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Hello LPs! We heard from several of you that the content from our book club session with Hamilton was great, but was pretty hard to consume as a Zoom recording online. So we have gone in and pulled out the audio and are putting it in the feed here.
The quality and production here isn't obviously up to our usual acquired episode standards, but this was such a special and cool experience to be live with so many of you, hear your voices and questions in the discussion with Hamilton. So we wanted to make sure that it was open and accessible to everyone in the LP community.
If you have not read the book and want a cheat sheet before listening to this, you can pull up our notes on the book in the LP Google Drive or go back and listen to our full LP episode with Hamilton on March 10th of this year in this same LP feed here.
Um, also FYI, our next book club live zoom discussion is on the outsiders with author Will Thorndyke, and that's going to be on August 28th, 2020. So if that hasn't happened already, by the time you listen to this, make sure you come join for that. We are super excited about the conversation with Will. And, uh, with that onto the discussion with Hamilton, enjoy.
All right. Hello, everybody. Look at this motley. Hey, what's going on? Hamilton, I think, just joined us. Yeah. So hopefully everybody got the emails that went out, but plan is to do an hour or so of Q&A with Hamilton, and then after which Ben and I will stick around and we can all keep jamming. Let's see. A couple logistics. I think unless things get too unruly,
Let's just have everybody ask questions directly. If there's anything you don't want to ask directly, you want to do anonymously, just send me or Ben a DM in chat and we'll jump in and ask Hamilton. Let's see. The only ground rules are, I think most people know Hamilton also runs a public equities, registered public equities hedge fund. So we can't talk about investing directly or any of strategy capitals, Hamilton's funds,
proprietary kind of models or methods. But so that's the only stuff that's out of bounds, but everything else hopefully should be inbounds and Hamilton will let us know if we can't talk about anything. Yeah, I'd prefer to stay out of jail. As would we all, as would we all.
Cool. Let's see. With that, we thought we'd break the ice with maybe a fun one, Hamilton, to start off your game, which if you were assembling kind of a dream team of CEOs you've observed, worked with maybe over the years, who makes your list? Who's the captain of the team and who are maybe the starting five? Yeah, I was... David was kind enough to end something. He's going to be listening.
I thought about it a little bit. What I say won't be terribly startling because these are kind of, you know, I think on everybody's team. I'm certainly, of course, huge fans of Zuckerberg's and Bezos's for lots and lots of reasons. I think they're amazing. But I thought when you asked me favorite, I'd sort of,
I was thinking, well, who had really hard, hard strategy problems that were very difficult to solve and then follow up on? And I'd say with Facebook, it's like it's a straight up network economy play. And it was not easy. They had to start at Harvard and
and sort of figure out how to scale it and then all that, you know, I'm not saying, but it was more, I'd say more on the operational side and the strategy wasn't so much a puzzle
It was because it was, if we do this right, it's a network economy's play. You're on Facebook because I'm on Facebook, period. And I think, of course, it's interesting with companies that have that directly, they become accustomed to that clarity and don't realize that most strategy problems aren't like that. And often demand out of anything they get into, which is too high a hurdle.
But I thought two companies where it was really hard and as a strategist, I had to admire them enormously.
were Tesla and Netflix and for sort of different reasons. I think for Netflix, they did, I heard you earlier talking about Kodak and if you think about how you create value, they're kind of two piles, tuning and transforming, right? Tuning is what can we do better and transforming is what do we do next? And transforming is really hard at a strategic level if you're actually creating a new business.
and from the base of an existing business. Because usually, you know, it's very, very hard to do business. And so once you've established something, you have a whole series of modalities and, you know, culture and processes and everything that are fitted to that. And then to try to do something new is just, I mean, it really is Herculean. And
And so on Netflix side, they did that. So they went from the red envelope business to the streaming business. And those really are different businesses. And I give full marks to actually the co-CEOs now, Ted and Reed, because they're, you know, and both of them were great.
essential ingredients to this and both are frankly quite brilliant strategists. I know them both fairly well and they're very high at the top of the pile for people I've ever encountered who can think acutely strategically. Um,
And so they, if you think about what they faced, I mean, think about, so they tried content before when they had the Red Envelope business and failed, right? I can't remember what it's called, Red Envelope Productions or something or that. I can't remember. It didn't work out. They tried to do movies. And so the notion that they could actually
get into streaming seemed, you know, not like an unbelievable stretch because they are named Netflix and they'd already thought about using the internet and stuff. That didn't seem...
you know, so weird in a way and the technology is has its own challenges, but it's not, you know, incredible to do. But, but to get power in that is something else again. And, and, and they got power by going into original content.
And because there were scale economies, there's a fixed cost to doing that. And there's obviously higher risk and some luck in that. You know, I mean, their first really big bet was House of Cards, which turned out to be a hit. It might not have been.
They've done Lilyhammer before that. But if you think of somebody advising them way back then and they said, "Well, we're going to become a powerhouse in original content."
Somebody look at them and say, are you out of your mind? You have no idea how to do that. There's nothing that you do that tells you anything about how to do that. That's a completely new area. You just don't have a competency. So if you think about strategy theories around core competencies or whatever, totally off the charts. I mean, you wouldn't, you'd say, I'm just
You guys are just crazy, you know. And yet they did it, you know. And it was, in retrospect, brilliant. Not easy always.
But that kind of transforming effort is extremely hard to do. And you mentioned Nokia from rubber boots to cell phones. Unfortunately, then they got counter-positioned by the iPhone and lost that business. But they're trying to rise again and taking on Huawei and so on and Gear.
