Aligning the Stock Market with the Planet (#24)

Aligning the Stock Market with the Planet,
w/ Luciano DIANA

Your host Ben Robinson, is speaking with , Senior Investment Manager at —one of the leading independent wealth and asset managers — where he is running the Pictet Global Environmental Opportunities Fund. In this episode we cover: should government stimulus packages be conditional on companies investing in energy efficiency? Why plant-based products are a space that you need to be paying attention to? Why we should be bullish about the ability for market forces to solve climate change? And more!

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Luciano recommends:

  1. One book: 
  2. One influencer: 
  3. Best recent article: , NY Times, April 28th
  4. Favourite brand: Vacheron Constantin®
  5. Productivity hack: Never let your inbox rule you. Action, delete or file

Full podcast transcript:


What happened with COVID-19 was a stark example of what we don’t want, right? We don’t want to solve environmental problems by shutting down societies because the pain is too big. So, the only real practical way forward is to invest in technology. And this is what we’re doing. — Luciano Diana

Full transcript:

[00:01:29.02] Ben: So, Luciano, thanks very much for coming on the podcast! Maybe we could start by you telling us how you got into environmental investing?

Luciano: Sure! Hi, Ben. I got into cleantech renewables research when I was at Morgan Stanley, back in 2005, and that was because I was very interested in the wind sector, the solar sector, I was part of a mid-cap team. Nobody was really covering those talks, so I carved out a small list of companies to research. And then, a few years later, when I joined Pictet, I started managing the Clean Energy Fund for a few years.

[00:02:11.16] Ben: When did you say that you started to look at it at Morgan Stanley?

Luciano: In 2005.

Ben: Even as recently as 2005, there wasn’t really much kind of invested interest or coverage of cleantech?

Luciano: There were just a few mid-cap names — definitely no large caps that were involved in renewables. And yes, it was a bit of a cottage industry. At the time, I also covered things like biofuels in a lot of companies that actually don’t exist anymore; I did a big piece on the carbon trading market that started around that time — the European Emission Trading Scheme, the carbon offsets, all that stuff. And so, it was very interesting work. I spent most of my time as an analyst to educate investors on industries — in fact, as much as on individual stocks. So it was quite a lot of fun!

the definition of what is environmental has broadened a lot since my days in 2005. So, back then, the view was quite narrow: solar energy, wind energy — and those are part of the solution, but they’re just one of many types of technologies that you can adopt to make an impact — Luciano Diana

[00:03:06.29] Ben: Just looking at the investment perspectives, which I downloaded from the Pictet website, one of the things it says is, “With our Global Environmental Opportunity Strategy, investors can help safeguard the planet while retaining the prospects of long-term outperformance.” How much of a paradox is it, to think that you can get a sustained rate of return from economic growth at the same time as you can protect the environment?

Luciano: That is the key reason why this fund is having success. And generally, investments into ESG funds with an environmental tilt are growing because we are able to get both objectives of the financial return and also the environmental impact. And the key to that is that also, the definition of what is environmental has broadened a lot since my days in 2005. So, back then, the view was quite narrow: solar energy, wind energy — and those are part of the solution, but they’re just one of many types of technologies that you can adopt to make an impact. Today, the way that we define an environmental investment is anything that can improve the natural resource efficiency, or address pollution. And that, then, ranges from energy efficiency to water technologies, to waste management, to software companies that are addressing the digitalization of manufacturing. So, it’s a very broad investment theme. And so, this diversification is very important for performance. So that’s the magic formula for our investors because we have an objective to outperform global equities by 3–4% per year or over an economic cycle. So, we’re not aiming to get 10, 20% plus volatility for the fund that is roughly in line with that of global markets. And then, we also have a positive impact.

[00:05:14.10] Ben: You sort of alluded to it there, when you listed the kinds of investments that you could make, but how broad is our environmental products and services? Like, for example, could you invest in Tesla? Could you invest in Zoom? What are the boundaries, exactly, of environmental products and services?

anytime that you digitize a process, you have some kind of raw material efficiency there — Luciano Diana

Luciano: Yes. So, the definition is relatively broad. And there is one framework that we use for our investment universe. It’s a scientific framework that was developed in 2009 — in fact, it was published in Nature Magazine back then — by a group of scientists coordinated by the Stockholm Resilience Center. And that tells us that there’s nine environmental domains that really matter. Climate change is one of them, but also, biodiversity is there, the water cycle is there, chemical pollution is there, and others. And each one of these domains has a boundary. The scientists are telling us more or less where the boundary is, and the economy needs to stay within the boundaries to avoid a nonlinear and unpredictable change.

Luciano: So, we, first of all, look for businesses that stay within the boundaries, to begin with. That means they have a low environmental footprint, and that means that they’re not predicated on overconsumption of natural resources to exist. That’s the first step. The second step is we look for the solution providers among them. So, it’s not enough just to have a low environmental footprint — like, for example, maybe a healthcare company could have a low environmental footprint — but we also look for solution providers for the environment. So, any solution, again, that addresses resource efficiency or pollution control. And if we find a company, a business that satisfies both of these conditions, and that has a sufficiently high proportion of its revenues in this domain, then we consider that eligible for our universe. And we ended up with 400 companies, which doesn’t seem much, but 400 companies that have at least 20% of their sales in some kind of environmental solution, globally — and these are listed equities, by the way, so this is a clearly listed equities fund.

Luciano: And then, within that, you find many technologies. You mentioned Tesla — for sure, electric cars are there. Volkswagen is not, also BMW is not, because they don’t do, at least today, enough electric cars; they still have a big legacy in combustion engines. You mentioned Zoom; Zoom is part of the theoretical universe, like Citrix, for example — any solution for remote working because remote working has a positive impact, avoiding commuting and all that. And then, for example, I mentioned before: software. Software is important for us when it’s linked to an engineering application. We’ve invested in virtualization software for a number of years. We invested in building information management software, in companies like Ansys and Autodesk. They really bring digitalization into the manufacturing, into the construction sector. And anytime that you digitize a process, you have some kind of raw material efficiency there.

the challenges that we have in terms of the damage we’ve done to the environment, those are huge challenges, so we can never go fast enough — Luciano Diana

[00:08:46.21] Ben: Have you seen a change in the kinds of investors that invest in your fund? Back, when you started it, I can imagine investors largely consisted of either funds or individuals that were interested in ESG. Would you say it’s gone way more mainstream now?

Luciano: Absolutely! It is becoming more mainstream. So, the fund was repositioned in 2014 — that is the key date, September 2014. Today, we have roughly $3.5 billion under management; mostly it’s retail and wholesale clients. We have large distributors within Private Wealth Management organizations, fund selectors, and some institutional clients as well, such as family offices and pension funds. So, definitely, more mainstream and not necessarily clients that want to use this as a satellite approach to their equity allocation but more and more as just an approach to global equities.

[00:09:53.00] Ben: I can imagine that doing what you do marries your professional interests with your personal interests, in the sense that we’re all affected by climate change and I think you’re somebody who’s very interested in it, in a personal capacity as well. Would you say, generally, you think things are moving fast enough?

Luciano: They are not moving fast enough because the challenges that we have in terms of the damage we’ve done to the environment — things like the concentration of CO2, the amount of plastic that we throw into the oceans — those are huge challenges, so we can never go fast enough. But what has changed and is encouraging and it’s very important for our theme is that the awareness on these issues has stepped up dramatically over the years. So, when we started, we thought that this would happen, we thought that young people would start to also get angry and complain about the state of affairs and how the older generation is treating things — and Greta Thunberg happened, so for us, it’s not really a coincidence. It was bound to happen, at some point. That’s very encouraging. We’re seeing how consumer preferences are changing. We’re seeing how the private sector is investing. And all of this has to do with more information, more awareness, so that’s the keyword for us.

[00:11:13.25] Ben: We haven’t yet reached the inflection point where all these nascent trends growing consumer activism, growing corporate responsibility, start to compound. Would you argue we haven’t reached that point, yet?

we cannot expect to leave the planet alone by shutting down our current society — Luciano Diana

Luciano: They are converging. I’m not sure about the compounding, but they’re definitely converging. So, they’re getting aligned. In most regions of the world, we see a very good alignment. I would caveat that the United States is a special case because of the current president and his policy toward environmental protection. That’s the only situation where policy is going backward instead of forward. But even there, if we take a long-term view, we think that eventually, the direction will turn 180 degrees. And so, the alignment will be pretty consistent across the regions. That’s powerful! I think there’s a sense of urgency. I think you might have questions later about COVID and the pandemic. We have almost put the entire economies to hold for an emergency which had the probability of being very severe in the short term. The hope is that we can mobilize, also, to address climate change and to build more resilience in the system.

[00:12:36.08] Ben: One of the challenges with climate change is that it’s always there, is a threat, but it’s not present in the same way as, let’s say, the pandemic is, where it’s constantly in the headlines. It’s like, one day we hear about a fire, another day we hear about a drought, but it’s not kind of this all-consuming, headline-grabbing issue that stays permanently on our consciousness. So, do you think that’s one of the issues which is, on the one hand, you’ve got kind of fatigue because we hear about it so much, but conversely — or paradoxically — it doesn’t stay sufficiently in our consciousness that we’re always reminded of it and we’re always acting on it?

Luciano: It’s not there every day but I would argue that in the last year or two, we’ve seen enough shocking events around the world to remind us about how dire the situation could become if we don’t act: the Amazon fires, the bushfires in Australia, and the hurricanes, and so forth. What I would also add is that it’s becoming more clear that climate health, the state of the planet, and our health are interrelated. So, more and more studies are linking air pollution with deaths in different cities. Even with this pandemic, there is an element of linkage there, seeing that people that are weaker in their lungs tend to be affected more gravely by the pandemic. There’s also the argument about climate change potentially favoring the spread of diseases. So, all these linkages are emerging one by one and I think the picture is getting clearer in people’s minds.

I think there will be some structural changes. Not huge. So, I wouldn’t go as far as saying that office work is dead, that we’re all going to work from home. There’ll be more flexibility. — Luciano Diana

[00:14:20.24] Ben: You mentioned earlier, but in the sense that the pandemic has accelerated digitization, I guess it’s been helpful in accelerating the energy efficiency.

Luciano: Yeah. So, there’s a couple of dimensions there. One is the pandemic and the other one is the current oil price. Maybe I can address both of them separately. So, on the effect of COVID, indeed, we are accelerating some technology trends that we were already seeing and we were investing in, and we think that’s going to be good because, ultimately, the environmental footprint of society might improve if we go in that direction. That’s one thing. When it comes to energy efficiency, we think that is going to continue but then, we have to also factor in the price of oil, the price of electricity — and whether that’s going to slow down investments in certain parts of the world for capacity, in general, we know that renewables have taken share, for example, versus fossil fuels. But, we also know that due to the lower economic activity and the pandemic, the overall level of investments in the energy sector has gone down by 20%, I think — there was a study from the EIA that was just released a day or two ago. So, that has to do with a slower economy, and the oil price is just a symptom of a slower economy. So, in the short term, it might not be the case that we’re going to see an acceleration, but that, in our opinion, is just a temporary effect. Again, when we do thematic investing like we do within our fund, we tend to look at the long term. So, a one or two-year-time horizon is too short term; we look at three years and plus. And if we look at three years and plus, then for sure, energy efficiency will continue to remain very important.

the worst is over and the markets tend to really have a huge amount of relief when they know that the worst is behind. — Luciano Diana

[00:16:21.00] Ben: What you touched on there is one of the biggest paradoxes about the environmental movement, which is almost like we have to continue to consume in order to create the incentives to be efficient.

Luciano: Yes, that is a very deep and philosophical question about where is society naturally going toward. Human beings need to reach a better state, they strive for better economic conditions, and therefore, society moves in a certain way: more mobility, different types of consumption. What happened with COVID was a stark example of what we don’t want, right? We don’t want to solve environmental problems by shutting down societies because the pain is too big. So, the only real practical way forward is to invest in technology. And this is what we’re doing, is really to try and get technology to save the day, and realistically, not trying to look for moonshots that don’t have any economic chance of success. Potentially changing our habits a bit, but not to the point of, sometimes I say, going back to the caves, the genies out of the bottle. And so, we cannot expect to leave the planet alone by shutting down our current society.

Ben: It’s almost like we need to create the demand, to create the profit incentives for entrepreneurs to come in and develop the technology that will save us?

Luciano: Yes.

[00:18:05.03] Ben: While demand has been temporarily reduced because of COVID, is this the moment where you think the government should step in? Like, for example, should stimulus packages be conditional on companies investing in energy efficiency, for example?

Luciano: Yes! There’s definitely a great opportunity within any crisis, and also, in particular, when there’s huge amounts of money being thrown at the economy. Not to put any conditionality would be, really, a shame. We are encouraged by what we’re seeing in Europe for the moment — the $750 billion package where a quarter of that seems to have some ties attached to it. We will see what happens in the United States. There’s also the potential for a huge Green Deal at some point in the future. And, in China, definitely, we’re seeing the subsidies going in the right direction. What I would say, though, is that, as investors, we don’t want to overplay the role of governments, and we don’t want to over-rely on those. Going back to the beginning of this conversation when I was mentioning renewables back in 2005, they were not yet ready as a technology, they needed a significant amount of subsidies, and therefore, there was huge volatility, also, in their businesses, when the subsidies were changed by governments. So, that lesson, as investors, has to be always there in the background — and that’s why, when we talk about technologies such as software for resource efficiency, digitization, these technologies make economic sense, and ultimately, they are adopted because of cost-saving reasons. So, whether the economy is in a good state or in a bad state, the companies always need to save money.

[00:19:56.17] Ben: I know you didn’t want to talk about moonshots, but are there any technologies that are not broadly on people’s radars, that you think could be game-changing? Things like carbon capture and technologies like that. What’s emerging that we should kind of be excited about?

Luciano: So, the carbon capture is indeed the holy grail of solving climate change, but it’s still too far away for us to look at, as investors, in public equities. So, we’re looking at the different initiatives, but the cost per tonne would require a price of carbon that the governments are not ready to accept. What I find very interesting — and that could have an equally important contribution not just to climate change, but to biodiversity and many other dimensions — is the plant-based products. So, it’s an industry that pretty much didn’t exist five years ago or even four years ago, and now it’s out with some valid products for consumers. So, very small, but with a huge potential impact. So, at the moment, there’s only one company that attracts a lot of attention in the stock market, which is Beyond Meat, but there’s others that are going to come into the market. So, I think as investors, while it’s early stages, while it’s not really clear who’s going to emerge as a winner, this is a space that I would definitely pay a lot of attention to.

[00:21:36.03] Ben: And is there a geographical bias, in terms of where the best companies and the best technologies are emerging from? And if there is, is there any way to rationalize that? Is it because of government policies and because of either just these places have startup hubs? What does the geographical picture look like for these technologies and companies?

Luciano: It’s quite skewed towards North America. So, if we look at our portfolio, for example, it’s been maybe 60%, roughly, exposed to that region, on average, over the last five years, and then, potentially 30% Europe and the rest of the emerging markets. So, the reason for that is innovation. At the end of the day, American companies tend to invest more in R&D. They have products that are leading-edge, and they tend to be also fairly well-managed businesses. In Europe, we have technology, but not as much, so clearly, on a relative basis, less than North America. And, in a way, the personal disappointment at the moment is that we are not able to find enough opportunities in emerging markets. So, we know that there’s a disconnect between the environmental issues that are present there, and the solution providers that domestically are developing solutions. That’s a function of, again, on average, not having enough companies that innovate. In China, there’s some great internet businesses, but we haven’t seen great environmental businesses that are really doing technology. It’s mostly companies that are applying technology that comes from elsewhere in the West and then deploying it, for example, for water management or renewable energy. So, we’re still lacking a bit some champions there.

[00:23:40.08] Ben: Should we put a price on the sea?

Luciano: We should definitely think a lot more about the oceans than we did in the past. David Attenborough’s documentary has done wonders for the awareness on plastic, and we should look after our marine life much better. When it comes to awareness, ocean acidification is a big problem. I don’t think that most people in the audience would know about it. It’s also linked to the intensive agricultural practices that we adopted all over the world. Basically, there’s a link between how much we fertilize our fields and when we overfertilize them, the nitrogen that is contained in the fertilizer is not absorbed by the soil so it ends up in the rivers that end up in the oceans, and that creates what’s called dead zones — so, zones where algae bloom, algae grow, they decompose and they absorb oxygen in the process. So, the ocean, as we get more and more of these dead zones around the world, along the coasts, actually is losing oxygen — and that has consequences on the types of marine life and fish that can thrive. So, we get a lot of jellyfish in the Mediterranean, for example; that’s a very resistant type of fish, but maybe tuna is a species that needs more oxygen than others. So, when we talk about the ocean, absolutely, we need to make sure that we limit the amount of plastic that we throw in there, we need to limit the amount of nitrates that we throw in there with intensive agriculture, and also be a bit more responsible in the way we fish.

[00:25:40.25] Ben: I suppose what I was getting at was like, in the same way as we’re starting to put a price on carbon, which should then get absorbed into the cost of production and should somehow internalize externalities, is the answer to the problem of polluting in the ocean to put a price on the ocean? Or is that you kind of think these things are too simplistic?

Luciano: Realistically, it would be too hard to put in practice. It’s the ultimate common good for countries. So, I think it’d be nice to think about a solution there. What we need to figure out is a way to get a carbon price, first. I would be very happy if we did that. And we know that we had several challenges in Europe, and we haven’t even started to think about a North American solution.

[00:26:33.20] Ben: Do you think that the pandemic can have a lasting change in terms of business life? So, business travel, commuting. And then, I think you told me earlier, that you’ve been attending a virtual conference. How does a virtual conference work in the investor world? Do you still have one-on-one meetings with the corporates, for example?

Luciano: I think there will be some structural changes. Not huge. So, I wouldn’t go as far as saying that office work is dead, that we’re all going to work from home. There’ll be more flexibility. As you say, if I just look at my job, some type of travel might be avoided. This format of virtual conferences is absolutely a novelty in the investment management ward, but it’s working very well. I think the feedback from both companies and investors is very positive. Basically, yes, you can meet management on a one-on-one basis, on a small group basis on Zoom — these days, that’s what the default platform is, really — and get pretty much everything out of it as you would with a physical meeting. That could take away maybe a quarter of our yearly travel because then, we would still need to go and see clients, we would still need to go and see companies on-site because there’s lab visits or facilities visits, so obviously, you cannot do them online, but this type of corporate axis could change.

[00:28:07.00] Ben: So, do you think virtual conferences might be something that becomes a new habit or a new function of investing?

Luciano: I think so. Maybe not all of them. I don’t think every single conference out there will turn into a virtual event. But I wouldn’t be surprised if one out of three, for example, becomes just virtual. That’s going to be positive.

[00:28:33.17] Ben: I wanted to ask you about the stock market, in general. So, between the 19th of February and the 23rd of March, the S&P lost a third of its value, and since then, with no underlying improvement in the economy whatsoever, it’s recovered. What do you put that down to? Is that a bull trap? Is that just the market looking through the recession? How do you explain where the S&P is at right now?

Luciano: We had the perfect vision in the market — not in the economy, but in the market. And ex-post we’re all geniuses and we all sound very smart. When you’re in the thick of it, it is a different story. So, when the market started to correct, there were a huge number of question marks about the virus. And we don’t do that anymore, but we were talking about parallels for the Spanish flu, and so forth. So, the panic on the way down, in my opinion, was justified by simply a complete lack of information and the unprecedented nature of the lockdowns. March 23rd was exposed to the point of peak panic. Why has the market rebounded since then? Clearly, the response from Central Banks has been unprecedented. So, there was a technical factor there — there was literally money being pumped into the markets to buy assets, equities, bonds, pretty much across the board. So, I kind of could follow the psychology of the market until just maybe a couple of weeks ago and in the recent couple of weeks I’ve also been a little bit puzzled by how far we’ve gone because when we look at the state of the different economies, we’re definitely seeing an improvement. But, I would say that in the US, we still have a few question marks about where all the unemployed people are going to end up if they’re going to be all reabsorbed quickly or not. It’s been pretty brutal over there and the money hasn’t necessarily reached unemployed people’s pockets. Maybe it’s available on paper but not in their bank accounts. So, the effect on the consumer economy in the United States is still a bit of a question mark.

The rise of passive investing is going to continue and it’s a challenge for the industry. But, when it comes to thematic investing, what we see is, really, the active approach is still successful. So, thematic investing is about looking for secular growth themes, is looking for different types of innovation, so it requires a very dynamic approach to identifying opportunities and that’s what passive investing doesn’t have as much. So, an ETF tends to be more rigid, of course, you have a certain universe; maybe once a year, whoever manages that product does a refresh of that universe and then keeps those stocks and maybe rebalances them every quarter. As an active investor, there’s a lot more dynamism. — Luciano Diana

Luciano: So, you could say that maybe the market overreacted a little bit on the way down and now it’s overreacting a little bit on the way up. The fact is that now we know the virus is not the Spanish flu, that it has affected a certain part of the population. So, in its current form, it’s unlikely to affect children and adults in the same way as it affects elderly people. And I would argue that, also, if we have a second wave — which is not yet a base case scenario — it’s a risk, but it is not considered as a base case scenario — our toolbox and our preparedness for that will be much higher than we had at the beginning. So, even if we have a second wave — and this is what I’m getting my head around, as well, these days or I’m trying to get my head around — are we going to have a second lockdown phase? I doubt it’s going to be the case. The measures to address that will be much more targeted. We will have testing, we will have tracing, we will have, hopefully, some pharmaceutical solutions there. So, the worst is over and the markets tend to really have a huge amount of relief when they know that the worst is behind.

[00:32:25.02] Ben: And you don’t think that, as poor earnings are announced, that somehow we’ll have a couple of legs down in the market?

Luciano: At this point, no. I think that the second-quarter earnings are going to be awful, but the market will absolutely look through them. And again, I’m trying to second-guess what the average investor is thinking, but we’re looking at 2021. If anything, I’m not so worried about what the companies are going to report. I’m maybe a little bit worried about things that were not present in the list of risks two-three months ago that they are now. And one is the geopolitical tension between China and the US, which has gone in the wrong direction. So, if we had issues with the trade war in the past, and the stock market reacted to that, then we’ve reached a deal. If we were to go back on that agenda, if the deal fell off, that’s a risk that would worry me because that would be a left-field sort of situation. And then, the other thing that I find interesting, and, to a certain extent, a bit sad is that we’re seeing the markets back at all-time highs, but actually, this is a time when the virus is hitting the population at large, the worst. Actually, in the last week or 10 days, we’ve seen the highest number of new cases since the beginning. And the reason why the market doesn’t necessarily care so much about that is because it’s not really touching the developed markets — it’s not touching the US, is not touching Europe or China or Japan, and now it’s about Latin America, it’s about Africa — and the companies that are represented in the stock market don’t have huge exposure to that part. But, from a human perspective, this is peak suffering. So, to have the stock market in a euphoric state, when hundreds of thousands of people are getting hit for the first time by the virus is, in a way, a bit sad, but that’s what it is in the financial markets.

in order to tap into innovation — and environmental technology, for example, in our case — we don’t feel that we need to necessarily look at very small companies. We have some holdings in companies that are already very well established to maybe $20–30–40 billion on market capitalization, so pretty large. And they’re the ones who are actually driving the most innovation in their respective space. So, finding opportunities in small caps is definitely there, but it is not an absolute necessity if you want to capture innovation. You can also get that from slightly larger companies. — Luciano Diana

[00:34:56.15] Ben: And I suppose another factor is — I don’t know if this is the right terminology, but they call it decapitalization — this idea that companies have been buying back more and more of their stock, fewer and fewer companies actually tend to list — you know, that divorce between Main Street and Wall Street, and that divorce between the developed world markets and the developing world has never been bigger because the stock market is less and less representative of the average business?

Luciano: Absolutely! And I think that was part of the knee-jerk reaction of several investors at the beginning of the drawdown in the markets. When you read the news about restaurants and cruise lines and airlines are really feeling the brunt of the hit, that’s only 6–7% of the market capitalization. In terms of employment, it’s a much bigger sector, so it may be 20% or so if you put everything together — the travel industry and tourism. But in terms of stock market capitalization, it is much less represented.

[00:36:05.02] Ben: We’re starting to see data come out about how stock pickers did during that kind of wobble or correction. And, basically, stock pickers did no better than passive funds. And so, I suppose the question as a fund manager I wanted to ask you was, how much are you concerned about the rise and rise of the passive investing in ETFs and index funds? Does that worry you or do you think there will always be a role for the stock picker?

Luciano: The rise of passive investing is going to continue and it’s a challenge for the industry. From a personal level, looking at what I do and looking at what we do with thematic investing at Pictet, I’m not concerned because we don’t see ETFs have been really taking the majority of the floors in our space. So, when it comes to thematic investing, what we see is, really, the active approach is still successful. I don’t have the exact numbers, but I think ETFs don’t represent more than 15% of our space. So, thematic investing is about looking for secular growth themes, is looking for different types of innovation, so it requires a very dynamic approach to identifying opportunities and that’s what passive investing doesn’t have as much. So, an ETF tends to be more rigid, of course, you have a certain universe; maybe once a year, whoever manages that product does a refresh of that universe and then keeps those stocks and maybe rebalances them every quarter. As an active investor, there’s a lot more dynamism. And in times like the drawdown, the key is to be able to take advantage of these locations that these situations create. So, an active manager can say, in wanting to buy that stock for a long time, “Valuation was not attractive enough — I have the opportunity, and then I go for it too.” So, obviously, it’s always easier said than done, but that’s the attractiveness of the active approach: that you can take advantage of these situations.

it pays to focus on the innovators and the companies that typically don’t have huge capital requirements to grow. That’s also another thing: even if capital is very cheap these days, the strongest performers that we had, have had that characteristic — high returns on capital, but with not a huge amount of capital employed. — Luciano Diana

[00:38:29.20] Ben: Do you think the other big opportunity is in your old hunting ground of smaller mid-cap stocks? Because, if MiFID is increasing the cost of covering smaller mid-cap stocks, don’t you think, almost by definition, there’s more arbitrage, there’s fewer people looking in detail at those stocks and therefore, that’s the place where you can uncover real value as an active investor?

Luciano: Absolutely! So, that is definitely true. MiFID, too, has caused a big change in the industry. We are seeing the need for more internal research, so, we ourselves are beefing up our teams internally, and, of course, we rely less on the sell-side. So that’s true. What I would have to say, though, and if I look at also my fund, in particular, is that in order to tap into innovation — and environmental technology, for example, in our case — we don’t feel that we need to necessarily look at very small companies. In other words, we have some holdings in companies that are already very well established to maybe $20–30–40 billion on market capitalization, so pretty large. And they’re the ones who are actually driving the most innovation in their respective space. So, finding opportunities in small caps is definitely there. What I’m saying is that it is not an absolute necessity if you want to capture innovation. You can also get that from slightly larger companies.

[00:40:08.21] Ben: Last question: what you’re saying is sometimes big is better, right? And that’s particularly the case where you have Demand and Supply Side Economies of Scale. But, in general, do you think the market is good at pricing Demand Side Economies of Scale, or is this idea that a product can get better and better the more people use it? And is that a possible area for value arbitrage?

Luciano: It’s a possibility. We don’t have, in our universe, the big platforms, like you would have — so Google and Facebook are not part of our universe — so we don’t really have examples of that economic power. But, what we do see is definitely that the economic modes of certain companies that have technology, they tend to get stronger and stronger every year as these companies mop up smaller competitors, and they acquire them. Because then, you have the flywheel of good free cash flow generation, which allows M&A to happen — and so, we have quite a lot of those stories where yeah, indeed, large is better because you consolidate the industry around you. So, yes, I think the answer to your question is, in our opinion, it pays to focus on the innovators and the companies that typically don’t have huge capital requirements to grow. That’s also another thing: even if capital is very cheap these days, the strongest performers that we had, have had that characteristic — high returns on capital, but with not a huge amount of capital employed.

[00:41:50.09] Ben: Fantastic! Can you leave us with one reason why we should be bullish about the environment and bullish about the ability for market forces to solve climate change?

Luciano: We should be bullish about the environment because we all want a better planet and our children, they will demand us to do that for them, and their awareness is going to be at a different level to what we’ve experienced in our lives. That’s number one. Number two is that we have the technologies so we don’t need to look for moonshots. We have technologies that can improve things and that can lead to performance. So, as investors, we can expect to have portfolios that outperform the markets, have a positive impact, and don’t require us to take more volatility or can use as a core component of our long-term investments.

Ben: Perfect! Thank you so much for coming on the podcast!

Luciano: Thank you for having me, Ben!

The Craft Movement: Swiss Maker Edition (#23)

The Craft Movement: Swiss Maker Edition,
w/ Marc MAURER and Arthur VIAUD

This episode focuses on two Swiss companies rising in the maker movement. First we interview , COO, and co-owner of the sports shoemaker, . On is a brand preferred by Roger Federer which taking on Nike and Adidas with a high-end, high-tech trainer — also known as sneaker — that is so lightweight that ‘it feels like you are walking on clouds’. After Marc, you will hear from , co-founder and CEO of — a craft brewery that is taking on the giants in Switzerland, and it’s starting to expand internationally. This beer-maker prides itself on being part of an industry with a heart and a smile, brewing beer with love, passion, and Swiss quality standards.

Podcast also available on:

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If you’ve been listening to this podcast for a while, then you may have noticed an observation woven through some of our episodes, and that is the idea that a combination of access to more information, online distribution channels, and rising affluence have killed the idea of the mass consumer. Now, we all want better quality goods, specially crafted and tailor-made for us. In this episode, we delve into this topic.

Full podcast transcript:


A craft brewer is someone who focuses first and foremost on the quality of what they deliver. — Arthur VIAUD

The market hasn’t seen any innovation in the last 20 years. So, if you look at running shoes back in 2010, they all look the same, and they all feel the same. — Marc MAURER

[00:02:55.05] Ben: Marc, maybe let’s just start with you just telling us, for our listeners’ sake, what is On?

Marc: On is basically a sports company that started out with running shoes back in 2010 and it started with a cushioning technology. So, On has a very specific cushioning technology that allows you a soft landing and a firm push-off. And the way we do that is with holes in the sole, which we call ‘clouds’. So, it’s the only engineered cushioning solution and it comes with very innovative and sleek designs. So, it’s a very approachable and a very versatile product that you can not only use for running but also for casual wear. That’s how it started and it started with running-only and in the last 10 years we went into outdoor, we went into lifestyle, On went into apparel — so it’s become a full-fledged sports company.

[00:03:53.26] Ben: And when the three founders came up with the idea and they came up with the technology, why were they confident they could be successful? Because it’s a very big market — I think I read that it’s something like a $370 billion market for performance footwear, but it’s clearly one that’s dominated by 10-ton gorillas in the form of Nike and Adidas. So, how come those guys thought that they could take on the giants and be successful?

The mission comes to life when you step into or when you wear our products. — Marc MAURER

Marc: I think when you stepped into the first product, you felt something different. So, it was a completely differentiated product from everything else that was out there. And the market hasn’t seen any innovation in the last 20 years. So, if you look at running shoes back in 2010, they all look the same, and they all feel the same. So basically, we felt there’s an opportunity in this market — it hasn’t been any innovation and no strong direct-to-consumer brands. And the market is huge, you’re absolutely right, but that’s an advantage because it means if you only get a relatively small share in that big market, that’s already quite sizable. And it’s a growing market. So, this is why, back then, in 2010, the guys decided to start the company.

[00:05:03.23] Ben: And what’s the company’s mission?

Marc: The mission comes to life when you step into or when you wear our products. And, originally, we always said we want to put the funding to the run. So, the idea is that you have a very different running feeling or a very different feeling when you’re moving and that, eventually, allows you to move more and that eventually allows you to run more. So, you’re spending more time outside, you’re spending more time being healthy. And we really believe in what we call ‘the human spirit’, and that people can do amazing things when they’re given the opportunity to, and On’s products are allowing you to do so.

[00:05:41.19] Ben: The technology is really at the heart of the shoe and the lightweight running sensation you feel when you’re outside and it came out VTH in Zurich, it’s patented, but how difficult would it be for somebody to imitate it or get close to the technology?

Marc: I think it would be relatively difficult because when you look at running shoes, actually, the way you produce them, you need tooling, you need molds, there’s lots of 3D drawings going into it, you have the foam that needs to have a specific kind of cushioning level and so on. So, there’s quite a bit of engineering that goes into it to come up with the same running feeling. So, it’s quite difficult, but we always knew, at some point, eventually, someone will do it. So that’s why On always said, “Hey, we need to reach a certain scale within a certain time. When eventually someone comes up with it, then everyone knows who or what On is, so it’s very clear that this is an imitation.” And we’re very lucky that we made it so far and that we’re in a position right now where that feeling and that technology and On’s patented cloud tech is really associated with On and it would be very difficult for someone else, even the big players to accomplish such a thing to the market.

[00:07:04.19] Ben: So, I wanted to talk a little bit about the company’s history. And so, you joined the company in 2013, right?

Marc: Yes.

[Switzerland] is great to scale from because the access to talent is super good and I think Swiss people and Swiss values and the way we’ve been brought up really help in international relations. — Marc MAURER

Ben: I read, I think it was an interview with David — one of the founders — where he said, “2013 was a difficult year for On. We had a bit of a slump in sales. We had a few ‘teething up’ issues scaling the company.” How difficult has it been — or how challenging has it been — for you since you joined, to scale this company to meet the growing international demand for your footwear?

Marc: ‘Difficult’ is probably the wrong word. I think it’s more like, interestingly challenging, and you experience so many different episodes throughout the years. So, in the beginning, when I joined in early 2013, On was 20 people — so it was very small, and our loss was as big as our revenues. So, we were actually fighting for survival, which is a very different mode to what we’re in right now or were in kind of three years later. And then, you start growing and you experience lots of growing pains in production, obviously, in marketing, in scaling up customer service, in finding the right people. But we never experienced it — or I never experienced it — as difficult because it was always associated with positive emotions. We had so much and we still do have so much fun doing it. We’re so fortunate to be able to work with an amazing team, great people. But it’s full of challenges. I’m a person who tends to get bored pretty quickly, and in seven or eight years, I never got bored — not a single day — because the amount of challenges is just so vast, and I think that’s lots of fun.

The problem with Switzerland is it’s a very small home market. So, if you’re the number one player in Switzerland, you’re still subscale from a production perspective. So, that’s why On decided already back in 2012 that we had to go international super quickly and we had to make the US our biggest market as fast as we can. — Marc MAURER

[00:08:47.19] Ben: Is Switzerland a good country from which to scale an international business?

Marc: Yes and no. For us, the advantages clearly outweighed the disadvantages. So, it’s great to scale because the access to talent is super good and I think Swiss people and Swiss values and the way we’ve been brought up really help in international relations. So, Swiss people tend to be quite well-traveled internationally, they’re adapting to different cultures because we essentially have four cultures or three cultures in one country, and three languages/ four languages in one country. So, that has helped. The problem with Switzerland is it’s a very small home market. So, if you’re the number one player in Switzerland, you’re still subscale from a production perspective. So, that’s why On decided already back in 2012 that we had to go international super quickly and we had to make the US our biggest market as fast as we can. And then, Switzerland serving as a basis for international expansion has proven very successful and very helpful.

I think Swissness stands for quality. It stands for design. It stands for innovation. It stands for reliability. And these are values that are very core to On and that we are carrying out. — Marc MAURER

[00:09:58.09] Ben: Yeah, I suppose it’s sort of a double-edged sword, isn’t it? Which is, having a small domestic market means that you need to look outside from the beginning. And so, it’s like, internationalization is higher up the agenda for a Swiss company than compared to a US company, for example?

Marc: Yeah. I mean, in the US, if you’re basically looking at Under Armour, they did $2 billion in revenues before they left the US. It would be completely impossible for us to do that. But, on the other hand, that means that you’re actually building an international company from scratch. So, already now we’re having several offices across the globe, in all regions: On is present in Brazil, in Japan, in the US, and so on. And it’s actually much easier to do that when you’re young versus when you’re already a $2 billion company, and then you’re building your first office abroad. So, I think looking at it from a 20–30-year perspective, hopefully, we’ll look back and say we were very fortunate that we scaled and went international so early on.

[00:10:55.13] Ben: Every single pair has a Swiss flag, right? So it’s almost like Swissness is at the very heart of On.

Marc: Yes. I think Swissness stands for a few things that are absolutely core to On — to On’s products, but also to On’s values and culture. So, it stands for quality, which is super important to us. It also stands for design. It stands for innovation. It stands for reliability. And these are values that are very core to On and that we are carrying out. And all our design work and all our development are happening in Switzerland. So, the product that you see is truly engineered in Switzerland. It’s not manufactured in Switzerland, but it’s engineered here. Swiss designers, lots of developers based in Zurich. So, it’s really at the heart of what we’re doing.

The way we started apparel is because we wanted to have apparel for ourselves. We never did an apparel business plan to eventually go to so many customers; we just said, “We need our own apparel.” — Marc MAURER

[00:11:46.24] Ben: It seems to be that you’re sort of riding a secular trend, which it’s almost like we’ve seen the death of the mass consumer, and we now live in a world where producers can produce things that are much more tailored to our individual needs. At the same time, we’ve become more affluent and we’re demanding better quality stuff; at the same time, we’ve become more conscious about the environmental impact of production. And it seems like you’re riding this big wave towards more locally-produced, more sustainable, better quality products?

Marc: Yes, definitely! I mean, what we see a lot and what is really core to On is authenticity. And that’s very important to today’s consumers. And it’s just come very natural to On because this is how it started. We always say On was started in the Swiss Alps or born in the Swiss Alps. So, we’re all runners, we love to run. The way we started apparel is because we wanted to have apparel for ourselves. We never did an apparel business plan to eventually go to so many customers; we just said, “We need our own apparel.” And we’re very, very fortunate that On has grown to such scale and that so many people are fans of our brand, but it’s all very authentic. Because it was never the goal, there was never a business plan to go where we are today. It basically just happened naturally by doing what we enjoyed doing, and by being true to our values, and true to what we believe in.

we’re holding ourselves accountable to be authentic — Marc MAURER

[00:13:17.16] Ben: How do you keep or stay authentic, the bigger you get? Because if your success so far has been built on this idea of you being really high-quality and a bit niche, what happens when you’re mainstream? I think I read that you already have a 10% market share in Germany. So, how do you keep authentic at scale?

Marc: I think we’re holding ourselves accountable to be authentic. So, On doesn’t have a CEO for example. We’re kind of like the Swiss government, but that means there’s lots of checks and balances and we know each other so well, because we’ve been working together for so many years, we’ve built a team together. So, everyone has an understanding of who we are. So, it’s very important to us that we’re staying true to ourselves. And we believe you can be a mass-market brand that is still authentic by doing the same thing. On hasn’t really changed in the last seven years in the sense of the products that we bring to the market. we’re still doing more or less the same thing and we’re still very price stable, we’re still very premium, we’re still super high-quality, we’re still very innovative. And then, basically, becoming mass market is almost like the consumer appreciating just the work that we’re doing, so why should we change? Because what we’re currently doing right now is appreciated by our customers.

[00:14:37.26] Ben: When I asked that question earlier about big consumer trends, I mean, one is the high-quality products — tick; and then I think the other big one is to more sustainably source products. And I know you guys have done a lot of work here to try to make your footwork greener, but I suppose the uncomfortable or the inconvenient truth is, shoes are largely made of petroleum. So, how do you make a green shoe? How do you make a green trainer?

Marc: Actually, building on what I said before in the last question, if we do it, we want to do it right. So, we see a lot of companies almost using it as a little bit as a marketing play and what we’re working on is kind of truly solving the problem — and you make it greener with the product. So, a lot it’s just what you said — kind of, if you look at CO2 or carbon emissions, or whatever, a lot of it is in the product and the material itself, and part of it is in the production process, but that’s the vast majority. So, what we’re working on is we’re working on materials that are basically, ideally, at least recyclable; even better if we can have a 360-reuse cycle, so to say, so we can reuse the residuals of the product in other products. And there’s lots of research happening in that space. There are solutions out there. What we don’t want to do is we don’t want to compromise on the product. So, basically, the shoe that has no oil component has to feel as good as the shoe that has an oil component. And this is what takes a little bit of time, but this is where a lot of people at On are invested in, and we’re putting a lot of money to come up, eventually, with a circular product, which is the ultimate goal.

[00:16:27.03] Ben: When we talk about authenticity, one of the things I read, when I was researching this podcast, is that you, guys, regularly have meetings out running. Is that true?

Marc: It’s absolutely true! So, for example, Caspar — one of the founders — and I, we do all our meetings biking, not even running. And it’s actually scientifically proven that when you walk or when you move your body, it stimulates your brain. So, you come up with better ideas rather than just sitting in a meeting room. And so, we do a lot of meetings running, biking, walking and just outside.

[00:16:57.25] Ben: Including client meetings, I heard, as well, right?

Marc: Including tons of client meetings. We had a t-shirt saying, “At the beginning, we don’t talk about our shoes.” Basically, what we meant is, “Just try it on, and then you’ll eventually experience it.” And this is how all the meetings started. We said, “We’re not going to talk about it. We’re going to go on a walk together or on a run together.” And that still holds true till today. A lot of our meetings and discussions are happening on the bike or on the run.

[00:17:27.20] Ben: I have six pairs of On shoes. And the reason I got into On is because a friend of mine just raved about them. He said, “You’ve got to try them! They’re amazing!” And since then, obviously, I’ve made many repeat purchases, I bought shoes for my friends and I can really see how this is a business that has grown organically, based on just having a wonderful product. And I think, when I read about your marketing strategy, you use terms like ‘grassroots’, ‘word of mouth’ — and I suppose, the question is, how big can you get on the back of grassroots, on the back of word of mouth? At some point, do you have to use other marketing strategies? Do you have to use above-the-line type advertising to get to a big-enough audience to really gain massive market share? Or, are you comfortable just to grow, I suppose, in a very Swiss manner, right? Which is, you just grow slowly, sustainably.

Marc: So, one of the Swiss values is also something that’s very important to understand: we’re building a sustainable business, in a sense of, obviously, sustainability, but also financial sustainability. So we always want to be able to kind of finance — or On should be able to finance itself — to a large extent. So, we had to come up with ways to make our product known, that doesn’t cost too much. So, that’s also why On it’s built around or on the basis of lots of retailers. So, when you walk into a store, you have your seven running brands and, eventually, the retailer will also pull the On — and once you’re in the On, the chance that you purchase it is pretty high. And then, hopefully, will remain a loyal customer. And we did a lot of grassroots activities and we still do, because this is really who we are. Then, at some point, to kind of take the next jump in brand awareness you need to start doing above the line. And this is what we already do. We do tons of digital. So, most of our advertising spend will go into digital. We are very lucky to have great ambassadors and athletes of the brand, we’re very lucky to have very loyal customers that are actually, as you said, promoting the brand to friends, and I think the more mature you get, eventually, the more you will start investing in above the line, but in a very different way than we would have done it 10 years ago. Today’s advertising environment is completely different. It has to be much faster. All our videos, all our creative is shot in-house, we’re not working with an agency. So, we have to be very fast in what we come up with.

[00:20:12.27] Ben: Yeah. And again, authentic seems to be the word because it doesn’t seem that you pay people to wear On. It seems that you just tell their stories.

Marc: Yes. So, in an ideal case, and in most cases, athletes or ambassadors come to us because they experience the product and they’re asking, “Hey, I wear On because I feel I can run faster, I can run longer runs, I need less time to recover.” So nearly all of our relationships really kind of emerge from, obviously, the product but then also friendship with all the people that are now part of On. I mean, with Roger who has joined a few months ago, it’s the exact same story. It started with the relationship first — the first discussion we had when we first met him was not targeted at whatever outcome. It was just getting to know each other. And we truly believe if interesting people come together, then something amazing might emerge. And this is how it started with Roger, as well.

[00:21:20.02] Ben: We’re going to come back to Roger later. But, how much do you envision doing something like what Nike does, for example, with Nike running and I suppose building the social context around the brand?

Marc: I think this is one of the next steps. I think there’s a very strong On community, and the community basically has a certain stickiness because of the experience this community is sharing. But there’s no orchestrated way from On on how to activate this community and how this community can really come to life. And there’s tons of grassroots activities, again, that we’re doing with that community. So, you might have heard of something called Tug-O-Run, which is like a squad race that we’re doing in different countries where we bring the community together, we’re doing arc runs in many different cities where we’re bringing the community together. But bringing the community together on social and really activating them potentially also with an app is definitely something that is one of the next steps.

[00:22:25.01] Ben: I wanted to ask you a question a little bit about the demographics of your customer base because I imagine you’ve got elite athletes, for sure, and I think they’re in many of the stories that you tell on your social channels. Then, you’ve got a lot of amateur athletes, people like myself who love the feel of the shoes and make repeat purchases. But I also read that the demographic is much, much broader than that. For example, I read that you guys have a really big following amongst nurses. Is that correct?

Marc: Nurses, and amongst chefs as well because basically, for people who are on their feet all day long, our product is really helpful because of the cushioning technology that it uses — so it’s less tiring, often it helps people that also have certain back problems and so on. So, there’s a huge followership amongst doctors, nurses, chefs, and so on. It’s a super broad customer base. It’s over 50% female, tons of elite runners, lots of outdoor athletes, as well. With the big outdoor push we are doing now, we see lots of walkers as well that are in our products. So, it’s a very big customer base. I think what they all share is obviously they’re all active people that love to be outside and they have an appreciation of quality and design.

