Transitioning to a Multi-polar World (#30)

Mike O'Sullivan on Structural Shifts podcast

Transitioning to a Multi-polar World, w/ Michael O'SULLIVAN

Your host, Ben Robinson, is joined by Michael O’Sullivan, author of ‘The Levelling: What’s Next After Globalization’ and former CIO of the International Wealth Management Division at Credit Suisse. Michael currently serves on the World Economic Forum’s Global Future Council on the New Economy. In this episode, Ben and Michael discuss what is the role central banks will play in the transition period to a post-globalization, multi-polar world; what international organizations should be completely reshaped to meet the needs of this new world, what new institutions should be created, and more.

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Michael recommends:

  1. One book: “Putin’s People: How the KGB Took Back Russia and Then Took On the West” by Catherine Belton
  2. One influencer: Chris Watling of Longview Economics
  3. Best recent article: Work done by Lisa Sanders for the The New York Times
  4. Favourite brand: “La Femme sans Tête”, bières artisanales de Paris
  5. Productivity hack: be ready to say ‘no’, politely.

Globalization is ephemeral, it’s in the ether, in the sky, in the way that people tend to look at it. There’s no ministry for globalization. So, it’s quite hard to get a grasp on it.

[00:01:23.24] Ben: Michael, thank you so much for coming on the Structural Shifts podcast. I’ve been really looking forward to this because it has been delayed a couple of times, but we finally got to do the podcast.

Michael: Yes, thanks! It’s a great pleasure. I’m delighted to do it.

[00:01:36.27] Ben: I wanted to kick off by just testing a little bit the premise of your book, ‘The Levelling’. Is globalization really over? Or are we just in a period where it’s sort of temporarily in retreat?

Michael: No, I think it’s dead. I think it’s over. I think there are many people, I suppose, for good reason, whose fortunes are tied to globalization, who don’t want it to be over, who deny its passing. Maybe it’s been dwindling as a force — in the last two years, we have been storing up many of the side effects or the perceived side effects of globalization. And that, I think, it’s been dealt a fatal blow by COVID. And I should say, I’m in favor of globalization. I mean, it’s done so much good. Billions of people have risen out of poverty, it’s transformed cities like London, Dubai, etc, it has given us so many technologies. So, I’m in favor of globalization but my reading, as it were, of the situation is that it’s dead and going. We’re moving on to something else now.

[00:02:50.15] Ben: And how objectively can we show that it’s over? Because, again, might it not just be changing form because, if we look at financial flows or trade flows, sure, we can show that it’s in retreat, but what about things like the flow of data? Is it not just becoming more digital?

Michael: I think there’s maybe three things just to bear in mind. One is that globalization is ephemeral, it’s in the ether, in the sky, in the way that people tend to look at it. There’s no ministry for globalization. So, it’s quite hard to get a grasp on it. We do have the benefit of history that we’ve had a wave of globalization from 1870 to about 1912, which looks very like what we’ve seen in the last 30 years or so. And that wave of globalization came to a juddering halt with economic crises, nationalism, etc. So, all of the warning signs are there. And then, thirdly, if I debate globalization with people, what I try and do is bring that debate down to indicators — the movement of people, the flow of ideas, trade — and all of those have been coming to an end, they have been cut off in different ways. So one example I give is that globalization began with the fall of communism, the opening up of Eastern Europe — not just economically, but democratically as well — and now we have events like the shutting of democracy in Hong Kong, which is the bookend to what happened with the fall of communism. You mentioned digital globalization. I think that’s quite interesting because tech and digitization have played a really strong role in globalization but the channels of digitization are being funneled in different ways. So one example I give you is Google in the early 2000s had about, I think, a third of the search market in China. Now it has close to zero. So, what we’re actually seeing is we have more digital activity, but it is becoming more regional. You look at TikTok as another example — potentially global company now being shuttered in terms of how it can be used not just in the US, but also in China and other parts of the world.

One of the problems we have, there really is no Minister or Prime Minister for globalization. It is an interconnected, interdependent activity, and many of those interdependencies are breaking down. In our world, the role of the nation state is still very, very important —Michael O’SULLIVAN

[00:05:18.01] Ben: Why do you think is over? Because as you yourself said, it’s had massive, massive positive effects. It’s a positive that raises economic activity and wealth for everybody. So why do you think it’s overall coming to an end?