And so I give them very high marks. And that's a hard thing to do, to transform, because you have to get it right strategically. But then there are all kinds of operational issues. I mean, think of, imagine trying to build the relationships with all the creatives in the Hollywood community, you know, what that was like. They'd say, well,
Well, let's see now. Bob Iger is on the phone. And who's this? I'm not sure I've heard of you. Who's that? You know, I mean, DVD guys. Right, right. Yeah. You're just, you know, aren't you? Are you related to Blockbuster or something, you know? And so, you know, they were a distribution channel, right? And so I get and they are and
these guys are really able. I mean, I, as I say, I've worked some of them and they're, they're just, uh, you know, incredibly acute. I've, I've, I've learned from them myself. I mean, I, there's a funny story of the subtitle of my book. I don't know. And I don't think I mentioned this in the book. No, I don't think so. So, so I was trying to think of a subtitle for the book and I, and I was, and I was, uh, I, I, uh, uh,
was trying to be clever rather than truthful. And so I was sort of taken with agile software. And so I thought, well, how about Nimble Strategy? That sounds kind of cool. You know, and I even got nimblestrategy.com. I thought, wow, this is pretty neat. And
And I mentioned it to Reid and he said, "That's really dumb, Hamilton." You know, strategy isn't nimble. Strategy is something that you sort of carefully consider and craft over time and amend as you get additional information. And nimble implies this quick jump from one thing to the other circumstances.
require and I know of course he was right you know and I and so then I was talking to my son Edmund about it who's got a larger vocabulary than me by an order of magnitude and he came up with Foundations which was the right which is what it is actually it's really a book about the theory of strategy
So that's one. So I don't know how long-winded you want to be. So that's one set of CEOs. So Elon Musk, I mean... This community is always down for more Elon stories. Keep going. So, you know, I mean, as a strategist, so rewind 10 years.
and ask yourselves, and you're a strategy guy and/or woman, and I usually use the term in a genderless way, but sometimes it doesn't work. And somebody tells you, could any of these possibly happen? An American car company will become the undisputed technology leader in the world automobile industry. That's one. Or,
electric cars will become the sought after goal and strategic objective of every car company in the world. Or third, that the current group of automobile makers, and there's very high barriers to entry from you have to get to a minimum scale, which is very large, that there'll be a new entrant
that's successful. If you said any one of those as a strategist, I would have said, oh, that's really dumb. You know, I mean, it is true. I can't talk about my investing specifically, but I can tell you that I wouldn't have invested if anybody had suggested that to me. But imagine somebody doing all three, you know, I mean, I mean, the story's not over, that's for sure. But this is an absolutely...
extraordinary leap strategically to accomplish all three of those things. And, uh, and yes, you know, there's the ups and downs and the perils of falling and, and, uh, I don't know. I don't know Elon. Um, but I, you know, he's, he certainly has, you know, like, like almost every super creative person has his own quirks, but, but genius, you know, I mean, uh, uh,
real genius. And Hamilton, if I could jump in, where do you think Tesla derives its power if they do? Or is it? Yeah. So, you know, I'll speculate, but I don't know the answer, but I'll speculate. So the first place I'd look would be counterposition. And the question there is, and all of you on this call, I'm sure many of you have witnessed this over and over in other industries, is
that companies that build up from the start in a software-centric way develop in a way both culturally who they hire and how they do it. That's very hard for a company that wasn't born out of software
to emulate or to mimic. And actually my view is that was the fall of Nokia actually, was that they couldn't, that's why they couldn't take on the iPhone. And so that's one hypothesis certainly that
that the software centricity of what they're doing. And so you can, and the jury's still out on whether I'm right or wrong in that. So follow the Volkswagen ID3 and see how they get that. They just fired their head of software, as you probably saw. And there's a wonderful piece by, I think he was the head of, used to be head of Audi, who was on the board or something, who talked about how
what a challenge it was for VW to be good in software. And so I think counter-positioning is definitely on the table. Another aspect of counter-positioning is dealers. Electric cars don't require much service. Dealers get all their income from service, not from selling cars.
And at least the United States, in many places dealerships have a statutory hold on their distribution rights. And so that's another one. You could argue maybe some network economies and charging stations, although I'd argue that if that ever became too much of a hurdle, that other automobile manufacturers would join together and do something or in a private company, that's already happening to an extent.
And then you get into long-term possibilities if it turned out that they were the first to crack AV because they have better edge data.
than anybody else, then that has obviously their scale economies in that. They're profound if they got there first. But I think the one that's, if you see the automobile companies struggling, you can see all the hallmarks of counter-positioning. The people getting fired, they're trying to do this, it doesn't work.
And so VW, for example, started off by, I think they've written their own operating system or tried to. And we'll see. So if it turns out that the ID.3 is pretty darn good and they're able to do it, then that's something else. But I'd say of the large automobile manufacturers, VW is probably the most committed manufacturer.
If I were a BMW, I'd be scared to death right now. And I think the way it used to work in car companies is that they had, you know, because of course this blows up all their supply chain arrangements because they used to have all these suppliers with all these components and they all had their own CPUs or something like, or, you know, or processing units, not CPUs, but CPUs.
And then they kind of, sort of would get them to talk to each other, kind of, but not really. So it was, you know,
IT chaos and trying to do that on a unified platform so you can update over the year and all that is a real stretch. So that would be my hypothesis. But anyway, I so admire what he's done. It's an amazing accomplishment.