On and Roger Federer had a dream and a vision on how we could create something that would eventually be there for a very, very long time and would be way longer-lived than Roger’s career. — Marc MAURER

[00:23:40.29] Ben: That brings us out on to the pandemic because you said these are people that love to be outside. How difficult has it been for you to sell footwear during the pandemic? Because I suppose you’ve got multiple challenges. One, I think, most of your sales go through physical retailers. I think you’re now stocked in 6500 stores in 50 countries, I think. So you’ve got the one challenge of, your distribution channels have been disrupted. And then, another one is that people have been asked — I suppose it’s easy now — but for a long period of time people were asked to stay at home and not exercise too much. So, how difficult has the pandemic been for On?

Marc: I think the pandemic actually triggered two big consumer trends. So, one is running or walking despite some people had to stay at home for quite some time. But it’s mutually searched. So, when you look at cycling case and running case or miles and how it has developed, it’s grown like crazy over the last weeks. And so, you have this huge running boom. So that means there’s a need for people to get access to their product. And now, with many stores closed, the second thing that has done, it has basically leapfrogged roughly three to four years in terms of digital adoption. So, what it meant for On is, immediately when the outbreak happened, we shifted a lot to digital because we cut marketing spend on the physical side because we knew stores were eventually going to be closed, we heavily invested in digital channels. And we also allowed retailers to have a digital channel to sell on. So, if you’re a store in the US, let’s say you’re called A Runner’s Mind, then we basically made an URL for you, which is that you could share with your customer base and that would allow the customer base of that store to purchase On product and we will do the fulfillment. So, these two elements together have actually allowed us to overachieve our business plan in April and May. And so, we’ve grown stronger than we anticipated, due to the crisis — and that has been a very positive surprise. So, we didn’t think that impact will be so strong.

[00:25:59.28] Ben: What’s the relative split now of online versus physical sales?

Marc: Before the crisis, online being our own channel, we also do work with third-party online, but let’s take our own direct to consumer channel. So, you’re looking at roughly 25% D2C and 75% B2B. And that’s basically switched. So, April — May, is going to be close to 75–25. And so, it’s completely turned around. And, what we see now happening in the countries that have reopened is that actually, the B2B channel comes back to a large extent, so developments in Germany and in Switzerland, the first weeks have been very, very positive. But that e-com channel stays up. So it’s actually almost a market expansion that is happening, which is very positive to see.

[00:26:53.01] Ben: Let’s talk again about Roger Federer. So, I think he joined — if that’s the right term — On, I think it was November last year, was it?

Marc: Yes. Yes, exactly.

Ben: That garnered quite a few headlines, including, I saw there was a piece in The New York Times. And so, I suppose the first thing achieved was elevating the brand, which I guess you’d anticipated. But I think you alluded to this earlier on, it’s like, not just about Roger wearing the shoes. I think he’s actually becoming much more involved in helping design the shoes. So, what is Roger’s role at On and how significant is it beyond just the marketing impact?

growth has never been the ultimate goal. The ultimate goal has always been to give you, as a customer, an amazing experience — Marc MAURER

Marc: Yeah, I mean, it’s very significant. So, both, I think, On and Roger had a dream and a vision on how we could create something that would eventually be there for a very, very long time and would be way longer-lived than Roger’s career. And because the product is at the core of what we’re doing, it had to come through a product. So that’s why, at the beginning, we really started to work on a product, brainstorm on a product, and eventually coming up with ideas and first sketches and a first product. And that’s a big part of Roger’s role: helping us thinking through what that product range could look like going forward, and he’s very actively involved in that. At the same time, obviously, Roger is an extremely authentic person and he shares the exact same Swiss values that we do. And together, that allows us to also reach a broader community, kind of take a step in sports marketing. And it has been a very, very inspiring partnership so far.

[00:28:41.06] Ben: How long before there’s a tennis shoe? And how long after that before there’s a squash shoe?

Marc: Probably there’s never going to be a squash shoe. And I’m not sure if there’s going to be a tennis shoe. But I think everyone who is listening, should look forward to eventually something come out that is very authentic to Roger and to On.

[00:29:04.08] Ben: So, up until now you’ve built a business and you’ve grown market share on the back of product innovation. So you’ve had the Cloudrac, Cloudflyer, Cloudedge. Are you now starting to move beyond just product innovation to product development? So, I think one of the things I read — I don’t have a pair yet I’ll get a pair — is that you’ve now started to move into fashion sneakers or fashion trainers, beyond just performance shoes. So, is that now the shift you’re making? Or is it more just that all these different lines are getting blurred? So, what was a running shoe is now doubling up as a fashion shoe. How much is the category changing versus your strategy’s starting to change?

Marc: It’s more the second one. I mean, the thought behind this is basically, what if I could wear my running shoe every day, everywhere, anytime? In the past, you either had a running shoe, a comfortable, performance shoe, or you had a fashion shoe. But you would never have a comfortable or performant fashion shoe. So what we’re trying to do is we’re trying to take our tech and bring it to the lifestyle industry so you actually can wear a very innovative product that is extremely versatile but that is made for a 24/7 active use, rather than just running. At the same time, the second thing is we’ve moved strongly into outdoor because, again, as I said, we were born in the Swiss Alps and trail running is something that we love doing, hiking is something that we love doing, so we invest a lot in outdoor as well. And outdoor, at the same time, has become a huge fashion trend. So, actually, if you go to the big cities now, if you go to some of the key tastemakers that we see in the retail landscape, then a lot of the silhouettes are now influenced by outdoor. So, we’re, again, taking that, and also bringing that trend to what we call, ‘performance all-day’.

[00:31:06.10] Ben: You’ve been, as you said, a couple of times, you were growing in a very Swiss way, which is very sustainable, very organic. How big do you think On could eventually be? I’m not asking for your projections, but much more your long-term ambition for the company.

Marc: We never dared to dream to be where we are today. We would never have imagined being where we are today. So, I don’t think we could give you a number or whatever. I think, in the end, we’re trying to have a great product, work with great distribution partners, have a great team. And if we do that right, and if we continue to execute on the highest level, eventually, our customers will appreciate that and that will allow On to grow much bigger than it is now. But growth has never been the ultimate goal. The ultimate goal has always been to give you, as a customer, an amazing experience — and the more customers we can target and reach to have that amazing experience, the better it is.

For me, an industrial guy is someone who is basically making a commodity. You can swap around industrial lagers and basically see no difference to them. They spend millions in marketing but it doesn’t necessarily mean a difference. Sometimes they don’t even have their own brewery, they contract brew all over. It’s not about the story. — Arthur VIAUD

[00:32:12.26] Ben: Arthur, before you started La Nebuleuse, you were a private banker. How does one go from private banking to craft beer?

Arthur: Well, I was working on the trading floor at the private bank in Geneva. So, of course, they’re very unrelated topics. I was brewing on the side, as a hobby — something I’ve been doing since I was a student.

Ben: Like in your bathtub?

Arthur: Kind of in my bathtub. Not literally in my bathtub, but in the bathroom, for sure! At some point, I felt like I wanted to find a really meaningful working life, and the entrepreneurial spirit always has been in me and then, I’m not going to say it was a very natural jump, because you need to consider a lot of things before jumping ahead, and of course, you go into a lot of uncertainty. But it was just about taking the jump. The passion was there, the interest was there, and it was about doing something with my brain but with my hands and with passion and moving ahead with a different set of values, etc. The previous professional experience was useful and proved to be useful in a lot of different aspects in the journey, so I never regretted having done what I’ve done, but of course, I would not go back to it now. I’m very, very happy, and proud that I’ve made this move. So I would say it came up naturally and the deep motivation was so early on in my career. I’m young, I don’t have any family to feed, it’s easier to take risks, as well. So, that’s how it came.

[00:34:00.21] Ben: And when you were weighing up that decision, did you literally weigh up the pros and cons? I mean, did you make a list of, a private banking offers me a steady career, it offers me a fixed wage, it offers me a bonus each year. On the negative side, I don’t want to wear a suit anymore, I want to do something I’m passionate about. Like, how did you make that decision?

if you share that passion and that interest and you’re passionate about your product and you want to get the best thing out, then I think that it’s not really volume question. It’s about your interests and how you’re aligned. We take decisions that are sometimes not efficient on an industrial basis, but we won’t compromise on them because we just think it’s the right thing to do. — Arthur VIAUD

Arthur: Well, first, it was not a single decision because I went into the game with two very old childhood friends of mine. So, we all took the decision at the same time and both of them also had corporate jobs. So, it made it both easier and harder. It made it easier because all of a sudden, if you’re three people convinced about something, it’s easier to say, “Okay, well, this must be something right about it.” But it may have been also harder because then you have on your shoulder the potential failure of the business but you also have on your shoulder the potential failure for your other partners who are also taking a lot of risk there. And so, of course, we discussed about it. So, in my head, I mentally went through pros and cons and I think I remember writing down a small list about things that I will lose by doing it, and sometimes writing them makes you realize, “Am I really willing to let go of that?” But it was easier because we were still fairly Junior in the positions. So it’s not like we left a huge paycheck on the table. It’s not like we left massive benefits, big stock option plans, whatever. It was way earlier in the curb. And I thought, “Okay, well, I might not miss much of the curb at this point in time.” So it was also easier to go ahead at this point in time.

[00:35:40.16] Ben: So, on the one hand, you had your personal desire to do something you’re passionate about, but presumably you also saw the gap in the market, the opportunity to launch something which would be successful. So, what is the gap that you saw, and how is La Nebuleuse addressing it?

Arthur: We’ve been following the craft beer markets in other countries just out of interest because we were just homebrewers and it was quite fun to do that. When we realized, “Well, actually, maybe we should do that.” Then I thought, “Okay, I had to go ahead and do a few trips abroad to really check what the scene was like, to see how is this different from the current market?” I just went to the US for about three weeks, in California, and just checked the craft beer scene there, and then I discovered that the level of development of the market there was way, way, way ahead of the Swiss market. And, looking at it, I saw no reason why this would not come here. The power of the population, the level of education, the center of interest, the psych — all the stars were aligned to see a real booming of the industry in Switzerland and it was just not there. There were a few players who were still around brewing but there was nothing spectacular. The connection with the customer was pretty low, to be honest, the quality of the products was not outstanding, we would not find the flavors and the kind of brand that we would look up to abroad. So then, it became apparent that something could be done. And then, I got further confirmation looking at what was happening in Scandinavian markets, in the UK. So, I was like, “Okay, it’s happening also in Europe; it’s not only a US thing. There’s absolutely no reason in the world why this would not happen in Switzerland.” And that’s what really triggered the, “Okay, this was just an idea and now we have to make it a business.”

Craft beer is an affordable luxury. It is a luxury because it comes at a premium and it comes at quite a premium if you look in percentage terms, but if you look in absolute terms, it’s actually quite cheap and affordable for most people. — Arthur VIAUD

[00:37:39.06] Ben: Basic question: what is the difference between an industrial and a craft beer?

Arthur: It’s not volume related. A lot of people think it’s volume related. I think it’s spirits related. For me, an industrial guy is someone who is basically making a commodity. You can swap around industrial lagers and basically see no difference to them. They spend millions in marketing but it doesn’t necessarily mean a difference. Sometimes they don’t even have their own brewery, they contract brew all over. It’s not about the story. It’s not about what you offer behind it. And you have small guys who actually have kind of an industrial mindset — will produce something that’s not so interesting, they don’t put much soul into it, and much interest to it. On the other hand, a craft brewer is someone who focuses first and foremost on the quality of what they deliver — and I value that a lot. It’s a bit like an industry with a heart and a smile, I like to say, so you’ve got to be passionate about what you do. You’ve got to be very interested in the people — it’s a people business, we do something that’s basically as old as the world and has been gathering people around beer forever. And so, if you share that passion and that interest and you’re passionate about your product and you want to get the best thing out, then I think that it’s not really volume question. It’s about your interests and how you’re aligned. We take decisions that are sometimes not efficient on an industrial basis, but we won’t compromise on them because we just think it’s the right thing to do. And a big guy would not do that.

[00:39:11.21] Ben: And the rise in craft, as a general term — which encompasses beer, but also chocolate and all sorts of different items — this is really riding, I guess, two waves, right? One is the growth in disposable income. And the other one is the death of mass marketing. Would you say that’s fair to say? Because it’s harder to get people to buy an undifferentiated product at scale — on the one hand; on the other hand, as people get wealthier, they’re demanding better quality products, and they’re more interested in where these products come from, and how they’re sourced and if they’re sustainable, and so on. Do you think these are the two trends you’re riding with craft beer?

Arthur: Yeah, totally! Over the last maybe 50–60 years, there’s been such a rise in consumer choices, and people got a bit obsessed with choice. And then also the price was a big trigger, because all of a sudden it became accessible to the majority, to have access to a wide range of goods, which if you go back in the early 20th century was not at all like that. And then, at the end of the 20th century it was already a very different game with goods coming from all over the world, and products that were once never available, were available to the masses. I think that’s the first part of the equation. Now, the second part of the equation is that people got used to diversity, they start to also look a bit deeper than just, “Okay, what do I have available?” They start to look for the story behind, they start to associate with the brands, they want to support maybe more values that they like, and I think the rise of the Internet in the way that it increased the speed of information and then people got just much more information about things. So, it’s much harder to fool consumers today than what it was 30 years ago. So, you can’t just go around and say something that’s completely wrong or that’s completely not in line with your values and expect to take people for fools and think they will just take it. So, I think that this is a big change. Of course, there’s wealth involved, but also, it’s just that people are more sensitive to what they consume. They think more. And I think if you’re just doing a good job, and you’re being honest about it, and you show it and you’re caring and professional, then eventually you’ll find a market as well — as long as you do something that’s quality-driven and that you actually mean it, then there’s a market out there for you.

We target people who are conscious about what they want to drink, who like to taste, who like to feel, who like the branding, and who feel like they can have some tie with us one way or another. So, naturally, we tend to go a bit local. But, of course, this can resonate with people abroad, it can resonate in a lot of different places. — Arthur VIAUD

[00:41:30.01] Ben: How big could that market be? Is there a tension between this constant fragmentation, this constant search for better quality? And then, on the other hand, producing a really good product at scale? Because, some of these “craft brewers” like, BrewDog, for example — I mean, these guys have gotten really, really quite big and they’re distributing internationally. So, does it come to a point at which you grow so big that you almost look like a mass-market brand?

Arthur: I think it’s a fair question. It’s the big question of, “Is it better to be a big fish in a small pond or a small fish in a big pond?” And I think BrewDog, for example, has had a very aggressive growth. They’re fueling a lot of that. So, for those who don’t know, they’re a Scottish-based brewery, they brought a lot to the equation in terms of craft beer throughout Europe. They’ve been very disruptive. And they’ve been expanding internationally. This is a bit against the base idea of craft, which has some sort of local grounding to it. So, we’re not talking about historical beers and say you want a special beer from a Belgian Bay and you won’t find it anywhere else in the world, and that’s shipping all over the world. Craft beer is an industrial process and someone in Iceland can do an excellent beer, and someone in Vietnam could do an excellent beer, given that they have access to the raw materials that they of course have to source internationally, but they can produce and brew something really qualitative. So, I would say that the craft beer market tends to be a bit more local than the international beer market. And hence, some guys like BrewDog, have tried to associate a lot with local brewers when they go abroad, not to get too much of this image of an international global brand. Whether this is successful or not, it’s hard for me to say. But what’s for sure is that I think that our market, for example, is still very Swiss at the moment. Could evolve over time. But I think it’s hard to be a really global brand and have a really close relationship with the consumer. Or you can have a close relationship, but in a product that’s physical, I think there’s some limitation to that one way or another.

we go and have drinks in the same places that our consumers go have drinks and we just see people there, we know everyone from bartenders to waiters, to bar owners, restaurant owners, shop owners. And so, there’s a very special relationship — Arthur VIAUD

[00:43:39.18] Ben: But isn’t it about finding the right demographic for La Nebuleuse?

There’s a certain type of drinker and you identify with that drinker and maybe it’s about their lifestyle, maybe it’s about their age, and then you’ll find that same demographic in all the places where you have “hipsters”. So, do you know what I mean? Like, you have an audience in Lausanne, you have an audience in Geneva, you have an audience in Zurich, and then maybe the next natural audience is in Lyon, or it’s in Milan.

Arthur: I mean, it could be, of course. I think beer is an affordable luxury. Craft beer is an affordable luxury. It is a luxury because it comes at a premium and it comes at quite a premium if you look in percentage terms, but if you look in absolute terms, it’s actually quite cheap and affordable for most people. So, we do not see ourselves as a very exclusive good. We just target people who are conscious about what they want to drink, who like the taste, who like to feel, who like the branding, and who feel like they can have some tie with us one way or another. So, naturally, we tend to go a bit local. But, of course, this can resonate with people abroad, it can resonate in a lot of different places. But I think, then, in these places, it will tend to be a smaller size market than in our home market. It doesn’t mean that there’s no market, it just means that it will be a bit more niche. But again, a niche market in Shanghai might be as big as our local market here. But demographics are obviously very important. Because it is such a widespread good, because it is consumed by so many people, in terms of demographics, it might touch a lot of people anyways. But, of course, we have a core range of consumers who are much more likely to take the product than others, that’s for sure.

The only motto that we have, internally, is that we do not produce something that we don’t like ourselves. So, any single product that goes out is something that we would happily consume ourselves. And if not, it’s not making it. — Arthur VIAUD

[00:45:21.04] Ben: That just seems that’s the mistake of mass-market brands, which is, in order to appeal to every single demographic everywhere, they stand for nothing. Whereas I think you authentically stand for something and it would almost be better to target a small demographic across Europe than to try to get too deep in Switzerland.

Arthur: Well, I think that you can’t touch everything and you can’t touch everyone, that’s for sure. I think that we can also stand for something that can be seen as local pride because we think it’s how we want to be perceived, eventually, and it’s what we want to work towards. So we want to do things differently and we want to brew the best beers we can with an independent spirit and all of that. And I think you can reach the point where you’re seeing not just as an outstanding product but also as a symbol that can be seen and put forward. So in Lausanne already, in a lot of places, we’re seen as really THE beer of the place and there’s a sense of pride from people living there, just because they have a cool brand that’s the cool beer that’s being brewed very close by and it’s part of it. And of course, if they can see that brand elsewhere in Europe, they would also advocate it. So, it’s really, I think it’s two things. And at the same time, we also appeal to people who are very in line with the brand. So, as I said, our real core target group of people who will really fit with us, they will also be all over Europe, maybe, and they will associate with our products, our design, our spirit, all of that — and regardless of where they are, they might be a perfect match and if they can have their hands on our product, they will do that.

[00:46:58.13] Ben: Tell us, what’s so special about La Nebuleuse, in your opinion?

Arthur: I think we’ve seen the whole thing as not only brewing the best beer but as being part of something. So, we haven’t followed the typical, “Let’s try to make the best beer.” We talked about how are we going to activate with our customers, do events things like this? How are we going to do the best packaging we can? How can we be very, very active to support the local community? How can we interact with all the industries as well? So, we try to be part of an ecosystem instead of just being a player somewhere. And I think it makes quite a big difference between a lot of the players around. It’s us, the three founders being very, very involved and the team that grew around is very involved, and where it all takes place is Romandy, in general, and I would say mostly focused on Lac Leman in general. And there’s a story behind it and there’s the relationship we’ve got with the people and we go down to meet customers but not on the purpose of meeting customers. It’s just because we go have drinks in the same places that our consumers go have drinks and we just see people there, we know everyone from bartenders to waiters, to bar owners, restaurant owners, shop owners. And so, there’s a very special relationship in that perspective, which is very different from a lot of different brands.

[00:48:20.17] Ben: What is the best-selling beer that you have?

Arthur: Now, there’s a bit of a competition, but we have three brands that are really doing great. And that’s Stirling, Embuscade, and Zepp. Zepp, obviously, is taking a big hit because it’s a beer for bars and restaurants, and over the last two months plus it’s been closed pretty much. So, it took a hit but Stirling is getting stronger as well. Embuscade is still growing. So, I would say these three are really the three brands that are all the way at the top.

[00:48:54.02] Ben: You have an IPA, you have a Pilsner, you have a session IPA. So you have all these different types of beers. And is the idea to appeal to everybody’s different tastes? Or is the idea that you can not just take market share from traditional beers, but you can start to take market share from spirits and wine. What’s the idea behind having such a broad range of beers?

Arthur: Well, first of all, it would be very boring to have only one or two beers and that’s not in the spirit of what we do. I think it’s very hard to have a favorite among your children — you should not — so the thing is it’s part of our culture to have a range and to have diversity. And, of course, we try not to overlap too many styles together. We have a lager that can compete against bigger industrial breweries, but most of the time, it’s still priced at a premium. And so, it’s not necessarily really scavenging on the big guys market. And we’re not necessarily trying to scavenge on craft beer themselves. It’s just that the craft beer segment is growing. So by growing, we have more space for products. We try to have a portfolio of products that’s balanced that we like and we’ve built it with that in mind. Of course, we wanted a Pale Ale, we wanted an IPA, we added a Session because it’s something that was really missing in our range — we wanted something that was highly drinkable with lower alcohol. The only motto that we have, internally, is that we do not produce something that we don’t like ourselves. So, any single product that goes out is something that we would happily consume ourselves. And if not, it’s not making it.

[00:50:34.16] Ben: And I think you have very passionate customers, like me, right? Real brand advocates. What’s the plan to get your passionate customers and use that passion and channel it to make the product better, and I guess, more importantly, use that passion to help you to sell more?

Arthur: I think the best thing is to embark them on the journey one way or another. I think we are a great brewery, we’re going to pull back visits on the schedule, ideally from July going forward. We want to get as many people to come and visit, as possible. And you rarely speak about the beer that you had yesterday except if it was something truly outstanding, but you’re not going to pick up a discussion with that. But you might pick up a discussion on the visit that you’ve done and how great it was and how you discovered this and that about the process and all of this, and then you might get these other people to come and visit. You came, you tasted beer, you liked the place, you liked the atmosphere, you liked all that. The likeliness of you consuming more of that product next time you hit the bar or telling the bar manager, “Hey, why don’t you have this product in stock?” Or picking up that product the next time you go to the supermarket just shoots through the roof once you’ve seen that.

Arthur: And we’ve seen this with some of the bar managers, bartenders — after they came — because our place really sweats of passion. And so, once you really got into this and you saw it, it actually triggers something. You get more interested in the product, about the whole story behind. And it’s much cooler to speak about something that you’ve seen the back scene of it, then to talk about something that you don’t really know about. I think big brands have nothing to say. They have to spend millions to find a storyline that they can share with the consumers. And we have a lot to say. We just need to get the people in to see it. And after, I think, they will do the job themselves and they will advocate for what they like or they didn’t like. And if they don’t like, well, we’re actually small enough so that we take very seriously any comments that we have and we can actually act upon it quite fast or much faster than the big guys. So, that’s also a big differentiating point for us.

[00:52:53.22] Ben: Tell us about C’est ma tournée.

Arthur: Yes, sure. So, you know, of course, there is a multitude of campaigns that were launched by a lot of different actors throughout the pandemic and how to support your consumers, how to support clients, how to support the society as a whole, as well. We thought about a lot of different things. We thought about, of course, it was this huge talk about, should we do some hand disinfectant? But we realized, “Okay, we cannot. We can’t produce pharma-grade disinfectant. It’s not going to work. We’re a brewery, we’re not distilling and we can’t even bottle the product.” So, that was a no-go. But we really wanted to help with something because the whole company is not going to a dead stop. But it was very, very slow because more than 50% of our sales were in bars and restaurants. All of a sudden, you have zero sales with that. And we thought, “Well, we have to help these guys out, as well, because if they go down, we also go down. Oh, it’s terrible. We need to find something to do.”

Arthur: And we didn’t want to do something complicated because we know the guys, and they’re not very big into paperwork. So, we wanted to do something that’s quite easy that requires minimal effort from their side and that can bring what they need most — that is cash — just to survive. And we thought, “Well, we have a bit of a capacity because of course, it’s being unused. And we know how to make great beer because it’s our day-to-day job. And we don’t have a niche shop — because we didn’t then.” So we thought, “Well, what could we do that would be significant?” Well, that would be saying, well, we’re going to deliver ourselves the beers to a limited area — because we can’t deliver throughout Switzerland — and people can buy a pack of 24 and select which bar or restaurant they want to support. And the bar or restaurant needs to be in Lausanne or in Geneva — the two areas that we deliver — and if they don’t want to pick, they just say, “Okay, I split parts” and we give to all the different things. And we decided, “Well, we’ll give half of the sales” because it’s not very profitable, at all, for us, but that’s okay, we get the beer moving. And most importantly, we support bars and restaurants. So, for every franc that we get, we give back 50 cents.

Arthur: So, it’s that simple and people get to select which bar and restaurant they want to support. So, of course, people are stuck at home, they can’t do much so they might as well get a beer in the evening and they might as well help the bar that they used to go to, to have drinks because that bar will be in dire need at this point in time. And “C’est ma tournée” means “it’s my round” and what we thought is that very often when you go to a bar or a restaurant, the bar owner will give you a round at the end of an evening just to thank you for being there. And I thought, “Well, now it’s time for you, the consumer, to give a round to your bar or to your restaurant to help them out.” And you can do that by contributing no more than paying the normal price for your beers and we will go the extra mile and give 50% of that to the bar or restaurant of your choice. So, we made some posters that bars and restaurants could put on their windows and some banners they could put on their social media. So it was a very simple operation, at the end of the day. It was put in May, and it’s been running since then.

[00:56:18.26] Ben: The last question is, will you keep direct distribution to consumers post-pandemic?

Arthur: It was something we didn’t consider before. But we had surprisingly high traction on that — or I don’t know if it’s surprising, actually, but we had excellent traction on that. Now, the website is actually put up, so it is very possible that we keep this as a branch of business for us. Also, because some products that we sell are sometimes a bit more difficult to get out on standard channels because you might have distributors who don’t want to stock up small volumes. If you do some funky beers, then it’s always hard. You can find a lot of people who will be interested. We actually often have consumers who call us up at the brewery and say, “Well, I’ve seen that you’re releasing this beer and I can’t find it anywhere. How do I get it there?” And sometimes there’s only a few places that will actually pick it up, even though there’s demand because they can’t be bothered to buy just a few boxes, they can’t be bothered to change their menu, they can’t be bothered to make some space in the shelves. But still, there’s demand for it. So, I think for that simple reason, as well, it’s a very good channel that we’ve never really used. So, most likely we’ll keep it up and running, yeah.

[00:57:25.19] Ben: And can you ship internationally?

Arthur: It’s complicated today. We ship internationally on occasion for professionals. So, if we have some bars in France or in Belgium, or in Scandinavia, or in England, who want to buy the beer, sometimes some have just contacted the distributors, and it’s going through like that. So, it’s been, I would say, a non-systematic business, but it’s been happening ever since 2015. We’ve been selling beer internationally, but not to private consumers because it’s very difficult and you need to go through a guy, you need to go through a middleman. I don’t see how you’d do it without.

Ben: Perfect! Arthur, thank you so much for coming on the podcast!

Arthur: Thanks, man!

From Scalable Efficiency to Scalable Learning (#22)

From Scalable Efficiency to Scalable Learning,
w/ John HAGEL

We are speaking with John Hagel, who has been working with the most successful companies in Silicon Valley for 40 years (also a startup founder of his own). John is the author of several books — including The Power of Pull he co-chairs Deloitte Center for the Edge, which is a Silicon Valley research center. In this episode, John joins Ben Robinson for a very comprehensive discussion on the zoom in — zoom out approach to strategy; why the advertise-based business model is unsustainable and the alternative; how customers’ reluctance to accept mass-market products will drive the fragmentation of product and service-based businesses; why learning in the form of sharing existing knowledge is not where the greatest value is; why John is optimistic about the gig economy — and more.

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast


  1. The Power of Pull — John Hagel, John Seely Brown, Lang Davison
  2. Zoom In / Zoom Out — Deloitte Center for the Edge
  3. Never underestimate the immune system — John Hagel

Full podcast transcript:


One of the things I’m intrigued by is the degree to which the big shift is producing a return to the past, and I think one of the interesting trends that I anticipate in the gig economy is moving to what I call ‘the guild economy’. — John Hagel

[00:01:40.27] Ben: So, John, thank you very much for coming on the podcast. I guess most listeners will know who Deloitte are, but probably there are quite a few people that aren’t quite so familiar with the Center for the Edge. So what is the Deloitte Center for the Edge?

John: Broadly, it’s a research center that’s chartered with identifying emerging business opportunities that should be on the CEOs’ agenda, but are not, and do the research to persuade them to put it on the agenda. So, we try to stay a step ahead of everybody else.

[00:02:14.11] Ben: Your work is guided, I think, in large part, through this idea of the big shift. How do you define that big shift?

John: We don’t have a single definition. We just view it as the way in which the global economy is transforming as a result of long-term trends that have been playing out for actually several decades.

[00:02:37.15] Ben: So, you mean technological trends like Cloud, mobile — those kinds of things?

John: Certainly digital technology is a key driver of the changes. I’d say the whole movement towards the freer movement of people and goods and information across boundaries on a global scale is another factor; the increasing power of customers is another factor. So, there are many forces that are coming together to shape the big shift.

[00:03:09.13] Ben: And this big shift, you would argue this is as big a shift as the move from an agrarian to an industrial economy? It’s that kind of magnitude of shift?

John: It is. I mean, I think that often we hear the phrase or some framing of, “We’re in industry 4.0”

Ben: Yes. It’s the World Economics Terminology, I think.

There are two very different time horizons: 10 to 20 years, and 6 to 12 months. When you think about the way most companies talk about strategy, it’s the five-year plan, right? It’s year one, year two, year three, year four, year five — that’s their strategy. [While Big Shift] companies spend almost no time on one to five years. It’s all about 10 to 20 years or six to 12 months. And their belief is that if they get those right, everything else will take care of itself. — John Hagel

John: Yeah. And our perspective is, no, we’re beyond the industrial era. And the way we frame it is around this notion of a contextual era where it’s all about context — reading context, responding to context quickly and effectively — and that’s a very different way of organizing and acting on business issues.

[00:03:55.08] Ben: That’s good! I think we should now start to delve into what that really means — the big shift in the contextual era. So, maybe let’s start by talking about the role of strategy within an organization. Because, I guess, in response to faster change, a company needs to introduce more agile decision-making and you’ve written a lot about this. So, I was wondering if we could maybe start with your concept of zooming in and zooming out and how that helps to frame strategic planning horizons.

One of our concerns is everybody today talks about agility and flexibility. And certainly, that’s valuable in some contexts. But if all you’re doing is sensing and responding to whatever is happening at the moment, being flexible and agile, you’re going to spread yourself way too thin across way too many things, because there’s so much going on. If you’re just responding and reacting to anything and everything, good luck! Zoom out — zoom in helps you to focus to get a sense of what really matters. — John Hagel

John: Yes. It’s a very different approach to strategy — zoom out, zoom in. I’ve been in Silicon Valley now for 40 years, and I’ve had the opportunity to work with some of the most successful tech companies in the Valley and they have a very different approach to strategy and it inspired the zoom out — zoom in. They don’t use that term, but it’s one that I’ve used to basically describe a very different approach to strategy, which focuses on two time horizons in parallel. On one time horizon, it’s 10 to 20 years — and that’s the zoom-out horizon. And on that horizon, the questions are, “What will our relevant market or industry look like 10 to 20 years from now?” And then, “What are the implications for the kind of company or business we need to be, to be successful in that market or industry 10 to 20 years from now?” So, that’s zoom out.

John: Zoom in is a very different time horizon. It’s six to 12 months. And on that horizon, the questions are, “What are the two or three initiatives — no more; two or three — that we could pursue in the next six to 12 months, that would have the greatest impact in accelerating our movement towards that longer-term opportunity we’ve identified? And do we have a critical mass of resource against those two or three initiatives in the next six to 12 months? And how would we measure success? What are the metrics we would use to assess our progress towards that longer-term destination?” So, there are two very different time horizons: 10 to 20 years, six to 12 months. When you think about the way most companies talk about strategy, it’s the five-year plan, right? It’s year one, year two, year three, year four, year five — that’s our strategy. These companies spend almost no time on one to five years. It’s all about 10 to 20 years or six to 12 months. And their belief is that if they get those right, everything else will take care of itself.

John: And so, it’s a very different way of thinking about strategy and we believe in rapidly-changing times it’s necessary, essentially, as challenging as it is, to look ahead. You need to do that. One of our concerns is everybody today talks about agility and flexibility. And certainly, that’s valuable in some contexts. But if all you’re doing is sensing and responding to whatever is happening at the moment, being flexible and agile, you’re going to spread yourself way too thin across way too many things, because there’s so much going on. If you’re just responding and reacting to anything and everything, good luck! Zoom out — zoom in helps you to focus to get a sense of what really matters. Where are we headed? What’s the destination that we’re trying to achieve? Then, how can we accelerate our movement there? It’s a very powerful way to focus effort rather than just respond to whatever is happening at the moment.

One of the zoom-in initiatives — six to 12-month initiatives — should be focused on what we call ‘scaling the edge’. It’s finding an edge to the existing business that has the potential to scale to the point where it will become that business that we anticipate 10 to 20 years from now. — John Hagel

[00:07:30.28] Ben: And presumably, when you’re working on these different time horizons, you’re using different strategic tools to try to figure out what the world looks like in 20 years; and also, I guess, separate tools to optimize what you do in the next six to 12 months. Is it fair to say that when you’re looking 10 or 20 years out, you’re using scenario planning, kind of pulling yourself out of your comfort zone, and trying to think without constraints about what the future might be?

John: Absolutely! Scenario planning is a critical tool and very useful in terms of looking ahead and imagining all the possibilities, alternative futures. I think that the difference here is that in most scenario-planning efforts, you imagine very different futures, you may ultimately just agree on which future has the greatest probability, and then you leave; the meeting is over. In this approach, the meeting is not over until we have committed to the future that we believe is most likely — and committed to short-term initiatives based on that future. So, where this has implications for us — and it very much changes the whole discussion because a lot of scenario-planning efforts are viewed as theoretical, conceptual exercises, but they don’t really make a difference to the business today. Zoom out — zoom in has a profound difference in what you do in the short term.

[00:08:57.02] Ben: How concrete an idea or a future do you have to come up with? Because one of the things you talk about a lot in your writing is this idea of narratives versus stories. And I think the difference you draw is that a narrative is open-ended. So, can a future state be a little bit nebulous and just kind of help frame where you’re headed, kind of like the Northstar, without having to be too concrete?

John: Yeah, it’s a balancing act, ultimately. It has to be sufficiently tangible that it can help you make choices in the short term, but broad enough so that there’s room to explore and discover as you go. One example I use, most of the companies that pursue this approach don’t talk about it publicly: there was one company where it’s been written about, so I can share, and it was actually Microsoft in the early days when it was just a startup, back in the 1970s. Bill Gates pursued a zoom out — zoom in approach and the zoom out he had for his company could be summarized in two sentences: one is, “Computing is moving from centralized mainframes to the desktop”; the second, “If you want to be a leader in the computer industry, you need to be a leader on the desktop.” So it wasn’t a detailed blueprint of what the computer industry would look like 10 to 20 years from now, but it was enough specificity so that you could make really hard choices in the short-term and accelerate your movement towards the desktop.

I think the immune system, the people in the immune system are very well-intentioned people. They’re not evil, by any means; they’re wanting what’s best for the company. Their view is what’s best is to continue doing what we’ve always done. So, this notion of scaling the edge is a way to not draw out the immune system. — John Hagel

[00:10:29.13] Ben: You just said something that I want to touch on, which is, you said, you’ve got to be able to make hard choices in the short term. In this kind of strategy work that I’ve done, I think that’s one of the hardest things to get people to do, right? So let’s assume that you can galvanize an organization around the long-term vision, then getting them to make difficult choices to actually divest of some activities is super difficult. What’s the right way to approach making those short-term choices?

John: It helps if it’s short-term and it’s not massive resource requirement. So, a lot of the resistance is, if you’re talking about five-year programs and billions of dollars, that’s going to encounter a lot of resistance. We have kind of a filter that we use on the zoom inside, which is that one of the zoom-in initiatives — six to 12-month initiatives — should be focused on what we call ‘scaling the edge’. It’s finding an edge to the existing business that has the potential to scale to the point where it will become that business that we anticipate 10 to 20 years from now. So, it’s finding an edge and starting to scale the edge in the next six to 12 months.

John: The second zoom-in initiative is, “What’s the one thing we could do that would have the greatest impact in strengthening the performance of the existing core of our business? Because ultimately, that’s where the money is today and we want to prolong it as much as possible.” And then, the third one, which is the most challenging in my experience, the third zoom-in initiative is, what one major set of activities could we shut down in the next six to 12 months so that we can free up resources for scaling the edge and for strengthening the core? And that’s looking for something that is marginally profitable, has no real potential for growth. Why are we doing this? Let’s shut it down, so that we can, in fact, devote more attention and resource to the things that matter.

[00:12:41.10] Ben: And how successful are you at getting companies to do that third aspect?

John: As I said, it is certainly challenging. I think that, in my experience, having a sense of what’s that edge that we could scale and the really big opportunity we could be moving towards, and then also that there’s an imperative to strengthen the core — we can’t just continue on as we are — I think that helps to build a sense of need for shutting down. I mean, if you just say, “Let’s shut down things that aren’t very good or very profitable”, that’s going to encounter a lot of resistance. But it’s the notion that there’s actually something much bigger and better that needs and deserves the resources that we’re currently devoting to something that’s not producing great results.

[00:13:30.24] Ben: One of the articles that you wrote that we have cited the most — in fact, I’m pleased we don’t have to pay royalties to you because we’ve cited it so many times — is the one around the immune system. I think you consistently say, “Never ever underestimate the immune system!” How does one scale the edge under the radar of the immune system?

in most of my career, I’ve been a business strategist — it’s been all about strategy: that’s what’s going to win, and if you get the right strategy, everything else will solve itself. Increasingly, I’ve come to believe that it’s much more about psychology than strategy. We need to understand the emotions that are shaping and driving our actions. — John Hagel

John: It’s a great question and certainly a major focus of our work is the notion of how do you avoid mobilizing, exciting the immune system. And a general counsel to companies around the drive to change, first of all, it’s scaling the edge versus trying to transform the core because even if you see the need to do everything fundamentally differently, if you go in from the top-down into the core, and define this massive change program that’s going to take many years and a lot of money, that guarantees that the immune system is going to come out full force against you. They want to hold on to what they have, they don’t want to take risks. And by the way, I think the immune system, the people in the immune system are very well-intentioned people. They’re not evil, by any means; they’re wanting what’s best for the company. Their view is what’s best is to continue doing what we’ve always done. So, this notion of scaling the edge is a way to not draw out the immune system. If you start with a small part of the business that today is relatively modest, doesn’t get a lot of attention and you focus on short-term action and impact, that helps to build more credibility for what you’re trying to achieve and over time, in our experience, it undermines the immune system because the immune system, a lot of it is about being risk-averse. But if you can show real impact in a short period of time, it starts to overcome that risk averseness and people start to ask, “Well, wow! That’s interesting! How can I be part of that?” So it’s a way to avoid direct confrontation with the immune system.

[00:15:41.16] Ben: You have an expression — in fact, it’s the subtitle of your book, The Power of the Pull — where you say, ‘it’s all about small moves smartly made’. I suppose that begs the question, if you’re making small moves, are we not in danger of incrementalizing ourselves to death, if we’re not careful?

John: That’s one of the biggest risks these days. The focus is on the term ‘smartly made’. I mean, yes, it is small moves, but it’s with a clear sense of direction and focus on what really matters, and being very aggressive in those small moves. It’s how quickly and how much can we achieve in a short period of time? The emphasis is on ‘smartly made’ and the way to avoid incrementalism, again, is to have a very clear sense of what’s the destination, and how would we measure our progress towards that destination? What are the metrics so we’re very clear what really matters here, and then focus on how quickly are we actually making progress on those metrics?

I think the fear is definitely dominating, in my view, the reaction to the pandemic versus viewing this as a catalyst for change — John Hagel

[00:16:50.03] Ben: And I suppose those small moves might actually be quite large moves but they’re small in the sense that they involve a limited number of people so they don’t consume too many resources or invoke the immune system, the antibodies of the immune system.

John: Yeah, it’s all relative, obviously. If you’re a large company, a small move can still be a fairly large initiative, but it’s lost in the rounding for the overall company because it’s not that big and doesn’t draw that much attention. So, I think that’s the focus is really not trying to excite that immune system.

[00:17:31.02] Ben: And it seems like, listening to you, there are two parts to not exciting the immune system. One part is doing something which is relatively small so it doesn’t consume too many resources or bump into too many people or too many budgets. But the other part is around fear, right? Because, as you said, it’s perfectly rational — at least it’s rational in the context of what we’ve been taught in the business school, etc. — to not cannibalize revenue streams, and to pursue things that can double-down on things that work. So, I suppose, is countering fear also done through narratives?

John: First of all, I think your point about fear is absolutely spot on. I say now that in most of my career, I’ve been a business strategist — it’s been all about strategy: that’s what’s going to win, and if you get the right strategy, everything else will solve itself. Increasingly, I’ve come to believe that it’s much more about psychology than strategy. We need to understand the emotions that are shaping and driving our actions. And in the business world, again, the culture we have today is emotions are a distraction; focus on the numbers and do the analysis and everything else will solve itself. But I think in that context, this notion of narrative has become a key piece to our approach, which is… And again, I’m sorry if I go on a bit, but I make a big distinction between stories and narratives. Most people use the terms to mean the same thing. For me, a story is self-contained: it has a beginning, a middle and an end to it. It’s over the end. And the story is about me, the storyteller, or it’s about some other people. It’s not about you in the audience. You can use your imagination, figure out what you would have done, but it’s not about you. In contrast, for me, a narrative is open-ended — there is no resolution yet; there’s some kind of big threat or opportunity out in the future, not clear whether it’s going to be achieved or not, to be resolved, and the resolution hinges on you. It’s a call to action to the people who are hearing the narrative to say, “Your choices, your actions are going to help resolve this narrative. What’s it going to be?” And I think, in that context, if I focus on opportunity-based narratives, that helps to inspire people and excite them, and helps them to overcome their fear and act in spite of their fear.

John: One of the reasons we’re such strong proponents of the zoom out — zoom in approach is because if you think about it, at one level, it’s not framed this way in the strategy domain but you can think about the zoom out as framing that opportunity out in the future. What’s that really big opportunity that we could focus on and become over time? And then, it focuses people on short-term action and impact, which helps to inspire people — there’s a really big opportunity out there — but also overcome the skepticism that many are going to have who are afraid to say, “Well, wait a minute! That’s just fantasy. That’s never going to happen.” “No, we’re actually having an impact today, we’re making progress towards that opportunity. Come join us.” So I think it can be a powerful way to address and overcome the fear.

[00:21:11.24] Ben: The companies you’re working with at the moment, how good a job are they doing? Or how tough is it to translate this pandemic, into an opportunity and not into something to be fearful of?

It’s early days, still, but my counsel to companies is, find alternative approaches to advertising-based business models, if you really want to build trust and deeper relationships with your customers. — John Hagel

John: It’s hard to generalize, but, at least, in my experience with the companies that I’m dealing with, it’s still very much driven by fear and short-term focus, understandable at one level — I mean, many companies are struggling to make payroll for the month and continue to exist. And so, that definitely holds people back to a very short-term time horizon and just focusing on survival versus how can we learn from this? What are the things we could change that would help us to become even more effective and successful in the future?” So, I think the fear is definitely dominating, in my experience, the reaction to the pandemic versus viewing this as a catalyst for change.

[00:22:15.17] Ben: I want to slightly shift gears if that’s okay. So far we’ve talked about evolving strategy in response to the big shift. Now, let’s just focus a bit on how business models need to change in response to the big shift. I think you’ve written a lot, and I think you’re one of the earliest people to flag this, which is, in a lot of the platform business models we see today there’s this kind of inherent conflict between the consumer and the producer because in the middle you’ve inserted an advertisement, right? So, I think you’re one of the first people that I can quote, who was starting to question the sustainability of these “free models” that depend on that advertising revenue because they introduce that conflict of interest. But, I suppose, we haven’t yet seen. I mean, I think for a long time we’ve anticipated that maybe Facebook was about to move into negative network effects, but it hasn’t really happened. Do you still subscribe to the view that these advertising-based business models are inherently unsustainable? And when do you think we, as consumers, wake up to this? And when do you think these business models start to perform worse or not as well as they have done?

John: Yeah, there are a lot of challenges with the advertising-based business models. I think, certainly, one of them — and it was the whole focus of the book ‘The Power of Pole’ — was advertising intrinsically is a push-based model. It’s all about how to intercept people, get your message, push your message to them, push to get attention. Our belief is that model is increasingly challenged. The number of options that are trying to push to get our attention is significantly increasing and we, as customers, are becoming overwhelmed with all the attempts to reach us. So, I think that’s one piece to the puzzle. The other piece is that it goes to the notion of trust and perception of what interests are you serving when I interact with you? Is it my interest? Or is it somebody else’s? And, intrinsically, in an advertising-based business model it’s the advertiser paying the bill so the attention and focus are going to be on their needs and what do you need to serve them? It’s an interesting question.

John: I do see early signals. Again, I don’t think it’s a massive movement, yet. But, if you look at, for example, the adoption of advertising blocking software on the Internet, it’s skyrocketing. It’s significantly expanding. More and more people are using that to block the ads that are coming in. I think there’s also, again, early signals, but a lot of people who are active users of some of the social media platforms are pulling back and now saying, “Wait a minute! Do I really want to share this? Can I trust that it’s going to be used for my benefit versus somebody else’s?” And then, the other thing is the growing call — and again, I think it’s early days, but it’s enough evidence out there — that the mobilization of people for the regulation of online businesses and around data capture and around advertising and all the rest suggests that people are less and less open to having that model and having their data being used for that purpose. It’s early days, still, but my counsel to companies is, find alternative approaches to advertising-based business models, if you really want to build trust and deeper relationships with your customers.