Michael: I think that the prime concern I would have is that the economic engine of globalization has slowed. So, in many emerging countries, the rate of growth is slowing. In the developed world, productivity has been slowing — notably so in countries like the UK, where it’s at multi-decade lows. The financial side effects of globalization, the negative ones have been rising, so the world is becoming more and more indebted, which will slow future growth. And then, there’s a range of economic problems that people associate with globalization, such as inequality. To my view, it has really, nothing to do with globalization, but rather the way individual countries have harnessed it. So if you look at the most globalized economies in the world — Ireland, Netherlands, etc. — the income inequality in those countries is actually reasonably well managed, because they use tax to distribute the benefits of globalization. If you look at the US, where inequality is really egregious, they have not used their tax system to spread the benefits of globalization, and that creates discontent with globalization,

[00:06:52.07] Ben: Had globalization been better managed, then it wouldn’t be coming to an end?

Michael: I think that’s largely true. And I think one of the problems we have, there really is no Minister or Prime Minister for globalization. It is an interconnected, interdependent activity, and many of those interdependencies are breaking down. In our world, the role of the nation state is still very, very important. I think COVID is a great example of this: different countries have managed and digested globalization in very different ways with different consequences.

The post-globalized world order will be a multipolar one. What I mean by that is you’d have at least three big regions: China, Europe, the US — for the reason of their size will be dominant but also who will do things increasingly differently — Michael O’SULLIVAN

[00:07:35.16] Ben: You talk quite a lot about Brexit in the book. I suppose we should see Brexit as being part of something bigger, i.e. the end of globalization. But can we really draw that conclusion? I mean, could Brexit not just have been a political mistake, a referendum that should never have happened, a unique set of circumstances? You know, the refugee crisis, etc. Can we not just see Brexit in those terms? I mean, does it have to be read as part of this end of globalization?

Michael: That’s a very good question. To give context, we’ve had two big waves of globalization. The first of the early 20th century, which was led by Britain from London. The second was an American wave of globalization. So, both waves have been led by Anglo-Saxon countries. And the two main Anglo-Saxon countries — the US and the UK — are now in political crises. That much is clear. And those political crises are also crises of globalization. In the case of the UK, I think there is an argument that the calling of the referendum, or the way it was constructed, was accident-prone and could have been done better. I think, however, the way I tend to look at globalization, it’s like a big block of ice that’s begun to fragment and the first really big crack in the world order was Brexit — something that many people thought would be inconceivable happened — and that respected was the first shock, and I think the first really big event that’s taken us into the post-globalization age. And why I’m convinced that it’s linked with globalization is that many of the underlying problems in the end of globalization argument — low productivity, inequality, a country dominated by one city, one elite — you find all of those in the UK. And I think what I’m also drawn to is this whole idea of the rise and fall of nations and the fact that nations go through cycles and globalization is doing the same. The UK is now in a cycle where it’s in, I think and I hope, it’s sort of a bottoming out phase. And in the next few years, we’ll begin to see things improve and be reconstructed. So there is that logic to it, I think.

We would probably feel the end of globalization more severely if it weren’t for central banks, but the cure is arguably storing up worse down the line — Michael O’SULLIVAN

[00:10:09.09] Ben: How does a country like the UK fare in a world that’s deglobalizing? Because, you know, it’s detached itself from a very large trading bloc and so, now it’s seeking, I guess, new alliances, new trading partners in a world that has become less interested in trading. So, how does that play out, do you think?

Michael: Yeah, it has a lot of risks. And one of the risks, I think, is that the discourse in Westminster and in London is not really focused on what’s happening to the world order. It’s really very inward-focused — and this is a risk that things shift outside the UK, and it doesn’t adapt. So I think that there are several things. The most important, I think, is that the post-globalized world order will be a multipolar one. What I mean by that is you’d have at least three big regions: China, Europe, the US — for the reason of their size will be dominant but also who will do things increasingly differently. So, if you look at the way the EU is imposing itself on the tech world in terms of regulation, that’s a good example. So the UK needs to ask, “Okay, first of all, do we want to be outside this very powerful block?” — and that decision is already made. So, then it becomes a relative decision: “How do we position ourselves between these big blocks?” And in particular, two of them, the US and Europe are very, very close political and trade partners. And my hope would have been that they pay acts to arbitrage these regions. It’s a sort of third independent, but not neutral party, whose upholding of the rule of law makes it more where people feel very secure to do business. So, in that plate, the declaration in Parliament that the UK would break the rule of law is extremely worrying. And I think the international consequences of this have not been thought out at all.