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Like Vanta's 7,000 customers around the globe. And go back to making your beer taste better. Head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. Let's open it up to everybody else. So feel free to jump in, ask Hamilton questions. If it gets too unruly, we'll do chat or hand raise.
Yeah, and to start before people just start sort of firing questions, I think a good way to sort of warm up audience questions is I tried to seed it in the chat there so people could think about it if they saw it. But, you know, what's the thing where you were reading Seven Powers and something clicked into place for you that hadn't ever clicked before? And I think, A, this is going to be interesting feedback for Hamilton, but B, I'm just curious what you all sort of when you all had those moments. Yeah.
I guess it didn't help anybody. I can go.
Hamilton, I love the book. I've read a lot of business books, but this one I read in like two days. It's fantastic. So great job. I was actually surprised nobody had given it to me before. And I'm now organizing a book club at my company because I feel like it's, and there's a lot of, there's a lot of ex Bain people at my company and none of them had read it. And I was like, how is this not required reading at Bain? So maybe you got to call, call some people. Yeah. Yeah.
It's all word of mouth. I haven't done anything. But the thing that really, I think, hit me was that operational efficiency or like, you know, like a really well run organization is not the thing that takes you to the next level if you don't have power.
But if you do have power, it can supercharge you. So a lot of, I mean, as an operator, I am constantly trying to figure out like how do we become more efficient? How do we take advantage of markets? Things like that. But this really shifted my perspective into, okay, what is now I'm trying to think about it in terms of what's our power and how do we take advantage of it versus how do we operationalize what's already working? Right, right.
It gives, to use a terrible term, it gives it a more strategic view, but it also makes you a little more analytical in that, like, what are the pieces that are, and I love the empirical elements that you brought in where you can actually use numbers to prove everything. I can't say that on my Kindle I was able to follow it completely, but it's helpful to understand that these things are grounded in reality and they're not just conceptual. Yeah.
Yeah, it's a very, is it Francesca? Is that right? I guess. All right. Yeah. So, so Francesca, I mean, it's, it's a very interesting area to talk about operational excellence versus strategy. And it's very important to remember it's an and not an or.
And because you, to create value, which to me is the objective of why you do business, you need both. And both are really hard. And I think the point that you made, which is right, is that operational excellence isn't enough.
And that insight actually goes back to Porter, you know, 50 years ago probably, or, you know, yeah, 45. And he made that point and made a lot of enemies, I think, at Harvard at the time because they were focused on operational excellence.
And so it's equivalent in finance theory to sort of full arbitrage, which is, in other words, you say that you don't depend on the incompetence of your competitors to do well. And that's a smart thing to do. Occasionally you'll get lucky and they'll be really incompetent, but eventually it'll probably come back to bite you because there are a lot of people out there that if you do well, they'll observe how you do.
And so you need to do both and the focus of a firm changes over time. I mean if you looked at somebody like Netflix right now, I'd say the strategy is pretty clear. It's pedal to the metal and originals and international, right? And since there's clarity about that,
then there's a lot of operational issues which then understand, which then take that into an operational area. Like I wonder if that's telling tales out of school
I probably can't say that. But Netflix, for example, how they interact with content providers have to think that through very carefully in an operationally specific way. And it is a hard lesson that it's not enough. And then if you switch to sort of founder space and think about operational excellence,
In other words, in the development of a strong strategic position, and this is something Porter hadn't figured out, you get a different answer, which is that actually operational excellence can be highly strategic. And I think the example, I use in my book, I can't remember if I did or not, but it's a good example, is the Apple III.
Apple was poised to own the PC business. And they had their own OS, so they would have owned the OS business. But then they came out with a really,
really horrible product. I mean, it really stank overpriced broke. It was just terrible. And the IBM PC snuck in under and, and that was the demise of Apple's PC business to, you know, and almost the demise of the company ultimately. And, and, and so, so that lack of, of operational, you know,
excellence at that time killed them in, as you may recall from the book, The Power Progression. In this takeoff stage, it's all about relative scale. And so operational excellence
you know, the right product, the right segments, the, you know, cost is right, pricing's right, you know, all that stuff. That's what a lot, if you get that wrong, you don't scale properly. And so in those three types of power, switching costs, network economies, and scale economies, it becomes highly strategic. And so it's, but I very much resonate with what you're saying that that's
that that distinction is important because often you'll hear people say, well, we're just going to be operationally great and they don't really have an idea of why competitors can't arbitrage out their returns.
Yeah, that's a great point. I want to share one aha moment that I had, which was bridging two different worlds that I'd never managed to square before, which was like, you should be brilliantly strategic in how you grow a business to become like Netflix. Also lean startup, like MVPs and ship stuff and move fast and break things and have a cool idea and build it. And Hamilton, I think you're...
The clarifying moment for me was that all power
ultimately comes from creativity was really like, oh, I see. That's the starting place. That's right. It all starts with inventiveness. And I think the thing about what you're talking about, about ship fast and do all that, one of, I think it was Alex of Scale AI was saying this to me, that he'd observed that companies that
turned around their product faster, seem to be more successful strategically. And what that's about is that in that very critical moment where strategy is very fluid and you have very large degrees of freedom, getting all that stuff happening quickly, effectively,
It gives you very quick feedback loops so you can, so remember in that phase if you are trying to relative scale to other people, that means you get product market fit just right and you get to exactly the right set of customers at the right time.
you know and you go to the you know which markets you address and all that and and so so that that fast cycling or and and and this this comes back a little history of strategy thought you know that there's this guy Henry Mintzberg who wrote a wonderful article about a strategy being adaptive and this was way back when and and and and it is that it's
It's that you get this additional information and he talked about crafting strategy as opposed to designing it. And so you get all that information. If you go back to the example of Netflix, so when they were getting into original content, what did they do? It didn't go right off the bat. They started first with some crappy content that they put out in streaming and then they
put a toe in the water with Lily Hammer and then they step by step did it, but fast enough. But that adaptiveness and response to that is critical because you don't have sufficient information when you start often to understand what the correct strategic position is. There's a lot of noise around the idea that,
that you can sit down in a room with somebody like me and just figure out what your strategy should be. And usually you don't have sufficient information.