[00:26:15.14] Ben: What you paint is this alternative or a better model is a model where you have alignment, right? So, I’m helping you to make better decisions to find products or services that are better suited to your needs. And so, it’s a model where I very clearly give you the consent to use my data in exchange for you doing something that will benefit me. So there’s total alignment, there’s trust, and also, an expression that you use, “In our attention-stuffed age, it’s about helping us to get a higher return on the attention that we afford to your platform.” So I can definitely see how that’s the next model to triumph. And I listened to everything you say about regulation and people turning on ad blockers, but we haven’t yet seen, as far as I’m aware, anybody who’s really profiting from this new idea of a trusted advisor or an intermediary. Have you seen examples in the marketplace that are really starting to work?

John: Not in any massive way. I mean, I think there are, again, early signals. I’m frankly, frustrated. I’ve been talking about these opportunities for quite a while. The challenge is it requires a massive cultural shift for a company to really address this opportunity. And the focus is, again, much more on the scalable efficiency and just doing things faster and cheaper and more incrementally. So, I think some of the early indicators — again, not perfect — there are companies in Asia that are being much more effective at mobilizing large networks of third parties to provide value to their customers, positioning themselves essentially as a trusted advisor. It’s more in the business to business space in those situations — things like the motorcycle industry, the clothing industry. So, there are some examples at that level.

the evidence is that customers are becoming more and more demanding and less and less willing to accept something that’s standardized, mass-market product or a bundle of things, some of which are good and others that are not that good. We want the best in whatever product or service category we have a need for and we want something that’s the best in the sense of addressing our individual needs, not just the mass market or even a large segment, but our specific needs — what would be the best product or service? In that context, we believe that that is a force that’s going to drive fragmentation of product and service businesses. — John Hagel

John: I think, one that’s intriguing to me, although, again, relatively early stage — not in terms of time, but in terms of real development — is what Johnson & Johnson has done with Baby Center website: they invite parents with small children, babies who are experiencing a very challenging life event and offering them a space to connect with each other and get help from each other, learn from each other about how to be more effective as a parent with small children. And so, I think it’s this notion of, again, being proactive in connecting the customers with people who can help them. And, at least in the US, that’s become a go-to place for millions of people. Parents with small babies are going there because the word is spread. And it’s the power of pull in that case because they’re not doing advertising for this website. The word is spreading — a parent with a baby has a friend who just had a baby and says, “You need to go to this website. It’s really helpful.” And so, it’s word of mouth and this draw because it’s so helpful to the person.

[00:29:43.27] Ben: Yeah, with that Johnson & Johnson example, I think you’ve more or less answered the question I was going to ask you, which is a kind of a paradox — and I know you like paradoxes — this idea that you could imagine I have your trust and in exchange for you sharing your data, I’m giving you useful information back. But without engagement, people won’t return enough to the site and won’t show enough data to make that site truly useful. But I think you’ve kind of answered it, which is, it has to be both, right? You have to achieve trust and engagement at the same time, otherwise, you won’t have a big-enough factor, and enough data to be able to be really useful to people’s lives. And I guess also, the social aspect helps with what you term as ‘scalable learning’ — which is, it’s only through many-to-many interactions that you can learn fast enough to really materially improve the learning curve, materially move up the learning curve.

John: It’s definitely complicated. I don’t suggest this is easy, at all, but another example that I use — and again, this is from quite a while ago, in the mid to late 1990s — a company here in Silicon Valley, Cisco, making networking equipment, created an online website called ‘Cisco Connection Online’. And what they were doing was they were inviting prospects — people who were interested in their equipment — to go to this website. And what they would do on the website is they would start by asking two or three questions — just “Tell me something about yourself.” And then, based on those questions, they would immediately provide tangible advice and value back to that prospect, to say, “Okay, based on that, here are the kinds of things you should be thinking about and why those could be valuable to you.” But then, they would ask another set of questions. And it was this notion of rapid staging to build trust, that you’re not presenting them with a five-page questionnaire or survey. It’s two or three questions; they’re providing real tangible value back to them, and then, based on that, asking for more information. And the experience was customers were more and more willing to share more detailed information about themselves because they were getting real value back in return.

John: And another piece to the Cisco platform, which was, I think, an important part is, based on the answers to the questions, Cisco would start to connect you with experts based on your needs. So, they might come back and say, “Well, based on your answers, you haven’t really clearly defined your need yet. You could benefit from having a consultant work with you to really frame the needs that you have. Here’s a consultant that you might consider.” And they make an introduction and connect the customer with a third party. Cisco had 40,000 specialists or experts within their network that they could connect customers with. So again, word spread among people who were interested in networking equipment that if you go to that Cisco site, it’s really helpful. It can help you figure out what you really need. And then, once you figure out what you need, another key piece to this platform was, once you bought the networking equipment you had needs like staging the site, the location for the networking equipment. So, Cisco would connect you with a specialist who could prepare the facility for the equipment, training people — people who could come in and help train your employees to get more value. So after the purchase, it was continuing that focus on how to help the customer get more and more value from the products that they had purchased.

while we see fragmentation in the product and service businesses, we also see concentration in a set of other businesses, starting with things like running data center operations, logistics — businesses where there are significant economies of scale, and network effects that can really drive scale over time. And, in fact, part of the reason we see fragmentation in the product businesses is because you have those concentrated resources you can tap into. — John Hagel

[00:33:40.01] Ben: I wanted to ask you about the fragmentation that is bundling. You envision a future state where we see massive fragmentation because if we move to a state where platforms are really connecting us with the optimal service of each individual, then we have much more self-heterogeneous suppliers. We actually move to a longtail-type concept where you could optimize just for a very small demographic of people in each case. Do you really think that that is going to be the end state? Or do you think you’ll always be able to bundle an inferior product with a great product, if you can bundle the pricing?

John: Yeah, again, this goes back to our view of the big shift, and the evidence is that customers are becoming more and more demanding and less and less willing to accept something that’s standardized, mass-market product or a bundle of things, some of which are good and others that are not that good. We want the best in whatever product or service category we have a need for and we want something that’s the best in the sense of addressing our individual needs, not just the mass market or even a large segment, but our specific needs — what would be the best product or service? In that context, we believe that that is a force that’s going to drive fragmentation of product and service businesses.

John: We’re starting to see it. I mean, the early-stage trend for this was actually in the digital space, where things like music, videos, software have seen exploding fragmentation, more and more options that are available for very specific customer interests or needs. And it’s starting to spread into the physical product space. My favorite example because I’m a chocoholic, is craft chocolate. Ten years ago, 20 years ago, there were three or four global brands of chocolate; that was what you had, and that’s all you could get. Increasingly, we’re saying, “No, that’s not enough. We want chocolate that’s tailored to our very specific tastes and interests”, and there are more and more craft companies — small, profitable companies. I mean, again, part of our view around fragmentation is, while these companies will be small, they will be quite profitable. It’s just that they’re not going to grow into massive, multinational companies in the way that the traditional mass-market companies did.

John: But also, I will say, too, that while we see fragmentation in the product and service businesses, we also see concentration in a set of other businesses, starting with things like running data center operations, logistics — businesses where there are significant economies of scale, and network effects that can really drive scale over time. And, in fact, part of the reason we see fragmentation in the product businesses is because you have those concentrated resources you can tap into. I don’t need a data center if I’m a small product company — I can just rent space in the data center. I don’t need to have my own trucking and logistics operations — I can contract that out. So, I can access the scale assets and resources that I need for my business without doing it myself. That allows me to stay small and profitable.

John: And then, on the other side, I think the big opportunity — which we briefly touched on, but I think is more speculative, but ultimately more interesting — is this notion of a trusted advisor. As you’re confronted with more and more choices as a customer, as you see the fragmentation of products and services and the rapid evolution of products and services, having somebody you trust, who can really help you connect to the products and services that are most relevant to you, is going to really be hugely valuable. And our view is, the trusted advisor has what we call economies of scope, in that the more I know about you as a customer, the more helpful I can be to you as a trusted advisor, versus if I just see a small slice of who you are. And the more other customers I am serving, the more helpful I can be to each individual customer because now I can say, “Well, customers like you have gotten huge value from this product or service you’ve never even asked for it.” By the way, a key role for the trusted advisor, in our view, is not just waiting for a customer to ask for something — it’s being actively challenging to the customer to say, “No, you asked for this. You really should be looking for this and here’s why.” Or “You haven’t asked for anything but here’s something that could be really valuable.” So, it’s challenging to get more value for the customer.

One of the key challenges in our view is most institutions today are run by a scalable efficiency model, versus a scalable learning model. In the scalable efficiency model, the one message that every employee hears is ‘failure is not an option’. You will deliver as predicted, as expected, reliably, and efficiently. But what’s required for learning, especially learning in the form of creating new knowledge? Failure! If you’re not failing, you’re not learning fast enough. — John Hagel

[00:38:51.12] Ben: I 100% agree with that. The way you depicted the future economic state where you have a small number of players that have a very large supply side economies of scale, and you have a few number of players who have a very large demand side economies of scale. And in the middle, you have this proliferation of producers, right? So, you can borrow the scale from those people that have supply side economies of scale so that you can produce at much lower unit costs and then you distribute through those people who command attention. I think I would totally agree with that end state. I think what we haven’t seen yet is a shift in who aggregates demand. Because I think what we’re seeing is — and I totally agree with you — it just hasn’t happened yet — which is the precondition, ‘to aggregate my demand is you have to have my trust.’ And I think at the moment, the precondition is ‘you’ve got to have engagement and then we’ll pay you 40% of our revenues so we can get access to your customer’. I think that’s the bit that will change, but just I’m not sure how quickly.

John: Yeah, it’s early stage. But again, if you look at the fundamental forces reshaping the economy, our view is that that’s going to unfold over time because there’s a growing unmet need for that kind of service. We’ll see how it plays out.

[00:40:06.14] Ben: I want to talk to you next about lifetime learning. So, clearly in the big shift — which is in many ways an acceleration of economic activity and an acceleration of change — the knowledge that we accumulate will depreciate faster, necessarily. And I think, as you said, it’s sort of almost Canute-like to just try to read more books and go to more courses. And so, what you’re saying is we have to put in place something that will achieve scalable learning. How do we do that?

John: I think most people, when they hear ‘learning’, especially executives, will say, “Well, yeah, we have training programs, we do learning.” Actually, in a world that’s rapidly changing, learning in the form of sharing existing knowledge, while it’s still helpful, is not where the greatest value is. It’s learning in the form of creating new knowledge and doing that through action in the workplace as you’re confronting new situations that have never been confronted before, and connecting with others so that you can learn faster — when you confront those situations, who can I connect with that is going to help me figure this out and come up with an approach that really would create value in this context? It’s got huge implications for how we do business. I mean, one of the key challenges in our view is most institutions today are run by a scalable efficiency model, versus a scalable learning model. In the scalable efficiency model, the one message that every employee hears — if not daily, it’s certainly very frequently — is ‘failure is not an option’. You will deliver as predicted, as expected, reliably, and efficiently. Well, okay, I got that message. What’s required for learning, especially learning in the form of creating new knowledge? Failure! If you’re not failing, you’re not learning fast enough. You’ve got to learn from the failures and figure out what the right approaches are. But again, there is that fundamental conflict between those two messages. And that’s why many companies try to just isolate the learning and innovation labs or incubation centers somewhere off on the side and focus everybody else just on staying true to the manual. So, I think that it is a massive cultural shift.

the people who are just doing work because they want to get a secure income or paycheck are the ones who are going to struggle with lifelong learning. — John Hagel

[00:42:34.01] Ben: John, what about as an individual? Because I suppose we have knowledge stocks that are also depreciating very fast. How do we learn faster?

John: I think it’s an interesting question! We increasingly are hearing in the world the need for lifelong learning because the world is changing so much, but nobody talks about why. What’s the motivation? I mean, why would somebody engage in this? It requires a huge amount of effort, it takes you out of your comfort zone. The unstated assumption, I think, is that most people do it out of fear. If you don’t pursue lifelong learning, you’re going to lose your job, you’re going to be out of work. And so, get to it. My belief is while fear can be a motivator to learn at some level, it’s not a very powerful motivator. The most powerful motivator is passion. And we have a very specific form of passion that we focused on in our research. We call it ‘the passion of the explorer’. Our belief is that people who cultivate this passion find out what they’re really passionate about and then find a way to pursue it as a profession, as a way to make a living. Those are the people who are going to learn the fastest because they’re excited by, driven by the need and opportunity to learn. They’re not doing it out of fear — they’re doing it because they’re excited about it and they’re constantly seeking it. So, our sense is that the people who are just doing work because they want to get a secure income or paycheck are the ones who are going to struggle with lifelong learning. The ones that are going to be most successful are those who are working out of passion.

[00:44:16.14] Ben: So early on, we talked about the whole move to craft, right? And you talked about chocolate and if you’d asked me to give an example, I would have talked about craft beer. But I suppose in a way, that’s a manifestation of people actually moving to do things that they’re passionate about. There’s this whole return to craft and therefore, becoming artisans and doing something they’re passionate about allows them to create this motivation for them to continue to learn.

John: Absolutely! I think a key driver of fragmentation in the economy overall is this quest for passion and many people are passionate about very creative kinds of activities and developing products that are tailored to very specific needs. But I think you can be passionate about virtually any activity. It just depends on looking inside, what really excites you, and then continuing to search for that, until you find it — and then finding a way to make a living from it. You’ll be quite successful in a world that requires lifelong learning.

Our view is that, as we move to the scalable learning model, there’s still value in connecting with people outside the organization but it’s with the objective of learning together so that we can actually rapidly improve our performance in whatever the work area is. And in that context, the notion is that the independent contractors are increasingly going to want to connect with each other because they’ll learn faster as a small group — John Hagel

[00:45:22.24] Ben: How does scaling the edge tally with, or how is it compatible with the organization, at large, learning faster? Because it’s almost something that you said earlier on, implied that you think some of these things like innovation centers and so on are a bit of a sideshow. They’re never going to achieve the large scale, systematic changes that are necessary for an organization to really learn at a much greater scale.

John: Again, it’s a challenge. I sense it’s unlikely that you’re going to get the entire core of your business to fully embrace all aspects of scalable learning because that does require massive transformation. On the other side, again, I go back to this notion of strengthening the core. We have a framework that we call ‘metrics that matter’ that can help you target elements in the core where you could start to drive some of these scalable learning principles and approaches. And the example I give for metrics that matter, is, start with the financial metrics of the company as a whole. And just as an example, revenue growth is a big challenge. Okay, let’s drill down one more level to operating metrics. What’s holding us back from revenue growth? And in this illustration, it could be, “Well, we’ve got a high rate of customer churn — customers are leaving at a rapid rate so we can’t grow revenue.” Okay. Drill down one more level to say, where in the front line is there a metric that could really make a difference in customer churn?” And in this illustration, again, it could be Call Center Operations, it could be, “Well, customers are calling us and they’re getting frustrated they’re not getting answers to their question.” Okay, now we have a very specific part of the company in the core, where there’s a big need, and it could influence the performance of the whole company. Let’s focus, again, with small moves targeted to this particular area, and say, “How could we help the customer call center operators learn at a more rapid rate in terms of addressing unmet customer needs?” The intent is to show real impact quickly and to build more credibility and support for doing this in other parts of the organization versus just customer call centers.

In a network, if you design the network and the relationships in the network so it’s not just transactions — buy low, sell high — but we’re all committed to learning faster and accelerating our performance improvement, that’s powerful as a motivation to participate in the supply network — John Hagel

[00:47:48.04] Ben: On the gig economy, again, you’re starting to craft a different narrative from the one we tend to read about every day, which is, most of the stuff you read about the gig economy is, it’s a race to the bottom, right? By not allowing people to act collectively and by putting them on different types of contracts, we just get people to work harder for less money. That’s one narrative. And I think you’re starting to reframe the narrative by saying, “That might be true today, but we’re going to see a different type of gig economy job, in time.” And then, the second thing is, we’ll start to see gig economy workers form collectives, right? Not collectives in the sense of trade unions or anything, but they’ll start to form groups where they can collaborate together in order to learn faster and achieve better quality at scale. And so, can we break that down? Can we start with why you think the gig economy will move upstream in terms of requiring different types of skills and, I suppose, creating jobs that are better paid?

John: Yeah, I think, again, it has to do with this broader focus on the big shift. In the scalable efficiency world — which is the world we’re largely in still today — the gig economy emerged largely as a result of a drive towards more efficiency: if we can take fixed labor cost and transform it into a variable labor cost, and potentially access the labor in lower-wage regions or countries, we’ll become more efficient. And that’s the gig economy. Our view is that, as we move to the scalable learning model, there’s still value in connecting with people outside the organization but it’s with the objective of learning together so that we can actually rapidly improve our performance in whatever the work area is. And in that context, the notion is that the independent contractors are increasingly going to want to connect with each other because they’ll learn faster as a small group than they will, just sitting in the isolation of their home or wherever they are. But connecting and now offering their services as a small group — five people maybe — they will learn faster, they’ll help their customers to learn faster in terms of whatever their needs are. And one of the things I’m intrigued by is the degree to which the big shift is producing a return to the past and I think one of the interesting trends that I anticipate in the gig economy is moving to what I call the guild economy, where, as you said, people with similar areas of interests are going to come together in guilds. And again, it’s not with the desire to just hold on to what they have, it’s to connect so that they can learn faster together and help each other learn faster. And that’s a very different kind of mindset or model.

In the big shift world, the winners are going to be those who learn faster. The ones who are going to learn faster are those who are more networked and connected with a broader range of more diverse expertise and resources. And so, if you’re just narrowing your connections, we believe you’re going to be increasingly disadvantaged relative to those who continue to expand their connections and harness the power of networking on a global scale. — John Hagel

[00:50:53.26] Ben: I think you’re right, and I think another reason why that might happen is because, at the moment, a lot of this gig economy is mediated based on ratings, right? So I won’t take an Uber driver, theoretically, if they’ve got a 4.2 rating versus a 4.8 rating, or whatever, or I won’t use a tradesperson if they’ve got a low rating. But if we think the gig economy is going to step up and do more and more complex work, then it’s going to be harder and harder to mediate that work just based on ratings because there’ll be much more complex deliverables, which will consist of many people contributing to that deliverable. And, at that point, I think is when it makes sense to create guilds or some sort of collective bodies because simply having a four-star rating is not going to be enough if I want you to build my home and plummet — whatever the example might be. I just think the deliverables become more complex, so it lends itself to some sort of intermediation. What do you think will happen to globalization in light of this pandemic? Because, I think one of the things that we realized was that our supply chains were much more fragile than we thought. So, do you think that will, to some extent, put the brakes on physical trade? Do you think we’ll end up reshoring a lot of manufacturing?

John: Clearly, at one level, there’s this desire to have things closer to me so that I can rely on them more. But, on another level, if you’re just taking the supply-chain mentality, and again, it’s a longer conversation, but broadly, the scalable efficiency model says, “You want a supply chain with as few participants as possible and tightly integrate and tightly specify every activity that’s done in that supply chain.” That makes for a very brittle and fragile supply chain in times of extreme events like the pandemic. And just bringing all those activities onshore, closer to where you are, is not going to solve the problem; it’s still going to be very brittle and fragile. Our belief is the real need is to expand our horizons from supply chains to what we call supply networks where you are working to orchestrate a very large number of participants and pulling them in, as needed — as specific situations arise — versus “No, I’ve just got this one supplier who depends on this other supplier that depends on that supplier.” No, it’s increasing the range of participants so you have more flexibility. And by the way, so that you can learn faster. In a network, if you design the network and the relationships in the network so it’s not just transactions — buy low, sell high — but we’re all committed to learning faster and accelerating our performance improvement, that’s powerful as a motivation to participate in the supply network.

[00:53:57.20] Ben: It’s almost self-evident, but just, as more and more activities move online, they become intrinsically more networked. And so, would you argue that what we’ve been seeing over the last few decades is supply is becoming more networked and therefore, what we might be seeing now is an immediate reaction where we’re trying to, again, put up barriers, but effectively, the secular trend towards more networks and more ecosystems will trump the immediate backlash to erect borders and become more nationalistic?

John: In the big shift world, the winners are going to be those who learn faster. The ones who are going to learn faster are those who are more networked and connected with a broader range of more diverse expertise and resources. And so, if you’re just narrowing your connections, we believe you’re going to be increasingly disadvantaged relative to those who continue to expand their connections and harness the power of networking on a global scale. So, in the short term, yes, because of fear, we may see borders come up and barriers to movement come up. But over time, our view is the countries and the areas that maintain openness and connection are going to be the ones that thrive. And over time, those who are putting up these barriers are going to realize that they’re being disadvantaged and start to reconnect again.

[00:55:30.08] Ben: I know that every one of your blogs finishes with ‘the bottom line’. So I wonder if I could end this podcast with the bottom line, which is a summary of what the big shift means — if we can summarize it. And then, the last thing is, reasons to be optimistic about how we overcome the fear and inject the optimism to make it happen.

John: Well, I’ll end with a paradox — it’s what I call ‘the paradox of the big shift.’ If you think about the big shift, at one level, it is creating exponentially expanding opportunity. We can produce much more value with far less resource, far more quickly than would have been imaginable a couple of decades ago. Huge opportunity! At the same time, the paradox is the big shift is also creating mounting performance pressure on all of us. As individuals and as institutions, we’re experiencing more and more pressure. It takes many forms: intensifying competition, accelerating pace of change, extreme events that come in out of nowhere and disrupt our best-laid plans — witness the pandemic. So, you’ve got the interesting thing that the big shift is, at one level, creating exponentially expanding opportunity; on the other side, mounting performance pressure. And the challenge and imperative, I believe, is how do we move from that mounting performance pressure to exponentially expanding opportunity?

John: And the overlay here is that mounting performance pressure induces fear, it creates an emotion of fear. I think it’s notable around the world the extent to which fear is becoming the dominant emotion. But, in that context, I think the way to move forward and move from that pressure to opportunity is around framing what I was describing as opportunity-based narratives that can really focus people and inspire people on the really big opportunity and help people to come together. I think, again, one of the key roles of narratives, the way I define them, is to bring people together saying we all need to address this opportunity. You can’t just do this individually. And that’s, to me, what gives me the optimism, is that framing that kind of opportunity-based narrative can help overcome the fear and help mobilize us to address that exponential opportunity. But it requires articulating that opportunity-based narrative.

Ben: John, thank you so much for coming on the podcast!

John: I appreciate the opportunity. Thank you! We’ve covered a lot of ground!

Hitting Internet Escape Velocity (#21)

Hitting Internet Escape Velocity,
w/ Brett BIVENS

Our guest today is Brett Bivens— a venture investor at TechNexus Venture Collaborative, an early-stage venture capital firm — and he is going to talk about why he is so optimistic about Spotify and how the future of audio will be a social experience with various network effects loops. One of the core investment areas for TechNexus is audio and media. And so, in this episode, you’ll hear Brett talking about that, with your host, Ben Robinson, as well as talk about the various concepts that Brett has coined, including ‘escape velocity’ and ‘clampetition’.



  1. Venture Desktop Newsletter — by Brett Bivens
  2. Brett’s Medium Essays
  3. Brett’ Telegram channel for high-cadence thoughts

Full podcast transcript:


I think that a lot of people might actually get their first onboarding into VR-like experiences through audio-first experiences — Brett Bivens

[00:01:51.12] Ben: So, you work in venture capital. The home of venture capital is the United States. You, yourself, are American. So, why practice the trade from Paris?

Brett: Yeah, it’s a good question. I think the first thing is that our investment model kind of dictates it, to a degree. So, we work with a number of large corporates across industries and these companies all have global businesses. And so, as they think about what the future of their company looks like, they need access to the global innovation ecosystem. And so, from day one, we’ve always had a very geographically-agnostic perspective on where we want to invest and the types of companies that we want to work with. And, on top of that, I think we really do buy into the idea that great companies are being built everywhere and have been being built everywhere. And so, that was a big part of it, trying to now, given that we’ve seen so much talent and so many great companies built in Europe, get a little bit more involved over here. And then, why Paris specifically: so, partially family. My wife is from France. I’ve spent a lot of time over here building relationships, following the ecosystem. I was getting just really excited about what was happening with the types of companies that were being built here. So, it was kind of just natural that it worked out that way. And it turns out, actually, that the first investment that we made through this model that we have at TechNexus, about three or four years ago, was a company founded by French founders, partially based in the US, partially based in France. And so, that gave us a perspective, as well, on this distributed nature of teams that were being built. So, yeah, that’s kind of why I ended up here. Our team is still based in the US and we invest in the US, North America, and Europe.

[00:03:28.16] Ben: We could argue that France, within Europe, is probably one of the hottest ecosystems, right? So I think I read that VC money going into French tech is up to something like 5x since 2014. So, I suppose, as you said, it was a bit because of family but it was also because you think that Paris is increasingly becoming the hottest or the hub for tech in Europe?

Brett: I think so. I think there’s great things that you could say about any of the ecosystems in Europe — Berlin obviously has some incredible companies that have come out of air, the cities and the countries in the Nordics just kind of incredible per capita output of innovation, and then, obviously, London being the centerpiece of the European tech ecosystem. But yeah, Paris, again, we were just really excited about the companies that we were seeing here, the attention that was being paid to the region and the ecosystem by investors. And, even apart from all of that kind of stuff, even at later stages, so, sort of beyond where we invest, we were seeing a tremendous amount of talent kind of flow into the ecosystem from all over the world to launch Europe for American companies and doing that from Paris or joining teams in Paris, leaving Silicon Valley companies to do that here. So we sort of saw this confluence of things, all of these different things — capital and talent and attention, and even governmental resources being poured in that just got us really excited about where the ecosystem was headed.

We’re getting new technologies coming to market […] that are expanding the addressable daily hours for audio content to be accessed, creating more social opportunities for audio, creating more contextual opportunities for audio — Brett Bivens

[00:04:57.21] Ben: I wanted to get you next on Spotify because for anybody who subscribes to your newsletter, is a company that you focus on, almost disproportionately, and it’s obvious you’re really excited about the prospects for Spotify. But, if you listen to most commentators on Spotify, most of them see it as a company that has quite difficult unit economics — low gross margins, high variable costs — and a company that’s up against really deep-pocketed competitors. And so, why is it that you rate Spotify so highly?

Brett: Yeah, so, I think there’s a few reasons. So, one, I see it as emblematic or as an embodiment of what’s kind of happening to European tech in this world where you have the American tech giants and the Chinese tech giants kind of squeezing it out and seeing where that lands. And so, I find that interesting. At the same time, at TechNexus, one of the core investment areas for us has always been audio and media and we have a large portfolio of companies there. And so, it’s just natural that we follow that space, try to understand the key players in that market. And I think Spotify is a very central company in the sense that they have to work with, and integrate with, and serve different stakeholders across all different parts of the audio ecosystem and value chain. And so, from that perspective, that kind of speaks to why I follow the company so closely.

Brett: In terms of my optimism about it, and how I see them fitting into the broader picture, I think you’re spot on. I mean, anytime a company puts a competitor slide up, or you build a competitor slide for a company — it includes Apple and Amazon and Google and Tencent and ByteDance with TikTok — it’s a little bit scary. I think that Spotify has done a very good job of delivering a differentiated user experience within the limitations that they have. I mean, it’s well-known at this point, that they have a tough supplier relationship with the record labels, and that’s kind of slowed down their ability to innovate. Like you said, that flows through to their margins and the way that the business functions. So, I would say I’m cautiously optimistic. I think they’ve done a lot of really great things. As a company, I think they have a lot of hills to climb. But that optimism and the upshot of what I think Spotify can be in the future is really just as much about my excitement about where audio is going, and what’s sort of evolving within the audio ecosystem.

Brett: I think, for a lot of the same reasons that a company like Spotify has been forced to innovate rather slowly, I think it’s just true of the broader ecosystem as well. So, I think we often underrate path dependency in the way that technology is adopted, and the audio ecosystem has had that play out in the spades with regards to, again, the record labels and the way that Apple has been an early mover on podcasts and not really done anything there but their scale and size has scared a lot of people away from doing anything interesting there. The same thing has happened in audiobooks with Amazon. People are kind of scared away from that, and so, it sort of slowed down innovation in the ecosystem. But we’re starting to see different things break through and different user experiences develop. We’re getting new technologies coming to market, like AirPods and voice interfaces that are, I would say, expanding the addressable daily hours for audio content to be accessed, creating more social opportunities for audio, creating more contextual opportunities for audio, and kind of having it always with us.

Brett: So, we’re on this path almost to an ambient audio experience where, in a very, I guess, optimistic reading of what the future looks like, we have these different audio experiences and scenes and technologies that can be applied to whatever activity we’re undertaking at the time to just improve our daily lives. And so, that’s kind of the upshot for Spotify and for the company in audio: the engagement surface area just kind of continues to expand, monetization catches up, and they continue to deliver good user experiences along the way and incrementally innovate. And so, yeah, that’s kind of how I view Spotify in the broader audio market, in general, I’d say.

[00:08:59.25] Ben: Yeah, I think there was one really spiffy statement in one of your essays. I think it was something like, “The ear is under-monetized vis-a-vis the eye.” And I think that’s a pretty good starting point, to start to look at the companies in this space.

Brett: Yeah. I think that came from Daniel Ek, the CEO of Spotify, but it’s something that a lot of other executives in the industry have sort of echoed. You have podcasts that really haven’t had internet-scale advertising applied to them. They have always been this hobbyist kind of enterprise where the host reads their own ads and it’s not particularly programmatic, not particularly scalable, which has kept a lot of large brands and companies that are going to spend millions and millions of dollars on advertising through some medium kind of out or just barely dipping their toes in the water. And so, yeah, I think we’re starting to see that all catch up. We’re starting to see social experiences catch up in a significant degree. I mean, not to dip too far into the tech Twitter topic du jour but a company like Clubhouse which recently raised money from Andreessen Horowitz at a pretty lofty valuation — or people think it’s a pretty lofty valuation — kind of gets at this as well, which is, audio as a social experience and the different network effects that can be driven through that.

[00:10:20.07] Ben: You talk a lot about patient investing, in the context of Spotify. And I think the term you use is something like, they have a different investment horizon, compared to some of their competitors. Is that through design, or is that because you almost have to patiently invest, you have to stealthily invest because your competitors are so powerful?

Brett: It seems like a little bit of both. I mean, as a total outsider to the company and not really knowing the inner workings so much, I do get a sense from hearing executives talk and people like Daniel, like the CEO, talk that there is just sort of this cultural patience to the way that the company thinks about building this business and the long-term opportunity that they’re going after. So, again, without knowing anything from the inside, that’s kind of how I perceive their culture a little bit to be. But yeah, I think that, because of the fact that they are squeezed in the middle of all of these different powerhouses, these different monopolies, basically, they have to tread lightly and carefully and sort of eke out what they can over time. They’ve maybe been forced to slow play their hand in social because of the friction that might create with record labels who think they’re trying to go around them; the same thing with Spotify going direct to artists and working directly with artists — they probably had to slow-play that a little bit; their relationship with platforms like Apple or like Google, where they’re reliant on those platforms for distribution to a degree through the app store, but they’re also directly competitive with them creates some challenges. So yeah, I think it’s a little bit of both and they probably feed off of each other. By design, it’s baked into the culture, but it’s also just inherent to the business model and how they have to operate.

I think that most people look to gaming as the first path for immersive social media. And they’re definitely not wrong about that. — Brett Bivens

[00:11:57.16] Ben: Do you think they need to win the podcasting war, in order to completely change the unit economics of their business?

Brett: I think so. I think that that’s one piece of it. I think that that’s only one piece of it. There’s so much more and I think that there’s an interesting comment that I heard once and I agree with, and that’s to say that, “A category isn’t really one until a social product emerges.” And I think that that is kind of the long-term play for a company like Spotify, is to have a more social component to their business. But to get there, I do think that they need to continue to innovate across these different categories and continue to expand beyond music to podcasts, to books, to health and wellness, to all of these different categories that help them build up that user demand and help them build up the leverage against all of the people that they’re working against in the industry, to then layer on additional social experiences.

[00:12:52.10] Ben: And is it the importance of social experiences what makes you think that a marriage between Spotify and Snap might be a good idea? Because you’re the only person I’ve ever seen to put those two names together as a potential merger, and I’m just quite curious about that.

Brett: Yeah. Well, it was sort of a throwaway comment at first, in response to what I just said, which was this idea that a category isn’t one until a social product emerges. And like I said, I agree with that. And I don’t think it’s likely at all that that would happen but it does get you to start thinking about, again, the evolution of audio and social media, how they come together, as well as immersive reality, virtual reality, and how all of these things converge at some point in the future. I mean, I think that most people look to gaming as the first path for immersive social media. And they’re definitely not wrong about that. I mean, we’re seeing that play out in real time with things like Fortnite and these massive games that have created virtual universes, but if we think about the things that create immersive, kind of these metaverse-like experiences, even on a partial basis, and you have things like persistent worlds and synchronous collaboration and communication and the ability for the platform to be populated by content that’s created by a wide range of contributors, and even interoperability across platforms — I think all of those things work well with audio. And so, I think that a lot of people might actually get their first onboarding into VR-like experiences through audio-first experiences — and that’s where Snap as this AR and VR company, they do some really interesting things there; Spotify as an audio company — I think there’s some interesting tie-ins there that just gets you thinking about what the future of the media market looks like. But no, I don’t think it’s likely.

There’s this balance between being a great product or a great platform for your core customers versus going broad and scaling and alienating that core customer set. And so, it’s a delicate balance, and I think ‘internet escape velocity’ is just a way of thinking about that. -Brett Bivens

[00:14:38.25] Ben: As I was saying to you earlier on, I read all of your newsletters in one go. I mean, I’ve read many of them before, but then I read them all in one go. And the thing that’s striking is just how many terms you seem to have coined. It’s like you have your own personal lexical set. And so, if you don’t mind, I’m just going to ask you about some of these terms — what they mean. So, I’ll do one now, and then I think later in the podcast, we’ll cover a couple of others. The first one I wanted to cover was ‘escape velocity’. What do you mean by escape velocity?

Brett: Yeah. So, a couple of weeks ago, or whenever it was, there’s an investor named Gavin Baker, who is a growth and public market technology investor, has really, really interesting thoughts about just the development of a lot of the things that I know you think about and that I think about, and he wrote a piece talking about the two things that he looks at when evaluating competitive advantage for consumer internet companies — and those things being scale and loyalty. And those are really the only two ways to get out of this rat race, where you’re paying Facebook and Google 40% of venture capital dollars that come in or some massive amount of money every year to just maintain your growth and your customers.

Brett: And so, for me, that brought up the next question of, what does the company have to do in order to achieve the level of loyalty that allows them to generate word-of-mouth acquisition, lower their customer acquisition costs, create long-term stickiness in a product, and then how do you translate that into scaling without losing the essence of what helped you get to that loyalty in the first place? Because that’s something that I think constantly happens is there’s this balance between being a great product or a great platform for your core customers versus going broad and scaling and alienating that core customer set. And so, it’s a delicate balance, and I think internet escape velocity is just a way of thinking about that. It’s not a thing that I necessarily have a prescription for. I think there’s a lot of elements that play into it. It depends heavily on the business model and the stage of the company but it is just a way to think about, “Okay, what are the factors that allow us to build community and build word of mouth and build that stickiness? What are the technical features for how we can serve customers if behavior changes? Or, as new competitors come into the market, what are the core features? What are the ways that we stay aligned with our customers from a product and technology perspective? And then, what are the areas of new business that we can go into that keep us aligned with those customers, but don’t sacrifice things like margins and profitability long term?” And so, it’s kind of a loaded analysis to try to do and again, it’s very different for every company, so it’s not necessarily a prescriptive thing. But I think it’s important for companies, for investors to think about if scale and loyalty are the two strongest drivers of competitive advantage for consumer internet companies, what are the core elements that underlie those things and allow you to reach those two points.

[00:17:37.19] Ben: And you said it’s not prescriptive, but you do set out three, almost preconditions, right?

The way that I think about ‘business model leverage’ is you build up your core business on what might be considered a low margin business that presents opportunities to then scale in a way that helps you expand the margin or sets you up to at least scale in a way that helps you maintain margin. And so, when I think of Spotify with […] by owning the consumer demand via the lower margin streaming business, they have the opportunity to expand into those areas. Lululemon, as I talked about, is a similar company — they have a high-margin business, to begin with, relative to peers, but because of the fact that they’ve invested in digital, they’ve invested in all of these community-level features, they also have additional areas to grow that help them maintain their high-margin status. — Brett Bivens

Brett: Yeah. I’m certainly happy to walk through those. I think the notion of responsive instrumentation gets to this idea of loyalty and there’s one company that I talk about in the piece — Lululemon — who I think demonstrates this extremely well. It’s this idea of, again, being able to quickly adjust from an operational perspective, from a product perspective, being able to make sure you meet your customers where you are, and stay aligned with your customers, and no matter what the situation is, deliver on your brand promise. And they’re an example of a company that, in this kind of crazy time that we’re in right now where their stores have closed and people aren’t going to yoga studios anymore, they need to figure out how do they continue to engage those customers, how do they continue to deliver on the brand promise that they’ve always offered. And one of the things that they’ve done early on, and again, this isn’t for every company, but it’s worked for them, is sort of this idea of vertical integration, owning the entire value chain that they use to deliver their product. So, they have a very direct and strict product focus, they don’t have this broad range trying to serve every type of customer; they manage and run and own their own stores. And so, they’ve been able to turn those retail locations into distribution outlets, and they’ve been early — maybe not early — they’ve been active in understanding digital content and how they can use that to further engage their customers. And so, I guess, a short way of saying, it’s adaptability. So, it’s the ability to adapt when situations change rapidly.

[00:19:20.13] Ben: Another one was ‘business model leverage’, I think. Right?

Brett: Yeah, exactly. And that, I guess, goes back to Spotify a little bit. I think that’s a company that has a pretty interesting business model leverage. And the way that I think about business model leverage is you build up your core business on what might be considered low margin, or whatever it may be, but a low margin business that presents opportunities for you to then scale in a way that helps you expand the margin or sets you up to at least scale in a way that helps you maintain margin. And so, when I think of Spotify with that, we talked a little about it earlier, but it’s this low gross margin streaming business where they’re paying a ton of money to the labels, but over time, as they expand and gain leverage, podcasts are a higher margin business, social products are a higher margin business, marketplace products are a higher margin business for them. And so, by owning the consumer demand via the lower margin streaming business, they have the opportunity to expand into those areas. Lululemon, as I talked about, is a similar company — they have a high-margin business, to begin with, relative to peers, but because of the fact that they’ve invested in digital, they’ve invested in all of these community-level features, they also have additional areas to grow that help them maintain their high-margin status. So, there’s probably a million other companies that do these types of things particularly well, but those are two that come to mind, there.

For us as early-stage investors, it really does come down to the founding team and the way that they set the vision for the company and the way that they think about culture; and so an interesting way to frame that is maybe ‘followability’ — Brett Bivens

[00:20:40.15] Ben: I’m going to quote you from one of your essays here. You wrote, “Company culture is the bridge between theory and action. It is the operationalization of a company’s values and it expresses itself as a set of frameworks that a company uses to make decisions under uncertainty.” I thought that was a really eloquent definition of culture. It’s clear that culture is really important for you when you assess companies you invest in, but how easy is it for you, and how practical is it for you, as an outsider, as an external investor, to get a really good gauge over a company’s culture, whether it’s private, or whether it’s public?

Brett: Good question! And it’s a challenging thing to assess, quite frankly, I think, especially in a world like venture capital, where at times, you don’t have full control necessarily over the timeline in which you get to invest. There are companies that raise funding rounds, and maybe the opportunity doesn’t exist for too long. And so, you have to figure out a way to build that conviction and build an understanding of that culture very quickly. I think that there’s a few ways — and this is not comprehensive by any means, and I think everybody has their own way of assessing these things. But when I think about it, from our perspective, as early-stage venture investors, we’re often trying to understand a few things. I mean, if there’s a team that’s already been built up around the core founders, it’s always helpful to understand why the next person, why that first engineer, first salesperson or whoever are some of the more recent people to the team, why they’ve joined the team? Why they’re excited about the mission? What that mission is, in their mind? Does that mission align with what you’re hearing from the founders that you’re talking to? And really, is there this true north that the whole company is pushing towards? I think that’s one interesting way that we try to test for that and solve for that.

Brett: And that gets back a little bit to this idea of alignment with customers and being very customer-centric. I think if companies are very clearly focused, first and foremost, on delivering the kind of value like that to customers, that can be a hint of a really strong culture and an aligned culture. And then, for us as early-stage investors, it really does come down to the founding team and the way that they set the vision for the company and the way that they think about culture and so, one of the things that we always talk about and I think is an interesting way to frame that maybe is, ‘followability’. It’s this idea of, are these people that are leading this company, that have founded this company, maybe key early executives, are they going to be able to attract and retain talent and capital and customers and tell a story and stay true to that story personally, that is going to help them compete over the long term? And so, these are a few different ways that we look at it and think about it. But, I think, regardless whether it’s an early-stage company that you have access to, whether it’s a growth-stage company, or a public company, it’s always a challenging thing to really assess out how that plays out.

The (venture capital) investment thesis […], surely becomes sort of a marketing vehicle, a way for you to tell the market who you are and what you stand for and how you think. The challenge comes when you start to overly believe your own view of the future and close your mind off to the ideas that founders are coming to the table with and some of the emergent opportunities that develop in the ecosystem. And that’s really where the friction comes in between bottom-up investing and being overly thematic. — Brett Bivens

[00:23:42.08] Ben: And how important is it, relative to everything else? So, for example, if you came across a company, and you love the business model, you’re really comfortable with the unit economics, it had responsive instrumentation, it had business model leverage, but you didn’t like the culture. Would that be a red flag that would lead you to potentially not invest?

Brett: Absolutely. I think that, for us, as early-stage investors, all of those things are important. You know, there’s always this, ‘is the product great? Is the market great? Is the team great? And how do you weight all of those?’ And the answer is, it kind of depends on the company and the market and everything like that. But yeah, for us, that’s the first checkpoint — is this a team with whom we have intellectual and emotional alignment on where they’re going as a business? Because all of those other things can fall apart very, very quickly if you don’t have the culture right, if you don’t have the leadership right, product decisions can go awry, new market development can certainly go awry, talents and how you keep that around, that’s so core to building the business can sort of go awry. And so, I always think that, yes, the culture and the leadership team at the early stage is so, so critical to making sure that the right market is captured and the right product is built and the right strategy is applied for the long term.

[00:24:59.28] Ben: Just another question on investing. So, one of the articles I really enjoyed reading at the time, and then I also really enjoyed rereading it in the weekend was the one about bottom-up versus top-down or thesis-driven investing. It sounds like you see the thesis is the marketing narrative, and then the bottom-up stuff is the hard work you need to do to actually arrive at the right solution. So, it’s almost like the thesis helps you to raise money, and the bottoms-up investing helps you to deploy the money, and you shouldn’t confuse the two, almost.

Brett: Yeah, I think that’s true. I think that even applying thematic investing at an operational level is totally fine. I mean, there’s a circle of competence element to it, where, if you’re truly just saying, “I’m going to invest in everything”, there’s challenges with that, as well. So, there’s a give and a take. I certainly hope that that’s the case, that there can be those two opposing forces at once, just because that’s, as you mentioned with Spotify and the way that we invest in our funds, this vertical focus that develops. But you’re right. The investment thesis and the way that you talk about where you invest in the venture capital world, surely becomes sort of a marketing vehicle, a way for you to tell the market who you are and what you stand for, and how you think, and all of these different things. The challenge comes when you start to overly believe your own view of the future and close your mind off to maybe the ideas that founders are coming to the table with and some of the emergent opportunities that develop in the ecosystem. And that’s really where the friction comes in between this bottoms-up investing and being overly thematic. I think that if you’re trying to predict the future and do all of that, I mean, that’s the job of the founder, in my opinion, and the team that’s kind of building the company. So, that’s definitely the way that I think about that.

A really interesting term that I learned about a couple of months ago, called ‘accumulated accidents’, […] and it basically prompts us to say about different societal behaviors or institutions, whether this is actually representative of an ideal expression of society, or whether is built upon a series of accidents that can actually be unwound in the right circumstances. And, really, for lack of a better term, it’s creative destruction. It’s how new innovation comes to market. And in a lot of cases, you can unwind some of these accidents via a better business model or via better technology but some of the really, really big things, some of the things that we’ve really screwed up in the past that have just accumulated on themselves and where incumbent interests have become extremely entrenched and difficult to pull away, I think that’s what this crisis is giving us — an opportunity to rethink and reset with. — Brett Bivens

[00:26:54.24] Ben: And it sounds like you shouldn’t shut yourself off from opportunistic opportunity, as well, by being too sticky and too rigidly to thesis. I just wonder, does that happen to you? So, as much as you do have sectors you prefer and business models you prefer, I guess you’ve had instances of where founders pitch to you and even though it wasn’t something that was on your radar, you were struck by the passion and the vision and the team. Would you argue that it’s almost unhealthy to deny yourself the chance of being opportunistic?

Brett: Oh, yeah, absolutely! And it’s something that I think about a lot, and our team thinks about a lot because we do have a handful of different verticals that we focus on, different funds that are completely divergent from one another. I mentioned audio quite a bit, we do a lot in travel and recreation, and public safety, and industrial markets. And so, we’re touching all these different areas and I think that’s exactly right. I mean, this idea of thinking about new technologies, new business models that founders are coming to you with, new angles for how to bring a product to market is benefited by this broader approach of understanding, “Okay, what did we see over here in this market that worked or didn’t work? And how can we apply it to this completely different area?” And if you do just get overly rigid, you kind of miss out on those opportunities for, I guess, transferred learning, in a way.