Coming out of the global financial crisis, central banks were like doctors who gave financial morphine to the economic patient — Michael O’SULLIVAN

[00:12:17.07] Ben: What role do you think central banks are playing? I mean, do you think their role is helpful or not? In the sense that are they smoothing the transition period by cushioning economies from some of the worst economic effects of the transition? Or do you think they’re prolonging the transition and exacerbating some of the ills of the current age, such as wealth inequality?

Michael: Yes, this is a very good question — quite a complex area. We would probably feel the end of globalization more severely if it weren’t for central banks, but the cure is arguably storing up worse down the line. So the way I tend to phrase that is that coming out of the global financial crisis, central banks were like doctors who gave financial morphine to the economic patient. You know, a doctor, if you’re injured, he or she may give you morphine for a couple of days to take the pain away, but they won’t do it every day for 10 years. And that’s what we’ve had. And to that end, markets, investors, many other players have become dulled and stultified to the reality of economics and what’s happening. So, we’ve had no inflation, except in asset prices, valuation for government bonds for many equities, the technology equities are at all-time highs. What we have is we have bubbles in financial markets, which potentially rob future generations of the returns they will need for their pensions. And I think, at the same time, what the cover of central banks has done is to make it much less urgent for politicians to address underlying economic problems. So, if you look at Europe, there’s actually been relatively little reform on things like capital markets union, banking reform — all these things that were super urgent nine years ago, where we had promises from finance ministers that they would be addressed — pretty much nothing has been done.

[00:14:27.09] Ben: Yes, slowing down reform. And also, I guess, it’s also removing some of the market censoring that happens to politicians and to political actions, right? So, you know, you might argue — I’m sorry, I don’t want to get into counterfactuals, but you might argue that in the run-up to Brexit, there would have been harsher market movements, because the central bank was intervening.

Michael: That’s absolutely true. And I think it raises many legal questions, too, as to what end should central banks go in terms of trying to intervene in markets and economies? And you now have a situation where central banks are trying to mandate themselves or justify themselves on a whole range of criteria. The European Central Bank is now adopting the mantle of the green economy; in the US, the Congress has proposed that the Fed do everything it can to reduce racial inequality, which is a just cause, but it’s much, much better left to politicians and lawmakers than central banks. I don’t know how they would go about doing that. What we want in democracy is we want parliaments and governments to address these problems, not central banks to, if you like, swamp the whole political economy in terms of what they’re trying to do.

[00:15:57.16] Ben: If we break those things down, then, so first of all, how do we sort of de-politicize central banks? Because as you say, it’s absurd to think that the body in charge of monetary policy could affect racial inequality. So, how do we de-politicize central banks?

Michael: So, the world went through — from the ’70s onwards, many central banks were politicized in that their governors or presidents had, in some way, ties to the governments who appointed them. And then we went through a phase where central banks were trying to crush inflation, which was politically very unpopular — the best example was Paul Volcker in the US. And we’ve gone through an era of independent central banks who are run by technocrats, civil servants, independent from politics. And that is beginning to change, I think. There is a sense that, maybe in the States, that the heads in the central banks are somehow siding with the mandates of individual governments. It’s been the case certainly in Japan. And I think that there’s several things we can do. I think the appointment process for central bankers is important, and also the people who populate the committees of the central banks; stressing their mandates, and narrowing their mandates is also very important. And maybe, I think, in future what we need — we probably need another crisis to get over this — is a curbing of extraordinary powers, like quantitative easing. That, when it was introduced, was something that was considered off the charts and now it’s normal. So, there needs to be a debate about the extraordinary powers that central banks have.