And that's why you're an investor most of the time instead of a consultant now. I was joking. A lot of readers reach out to me and I have a lot of interactions, but part of it is teaching to fish because the whole point of the book basically is to give individuals the tools so that as they move through space and time, they actually are
aware of what is a good and bad strategic position. So they're in the driver's seat in figuring that out.
And so it's that kind of advice and then sort of intelligent sounding work, but not sitting back and going off and doing a project and figuring out their strategy. Nice. Dmitry, I saw you had your hand raised. Do you want to jump in? Yes. Hamilton, thanks very much. That's required reading indeed. With everyone who I start working as an entrepreneur, I send a set of books
And this is one of them. And I bought it right after I listened to the episode with you guys.
I spent over six years in one of the top management consulting firms and I can tell very few people actually understand what they're talking about when they start talking about or advising on strategy. And my big aha moment was on the first chapter, I guess, where you're saying, you know, I will distinguish what strategy with capital S means versus all other different strategies which people refer to.
And I saw many, many efforts of, you know, making something slightly better and calling it a strategy. But I very rarely saw that, you know, a partner and chief strategy officer would actually solve the big question using any tool like you propose, any framework like that. Thank you for that.
Oh yeah, my pleasure. Yeah, it's very easy to lapse into using the word strategy for anything that's important. And you lose so much if you do that.
And if you step back and say, no, no, strategy is about something that creates durable value, the fundamental determinants of that, then it opens the door to a lot of clarity about a good strategic position. I often use the example of Pearl Harbor, you know,
Pearl Harbor was brilliant tactically, but from the way I think of strategy, was about the dumbest strategic move ever. It basically guaranteed the loss of, if they properly understood the economic assets the U.S. had, that essentially assured both the defeat of Japan and Germany in that one moment.
And that's what strategy is about, is what are the things that lead to very, very durable, not forever, even powers, powers not forever. Interestingly, I think the longest duration power I've ever seen for an institution, leaving aside countries and things, is elite universities.
So, I mean, think of Oxford and Cambridge, right? And is it brand? Is it network economies? What creates that power? It's intergenerational network economies. The brand comes from that. So it's that they are able to attract the best and the brightest together.
and by their reputation, also the quality of people, those people get really good jobs and so earn the view that they are that good, so therefore people want to hire them. And then the next class, next generation says, well if I go to Oxford,
Will be thought of as being great and that's a credential that I can use and so I go there so so they so it's intergenerationally connected and it's extremely powerful network economy, I think. Do you think it will deteriorate anytime soon? What's that? Do you think it will deteriorate anytime soon or it will stay as strong as it used to be?
It's a great question. I'm building a business around this. Yeah, I mean I think there are interesting educational plays certainly. I mean there's a lot, you know Bethany Poehler is a friend and I know Corsera pretty well and some of the others.
I certainly wouldn't bet on it personally. I mean, I think there are interesting educational opportunities, but it's very, it's complex and segmented, you know, in terms of which segment of the education you're going after. But I think for the elite universities, their position is pretty strong for quite a long time, I'd say, certainly at an undergraduate level.
That's an opinion. I happen to have to invest in it, so I don't know. Although I guess I am sort of invested in the personal one. Ella, I think you're at the top of the queue. Also, since lots of people have questions, let's switch over to raising your hand in the participant channel if you want to ask a question and we'll go in order. Ella, let's see, maybe we can come back to Ella. Ian, I think you're next in the queue.
Yeah, thanks, David, Ben. Thanks, Hamilton. I found reading Seven Powers like finding the cheat code. So thank you for finally open sourcing all your work. I'm a venture investor. I have a lot of respect for
quote unquote value investors. Um, and the dichotomy between value and growth had always been a bit of a paradox for me. I suspected that, um, it was a solvable paradox and my aha moment reading seven powers is that the extent to which the powers are present is part of, uh, solving this paradox. Um,
Now, there's certainly broad-based multiple expansion. Let's set that aside. But there are cases where, you know, yes, maybe Amazon's worth 120 times earnings. And so this has been a way that I've been, I've just been asking, you know, quote-unquote value and quote-unquote growth investors what they think about this and whether Seven Powers is part of solving this paradox. And I'd be curious to hear, you know, your thoughts on that.
Yeah, I'm with Warren Buffett. I think value growth distinction is preposterous.
It's all about value. There are companies that grow slowly that have value and some companies that grow very quickly and have value. And it just figures into sort of an NPV equation basically. And power is just something that one thing you see is that long-term growth
attractive performance is serially correlated. So if Walmart gets these margins this year, they probably won't go back to normal retail margins next year. They'll be a better predictor of how they did this year. And that serial correlation means that there's structures underneath that
that even with ferocious competition guarantee those or create a high probability, guarantee is too strong a word, high probability of that continuing for some time. And that's what value comes from because if you do a calculation of value of a firm,
It's almost all in the future. I don't know if the number is right in front of me, but as I recall, standard valuation model, 10% growth, I think 85% of the value is after year three. It depends on which terminal value assumptions you use and all that kind of stuff. So I think that people can...