[00:28:23.19] Ben: I think we’ve done an amazing job because we’re at the halfway point and we haven’t talked about the pandemic yet. I am actually going to start to steer us in that direction now, by asking you about remote work. You wrote an essay on remote work, and if I were to summarize it — and badly, by the way — but if I were to try to summarize it, your view is that a lot of the “easy” solutions to remote work have been tackled but we’re only at the very early stages of starting to tackle some of the harder aspects of remote work. So, I suppose the question is, what are those harder aspects and those harder problems that we need to solve?

Brett: The thing about remote work and distributed work is it’s very challenging to crack, as a company that’s trying to do it well, and as a company that’s trying to build products and services for that market. And so, because it’s been so hard to do historically, as a company — and really many have shied away from actually even trying it until the pandemic sort of hit — maybe the addressable market hasn’t been big enough, or companies looked to build solutions that could be purchased and used by companies that were maybe trying remote, but also had people in an office. And so, you had that fact in play. You also had the fact that a lot of the easy things — we talked about video conferencing and all of these different tools that we’re using for remote work — every company and every use case is so idiosyncratic, that it’s easy to say, “Oh, well, this doesn’t work. This doesn’t work. So I’m going to build to scratch my own itch here”, which is great. I mean, it’s how a lot of great innovation occurs. So, that was kind of the reason that a lot of these easy solutions get a lot of attention and a lot of traction, that are maybe fun to play with and test out and are buzzy.

Brett: But yeah, you’re right about the hard solutions and I think that’s something that hasn’t been paid enough attention to until I would say before the pandemic; I think it was really becoming clear for a lot of companies who were trying this and a lot of onlookers who were starting to spend more time thinking about how distributed work would develop, that there were a lot of infrastructural things, whether that’s around how do you do a payroll across borders for a company without being this massive Fortune 500 company that has teams of lawyers and regulatory people who can handle that kind of stuff, or how do you manage insurance across countries, how do you handle security — cybersecurity — for people that are working from home now. One of the things that I think has really come ahead with this pandemic is just mental health and how you manage the psychology and wellness of all of the people that are working in this situation. And so, I think all of those challenges present new opportunities for companies that in the past, maybe it didn’t seem like it was worth it to go through all the legal and regulatory headache because you couldn’t really predict when we were going to hit that inflection point to really start seeing that curve go up super, super fast in terms of adoption of distributed work. But we’re kind of there now. I think, every day, there’s a news item that comes out about XYZ massive company is letting employees work from home forever. And so, the reality is that the market, so to speak, is big enough for people to go after now and I think we’ll see a massive amount of innovation happening there. And the good thing is there’s a lot of companies already that have been doing great stuff there for a while to kind of build out that infrastructure layer.

The pandemic has given a lot of companies this carte blanche to do innovative stuff that they may have not had the boldness to do before. The way that I think about this term, ‘clampetition’, it’s a word that just joins together competition and classiness, which is essentially companies using this totally disjointed economic situation to make moves that are classy in terms of helping their customers or helping their suppliers, but also double as these smart customer retention or acquisition tactics. — Brett Bivens

[00:31:50.10] Ben: It’s almost like what you’re saying is we’ve got very excited about the first-order effects. So, we need to work from home, therefore we need to communicate, therefore buy Zoom — we get excited about video conferencing. And what you’re saying is actually, the second and third-order effects, in terms of stuff that are potentially overlooked at first, like mental health. So, beyond just remote working, what do you think are some of the most interesting second-order, third-order effects of what’s happening with the pandemic?

Brett: I think if I’m going to answer this, honestly, I’ll kind of answer with a non-answer, and saying, I don’t think any of us know at this point. But I do think that you’re right, there are these really interesting second and third-order effects that are going to occur that, as investors, as analysts, as people watching this space, you almost just have to really keep your eyes open, keep an open mind towards how demand is trending in these different areas, how some of the things are changing. I think that a couple of areas that I think of that will be ripe for interesting things to happen: certainly cities is one — and that means both in terms of transportation and mobility, but also in terms of retail and physical locations; of course, offices and stores and things like that. There’s this interesting, potentially nonlinear jump that might occur as a lot of small businesses are going out of business and what happens when we need to start backfilling that and people are reopening restaurants or starting new restaurants or trying to start new gyms or what does that new experience look like? How does it now bridge digital and physical experiences in a different way than maybe before? So, I think there’s a lot of things to look out for, there, but I guess the short answer would be it’s tough to say.

[00:33:45.22] Ben: And are you excited as an investor? Because, as we know, it’s difficult to displace incumbent organizations, whether it’s Facebook or whether it’s a local restaurant. I suppose it’s even harder if it’s an online company. But what we’re seeing is there’s this one-off discordant event, this discontinuity, which must, therefore, create opportunities for companies to move in and do something different. And so, are you very excited? I mean, it seems almost paradoxical to ask if you’re excited in a time of pandemic. Are you very optimistic about the silver lining, the opportunities that will come out of this?

Brett: There’s a really interesting term that I learned about a couple of months ago, called ‘accumulated accidents’, which originated with an analyst and a writer named Clay Shirky, and it basically prompts us to say about different societal behaviors or institutions, whether this is actually representative of an ideal expression of society, or whether it’s sort of built upon a series of accidents that can actually be unwound in the right circumstances. And, really, for lack of a better term, it’s creative destruction. It’s how new innovation comes to market. And in a lot of cases, you can unwind some of these accidents via a better business model or via better technology but some of the really, really big things, some of the things that we’ve really screwed up in the past that have just accumulated on themselves and where incumbent interests have become extremely entrenched and difficult to sort of pull away, I think that’s what this crisis is giving us — an opportunity to rethink and reset with. I think about healthcare in the United States and just the layer upon layer upon layer of difficult things to unwind with that, that we hadn’t been able to do forever, that are now just becoming completely undone with consumer products playing the role of helping early-warning and telemedicine and regulations coming down there and things that could never have been done without this. And so, does that create an opportunity for a reset? I think it does in really interesting ways.

Brett: The same thing with higher education and doing a lot with being more precise in helping people learn at their own pace, on their own schedule in a way that aligns with what they want to accomplish throughout life — whether that’s an elementary level or adults that are needing to change careers and do things there. And so, I think that we’re at a unique opportunity where we have business model innovation that can come to market, technology innovation that can come to market, and this massive catalyzing force, which is in our face on a daily basis, that’s saying, “You need to change because the world as you knew it does not represent this ideal state.” And you may have known that, but now you have the opportunity to actually take action and move in the right direction.

[00:36:41.15] Ben: I thought one of the interesting points you made in one of your essays was, I think you called it, ‘daily active crisis’. So this is just providing air cover, if you like, for innovation in a way we haven’t seen, and then you draw the distinction from climate change, which is clearly a more pressing issue than the pandemic, but it can’t achieve the same headspace, the same focus with regulators and innovators and business people because it’s not a daily active crisis. It’s something that periodically we hear about, you know, a forest fire, we hear about a drought. But it’s not every day in our consciousness, in the way that this pandemic is.

Brett: It’s a bit of a damning statement on human psychology and our inability to plan for the long term and think about the future, I guess. But yeah, I think that’s just the reality of the situation. Without this kind of a crisis hitting us in the face, reminding us daily of the impact that’s having on our lives, there’s really less of an impetus for people, at large, to really try to change their behavior and push for behavioral change. And, who knows, I think that we are the way that we are for a good reason in a lot of ways. I don’t think we’re going to suddenly change overnight with this and start thinking at a societal level much more about the future. I mean, that could be the case, but at the very least, this can help us, again, reset, and at least at this point in time, do the right kind of planning for the future so that maybe we compound some happier accidents, I guess, in the future than what we’ve done in the past.

[00:38:15.27] Ben: Yeah. And out of previous daily active crises, we have achieved great things, right? The Second World War was a daily active crisis, where we built the welfare state. I wanted to actually just take you back for a second to the second-order, and third-order effects of the pandemic. It’s almost like I don’t want to let you off the hook, but I’m not asking you to necessarily make predictions, but I thought you had a really nice framework for thinking about the future, which is what you call ‘economic oceans’. And, actually, what we’re talking about, is we’re talking about clusters of attention. And so, what businesses do you build that leverage those clusters of attention?

Brett: Yeah, that’s maybe a good thing to focus on. Yeah, I’ve called them ‘economic oceans’. I like this oceans analogy to describe the way that attention is flowing in our world today because we can’t really think about the economy and everything that exists out there, as defined by verticals or just specific areas because there is so much overlap between the types of companies that are being built, the types of innovation that’s being brought to market. I mean, I think if we look at all the companies that have been built over the last decade, maybe just take a couple of companies like Square or Uber or even Zoom — they’re built at the intersection of these different pools of attention: the way that we think about work, the way that we think about cities, the way that media is evolving, the way that commerce is evolving. None of those are industries in and of themselves, but they’re, again, these areas where, at the intersection of those things, is where some really, really interesting innovation can kind of be created. And I think that more than anything, as we think about where value gets created in the future, it is less about predicting, and it’s more about staying close to where those areas are overlapping, and how, for example, to take one area, how does this new approach to wellness and well-being and managing our health and understanding our health in the wake of this, change the way that cities are constructed or change the way that we consume media, or change the way that we think about work and value work and prioritize work in our world. And so, I think that there’s going to be some really interesting bundling of these categories that is sort of not predictive, and it’s hard to say exactly how it’s going to play out, but to try to focus on those intersections is maybe the right approach.

[00:40:46.12] Ben: Yeah. And I think that’s very consistent with what you said earlier on, which is it’s very difficult to have a winning business model unless you’ve captured demand, right? Or, I think you said, what was the term? To introduce a business model without social aspect. Because it’s almost that. I mean, look, if we think about finance, for example, it doesn’t have that social aspect, therefore, it’s a service that almost increasingly lends itself to be bundled with other activities within an economic ocean, because in itself is obviously intrinsic to economic activity, but it’s not something where you have particularly strong social network effects, for example.

Brett: Yeah, it’s kind of the way that any company on the internet seems to trend. Those commoditized services get bundled into a company that owns significant demand in one area or another. It’s sort of like, you know, that you always hear the term every enterprise SAS company becomes a FinTech company at some point because you get deeply enough integrated with the workflows of your customers that then you can start offering them just different features, different financial products, etc. And I think the same thing is happening in the consumer internet world as well, as you see the proliferation of digital wallets across the board with every company trying to offer them, thinking about how to offer them. It’s sort of the same thing. So, yeah, if you can identify the companies, I think, that are owning that demand and generating that demand, and I guess going back to that idea of generating intense loyalty from a customer base and finding the right ways to scale that loyalty, then you can really figure out where the next steps lie for that company and where the next features and monetization paths are.

[00:42:25.28] Ben: I want to ask you about another term, which I think is yours. I think it’s another one of your idioms, which is ‘clampetition’. What is clampetition? And can you give us an example? Because, again, it’s quite specifically used at the moment, within the pandemic, I think.

Brett: You touched on it earlier, where the pandemic has given a lot of companies this cover to do different things or interesting things or this carte blanche to do innovative stuff that they may have not had the boldness to do before. The way that I think about this term, ‘clampetition’, it’s a word that just joins together competition and classiness, which is essentially companies using this totally disjointed economic situation to make moves that are classy in terms of helping their customers or helping their suppliers, but also double as these smart customer retention or acquisition tactics. And a lot of these moves are pretty minor. I mean, I’ve probably gotten a million emails from companies saying, “Our product is free for 30 days during the pandemic” or something like that, that are just really lightweight attempts to acquire new customers when they may not have otherwise had a channel. To assume upgrading its education users to a free plan is one example of that.

Brett: There’s others that run a lot deeper and I think the food delivery space provided an early interesting model of that. So, in the US, at least, there’s sort of these four companies that are vying for the leadership role in that world and it’s Grubhub and Uber Eats and Postmates and DoorDash — and Grubhub is the only one of those companies that’s actually profitable. Postmates and DoorDash are kind of these venture-backed companies that are burning a ton of cash, Uber Eats burns ton of cash as well. And DoorDash used this opportunity to do something that their competitors couldn’t, because they’re burning so much cash and have this existential runway threat where Grubhub suspended commission payments from restaurants and was able to do that, and it’s a classy move — it helps restaurants, in theory, not have to pay and save working capital and things like that — but at the same time, it’s pointed directly at their competitors and saying, “We can do a thing that you can’t, and hopefully that’ll allow us to serve our customers better, acquire more customers, pull them away from you and hurt your business long term.” So, I think it’s a type of thing that’s been happening quite often across the board and it’s just an interesting, unique thing that’s been birthed by the pandemic.

There’s a new paradigm — places where there’s a significant gap between engagement and monetization, where companies have been positively impacted by spatial economics, where there is network effect developing or positional scarcity developing. But, the market hasn’t quite caught up to that or understood that yet. — Brett Bivens

[00:44:53.05] Ben: Square is another company that you’ve consistently been really bullish on and a company where, a bit like Spotify — maybe that’s changing with Spotify, and it’s certainly changed with Square — but where, for a long time, you were almost contrarian in really rating the prospects for Spotify and for Square. Why is it you’re bullish on Square and what have they done in terms of clampetition? Because I think you used the example of Square a couple of times in the essay.

Brett: Yeah. So, Square is a really interesting company as well, just because they are one of those companies that have hit that internet escape velocity state. They’ve driven so much demand with this Cash App, and they’ve just understood culture to such a degree and have driven so much loyalty within that product that their biggest challenge or threat as a business right now is their SMB customers just going out of business. That’s a massive threat to them. They’re the type of company that has this sort of responsive instrumentation, this ability to adjust incentives, adjust operations in real time. And because of the fact that they’ve built up this two-sided business where they’ve got SMB customers on one side, massive demand with Cash App on the other side, they can actually drive significant relief to those SMB customers over time by doing things like offering rewards to their digital wallet customers for shopping at those places and recommending different Square SMB customers, so they can be the force that drives the recovery of a lot of their customers. And I think that’s a really, really interesting company to keep tabs on and follow and yeah, I’m very bullish about their prospects and where they’re going.

[00:46:36.12] Ben: They’re almost a good example, as well, of patient investing, right? Because they started with that card reader that a lot of people saw as just being almost like perpetuating the same because it ran on all the same networks. But from there, they’ve innovated and innovated, and I suppose they did it under the radar to some extent or patiently because, again, they’re formidable competitors, and they’ve run on other people’s networks. And so, they’re a little bit the same as Spotify, in the sense that they’re operating in a space where they’re surrounded by very, very powerful players. And then, would you also argue that they’ve got business model leverage, i.e, they’ve now established a really good unit of exchange, and a loyal customer base and scale, and are in a position where they can start to layer on new product offerings and expand within their economic ocean? I’ve tried to use as many of your terms as possible.

Brett: Yeah! I think that’s spot on and I think it’s true for both sides, if you think about their SMB customers, again, because they can potentially drive so much demand to those customers, because they’re so deeply embedded in their workflows. They have an opportunity to offer additional services over time that, again, they’ve got this captive audience, they don’t need to acquire them for a huge cost or anything. They’ve got them right there, so they can just continue to upsell. And that’s great. And then yes, on the customer side, this sort of digital wallet, the Cash App, the payments, the peer-to-peer stuff is a great starting point. But then, they get into areas like stock trading and other places like that where they can just keep serving out new services, new features, new products to these users over time. And that whole flywheel just kind of keeps spinning. Yeah, I mean, it sounds easy. It’s certainly not easy. I think, for any of these companies, there’s massive competition from all sides for a company like Square but they certainly do sit in a pretty advantaged position.

[00:48:36.02] Ben: So Brett, I want to ask you also, now, about the shifting economics of distance. So, I’m going to quote again to you from one of your essays. You said, “We are seeing, for the first time an economic shock create a discontinuous divergence in the spatial economics — the cost of distance between the physical and the digital worlds.” What did you mean by that? And also, if you don’t mind, can you also talk us through this matrix that you’ve got? It puts people in quadrants based on positional scarcity versus spatial economic impact of COVID-19. Because it’s a great diagram.

Brett: Yeah, absolutely. I think over the last few decades, we’ve seen a broad-based decline in the cost of distance across digital and physical worlds. It’s cheaper to ship things, it’s increasingly cheaper to travel all around the world. So, doing things in the physical world, at a long distance, is increasingly less expensive. So that cost has been coming down. The cost of doing that, from a digital perspective is coming down even faster. It really hasn’t been necessarily significant enough to break the status quo that’s kept many things functioning as they have — I mean, the cost of delivering education or the cost of doing a business meeting digitally has gotten less expensive for higher quality over time. But, because of the fact that the other pieces of the physical world side of it have also been declining in value and because of the fact that there is an element of positional scarcity to these things — there’s prestige tied into jumping on a flight and going to a business meeting or there’s prestige in being on location at a university, getting your degree there — they really haven’t decoupled and I think that this pandemic situation has totally decoupled those things from, again, health to education to the way that we do business, and it’s really broken down those things, and it’s having a pretty significant impact on capital and attention flows. I think you can see this play out. There’s a really good tweet from Chamath Palihapitiya of Social Capital, that talks about just the different terms that a company like Slack who has significantly benefited by this rapid decoupling in what they were able to get as they went out to the markets to raise debt versus a company like Airbnb, who has been really, really challenged and put in a tough position through all of this.

Brett: And so, the quadrant that you’re talking about, or the chart that you’re talking about, looks at four different areas. So, is a company negatively impacted by the spatial economic shifts of COVID-19? On the negative side, you get things like movie theaters or non-elite secondary education institutions. And then, on the positive side, you get things like digital wellness and telehealth and teleconferencing and distance education and things like that. And then, on the positional scarcity side, sort of high and low, it again kind of comes back to, is there prestige or legitimacy tied up in this activity? Is there a physical or regulatory monopoly around this activity? Are there network effects that will come back as we sort of start to ease away from this? So, the four categories, if we look at it, there’s a resilient recovery category, which is sort of this high-level…

Ben: It’s top left in the quadrant, right?

Brett: Exactly! Top left, and it’s sort of high positional scarcity, high signaling value, high degree of assets that will be valuable over time — and that’s things like Airbnb, or the NBA, or Harvard; those are things that will have a dip but should recover pretty resiliently.

[00:52:34.01] Ben: Yes. These fit in the bounce-back category, right?

Brett: Exactly, yeah. And then, there’s the side of that where an activity or a company has been negatively impacted, but does not have the benefit of prestige or legitimacy and has seen significant brand impairment or a massive shift in the value chain. And again, that’s what I talked about a second ago with movie theaters and non-elite institutions. There’s the obvious growth category, which is, these companies that have been positively impacted, but don’t really have that positional scarcity or any kind of real signaling value. And again, things like Zoom, things like distance medicine, etc, where it’s kind of obvious that those are going to grow — if you’re already invested in those categories, great; if you’re not already invested, it’s possible that the valuation gap has closed already on those things and it’s not really clear where the alpha is, so to speak, in there. And then there’s, I guess, a new paradigm, and this is maybe hard to judge or hard to understand exactly where it plays out. But places where there’s a significant gap between engagement and monetization, where companies have been positively impacted by spatial economics, where there is network effect developing or positional scarcity developing. But, the market hasn’t quite caught up to that or understood that yet. And, again, who knows what this category is going to be. If any of us knew that, we’d be in a pretty good situation, but potentially things like gaming and distance primary education fit into this category. But yeah, we’ll see how that plays out.

Ben: Fantastic! Brett, thank you so much for coming on the podcast. That’s been a fantastic conversation! And I think not only have you opened our eyes to lots of different opportunities that we maybe weren’t thinking about, but I think you’ve also given us a new vocabulary to talk about those opportunities. My last question to you, before we conclude is, where do people find your writing? How can they engage with you because I think you’ve also got a Telegram channel now, right?

Brett: Yeah. So, Twitter — I’m pretty active on there, @brettbivens. I have a weekly newsletter that I put out where I talk about a lot of this stuff, at, and then, like you said, I also have a Telegram channel where I have more high-cadence thoughts, rapid thoughts on different things, share different links that I’m reading, stuff like that. It’s been a fun experiment to try to connect with some new people and share more thoughts in real time. So, those are probably the three areas to connect with me.

Ben: Brett, thank you so much, indeed!

Brett: Thanks, Ben! I appreciate the time.

Post-pandemic Wealth Management (#20)

Post-pandemic Wealth Management,

Your host, Ben Robinson, sits down with Anna Zakrzewski who leads Wealth Management globally, for Boston Consulting GroupChristine Schmid who heads up Strategy at additiv, and Laurence Mandrile-Aguirre — who heads up Switzerland & Monaco for Citi Private Bank. We cover the opportunities around Digital Wealth Management and what that truly means, how ready are wealth managers to take advantage of the shift to Assets under Intelligence, where new entrants fit into the market and what the future of wealth management will be.

Resources mentioned in this podcast:

  1. For Wealth Managers, COVID-19 Is a Wake-up Call” — Boston Consulting Group
  2. Post-pandemic Wealth Management Opportunities” — additiv
  3. What society needs from the financial sector — now more than ever before” — additiv

Full podcast transcript:


There is no way that we’re going to go back to a less-digitized world post-COVID19. It will have a lasting impact in that respect, on the client experience, on the way relationship managers and investment advisors interact, but it will also have a lasting impact in terms of how you onboard, how you run KYC, what your future compliance model is going to look like — Anna Zakrzewski

[00:01:57.09] Ben: Anna, thank you very much for coming on the podcast! I want to start with the white paper that you recently issued, called “For Wealth Managers, COVID-19 is a Wake-Up Call”. It begins with the following line:

“Outsiders might think that wealth management, after a 10-year bull market should be in good shape to weather the storm. But this is not what we find.”

Anna, have wealth managers been complacent and failed to prepare for the future while times were good?

Anna: I would say a lot of the topics that we see that wealth managers have to focus on today, they should have already been doing the last two to three years — and I would say they haven’t really done too well in implementing them. Whether they fail to make the world shine, I would say they never really had the huge pressure on which they had to act because margins were still quite okay. On the other side, a lot of them had such a thin profit margin, that right now, with the crisis and with COVID-19, there will be not that much leftover.

[00:02:55.26] Ben: Do you think that they now realize the severity of the situation — i.e. that what we’re facing is a downturn, of course, which will affect assets, but the fact that it’s more than that, that it’s also going to catalyze some bigger structural changes?

Anna: Well, I think what they are realizing is two, three things. The first one that they are realizing is that the topics that they have to act on now, the actions that they have to take on now, are not all necessarily new — with very few exceptions — but they have to accelerate and they actually have to really implement them well. For example, structural cost changes; for example, rethinking how they deliver advice, and actually enabling and embracing the opportunity to work remotely, to work digitally — at the moment, it’s the only way for wealth managers to interact with their clients. And before that, it used to be a threat. So, I think that’s the one bucket.

Anna: The second one, in terms of major structural changes, in the past, most wealth managers have not really embraced and adapted their complete operating model. It’s always been relatively a good business — 10 years of a bull market, a high volume of transactions — which means basically, their long-term view on profits hasn’t really been distracted. So, that also means that they never really had to make more cuts than just little salami slices on their cost and on their operating model — so you have a lot of duplications, you have a lot of complexity, you have a lot of processes that are not necessarily scalable, and most of these structural topics haven’t really been implemented well so far.

the banks that have invested in digitization, they were within a few days able to completely shift 80% of their workforce to working from home, even in functions you wouldn’t have imagined before. They were able to contact, reach out, and provide advice in a digitized, faster way to their clients, far more personalized than anybody else — Anna Zakrzewski

Anna: I think the other catalyst that we see is that after COVID-19, there will be a lasting impact in terms of interactions and also servicing. There is no way that we’re going to go back to a less-digitized world post-COVID. It will have a very lasting impact in that respect, and it will have a lasting impact on the client experience, on the way relationship managers and investment advisors interact, but it will also have a lasting impact in terms of how you onboard, how you run KYC, what your future compliance model is going to look like. These are the three big blocks where we definitely see strong acceleration. And lastly, if you look at the smaller banks and the smaller players in the market, who on average have really high cost:income ratios, the question is, if they will not focus right now, how many of them will really survive? And we actually do expect, as an acceleration, also industry consolidation to start happening.

[00:05:38.20] Ben: What you lay out there is quite a clear blueprint in terms of how wealth managers should be responding. How do you see them responding so far, especially the speed with which they’re now tackling what they arguably should have done a while back?

Anna: What they have been doing quite well — not all of them, but most of them — is the short-term actions directly linked to the COVID crisis: ensuring working from home, ensuring some acceleration on digitization, upgrading a little bit some client experience piece, start to run some scenarios, managed liquidity. I would say those short-term actions — keeping their own people safe and engaged — all of that, I would say that that has been done quite well. The part where they have also, at least some of them, become quite creative, I would say — and some have definitely surprised us — was also how they onboard clients, how they now run KYC, how they now manage compliance and enable work from home, especially in an environment and in a business, where confidentiality and also regulatory elements are very strict. So far, they haven’t been able to even onboard a client remotely, and now, in COVID, some have really been creative. They optimized digital signatures, they were able to do client identification through video calls. Before COVID, nobody really thought video calls, especially around Europe, would be something the clients would want. At the moment, it’s actually one way of getting onboarded. So I think some of these reaction times have been surprisingly quick and surprisingly agile. The thing that hasn’t really gone so well, for some of them, was really the decline in communication. So, some of them where weaker content that was not necessarily personalized it was talking about the crisis, but partially not individualized enough or solution-based — and that is an angle which should have been an opportunity for wealth managers to do really well. And I would say, on average, that part hasn’t been the strongest.

[00:08:05.00] Ben: In your report, you definitely identify that — as you said — is one area where digitization should be able to deliver a much better experience at scale. Do you think now that we’ve had this acceleration and digitalization, that wealth managers appreciate that, and they’re starting to make those kinds of investments? And then, how difficult is it to make longer-term investments in an environment where there’s such a focus on guarding liquidity and managing communication — things that seem so much more pressing?

Anna: There is one major shift in terms of how investments are being done, and also how levers are being prioritized in terms of where the focus and the action of the wealth managers are moving towards. So, to give you one example, one bank actually had a quite broad and ambitious digital roadmap before the crisis — most of the topics and most of the angles were completely focused purely on the front experience, the client experience, and that part. And there was quite a big budget behind it. They have revisited it, not cutting on that client experience piece, but adding a component in the whole digital roadmap, which actually allows them to reduce costs, to unlock some flexibility in the processes, to help them partially in an end-to-end view become more scalable, and through that actually leading to an efficiency increase of up to 20%. And that actually funds the partial investment also into the front and into the client experience piece. So, you see a much stronger balancing of complexity reduction and front client impact. And before COVID, it was mostly focused purely on the front and just on the client — and I think that is just one of the examples that we see in terms of a mindset shift.

Anna: Another one that is very interesting is, how do you ensure that you have a stable and continuous revenue flow mid to long term. And it’s about really thinking how you make your clients more sticky, how you make your clients stay with you and invest more money with you by truly tailoring on the one-hand side, and on the other side, also making parts of the portfolios in a short term — and it’s not easy — a bit less volatile to potential upcoming future shake-ups. But that’s, I think, one of the big notions. And in terms of reassuring — and, I guess, it also goes in that way — is, in times of crisis or COVID right now, with everybody working from home, you also have quite a large part of your employees in marketing and events or in the client front-facing angle, not necessarily being able to do what they’ve been doing before. So, some players have actually done a creative approach in rethinking and re-skilling some of their employees to now help where you have the big bulk of the work happening, driven by COVID, and allow them a more flexible engagement across the organization, and it actually puts them in a nice position to now experiment what their future working models could look like.

if you actually look at wealth managers today, they are still very strongly vertically integrated and it will require quite a change of mindset to let go of what is not core, in terms of, you know, “We do our own products”, “We build our own app”, “We have our own reporting”, instead of actually leveraging some of the players that are out there in the market — Anna Zakrzewski

[00:11:33.29] Ben: Going into the pandemic, we’re already starting to see a growing differential in performance between those wealth managers that have made big investments in digitalization — I think you call them ‘digital leaders’ in your report — and on the other side, those that hadn’t yet made those type of big investments in digitization. Presumably, that differential in performance is getting magnified during the pandemic, do we already have any evidence that that’s happening, or is it too early to see that divergence in performance?

Anna: You already have seen that divergence in performance before the crisis — and that’s a fundamental difference in performance. So, we have looked at 150 wealth managers last year, across the globe, in all business models, in all shapes and sizes, and we have also looked at the top performers in terms of profitability. There are two major differences that really make the top performers, top performers. First of all, they absolutely excel in the revenue margin because they already, through digitization, are able to deliver better to the client, cross-sell better, they have the right tools, and they really focus their front to deliver. Plus, they have also redefined their pricing model. And the difference, globally, I mean, we’re talking about a delta of approximately — depending on the regions — 15 to 18 basis points. So, it’s really significant. And these top performers, they also invest double and have invested double the amounts in digitization over the course of the last two to three years. So, there is a direct correlation already, before the crisis.

Anna: And thirdly, what was a very insightful angle for us was, we also looked at the cost difference — is the cost over assets of those top performers significantly different than the one of the average? And the third proof point here is that, actually, the difference globally-seen is something like three or four basis points, so it’s not as significant as on the revenue side. But the reason for that is that these top performers have already started to invest: they have invested into the changes in operating model, they have invested into the new talent, into the new and accelerated ways of working and, like I said, double the amount in digitization, not just in the front, but across the value chain.

[00:13:59.29] Ben: Is it too early to have any data points from the pandemic?

Anna: I wouldn’t say it’s too early. One thing that you already see is that the banks that have invested in digitization, they were within a few days able to completely shift 80% of their workforce working from home, even in functions you wouldn’t have imagined before. They were able to contact, reach out, and provide advice in a digitized faster way to their clients, far more personalized than anybody else because they could just review the portfolios. So yes, they were clearly at an advantage when the pandemic hit the market.

[00:14:39.24] Ben: But we don’t yet have data points on financial performance, right?

Anna: No. On financial performance, we don’t have it yet. However, in terms of onboarding clients, in terms of winning new business, in terms of maintaining clients, and in terms of tailored communication, this is what we see, these were the players that have been able to do that better than the others.

Let’s not forget that the customer acquisition cost is quite high. So, I wouldn’t necessarily see the digital players being the consolidators in the market. I would see some of the bigger players trying to acquire the capabilities of the digital players or even more, a partnership model where some of the traditional players have great access to clients and they do have the client relationships, to actually tap into the digital capabilities of the other players, to have it as an integrated service model and as an integrated offering towards these clients — Anna Zakrzewski

[00:15:02.11] Ben: We talked a bit about what digital servicing looks like. What about analytics and the capabilities that wealth managers are using there, in order to build more tailored products for customers? How strong would you say the data analytical capabilities were of wealth managers? And do you think this might be one area where they’re at risk from some of the digitally-native new entrants?

Anna: So, it’s maybe a bold statement, but I don’t think wealth managers yet are really very advanced and reaping the full benefits of the power of analytics today. So, I think that’s where they are, compared to other financial services places. With a few that can already do it, a lot of the times it’s still a bit of analytics here and a bit of analytics there, but very few have a truly centralized data lake, which allows them to on one-hand side, fully personalize their client interface, fully personalize their offering and the value proposition to each one of the clients, and thirdly, also, leverage analytics to allow them to scale up their processes and operating model. So, what we hear more is that the analytics capabilities will significantly accelerate now, in terms of enabling cross-sell, enabling pricing, taking into account client price sensitivities when we’re thinking value proposition design, etc. It’s going to really be a big focus now, and before the pandemic, I would say it’s been there — it’s been a great buzzword — but in very few cases it has been truly implemented, end to end. In Asia, I would say, yes, it’s been there, and it’s been definitely in the tech fins and in the more technology-averse digital wealth managers, it’s been playing to their complete advantage. In Europe, we’re still quite far away from that.

[00:17:10.10] Ben: One other aspect of the report I wanted to pick up on, was that I think you said this also, “in addition to changing operating models and servicing models, banks should also look at their sourcing models. But rather than just try to source things that are cheaper, they should also tap an ecosystem of partners to help deliver improving quality at scale.” I totally agree with what you’re saying, but it’s such a difficult area to get buy-in from banks because this is something that potentially threatens to cannibalize existing revenue streams. And so, I guess the question is, do you think that, culturally, banks and wealth managers are ready to look at changing their sourcing models in that kind of way, to actually insource even parts of their asset management?

Anna: When you mean sourcing, like outsource parts of their asset management? That’s what you mean, right?

Ben: Yes, outsource functions to India because they’re low cost. What about finding somebody who could offer a better-automated investment service than the one the bank has, for example.

Anna: I guess what wealth managers are facing today is a true definition of what their core competencies are and it is not like a process or your technology is going to be a key differentiator for you to win in the future. And we already see today that some wealth managers and private banking players are actually setting a primary focus on client servicing and investment servicing while some of the rest in the value chain, in terms of the middle back office, etc, is already quite radically and can be even more radically outsourced to third-party providers. On the other side, if you actually look at wealth managers today, they are still very strongly vertically integrated and it will require quite a change of mindset to let go of what is not core, in terms of, you know, “We do our own products”, “We build our own app”, “We have our own reporting”, instead of actually leveraging some of the players that are out there in the market. So, I would expect going forward, to also accelerate some of the changes that need to happen and accelerate some of the digitization elements that have to happen, that actually FinTechs — who are very focused on individual capabilities — will be a great source to pool and a great source to actually integrate to deliver some of these capabilities required.

The large wealth managers will clearly gain in market share, but they will only be able to do that if they do the right investments and the right level of personalization and client experience, and they will also act quite fast. The broad middle play, they will only survive if they stop being a big-bang, but they will also really refocus and turn around the operating model — Anna Zakrzewski

Anna: And then, the question is, in the future, what will wealth managers be? Will they be the ones that focus on wealth management, financial wellness, client experience? Will they be the players that will have everything in-house across the value chain? And then, the challenge is how do they get to scale in terms of the number of clients, etc. to really put the volume on their platform. And then you will have the players that actually are purely driven by technology — which are the tech fin and the digital wealth managers who actually are already having the digitized business model and don’t yet have the direct access to the customers.

[00:20:30.25] Ben: You said earlier on that you expect consolidation in this market because what COVID and then subsequently what an acceleration digitalization will do, is it will clearly separate the winners from those that are less strong and less able to adapt. How soon do you think that phase of consolidation will happen? And is it just the question of the large consuming the small or is it more nuanced? And then, if you allow me a third question, do digital leaders really need to buy assets? Because won’t superior value add just see them win those customers anyway, from those that aren’t able to provide that kind of value add?

Anna: Let me take one question at a time and try to bundle it. Today, nearly half of all wealth managers have a cost:income ratio of over 80% and some are close to 100, which means they’re already not very profitable today. The degree and the speed of consolidation, in our view, will depend on the severity of the crisis and also on how long the crisis will last. What we see is that size and profitability are definitely correlated, although, also here we see some examples of small boutique banks that are very successful and they are very focused.

Anna: So in terms of the speed at which consolidation will happen, comparing it to the previous crisis from 2008–2009, we have seen the big shift in terms of reduction, in terms of the number of wealth managers, approximately 18–24 months post the crisis. Now, in times of COVID, I would partially expect an even earlier kick-in of the M&A and consolidation wave driven by two drivers. The first one is, already today, a lot of wealth managers that were strong before the crisis are thinking and seeing this as an opportunity how in a relatively short period of time, they can acquire scale and acquire capability to make them stronger post-COVID — And typically, you will have 15 to 20% of players that come out stronger after the crisis. So, they will be the consolidation drivers and they have already started to screen and look for these opportunities, partially, today. And then, you will have the ones that will be so severely hit because they’ve already been in such a poor position before the crisis, that it’s going to be more a matter of decision, when do they sell to still get good value compared to how long can they last to somehow keep their business afloat. And this balance, I think, is going to drive the speed at which the consolidation wave will start.

Anna: On your other question, we already see today that some of the large wealth managers have significantly grown in the share of the market that they owned in the past few years. So, yes, it’s definitely going to be the mid-sized and larger players acquiring some of the smaller ones, which on average, are, today more unprofitable than some of the larger players, of course, because of the scalability of their business. But, like I said before, we will always have a few small boutique plays and niche plays that will continue to be very successful, already like we have today. But they are very focused.

[00:24:09.13] Ben: And then, the last question was around whether it’s actually necessary. So, the really successful digital leaders in this space, do they need to buy up the frail competition, or can they just take their customers through better execution anyway?

Anna: Okay. So, a lot of the pure digital players that we have in the market today, they have simple and nice, pragmatic client experience. They are very customer-oriented and friendly, but what they do not have is access to the clients. And let’s not forget that the customer acquisition cost is quite high. So, I wouldn’t necessarily see the digital players being the consolidators in the market. I don’t see that. I would rather see some of the bigger players trying to acquire the capabilities of the digital players or even more a partnership model where some of the more traditional players have great access to clients and they do have the client relationships, to actually tap into the digital capabilities of the other players, to have it as an integrated service model and as an integrated offering towards these clients. I don’t believe that the entrants such as robot advisors are actually going to be acquiring the smaller chunks of the clients that we see in the wealth managers today that may be up for sale at some point in time.

[00:25:36.23] Ben: What do you think the end state is? Does the middle just disappear? And what’s the final number of wealth managers you think we’ll have, once this consolidation phase is over?

Anna: Once we will definitely see in the future that the long tail of small wealth managers will actually disappear and only a few boutique plays will remain. The large wealth managers will clearly gain in market share, but they will only be able to do that if they do the right investments and the right level of personalization and client experience, and they will also act quite fast. The broad middle play, they will only survive if they stop to be a big bang, but they will also just really refocus and turn around the operating model — be it outsourced or be it really focused on a few segments and a few real credible value propositions.

The digital entrants focus on the younger population, most of them. I haven’t seen a digital entrant that focuses on retired persons yet — Christine Schmid

[00:26:33.27] Ben: Christine, thank you very much for coming on the podcast. Let’s maybe start by asking you, what is additiv?

Christine: Thanks a lot, Ben! Additiv is a technology company. It was established in ’98 and it helps the leading financial institutions to capitalize on digitization. The most known product is the Digital Finance Suite — that’s an orchestration engine for wealth management in particular. Newly, we have launched the KickStarter campaign that’s even a faster enablement for wealth managers to digitize. Additionally, it provides some expert systems, basically data analytics, but also credit tools. I would say it is global, excluding the US — this has some regulatory reasons — the US is a beast of its own. So, it is doing business out of Zurich, Singapore, Nairobi, and Frankfurt.

[00:27:25.17] Ben: And what’s it like trying to sell technology to banks and wealth managers at the moment during a global pandemic?

Christine: I think it’s the right time. For the ones that haven’t set up a servicing model through digital channels — i.e. where their advisors could serve their client through digital means — they’re doomed.

[00:27:47.16] Ben: So you’re saying almost counter-intuitively that this has actually risen to the top of their corporate agenda because, quite simply, they can’t service their customers in this environment without better technology?

Christine: I would say so, for the ones that are very still more towards the old dine & wine, that’s really over.

[00:28:05.02] Ben: Okay. Let’s assume they have the motivation to implement new technology and they have the budget even in the pandemic to implement new technology. How can they do it practically, if the IT staff are working remotely?

Christine: Working remotely doesn’t harm work. It just shifted. And, if you look for the wealth managers, they were used, I would say, on the IT staff side to work out of different locations — that’s common standard. So, just to give you an example, we were able with a large Swiss bank and it’s public with post finance to launch their new digital wealth advice during the pandemic. So, that’s no limitation at all, in particular, if you talk to IT staff on their side.

[00:28:55.11] Ben: So, Christine, before working at additiv, you used to work in the industry, right? You were in the wealth management industry. What’s your view on how bad a financial correction we’re looking at and how that will affect the wealth management industry?

Christine: So, yes, we will have a negative correction. We don’t know if it’s a V or a U or a W in the end, but it looks definitely like a correction. The numbers that are coming out from either the banks, on their estimate, but also from the IMF, are simply staggering. So, how does that affect wealth management? Certainly, we will have to refocus back on trust in quality, and people will focus more on the preservation of capital. But the line with what I would call stability and service at a fair level, at a fair price, a second thing is what we would expect and we see that also on the government side, is a refocus towards more sustainable investing again. It is already growing like there is no tomorrow but it will continue. So, if you look on the government side, they link their lending, often these days, to a greener approach of doing business. The same will happen on the investment side — this will continue. And on the retail side, I think we need tools in wealth management that allow for saving, that combine it with budgeting, and that have it in a transparent and fairly-priced way. I think the term that is often used and coming out of the UK where I hear it from often, is financial well-being. It’s really, on the retail side, how helping to save, but also helping to fund through a more difficult time on the economic side for every retail client.

I think that’s the ‘new’ normal model we see throughout various countries in Europe, in particular as well, Switzerland. They team up. It has become a ‘together’ and not only an ‘against’ — Christine Schmid

[00:30:51.03] Ben: You recently published a report on post-pandemic wealth management, and I think we’ve seen a number of these types of reports come out, where people try to anticipate what the future holds. And so, there’s a bit of that in your report. But the other thing I really liked about it is, you actually explain what you mean by digital wealth management — because I think a lot of times people either just assume we know what is meant by digitization or they — for me — minimize what it is and just assume it’s about, as you say, servicing clients through digital channels. So, can we start by having you explain what you think and what additiv thinks is digital wealth management?

Christine: Let me explain it from two views — first of all, from the view of a bank for wealth management, and secondly, then, from a client view. From the view of a bank, it transforms its business model. We always say, at additiv, it changes the operating model, it changes the servicing model, and it changes the sourcing model. So, operating model, it allows a cheaper production on wealth management. It allows on the servicing side an easier, simpler interaction with advisors to the clients, even taking all the regulatory means we have out there into account. And, on the sourcing side, it allows that you benefit from an engine in between, an orchestration engine in between, that already sources either the best partners for solutions or the best investments for solutions — and you can build upon that. So, you don’t have to do it on your own. And these three layers together, it’s not only wealth management; for the banks, it makes the risk management easier, it makes the compliance side easier, but also the audit side easier. So, it’s really various layers where it helps — coming back to where it all had begun — to transform the business model. That’s from a bank’s point of view.

Christine: From a client point of view, digitization in wealth management is partially about democratizing. It’s, from an exclusive offering, open to a broader number of clients. Honestly, it allows, as well, to produce cheaper, it allows as well to have lower fees in and lower costs. It can be personalized. So, in the past, you had a fantastic product and this fantastic product had to fit for a majority of your customers. You know more about the customers by combining different data sources and you can start to personalize that, you can start to personalize the offering, the information you provide. It’s not only that it has to be included within the e-banking but also it can be banking as a service. So, it has to be of becoming even more seamless to include it, for example, in a super app where you do all the transactions as a client, but you have banking services as well, aligned. This is how we break it up. But it will always be about trust, it will always be about a safe way to store your wealth. What is newly added — it has to be convenient. So, where the clients do their transaction they expect, as well, banking — and it has to provide a value add. I think that’s where digitization or digital wealth management really changes from the old world.

[00:34:21.24] Ben: Essentially, the trade-off that used to exist between quality on the one hand and scale on the other has sort of disappeared. We can provide better quality at better scale or higher scale. Would you say that’s fair?

Christine: And to lower assets under management levels. So, to lower levels of wealth per end client.

If you look in the Western world, pensions had quite a decent level of cost of living covered. The risk is, with the demographic pattern we have, with the lack of reforms we have seen, but also with the low interest rate level, you face a pension gap in which your targeted cost of living will not be covered by your pension anymore, and thus, you have to find a way to decumulate your wealth during the retirement period in a most efficient way, by not giving up completely on risk, by having the right investment products, which then allows you to live a life free of financial concerns. That’s a huge opportunity— Christine Schmid

[00:34:40.03] Ben: And in that kind of world, it would suggest that we can provide wealth management to a much larger population of customers? And so, how much bigger do you think we could grow the addressable market? Because I guess, most of what we talked about up until now is how we’re talking about a crisis in reduction in assets. But, on the flip side, if this accelerates the push to digitalization, then it also accelerates the opening up of a much bigger market for those wealth managers that can capitalize on that shift.

Christine: It’s a huge opportunity. It allows the scale — be it either self-serve with call center or with an advisor behind. At the moment, the only small amount is really advised of the assets out there. If you take the growth we are expecting in Southeast Asia but also partially the growth we are expecting in Africa, it’s really a super, super multiplier. So, from today’s around 50 million of people that really are fully advised, certainly at a lower scale of complexity, up to nicely into the 1.7 billion number of people — if you can scale it properly.

Ben: So, I’m not going to try to do the maths but that’s, as you say, it’s a big multiplier.

Christine: It will come at a different price tag and it will come obviously for way lower assets on the management per client, but there is where digitization helps to open their client groups.

[00:36:09.15] Ben: And what’s the share of your business that’s coming from existing wealth managers versus new entrants? You’ve got kind of all the right ingredients for new entrants here because you’ve got a large profit pool, fast-changing technology, fast-changing customer needs, which would suggest that there’s a once-in-a-generation kind of opening for new entrants. To what extent are you working with new entrants? And to what extent do you think they can enter the market successfully and build trust?

Christine: We are working with both sides. With new entrants, in particular on the pension side, it is not that simple because it is a highly regulated area. But they’re faster in terms of the platforms and the offerings. And normally, the new entrants then offer their model as a white label for the incumbents, so they follow fast behind. I think that’s the normal model we see throughout various countries in Europe, in particular as well, Switzerland. So they team up. It has become a ‘together’ and not only an ‘against’. Payment was different. On the payment side in particular, if you look at the case of Revolut, this was different because it really heated into a highly profitable area of foreign exchange. But here, it’s more a collaboration and a service model in the interest of the end clients.

