the three numbers are, and letting everything else answer to them.

Two things worth trying this week:

First, name your levers. For most businesses they’re some version of Howley’s three, but make them yours. Then look at your last month of leadership meetings and ask how many agenda items touched any of them.

Second, run the tertiary test. Take the current list of initiatives and projects. For each one: which lever does it move, and by roughly how much? Keep what has an answer. Question everything that doesn’t.

The test of an operating philosophy isn’t how smart it sounds in the boardroom. It’s whether the newest person in the company can repeat it, and whether it’s still true at ten times the size.

Talk soon,

Matt

P.S. When I’m not writing this, I’m buying and operating founder-led businesses for the long term at Eidolon Capital. If you’re a founder thinking about your next chapter, or you advise one who is, just hit reply. I read every note.