David Erickson: Investors divide that and that you that division may be useful for them in terms of the particular risk profile thereafter, something, but in terms of David Erickson: The way I think about the world, which is it's all about value and then and then growth is something that figures into that. It just doesn't doesn't make any sense. And I know that's that's what Warren Buffett has expressed as well.
I think this is Mark Leonard at Constellation Software. I think he wrote in one of his old shareholder letters he used to do that something to the same effect, like it's all value investing. There's a very special case of value investing where a company is growing very fast, but the market doesn't understand or believe that
that it's actually growing way faster and that you're still like it's all cigar butt investing it's just a question of like how long is the cigar and how big is the butt well i should say that the early if you go back to the early days pre-buffet of value investing it was cigar butt stuff but i was i was referring to value in the buffett and that is different that's looking at balance sheet kind of stuff more and uh but if you look at how buffett does it he's basically looking at
low flux high power companies right once the word and that's what a mode modes are a subset of power basically you know it's just powers a superset of what he thinks about when he thinks about mozis if you ever want to look at it's very interesting to see there is a in the Microsoft antitrust suit there is they made public
communications between, I think it was between Buffett and Gates, about Buffett talking about why he couldn't understand, he didn't have, and he's being very modest about it, he's saying he didn't have the framework to be able to figure out why Microsoft was valuable.
And so it just, you know, his moats tend to be more brand than some, you know, some other stuff and network economies at the time didn't really figure into it. - Let's see, Harad, I think you're up next. - Yeah, thank you. I don't know if I can pin down my aha moments to single thing. I think for me, this book definitely,
brought together a bunch of concepts that I had kind of heard from other places, but it actually put them in a framework that made sense and like to echo what everyone else said.
said already was definitely one of the most value-packed business books I've ever read and I've been evangelizing it as much as possible. Hey, go for it. You can be my marketing arm. I need it. So I did have a question for you. You started off talking about, you know, the Netflix and Tesla and how well their CEOs have done.
I'm curious from your experience. So say a CEO has the value, has the,
power compass now. They've read the seven powers and they have the compass. What have you seen in their stumbling blocks in trying to navigate the landscape? I can envision things like you mentioned in the case of Netflix, them transitioning their business from something that was already working. Things like institutional momentum would be a factor in a situation like that. I can imagine there being other stumbling blocks as well.
What are some of the ones that you've seen and what traits of a CEO have you seen successfully overcome those? Yeah, that's a great question. Let me process for a minute. So I think that you can think of sort of internal and external barriers. And so externally, it may be that
that the things that you need to have to have power aren't in place yet, that you can't seize it yet. So think about Netflix streaming business. Until there was enough people with broadband and the right kind of displays and the right kind of computers and stuff, they couldn't do it. So there's a technological frontier that had to, so there's that kind of constraint. And then on the internal side,
I'm thinking about some sort of attitudes that you have about strategy. I mean, one attitude is that you think it's easy.
So one thing, I think maybe it was David or Ben that asked me this question before about what I thought was the biggest misunderstanding about seven powers. And I'd say it probably was that people read the book and think they can go to their business and just say what their power is or figure it out. It's actually...
even figuring it out is hard and complicated. And sometimes there isn't power yet and you've got to do something, there has to be an invention step. I think then there's sort of attitudinal things like you need to be
obviously open to all kinds of odd ideas. I mean, you know, so the original content one in Netflix, there were a lot of people thought that was nuts. I mean, you know, inside. I mean, because they said, well, original content costs a lot more than just getting...
you know, non-exclusive rights to stream friends or something. And so why would we, our customer satisfaction depends on how much content we have. So why would we want in the world to be able to do something as dumb as that?
And then there's just the normal sort of entrepreneurial stuff that is so essential. I mean, like grit, right? I mean, you know, you've got, you know, and positive attitude. I mean, you've got to get up. I mean, I'm in a very small scale. You know, I've started my own businesses and, you know, you've got to get up and do the right, do something every day and put one foot in front of the other. There's all that kind of stuff as well.
I'm trying to think there's, pursue your question a little bit more 'cause I don't feel like I'm answering exactly what you were asking. I think you're muted. There you go, yeah. - We've been working remotely for several months and I still can't find this mute button.
Yeah, I think so my question was kind of from a from a founders perspective So one thing you did mention, you know, it could be a mistake to kind of think you can Read the book and then go to your business and think you can you can apply it so I think kind of my question is like what challenges have you seen in in going from the theory to the to the application I guess the people that you observe so it's
So the purpose of the book is to give somebody a cognitive framework, right? You know, I'm a great fan of Alfred North Whitehead's book, The Function of Reason. You know, he says, I think he says, one main law which underlies all modern progress is that thought precedes observation, right? And so the idea is that, you know, you're cognitively
enabled to see. And so that you got to start there, right? So, so, and that's, and that's, and that's what, that's why I wrote my book is to cognitively enable people. Then, then
And it's what David was saying before about fast cycling and doing all this kind of stuff. Then you got to do a lot of stuff, right? And so, first of all, are you at a product, do you have product market fit, right? If you don't have that, then there's not a lot of point in even having a strategy conversation because
There are too many degrees of freedom of what the strategy issue might be if you haven't figured that out. So you've got to get that one right. You've got to have customers that like what you're doing and you're able. And then once you have that, then you can start to apply that framework and say, okay,
okay, you know, is it, are there this kind of, and this kind of power or not? And the way to go about that is, is, um, the way I typically think about that kind of problem, um, or, and get people that I work with founders to think about it is, is, uh,
Remember, the necessary conditions for power are benefit and a barrier, which basically says that something good happens and others can't take it away from you. But you can divide that up to another mnemonic, which is three S's, which is--
Instead of benefit, talk about superiority and significance and barrier, just talk about sustainability. And so if you think about what it is that you do that you think yields that's different from the way than what other people do, your competitors do or might do,
and that yields you some benefit, meaning higher prices or lower costs or some benefit that looks good in your P&L or cash flow. And then that satisfies superiority, right? And then the next one is significance. Is it material? Is it a 0.000% change in how you do or a 10% change?