[00:37:34.24] Ben: You’re saying that so far new entrants are more friend than foe, but how hard would it be either for banks to replicate these kinds of simple digital services that new entrants have provided? And also, how hard would it be for these new entrants to move up the value chain towards larger, higher net worth customers?

Christine: For the bank, if they start on a greenfield, it is doable. For the bank, if they integrated into their existing systems, it is rather expensive and a long-term project. So, it really depends on the incumbent side how willing they are to start businesses from scratch and maybe even cannibalize some of their still attractive earnings streams. How easy is it for the new entrants to scale up? We are seeing most of the digital banks, really, at the boundaries of wealth, I would say. They started with payment. They had a lot of success by cannibalizing into high-profit areas like foreign exchange. Now, they are really at the border of wealth management.

Ben: Barbarians are at the gate, as it were.

Christine: At the gate, exactly! They’re at the gate of wealth management. And what we see is they’re not growing as they were originally expecting, and this has really to do with the trust where you store your wealth. If you have a chatbot on the other side that sends you in circles, or if you at least can call a call center, or can call your advisor, that’s different. That’s really a difference. So there are some limitations in Europe. In the US, we have seen a completely different picture. If you look at the aims of Acorns, for example, they’ve entered in particular the 401k business quite successfully, and they’re growing nicely there.

[00:39:27.17] Ben: What you’re saying is, to be truly digital requires a business model change, and to some extent, is going to involve cannibalizing existing revenue streams. But, what you’re also saying about the additiv system, if I understand it correctly, is this can be introduced in a much more phased fashion, right? So in other words, you can both help banks to deal with the immediate need to service customers better, but also provide a simpler route to fundamentally changing their operating and sourcing model over time. Would you say that’s fair? So you can either, for those that are really progressive, they can immediately switch to a new business model with a new operation, a new business venture. But for those that are a bit more conservative, they can do it in a phased fashion using additiv’s orchestration engine.

Christine: Absolutely. So, the beauty is that they can transform their business model in steps if they want to, or they can even become more aggressive. The way it is built, if you look at the hybrid wealth management, it’s really tailored to a new servicing model. New servicing model by allowing working from home and serve the client as best as possible, and certainly better than through a simple phone call. At the same time, you could go fully towards accumulation robo, even being more aggressive out there, in the wealth management side, combining with other sourced options. So, it allows both.

[00:40:56.16] Ben: Decumulation versus accumulation. Why is that decumulation opportunity A so big and B, as you wrote in your report, so overlooked up until now?

Christine: Accumulation is growing wealth. So, you start to save preferably as early as possible, at the age of 25, and you grow your wealth through savings and obviously through smart investing over time, towards where you start to live partially from the wealth you have accumulated. It also can be that you grow your wealth at a young age and then start to decumulate because you start your own venture — for example, startup — or you go traveling around the globe for 12 months and you have saved 20K and you want to live off that for a year. Things like that are possible. That wealth will be decumulating — a reduction of wealth. Why is decumulation these days such a large opportunity? Why has it been neglected till now? If you look in the Western world, pension had quite a decent level of cost of living covered. The risk is, with the demographic pattern we have, with the lack of reforms we have seen, but also with the low interest rate level — which we now had for quite some years — you face a pension gap so that your targeted cost of living will not be covered by your pension anymore, and thus, you have to find a way to decumulate your wealth during the retirement period in a most efficient way, by not giving up completely on risk, by having the right investment products, which then allows you to live a life free of concern or free of financial concerns. That’s a huge opportunity. If you look into numbers, the gap is estimated up to 400, I think it’s trillions — a staggering number — which will be needed to close the gaps, either through savings, but also through smart investment offerings.

The paradigm we worked alongside was optimizing for return. Well, the problem was that not all the costs were internalized. That was really the problem — the costs that were taken by society and, in particular, by the planet. And if all the costs would have been taken in properly, certainly then, the financial market would have priced it differently. And therefore, it’s really the goal of the financial industry to start to not only recommend sustainable investments, but also to lend on the corporate lending side, according to the rules that take this cost into account— Christine Schmid

[00:43:04.01] Ben: If you look at all the FinTech entrants into Wealth Management, they seem to be mostly focused on accumulation — people like wealth from betterment. Why so few people focus on decumulation?

Christine: I think it’s a natural pattern. The digital entrants focus on the younger population, most of them. I haven’t seen a digital entrant that focuses on retired persons yet — maybe that’ll come, but I haven’t seen that yet. So, obviously, if you focus on a client group — 20 to 40 years old — you do not look into decumulation into pension savings, yet; you look into accumulation. You want these fun products, these easy to use, you want to cover traveling — or you wanted, in the past, to cover traveling — and foreign exchange, payments made easy; it’s the lifestyle that covers to that age group. Therefore, obviously, the ones entering that market were not focused on the needs of the elderly population. But also we all become older at some point. And, if you look at the age of 55 into your pension, it’s too late to cover the gap. You have to start earlier. We believe this is a huge trend and wouldn’t be surprised if market entrants not only start to look into accumulation but also on the way to build up into retirement. The best example will be Acorns, with its 401k plans. They do that. It’s still in the accumulation phase, but at some point, their clients will be retired. It might take a bit longer if they’re 25 years old today, but they will be retired, so it will become a normal business for them.

Assets under intelligence, how we call it, or return on intelligence, it’s not using only an investment product per se, but using multiple data sets, combining them and then giving even more personalized advice, optimized risk advice, and therefore, as well as optimized returns. So, it’s not the product per se that’s in focus. It’s really the whole construction within wealth management, but also other data sets around, that are more important to advise the clients going forward — Christine Schmid

[00:44:49.21] Ben: One of the concepts that I really, really liked in the report — in fact, it goes as far as to say I loved it — is this pivot in value proposition from being about return on assets to being about return on intelligence. Can you just go into slightly more detail about what that fundamental shift is in the value proposition of wealth managers?

Christine: In terms of the return on assets, you look at your assets under management, and you look at the profitability of the investment products that could have been sold within that group of assets under management. And obviously, therefore, the focus was on the best products to source. The best advice, then, to give to the clients that the level of sales, with hopefully, the best product was the highest. We expect this to change. Assets under intelligence, how we call it, or return on intelligence, it’s not using only an investment product per se, but it’s using multiple data sets. It’s combining it and it’s giving even more personalized advice, it can give even optimized risk advice, and therefore, as well as optimized returns. So, it’s not the product per se that’s in focus. It’s really the whole construction within wealth management, but also other data sets around, that are more important to advise the clients going forward than simply the pure investment product focus.

[00:46:28.18] Ben: You don’t see that many wealth managers yet ready to cannibalize their business. How ready do you see wealth managers are to take advantage of this move to return on intelligence, which presupposes that they’re ready to take this role as a kind of concierge and act to introduce customers to all sorts of different products and services?

Christine: The shift towards return on intelligence, that’s something they’re very keen on doing. It is linked, obviously — and we briefly touched upon base — before it was well linked to the whole area of sustainable investing. Sustainable investing has a lot of intelligence behind to select the right investments, but also the willingness if an investment wasn’t or hasn’t proven as sustainable to shift the transparency therein, I think the banks are really willing to go that extra route, as well to unbundle. At the moment, we have a clear shift towards ETFs and index products, but we don’t know what’s really in there — the detailed level of know-how we have per index is limited. And therefore, there will be another layer of intelligence that you could add, but really looking into the portfolio, unbundling all the ETFs, unbundling all the indices and adding it up then, again, on investment level. And guess what? You might be surprised by some concentration risk that’s in a client portfolio. And you might advise the client differently. That’s another level of adding intelligence to advice or combining it with payment data. If you know the client’s behavior on the consumer side, on the consumption side, you might know products a client would like, so you can, again, use this intelligence and provide it in a better way. Or, last but not least — and I think the industry has discussed that for quite a long time — you bring the intelligence of various clients — clients behaving the same — together and leveraging that for every single client.

[00:48:42.04] Ben: Last question. So, we’ve talked, I think, reasonably narrowly about wealth management. But I wanted to, if you’re okay with it, to zoom out and talk about another paper that you recently issued, which was about the changing needs of society when it comes to financial services. Financial services haven’t provided the insight that it needs to, and have those needs become more urgent in light of the pandemic?

Christine: The big question mark, is it the financial services who haven’t provided it, or is it the general economic, academic rules we are all behaving alongside? The paradigm we worked alongside was optimizing of return. Well, the problem was that not all the costs were internalized. That was really the problem — not all the costs that were taken by society and, in particular, by the planet. And if all the costs would have been taken properly, certainly then, the financial market would have priced it differently. And therefore, it’s really the goal of the financial industry to start to not only recommend sustainable investments but also to lend on the corporate lending side, according to the rules that take the cost into account. For the society to live on this planet — and I believe we just have one; there is no alternative, no planet B — the financial sector has a key role because it’s still the engine that keeps the funding alive. So, from savings, deposits into lending, into economic growth, into job creation. And obviously, this cycle has to be profitable, yes, but at the same time it has to take the costs for society and has to take the costs for the planet — climate change is a big topic — into account.

[00:50:45.17] Ben: So that was my last question, but as it turns out, it was actually my penultimate question because, how do we do that? How do we take those externalities and bake them into the price of assets and transactions?

Christine: How do you do that? That’s the question this industry is looking into, for the last 20 years. If you use the market to do it, then you would need to take the majority funding for each corporate. And the majority of funding for a corporate normally is bonds, and not equity. So I’m a big believer in the international capital market — the ICMA — rules for green bonds and for social bonds. These are rule sets that are not only legally enforceable but also international. So, if a corporation can issue a bond under a green bond ruleset the requirements have to be clear and they have to fulfill that. And the market, then, can price a green bond more attractive than a normal bond from the same company.

Christine: So, let’s take, for example, Volkswagen. They want to fund a new plant where they build the new e-cars. The new plant has to be according to certain standards — the buildings are done — but also about alternative energy use, so solar panels on the roof — all that set. They get cheaper funding than if they built a plain vanilla plant next to a nuclear power plant, for example. It’s a very basic example but you start to shift the funding towards greener, towards more social — by social I mean, for example, if you have to fund the bond for Inditex — and obviously, they have to fulfill certain rules in the way their clothing is produced, even if it comes from Bangladesh. And only if these rules are fulfilled, they are controlled, then they can issue the bond under these standards and they can issue cheaper. And the more the companies shift toward that standard, the more the rest in the old style will become expensive. That’s a way of market mechanism starting to include the pricing and using the market to do the pricing. Because what’s not working out there, if we’re trying to find out who is doing what and externalize the price into, this won’t be of thrive, this is not working. And through the bond side and through the debt side, you could use the market mechanism to start a pricing mechanism. That’s important.

If anything, this crisis has indeed accelerated the way we look at the digital world — Laurence Mandrile-Aguirre

[00:53:33.02] Ben: So, Laurence, I wanted to start off by just asking, what, so far, as we’re living through this pandemic, has been the hardest thing for you to manage in your job?

Laurence: Coordinating everything. We had to adjust to a lot of changes. Usually, when we need to adjust to change, it’s about your manager is changing or something is changing — but one element. In this case, we had to adjust to how we deal with clients, how we ensure continuity in the way we service our clients, how we deal with our people, understand their personal circumstances, how we communicate among each other internally. So, it’s more of making sure that we had everything under control to ensure continuity of business. And I must say that on the technology aspect, it took us a few days, but because we are a global bank, and we are used to having people traveling all over the world and working from a laptop, we were pretty well set up. The challenge was more coordination with the clients and the people.

[00:54:48.18] Ben: Because, I suppose it was not only with the normal channels of communication disrupted, but at that very time, you probably needed to speak more often with customers and with employees or with coworkers than normal because they needed reassurance and so on. Is that true? Would you say that’s a fair statement that, at the very time you needed to speak most and communicate most, the mechanisms you would ordinarily use for communication were disrupted?

Laurence: Absolutely! I mean, in a very short period of time, we had to get used to a lot of technology-related jargon — how to connect, which system to use, are we on the cloud, are we on the network, are we inside our own safe environment at work, terms of network. And the same for clients. Our clients are ultra-high net worth. They are global citizens, they travel a lot. They were not necessarily used to dialing to Zoom. They were used to go to a meeting and meet actual people, so we had to revisit entirely how we communicate among each other internally — it’s important as well — because we needed to be mindful of the bandwidth that we were using; audio/video had consequences on the network. And with customers as well. But, I must say that it took about a week or two to get used to this, and it’s almost common practice now.

I think digital is the way forward, and it was clear to the wealth management community even before this crisis. But it’s also a world that is constantly evolving. There are new technologies all the time. Things are being tested — whether it’s blockchain or artificial intelligence to see how we can use our clients’ preferences or behaviors to deliver a better tools to service them more efficiently. But definitely, I don’t think clients would want us to go back after this crisis and be less digital — Laurence Mandrile-Aguirre

[00:56:35.10] Ben: Yeah. I was reading somewhere that it takes something like 60 days for people to form new habits. Would you say that your customers and your team members have formed new habits? And to some extent, even if we could get back to normal, we won’t go back to the way things were exactly before the crisis.

Laurence: We have completely reorganized the way we communicate. So, we have large forums internally where we like to communicate the important features and the decisions that we are taking for the Private Bank. And, at the same time, we have smaller forums where everybody can voice their own concerns and ask their own questions. And I think we are going to keep that for a while because, obviously, in Switzerland, the economy has reopened. But, at the same time, we have not sent anybody back to the office. We are thinking about the safety of employees. So, we will need to continue communicating that way, definitely, for a longer period of time. And even when we will be able to go back to the office — we’re trying not to say ‘go back to work’ because we feel we are efficiently working — but when we go back to the office, because of the distancing and the security measures, I don’t think we will be able to do large meetings anyway and it will be from our desks, and therefore, phones and videos will continue to be the way forward.

[00:58:21.15] Ben: Looking back on this, you can argue whether this was a black swan or a white swan, whether we should have anticipated or not, or whether we couldn’t have anticipated this crisis. So, we’ll leave that question aside for a second. But, I guess, if we could just argue that what the pandemic is doing in some form is just accelerating the pace of digitization, right? So, we’re moving much quicker than was the case before the crisis in terms of remote work and digital interactions. Do you think that the wealth management community could have been better prepared, and maybe should have made more investments in this digital future while the times were good and ahead of this crisis?

for large banks, I would say — and Citi is focusing on the ultra-high net worth, what we are trying to do is to focus on keeping the full-service offering. That’s very important to us. Therefore, when we look at technology and outperformance, it’s under a more strategic long-term basis. — Laurence Mandrile-Aguirre

Laurence: Well, what I would say is that for sure, there was a strong level of awareness of the disruptive technologies — the need to become digital. We were all exploring our options. I would say that the smaller players could benefit from adding some new digital tools quite easily and for larger wealth managers it had to be compatible with a broader network and system. But I think we’ve been spending a lot of time looking at the options that were around us, how we could become more digital, how we could use AI in the way we improve client’s experience, the tools that we make available internally to our bankers. And we actually created a group called the Investment Innovation Lab, dedicated to that. So that’s what they were doing all the time — talking to FinTech companies, technology companies, looking at the new options, and what could take us forward. If anything, this COVID-19 crisis has indeed accelerated the way we look at the digital world. Just to give you an example, we had started to onboard clients digitally, but we still had a few hurdles to overcome. Most of the time, it was around regulatory requirements that we couldn’t fulfill completely easily. So the fact that we had to work from home triggered a lot of conversation to solve these points and basically, we managed to be 100% digital in onboarding and opening new clients in a week, while if we had not had this crisis, we would be probably still trying to work on the hurdles. So it has accelerated, definitely.

[01:01:20.02] Ben: So clearly, the most pressing problems that the bank is solving very quickly, like, how do we onboard a customer completely digitally? But, do you think you now prioritize more digital spending, particularly for things that are deeper down the technology stack, or for things that affect not just client servicing, but also the operating model and the sourcing model of the bank? So, do you think now there’s an appetite to make bigger investments in digital beyond the stuff that you absolutely had to do because you couldn’t function as normal without it?

Laurence: Absolutely. I think digital, anyway, is the way forward, and it was clear to the wealth management community, I’m pretty sure, even before this crisis. So, all this has just been an accelerator, and I’m pretty sure we will lock in what we’ve managed to achieve in that field. But it’s also a world that is constantly evolving. There are new technologies all the time. Things are being tested — whether it’s blockchain, which is a technology we use a lot at Citi — or artificial intelligence to see how we can use our clients’ preferences or behaviors to deliver a better system or better tools to service them more efficiently. But definitely, I don’t think clients would want us to go back and be less digital, especially the new generation and the millennials that are used to connect and access everything — and making information available efficiently and quickly is very important.

[01:03:12.24] Ben: Would you say that you’re clear on what the next big priority is in the digital journey for your bank?

Laurence: It’s clear we have a full team dedicated to exploring our options and are talking to technology companies all the time. If anything, a big portion of our budget, I know, goes to technology and anything digital. So, I have no doubt that we will continue to lead in that field. Absolutely.

[01:03:47.19] Ben: So, pre-crisis, I think it was clear that we were starting to see the big banks operating at a massive scale. We’re starting to outperform smaller wealth managers. What do you think happens post-crisis? And do you think this acceleration in digitalization also creates the potential entry point for new players? Maybe more FinTech-oriented players.

Laurence: I think indeed there is an opportunity for smaller banks or FinTech players, to enter the industry and be extremely good at one particular thing — for example, online payments or robot advisory. In one particular field, if you start from scratch and you don’t have the legacy of a large database and a full network, it’s, by definition, an opportunity to be very competitive and very good in one particular line or segment. But, for large banks, I would say — and Citi is focusing on the ultra-high net worth, what we are trying to do is to focus on keeping the full-service offering. That’s very important to us. We’re not trying to be extremely good in one area, but we are trying to continue to provide the full breadth of service. Therefore, when we look at technology and outperformance it’s under a more strategic long-term basis.

[01:05:31.26] Ben: Do you think that we’ll see consolidation as a result of this crisis? I.e., if what we’re seeing in other industries happens in wealth management, there’s a bigger separation in performance between the winners and those that are left behind. Do you think that will lead to consolidation?

Laurence: There should be opportunities as well in that field, and it’s been a trend anywhere, especially in Switzerland, for several years now. If you count the number of small banks, mid banks, and large banks, clearly there is a trend for consolidation. So, I guess that should continue. Whether it creates opportunities because of the current situation? Probably. We can see that, for example, access to lending is still available, but it’s becoming a bit more restrictive. So, I guess, at some point, there will be some difficulties for smaller banks to continue to provide certain services and therefore they could be open to merging. But it also triggers the questions on, when we think about consolidation and we try to merge two teams, two systems, two client database, there is a culture element to it. So, it’s also complicated. So, I guess the M&A activity will continue because the trend had started before, but it’s not that simple to buy a smaller bank and integrate culturally with the systems and the client base. It’s not that simple.

[01:07:25.14] Ben: What are you telling your clients? What advice are you giving your clients about how to position their portfolios and their assets in response to COVID-19? Are you advising them to sit tight, try not to worry too much about the volatility and just hold for the long term, or are you actively getting them to reposition to more defensive assets?

Laurence: So, that’s an interesting question because obviously, the market’s reaction has been quite sudden in March, and we had very limited time to review our recommendations. So, we had just finished our outlook for 2020, for example, which was quite promising — so, we had to do a lot of groundwork trying to understand when we had been in previous situations, if markets tended to recover quickly, if we were in a situation completely new that needed to be reassessed completely. So it took us about two weeks just to reassess the situation, take a bit of perspective. And we are taking always a strategic long-term view when we issue recommendations to our clients and guide them to manage their wealth. For example, advising to remain invested. We feel that trying to time the market in this environment is very tricky, and if you missed the best 10 days of the market over the last years, you could significantly miss out. So, we are telling clients to remain invested, but we’ve increased the quality of the underlying investments. Diversification, which is a very common concept, has never mattered that much than today. But we are also taking a thematic view — I give you an example: investing in private equity today, putting new money at work, giving money to a manager who would be able to invest post-COVID and deploy the money as the opportunity arise, I think could be a good recommendation to look at this space. To try to generate some returns that are less correlated to the traditional markets, I think it’s very good thematic investing. We were very engaged before this crisis in technology, healthcare, digital disruptions — the key themes that we believe will have superior growth going forward because they have their own trends. We continue to focus on, and we commit to invest in them.

Laurence: At the same time, what we are telling clients is that it’s very important to measure the impact of this crisis on the EPS earnings, and I think EPS growth has been revised downwards quite significantly, but it’s not clear yet how much it will hurt in Europe and in the US or Asia because the crisis is evolving at a different pace and economies will reopen at a different timing, and we don’t know whether there will be a second wave, etc. So, what we are telling our clients is to be careful about the equity markets, to invest in high-quality, high-dividend paying stocks and thematic investments, but to be ready to deploy more money along the way, because we might see market lower before it actually turns back. We’ve also advised our clients to explore opportunities in the capital market area — volatility has increased, our clients are trading a lot and by selling volatility, at least short-term is a good way to enter the market at a lower level. So, we are trying to be cautious but and remain invested, but there are some opportunities around volatility and private equity that we are recommending to capture.

Seeing Around Corners (#19)

Seeing Around Corners,
w/ Rita Gunther McGRATH

On this week’s Structural Shifts podcast, we talk to the brilliant Rita Gunther McGrath, author of “The End of Competitive Advantage”. In this bestseller, she talks about how the world is moving from one dominated by organizational systems and hierarchies to one of individual superstars where a stable career means a series of gigs. Hosted by Ben Robinson, they discuss strategy, the benefits / limitations of network effects, Facebook’s failures, and more.

Full podcast transcript:



I think the more confusing things are, the more you need a strategy because it orients you, it gives everybody the potential to be aligned around a common future. It pulls you into the future — Rita McGrath

[00:01:34.18] Ben: I wanted to start, Rita, talking about your book called, “Seeing Around Corners”. Probably the key concept in the book is this idea of an inflection point. I wanted to start by asking you, what is an inflection point?

Today, we’re living in the mother of all inflection points, and everybody’s assumptions have really changed.

Rita: So, an inflection point is some change, typically in the external environment, that creates what Andy Grove used to call a 10x shift in the circumstances under which your business operates. And what that does is it has the effect of changing the assumptions that you’ve been making about your business. So, of course, today, we’re living in the mother of all inflection points, and everybody’s assumptions have really changed. I mean, the idea that we would be comfortable in the company of strangers has been with humanity forever, and now that’s been abended.

Once you have credentialing based on a skill, rather than a degree, the whole edifice of higher education collapses. It’s a bit like when the music industry began selling songs by the song rather than the album — Rita McGrath

[00:07:34.14] Ben: And you also talk about the 6-months, the 12-month, and the 18-month metrics that would indicate which of these boxes, these quadrants we’re moving into. So, for example, if we were going to get to this new Great Society 2.0, what might be the sort of metrics that will indicate that? I suppose Joe Biden being nominated President might be one.

The whole notion that we compete in an industry is a bit narrow. And what we’ve seen certainly over the last 10–15 years is industries competing with industries. What industry is Facebook? Is it a media company? Is it a publisher? What is it? And yet, it’s soaking up much of the advertising revenue that provided the oxygen for many news businesses and entertainment businesses and so forth. So, in defining yourself very narrowly as an industry player, I think can create blind spots

Rita: And I think what a lot of people don’t understand is the inside higher ed — and I’ll just stick to higher ed for a minute because I think at lower levels it’s different than this. Inside higher education, the faculty all jockey to have their courses included as part of the required courses. Well, why do you do that? Is it because “Oh, the student must have this in their blood”? That’s the cover. But the real story is, if you have required courses, you have to deliver, and that means you have to hire faculty to teach those courses, and that means you get more faculty allocation than you would if you didn’t have a required course. So, a lot of the structure of what we’re teaching is designed for the faculty, it’s designed for the benefit of the institution, not for the benefit of the students. And so, to me, that’s very vulnerable. If you’re ultimately doing something that’s in your own interest and not in the interest of your customers, then, I think that puts you in a vulnerable place. Once we can have credentialing by the skill, once we can have credentials at a level lower than the degree, the whole kind of edifice of higher education really, is challenged.

if you take the sustainable competitive advantage world, you needed an innovation once every five years, and then the rest of it was all about execution. When you have shorter-lived competitive advantages, you really need innovation that’s more continuous because you need to be continually replacing your competitive advantages as the old ones expire.

[00:19:16.07] Ben: Also, I guess, that agility in supply chains might be harder to achieve post-pandemic?

The ease with which you can get into a digital business I think, actually, demonstrates the strength of one of the traditional concepts in strategy, which is you need to have entry barriers.

Rita: Well, I think what you see is when events move more quickly — if you think about the typical picture of a sustainable competitive advantage, it’s an advantage that goes on for a really long period — and if you have competitive advantages that last for shorter periods of time, that means you need innovation on an ongoing basis. So if you take the sustainable competitive advantage world, you needed an innovation once every five years, and then the rest of it was all about execution. When you have shorter-lived competitive advantages, you really need innovation that’s more continuous because you need to be continually replacing your competitive advantages as the old ones expire.

If you think about the relationship between employees and employers, back in the day the unspoken negotiation was, you gave me stability and security — and I gave you loyalty. But what that meant was that you had people who were prepared to invest literally decades in your organization. What we’ve got now is what many people have called “the tour of duty” economy. And so, you’ve got people who are migrants from company to company to company, and they are essentially free market operators. It therefore doesn’t give you any advantage that lasts because they’re always open to the next bidder when their contracts come up.

Rita: Now, why I think that’s so interesting is, it was much user-friendlier on the part of the customer, but when that digital request hit the company, there was no change required. You just responded to the digital request the same way you would have responded to a faxed request. So, the thing I think is interesting is you digitized something without perturbing the incumbent organization at the time. And then, once you’ve got that going, then you say, “Well if we’re sending digital orders, wouldn’t it be easier if we digitized the inventory? And that way, the incoming order would know what it was looking for, without a person having to go and look it up. Okay, that makes sense.” So you talk about antibodies — if he’d gone in there guns blazing and said, “We’re going to take this whole thing and digitize it all”, you would have come smack into the antibodies, and things would have gotten screwed up; I mean, things always get screwed up in a digital implementation and then it would have been, “See? It doesn’t work! I told you it wouldn’t work! The orders are all messed up, the inventory is all wrong.” Instead, what they did was they took it piece by piece and they said, “Let’s fix the fax problem. And then, once we’ve got the fax problem fixed, let’s fix the inventory-naming problem, and then once we’ve got that fixed, let’s maybe make an online store where we take out the need of a person to go pick this inventory — a customer can just pick it themselves.” But I think it’s that step by step solving of consecutive problems rather than announcing you’re going to turn the whole organization inside out — I think that’s really where it makes a difference.

if everybody you interact with is just like you, there’s a lot of overlap. So, they may be very comfortable, it may be very fun, but you’re not going to learn a whole lot

Rita: The second thing to worry about with network effects is they can increase but they can also fall away. So, a network can peel away even if it holds users in. I think Facebook is a super interesting example of that. So, what you’ve seen up until the recent pandemic is for younger people, they’ve been leaving the core Facebook product in droves. Now, they’ve been going to Instagram and other networks to do their exchanging — Tik Tok is the latest one — but you’ve got a diminished network effect, almost, there. So I think that’s the first thing.

don’t judge the quality of a strategy only by whether it delivered the results that you were looking for because that’s not always a predictable metric

Rita: Well, I think you continually have to be thinking about learning. One of the things I do at Columbia Business School is I direct a number of our executive education programs, and they’re very much about, your business education doesn’t stop at the age of 28. So, even if you have an advanced degree, even if you have a Master’s or an equivalent, I think it’s really important to keep coming back to get refreshed, to add some new tools to the toolkit, make new friends, make new network connections — all of those things are really important. And so, in the book — I think it’s the last chapter in “End of Advantage” — I really spend a lot of time on that. So, there’s a one-page quiz you can take which says, “How prepared are you?” It’s things like, “I’ve learned a new skill even if it wasn’t directly relevant to my job”, or “If I lost my job, suddenly, I know 10 people I could call that would help me find the next one.” It’s those kinds of things I think we need to be thinking about.

we have this cultural myth, almost, of the hero CEO who is going to come down and tell you what to do, and everything’s going to be fine, rather than the organization having to figure it out. I think we’re slowly realizing that the organization figuring it out is actually more of the norm.

Rita: I think it’s crucial. If you think about it, if everybody you interact with is just like you, there’s a lot of overlap. So, they may be very comfortable, it may be very fun, but you’re not going to learn a whole lot. It’s different than what you already knew.

crescive leaders are much more about discovering the organization’s capabilities, shaping decision-making, shaping decision premises, and a lot of those practices are actually much more closely associated with women’s styles of leading, for whatever reason, than they have typically been with men’s. And so, I think it’s very interesting now, as we look across the world, which countries have done well, in the midst of this pandemic? And overwhelmingly, they’ve been countries that have had female leaders.

Rita: One of the things that I find super frustrating as a person who studies organizations is you can make stupid, ill-informed, poorly advised, really dumb decisions and have a great outcome because you happened to be in the right place at the right time, you got lucky, whatever. And you can make well-considerate, very smart, strategically substantive decisions and end up with a bad outcome. So, take a company like Disney — here they are, launching their streaming service and hitting success on every possible dimension, and COVID-19 comes along, and now nobody’s going to theme parks. Well, that wasn’t their fault. And so, I think one of the things I really encourage people, really, to differentiate is don’t judge the quality of a strategy only by whether it delivered the results that you were looking for because that’s not always a predictable metric.

when your fundamental business model relies on your customers being ignorant of what you’re doing, I just think that’s a fundamental weakness

Rita: I think so. So the word “crescive leadership” was actually coined in the 1980s by my friend, Jay Bourgeois, and a co-author of his. They were cataloging leadership styles and they had four that they felt pretty comfortable with: so there was the command and control leader, and then there was the coalition builder — so four archetypal leadership. And then they ran across this fifth style, they could not figure out what to do with it. And finally, they said, “Alright, we’ll make it its own category.” And they didn’t spend much time on it, but they called it crescive, which I think is Latin for growth leader. And, you know, crescive leaders are much more about discovering the organization’s capabilities, shaping decision-making, shaping decision premises, and a lot of those practices are actually much more closely associated with women’s styles of leading, for whatever reason, than they have typically been with men’s. And so, I think it’s very interesting now, as we look across the world, which countries have done well, in the midst of this pandemic? And overwhelmingly, they’ve been countries that have had female leaders. I mean, if you look at Angela Merkel or the Prime Minister of New Zealand — calm, factual, not fear-mongering, but just matter of fact, and “Here’s what we need to do. Let’s take it step by step. And here’s why. And this is what I know, and this is what I don’t know — and I’m going to be very transparent about those things.” And it engenders trust, it engenders a willingness to cooperate, it engenders a feeling that someone capable is manning the helm — unlike the rather chaotic response of a lot of other countries.

it’s very hard to have multiple visionaries in one company. I mean, the only way I’ve ever seen that work is if you’ve got a strong divisional structure — so each visionary has their own swim lane, as it were — but at the top of the company, it’s really hard because by definition, if you talk about culture, visionaries are people who believe in let’s create the future, and if I’ve got two visionaries with two different dreams of what the future could be, it’s going to be really, really hard.

Rita: So, I have no personal vendetta against Facebook; I just think when your business model requires that your customers are basically ignorant and you contribute to that — you’re not transparent, you’re not honest about what you’re doing with the data. And then, Cambridge analytic was just this bit of the surface. And if you look at the way bad actors are using the platform, if you look at how they’re sort of washing their hands, “Oh, no, we’re not publishers. But yet, we derive a huge percentage of our revenue from the ability to reproduce news that’s created by other organizations that have to get paid for it somehow.” I don’t think their outcome in a political social sense is very positive and I think we haven’t yet quite accounted for the imbalances they’ve created in our system of interacting with each other, getting news, advertising, getting paid — that’s all kind of not come together yet. So, the reason I think they may be up for an inflection point now — it could be five years from now could be 10 years from now, but at some point, people are going to say, “This is not legitimate” and businesses, in the long run, that are regarded as not legitimate, fate has not been kind to them. So, take tobacco companies as a case in point. Once you begin to be seen as a provider of something dangerous — and in the case of Facebook, I think a lot of what Facebook is creating is social pollution. It’s just disinformation — and it’s sucked all the revenue out of legitimate news organizations. So I think at some point there’s going to be a rebalancing.

Previewing post-Pandemic Finance (#18)

Previewing post-Pandemic Finance,
w/ David GALBRAITH, Thierry ZOIS, Martin McCANN

We have another special episode for you on how post-pandemic finance would look like. We are bringing back two of our favorite guests: David Galbraith — Partner at AnthemisMartin McCann— CEO of Trade Ledger; and a new guest Thierry Zois — VC at Finch Capital.

Full podcast transcript:


[00:02:02.17] Ben: Dave, welcome back to the Structural Shifts podcast. You’re a deep thinker anyway, and I can imagine that since you’ve been in isolation, since your role is to look at future investment opportunities, you’ve been thinking about the pandemic and the post-pandemic world a lot. So, we wanted to pick your brain and have you share some of your thinking. What’s the right place to start? As we look at the post-pandemic world, what’s the right prism through which to look at future opportunities?

the landscape of everything has changed and therefore there are new products and new opportunities. There’s a switch toward adaptability, but it doesn’t mean that all the insurance changes. It just means that the market for insurance has increased.

David: So, I think there might be lots of them. People were worried about automation and losing jobs and we’re now seeing a bunch of very underpaid people, like delivery workers or nurses, suddenly becoming proven to be utterly critical. So, I think you will see the relative importance of the premium pay for social proximity i.e. human caring professionals. So, then this will be part of the backlash — the value of human interaction will be at a premium. And so, how that plays out online in terms of online investment is that ordinary social media has remained largely flat but real-time social media — and that includes things like Peloton, and that includes Houseparty, and that includes people doing concerts live, that includes virtual busking by musicians — has increased by up to 75% because people will crave real-time experiences. And I think we’ll look back at this period when people were watching Netflix programs on their own, asynchronously, when no one else was watching the same thing and realize there’s been quite a lonely period of media, and so, I think that is something that’s highly investible in the future, is real-time shared experience.

Part of this whole acceleration of change that’s happening now, is that people can make decisions and not have to do six months of PowerPoint presentations to the rest of the company to make a decision to actually say, “We’re going to switch to Zoom video.” They can decide overnight — we’re doing this and this is the way it is. — David Galbraith

[00:10:43.03] Ben: Yeah, and I think one of the things that’s interesting is it introduces social network effects into businesses that we never thought had them, like Netflix. Netflix was a business that had some sort of data network effects in the sense that if they understood you better, they could make better recommendations, but had very few other network effects. But if we think that it really matters to watch Netflix at the same time as your friends and comment on it, then it brings a whole new level of value to it, a new level of locking in.

the number of people going to visit a doctor is suddenly going to reduce because doctors shouldn’t be exposed to lots of sick people at the moment — it’s actually dangerous for them — and so, telemedicine will increase massively at the general practitioner level, for that first interaction with healthcare services. A lot of that will go online. — David Galbraith

[00:14:15.25] Ben: So do you see more B2B than B2C opportunities then, in all those B2B FinTech companies that can help the incumbents to become more efficient and deliver a better digital experience — that might be where a lot of the action is?

The delivery of electricity is going to look more internet-like than it currently does. — David Galbraith

David: So, obviously, this is one of these areas where it requires expert knowledge to look at pure healthcare services. But, if you were to look at the business of healthcare or the structural changes it took, you can have a view and one of the possible views is that it decentralizes. There are two aspects of healthcare that might change. One is, the number of people going to visit a doctor is suddenly going to reduce because doctors shouldn’t be exposed to lots of sick people at the moment — it’s actually dangerous for them — and so, telemedicine will increase massively at the general practitioner level, for that first interaction with healthcare services. A lot of that will go online. And that sounds trivial, but I recently, during this process, went to the pharmacy to get a Ventolin inhaler for hay fever. I was told that I had to phone the emergency services because they wouldn’t fill the prescription and the emergency services in France told me that I had to see a doctor in person and when I told them I would just go on the internet, they said that wasn’t possible, but when I hung up the phone and I did go on the internet, within 15 minutes, I had the prescription and went back and filled it. So it helps the healthcare service to accelerate these changes, to decentralize.

the markets are irrational at the moment, not because things are going to be terrible or things are going to bounce back; it’s because we don’t know and therefore that isn’t priced in. — David Galbraith

[00:19:43.08] Ben: I just want to revisit something you said at the start, which is, there’s no consensus among experts about what this means or what the right response necessarily is. So, as you said, people have been making a big cause of shutting down the economy. I suppose implicit, in all the actions that have taken place so far is there’s a binary choice between human life on the one side and the economy on the other. I think the Italians have, in a way, set the precedent by standing up and saying, “We’ll put human life ahead of the economy.” But it’s not as black and white, is it? I just wondered if you had thoughts about the morality of the response we’ve seen so far in terms of shutting down the economy?

we have seen in the market that a lot of corporate VC pulled out on investments due to the whole uncertainty. — Thierry Zois

[00:25:01.11] Ben: Thierry, what we wanted to discuss was the report that you put out a few weeks back, which is entitled “The Future of Disruptive and Enabling Financial Technology post CV-19”. We’ll share the link to it for the listeners, but in essence, it’s a 26-slide presentation, jam-packed with interesting data predicting what might be some of the near and medium-term impacts of COVID-19. One conclusion that seems to jump out from the report is that there’s this clear dichotomy between consumer-facing FinTech companies that face lower volume, shrinking assets, etc. and the B2B FinTech companies whose technology is now in really strong demand because financial services see that they basically have little choice but to become more digital more quickly. Would you say that’s fair, that that’s this overarching conclusion?

We also expect that the road to IPO is going to be so much more difficult. It’s going to be really tough for companies to go all the way down that road, given that there is not, anymore, this hungriness as there used to be in terms of capital providers — Thierry Zois

Thierry: Now, if we look on the B2B side, I think it’s a very hard time if you’re planning on signing on new clients. The main reason is because they’re very old-fashioned type of sales and very long, so there are a lot of procedures in place and a lot of face-to-face is actually quite necessary, in order to build a certain trust; given that it is such a big animal, they really want to make sure that any technology or any person that they onboard is the right technology for them and the right cultural fit, so to speak. Therefore, in the current crisis, to sign up new clients at the moment is quite difficult, I must say. However, everybody’s working from home, like you and me, and also the ones that work at the incumbents, they work from home. And well, they will be working on existing portfolios or existing openings that they still have. If you had started already your sales a couple of months back, then the likelihood that you will close them is still quite high — it just obviously will delay a bit, but the funnel will come to it.

I’m not sure that the pandemic is the only driver in the change of global trade. I think there’s been a shift in the ethos of global trade now for a couple of years. — Martin McCann

[00:45:22.03] Ben: Martin, I just wanted to start by talking about trade finance. I think one of the things that the pandemic has demonstrated to us is that our supply chains are probably much more fragile than we thought. And, for example, I think something like 80% of PPE comes from China. And so, what a lot of people are saying is that this is going to lead to acceleration and reshoring of production. Do you agree with that statement? And if so, how will that affect global trade finance?

cost should not be the only factor in determining how you structure a supply chain. So, the security of supply chains is actually becoming front and center in the way that supply chains are being designed, and that’s most definitely going to change a lot of trade in the next one to five years. But also, the lack of transparency has come front and center as well — Martin McCann

Martin: I think what this pandemic has done is two things — which build on that emerging trend — and you can see it in the numbers. It’s shown that cost should not be the only factor in determining how you structure a supply chain. So, the security of supply chains is actually becoming front and center in the way that supply chains are being designed, and that’s most definitely going to change a lot of trade in the next one to five years. But also, the lack of transparency has come front and center as well. The fact of the matter is, most people didn’t know that most PP equipment came from China. Most people who buy PP equipment didn’t know that it came from China. They’re just buying equipment without any visibility into the further reaches of the supply chain. But I’d say this is something that has been happening for a while. If you look at the numbers in terms of trade, effectively, at the highest level, trade looks like it stalled in terms of growth, but when you unpack that look within it, actually, it’s not really stalled in terms of growth; the way that we track trade is really aligned to physical logistics chains, where actually, what’s happening is a rebalancing of global trade as the economy moves on to a new phase globally. So, with more and more of the former low-cost production countries not consuming more of those goods — that’s not showing up in the trade figures, obviously — they are now producing a lot more services-based exports than they were previously.

there’s actually a very, very rapid rise in global services export across borders, which is very, very hard to track by traditional methods and there’s less of a focus on the traditional logistics networks, which tracked physical trade previously. The main change that we’re going to see from this pandemic is there’ll be more of an insistence that supply chains are visible all the way through. So, I think what we’re seeing is just a natural evolution of trade. — Martin McCann

Martin: So, there’s actually a very, very rapid rise in global services export across borders, which is very, very hard to track by traditional methods and there’s less of a focus on the traditional logistics networks, which tracked physical trade previously. So, I think what we’re seeing is just a natural evolution of trade. I think trade volumes include services as well — more complex services particularly — and the gig economy is definitely increasing, just not easily trackable. And for me, the main change that we’re going to see from this pandemic is there’ll be more of an insistence that supply chains are visible all the way through, and that there’ll be proactive decisions made as to what products need to have more strategic owners in terms of understanding the complexity, globally, of how to get the final products shipped, versus things which are much more of a commodity where it doesn’t really matter whether or not they’re disrupted.

It’s mind-boggling to think that in 2020 — we’re talking about 15 years after the advent of the Internet — we’re still using the same documents and finance mechanisms as have been around for hundreds of years. So, I think what we’re about to see is a rapid product innovation cycle for trade finance, which is more suited to clients who’ve got less tangible assets, and to more of a gig and services driven economy where those services are being delivered across borders. — Martin McCann

Martin: Yes. So services finance is slightly different in two respects. One is the term for which you need financing for is probably shorter because it has more to do with the payment terms of your contracts. Whereas with physical trade, it has to do with, the manufacturer and the shipping generally are the longest period of the credit terms which are required. It also means that the types of products are different, whereas when you’re looking at physical logistics, you have goods or components of goods, physical goods, which can be taken as security or at least assignment of those goods and the control of those goods can be used as a securitization mechanism. Whereas with services that’s not really the case. What you need to do is really look at the class of open-account trade finance products, really looking at the inflows and outflows from the companies that you’re providing credit to, and looking the less tangible assets that are available for securitization, mainly things like receivables, and looking at the other creditworthiness factors of those companies, as opposed to the physical goods required for securitization in more traditional trade.

demand will always determine the shape of the market and in times of stress, you need to see rapid innovation in order to meet the changing demands of the marketplace — and if you don’t see that, you’re going to ultimately see a decline in your business and you’re going to see yourself replaced by nimbler, faster-moving, more digital innovation propositions. — Martin McCann

Martin: So, I use the UK example again: it’s 80% guaranteed, so the government’s taking 80% of the risk and the bank’s taking 20%. The bank is still going to do the same credit assessment as it always does, not 20% of the risk. The problem of technology is quite interesting. What we’re hearing from all of the banks that we talk to is consistent — none of the banks actually have the ability to do straight-through processing on applications for SMEs. All of the banks have paper in the system. In fact, we know of a bank — our own bank — who told us that they can’t put an overdraft facility in place which we’d agreed before the crisis because of a lockdown on one of their operations centers overseas, which means that nobody can go into the office and print out a physical piece of paper required to approve the overdraft. And that’s sort of symptomatic of where the banks are. I mean, they’ve moved from legacy systems, they’re moving at pace, but they’re not able to respond in a matter of weeks in order to deal with this unprecedented demand of credit applications.

I think there’s just going to be extreme pain by the SME sector, despite the goodwill and all the effort by the governments because they just don’t know how to deal with these problems and they’re using peacetime governance processes to try and deal with wartime situation. — Martin McCann

Martin: Whereas, if you look at new cloud-based infrastructure, it can actually respond. So, the consistent feedback that we’re getting is that overall, the banks don’t have the workflow orchestration and automation capabilities; they don’t have standard technical capabilities and automation capabilities such as centralized task management, role-based user management on all of their systems so that across different teams, people can see when stuff needs to be passed off. There’s not a dropping of the applications between relationship managers and credit managers and documentation. There’s no standard way of actually triaging documents and information through the entire system — stuff needs to be printed off from one system and then re-entered in another system, then documents need to be taken from one place and stored in a central place and then accessed from somewhere else. And in the meantime, they’re going back to the customer and asking them for the same information multiple times in many cases or asking them for information, which they’re not being precise about the requests and getting the information in a format which doesn’t suit the processing of the application automatically. So, these are the capabilities, which, you know, they’re not rocket science, but these are the capabilities the banks don’t have, because of the legacy of how the systems have grown up.

There are going to be winners and losers, just as in every other business situation. The winners are going to be the people who actually realize what the new reality is going to look like — it’s fully digital when you talk about lending, there is no paper, there’s no relationship bias — and if you don’t use this scenario, as a way to accelerate your adoption to fully digital lending processes based on new modern infrastructure and technology, you’re going to be one of the losers. It’s that simple. — Martin McCann

Martin: A couple of points around the FinTech sector. I mean one is, the FinTech sector is unusual. It falls outside the funding schemes of most governments because it’s high-growth and massively loss-making. So it’s not a good credit risk if you just look at the numbers and the inflows and the outflows. So, it hasn’t been addressed, for the most part, by the schemes that are already in place. So you need to have a separate scheme to deal with FinTech. I do think that there needs to be a role for FinTech to solve the problem. What I talk about is the national interest to create that distribution infrastructure capability. But how do you do it without choosing winners and losers? So, I think there’s been wide criticism of how governments tried to do that before and one example I’ll use is the British Competition Remedies Fund set up in the UK last year, where 450 million was distributed because it was deemed to be illegal stated to the RBS during 2008. This was set up as an independent body, which in theory sounds like a good thing, but practically what happened was, the BCR basically made winners out of thin air, and massively disadvantaged the rest of the industry, and the process was done in a very, very unusual way, which has been open to massive amounts of criticism. And today, 100 million of that has already been returned. But now that 100 million is sitting there, it’s like, well, there’s a pot of money, which could be distributed much more quickly to help FinTechs that can provide part of the solution, but there’s no mechanism in place for government or this independent body to actually do that.