I would prefer a total reboot. I think some institutions have remained relevant, like the OECD, because they’ve had a good sense to attach themselves to a bigger framework in the shape of the G20. Others, I think should be completely reshaped — Michael O’SULLIVAN

[00:17:52.21] Ben: Yes, that was gonna be my second question, which is, how do we roll back the balance sheets? How do we de-leverage the central banks? Because I think in the book — you know, the book is already out for a year, so they’re even higher, particularly COVID — but you said they’re as high as they’ve ever been since the Napoleonic Wars. So how do we de-leverage central banks and get back to some sort of sensible level of leverage?

Michael: So the background picture to this is that world debt to GDP levels have been rising, they’re passing out the previous high of the Second World War, on course, as you said, to hit the highs of the period around the Napoleonic Wars. And that’s quite extraordinary if you think of the events associated with that. One of the reasons debt is rising is because interest rates are so low, governments, companies find it very, very easy to borrow and, in particular, government debt has been hoovered up by the central banks. Now, there’s a number of ways of walking back from this. One is the enlightened approach where policymakers decide, “Look, there’s just too much leverage in the world system. We need to pare it back.” And that’s done in a collaborative way across central banks. I don’t think that’s going to happen — that would be too ideal.

[00:19:20.20] Ben: This is what you refer to as the ‘New West Failure’, right?

Michael: It is. We need a reordering of finance in the world, along the lines of the Westphalia Treaty of 1648. That’s a very grand example. But, you know, the size of central banks, the size of debt in the world, is the biggest in centuries. So, we do need a grand setting for this. I certainly think that we are storing up the ammunition for the next financial crisis which will be a crisis of debt and ‘debtness’ and it will probably come about by, you know, additional QE from central banks not working or not functioning, a loss of confidence, and then, for the first time in some time, people begin to look to get the money they’ve lent back, either from governments or countries, projects, companies — and it’s just not there. You get a deep recession. Maybe central banks will try more QE and that won’t work because often, in a credit crunch, monetary power can — in a deep credit crunch, monetary policy can lose its power. So that’s sort of a negative, nasty scenario, which I don’t like to paint, but in the absence of enlightened policy, that’s a potential route for the future.

[00:20:51.26] Ben: And I can’t resist asking you this — I know we’re gonna go slightly off-topic here — because you used to be a CIO, so it’s too tempting not to ask this. But how does one position a portfolio for a world where there’s a massive governmental debt crisis on the horizon?

Michael: Yeah. So, I think you do a number of things. The first thing, I suppose is to figure out what really is a safe asset. So what government debt will you feel really safe holding? I mean, that’s why German bonds, for example, continue to trade-off at a negative yield, because it’s one of the true safe assets — maybe Dutch debt as well. So, if I had a portfolio and there were private equity in it, for example, I would switch that into things like distressed debt funds, long/short credit funds. I think what you can begin to do, as well, is to look at tail-risk strategies — that’s quite a technical term, and what it means is that these are strategies that would form a small part of the portfolio, but if an extreme, negative event happened, they would pay off quite handsomely, they would tend to be kind of derivative-based or derivative-type strategies. And then also, I think, you know, in other parts of a portfolio, you want to aim to hold companies that have got a lot of cash and less debt. Ironically, some of the big tech companies fall in that category, even though they have somewhat stretched valuations.

[00:22:33.13] Ben: So, just coming back to the book and the end of globalization, how do we get back to sustained organic growth? Because some of the things that you talk about in the book have become, I guess, slightly passé or old fashioned, which is you advocate for things like education and rescaling and things that don’t seem to be at top of the political agenda right now. So, is that what we need? Do you think we need to get back to education and re-boosting productivity? Because that’s the only route back to sustained organic growth.