And then if you get those things, then start to think about is it sustainable or not? So ask the question, okay, somebody smart and committed, can they take it away from me?
So again, I'm using the Netflix example since we were on that. If you think about things that were good that they did, you might think about their UI, right? And just, you know, a tremendous amount of work going into, you know, hundreds and thousands of A-B tests and stuff and getting the UI right.
And it probably is better than competitors. Is it significant? I would say probably not. And that if I think of using Netflix versus Amazon, it's maybe not that big a deal. Or a recommendation engine, their recommendation engine is peerless, I think. The same thing, I'd say superior, probably not significant.
And then, and so, and it's almost always true that the really hard one of the three S's is sustainability, the barrier. Why is it somebody can't take it away from you? So you have to press really hard in that and then just, you know, and then, and then hopefully you'll have some people that as a founder that you can have these conversations with.
that are kind of open-ended where it's not like somebody's trying to prove their point. You're really just trying to come to an answer. And over time, you kind of tease that out. You often will end a conversation, well, we think it's this, but to really figure that out, we need to know X and then maybe
Three months later, you come back and say, yeah, well, now we have a better understanding of X. So then we think that this is probably the case. And another thing that's very important is to remember that power is a company only has power if it has power against all comers. Again, it's not an or or an and. It's an and. In other words, against every company.
competitor, both direct and functional and actual and potential. And so you need to think through. So it's hard. Power is really hard. Right. And so, so you need to think through all you, you have to ask yourself, well, if so-and-so came into the business, you know, what would that do to me? You know? And, and, and, and, and, and so, so you have to be, you know, thoughtful about all that.
I think Ella, if you're able to jump off mute, I think we skipped over you earlier.
- Yes, sorry, I am also struggling with the mute button after four months of remote work, so I apologize. Hamilton, love your book. It was really, really interesting and crisp. I, you know, probably like most people work at a startup, and so I was trying to trace back what kind of power we had. Luckily I did find some, I think, so that was comforting. My question is looking at companies like, let's say Uber and Lyft,
where it seems like, and I wanna say companies like Uber and Lyft in case this is not the best example and you have a better example. But for companies that basically have very similar power, roots to power, like let's say brand, for instance, is that going to be the main, or sorry, companies that have similar roots to power, in the end, does it just kind of become a race to the bottom?
where pricing and brand becomes the differentiator of who actually is able to win out in the market, where city by city, Uber and Lyft kind of competed against each other. If they're able to sustain their runway long enough, is it just going to be a question of who can outlive the other or whose brand has more favorability in the consumer's mind?
Yeah, that's a really interesting question, Owen. So there are some types of power that are aggregative and some that aren't. In other words, there are some that where only one party can have power in a business, but there are others that aren't like that.
Hermes and LVMH can have both highly profitable handbags, right? It's branding. And so if you think of aggregative types of power,
where the power is driven by relative scale, then that's not true. So if you think of something like scale economies or network economies. And in those, there will be one, the large-scale competitor will be the one with power and the small-scale competitor will be without it.
And they'll be in the penalty box. And so if you think of Uber and Lyft, the scale economy there is regional growth.
density, physical density economies that the more drivers and passengers you have in a region, the better route construction you can get and get the right people together at the right time and more quickly and so on. And I'm not an authority in this because I haven't consulted Uber or anything, but it strikes me that they misdefined their business. I don't know how, whether that, how
how far that went, but certainly it seemed like they wanted to be a transport company for everybody everywhere. And it's not an international business. Uber being strong in
uh, London doesn't help them one in San Francisco, uh, cause it's mostly local customers. And, and so it's about the density and the, uh, geographical Bay area. Um, and so they're, they're, you know, the cashflow loss that they had in DD versus China is an example of that. Or, and so, so, so in that case, there's a winner and a loser, um,
And then if you look at Uber versus Lyft, those regional physical scale density economies have, for the mathy ones of you, have a negative second derivative, right? So the cost function does. So it tails off over time and there's a range beyond which
additional scale it really doesn't help much you know and and so so you can have two companies that actually somewhat different scale but if they're both at scale at past that sort of point in the curve they can both be more or less competitive and and then if you get into a situation like that you could get into you know sort of
duopoly types of things where maybe there's an accommodation, they don't cut each other's throats, you know. But if you had six companies, then the game theory of that doesn't work out very well.