Jumping S-Curves and Inventing the Future, with Bill FISCHER and Ian STEWART (#16)

Jumping S-curves and Inventing the Future with Bill FISCHER and Ian STEWART

Jumping S-Curves and Inventing the Future,

How reliable will strategy be in the future? What if tactics were more important than strategy? Are firms obsolete? What about nation states? Can the future of companies be a model for the future of countries? How is the nature of competitive advantage changing? How are we redefining quality to meet the needs of consumers and the marketplace? In this episode, Ben Robinson is in conversation with Bill Fischer and Ian Stewart from the International Institute for Management Development — IMD. Bill is Professor of Innovation Management and Ian — who you may remember from a previous episode of this podcast — he co-founded WiReD and he is Executive in Residence at IMD. 

Innovation should describe the characteristics of the way we work. It should be about how we do things, rather than what we’ve done at any particular time, or who’s doing it. — Bill Fischer

Full podcast transcript:


[00:01:51.29] Ben: We are at IMD to interview Bill Fischer, and Ian Stewart is here to make sure I get the very best out of this podcast. So, it’s going to be a joint interview and more of a conversation than anything. Starting with teams — is team a noun or is a verb?

Bill: It’s a verb. Without a doubt! Incidentally, thank you for coming over here and thank you for inviting us to be part of this. This is great fun!

Ben: I always forget to say that. So yeah, thank you for coming on the podcast!

Bill: So, I think, when we talk about innovation, the idea is, no matter what part of innovation we’re talking about, to make it a verb, not a noun. A noun describes somebody else doing it, some of the other departments, and I think that it’s too important as a quality of life — organizational life, individual life — to be pigeonholed in somebody’s group. So, I think it’s a verb. Amy Edmondson at the Harvard Business School talks about teaming rather than teams, and I think that’s a good way to begin.

Ben: And the reason you think it’s a verb, rather than a noun, is because it can never be passive — the formation of a team, the building of the team, the management of the team.

Bill: No, I think that innovation should describe the characteristics of the way we work. It should be about how we do things, rather than what we’ve done at any particular time, or who’s doing it. I think we want everybody, ideally, to think of themselves as potentially involved in the innovation process, so it shouldn’t belong to any department or group or section or what have you. I think we ought to characterize a way of working that involves curiosity, autonomy and the ability to experiment.

[00:03:45.15] Ben: I imagine Ian had the same experience that I have. You know, sometimes you have teams that just gel and they perform amazingly well; other times, you think you put together a similar composition of skills and it just doesn’t gel. So, what is the key to team performance and the composition of team, in your experience?

Bill: So, I think teams are too casually regarded. My sense is that teams should be fit for purpose. And if you think about industry development — I know we’ll talk about industry and arenas later — if you think about industry development as an S curve, then in the middle of the S curve where you know what you’re doing, and you know how to do it, then I think teams ought to be run in one way — probably harmonious and people get together and they gel quickly and they know each other. But, when you’re trying to jump from one S curve to another, when you’re trying to invent the future, then I think teams have to be very different. And I often think that contentious teams, teams that are staffed with people who know a lot of stuff and who disagree with one another, it’s probably the better way to go.

Ben: Yeah. And you take aim at what you call “polite teams.”

Bill: Right. Polite teams get polite results. Yeah.

Ben: Yeah! It’s almost like the antithesis of polite teams — teams that are combative.

Bill: Yes, but not destructive. I mean, I think they have to be led differently. I often think of teams in the middle of an S curve being led by an orchestra conductor who stands there and everybody knows what they’re doing and his or her job is to keep the movement going in the right direction and the right speed. But crossing the S curve is more like a boxing referee: allowing contentious discussion — because I want to get every brain cell I can possibly get — allowing contentious challenge to take place without being corrosive or destructive.

[00:05:55.16] Ben: You cite the research that shows there’s an inverse correlation between the size of teams and their performance, which I think, intuitively, feels great. And also, it’s unbelievable how much research went into that report that you cited. But that, then, poses the question of, if you’re going to run a large organization, how do you avoid having large teams and thinking in terms of large teams?

Bill: Yeah, so, just to be clear, the research you were talking about was a piece of work done by three fellows from Northwestern University last year — it appeared in Nature, I think, or Science.

Ben: Nature I think.

Bill: And it’s an amazing piece of research! Wonderful data, large data sets — a really spectacular piece of work. But it’s about invention, not about innovation, and I think that’s important to clarify; it’s at the very front end of the change process. For me, the thing that was so interesting in their results was that at some team size over five, every person you bring in reduces monotonically the level of novelty and the expected outcome. That’s extraordinary! I mean, the more people, the more conservative we become. In fact, they have some interesting data that argues that it’s a functional way that larger teams work, and also, the expectations that larger teams are going to deliver different results, and so people are responding to the audience as well. What clearly comes out of that is that if you have your preference, if you’re able to do it, smaller teams are better than larger teams, and they have more autonomy as well. So, I think that rule #1 about thinking about teaming is, how small can I do this, and can it be, and how autonomous can we fashion this?

Ian: Interestingly, I found the same thing on boards, with the same parallel thoughts. The less change an organization is going through — whether it’s for-profit or non-profit — the more it can afford large boards, the more it’s involved in something which requires substantial change. I’m on the board of an NGO at the moment, which is seeing its funding sources around the world radically change as governments fund less, and private sector sources, foundations, family offices are funding more in this particular area, and they have zero experience in this space. So, trying to understand how to change the fundraising process, changing actually the management team to enable them to do it has been a struggle, and what I often find on these things is that the first thing that a good chairman does is break things down to smaller groups so that there’s only three to five people handling it. So, there was a small group of us that went out to hire the new CEO, there was another small group that had to restructure how funding works. It’s a very interesting process. I think it’s exactly the same on boards as it is in innovation teams within companies.

Bill: I’ve come away over the last couple of years thinking that end-to-end responsibility, smallness, and autonomy are really critically important characteristics for teaming. Contextually, when you want to do something big, if we want to run the day-to-day operations of an activity in a mature industry, then those rules may not apply at all.

[00:09:34.29] Ben: Yeah. So, we’re going to come back to talk about whether the structure of a firm is still as relevant as it was because the very notion of a firm is building these high-transaction costs. So, we’ll come back to that. But, if the future, if optimal performance is achieved through very small teams, does that mean that organizations just become a composite of lots and lots of small teams, then? And how easy is that to actually orchestrate?

Bill: So, I have a long-term relationship with Haier — the Chinese appliance company — and that’s the direction they’re going in. They’re going in that direction because their industry is on the verge of a major upheaval around hyper-connectivity in the kitchen, and they’ve never done this before. They’ve never produced content. They used to talk to their customer typically once every 15 years; now it’s five or 10 times a day. So, they need to be really different, and what they understand, I think, is that there’s so much opportunity to do different things, but they’ve never done this before. So, what they’re doing is they are subdividing into small groups that are autonomous, that are self-investing as well, which reduces the risk to the organization as a whole, and they’re allowing people to take chances. And I think the belief is, “We’re going to be in the right place at the right time not because we’re smarter, but because we’re taking more chances — and most of the chances aren’t going to turn out well, but a couple will, and then we’ll be uniquely positioned to move forward.”

[00:11:25.17] Ben: So, I just want to drop anchor on Haier, because I’ve been to Drucker Forum and you’ve brought them there in the past, and it’s a fascinating case study, but I think there’s several things I’m interested about, one of which is, how replicable is that in other examples of companies that are doing the same thing? But the first thing is, how do they manage consistency with that level of autonomy? Because we’re talking about home appliances, so these are not things that you would want to be breaking every day. How do they manage that?

Bill: These small teams are located on platforms that are overseen by people who are more internally focused than externally focused — so the small teams are completely externally focused. But then, that behavior in activity is mediated by the role of the platform, which is sort of a bridge between the external and the internal world and does the translation. So, that, to me is the way they go about consistency. And, on that platform, they have a number of stakeholders involved, so you’re all using the same connectivity systems, so that you’re not doing one thing. One of the interesting things about this is that all of a sudden, logistics becomes a much more important player in the conversations than they did in the past, and that is because you’re no longer buying separate pieces of home appliances, but you’re applying a suite of home appliances to talk to one another. You’re spending a lot more money, and when you walk in that kitchen as a customer, you want to push the button and everything works, which means it has got to be all delivered on time as well. So I mean, you’re seeing very different internal players participating, as well as somewhat bizarre external players.

Ian: In answering the first part of your question, Ben, I think depends on the size of the organization and the dynamism of the environment in which it works. If there’s a great deal of change going on, or a great deal of change necessary and/or there’s a level of disruption because of changes in the way either the context of the business is formed or the competitors in the environment, I think that level of change requires structures and systems that allow for it. If you’re dealing with something that is relatively static — and that’s less and less true these days; all of the indications are that the lifecycle of companies is dropping — but if you’re dealing in a sector which is relatively static, then you can afford to build a deep process, which fine-tunes, which eliminates, which molds down to a point where it’s as efficient as it can be to run one set of processes. Now, something like that — and I’m thinking of large Japanese companies, for example — doesn’t react to change terribly well, isn’t able to adjust, isn’t able to innovate. But, if you’re in an industry that doesn’t have that level of disruption yet, because they probably all will at some point, then I think it’s okay to have an order type of structure. But I think it’s very clear that the trends on company lifecycles, and industry lifecycles, and the level of change that’s taking place through the application of technology in all sorts of different levels in different companies, in all parts of the value chain, suggests that some level of management, of innovation plus reliance on core processes I think, is inevitable.

[00:14:43.13] Ben: Yeah, a tension between the exploitation tap and the exploration tap, which is, as you said, depending on where you are on the S curve, which one is taking precedence. Just going back to Haier, you talked about the rising importance of logistics and the platform that underpins it. I suppose another case study is Amazon, right? We have this idea of API first, so even the internal teams interface with other internal teams through APIs, which actually makes it possible then for those internal units to be exposed to external parties — a bit like AWS was. Is that how Haier is built? Which is, you can quickly change the interface from internal to external, the same way as if you wanted to plug out a Haier appliance, you could plug in another appliance because they have to be built on a platform that allows interoperability.

Bill: I think, actually, what happens is by creating autonomous work units to the extent that they are at least responsible for their own functions, everyone has a line of sight to the customer and as a result, they take what’s going on in the marketplace much more seriously than they might have — buried under levels of bureaucracy and really don’t see the customer at all.

[00:16:09.11] Ben: I think I’ve been to the Drucker Forum twice, maybe three times, and each year, you bring Haier back to speak. They’re great! It’s a phenomenal story, and it’s so innovative in its business model. But, the fact that you bring them back and you don’t bring other examples back is that because there aren’t that many examples, still? They’re still trailblazing?

Bill: There are a fair number of organizations that are experimenting with change, but I have not yet seen any organization that’s gone as far as Haier, for as long a period of time — this is about a 35-year continuous story, with 70,000 people. And yet, there are plenty of organizations that are really experimenting in different ways with autonomy, but not on that scale, not for that long, and I think not that comprehensively.

Ian: It’d be interesting to take a closer look at Alphabet and Amazon — they’ve not been going at it for anywhere near as long. That’s the impressive thing with Hire — the longevity of the process is really quite something. But clearly, Alphabet and Amazon, in their own ways, have approached the same problem in parallel ways, trying to work out how to be continually innovative, whilst maintaining the core business and trying to build a set of internal processes that keep it feeling and acting and operating as a single entity, a single corporation whilst creating these new services and businesses. I mean, it’s a fun area! It’s a really, really fun area! My favorite bit of business at the moment is this frontier between trying to run something and trying to build something because they’re not always the same thing.

Bill: And the boundaries between these organizations blur because, where’s your focus and where’s your allegiance and where’s the center of activity occurring? And that’s interesting. The other thing that I have always been fascinated by, at Haier, and it’s probably because I had gotten to know the chairman Zhang Ruimin so well, but he talks a lot about giving up control — not amassing control, but giving up control — because that’s the only way the organization can move responsibly fast enough; that’s interesting, to watch an organization trust its people to get on with their job.

[00:18:35.04] Ben: In terms of lessons learned, one of the fascinating things is, home appliances, this is quite a capital intensive business, and so, I can get how you can devolve down autonomy for decision-making because you want the individual units to be quite responsive to changing customer demands, but how do you devolve down capital allocation on that scale?

Bill: That’s a big problem! And it means, probably — and I’m watching some organizations try to deal with that — it means that the sizes of these organizations are arguably going to be much larger than the small groups that are interacting on the frontier of client-facing type. But it doesn’t mean you can’t do it, it doesn’t mean that a group of people can’t run a large-asset, intensive operation within a manufacturing framework or run the manufacturing framework itself. I mean, that can be done — it’s a different size, and it’s a different degree of involvement engagement.

Ian: I think it’s also a different approach to risk. If one’s trying to allocate capital in areas that are less well-known by the existing management team… I mean, I spend my time these days often going backwards and forwards between French organizations and American organizations or whether they’re Canadian or US, and there’s a very different approach to a decision about whether to invest in either a process or a new technology. The French companies — and forgive me for French listeners, if I’m generalizing to a point that is offensive — French companies tend to go more into the reports, and details, and they want to be absolutely certain if they possibly can before they make the decision. The American companies want to be sure or more or less triangulate that this is the direction, and then they’ll throw money and people at it and see what happens. And I think that that different approach, the ability to take on investments with higher risk and less certainty, I think is fundamental to very large organizations being able to allocate capital to their internal operation. So, I’ve spent time, obviously, as an investor, as a venture capitalist, and I think that some of those attitudes, some of those approaches to being comfortable with risk and trying to judge what are the levels of risk you’re willing to accept — is it more the team? Is it more the tech? Is it more the goal? Are the processes involved appropriate, given whatever the context is for what they’re trying to do? And then deciding, “Okay, $150 million goes on this” based on less information than some companies might be willing to accept. I think that’s essential for this type of change at this type of scale in large organizations trying to stay relevant.

[00:21:13.06] Ben: So is that what will determine the winners in the future? Which is, if we think about the changing nature of competitive advantage, is that ability to deploy capital better and faster or will they be disrupted by companies that are more modular and more networked?

Bill: So here we get into the difference between industries and arenas.

Ben: Yes.

Bill: As a preface, I would say, if you reflect on the way we think about strategic thinking, it’s based on industry analysis — Michael Porter’s five forces, and things like that. Industries are asset-defined. So, all automobile companies pretty much look alike and all banks pretty much look alike and they all have the same assets and the same talent, but there’s a couple of things going on now, I think, that are really changing that. One is that we’re no longer as interested in the asset-defined rivalries as we are in the outcomes, the customer experience. So, for 100 years, when we think about strategy, we’ve been thinking about the inputs. And now, we’re thinking more about the outputs. I think that’s a function of a business model innovation, and the ability of a whole generation of entrepreneurs who have decided that they don’t have to have those assets, they don’t have to have those engineers; they can go out and play in the customer experience game and access the assets and talent that they need some other way. And they’ll differentiate themselves on something within the business model that everybody’s been aware of, for a long time, but nobody else has taken on. And so, I think that the nature of the way we categorize firms is changing.

[00:23:08.29] Ben: And so, is the right way to categorize firms as aggregators, and platforms, and long-tail, then? Is that the way to think about it? So they’re either aggregating the work of other companies and their consumer-facing, or they’re sharing network effects across their platform where they’re not necessarily customer-facing, but they are sharing between all the different tenants of the platform, or are they the long-tail suppliers to the platform?

Bill: So, we start outside-in rather than inside-out, and we start with the customer experience, and then, we think about all of the different ways that we can affect that customer experience or change the customer experience. At the present time — and I don’t know if this is because it’s in the middle or at the beginning of this transition or it’ll always be this way — there are still some assets-specific providers who do everything and well-known brands who are participating in the arenas — as Rita McGrath calls it — that characterize the creation of customer experience, but there are also some aggregators and some modular assemblers. I guess those would be aggregators who are doing the same thing with a completely different balance sheet in terms of the way in which they go to market. While I’m saying this, I’m thinking that we’ve seen modularization around for a long time. It’s not new. The missing piece, I think, has been the business model, which has really tied it together. So, Alex Osterwalder who lives just a short distance from here, really deserves a lot of credit for reminding us, calling our attention on the fact that the business model is really an important way to think about innovation, and we lost sight of that somewhere along the line, I think.

Ben: Yeah, I think the business model is the most important thing to get right. We’ll come in a second to the discussion of strategy versus innovation, but I think business model trumps both because if you get the business model right, then it allows you to innovate at scale and it allows you to execute the strategy. So, I would argue, the business model is now more important than ever has been.

Ian: I think it also depends on where you are in the value chain for an industry — or an arena, for that matter — and where your skills and competitive advantage lie. Even in the car industry, where you have a whole bunch of people facing the customer on the B2C side, with variations on a number of different themes — with SUVs dominating these days — at the back end, you’ve still got a very limited number of suppliers of, for example, gearboxes, where a few companies really dominate. They do one thing really, really well, then they customize it to the different customers, but, essentially, there are very few companies supplying to a great many B2C-facing car companies and car brands. So, I think it depends a little bit on where you are and where you sit in the system.

Ian: I wanted to address another question you asked very early on about whether Haier and its development of platforms facilitates interoperability. I think there’s a big difference between the platforms that a company creates for itself, for its own innovation, and for its range of products and services. Bill mentioned if you start to buy from a company which has its own system — and of course, we know Apple in the space, not with washing machines, but yes, with consumer objects — it becomes very hard to leave after a while because the system works very well in amongst the different objects and tools and machines that they sell. The same will be true, I’m sure, at Haier, but I’m sure, as with Apple — I’d love to hear from Bill about this — Haier probably doesn’t make great efforts to ensure that their systems interoperate with other competitors in the Chinese marketplace, because that’s a source of competitive advantage. So we see certain benefits of network effect within ecosystems that we control. We don’t necessarily want other people’s devices to be able to interoperate because then we lose our control of the customer. So I think it’s interesting to see what’s happening, and I think there are efforts to create standards to allow IoT systems to interoperate — it’ll be very interesting from a competitive landscape point of view to see how that goes.

Bill: Yeah, I agree. I was trying to think about how that would work, and my sense is that, certainly, Haier does have its own system of connectivity and within the domestic Chinese market, that’s the one that is in use and I think has been probably the market leader. Outside of the Chinese system, the reality is that you have other organizations like Amazon, Google, and Apple who have a head start with their systems — particularly Amazon Echo and the like, because they’ve been around for a longer time. So, I think it would behoove Haier moving into the domestic North American market to make sure that their equipment works with the standards — how many of these devices do I want to talk to so that they’re a system? What I don’t know, and an interesting question is, would they have a special microenterprise that would take responsibility for that system, or would the existing microenterprise adapt to fit both systems? I don’t know how that works and I don’t know who would make that choice. I think the way the choice will be made is who moves the fastest within Haier?

[00:29:04.20] Ben: I’m really pleased that you raised this, so I think it’s worth delving into this a bit more. Isn’t that notion of switching costs — which is really what you’re talking about, which is, you make things proprietary so that it’s difficult for your suppliers, your customers to switch up — isn’t that a very Industrial Age concept that will gradually disappear? Because the nature of competitive advantage is changing. I mean, you’ve said everything has to be customer-first, ecosystem first, such that the most successful companies will be those that generate the highest level of network effects and those that externalize those network effects with their ecosystem, such that the idea of introducing heavy switching costs is almost the antithesis of how you increasingly create and sustain competitive advantage?

Bill: If I can just make a quick observation: I used to do a lot of work in the telecom industry, and I remember how major telecom companies would be afraid to become the dumb pipe. Nobody wanted to be the dumb pipe. I now hear automobile companies say that because in autonomous drive vehicles, if the audio connectivity is done through an existing system like Amazon or like Google or whoever, then who actually owns the customer? And if I have an Amazon Echo on in my home, and I then go out into my garage, do I really want to change systems? And how interoperable do I want to be? So, it’s not in Amazon’s interest to make it easier for anybody.

[00:30:46.05] Ben: But, in a way, isn’t that Canute-like to resist that? Because, almost necessarily, we’ll prefer some channels to other channels, and we won’t want to have different proprietary channels for our car, for our bank, so we’ll probably necessarily move to horizontal channels. Isn’t the trick to make yourself desirable even if you don’t interface directly to the customer — i.e. to be the car that people choose even though they might interface through Echo, the bank that people might choose even though they might interface through WhatsApp?

Ian: I think that’s the crux of a competitive question. If you think that there is going to be the potential for a horizontal network effect, integrated system across multiple brands, then you target that. But, if you think you’re going to add enough value — remember, it’s not about optimum value, it’s about enough value — to your customers to keep them loyal and keep them within your system as much as possible, then the rent you can charge for that, the amount of margin you can generate from that is going to be enough to sustain you for a great many years, even if ultimately you think you’re going to get knocked out, as you say, “Canute against the waves.” I’m not sure. I think this is a classic problem that every company in every industry faces at some point, open or shut, and I don’t think it’s a given that everything’s going to be open. I really don’t.

Bill: So, it’s an interesting exercise of legacy thinking: what’s legacy thinking and what isn’t? And it also calls into question the enduring power of brands. Is there enduring power of brands, or will brands fade, in what Charles Fine would call “fast clock speed industries” where there’s a lot of turnover? Brands that have prospered in slow-change industries would they also prosper in fast? Can you make them do that? And if you can’t, then how fast you move to get out of that constraint? I think those are really interesting questions. So, the way I see platforms working is, if I’m doing a proprietary system that allows my products to be connected, whether they’re home appliances or not, do I encourage another internal microenterprise to try to do ones with a broader set of connectivity — maybe common standards, among others — and see how the market reacts?

[00:33:24.04] Ben: But I think what’s interesting about Haier, is they’ve built an organizational business model, let’s call it that, that allows for very fast innovation. So, arguably, that’s a business model where they can keep up with changing customer expectations. But most companies can’t; I guess they need to insource innovation from other people. And so, I don’t know if Haier can innovate fast enough, particularly as it expands into a larger arena. But, isn’t that the question: How your need for the work of others depends on how fast your own market moves? And, to talk about something else that you mentioned, you think this is sort of the New Age of Edison. Are there slow-moving industries anymore? I mean, you could argue that electricity was a slow-moving industry, but that’s undergoing massive change, right? So, what is a slow moving-industry and can anybody afford not to adopt an ecosystem model?

Bill: So, I think there are industries that wish they were slow. But my sense is, if you say there are no slow-moving industries anymore — which I don’t think we’re there yet, but I think we’re in the not-too-distant future — and we’re moving into unknown areas of rivalry where we have broad arenas with many different types of approaches, I think that strategy no longer becomes reliable, dependable.

Ben: Not enough time!

Bill: And that strategy becomes the ex-post rationalization of successful or unsuccessful tactics.

Ian: As it sometimes already is.

Ben: Every successful entrepreneur post rationalizes the story of the firm and the fact that everything was pre-planned and not down to luck.

Ian: And every country writes its own history. You’d only have to compare the English, the British, and the Chinese histories of certain parts of Southeast Asia to see.

Bill: What if we managed as if tactics were more important than strategy? I think that, in a sense, we’re doing that.

Ian: I agree.

Bill: I think Haier certainly uses it. And I think that changes the way in which we approach things. To go back to teaming, if we take a look at the last hundred years of industrial history, most organizations, and most generations of managers have remained on the same S curve. And now, all of a sudden, we have this acceleration of change. For me, the most important piece of that is that the ruptures between S curves become a larger part of my managerial career — and in those ruptures, I have to act differently. So, if I move quickly from a world where strategy was worthwhile because I had a long expectation of harvesting that strategy, to a point where I have to continually move from one S curve to another, I think I need to act differently. And every one of those S curves is the unknown, it’s no longer the uncertain, right? Strategy is the province of the uncertain. We sort of know the way the game is played, we know who our customers are, we know who our rivals are, we know how to do this. But if I’m going into the unknown, if I’m going to brand new industries and brand new customer experiences, then all that decision-making becomes unreliable.

Ben: Yeah.

Ian: There’s not much point in having a three-year or five-year strategy plan if you have to adjust it every 18 or 12 months.

Bill: Right!

Ben: Or three months.

Bill: Yeah. I had dinner a couple of years ago with Tim Brown from IDEO, and he said one of the things that is changing in his business — which is the design business — is that they’re losing the middle of projects. So, they have beginnings and ends but there’s less and less time in the middle to do things because of customer pressure and time to market. That changes the way in which you do everything about a project.

[00:37:32.10] Ben: So, taking that same idea of losing the middle, is that now what’s happening to strategy, which is bifurcating between, on the one hand, setting the company vision and mission and trying to manage the company culture, to put in place the right business model — which is just stuff that doesn’t change very often — versus the polar opposite, which is, the rest of the strategy is introducing as few constraints as possible and allowing the company to be as innovative as possible?

Bill: Oh, yes! So, my view is that change is continuous and accelerating, but in corporate life, organizational life, is episodic and remains episodic — so they’re always going to be out of sync. The problem is, how do we speed up the nature of organizational life, so that it’s more in tune with the change in the outside world? And this is not unique. Another lesson from Haier is we have to resist linearity and sequentiality in the way in which we work.

Ian: This is a parenthesis, which takes us out to a different field, but I would argue the same is true for country governance as it is for corporate governance. I think a country like China, that still does five-year plans, struggles when things change very, very quickly in large ways.

[00:38:57.19] Ben: How repeatable a process can innovation be? I mean, you wrote a book called “Idea Hunter”.

Bill: It’s a great book!

Ben: It’s a great book and it cannot be simplified in a simple line, but this idea that there is a formula for continually coming up with good ideas, which by extension means that the same company or the same individual could continue to be innovative.

[00:39:46.25] Bill: Right! Design Thinking, Lean startup — things of this nature — are procedural, and I think what they are is procedural in a way that reduces the linearity in the innovation process. So, the old innovation funnel, right? The old innovation funnel was completely inside out — it was all about our numbers rather than the customer experience. It was completely inside out, was completely linear in the way in which the stage-gating processes worked. And, for me, the biggest cost was that learning took place at the end. And what I think we’re doing with Lean Startup and Design Thinking, and the variants thereof, is we’re trying to move to a slightly less linear process where we do more testing along the way, pretotyping, prototyping, and so, the learning is moved forward. We don’t have to wait until the end of the experiment. So, my sense is that, in the face of increased unknowns — which is the shorter S curves, more ruptures between — we are moving to a more experimental model of decision-making, and that experimental model involves much more testing, faster testing, and quicker learning — and then, the application of that, as we go along, but it’s still a process.

[00:41:08.00] Ben: Recently, we interviewed Marc Gruber, for the podcast, and his argument is that the toolset that you’re referring to — Design Thinking, Lean startup — is missing one tool, which is the where-to-play framework. Do you also agree that it’s really important, ex-ante, to decide where you’re going to play?

Bill: So I think prototyping is, can we do pretotyping? Does anyone care if we do it?

Ben: What’s that term?

Bill: Pretotype. It’s the minimal viable representation of the idea tested in a marketplace. So, it’s an attempt to try to see if anyone cares about this and, in a sense, that’s some insights into whether or not there’s a market for this, whether we should be playing in this space. And the beauty of pretotyping or prototyping is that it gives you better feedback because you’re talking about something tangible, rather than something abstract. So, my sense is that all of these things, moving from abstraction to tangibility — quick testing and all that — are attempts to reduce the impact of legacy, linearity, and sequentiality.

Ian: I have this worry sometimes, as we lose the middle, as we’re constantly working on customer value innovation, and we’re constantly trying to catch up with production to meet those new expectations of our customers, whether that lack of middle and lack of longevity of process reduces quality and reduces the longevity of the product and the service.

[00:42:55.20] Ben: There is a clear trend in place where customers don’t want mass-produced products; they want things that are more locally-sourced, higher quality. Almost like the end of the end-consumer brings with it the end of the mass-produced customers.

Bill: I don’t see any reason inherent in that process where quality should be reduced. It’s not as if we’re doing it in a half-baked fashion. We’re still trying to build the right quality but the interesting thing that comes out of this is that, what if the customer decides the quality is not an important issue in their purchase decision? What if, in fact, the quality that we’re producing is unnecessary?

Ian: The best example is in fashion. Fast-fashion over the last 15 years, people have been happy to have things that fall apart in three months because then they get something new because it costs them nothing.

Bill: Yes! Yes! Actually, I spoke with a firm that makes fast-fashion and whose largest market is in the city, in London, because they have wealthy, well-paid typically men who have no domestic skills, who buy a shirt once and throw it away, because it’s so affordable. So, I think that we have a definition of quality, a legacy definition of quality that needs to be re-examined. Listen, I’m not advocating bad quality.

Ben: Fast throwing away shirts after single-use.

Bill: What I am advocating is rethinking the nature of quality and what’s required. We see a movement away from long-term — particularly in North America — two-year MBA programs to shorter MBA programs. Is that a reduction in quality? We don’t think so. We think that we’re redefining the nature of this experience, in many ways. And you see a growing rise in certificate programs. I think that quality, like anything else, is constantly up for redefinition.

[00:45:17.15] Ben: I’m so pleased you brought up the topic of MBAs because, in a world where innovation matters more than strategy and where experimentation matters more than knowledge, is it worth people taking two years of their life to study in a classroom?

Bill: I don’t know what the right time period is, but I’m a great believer that knowing more is better than knowing less.

Ian: It makes sense to me.

Ben: Even if you continually write in your articles that the experimentation trumps knowledge?

Ian: Experimentation also leads to knowledge.

Ben: Touché!

Bill: Yes! So, last year, I took 95 MBAs to Shenzhen — a colleague and I did — and it was a great experience! We spent five days there. It was about learning, not knowing. So, I think more and more of education is about how do you engender the curiosity to seek things out? And then, how do you learn? What do you do to learn more? Because going back to the rapidity of change in the S curves, in the future, what you know will be less valuable than how you learn.

[00:46:35.22] Ben: And is that what you are increasingly teaching that — how to learn?

Bill: Yes, I think so. I think what we’re providing is frameworks and vocabularies that make it easier to learn and make it easier to share learning — scalable learning — but I think that more and more those frameworks have change at the center, rather than stability at the center.

[00:47:00.02] Ben: So, I’m looking around at your bookshelf here. We’re in Bill’s office, and as you can imagine, you would expect of a professor’s office to be full of books. I’m just trying to count how many of these books have the word “firm” in them. And my question to you is, is the firm still a relevant concept or is it obsolete? Because the firm was all about grouping people under one entity because transaction costs were high and because it was about systemizing production — so you needed to organize work into repeatable tasks, with formal hierarchies — and everything we’ve talked about so far suggests that every notion I just mentioned there, is obsolete. So, is the firm obsolete?

Bill: That’s a good question!

Ben: You’re going to have to throw many books if it is.

Bill: I think in the spirit of how we started this conversation, organizing is not obsolete. Teaming is not obsolete. The construct of a firm may, in fact, need to be re-examined. Earlier you talked about how we think about organizational size and how that’s changing, and I think that’s really true — and that’s probably true in the nature of the firm as well: the motivation for the firm, the corporate nature that tends to be associated instinctively with the firm. All of those things probably need to be rethought and redefined and re-examined, questioned, but I’m not sure that organizing itself is a bad idea.

[00:48:37.01] Ben: So, we’ve nearly got to the point where we delved into the Chinese question — we’ve constantly held ourselves back, but I think we’re ready now. But maybe let’s start through the prism of the idea of the nation state, which is, if the firm needs radical overhaul, does the nation state require the same?

Bill: Ian?

Ian: So, I guess, referring back to my earlier comment about the difficulty of having five-year plans in a world that changes every three to 12 months, I think the general answer is yes, to a degree. I think a lot of the things that still glue people together — culture, attitude, and history — remain and will remain important. I think what’s interesting, today, is that the nature of citizens’ relationship to their country is changing, and it depends on where they are. I’ve said in public before that I think that the relationship between capital cities of a lot of the world, certainly Western nations, but including places like Beijing and Tokyo, less so Jakarta, bear more resemblance to each other. These places bear more resemblance to each other often than they do to their own hinterlands, and I think, therefore, that the term nation state is interesting because I think there’s a difference between how large capital cities, large busy cities, whether they’re officially the capital or not, are very, very different to the countryside from whence they came. You only have to look at the Swiss referendums to see how different the voting is between cantons in the center of the country and the cantons that touch the outside world. But also, if you look at the voting for Brexit, if you look at the voting for many major cultural and/or country changes over the last 10 years — I think of the US, as well as the UK, but also Venezuela and Brazil, and elsewhere — we have a dichotomy taking place. We have a dichotomy appearing very strongly between big cities and the rest of the country. So, I think that’s one dynamics which requires change in governance with the countries concerned, but it’s also about the relations between countries across the board. I haven’t been for a long time a big fan of things like the United Nations, but the purpose of the original League of Nations made sense. I wonder now, within the context of the changes that are taking place inside countries, whether we need better relationships across countries.

[00:51:00.00] Ben: If Haier is the future of the firm — large autonomous independent units that are brought together through logistics and data — is that the future of countries? Because, in some ways, in Switzerland, the model for a modern country because that’s really what Switzerland seems to do quite well, which is this thin federal layer that kind of coordinates activities, and then a lot of power and responsibility and autonomy devolve down to communes — and if that’s the case, it would seem we’re moving in the opposite direction: states become more insular and I don’t know. That’s just as a thought. If the Haier corporate model is the model for nation states, how does that play out on a global scale?

Bill: You know, it’s hard for me to answer this question. When I was much younger, I thought that the nation state would fade and that multinational corporations would become — I mean that was 100 years ago — multinational corporations would become the real powers that move the world, but they failed. They failed because of inefficiency, they failed because of greed, they failed, because they did not take the interests of everyone into account.

Ian: I wonder if it’s changing with a move to stakeholder focus rather than shareholder but yes, I agree with you.

Bill: Great! And I certainly don’t see any change coming out of Silicon Valley with these new-age sorts of organizations. The biggest problem I think that we have, in so many countries, is the income disparity that exists and the inability for some people to have futures. So, what I do think is interesting in the example of Haier, is that, first of all, they trust the people — and I think Switzerland does that as well with the way in which the voting takes place on everything. So, there’s a great deal of trust in people to be effective participants in a political process, and there’s a very clear focus on what they want to achieve. And there’s been 35 years of consistent trust in the workforce and a belief in the talent of the people there. I think that over time, what that’s done is that has led to the ability of people to advance their own situations. People who normally would have been in a traditional organization, would have been on the margins of society because they lacked the educational credentials or because they lacked the connections. The ability to be autonomous and to start things on a small investment has allowed smart, hardworking people to succeed. So that’s a good outcome.

Ian: I’m generally a great believer in the notion that smaller is better for structures, not just in times of innovation, but also because of the nature of the way people treat each other in small structures versus big structures. I think smaller structures are healthier in interpersonal relationships, whether they’re in organizations or societies. I’m going to take a twist on your question, Ben. I am not sure that there is an optimum model visible yet for country governance because I think it’s context-related. In the same way, I think that the optimal model for company governance is also context-related partly speed, partly size, partly environment. I think I’m going to twist it and say that my faith, both looking at history and looking around me — but I’m slightly biased in this because as someone who starts companies, I believe in the power of the individual — I’m going to say that I think it depends a great deal on leadership. Just because one country has a leader that people are unhappy with, it doesn’t mean the structure of the country or the systems within it are wrong.

Ian: Similarly, I think because a country is successful, I think one has to look terribly closely at who’s driving the success currently, to understand whether it’s the individuals that are within that structure that are making something unwieldy work, or is it the structure itself, which is predisposed towards producing good leadership and therefore good results. I’m more a believer in good leadership, whether it’s corporate environments or in-country governance, than I am in the structures because I’ve seen bad structures work and I’ve seen good structures fail, both in corporates and in countries. So, I care a great deal about leadership. One of the reasons I spend so much time at the school, one of the reasons that I like coming back here and something I very much enjoyed about my time when I was here was, it’s about leadership, it’s about creating good, global, citizen leaders. I think that’s crucial. I think I wouldn’t put my faith in structures; I would put my faith in individuals.

Bill: I agree with that. I think that we need to look at the role of people to be able to play a leadership role, not only at the top of the organization but throughout the organization. And my sense is that when we work with organizations who aspire to be like Haier, one of the problems we run into almost always is that they’re unprepared to give autonomy to their people, and the people are unprepared to accept the autonomy if it’s given to them — and that’s largely because the perception is that leadership doesn’t take place throughout the organization. And I think what I’ve learned from Zhang Ruimin is he says, “We’re an organization of leaders.” These people are all running small businesses, some of which are not so small, many of which are quite successful, and that needs to be reinforced. And then, I go back to the IDEO example, and one of the things Dave Kelly used to say was his job as CEO, as the leader, was to reinforce the confidence of the people in the organization to make the right decisions.

Ian: But I think you’re also reinforcing my point about the fact that if you don’t have a leader like that, it’s not going to happen in the organization.

Bill: That’s right!

Ian: It is important for the leader to be aware that they need leadership at all levels of the organization.

Bill: So, if we go back to the broader innovation question, for me, I’m a big believer in top-down leadership. Not dictatorial, not oppressive, but if you don’t have strong top-down leaders, then you cannot allow bottom-up to occur because the leaders become intimidated or threatened by the suggestions. So, you need people at the top who are secure in their own confidence and who are enthusiasts for autonomy. And so, that’s going to determine how organization boundaries get set and how they operate.

[00:58:24.28] Ben: Is that how you would define the leadership in China?

Bill: Well, that’s a very different level of complexity. It’s a political leadership. I don’t think that’s the role of political leadership in any country that I know of.

Ben: But leadership at a country level is just as important, isn’t it?

Bill: Oh, yeah, I think so, too.

Ian: I think Bill’s referring to the systems underneath. The complexity of politics in any country is such that you can’t necessarily assume that everybody is united on a particular goal or vision because there are many visions and many goals — you have competing parties, you have competing people within parties, you have systems within the systems, you have autonomous bits that fight with each other. It’s not so easy.

Ben: This is what business people that become politicians always underestimate, isn’t it?

Bill: Yeah, right.

Ian: Absolutely! I think there are certain types of people who run businesses, who have the capacity for this openness and this ability to deal with complexity underneath them that might survive in that environment. But it was the reason why not to have generals running countries, too. If you’re used to a certain type of hierarchy and an assumption about how the orders would flow down and follow what was required by the top, then that doesn’t work in almost any political system that I’m aware of.

[00:59:47.15] Ben: Other than the fact that you both work at IMD, another thing that unites you both is that you lived for a long period in China and you witnessed the economic miracle that has taken place over the last 30–40 years. Is the economic miracle stalling? And if so, why?

Bill: So, I think there are some structural issues that everybody has known about for a long time — it starts with the demographics of the country. You have an aging population. I think that that’s not going to go away in the short run. I also think that you have an economy that was built originally — the modern economy — starting in 1979–1980, built with an export orientation. It’s harder to build a domestic market. It takes more time and the like, than anyone thought. It’s happening now, but it’s been a while. And the other thing is, if you build an export-oriented economy, you sort of hope that your customers are going to grow — and the rest of the world is not growing either. So, I think that there are important what I would call, structural and demographic reasons for the present slump.

Ian: To add to that, there’s also a natural cycle. They’ve gone through an extraordinary expansion with all the funding coming in from overseas and the growth in population and the extraordinary improvements internally to allow both. I’m not going to say the defeat of poverty, but there was a huge reduction in the number of people surviving on very little. So, I think the governance of the country is in a place that’s so large and so complex — it has been really quite extraordinary over many years — but we’re now at a cycle stage in their own cycle, where there are other things to be sorted out — a slightly less capital available, there are concerns overseas in terms of how the country is perceived. Internally, there are questions about the way the country is governed, the way that certain decisions are made, which partly happens when things slow down and there isn’t this sense that everybody can do fine and it doesn’t matter what the government’s doing, because we’re all going to be better off than we were before. I think all of these things lead to a natural slowdown. I don’t think it’s something I would worry about from a global perspective. There is the issue of the internal debt problem and the possibility that the non-performing loans in some of the larger regional banks are never actually going to be paid back because the developments have been made. But I think those are structural issues, which again, people are aware of, both in China and abroad.

Bill: And it is not the first time.

Ian: And it’s not the first time. And actually, if you look at history, their history is a lot better than, say, Argentina, so I’m not worried yet about China.

Bill: I first moved to China in 1980, I’ve been there every year since. If you look at China through that period of time, what has happened today would have been unimaginable in 1980. Absolutely unimaginable!

Ben: Quite extraordinary!

Bill: Right! And so, I think one of the great headlines of the late 20th century, early 21st century, but certainly late 20th century was the movement of China, the development of China into a modern nation state. And modern nation state, I don’t think it could have happened if it was just individual provinces working in an autonomous fashion. So, I think they needed that galvanizing force. Since the onset of the One-Child Family Policy in 1980, you could forecast that there was going to be a plateauing of growth in the economy, due to the reduction of people consuming and producing age. We’re there now. I have also learned never to underestimate what the Chinese people can do, and my sense is that China will come out of this fine, I think. I would not short China in any point.

[01:03:45.24] Ben: Do you think China is ready to overtake the US?

Bill: I don’t think that’s important. First of all, what numbers are we going to use? We could argue it forever. I think the fact is that China has modernized to a point where it’s a global, geopolitical, economic, technological power. And I think that’s the accomplishment.

[01:04:04.27] Ben: But in a way, the US — and you could argue whether this is a trend that will be sustained — right now is becoming more insular. It’s not rejected globalization, but is retreating from international organizations, they’re retreating from globalization. Does that mean that China steps in and becomes a global superpower? Because you said, it doesn’t matter. But if that mattered.

Bill: I think China is a global superpower.

Ben: Preeminent. Voilà!

Ian: Again, it depends on what preeminent means.

Bill: Yeah.

Ian: Hearts and minds versus economy and dollars, I think are very different things.

Ben: Yeah. China is much more interested in the latter, right? The Belt and Road Initiative is about creating markets for exports.

Ian: There’s also a sense of history in the Belt and Road Initiative. There are different things going on there. And again, I don’t think either of us is here, ready to speak for China, but what we can see is a concern at different levels of government for how the company is viewed — even though they pretend it’s not so important — how it builds its own systems internally, how it helps its own people, and logically, so given how recent and massive the changes have been, it’s obviously more concern with ensuring that things are fine within China than without. And so, I haven’t seen any politician attempting to create a global leader role, either as a politician or for the country, because there’s always been this sense that we worry about our problems, we don’t interfere with other people’s problems, we don’t want other people to interfere with our problems. I don’t think there is this wish to have this role of leading global adjudicator over other people’s issues. Yes, perhaps the US did play that role for a while, and yes, elements of US society wish to be less involved in other people’s issues for a while, but I think Bill’s right, I think it’s the wrong question. I think what’s interesting now is to try and work out what the new world looks like with a few large stakeholders, a few smaller stakeholders, and very different ways of measuring impact and influence in the world today, partly because of the difference between network effect and military effect and partly because it is about ideas and concepts as much as it is about the ability to control a seaway.

Bill: I think we’d all be better off if the US and China were in an amicable relationship. Everyone would benefit as a result of that. At the present time, fear is an insidious, corrosive power.

Ian: Often used by politicians.

Bill: Yeah. Often used by politicians and at the moment, at least, in North America, in the US, it’s on the rise. Actually, if you look at the US, the US has never really been a whole-hearted embracer of a global community except for the period between the First World War and recently, so it’s a return, I think, to some of the inherent conservatism of people in the center of the country who are not as cosmopolitan as they probably should be.

[01:07:32.08] Ben: And where does that leave Europe? So, if the Belt and Road Initiative is about creating a stronger economic alliance in Asia, in Africa, United States is a large domestic market and they’re happy to subsist with being themselves and they don’t have somebody difficult neighboring countries to deal with and they’ve got a large domestic market, where does that leave Europe? Where is Europe set in this two-polar world?

Bill: So, I’ve always been enthusiastic about Europe playing a larger role in the world than it is at present. I would like it to be more relevant. I think that it has historically been a source of values and reflection that the other two great powers have not been interested in. But I worry about Europe playing that role because I don’t know where Europe is any longer and I don’t know where it stands. It seems to be perpetually stuck between aspiring to be a great power and not being able to execute.

Ian: One of the strengths of Europe is exactly what causes that issue. It’s not one country, it’s not a superpower, it’s not a nation state, per se. I think it’s one of the charms and values of Europe. I think one of the things that’s great about this part of the world is the multitude of languages, approaches, cultures, and ways of thinking and doing things. I think that’s what creates the richness of Europe, and the richness of the experience of being here. Now, it does make it difficult to make a decision in one place, and it does make it difficult to have a European viewpoint. I’m not 100% sure the world needs it. I like the fact that every now and then you do get a European point of view because there are certain things that many of certainly the Western European states, sometimes less so the Central European states agree on. I think I quite like the variety of discussions that take place about any points that are in Europe. I like that diversity of opinion — I think it’s what is the charm of Europe. I also think that being smaller makes it easy to manage, if you think of the Haier model, this multitude of different approaches to problem-solving and different products that occur.

[01:09:58.16] Ben: Doesn’t that require a thin federal layer? Which is kind of developing as we speak.