We can continue with globalization as it is, which I think is unlikely. We can have a lapse into chaos and disorder, like the 1910s and ’20s. Or I think what’s much more likely is we’ll have a multipolar world, which I think the way to look at it is that it’s not so much a world dominated by big regions, as to the fact that these big regions do things increasingly distinctly or differently — Michael O’SULLIVAN

Michael: I think someone said — maybe it was Paul Krugman — for developed countries, in the long run, productivity is everything. And I agree with that because it’s the main — unless you’ve got rapidly changing demographics — it’s the main and perhaps the only way to boost economic growth. And I think the first step is that there needs to be a debate and a movement amongst governments to focus on productivity and focus on what I would call ‘trend growth’. So, what’s your sort of trend level of growth? And the best way to improve that is through productivity. As you said, many of the things that drive productivity — you know, rescaling education, careful investment in technology in country strategy — they have been forgotten. If you look at what’s happened to education and educational attainment rates in the US, that’s quite alarming. And many of the other factors around that, things like human development, are regressing. So you’re right. I mean, they’re worse than passé. They’re just being degraded. And there’s really no other way for developed countries to grow in the long term. You can do trade wars, you can try and convince countries to reshore investment, but that’s all one-off kind of short-term stuff. The real driver of growth is through productivity. I think the problem many politicians have with this is that we are in short, political cycles. So, by the time you’ve invested in the factors that drive productivity, you only see the benefits of that maybe 5–10 years down the line.

[00:24:58.03] Ben: I wanted to ask you about the US elections in November because you make the point in the book, you sort of draw the parallel with the 1980s and you say, you know, people were fixated with the end of communism, and they felt as bought what was coming next, which is this period of rapid globalization and internationalization of trade and everything. And to some extent, you say the same thing here. Now, we’re obsessed with a little bit the political circus, and we’re missing this bigger shift. But to what extent is Donald Trump and this US election, a circus versus being really important in determining how we transition to this new world, whether it’s a smooth transition, an elongated transition, etc.?

If there’s any doubt that globalization is over, four more years of Trump will entirely smash that — Michael O’Sullivan

Michael: He is very important. And I think what is important is that, you know, Donald Trump as an individual has a lot to be responsible for. But he has come at a time when that’s maybe apt in that it’s the end of an era and he is the human wrecking ball breaking down the old order. He is not going to be the person to build up the new order. And he has also been enabled by many people principally on the Republican side for whom it’s convenient to have him as President. I think it’s quite clear that, you know, four years of Donald Trump have broken many things. He’s broken America’s diplomacy with Europe, with parts of the Middle East, but not all; obviously, broken diplomatically with China, and sown general confusion. He’s also, I think, devalued many of the institutions in the US — the State Department, some of the financial institutions as well. And then, in that background, four more years of Donald Trump would make permanent all of these ruptures and it would cause the rest of the world to maybe ignore America. Europe in particular will tend to go its own way. I think countries like China will be more and more convinced that the US is in turmoil, and it is weakened, and Russia will probably have the same view. And they will act accordingly. And I think that will well and truly break globalization. If there’s any doubt that globalization is over, four more years of Trump will entirely smash that. Joe Biden, for his part, I think will not be a transformative president, but a restorative president in that he will restore the status quo, he will repair the State Department. His team, I think, is very strong on foreign policy, maybe less so on the economy. And he will, I think in particular, restore relations with Europe and try and rebuild the partnership with Europe, to the detriment, I think, of Russia, and maybe China as well.

[00:28:10.06] Ben: But I guess the point that many people would make is, as you said, he’s a wrecking ball. He’s gutting institutions domestically, globally. But, in a way, is that necessary? Do we need to break these institutions in order to remake them? You know, would a Biden presidency as you said, restore the institutions or, you know, other institutions still fit for purpose? So, I suppose the question is, do we need four more years of Donald Trump to hasten this transition to the new world? Or would it be a disaster and lead to a much, much more uncontrolled transition to the new world?

The level of denial amongst governments and companies that things can go on, as they were, I think, is still very, very high, and that denial needs to be broken — Michael O’SULLIVAN

Michael: I hesitate to recommend four more years of Donald Trump, but a lot of what you’re saying, which I accept, which is that we’re in the midst of a paradigm shift, which is a very overused phrase — and you only get paradigm shifts for a number of decades, maybe centuries, and you only get the rebuilding when a lot of the old order is broken down, there is chaos, and then people come forward with new ideas and new initiatives. And the reason I think we need more breaking is the level of denial amongst governments and companies that things can go on, as they were, I think, is still very, very high, and that denial needs to be broken. So, if you take as an example the debate over the World Trade Organization, which is potentially a defunct and irrelevant organization in the context of a multipolar world, the debate now is to whether we just have a new leader and someone who’s not from Europe, or the States and everything would be fine. And you have similar debates about the World Health Organization, the World Bank, and not about, you know, should these institutions be radically changed or displaced? And what institutions of the future do we need to have?