did that thank you that's super helpful yeah yeah and it's actually super helpful because uh when you think about it in terms of like improving the algorithm having more people in london doesn't really help you the like millionth customer doesn't really help you improve the algorithm in san francisco that much if you don't just draw like add more drivers and more passengers uh so that's super duper helpful thank you yeah yeah i mean one of the really interesting areas is
when are there actually scale economies in data? Because most people claim there are, and usually they're not. And one of the areas that's probably true is an area that's interesting to me is if tail events matter. So if it turns out that on the three S's, if it turns out the significance part is driven by tail events,
Then then scale matters because the scale producer has a gender generates a lot more tail instances. And so it may well be that that Evie is like this because you just can't tolerate accidents much and so tail events really matter. And so, you know, so there and there are other things that are occasionally like that at our Google searches, probably like that as well. It's Oliver
Yeah, hi. Hey, Hamilton. It's nice to talk to you in person. We exchanged some email a few months ago after I read your book. So I've been thinking about the exchange that we had a little bit. And one of the things that I've been sort of musing on, I'm just curious what your take is. I think there's the things that you're calling powers, which are very durable and effective.
attributes that can't be replicated by anyone else. And then there's sort of operational efficiency, which is really something that's not durable in the same way. But I think there's this interesting middle ground and for a lot of companies and ours in particular, the middle ground is actually critical. And I'm just curious if you agree.
So I'll give you two examples. We have obsessed about our culture as a company, and it's something that's a little bit like brand, which is that you have to nurture it. It takes a long time to build. Once you screw it up, it's very, very hard to recover it, almost impossible. And it gives you this tremendous differentiated power that's quite durable.
It's not in the same category, I think, as some of the things you're talking about, but it's a very powerful, durable advantage that you have over companies that don't have it. Another example is the architecture of our product, which we've obsessed and sweated blood over, is much cleaner than our competitors, which gives us the ability to be far more agile than them in the market. And they literally can't build what we can build. And so they have to go buy companies and have a much poorer value prop for customers.
So these are examples of quite durable things that aren't quite I think in the category you're describing but they're very powerful and I'm just curious how you think about that so It's all about the time constant, right? So so You have to so you you so if you want to say something's I
If you want to say something strategic, you pick a time constant. In other words, you pick how durable does it have to be to cross that bar and that's arbitrary. You know, I mean, for me,
you know, it's probably five years or more, maybe ten, I don't know. And so there are many things that don't get to your time constant, that there's a continuum of things, right? It's not, there's not all of a sudden everything is six months and everything else is five years or more. There's a continuum. And so you pick those things. But I
But I don't agree. I don't think I agree with how exactly how you're thinking about that because I think if you think about culture, I will go into architecture in a minute. But if you think about culture, culture is can be very important.
And you can simply just apply a 3S test to it. You can say, okay, what is it about our culture that, what do we get out of that that gives us value? And so, as I say, it's going to be either, it's going to be either, you know, higher prices or lower costs, you know, better product or something. 95% gross retention.
Yeah. So, so, okay. So, so you have, so you have a, so, so you have that and then, and so, so, and then you'd say, well, and then you, you'd look at that retention versus other people and, and you'd say to yourself and let's say it's 80% for your best competitor and, and you assume they're competent. And so, so you've gotten this nice, you've gotten this nice retention kick, which figures in your long-term economics.
And then you say, is that significant? Yeah. And you say, and then you'd have to answer that question. But so let's say it is. And then you get to the question of saying, why can't they take it away from me?
And that gets you to the barrier. And if it turns out that there is something that they cannot mimic, and in culture, it's usually counter-positioning. It's embedded in so many aspects of who you hired, how you organize, how you compensate, how you conduct meetings, all these things that
that for a company to try to emulate that means they've got to blow up the way they do business. And that's part of what's facing VW and doing software, right? And so the barrier in doing it
if it's counter position is collateral damage. And so I don't agree with you that it's something other. I do agree that there's a full spectrum of time constants
And that you just and you pick an arbitrary point that you think is not exactly arbitrary because it's driven by value calculations. You know, you you have you pick a point that where a preponderance of the value is created if you, you know, if you have something that's that durable. So I don't mean to make it's just it's not just completely picked out of the air. But but but yeah.
So the question I'd ask you is, and as you think this stuff through, is to see if you can think of other reasons why people can't take it away from you.
And there's nothing sacrosanct about seven types of power. There could be eight, there could be 10. And if you think of the two dimensions of barriers versus benefits, the benefits side, I'm confident that's exhaustive the way it's defined because it's simply every element of positive cash flow. The barrier side, there's nothing in there that says that that's an exhaustive set of barriers.
I mean, I can give you arguments why it might be, but I cannot prove it. And so, you know, it is – so if you think of some reason that people can't take it away from you that's not included in the four types of barriers there, you might have – you might be able to expand the whole definition of the thing. I'm always looking for a new one because it would be a great investment opportunity because it would be pretty opaque.
Yeah, I think for me the real takeaway was that you can find durable sources of advantage versus your competitors that don't meet your powers bar, but that are nevertheless powerful, compelling and durable for a non-trivial chunk of time and therefore very interesting in terms of defending and growing your business.
So I took away that there was actually a spectrum and you, I think, articulated really nicely kind of the extreme end of it, but there's actually a lot of value, at least for me, in the lower end. Well, it's very important that you distinguish between statics and dynamics here. So if you're thinking about not being there, but getting there, then there are absolutely things that have short time constants that are utterly strategic, right?
So if you're getting to a point where you have to scale, and it's a scale economies business, and you just happen to, maybe you were lucky and got the right product to start with and got in first.
Or maybe you just can do really fast turnaround and you cycle so you get better information. So those things are highly strategic. So in thinking about that, but the key takeaway from that is that you have to think of those things in terms of
eventually there's a static issue, you know, that you've got to get to. And so I'm...