Ian: We kind of have a thin federal layer. The question is how thin it gets? I think there are structural issues. There’s the obvious structural issue of having a united currency and a disunited fiscal system. So, I think there are lots of things about Europe that don’t make sense, in the way it’s structured. And also, there are different goals from different European leaders, and it changes when the leaders change, about what Europe should be. The vision from the 1950s was relatively loose. The vision from some, now, macro-leaders amongst them is the United States of Europe, and not everybody shares that view — some of the newer members, even less than some of the older members. So, I think there are structural issues that make it very unlikely that Europe becomes this single voice, single cultural place that some people would like, but I don’t think that’s a bad thing. I quite like the diversity.

[01:10:51.05 Ben: But the problem with Europe, I guess, is, in the absence of having these new Digital Age giant businesses, it’s a risk of becoming a tourist destination for Chinese people over time?

Ian: It is a tourist destination for Chinese people.

Ben: But that is being the only engine of growth.

Bill: Incidentally, I think that’s not a bad thing because I think that we all…

Ben: It’s not that is a bad thing, but it’s difficult to find nations that rely solely on tourism that are really prosperous.

Bill: I think one of the things we talked about needing to expose people in the center of America with what’s going on in the world around them. We also need to expose people in every country to what’s going on around them.

Ian: Yeah. Everybody should travel!

Bill: And I think that the fact that we have a lot of tourists coming from China today is a victory. It’s a huge achievement! You would never have thought of that when the reforms began, so it’s a sign of success. I think that Europe plays or could play an important role in moderating the excesses of the other superpowers, and I think that that would be a healthy outcome, in particular at the moment with what’s going on in the US. I think that there needs to be a broader view of how we work together.

[01:12:20.10] Ben: So, I’m going to attempt badly to summarize some of the things we’ve talked about. So, team size matters — smaller teams, in general, perform better than larger teams for many reasons under certain contexts. Definitely, the nature of competition is changing much more to arenas than industries; innovation is rising in importance vis-a-vis strategy, and innovation can be a repeatable process. Business models matter so much more than they did in the past. China is at a point where it’s slowing down, but, as you said, you can never underestimate it and it will necessarily start to exercise greater geopolitical influence. My last question to you, both, is that I think you could argue that we’re at a point in history, which is almost like pre-reformation. I mean, China is almost the equivalent of the discovery of the New World; as a symptom, you’ve got massive change in information flow with the internet and so on. I want you to be bullish for a second and say, what’s positive with the world change from this point on? Starting with you, Ian.

Ian: I’m generally very optimistic. I’m generally very positive. I said, on the previous podcast, that it’s not technologies that create problems; it’s the people who use them and the way they use them. I refuse to be a new Luddite and say that we live in a world where all of these things are scary. I wish Elon Musk wouldn’t keep saying that AI is going to harm us all. I think because of our ability to see more, know more, understand more, I’m totally in agreement with Bill that knowledge is helpful and that experimentation leads to more knowledge. We simply are better able and better equipped than we ever have been to understand complexity and come up with solutions for it. And so, even if individual leadership or geopolitical regional issues or changes in demographics create challenges for both countries and the world as a whole for the next 20 to 50 years, I am totally a believer that we now are better equipped than ever before to face those challenges and come up with solutions. I’m very excited to see what happens. My daughters are now at an age where they’re entering the sphere at 26 and 28 — one is in private equity and one is running her own company — and I love the way they talk and think about the world, and I’m really looking forward to seeing what that generation comes up with. So I am absolutely an optimist.

Bill: I think we’re on the eve of an age where there’s technological revolution, a series of technological revolutions that will change everything — change the way we live, change the way we interact. The level of change will be unprecedented, both because of connectivity and hypermobility and also the genomics revolution. All these things taking place at the same time, I think will provide the potential for huge landscape change. But, what I would hope is that our organizations are up to the challenge and that leadership is able to recognize the opportunities and move fast enough — and this is why the teaming issues that we talked about are so important. And I think that we have to provide opportunities for our entire population, not just the winners of the past economic era. And if we can do that, I think we’ll have unprecedented success. So, I’m bullish.

Ben: Ian, Bill — thank you very much for coming on the podcast!

Bill: Our pleasure! Thank you!

Ian: Thank you for having us!

Smart Focus or Pivot Later?, with Marc GRUBER (#15)

Smart Focus of Pivot Later?,
w/ Marc GRUBER

According to our guest, Dr. Marc Gruber, Vice President for Innovation at the Swiss Federal Institute of Technology — EPFL — you can’t win if you don’t know where to play. Instead of a just-do-it mentality and pivot later if it doesn’t work, Marc speaks with our host, Ben Robinson, about how true entrepreneurs and innovators are reflective and flexible and how they think about what they’re doing and in what market to play in. By the end of this episode, you are also going to understand what’s a good market to be in and you will learn about the Attractiveness Matrix and the Social Identity Theory of three kinds of entrepreneurs.

Marc holds the Chair of Entrepreneurship and Technology Commercialization at EPFL, and he is a world-leading researcher in this area. He is also a Deputy Editor for the number one empirical research journal in management, the Academy of Management Journal — so a very talented fellow. We are very happy to have him on this podcast. Now, onto our conversation with Ben and Marc!

Full podcast transcript:


Ben: We are at EPFL and we are with Marc Gruber. I think where we wanted to start with you, Marc, was to talk a bit about Switzerland. So, anybody who listens to this podcast probably knows that Switzerland tops lots and lots of innovation league tables. And so, as a nation, it’s really good at coming up with innovation, but it doesn’t really have any sort of leading top-of-the-food-chain tech companies. Do you think that Switzerland is good enough at commercializing its tech?

Marc: First, let me say I’m very pleased to be here. Thank you for inviting me to the show! It’s a true pleasure to discuss with you all the topics around innovation and entrepreneurship. There’s some exciting stuff, I think, we can get to discuss and it starts with your first question. I think it’s a very pertinent question. If you look at the tables, we are extremely good at generating invention, and we see this in all the patent tables per capita. We’re extremely good on these fronts. Where we still have a lot of room for improvement is the commercialization side.

So, if you look at the definitions, innovation is invention plus commercialization. Moving them from the invention phase to the innovation phase where you have a commercialized product or service, this requires very different skills. This requires skills about understanding customers, understanding markets, figuring out good markets, about testing your products, about understanding whether the customer likes the features of the product. This is very different in terms of the activities — it’s the inventive phase. You might be inspired, as an inventor, by some real-world problem, and that’s often the case, but it’s still something different to test it with human beings, to understand what the response of a human being means — and not only one, but multiple or hundreds or thousands, if you want to do serious market testing.

So, everything that has to do with invention, and then everything that has to do with the innovation step, the commercialization step requires distinct capabilities, activities that engage with this, and from that perspective it’s quite normal to expect that in the league tables we can be good in one dimension — like in the inventive dimension, with patents — and we might not be so good at the other ones.

Ben: So you are saying that Switzerland should be top of the league table for invention, but somewhere way lower down the list for commercialization, then?

Marc: Ideally, we should be high on both. The invention is fantastic! That’s a great outcome, that’s intellectual effort, but the financial returns, the ecological returns, the sustainability returns — if we talk maybe later on in the show, about the broadening of our concept of returns — if we look at all these returns in society, those come up only in the next step, the commercialization step, where you create the impact, where you scale it up. If we are not good at the second step, the impact remains more limited.

Ben: And why is there that discrepancy between invention and commercialization? Is it because of the size of the domestic market or is it more about the skill sets?

Marc: It starts with the skill sets. It starts with the skill sets and then, it’s something that I see in my practical life, when I work with the startups, when I work with large companies, but that’s also part of the research I do. It clearly shows the skills and the inclinations to do these things also differ between people. You have some people who like to do technology, others like to do commercialization, and few people actually like to do both or are able to do both. If you look out there, there are few great leaders of companies that can do both. Think about Steve Jobs — he was good on the tech front, and he was a fantastic marketing person; maybe even a more marketing person than a tech person. I think it’s the skills, it’s the attitude and we are extremely good on the mental front, and I think we can be better on the commercialization front.

Ben: Do you think that those skills will appear just by themselves as companies have more success?

Marc: These initial skills to invent, I think we are solid with this, with the technical universities in Switzerland, and I think the amount of money we’ve spent in educating our population over the last 30–40 years, was extremely smart because we have really, really, really good technologists. What we have been starting about 20 years ago is to get into programs that support entrepreneurship, innovations, the second step, and educate people on this front. And we see it here, at EPFL, very concretely, where we have now a multitude of programs where students don’t only learn about the concepts, but apply the concepts so that they understand what it means to bring technology to market.

I think that’s where we are investing now. What we try to teach them, which is not the easy part, is this mentality issue of going out there, being more extrovert, talking to people, being able to convince other people to buy a product. These are very interesting skills and an important skill set, but it’s something that might not be so close to the culture that we see here, in Germany, in Austria, and in neighboring countries. In the United States, Americans are much better on these fronts.

Ben: So, you could argue that they’re better just because innately they’re better, but clearly one of the differences is that there have been so many successful companies, and success begets success. If you’ve commercialized one product and you know how to do it, then the likelihood is you stand a much better chance of doing it again versus somebody who’s coming at it fresh. So, isn’t that the bit that’s missing in the Swiss ecosystem?

Marc: Yeah, we have these reference models that are now popping up — we have quite some successful unicorns now in Switzerland, we have a few very good successes, but this is why we bring the students also into other ecosystems where they see the more advanced companies. What they realize is, I think, two things: First, they are inspired, but second, they see that water boils at 100 degrees Celsius. They come back and say if these guys over there can do it — and over the means students in Silicon Valley, and we send students over there for trips, for stays, for four to eight weeks, we have a desk at the Swissnex where they could go. Once they come back, they say, “Actually, we have all the ingredients here in Switzerland as well, to be successful.” Let’s take the smallest of our market, even, as an advantage because we are born in a small country that makes us much more open, if we want to conquer markets, towards other European markets by birth.” Either we are open-minded and start internationalizing early or we are staying small in the canton of Zurich. Let’s put it this way, that’s not a really strong impact you could have.

Ben: It’s almost like that maxim, which is you should be global from day one. It’s almost like, “Hey, you have no choice.”

Marc: You don’t have any choice. And what we also see, from the research side is quite interesting that there’s always this imprinting of the nationalities that you have on the management team, that foreshadows the internationalization strategy. So, if you have three nationalities on the team, the likelihood that this team will internationalize earlier is much greater than if you have only one country nationality represented on the founder team. That’s quite promising, as well, because we are a country that is quite diverse, the startups that are created here at EPFL are quite diverse in terms of the background of its founders, and that makes it more likely that they internationalize and I think that’s not only good for the country, that’s extremely important for the company.

Ben: Perfect! So, I want to talk a bit about your book, “Where to Play.” So, it’s a book and it’s a website, so you don’t have to buy the book necessarily to get access to some of the methodology.

Marc: Absolutely, no! Actually, all the tools are available for free and if you want to learn more, you can even get a free online course. If you want to buy the book, of course, buy the book! It’s a lovely book, we spent a lot of time working on it, and I think it gives you additional value, but the core of the method is out there for free.

Ben: It is a lovely book! It’s a book that I first came across thanks to Steve Blank, who wrote a very nice review, and the way he positions it — and I guess this is the way you position it as well — it’s like a very nice complement to some of the other tools, the business model canvas and so on. But the key difference being that it comes before, it’s like a precursor to doing the latest stuff, because until you’ve figured out which are your most attractive markets to operate in, then it’s premature to think about product-market fit. So, can you just explain to us a bit the concept, the importance of “Where to Play” and how people have maybe underestimated that until now?

Marc: Yeah. So it’s very correct what you say. Steve Blank wrote an extremely nice blog post about the book and the method that is behind it.

Ben: We’ll share the link to that, for the listeners.

Marc: Excellent! And what you said is, basically, the tools that were in the Lean startup up to that point were mostly focused on being successful once you know your domain — figuring product-market fit and developing a business model within that market. But these tools didn’t really help you to figure out where to start. What is a good market to be in, in the first place? And then he said that’s why he’s adopting the tool actually, for his Lean toolset, which is a wonderful badge of honor for us because it’s one of the most important, if not the most important innovation tool that was developed in the last 20 years, two decades — and to be adopted by the person at the origin of this is just a fantastic recognition.

So, me and Sharon — my co-author of the book and co-creator of the method — of course, we had big smiles when we got that badge of honor from Steve. But generally, the book is about trying the method that is underlying this, it’s trying to figure out what are good markets to be in because you could be in a very lousy domain and do all the stuff — you can develop a business model, you can do market testing — but then realize only after a while that actually, “Hey, that domain was not so great and I need to pivot to another one.” I still have to find the first venture team or corporate innovation group that likes to pivot. So, if you can somehow be a bit more foresightful — and I don’t want to say that you can predict the future, that’s not at all my thesis — but if you can be somehow a bit more foresightful and say, “Hey, there’s a better market here than there. Let’s first go into this turf before we try the other one.” I think then, you’re actually significantly more successful.

the question, “Where to play?” is always a sibling of the “How to Win?” question. If you are lousy in the “Where to play?” question, you will be inferior in the “How to win?” question because if you’re winning a super small battle in a small market, great! You have won! But you have missed out the big other alternatives, and that’s where I think they nearly need to go hand in hand.

Ben: So, I was going to ask you that. It’s almost like we’re given to believe that the pivoting is almost a natural part of the course, but what you’re saying is that actually, it doesn’t necessarily need to be because if you spend a bit more time understanding your market opportunities, then the likelihood of pivoting is decreasing. Do you have evidence to prove that those really unpleasant 180-degree pivots happen less frequently if you use that method?

Marc: I have done 15 years of research before I wrote the book. As a researcher, I said I’m going to write something where I know that all the empirical results point to some method that makes me more successful. And what it does is, I think, twofold, and let me describe this with an example. Flyability is a company that is here at EPFL, they are producing drones, and they have drones in a cage. And with this type of company, the question, really, is where do we apply this? They had the idea to say, “Okay, we go to nuclear disaster sites, atomic reactors, and the drone can go in there and get a good idea of the debris and of the casualties that might be there, as bad as it is.” But there are many other domains where they could inspect: electric landlines, pipelines, indoors, outdoors. So, it’s really about figuring out a good starting position. And if you think about it, yes, this company, once it sees more opportunities, there are some that are better, markets that are growing quicker with less competition, where the customer demand is stronger, where the development costs are smaller than other domains.

We’re living in an age where the industry boundaries are imagined boundaries

The first element that they learn is, “Well, we can actually start with a better, more fertile ground.” The second element — and that’s equally important — is that yes, but we still don’t 100% know if this works out. Once you have this wider lens, you become more sensitive to many decisions in your company and don’t dig yourself into a ditch so quickly by saying, “Hey, I’ll call my company now

Ben: Yeah.

Marc: They called themselves Flyability, and that gives you a lot of flexibility in case you have to pivot. Also, you have a double benefit out of applying the method. Number one, figuring out where a better market is, and number two, actually figuring out that you can be a bit more agile because you make decisions that put agility into the DNA of your business. So, even if you have to pivot, it’s much less painful than if you are just moving into one direction and see that as your one and only goal, and then realize after half a year, that this doesn’t work out. By the way, the statistics say that 73% of all companies need to pivot before they actually apply the method.

Ben: And do you know what it is now, post hoc?

Marc: No, we haven’t done that yet. But we see that the companies are created very differently. People have an opportunity set — that’s a portfolio of growth options. They go out there, pitch this portfolio of growth options to the venture capitalists and business angels, by saying, “That’s our first market. If this one works out, that’s our future growth market. If this first one doesn’t work out, this is our plan B.” And this is a super interesting storyline for any VC because a venture capitalist knows that they know the market and number two, they are de-risking the project by saying there’s a plan B, in case the first one doesn’t work out, and they have a future growth option in-store, which means more value creation; or they might even have two-three more growth options in-store. So, in that sense, all the feedback we’re getting from the financial community is they are super excited, they would wish that every company would apply that when it actually comes to their turf and seeks for funding.

Ben: So, I just want to test, slightly, the premise on which the book is built and the methodology is built. So, the premise is that every product doesn’t have just a single potential application. There are many potential customer groups and markets for any given product. And I was just reading this thing from Bain, and they basically take the same premise that you do, and they say what becomes important is not just to identify exactly where to play, but instead to focus on how to win because we’ve seen that the commercial world isn’t tightly grouped into industries anymore, but arenas — which I think this the terminology that you use as well — then what’s most important is having a sort of a competitive edge and having an execution edge to be able to win across large arenas now. How do you see that sitting alongside?

Marc: I think that this perfectly matches. I think the question is how to win, but you want to win in a good market.

Ben: Yeah, that’s right!

Marc: That’s why the question, “Where to play?” is always a sibling of the “How to Win?” question. If you are lousy in the “Where to play?” question, you will be inferior in the “How to win?” question because if you’re winning a super small battle in a small market, great! You have won! But you have missed out the big other alternatives, and that’s where I think they nearly need to go hand in hand. And what you’re saying is quite important, let me emphasize this. This question that we just started to discuss for the startups is of equal importance for the large companies.

We’re living in an age where the industry boundaries are imagined boundaries; we have the most successful companies actually moving to across industry boundaries — Rita McGrath calls this competing in arenas — and this is super important for large companies, too. Think about Daimler. Daimler is not worried about BMW’s competition. They are worried about the computer manufacturers, the Apple’s, the Google’s coming into the world of car manufacturing. If you look at Uber, Uber was born as a taxi service, but Uber moved into food delivery, Uber moved from food delivery now into tourism by offering tourism to vineyards, which is a smart idea if you’re trying to taste wine, that you actually have someone driving you. But they don’t care about the industry, they go wherever they can grow.

And look at Google, what they are doing, look at all their different businesses — they go wherever they can grow with their competencies. So what you said earlier with products, you need to look one step below and say, “We have competencies that generate these products” and if you maybe add from a large company’s perspective, AI or drones to the mix of competence, maybe you can do even something else, maybe you can offer new service.

Think about maybe one of the most traditional businesses — construction businesses. If they add drones to their mix of competences, they can offer everything from construction site inspection toward inspection of the fully-furnished site later on because they have all the knowledge about the construction process. In the second step, they will have the advantage to say, “We are actually better able than other companies to monitor the sites and to monitor the degradation of the site over time.”

And also, the logic that is out there is one where you very much now look for growth turf based on your competencies, and the initial question is actually where to play, and once you’ve figured it out, it’s how to win — and then it’s about figuring out a good business model, it’s about figuring out a good customer fit, etc.

Ben: Geoffrey Moore’s “Crossing the Chasm”, talks about leaving the relative safety of your first market to then get into the mainstream and how that’s almost like a trial and error type person. So, are you saying that if you employ the “Where to play?” from the very beginning, crossing the chasm is that much easier because you’ve sort of already identified the stepping stones? I think you actually used the term of building blocks. So, you’re saying that you’d almost build the tower that gets you to cross the chasm.

Marc: Exactly! And if you look at a Geoffrey Moore, he has this analogy with the pins that are falling — you focus on one and then it’s the other. But, in a way, it’s the same logic or a similar logic, where you say, okay, we need to figure out the first one to hit, and which is the most fertile ground that we can foresee, somehow. Then, when we enter there and are successful and go through the diffusion curve — we start, of course, with the people who are highly engaged in this market, there might be opinion leaders who talk about our product, so that we get into this most fertile ground, grow our tree there, to use another analogy, become strong there and then we can say, okay, now we branch out into the other domains that are related.

But what Geoffrey Moore has not explained so well in his book, but what’s basically then, in “Where to Play”, is the logic where you say, what could be this first pin? What are the other domains that we could get in? How can we structure a company or a project so that we actually have the capabilities that are more flexible, so that you can more quickly and more efficiently enter these other domains? This is in a time where everything goes much quicker. These are very important considerations. So, in that sense, I am a big fan of Geoffrey Moore’s book and I think we are perfectly complementary with the thought world.

Ben: Yeah, exactly, it’s complementary because you know that diagram where you sort of jump off one side and hope to get to the other side. You build the stepping stones.

Marc: Exactly!

Ben: Yeah. I think probably it’s natural now to talk about the attractiveness matrix that’s central to the book. So, there are two axes: one is challenges and one is potential, right? So, the first question is, could you talk us through that matrix? And then, maybe, I suppose, as a follow-on, how do you arrive at some sort of objective score for those two matrices?

Many entrepreneurs say, “Okay, yes, we have an idea about the market attractiveness and the challenges” but they typically only take one or two dimensions. They say, “Oh, it’s a big market! This must be good!” Or “Oh, we can make a quick entry. That must be good.” And they don’t see the full picture of what shapes a good market.

Marc: Absolutely! Let me briefly give you an overview, for the listeners. So, the method has three parts. The first part is about understanding the opportunity set, being creative, understanding — like in the Flyability case — where we can apply our drone to everything from inspection of bridges, up to the inspection of avalanche sites — so we have an opportunity portfolio.

When you look just at the description of a few of these examples that I’ve given with Flyability, somehow is almost obvious that not all markets are equally good entry points. Also, you need to have, in a second step, an evaluation, and that’s exactly where you can come in with the matrix. This matrix has two dimensions: it’s a challenge dimension and it’s a potential dimension. And we, Sharon and myself, we screened about 40 to 50 years of venture capital research to understand what type of features are of high importance to make sure that you are able to evaluate early-stage opportunities. And just look at a couple of these features: it’s, for instance, market size, it’s the strength of the customer needs, the ability to pay, it’s about the time that you need to develop the product, the time you need to make the sale, it’s about external risks that you cannot control, etc.

There are a couple of factors that are the main factors that you can get out of looking at these 40 to 50 years of venture capital research, and that’s, of course, not practical for the entrepreneur to go through thousands and thousands of pages. So, what we did is, within that matrix, we have two dimensions: the potential and the challenge — and behind it is a worksheet that helps you to score each opportunity. Sometimes you don’t know how to score it maybe on the market size front, so you would have to do some backup research to understand, is this a small market? How many bridges are there in Switzerland, in France, and in Germany, to understand what is the potential market size.

So, based on the worksheet that has a potential dimension, as well, and a challenge dimension to score, you come up with a summary score that you put, then, in the matrix. This matrix has four quadrants, and also, if you add the potential and challenge, we have the Moon Shot quadrant. This is high potential — high challenge. As a joke, this is the Elon Musk quadrant; everything he likes to do is in the Moon Shot quadrant.

You have low potential — low challenge: these are the Quick Wins; basically, it’s the lower-left corner. You can say, “Hey, I can go in there, I can make an easy living, I can make a first hit.” This might be the first hit that then gives you a stepping stone option towards something else.

You have the Questionable with a high challenge — low potential, where you might wonder if this is a good idea to do. If you feel suicidal, maybe you should do this, but we don’t recommend it.

And then, you have another quadrant, which is high potential — low challenge, which is the Gold Mine; those actually exist. It’s just that it’s low competitiveness, high market growth, strong customer demand, quick sales cycles, etc. And those actually exist, you have to look at them and try to rate them.

What we see with many entrepreneurs before they apply this method is that they say, “Okay, yes, we have an idea about the market attractiveness and the challenges” but they typically only take one or two dimensions. They say, “Oh, it’s a big market! This must be good!” Or “Oh, we can make a quick entry. That must be good.” And they don’t see the full picture of what shapes a good market.

Ben: Yeah. And I think, also, doing it this way removes the subjectivity because we tend to see things from our own prism. That’s a challenge I’ve seen personally.

Marc: Absolutely! You’re completely right! It’s like, either you rely completely on a gut feeling or you are subjective in scoring. But we designed the tool so that it’s a wonderful tool to work in teams with. So, you can say, “Okay, there’s Ben, there’s Marc, there’s Roger, there’s Henry and Fabiola, and we sit together and we are scoring together, and let’s see where we end up.” And at the end of the day, it brings the team together, and they say, “Hey, we did this together. We figured out this is the best point to enter” and I think, in that sense, we didn’t put this to the forefront, but when we observe the teams that apply it — it bonds the team because they discuss and decide the strategic questions together.

Ben: I think is implicit in what you said earlier on, but what you’re recommending is a portfolio approach, right? Which is to say, if there’s a Moon Shot, maybe pick a Quick Win to ally with the Moon Shot.

Marc: I think what you’re describing is very important because if you think about having a portfolio, it gives you additional abilities as a founder or innovator in a large company. Why? Because you actually can say, “Hey, I start here, here or here, and if I want to do the Moon Shot, I’m now more sensitive to the fact that I have to have much more resources, and it takes probably much more time than I expected.” So, you’re a bit more careful. That’s what we typically get as feedback from the people who say, “Okay, we have a Moon Shot, we want to do this. We thought we only needed to raise 200,000 from the VC, but we actually need 5 million.”

But we are not prescriptive at all by saying, “Hey, you need to do this or that.” We leave that up to the entrepreneur or the innovator. Sure, if you want to do a Questionable, go ahead and do a Questionable. If you want to do a Quick Win that is small, and that’s your domain, just do this. But be aware that these are the growth possibilities — and they differ — and be aware that maybe if the Moon Shot or the Quick Win or the Gold Mine should not work out, that there’s a plan B so that you don’t waste all your resources. If you’re more successful, yes, you can start in the first one, and then you’ll move to another one. An entrepreneur is a bit more of a reflective person, which is countering this can-do attitude, the just-do-it attitude — which bothers by now many people. Within the business domain, there’s this mantra of, “Oh, just do it, and then you pivot.” I think that in no part of life, we have this mantra. We tend, as human beings, to reflect a bit before we actually do it. I think, ultimately, what the book is about, is getting a bit more reflection on the whole process.

Ben: Yeah, and having worked with a lot of startups, I think that’s one of the friction points — the founding team suddenly needs to raise money, and then, the venture capitalists or whoever the external investor is, starts to ask all these kinds of questions, and it’s obvious that these were not thought about in ex-ante, right? And instead, they’re retrospectively trying to add this lens of, “This is where we’ll go next.” And so, I think is extremely helpful to have been through this process when you’re trying to raise money, for example.

Marc: Absolutely! What we see is that, from the venture capitalist side, they say, “Okay, if all the companies that apply for funding would be so explicit and so transparent of what they want to do, it would not only help us to judge the venture, but it would also signal to us that these people understand what they do.”

Ben: And you said, also, earlier on, this idea that once you appreciate that you’ve got your first market and you don’t have to do these really harsh pivots because you know where the next landing point would be if it doesn’t work out — you said that that determines things like what you call the company. But there is a whole list of things in the book about the sorts of things that you would want to be mindful of, when you start, given that you are likely to pursue multiple markets given that you’re operating in an arena.

You create a path and that path gets more fortified, stronger with each and every decision that builds on this. You go for a market, you choose your suppliers, you choose the brand name for that market, you develop the distribution network for that domain, etc. So, with each subsequent decision, you are more constrained and locking yourself in, which when you think about it, of course, it focuses you a lot, but it’s also something which with each step, it becomes more expensive, less efficient, more cumbersome to change.

Marc: Yeah. What we advocate is, as a small team, as a small venture — three or four people — to focus on one market, but if you are a large company with 50 people working in innovation, you can pursue multiple markets at once. But, especially when you’re extremely resource-constrained, what you need to do is to say, “Okay, I need to put a lot of agility into my project so that every change that I need to make is less cumbersome, not consuming a lot of resources” because your resources are not endless. And when you think about this, once you have this portfolio view of what you can potentially do, just go back to the Flyability example — once you understand that you can actually go from construction site to rescue missions in the Alps, what you are picking is a brand name that is different, that allows you to do many more things. Number two, what you’re trying, probably, to do is to say, I develop a product — the drone, in our case — which is within a few steps amenable to all these different markets, it doesn’t cost a lot to actually change the product so that it can be applied in all these different domains. So you might want to hire people who have a bit more generalist expertise to understand, “Okay, if this one is a great domain, maybe these people can also work on this other domain later on. It’s how you write your patents, the applications of your technology in there.

So, it has a range of implications that are very profound. And this goes down to the nuts and bolts of the company you create, the project you pursue, and that’s why I think this mindfulness at the beginning is then imprinted into the DNA of the company, of the project you’re creating, and I think that, over time, you’re creating a company that is more agile, has the agility in the DNA, has an outlook on growth that is quite different.

And if you think about the earlier example that I mentioned with Uber — Uber has exactly that mindset. They say, “Okay, we grow in this taxi domain, but that’s not all we do.” No one mandated Uber to just stay in this domain — they could grow in all kinds of different domains.

Now, think about the banking sector, which is quite important for Switzerland. The banking sector, they have this idea of saying, “We have financial services”, but if you move out of this logic, and say, “Actually, they could be about trust services.” And once you’re about trust services, finance is one leg that we could have and maybe there are two or three other legs that we can develop wherever trust is needed among human beings. Maybe blockchain is a key part of the skills we need to acquire and build, in order to be a viable player in trust services. This would be the Uber logic to the financial industry.

the zooming in — zooming out is a prerequisite towards seeing a portfolio of opportunities

Ben: I won’t ask you about blockchain because we’ve made that mistake on previous podcasts. It’s a bit of a rabbit hole.

Marc: They can listen to the other podcasts.

Ben: So, if you set up your company with the notion that it’s a portfolio play from the beginning, you’re saying that it’s almost in the DNA, this idea that you will be agile. So I accept that that’s true, but there’s still the temptation to always double-down on a market that’s working. And so, what else would you recommend to companies to make sure they’re agile, and they don’t become, in the Clayton Christensen sense, they don’t go so deep that they, then, become disruptors for somebody else?

Marc: Look, they can go deep as long as they are realizing that these decisions are creating these deep ditches of past — we call this, in research, “Path Creation”. You create a path and that path gets more fortified, stronger with each and every decision that builds on this. Let me give you an example. You go for a market, you choose your suppliers, you choose the brand name for that market, you develop the distribution network for that domain, etc. So, with each subsequent decision, you are more constrained and locking yourself in, which when you think about it, of course, it focuses you a lot, but it’s also something which with each step, it becomes more expensive, less efficient, more cumbersome to change.

That’s why we call the third step in our method, “The Agile Focus” because you should focus, yes, but keep in mind that once you do these decisions — like with the brand name — maybe you can make this decision in a bit more open-minded manner so that in case it doesn’t work out — and in innovation, oftentimes it doesn’t work out — in case it doesn’t work out, you are able to not fall into this big ditch that you have been shuffling, and don’t die from that.

Ben: And the other thing too, in the book, is “zooming in and zooming out.” So, we’ve come across zooming in — zooming out in the John Hagel context of having multiple time horizons for our strategic planning, but you use it more as in like, when you’re identifying target markets, you want to look at the highest level of what’s the massive group that you could target versus what’s the sub-segment of this industry that could potentially be addressable by the product. Again, what’s the repeatable methodology for doing that?

The rules of the growth game have changed and with it, the applicability of the frameworks and the need for frameworks. If we accept the idea that we are competing in arenas and no longer in industries, all the tools that would constrain you to think within an industry are not as meaningful anymore.

Marc: I think this has very deep roots because, in our research with Ian MacMillan from the Wharton School, we have continuously seen this into an entrepreneurial mindset. The true entrepreneurs and innovators are able to flexibly think about what they are doing — they’re not like a hamster in a wheel and say, “Okay, we have to run, and run.” They have this reflective capability.

Let me give you a simple example. One of the inventors here, at EPFL, one of the professors, developed a stent. This stent is basically for preventing your heart disease. But at the same time, he said, “Look, this is heart disease prevention, but we can apply this in the whole body.” Then it’s about blood flow technology. And if you zoom out one step more, it’s about flow technology — then, you think about pipelines, etc. So it’s like, you have from the very small narrow application within the heart towards everything blood flow technology, to flow technology. And that’s what a good entrepreneur should be able to say: I move out and I move in. The best application might be the heart, I don’t want to challenge that, but it’s like, “Hey, where else could we grow? What is our company about?” This a very profound definition.

And once you think about this zooming in zooming out, you can say, “Hey, that actually doesn’t cost me anything to reflect on this. This costs me a bit of time but makes me understand better what type of animal company I’m creating. So, in that sense, the zooming in — zooming out is a prerequisite towards seeing a portfolio of opportunities.

Ben: So, as I’m understanding, your value proposition is, at its most granular level, and then being able to zoom right from there to what’s the largest possible application. So as you said, with financial services, it’s understanding that we do trade finance and invoice finance, right through to which we’re about trust.

Marc: Exactly! But what I’m describing is only a cognitive process. It is purely how you allow yourself to think about it and then it relates back to what’s the makeup of the founding team or the management team. We have, since 30 or 40 years ago, a lot of super exciting research in the management domain where we see clearly that the makeup of the board, the type of experiences they have, their education is basically foreshadowing what the board will be able to do. So, if you have four people who have studied finance on the board, of course, the likelihood that this company does more finance and has that lens is much higher than them going into another domain.

If you make the same analogy now and say, “Hey, we have four people in finance, and three that have actually a blockchain experience”, guess how this company will redefine where it plays? So it’s a lot about the makeup of the founders or any management board of a company that basically, somehow is able to foreshadow what this company sees in your growth pattern. This insight is not from me. I’ve shown it empirically with my research, but from a conceptual perspective, there’s this late 1950s, Edith Penrose’s “The Theory of the Growth of the Firm” — a wonderful book; I think one of the most fascinating books that one can still read and it’s so current as probably has never been before.

Ben: One application, clearly, of the “Where to Play”, is when you’re starting out. You’re saying it’s also extremely useful for strategy teams and executives in an established company to provide answers about where to go next.

Marc: Absolutely!

Ben: That being the case, do you think it replaces some of the tools that the strategists are using today? For example, the BCG Growth Matrix. Do you think some of these things have become a bit antiquated or obsolete given the way the world has changed, both in terms of the nature of competitive advantage, i.e. that it’s more about the demand side, economy’s at scale, and also, the fact that we don’t have these narrow boundaries of what’s in an industry and what’s not?

Marc: I think that the rules of the games have changed. The rules of the growth game have changed and with it, the applicability of the frameworks and the need for frameworks. If we accept the idea that we are competing in an arena and no longer in an industry, all the tools that would constrain you to think within an industry are not as meaningful anymore. Think about Porter’s Five Forces — it’s a fabulous tool to understand the industry, but it doesn’t help you to understand the growth space beyond the industry — this arena.

That’s where, “Where to Play” comes in play because it actually gives you an idea of what is the growth turf that might be available for you, so it enlarges your perspective. And when you come to the large companies, they are in dire need of this type of perspective, and partly owing to the fact that most of the leaders running these companies were educated in the ’80s and ’90s. They know, of course, from the MBA programs that Porter’s Five Forces is the thing to do — but implicitly this constraints you to the industry. Once you come with an arena perspective, for the large companies this opens up very exciting new growth options. If you look at the interviews that Daimler is giving, the large companies are waking up to that very quickly. They have adopted not fully this mindset that there’s an arena out there, but they are starting to realize that competition comes actually from places they would never have expected.

That’s where they learn through the backdoor that actually there’s an arena, “A computer manufacturer suddenly competes with us. Whoops! We thought it would only be the car manufacturers.” So, they learn through the backdoor that actually there’s an arena to play in, and secondly, what they are realizing as well, is they have this set of competencies, “What else can we do if we now put AI to the mix?” If we put drones to the mix, like this construction company that I was referencing early on, it’s like, yes, you have your constant competence that has been around for 50 years, but now take drones into the mix. What else could you do? You can become a service business that is quite successful.

So, it’s about understanding how, as an established company, you can employ the latest technology, increase the scope of your product offering, service offering, etc. And I think there should not be a threat to any company. This is a wonderful process because it relies on creativity, imagining new frontiers where you can grow, and this is, I think, applied in the right way. It’s a truly exciting process that should energize everyone on the team. I know that the companies are worried because they see there’s competition coming from left to right.

Ben: The other thing that’s, I think, good about it, is it looks from a capability point of view, which is some of the tools that strategists use, and assume that the customer is captive, in a way; because you control distribution, you can just upsell. You know, like the Ansoff Matrix — keep the customer, the customer is fixed and you can sell them more stuff. I think that that’s been deeply challenged as distribution has opened up. And so, again, it doesn’t look at it through that distribution prism, it looks at it through capability prism.

Marc: Yeah. Or you can look at it through a distribution prism as well and say, “What other products could this customer need?” And then you evaluate these types of markets or options with a matrix tool. Our framework is, in that sense, quite flexible.

Ben: So, in other words, it sort of fits around. So, if you’ve got a matrix or a methodology you’re comfortable with, this tends to be always complementary?

Marc: So we are, in a way, highly complementary even to the Porter Frameworks, to the Ansoff Matrix, or to the BCG Matrix. You mentioned the BCG Matrix early on; the underlying question is, where do your new growth options come from? There’s no answer given in the BCG Matrix. It’s just like, “Oh, they’re rising stars!” Where were they born? Someone must have had the idea for this rising star. That’s where, “Where to Play” comes in with its method because it helps you to understand there could be a growth opportunity, a rising star, how rising and is it really a star or is it a dot, and it helps you to understand in the first place what you’re developing.

Ben: Another piece of research you wrote, which is about the characteristics of founders. You used the terms Darwinians, communitarians, and missionaries. Could you elaborate on what you mean by those terms?

The times are over where financial profit and job creation are the only two factors that matter. They are a long over. I think the companies who haven’t realized this are soon in the cemetery of companies.

Marc: With pleasure! It’s actually, one of the research studies that I learned most about entrepreneurship from, or innovation, or life — this is a big term, but I’ll explain in a minute why. We have done this study where we tried to understand entrepreneurs within one sector, to keep the heterogeneity low — it was all kinds of sports-related equipment, and there were entrepreneurs that actually were like the normal brands, very competitive. We said, “Okay, we need to develop something that gives us a lot of return.”

There were other entrepreneurs that were more the thinkers, they developed something for themselves, went on the slopes, for instance, others observed what they did and said, “Can you do this snowboard for me? Can you do this bike for me?” And then, you have a third type where you realize, “Well, these guys are not caring so much about the market, the producers, because they want to sell something, but they want to change the world to a better place.” They are about ethical production, etc.

We started off this project by interviewing these people on why do they actually have these different outlooks of what a company could be? Why would some of them give their invention for free to others, while others would patent protect it? And then, that gave us quite a lot of hard thinking to do.

And with my colleague, Emmanuelle Fauchart, at some point, we had discussions when I said, “Okay, I’ve done this study once, about identity.” And then, identity was basically the key that opened up this puzzle for us, because identity theory allows you to understand on a very deep level, why people do things. And what we did then, is to say, hey, there’s a more generalizable framework within our data, which by now has been applied by many other researchers and what we basically saw is that there are three types of entrepreneurs, pure types, and you can mix and match them at the end of the day.

The pure types would be the Darwinians who say, “I fight for my business, I’m the leader! If others in my market die that’s good because I have a better market share.” That’s one very typical way of viewing business. The others were the communitarians, who say, “Oh, we are within a community, we openly share. We are trying to make the community a better place.” And the third type was the missionaries where it’s about the whole world, “We want to make the world a better place.”

And from an identity perspective, that’s where it becomes interesting in two ways. From the identity perspective, this goes from the “me” to the “known other” to the “unknown other”. How you behave and act depends a lot if you do it for you, if you do it for known people, or if you do it for unknown others. What you expect as a return is quite different, too. If you do it for you, at the end of the day, your bank statement would be bigger. If you do it for the known others, maybe it’s love, it’s admiration, but if you do it for the unknown others, what is it that you’re getting out of there? Maybe you have a better conscience or maybe you’d like to be admired, maybe you want to be invited to talk shows. The motivators are very different, and if we are living in a world where people are soul searching and trying to understand who they are, what they want to do, these types of questions are extremely pertinent. They are relating back and that’s what we found after doing all these interviews, they are relating back to some very exciting parallels in philosophy — you have these three types described, repeatedly.

So, what we basically could show is that within entrepreneurship, we have types that have been for the last 2000 or more years discussed by philosophers as standard types of how we can think about human beings. In that sense, what I said earlier, to help you to understand entrepreneurship and innovators, but also human beings because these three types are the pure types, that are prevalent, but then you have mixes.

Ben: Yeah, what do you call it? A hybrid, right?

Marc: Yeah, the hybrids! If you think about companies nowadays that try to make profits, but also be sustainable, these are hybrids. And how their motivations might be in conflict, how they are aligned, I think identity theory can tell us a lot about this.

Ben: And would you argue that the hybrid model is becoming more prevalent, not because the makeup of the founders is changing, but there’s more constraints imposed by society to look beyond just financial returns?

Strategy and innovation are two sides of the same coin

Marc: Absolutely! I think that the times are over where financial profit and job creation are the only two factors that matter. They are a long over. I think the companies who haven’t realized this are soon in the cemetery of companies. It’s a much more pluralistic approach and it comes from the side of the founders or the managers, but it also comes as a demand by customers, but also by future employees. It’s like, if you want to have the best employees out there — I see it with the students here, at EPFL — if you are only profit-minded as a company, they will likely not choose you. They want to have this second leg, the social consciousness and the third leg, the sustainability consciousness embedded in what they do because they look for this meaning and they know that the world is breaking apart, so they want to work positively in an environment that allows you to follow these other goals.

Ben: I wanted to ask you about the coexistence of “Where to Play” and some of this other research. It feels a bit like “Where to Play” was written for Darwinians, but can it be used by all founder types?

Marc: Yes! “Where to Play”, in its purest sense, is written in the business logic to say “I want to create a company, I want to be successful” which is fine. I don’t want to challenge that. That’s still a model that creates a lot of wealth, that it creates a lot of good, and a lot of tax returns. What we have done now is an add-on that is available on our website where you download worksheets that help you understand if you want to create a social and sustainability venture, how to rate these opportunities and how to understand all the trade-offs between the profit side and the social side. I think this is extremely pertinent. So, the tool is now enlarged with these types of thoughts, and I think, from all the feedback we’re getting from social and sustainability ventures, this is a very important add-on because it allows these entrepreneurs to see more clearly how they could contribute and what it means, actually, to have sustainable and social impact.

Ben: Wonderful! I think there’s one last thing I want to cover. So, in all the years I’ve worked in strategy, each year, somebody, somewhere, some commentator proclaims that there’s a strategy. One of the things that’s great about reading your book is that it’s a return to fact-based, research-led strategy, which enables you to do what is the very heart of strategy, which is to make good choices and understand your constraints. And so, not to put words in your mouth, but I guess you would say that this book and this approach very much represents the triumph of strategy over the emerging school of just pragmatism and pivoting and iteration.

Marc: Yeah, I think it helps to bring both perspectives under one roof because it basically gives you a home for saying, “Hey, that’s more the strategic thinking and that’s more the testing, the reiteration that is needed to validate what you have thought.” So, it brings together the doers with the thinkers, and I think it gives them a home. I think that’s why Steve Blank liked it so much, as well, because it says that’s a part that was missing. He probably gets a hundred of these frameworks to look at every year and has been doing that for the last 20 years, and this is the first time he ever opened his toolbox in the last 15 years or so to say, “That’s a key new tool that needs to be in there.”

But, I think if we frame it nicely, strategy evolves, and I think we are thinking very differently about strategy nowadays than just maybe 15 years ago. And strategy and innovation are two sides of the same coin. It’s just how they work together — one is a world where you have to explore, where you have to investigate, where you have to test and the other is a world where you have to be a bit more foresightful, you have to try to understand where you’re strong at, what a good market turf is. How this interacts, I think it’s nicely described in the “Where to Play” framework because you have the markets you choose, there’s more of a strategic outlook, having a portfolio and then, on top of that, you say, “In order to understand these different options, of course, I need to test! I need to go out there, I need to collect data” but it gives you a framework to think about both, and I think that’s where this addition to the Lean tool makes sense because the Lean tool is one very much where you do experimentation testing, and now this gives you an additional aspect to do strategizing with.

Ben: Perfect! So, for those people who want to check out the toolset — which, as you said earlier, is available for free — the URL is, right?

Marc: Exactly! And I invite everyone. We have videos on there, there are PowerPoint slides that you can download for free, you can listen to webinars — there’s basically a lot of opportunities; For us, this is a tool that we want to see out there because we’ve seen in the research that it works, we’ve seen with thousands of startups and large companies that applied it, that it works.

Ben: There’s no excuse, now, if you blindly enter a market and you have to do a horrible, dramatic pivot.

Marc: Yes, there’s no excuse! Maybe after the first pivot, you realize that maybe you should have read the book and you read the book, then. It’s still valuable. You can start as an established company reading the book and try to figure out the new growth turf or you can start as a startup and say, “Let’s be a bit more mindful about what we’re going to do.”

Ben: Perfect! Mark, thank you very much, again, for coming on the show! That was great. Thank you!

Marc: Thank you very much! It was my pleasure, and good luck for everyone out there!

Putting Marketing Strategy Above Tactics (#14)

Putting Marketing Strategy above Tactics, with Paul MELLOR

Putting Marketing Strategy Above Tactics,
w/ Paul MELLOR

How often does advertising motivate you to buy? According to our guest, ad and branding expert, Paul Mellor, advertising fails 89% of the time. Hosted by Ben Robinson, this episode unpacks what has gone wrong with advertising and what companies must do to turn things around. Don’t be a bland advertising wallpaper! If you like swearing, then you’re in for a treat. Fair warning.

Full podcast transcript:


Ben: [00:00:00] We are with Paul Mellor, one half of Mellor&Smith, which is a London based advertising and branding agency. Paul, welcome to the podcast.

Paul: [00:00:14] Cheers mate. Thanks for having me.

Ben: [00:00:16] We’re recording this in Geneva, and the reason you’re in Geneva today is because you don’t live very far away, right? You’re now living in Annecy?

Paul: [00:00:22] Yes.

So what is the job of marketing? The job of marketing is to create demand. And the job of advertising is to get noticed. Now, people managed to confuse the two.

Ben: [00:00:23] How is it running a London based advertising agency from Annecy?