[00:30:19.06] Ben: And do you have a view on some of that or not? So, you know, I don’t want to run through the list of all the international organizations like the IMF, and so on. But, are some of them still capable of doing the job we need them to do or do you think it’s a total reboot?

Michael: I would prefer a total reboot. I think some have remained relevant, like the OECD, because they’ve had a good sense to attach themselves to a bigger framework in the shape of the G20. They’re sort of the think tank of the G20 now. Others, I think should be completely reshaped. The World Bank, I think should be relocated physically to Africa, which is the one part of the world that really needs the help of the World Bank. And then, I think there needs to be a debate on what the institutions of the 21st century need to be. Do we need, for example, an institution on climate change that has got the power to fine governments and companies in a forceful way for climate damage? Do we need an institution to govern cyberspace and cyber warfare and cybercrime? We don’t have that. We don’t have an international police force for the internet. So, there’s all these things that are beginning to crop up as future problems, and have not yet been framed either in philosophy and law or by institutions.

[00:31:48.20] Ben: Moving to what comes after globalization. So you’ve used the term ‘paradigm shift’, and you’ve also used the term ‘multipolar world’. Is that what globalization gives way to? Does globalization become a multipolar world?

Michael: I think so. I mean, there are many scenarios. We can continue with globalization as it is, which I think is unlikely. We can have a lapse into chaos and disorder, like the 1910s and ’20s. Or I think what’s much more likely is you’ll have a multipolar world, which I think the way to look at it is that it’s not so much a world dominated by big regions, as to the fact that these big regions do things increasingly distinctly or differently. So, again, coming back to the internet — I mean, the US has got the big internet giants, and they are stockmarket monsters. China has cut off its internet, but it has a thriving e-commerce sector. And then Europe doesn’t have any of these big internet companies, but it is becoming the regulator of the internet, looking to protect people from the ills of the Internet.

We’re in a world where lots of issues are emerging and lots of well-placed frustrations are being vented. So, it is definitely a period of turmoil, where democracy and rights and liberties are being contested — Michael O’SULLIVAN

[00:33:12.23] Ben: For how long can it seek to regulate the internet without those platforms? Because, to use an analogy from a previous podcast, it’s sort of trying to control the seas without a Navy or an infrastructure, right?

Michael: Yeah. It can because of its size and the power of its economy, and the fact that Europe in particular is very, very sophisticated in terms of policy, and regulation. So, if Britain were to try and come up with its own set of rules for the internet or how British people consume the global Internet, it may well not be able to do so. But Europe is obviously much bigger. I think the way we’re going now is we’re going towards a values-based, multipolar world. So what I mean by that is that when it comes to economics and politics and climate change, each of the big regions has got very different values and approaches- and those values will inform how they build out their economy. So, Europe wants to protect its citizens and their data. It’s also very strong on the environment, and many of the new policy plans we hear about from Europe, are focused on the green economy. Much less so in the States where there’s just a very different balance between society and the economy. And then China has its own very distinct set of values, which I think we don’t spend enough time trying to understand, in the West. And I think it has its own risks and its own complexities which are maybe not readily apparent in newspaper headlines. And if you look at the Chinese Communist Party, which is a very big machine, inside it you have lots of different groups and rivalries that effectively mirror what you have in western politics just that they’re all under the same big disciplined umbrella. But I think in China, the secret is not just the vision, but also the implementation. They can implement policy for such a big country in a very, very speedy kind of way.

[00:35:38.00] Ben: The gravitational poles are US, China, Europe. Will countries that aren’t in those countries or in those regions have to choose between them? So, you know, will Africa have to align itself with the USA? Or will India — and it looks increasingly like India is already aligning itself with the US — is that what it will be? It’ll be a question of choosing between one of these poles for everybody else?