I you haven't convinced me that it's missing something. That's alright. I think during hyper growth dynamics tend to be where you focus and then we aren't yet at a point in the market where we are really focused on statics yet is one aspect. Yeah, I would say I would say the book is you know, I don't spend
There are a few areas that I think are really interesting that aren't covered in the book, and one of them is just what you're saying, which is the variety of things that you do during takeoff that allow you to scale. Because remember, basically what's going on there is that if, let's say there's a business with scale economies, what that means is relative scale is a strategic asset.
And what you're really talking about is taking advantage of a period when that asset is mispriced. In other words, that you can attain it. The cost of attaining it if you do things in the right way is less than the value to you. And you're talking about taking advantage of that mispricing. Yeah, I think that's exactly right. Thanks. Hey, let's see. Aubrey?
Great. Thanks Ben and David for putting this on. And yeah, thanks Hamilton for joining. My question, I guess, is related a little bit to the topic of the podcast, M&A. Curious to get your thoughts on which power you think represents a better or maybe the best acquisition opportunity. So, you know, I think one potentially would be cornered resource where you're able to take, you know, if it's not a finite resource like oil, but something that's
zeros and ones maybe you can spread that across your customer base whereas maybe like process power you know you kill the culture if you try to integrate it or you know the acquire or doesn't successfully integrate it so yeah question is how would you maybe rank the top two powers in terms of their attractiveness and acquisition target so so
If you're doing acquisitions and you're interested in creating value, the one question you have to answer is, why is this company that I'm buying worth more to me than the seller? If you can't answer that question, you shouldn't be doing it, right? Because the seller will always have more information. Maybe you get lucky, but it's unlikely. So,
So, and so even if you buy a company with power, but you pay full price for it, you haven't created any value. So if you buy something that's a great invention, you haven't created any value at all. And so the key question there is why is it more valuable to me than somebody else? So if you think of Facebook buying Instagram,
the reason it's more valuable to Facebook is that they had the capability probably of scaling it very much faster than Instagram. You can argue whether that's true or not, but let's suppose it is. Of scaling it much faster than the Instagram founders could have. And it's a business where scale matters. And so it's...
So that's the key thing. And sometimes that relates to that additional value that you get might be related to power or it might be related to an operational acuity that you have, but you have to answer that question. That's the fundamental value question for M&A. Yeah, thank you. Yep.
All right. I want to be mindful of everyone in Hamilton's time here. Yeah, maybe another five minutes or so. Great. Why don't we do one more question then? Maybe, Stuart, since you're our farthest away caller is perfect. We'll end with you. Why don't you jump in?
Great, thanks very much. Thanks for the opportunity to ask a question. Going back to two fairly interesting things that tech companies starting with counter positioning essentially gives them an advantage of some sort to stay on the leading edge of the technology frontier.
So when you think about that, and then you also think about historically the last kind of group of or what institutions were powerful, you said kind of colleges and universities. Do you think that over the next, you know, 50 or 100 years, I guess one last point with that is even in the last 100,
50 years the kind of amount of fortune 500 companies from 1955 through to today only like 50 companies still exist. Do you think that given the kind of digital age that the duration of power is going to now be increased or
Is that offset by the ability for new companies to quickly kind of launch at the frontier, at the tip of the frontier of technology? Yeah, it's a deep and interesting question. I have to say I don't know the answer, but I think the data says that the
average duration of a company on the S&P 500 is declining. Does somebody know the data? I think that's right. I see John nodding his head. I think that's true. So far, the jury is that the time spans are shorter.
And I think, and I would say that if you think about things that, what often happens, I'd say, is functional competition takes you down because usually the power formula is very different and often involves counter position. And
And that's driven typically by an advancing technology frontier. There are other things that change, demographics and this and that, but for me, I think the big change mover is the technology frontier. And so I don't, if I'm going to be able to do that,
I don't see that lessening. I mean, people, you know, there's testimony in Congress today, right? So Amazon's terrible and Facebook's terrible and all this, you know, but I think they're,
they're probably more competitively vulnerable than say Kodak was. Of course, Kodak had an incredible run. I mean, they're one of the longest ones ever, but let's say Kodak was in 1940 or something.
So, I wouldn't put money on it, but if I had to guess, I'd say it's that trend of the duration being shorter will continue that we're not into. You know, another, but I don't really know. And, you know, another take of it is that
Now we're very global and that's so you can't you can't you know, so everybody knows everything about everybody and so that sort of takes away the opportunity for newcomers but but counter positioning this is wonderful that way you know you and Tesla is a great example. I mean who would have thunk you know, I mean really
Yeah, absolutely. And thanks for that. I guess that's that. And Ben did a great paraphrase of that is, yeah, how we're getting to this time where it does look like the average age of the company is getting lower and lower. But is that setting up the next 200 year run? But I appreciate that answer nevertheless. It's tough to tell. That's why I'm asking.
So I guess I'll break. I'm so glad, you know, as I've said to Ben and David before, you know, my ideas are my babies. And so it's just wonderful for me to see that people find them useful. And so I very much appreciate all of you looking at what I had to say. As I say, I'm just a plumber.
appallingly poor at marketing. So hopefully the word gets out of that. Well, thank you, Hamilton. We, uh, we totally appreciate it. And, uh, thanks for sharing your time. Thanks for writing the book, uh, and, uh, and coming on the show and sharing your time with us here.
All right, LPs, hopefully you all enjoyed that conversation as much as Ben and I did. And huge thank you to Hamilton for giving us his time and being part of this special community with us. Let us know if you like this, having the audio track of these discussions in consumable podcast form, and we'll keep doing it for future conversations. And
And thank you as always for being LPs and we will see you next time.