Paul: [00:00:27] It poses its challenges. I mean, I only moved here just over a year ago. I’d been in London for 15 years, more than that, 15–16 years, and I just got a bit bored. I got stale and I was on the M25 with my wife and kids, and we were stuck in traffic.

I just sort of had had enough… I was telling my wife, I’m sorry, I’m just not doing this anymore. I’m not sitting in the traffic. Let’s go, let’s go and have an adventure. Let’s go do something different. And we met in the mountains. We were both seasonaires, as doing ski seasons years ago. So we, we loved the mountains.

And so we, yeah, we decided to move to Annecy and then I commute back to London every week. So I do a couple of days in the studio in London, and then I do the rest of the week in Annecy and actually my creative is massively improved. In London, I’m… you know, managing the studio and I’m meeting clients, pitches, presentations, whatever it is, the three days that, I mean, so the Wednesday, Thursday, Friday, that, I’m in Annec, it’s just writing. I’m doing the things that clients buy and that is, you know, what do they get?

They get, “creative”… the things that will change their businesses. So that’s what they get three days a week. And that clarity has massively improved. I kind of almost gone back to why us, you know, it’s real in a fire and it’s good.

Ben: [00:01:47] I can see how that could work. So two day are dedicated to sort of meetings, getting stuff done, and then three days are dedicated to what?Marketing is about raw, which is being creative.

Paul: [00:01:56] Yeah. So our, the whole shtick of our business is we get you noticed, so an agency, the vast majority of agencies don’t get people noticed. They create guff. This is meaningless wallpaper. And we get brands noticed, that’s what we do. So how do you do it? We have to like dedicate some time to do it, it’s a really difficult thing to do.

Ben: [00:02:15] Yeah. And the challenge in a way has become harder, right? Because we as consumers are increasingly time poor and more importantly, attention poor, right? So is marketing getting harder, do you think? And therefore is it you’re doing a better job and everybody else has just sort of carried on doing the same? Or do you think that people have got worse?

Paul: [00:02:39] So there are not… This is a very big question. I mean, I could talk probably for an hour on that question. There are a number of factors. The first factor is that the media landscape is ever more fragmented.

If you rewind to the 70s you had a handful of channels available to you, you know, and of which the biggest by absolutely miles was TV. Whereas now the media landscape is really fragmented. You know, there’s a myriad of different channels that marketers can choose, and it’s almost, they don’t know where to go.

And that feeds into the second point. There is a massive dearth of talent in marketing, and that’s because the vast majority of marketers are not trained marketers. They’ve come out, they’ve come out of university having done some bullshit degree. And they go, wow, marketing is cool, isn’t it? And I’ll go be a marketer.

It’s dead easy. Just pictures, maybe some words. And that’s why the vast majority of is rubbish. And is it ineffective? And doesn’t work because the people that are commissioning it don’t know. They’re not trained marketers. Do you ask them, what are the four P’s of marketing, they look at you with a blank face. You know, you fucking moron.

And that then transpires or like moves into briefing agencies. Because you know, if you don’t know what you’re doing, how can you write a decent brief to get an agency to give you the best work? So the agencies get poor briefs, then they produce poor work. The flip side of that is the leaderships within agencies… just Yes Men. You know, I pride myself on being a pain in the ass. I shouldn’t just be a Yes Man. I should challenge and question and, and be difficult into getting to the answer of why this client has a problem. Rather than just accepting, well, this is what I think my problem is, and if, and if a client is prepared to have those difficult conversations, then that is when the best relationships and best work will come out of it. But that’s a whistle stop tour of, you know?

Ben: [00:04:39] Yeah, no, there’s a few things to pick up on there. It’s the first one. Is that what you said there about, you know, everybody thinking they could do marketing resonated with me, right? Because yeah, I remember in the time that I did marketing, it’s like. People feel there’s like, there’s such low, some barriers to being a marketer because it’s really about, you know, colours and you know, everybody understands it, and so it feels really accessible to everybody and therefore everybody has a strong subjective opinion on marketing, which makes the job very difficult. There’s no objective way to spot good work.

Paul: [00:05:10] Well, there it is. So what is the job of marketing? The job of marketing is to create demand. And the job of advertising is to get noticed. Now, people managed to confuse the two. So marketing is if you’re in the B2B side, generating leads, and if you, if you’re really good, like sales qualified leads, like ones that are actually worthwhile.

And if you’re on the B2C side, its shifting more products in the supermarket or you know, whatever it is they sell. That’s the job of a marketer. Create demand. The job of an advertiser is to get noticed. You can’t create demand if nobody knows you exist. So that’s why marketers use advertising. One of the biggest problems there is that marketing budgets have come under a lot of scrutiny and attention and have been cut over the last, there’s a trend over the last sort of 20 years or so that marketing budgets are, in the main, cut. They’re one of the first ones to be cut. When a business comes in, the pressure, which is madness. Why the hell would you cut a budget that gets you noticed if you’re in trouble? Don’t understand that.

Ben: [00:06:18] That’s very cyclical, yeah.

Can you imagine if 89% of an architect’s buildings fell down because they weren’t very good at their job? There’d be a complete outcry, but it’s somehow, okay that 89% of ads are forgotten and money is wasted, like just poured away.

Paul: [00:06:21] Which it shouldn’t be in if you’re in, if your business is, is struggling, don’t cut the thing that gets you noticed, I don’t understand

Ben: [00:06:29] Yeah, cut the oxygen. If we accept, which I’m not sure everybody would, right, but the objective of marketing is to create demand. How do you actually demonstrate causality, right? Because this is a field where I think in addition to everything you’ve said, right, about the fragmentation of the media landscape, the dearth of talent, I think people have become a bit obsessed by ad tech, right?

Because, because ad tech. You know, offered this promise of being able to precisely calculate the exact impact of your marketing. Right? So I would add to your list of sort of ills. You know, this obsession with ad tech, which is…

Paul: [00:07:04] It’s not just ad tech, but like digital marketing as a whole, but ad tech is definitely the problem child within that.

Thepremise that you can serve the right message to the right person at the right time is bollocks. Like, that’s how strongly I feel really strongly about this. Um, delivering a, a message, a perceived targeted message as a perceived, you know, targeted person at this targeted moment. It goes against all accepted marketing, fucking like the fundamentals of marketing, but that doesn’t matter if you’re selling ad tech, you can save a company money because you don’t get any…. The the sell is, there’s no wastage. Well, of course, the flip side is… no one notices what you’re saying because marketing works on broadcast, not narrow cast.

So the difference being, if you serve one message to one person that’s narrow, it’s narrow cast. I don’t know what that message says about me to my peers. I don’t know where I make what I’m signaling… virtue signaling… I hate that term… but I’m not able to demonstrate what I am telling my peers about myself by buying that product.

Whereas if it’s broadcast, everyone knows that that product exists. So if I buy that product, then I am telling my peers something about myself to them about what I stand for. You know, how much money I earn, what I, you know, what things I’m interested in, you know, like what am I, what my values, whatever it is.

And that’s why it’s effective. And of course, just by, just by being broadcast doesn’t mean it is effective, but it is an effective medium and effective channel. You then need to lay it out. With something that’s going to get someone’s attention. So that’s advertising. That’s creative. How do you get someone’s attention?

We do the complete opposite to everybody else. If you are the same as everybody else, you are wallpaper. You are, you are. It’s incredibly difficult to get someone’s attention if you’re the same as everybody else. Whereas if you’re different to everybody else. You will be noticed. And so the, the research that backs this up or sort of steadfastly supports this is the IPA did some research a couple of years ago, the average Londoner, and it’s the same for any built up urban area, but the, the research was done in London.

The average Londoner sees a thousand ads a day. TV, radio, print, social media, digital, whatever it is, a thousand ads. Of those thousand ads, 89% of them are immediately forgotten. 89%! Only 4% of them are remembered positively. 7% remembered negatively You, it’s to get in that 11% is so difficult. I mean, you’d rather be remembered negatively than ignored.

Yeah. To be ignored is, I said. It’s, it is a joke how bad our industry is at its job. Can you imagine if 89% of an architect’s buildings fell down because they weren’t very good at their job? They’d be complete outcry, but it’s, it’s somehow, okay. The 89% of ads are forgotten and money is just poured in and and just wasted, like just poured away.

You would get more traction by just, if you’re going to produce ads that are inside the 89% it’d be better off taking that a hundred grand that you’re going to spend, burn it, film it, and put it on YouTube. You would get more from that. The new world just…

our bland is the result of many bland meetings and brainstorms where no one in the bland team or the rest of the business could agree on anything. We’re like any other bland, unremarkable. It is our point of indifference, our USP, our unoriginal selling point. Why stand out when you were born to fit in? Our promise is to always go on noticed.

Ben: [00:10:53] Which is the band that did that? You remember they got loads of publicity because I think they burnt a hundred thousand pounds. But what I like about, well, I like everything you’re saying, but…

Paul: [00:11:03] Okay, that’s very kind of you

Ben: [00:11:05] But, a couple of things I want to pick up on that really, again, I thought were really on point, right? One was.

Let’s say just hypothetically I could target you precisely with exactly the right message at the right time. Probably the fallacy is that even if I did all that, you probably have an ad blocker on. And even if you didn’t have an ad blocker and you wouldn’t remember it cause it wasn’t very good advert in the first place.

So in a way, this is what I’m talking about, this obsession with adtech because we’ve got so obsessed with the tech and the ability to micro target that we forget that actually you still need to stand out and it still needs to be a good ad in the first place. And then the other thing that I liked about what you’re saying was… There was an academic study at, I don’t know if you ever saw it, but it was like the part of marketing that works is the wastage, the wastage works, which is, because you said, it’s like, you know, when you see a really expensive production on TV or whatever, that has a signaling effect that says, this company has money, this company can afford good actors, you know?

So, so in a way, just because we can’t measure the impact of it doesn’t mean that it’s wasted. Right. Yeah. And then the other thing you said, which I think you’ve referred to… Which is we’re not just trying to build demand, right? We’re also trying to build loyalty because loyalty creates sort of priced inelasticity and allows you to charge more.

And so at its root, it comes down to what you said, which is get noticed, which is one of, you know, we help you to get noticed as one of your taglines. The other one. Which is “take fucking risks”. Right? And the two go hand in hand. Right? Because you can’t stand out unless you’re prepared to say something and stand for something that’s a bit different from your peers, right.

It’s like, yeah. Tell us what mediocrity looks like because you referred early run for this bland guidelines that you came up with. Just just talk to us about that. Cause there’s this, I really liked this when I, when I found this on your website.

Paul: [00:12:50] I produced this with one of the most well known, best regarded, well-regarded copywriters in the world, I would say.

So, Vicki Ross, she’s @vickirosswrites on Twitter. She’s incredible. And so the two of us teamed up and we worked with Grace State, who’s one of our designers in our agency at Mellor and Smith, and we produced that, what we call our “bland guidelines” as a satirical view of the garbage that we see on a pretty much daily basis.

So brands will have their brand guidelines, and that is the, you know, the, the Bible almost, this document that cannot be deviated from that is the thing that that brand stands for and it will contain their vision, mission, you know, their purpose statement. It will, what fonts they’re using, what colors, what imagery, that tone of voice, all of the things.

Right. So you use that and we would get sent that…

Ben: [00:13:54] It is like an inverse correlation, right? Between blandness and the length of the brand.

Paul: [00:13:59] Yes, of course. Yeah. The, the, the, the more bland than longer… And so I get sent these, whenever we’re working with a new client that, you know, one of the conversations we write, send us your brand guidelines so we can see what it is that you think you stand for and all this kind of stuff.

And I, so I see them every day. I would say four or five a week. And they’re all the same. Uh, they all say the same old rubbish that’s so bland and vanilla and meaningless, and they think that they’re being profound and different. And so, you know, I’m in a really good position in that I see lots of them, whereas a brand will probably only see their own.

Um, or maybe a couple of others. And so we, we made the “bland guidelines” as a, almost like a bit of a piss take to these things. Satire. People see it and they go, shit, that’s, yeah, that’s, I was, you know, it’s, I mean, you can post it, but it’s, it says, you know, it’s kinda goes in our bland story. You know, our bland is the result of many bland meetings and brainstorms where no one in the bland team or the rest of the business could agree on anything. We’re like any other bland, unremarkable. It is our point of indifference, our USP, our unoriginal selling point. Why stand out when you were born to fit in? That’s the positioning statement and our bland purpose is to share bland communications with the world.

Our promise is to always go on noticed. The bland personality is we are always Daft. With D standing for Dedicated, A for Authentic, P for Passionate, H for Helpful, T for Trusted.

Ben: [00:15:37] I think Passionate is one of those company values — de rigeur. Like, if you don’t have it right, you miss. You know?

Paul: [00:15:43] It’s like saying you’re honest. Yeah. It’s like trusted. Like the minute someone says that, I’m. Trust me, I’m, yeah, I’m really trustful, trustworthy. Like you are obviously not trustworthy.

Ben: [00:15:55] Like, “I’m not a racist, but…”

Paul: [00:15:58] And then, you know, our bland color is blue and classic ivory. Cause you know, nobody’s that… there’ll be, there’ll be a picture of a millennial. Oh yeah. Yeah. I mean, cause you know, and no, no, no plan is worth…

Ben: [00:16:15] This is worth delving in for a second… because essentially people have pivoted so much of their messaging and targeted to millennials who…

Paul: [00:16:25] Who don’t have any money

Ben: [00:16:27] Yeah, they don’t make decisions in organizations, don’t have any money.

Paul: [00:16:30] Yeah. But they’re cool. And they eat smashed avocado on toast? No. The point, I mean, it’s a serious point. When was the last car ad that you saw that didn’t have a young person in it? Like when was the last time you saw a car ad that had an old person in it? If the over fifties in the US where their, their country in their own right.

They’d be the fifth richest economy in the world yet. And they’re the people that buy all the cars. The new ones. Yeah.

Ben: [00:17:00] Millennials rent them.

Paul: [00:17:01] Yeah. And you don’t see an old person in a car ad, but you’re expecting this old person to buy your car. Like it’s not hipsters that are buying Teslas. It’s 50 year olds. But you wouldn’t think that.

And that’s a serious point. Uh, you know, I mean, obviously it flippantly delivered, but it’s like millennials don’t have any money. They don’t even exist. I mean like they’re not even a thing. The idea that anyone between the age of 18 and 35 is exactly the same. They’ve all got exactly the same.

Yeah. But you know, they, those people don’t have any money yet. You wouldn’t think that for all the advertising that is targeted at them, especially expensive things that costs loads of money.

Ben: [00:17:43] Let’s talk about some of your own work where you, uh, where you’ve taken risks or you’ve, you know, you’ve pursuaded the customer to take risks and you’ve done stuff that’s really stood out.

So for example, on your website, you have this video of the Faulty Towers show in London, and that’s great. So could you just tell us about that, because that is, I mean, it’s, I imagine it was really successful, but it was certainly super distinctive. Right. Whoever saw that would never forget it.

Paul: [00:18:08] Yeah. So there was one of our clients is the immersive theater experience, Faulty Towers, so the TV show, Faulty Towers, they’ve made a theater experience, but you can go for dinner at in like the Faulty Towers Hotel, and they have the actors, the characters playing the part, and you have your dinner there.

It’s been going for 20 years in London, in the West End. Really, really successful. Um, and then there was a new entrant into the market about a year and a half ago and they started to erode market share as you would expect. A new Faulty Towers engine, backed by John Cleese. John Cleese made his own one.

So you think that that’s, that’s clearly, that’s a big powerful competitor in that respect. Cause it’s like the guy that wrote Faulty Towers has gone, well, I can make one of those. So our client came to us and said, you know, we’re seeing that ticket sales to starting to erode. You know, we’re not selling as many tickets as we were, so we need to get out there and tell as many people as possible that haven’t been to this show.

Probably mostly in our audience for people that hadn’t been to the show before, rather than trying to get repeat purchase to come by the show. So we looked at the problem and it, it came to is, you know, our creative answer to that problem was that you needed to get people to experience a little bit of the show.

All right. Okay, let’s do that. What we did was we put the show on the Tube on the Bakerloo line, and we chose that specifically because you can turn it into a dining room because of the way that the booth is kind of laid out and in the middle of rush hour, so we did it. We ran it from five o’clock until eight o’clock in the evening.

The actors on there made the tables essentially put a dinner party. On the Tube in the middle of rush hour, and we didn’t ask for permission. I mean, if we’d have asked, we’d been told no,

Ben: [00:19:53] Imagine the Health and Safety loops, you would’ve…

Paul: [00:19:56] And we ran it and it was incredibly successful. The amount of people that saw that, that was sharing it, the ticket sales, like immediately jumped.

They sold, they completely sold out in the most difficult couple of months. So the next couple of months after that stunt. Artificially, their most difficult months to sell this sold out. They’ve resolved the problem, they’ve taken the fight to the competition, and they’re back to selling out every night when, you know, when they, when they put the show on.

So it completely answered the brief. I’ve got a lot of attention, lots of press attention. So earned media rather than bought media. Um. Really, really successful. I mean, I had to bang out a couple of, you know, a couple of notes to the, the attendance on the, on the Tube, you know, because they were like, what’s going on?

And there was some sort of, Brian and I… In a nice way, you know, like as in, could you just turn and look the other way while we do this? And they did, but they got it. And you know, the commuter in London is notoriously grumpy and they don’t want to be there. They’ve got their face in somebody’s armpit, they’re bit cheesed off, and they absolutely loved it. They absolutely loved it. And it’s real. That’s, that’s pretty risky. And that’s a relatively small, a relatively small client, but I think it’s a really good case study for…

we started talking about Take Fucking Risks, telling clients one at a time — this is what you have to do.

Ben: [00:21:19] Just to come back to this point again, because we’ve completely, I think we’ve agreed upon about 90% of things, but what you, what you are doing there is not only taking risks, not only getting noticed, but you’re also adapting to the new world, right?

Because that’s one in which you’re getting in front of people. Yeah. I mean, you’re not using traditional media to do this. Right. And then also, you know, the, the act of them sharing it and become very memorable and them sharing it on their channels was very important. Success, I guess. Right?

Paul: [00:21:48] So, yes… Yes and no. I mean, there is a difference between digital marketing and, you know, people sharing, just because you share like word of mouth out to your 500 followers on Instagram, it doesn’t mean it has power. Yeah, it has some power, and I’m saying it, it’s just not as powerful as it was. You know, in years gone by. Yes, it is definitely a new, not a new method, but not a traditional method doing a stunt like that, but people have been doing stunts for years.

The, the point here is we shouldn’t be choosing the media before we’ve settled on the idea. The idea comes first and then like the best possible way of bringing that idea to life is that then the media that should be chosen there. We wanted people to experience, you know, a little snapshot of what it’s like.

You know, they, they enjoy that. That little moment. And then they’re going to say, Right, I’ll go and buy tickets for Saturday night for, you know, to go out with the, with the wife for dinner, and you know, on a Saturday night. Right. So that’s, that’s powerful. And the best way to do that, the best way to show that experience was a live event.

It was a stunt, if the, if the best way of showing that was a TV ad. We had done a TV ad. If the best way of doing it was to put it on a billboard, we’d put it on a billboard. We didn’t start with, let’s do a stunt. You know, cause that’s tactics before strategy. You can only get noticed if you’re prepared to take risks.

And we’re not talking by turning the dial one notch away from the competition. We’re talking about doing 180 degrees different. You have to be completely different. But that takes guts to, you know, to, to do that, you have to be really sure that it’s the right thing to do. And it’s far easier just to sit in the crowd in the congested central middle ground in a, in an industry.

And you never gonna get noticed. You never going to get decent return on the time and investment that you’re putting into your marketing, if that is what you’re going to do. So is risky. Now, risk mean different things to different people. And I’ve been talking, I mean, I’ve been running my agency now for nearly 11 years.

Um, and the first four or five years we just kind of getting things off the ground and. Yeah. About five years in, we started talking about Take Fucking Risks, telling clients one at a time, you know, you, this is what you have to do. And selling that methodology and that mantra and that mindset. And what transpired was that it took a lot of effort to tell, you know, one boardroom, you know, one meeting at a time.

And so what, three and a bit years ago, we set up an event series called take fucking risks. And it’s now. Does that mean we started in a pub, which is where all the best ideas start. We were in the pub and we were talking about how could we do this? We set up, we said, well, let’s do an event. The first event, 50 people came along to it.

I couldn’t believe we’d convinced 50 people to come along to an event. You know? No one had never even heard of the event, and that over three years is now grown and we get over 400 people to an event there every quarter. They’re probably the largest creative event series in London. And it’s a, it’s a, it’s a joke.

It’s a side hustle on the side. You know, we’re, we’re an ad agency. We’re not an event company, but we put on. Probably the biggest events series in London for the creative scene, which is, you know, if you think about where the real hotspots of advertising and creative are in the world, it’s London in New York, and we’ve managed to grow an event series in one of those two, which is the biggest, and it’s really, really successful.

And people come along and they, they’re inspired and they should be because it’s, it’s, it’s in your face. It’s not bland. It’s not. It’s not your usual kind of corporate patter. It’s snared lights just smack you in the face and actually make you think, no, we don’t give you all of the answers. You know? We give you a a challenge almost.

It challenges you to think. And I’ve had people come to the event and then email me at like three o’clock in the morning having left the event, had a few beers. Right. And tearing up what I’ve been doing for the last six months. And you know, this might be a marketing director, a brand director, a big business in there, started again and then scribbling in the middle of the night and they’re phoning me or messaging me.

And that’s pretty cool. I mean, that’s like. Yeah, I’ll have a bit of that.

Ben: [00:26:09] So in a way, you’re sort of with this, with this events series, in a way , you’re eating your own dog food, right? Because you, you’re using the events series a/ to stand out and b/ as a marketing tool of your own, right. Because, cause it seems to me that what’s disappeared a bit in the marketing… Because, you know, I don’t want to go into this territory of marketing is dead or whatever.

But it seems that some parts of marketing don’t work like they used to because. Because, um, if this attention deficit problem, and I would agree with you, the advertising is still as important as it was and brands are more important, they are than there were. Because, you know, because we need the signaling effect and have super busy environment.

It’s a crowded environment. But then the stuff that was more targeted, I don’t think, you know. Press releases work particularly well, or webinars or any of these things. But what does seem still work really well is actually getting in front of people and on a personal level, having quality time with them, doing really high quality events.

So you’re kind of in a way, you know, living or you know, are subscribing to your own self doctrine.

Paul: [00:27:11] If you have a different. I am one of the very few people that talk like this in our industry, so you know, Oh, I’m going to get challenged. And so I should, the easiest way to combat that or that scrutiny in that challenge is to practice what I preach and we do.

Ben: [00:27:30] And so it’s a good lead generator for you? The event series?

Paul: [00:27:33] I mean. You know, people aren’t like coming along to the event and be like, Paul, here’s a million quid. You know? But it’d be lovely if they did, but it’s definitely a lead generator. It’s an interest generator. We are, people are aware of. Who we are and what we stand for.

And so then we are hopefully top of mind when the opportunities come along, you know, where they want to reach out to a review, their agency that they’re working with and that kind of thing. So it definitely has generated business and, and, and we’ve won business off the back of it that we wouldn’t have won otherwise.

You know, I think we can be fairly confident of that.

Ben: [00:28:09] And a general brand awareness that’s outsized compared to the size of the agency, right?

Paul: [00:28:14] Yeah, we’re really small, yeah.

Ben: [00:28:15] When you talk on the website about keeping a purposely small team, which I mean, certainly it’s something I would, you know, adhere to as well.

Right. Which is, I think you can’t produce really high quality work on a consistent basis if you’re running a massive team.

Paul: [00:28:31] If I spend all my time managing people, then how can I produce the best work. No, it’s a, it’s a blend of the two. So we are a team of 10 and we’ve never been more than 10 and we’ve been going 11 years.

Ben: [00:28:43] And even if, you know, even if people were coming to the, I’m going to call it TFR cause I keep saying you split the TFR events. Yeah. And they were giving you million dollar checks. You still wouldn’t go above 10 right. You just think you’d just be more selective about who you worked with.

Paul: [00:28:57] And we are selective over who we work with as it is not because you know, we’re Johnny big time and therefore we can pick and choose.

But you know, you have to. You have to want, you have to fancy it. We’re not just going to take the check. We’re going to want to produce the best work, and so if you, you as a brand that you as a marketing director or CMO aren’t interested in actually producing the best work, then we’re probably not going to get along.

We were really clear about that and what actually makes us really easy to work with because. Do people know what they get? You know there’s, there’s no kind of hidden agendas. So people were really clear and obvious up front about what we’re like to work with the, the benefits of working with us. There’s no obscurity, and that’s the, I think people value that.

I mean, how many times the big brands, you know, choose a vendor and then actually, you know, three or four months down the line, it, it’s, it’s, it’s my head in arguments and debate and, well, I didn’t know you’re going to do this. I didn’t know this was going to cost more or whatever it is. Now we’re just really clear upfront and I think people appreciate that.

Ben: [00:30:02] Where do you stand… I mean, what’s your measure of success in terms of, I mean. We can come back to generating the minor stuff like that. But do you have broader measures of client success and you know, do you, are you like really fixated on client retention, or do you actually think it’s quite healthy when clients change agencies from time to time because they get fresh perspective?

Paul: [00:30:23] I have no time for brands or clients that change agency for no reason. Yeah. The average tenure of a CMO is now 18 months. The first thing that the CMO does is put the agency out for review. So you’ve got agencies pitching for work every 18 months. It takes about, if you, if it’s a big brand, and we work with some massive brands, we work with the biggest… Branding a lot. We worked with Amazon, you know, as one of our clients, and we worked with some small startups and sort of everything in between. You know, if you, if you go for big pitches with these big, big brands, you have Fortune 500, FTSE100 businesses. It takes a year to recoup the pitch cost.

So if you, if you’re on review every 18 months. The agency can’t make any money. And so then what’s the incentive, you know, to actually produce the best work and to go above and beyond. So that’s, that’s a really big problem in terms of how do we, you know, what do we fixate on other than getting brands noticed, client retention 100% so, like I said, we’ve been going nearly 11 years.

Our longest client relationship is nine years. We, we. Absolutely, to the point of paranoia about working with clients and understanding their business. We work with some of the biggest brands in the world, some of the smallest ones, and we are fixated on serving them, but not, but not delivering a service that is just, yes, yes, yes, yes, yes.

It’s now, well, let’s produce the best work. You will see the best results, you’ll then want to work with us more. Yeah, it’s really, it’s a really simple equation in my book, and I hate complexity, so I want to keep it really simple. Clients have got difficult enough job as it is, and it makes it sound like I’ve got a problem with clients.

I really don’t. I’ve lot of empathy with their situation. Like I said, like the average tenure is 18 months for the person at the top of a marketing organization with the big brands, you know, that is, and they’re under a lot of pressure to deliver. So I’ve got. A lot of time, a lot of empathy for the situation that essentially my client is in.

This isn’t me just bashing the person cause that’s really lazy. Um, fucking yes. No, it’s no good. You know, you’ve got to understand the pressures that they’re in. I mean, I might speak to my client for two or three hours a week. You know, so that what, let’s call it 5% of their week, that’s got to be the most thought provoking, the most challenging, but also the most fun 5% of their week because the other 95% let’s be honest, you know, corporate life can be really dull and really challenging at times.

So why the hell would I make my 5% it should be fun. It should be challenging and should be the the reason they’re in the business in the first place. Why would I make that the same as everybody, you know, same as the rest of their week.

Ben: [00:33:16] We should add, so into your initial list of all the ills in the industry, we should add sort of shrinking time horizons and shrinking tenure because you know there’s a definitely a positive return on time.

You work with the client because you understand that business better and you’re able to sort of craft the messages better. You understand the industry better, you know? Do you think this shrinking tenure of CMOs is. I mean, first of all, why is it happening? Is it because people are more and more impatient to see this, you know, return on investment?

And then do you think it also contributes to this, you know, this sort of returns and you know this like. Returned to mean what everybody wants to do something that’s a bit blind because they don’t want to lose the, you know, you don’t want to be kicked out after 18 months is do you think that’s also part of why you know so much marketing is indifferent and…

Paul: [00:34:09] I think it’s definitely, it’s a contributing factor, no doubt.

Like I said, I’ve got a lot of sympathy for the situation and that’s because that CMO is under a lot of pressure. There’s a board to report to the might. They might be on the board or they might report into the board and there are shareholders to satisfy, you know, you’ve got quarterly earnings reports, you know, to deliver on.

If a new CMO comes in, they’ve probably got three… Or they’ve got a month to tear it all apart because that’s the first thing they do. They’ve then got three months to come up with a plan. You know, this is what I’m going to do. Having, you know, again, torn up the plan and then they’ve got six months to implement that and start to see some results.

So they’ve got less than a year having come in fresh, knowing nothing about that business, potentially having no track record within that business. They’ve got a year to deliver some results. So of course, you know, their natural instinct is to put a lot of time pressure on their suppliers, their vendors of which an ad agency is going to be one of them. To, to get results immediately, but then you think that’s, you’re not going to get the best out of an agency if you go, you’ve got a week to come up with something. The fucking all right. Yeah, I can, I can think of an idea. We can find an insight and we can create an idea based on that inside a week.

Yes, we can. Is it going to be the best one that you can have? No, probably not, because it takes time. These things take time and you have to trust that you’re speaking to the right person. You need to trust in their skill and let them do their thing. And I’m not saying we need a year, we just need slightly more than no time.

When I, when I started in this industry, I mean, how long have I been in the game? 16–17 years, something like that. There was definitely more time when I started and it, and that really was the last part, you know, sort of the last moments of time. Being allowed for agencies. And I’ve just, I’ve seen it been eroded from that moment.

And there’s, it’s, it’s no coincidence that that was when the, uh, the internet really started to take off digital marketing to air, to go ad tech followed up a few years after that and then budgets started to be cut and, and, and all of those things happen at the same time. It’s almost like a bit of a perfect storm of components all coming together.

And, and we’re now at a moment where more and more ads. I just, it’s just a waste, like I said, 89% it’s just wallpaper. You walk down the tube in London and you walk anywhere. People are just walking past. Yes. This is wallpaper.

Consensus creates mediocrity. I’m not interested in consensus. Hate compromise. I’m interested in producing the best possible work.

Ben: [00:36:45] This shrinkage in marketing tenures and shrinking timescales and impatience to get returns is because of what you said, which is people have become obsessed that because we’re in a digital age, marketing has to be done very differently.

What’s your advice to a CMO? You know, it’s, it’s, you know, it’s a well remunerated function, but it’s a function where, as you said, right, the tenure is shrinking, how do you do, how does this, what are the characteristics of a good CMO? What, what should a good CMO do what I mean? When you work with good counterpart style CMOs, like what do they like?

Paul: [00:37:21] There is a mutual respect both ways. I think that’s the first thing. They don’t just. Treat me as a a doer.

Ben: [00:37:28] Supplier.

Paul: [00:37:29] Yeah. Like I’m like, I have a value and conversely, I have a lot of empathy and appreciation for the pressures of their job. So like a mutual respect going both ways. That’s the first thing.

The second thing is an understanding that they can’t solve all of their problems immediately. They need to assess what are their biggest problems. Uh, the ones that are the most critical and solve those ones really in, if we’re being really honest, they should do a complete assessment of their, uh, of the landscape in front of them when they join.

And then they should pick three biggest problems that they’ve got solve those three problems. Don’t try and solve a hundred, solve that, put all of their effort, all of their money, literally every ounce of focus into solving those two, three, or four problems. Yup. Solve those. They clearly, if they’re the biggest ones, they’re going to have an impact on their job and the desire to keep the role that they’ve got and to, you know, grow their influence and impact on that business. But that takes leadership, that takes experience, that takes a desire to actually solve the problems.

Being a D2C brand isn’t the same as therefore throwing the rule book out the window and going, well, because we’re D2C, we can avoid traditional media. We’ll do everything digitally. No.

Ben: [00:38:40] Do you think educating the other management and the board is a function? Because I remember when I was a CMO, right? I mean, we were killing it on all the sort of metrics that you, you and I would agree are important, right?

Lead generation, conversion of leads, share of voice. And then, you know, you’d be presenting on this kind of stuff. And then someone would say, yeah, but was in the Dubai office and I didn’t like the poster in the toilet, you know? And it’s like, how do you get everybody to the same level on marketing?

Paul: [00:39:05] So let’s just say the person that said that was the CFO.

I be like, I don’t like your accounts. The point there is he then go, Whoa, I’m a trained accountant. So, and I go, well, I’m a trained marketer. So, you know, I’m not antagonistic for the sake of it. Like I would make the point that you don’t have an educated opinion about that poster.

You don’t, like, I’m the marketer. I do. I make the poster in that instance. Yeah. I didn’t tell you how to do the accounts. Have some respect for what I do, and I have some respect for what you do.

Ben: [00:39:45] Yeah. And I think it comes back to the same point you made earlier on, which is, it’s, you know, it’s, it’s. It just feels so accessible.

So it feels like everybody’s entitled to have a strong voice about marketing, but you’re right, it is actually a profession.

Paul: [00:40:01] Yes. Consensus creates mediocrity. That’s Oliviero Toscani’s quote, I’m not interested in consensus. Hate compromise. I’m interested in producing the best possible work. And so that isn’t a team, that isn’t the board.

You know, 15 people signing off on the campaign. That’s one person, the CMO signing off on a campaign.

Ben: [00:40:24] So somehow she needs to have massive autonomy when it comes to,

Paul: [00:40:28] Yes. Because in the same way that all of the other people that make up that board also have autonomy. Like the chief tech officer has autonomy.

The head of product has autonomy. The CFO has autonomy. The head of supply.

Ben: [00:40:42] Yes. It’s so true because, and then when it comes to brand, there’s you in these endless workshops seeking conformity and you end up with the, with the kind of work that doesn’t stand out. You know, just want to revisit for a second this idea of ad tech, right?

Because one of the things that people say is that it’s launched a whole bunch of. New companies direct to consumer companies will be parked when people like that, and when I hear that, you know, I think part of it’s true, right? Definitely the internet has created a new route to the customer. Yes. But I think the bit this misdiagnosed is the somehow the actual marketing effort, the messages and all those things don’t matter anymore because what is in a way, or listening to you, I’m thinking.

What people like Warby Parker had was sure, they had a D2C, you know, a direct route to customer and they could listen to the customer and the feedback that, you know, those insights into the products and these, you know, and in a way, companies historically had itself more in direct relationship with the customer.

So that’s changed. But, but really what’s changed is that the big companies are changing their CMO over 18 months. They’re not standing out. They’re not coming up with personality and interesting messages, and so that’s created an opportunity for smaller companies to do it better. I think it’s almost like, I think we’re almost misdiagnosing the problem by saying it’s…

Paul: [00:42:07] Being a D2C brand, so direct to consumer. Isn’t the same as therefore throwing the rule book out the window and going, well, because we’re D2C, we can avoid traditional media. We’ll do everything digitally. No, this D2C just means you don’t put it in a shop. It’s not sold to a retailer. That doesn’t mean all other rules and all other practices that work should be thrown out the window and it’s, it’s, it’s madness. The reason why Dollar Shave Club, incidentally, are sold to Unilever. They sold, they didn’t for… Maybe it was maybe a billion, huge number.

Ben: [00:42:52] You sort of, you know, you unbundle Unilever and then you can rebundle on the Unilever. So it’s this massive transfer of wealth from Unilever.

Paul: [00:43:00] The reason that was successful. I mean, it was successful because it was a D2C brand, but the reason it was known and was successful wasn’t because of their digital media, because they didn’t do a great deal of that.

It was because the launch video has been watched 100 million times on YouTube. Like that is, that is the reason it’s successful. That’s the reason why you know about that brand. And I know about that brand because the launch video was a piece of genius and it got noticed. It was different to every single other launch period.

Ben: [00:43:32] But I think there’s also the business model change as well

Paul: [00:43:35] Right. Cause he changed the game. I get that. But that wasn’t the reason for success. The reason for success was because millions of people had heard about it. And then they were like, Oh, and I don’t have to go to the shop and I don’t have to spend 25 quid every time I want to buy a razor.

No, I can spend a couple of dollars a month and they get delivered to me and they’re decent razors. That’s the reason why they delivered direct to me. That was the reason. You know it grew, but the reason was because everyone had heard of it. And the reason everyone had heard of it was because they got noticed.

And the reason everyone saw it was because they were different in how they pitched themselves. They took a risk.

Ben: [00:44:16] But do you think that within marketing, the sort of relative importance of the four Ps might have changed a bit, i.e. That maybe promotion isn’t quite as important as it was relative to the product, cause the product, you know you have or visibly price or visibly place because.

In a world where the consumer has a bigger voice and the consumer has a bigger impact on sales, you might argue that product matters more.

Paul: [00:44:49] Is your point that the weighting…. Did you have a point that I haven’t though that that’s, that sound fair is the point is the weighting change.

Ben: [00:44:59] It seemed to me that in the past, right, and the, let’s call it the industrial age, right?

You could have pretty crappy product and you, if you spend enough money on broadcasting it through, you know, through mass communication channels, you could sell it. And part of what’s changed is the. That those same communication channels don’t work as effectively as they used to, which we’ve talked about.

And then part of the problem is, is also the, you know, the consumer has more power than they had cause it was, consumer has a big voice and the, and we know more about a consumer. And so we have to make better products as well. And I think this is. Alongside the, the desire for something more sustainable, locally sourced products, or I think the whole sort of hipster movement in a way, it’s like a desire to have just better quality stuff because we can, because we can afford it because…

Paul: [00:45:47] No, I don’t agree. So the, the, the, I think people have been bothered by, you know, decent products since the dawn of time. And actually, you know, if you, if you go back to where really, where like consumerism started.

Probably in the US you know, at the turn of the turn of century, the products were really good. They were built to last. It’s only as you know, product semantics and the, the idea that we’re designing a product. To last a year so that then somebody buys another one and then another one we can make more money like that.

You know the idea that really only came in over the last sort of 20–30 years or so, I think, you know, if we think back to where consumerism has started… the products were built to last and they were really good products. Now there were less products, there was less competition, there was a far more open competitor landscape. You know, it wasn’t as crowded, but I don’t agree that the, the, the weighting has changed. I think it’s really important to stick to those and give them the weighting that we always have. The, the, the, I suppose the, the slightly larger point here. Is that it’s way easier to sell a dream if you can say, this old thing is dead.

I have the answer to the new world, like, who the hell is ? Oh shit, I don’t wanna get left behind. Let me listen to this person. And it’s a snake oil salesman and I think no, like, and nobody ever got rich by saying it’s largely going to stay the same next year and that’s it. Sticking to traditional methods is what will grow businesses and brands, but that doesn’t, that doesn’t grow agencies, and that doesn’t keep CMOs in tenure. They need to be able to go, what you’ve been doing for the last 18 months is all rubbish. Right? I’m here to save the day. And that’s, that’s not, don’t do that. You look at some of the most successful brands in the world.

They don’t swap and change that senior leadership that often, you know, it is really stable tenure. These are the really senior levels and the trust in those people.

Ben: [00:48:01] I think the point I was trying to make, which is I guess there’s a truism and you wouldn’t contest, which is that in the past you could have relatively mediocre product and great marketing and that would work.

And now you could have, um. I think it’s just, it’s harder with an mediocre product and great marketing. I think you need it. Great. But I think great marketing is what I’m saying.

This idea that influencers are this brand new, shiny magic bullet that are available to marketers is rubbish. It is the wider point that word of mouth and having advocates that, you know, people that are a consumer of that product and then they advocate it to their friends. That is incredibly powerful.

Paul: [00:48:22] Yes. And that’s always been true. Yeah, I agree.

Ben: [00:48:24] So you’re just saying it was a universal truism. And for a while it wasn’t true because, because you know, the TV was just such a dominant, yeah.

Paul: [00:48:32] It’s like TV is still very dominant. It isn’t quite as dominant as it was. You know, it might slip a percent in terms of the, the amount of eyeballs that it gets over a period of time. And then, you know, the minute it slips from 90 to 89% or something like that, you know, the TV is… like, are you, are you insane?

No, it’s just ever so slightly, not quite as dominant as it was. Is there a general trend that, that the media landscape is changing and therefore you have? Yes, but we like, it moves really slowly those types of behavior changes. Not nearly as quickly as people think that it is. And if you’re selling ad tech, then you’re like, this is the end of the world.

You must, you must change. Like, no, that is not the case is the, is the point you’re making. Sorry. The point you’re making is. If you had a mediocre product, you could just put it on TV in the 70s you could do that and you’d get away with it. Yeah, you could. Now, if people see through that and the consumer is more powerful, but that doesn’t mean that the four P’s don’t, sort of sit as well as they did.

Ben: [00:49:36] And then on that point about, because it seems to me that a lot of where marketing’s changed as well as maybe, maybe again, it’s not true. Maybe I’m sort of exaggerating, but this idea that. You know, we’ve gone from something having a mass consumer it to what people call now multitude, right?

So multitude and this idea that the consumer is networked. The consumer therefore becomes way more important is an advocate of the product. And I guess anticipating we are going to say you need to create that emotional pull. You need to get the consumer excited through marketing, but where do you stand on things like influencers?

Paul: [00:50:14] I think it’s bollocks.

Ben: [00:50:16] I suspected you were going to say that…

Paul: [00:50:17] But yeah, no, I mean that. Eh, this idea that influencers are this brand new, shiny magic bullet that are available to marketers is rubbish. But brands have been paying celebrities to endorse their product for decades. And that is an influence. Is that is the wider point that word of mouth and having advocates that, you know, having people that are a consumer of that product and then they advocate it to their friends. That is incredibly powerful.

Ben: [00:50:49] But in a way, it’s like everything that we talked about, it’s true. Right. And it has been true forever, which is if I love the product, I’ll tell my friends.

Yeah. I suppose we’ve amplified the voice of the consumer now. So the consumer kind of advocating on your behalf has more impact than it did in the past…

Paul: [00:51:03] Why?

Ben: [00:51:04] Well, because the consumer is connected.

Paul: [00:51:06] But that would be to suggest. That just because they’re connected, it has value in that connection.

And I don’t think that’s true. So the 1960s housewife. Ah, that would sit around with their friends. Let’s say they got, you know, a bunch of other housewives round for a cup of tea and there’s five or six of them that is very influential. Like they’re able to, like you said, like look them in the eye.

I’ve got this thing probably holding the thing that they’ve bought. I bought this thing and it’s great. That is really powerful. I’m putting on Instagram. I bought this thing and it’s great… Doesn’t have the same power and resonance. And just because it’s then broadcast to your 500 followers on Instagram doesn’t mean then that you’re influencing 500 people rather than five.

I don’t agree. I don’t, I don’t think that it is anywhere near as powerful or have as much resonance just because it’s on social media. I agree that it has bigger reach as in like it goes further, but I don’t think it’s as powerful.

Ben: [00:52:10] In a way, whether we agree on that or not, the conclusion is the same, which is you want a product that people love and you want a brand that people love.

Paul: [00:52:18] That should be the starting point.

Ben: [00:52:19] Yes.

Paul: [00:52:20] And not, let’s get lots of people to put on Instagram how much they love our product. Just get them to love your product and they will do a lot of the leg work for you.

Ben: [00:52:28] What’s next for you? So. What are you working on now? So I guess you’re already planning the next TFR event for next year or the other events for next year.

Are you going to do anything with this “bland guidelines”? You’re going to turn that into some Mock Award ceremony. That’d be hilarious.

Paul: [00:52:47] So I was speaking on a panel with Vicki, the copywriter that wrote it when we produced it with, and I was speaking on a panel last week, and we’ve become really good friends and we speak on relatively regular basis, but actually we’d never spoken on the same panel and we were getting drunk on the panel cause it was in a pub and we just kind of turned to each other and said it would be great to present The Bland Book together at conferences and things and actually take people through the book and present it to them together.

So the, the copy side of it and the art direction side of it. Shakara advertising in a duo to, so anyone out there runs conferences that wants us to present The Bland Book should get in touch because that would be a really good fun thing to do. And I think it’s really powerful because I think it’s almost like a shock tactic.

People go, wow, right? And they see themselves in it and it’s really. I think one of the powers of, of the satire, so anyone that wants to book me for that, me and Vicky will, will definitely come along. It’s a plan for next year. We’re going to do more TFRs. We don’t have the date for the next one, but it will be probably in March.

We did. We don’t really do things January, February because, well, I’ve got to think about what we’re going to do…

Ben: [00:53:57] Skiing, right?

Paul: [00:54:00] And then what’s the plan for us? We’ve got quite a few. Really cool projects in the pipeline that we’ll be launching in Q1 of 2020 so yeah, we’re going to be doing that, getting, you know, getting our name out there as much as possible.

Ben: [00:54:13] By the time this goes out, I’ll probably already be February. Yeah, you wouldn’t have to wait for this.

Paul: [00:54:18] So there is some work launching right now. Insert project.

Ben: [00:54:23] Great. Paul, thank you so much for your time. So I’ve, I’m going to attempt, I think, badly to try to summarize what we discussed, but, and I think what you’ve told us, right, is you’ve, in a way, you’ve brought us back to first principles, right?

You’ve debunked a lot of the crap that people talk about. You’ve highlighted that marketing is a discipline. It is a profession that brings demand, gets you noticed. It can be measured, but can never be precisely measured. And that’s, you know, that’s a rabbit hole that we shouldn’t go down. Right.

Paul: [00:54:51] And that’s Okay.

Ben: [00:54:52] Yeah, that’s okay.

And then the tool set may have changed, but it’s not about the tools anyway, which is my ultimate conclusion, which is Strategy and Craft matter. And they matter more, probably more than they ever had. Right. Because consumers are more attention-poor than ever. Yeah.

Paul: [00:55:09] It’s more important to be really good at what we do than it has ever been.

Ben: [00:55:13] Amen to that, thank you very much for coming in and doing the podcast with us.