Michael: Yeah. So, I think there’s maybe a few things here. So, I think countries who fall between the poles — so, Japan in Asia, Australia, they are between America and China; the UK, Russia, in Europe — they’re on different sides of Europe, obviously — they will potentially find life more difficult because they’re not as big as the three poles and they’re sort of mid-sized powers and they have to come to terms with that and reshape their own identity. I mean, Russia has its own crisis in that it’s a military power, but not an economic or financial power. I think other parts of the world are in the stream. India, if you add it on to the area of the Emirates, is potentially in time, another pole, but it has a lot to travel in terms of its development in order to get there. And then I think for countries like, you know, Nigeria, Bangladesh, who are populous and growing, I mean, they have lots of choices. They can sort of say, “Well, let’s co-opt ourselves to China and the Chinese model, or do we still follow what the Americans have done? Or what the Swiss or the Irish have done?” Or they can kind of say, “Well, look, we just do it our own way.“ So, I actually think that these countries — there’s maybe 10 of them — you know, big, populous countries in Asia and Africa, who have not yet really globalized or developed, where they go in the future and how they do it, and what templates they use.

[00:37:35.14] Ben: And you see them as potentially in a strong, almost bargaining position or arbitrage position, do you think, between those poles?

Michael: Not yet. I think what they need to do — and this is where some of the new institutions of the world order would come in — is that these countries perhaps need to collaborate better in terms of building up their own cooperative institutions so that they collectively have more power vis-a-vis the US or China, as it were.

[00:38:05.16] Ben: You’re a big fan of small countries, right? Because you just used the example of Switzerland and Ireland — so, small countries that are very globalized in the sense that they’re magnets for certain kinds of information, trade flows. Are you still as bullish about those small countries in this sort of de-globalizing world?

Michael: I am, obviously, as an Irishman who’s lived in Switzerland, quite biased. And how I got involved in the whole globalization debate is I wrote a book years ago on Ireland and globalization — at the time, Ireland was the most globalized country in the world. I’m still bullish about them because I think this has been shown by the Coronavirus crisis, is these countries in general, they have a resilience, and they have a robustness. So, by virtue of being small and being open to world trade, they’re also very much aware of what’s going on in the world and what they need to do to correct against some of the imbalances that they will suffer. And the countries I have in mind are the likes of Sweden, Switzerland, Norway, Ireland, Singapore, etc. They’re all very different in terms of their culture and politics, but they have similar problems, but also similar ways of dealing with them. They tend to be the best countries who have this mix of strong rule of law, very good institutions, trust in experts, investment in education, etc. So, that model for me is still one that’s really relevant today.

[00:39:52.01] Ben: And how do you align that or reconcile that with also being a fan of supranational bodies like the… I mean, would it not be a good thing for power then to be devolved down increasingly to sort of nation states or even cities within nation states. Because if small is better, small is more agile, if small is more resilient, then is now an argument for fragmentation?

Michael: I mean, you can call it ‘fragmentation’, you can call it ‘devolution’ as well. I think what you may see is you may see countries like France become a bit more devolved to its regions in terms of taking some of the power that’s concentrated in Paris and devolving that to some of the regions. That doesn’t mean that France is going to break apart or that Europe is going to break apart — quite the opposite, because all of these countries are still happy to have the umbrella of the EU and to enjoy its laws on data protection, etc. I think, also, that globally, we do need to look at governance. So, climate change is my favorite example here, where many countries signed up to the Paris Accord, but it doesn’t really have teeth and it’s not, in my view, really contributed anything in terms of lessening climate damage. What you find is many of the big cities in the world, however, are much more progressive, and much more green than their individual governments. So, my suggestion would be that you have a sort of Paris Accord between big cities that it has teeth. They can, for example, tax their hinterlands, they’re better in control of pollution in their economic hinterland, they tend to be more advanced in terms of infrastructure and green policy, than individual countries. So that’s maybe one way to look at governance, I think.

we are beginning to see a fracturing of political systems where dominant parties are being pushed aside — Michael O’Sullivan

[00:41:56.07] Ben: Well, practically for other issues, because you still need a sort of supranational accord, that the cities sign up to. Would you need the same thing when it came to cybersecurity, or what else is coming down the road — you know, genomics, or digital currencies? How would you simultaneously have global accords in a de-globalized world with city states taking more responsibility?

Michael: Yeah, so I think cities are probably apt for climate change. I think something like cyber, you know, you need a cyber accord probably between at least five countries — and most of those will be on the UN Security Council. They are the cyber powers of the world plus a bunch of others because they are the ones who are either initiating or defending many of the cyber attacks and cyberwars. You know, this is an area of activity where there are no rules. So there’s no template or rule that says, “If Russia hacks me, I’m allowed to fire back a missile, because hacking me or hacking my hospitals is a declaration of war. It’s an aggressive act.” So, I think you need increasingly to match the institutions to the locus of the problem, the locus of the issue.

[00:43:24.06] Ben: Who are The Levellers? And why do they matter? And one of the related terms is ‘The Agreements of the People’ — what are the agreements of the people?

Michael: Okay, so the Leveller is a somewhat obscure story, but probably one of the most important in British history. And I’m guessing many people haven’t heard of them.

Ben: I used to live in Putney, and I’d never heard of them.

Michael: So my starting point is that we’re in a world where lots of issues are emerging and lots of well-placed frustrations are being vented — you know, from gender inequality, you’ve got black lives matter, and you’ve got then democracy-based struggles in Belarus — and you can go on for quite a long time. So, it is definitely a period of turmoil, where democracy and rights and liberties are being contested. In some respects, I’m not a fan of a lot of this political debate on Twitter, and I wish a lot of it were more constructive and that they were more constructive channels. I look at a lot of these protests movements, and you ask yourself, you know, can we go beyond protesting? And how would you take a movement forward and make it concrete and begin to embed it in changes and in laws?

Michael: I recall reading a couple of books some time ago on the Putney Debates, which happened in the middle of the 17th century in Britain. So the king was captured by Cromwell’s New Model Army and with the king being captured people had an inkling of what a parliamentary democracy might look like and they began to debate this down in Putney — it was called ‘the Putney Debate’. And it was primarily a debate within the army, the soldiers, and the officers. And one very important cohort was a group called ‘The Levellers’, who effectively were kind of the social democrats of the day. And they and their leaders came up with a template called ‘The Agreement of the People’. Quite a short template, but it’s really, in tangible form, what the people wanted from government and from parliament. And I think that’s missing today. And that needs to be reconceived.

Michael: For lots of somewhat bizarre and interesting reasons, these agreements of the people were written down, but then not fully transcribed or rediscovered for another 200 years. So, it’s an example for a while lost to history, but it was the first popular expression of what a constitutional democracy would look like, at a time in Europe when Europe was just beginning to throw out some huge innovations in politics and nation states. So, a very important time. And I actually think that if people today could look at these agreements of the people and use them as a rough template for what they want — because they were very practical. You know, they talked about people being treated equally by the debt courts, they advocated limited political terms to reduce corruption — so, foreshadowing many of the things we have today. And I think the use of a template would be taking many dissatisfactions with politics and many movements and making them concrete and also constructive, which I think is largely missing.

[00:46:59.27] Ben: I really like your idea of getting off Twitter, because, first of all, you know, Twitter tends not to lead to anything that’s particularly concrete. But also Twitter tends to lead to massive bifurcation which is, it’s very difficult to hold the center ground on Twitter, because it’s the extremes that gain traction on a platform like Twitter. But I suppose the question is, how is this so different from electing representatives with well-defined mandates in the first place? Are you just saying that we, as constituents, would put forward our ideas, and then almost the political parties would be formed to then put those into statute and into place? Would that be the difference then? So, rather than the political class coming up with the manifestos that we then vote on, it becomes much more bottom-up?

Michael: I guess it should ideally be more bottom-up. I think there’s a sense also that many political parties are somewhat jaded in terms of what they represent. And maybe one question, which I think we haven’t seen yet, is whether we get new political parties, new political entrepreneurs coming through. And I think there is dissatisfaction — you know, what we are seeing as well, we are beginning to see a fracturing of political systems where dominant parties are being pushed aside. You’ve seen that in France, the two dominant parties pushed aside. It’s interesting, we haven’t seen it in the UK or the US yet; the two-party systems remain dominant. But I think there needs to be channels constructed for taking, you know, what I think are well-founded grievances, and getting those into law. For example, there’s a lot of work now being done in social media, such as petitions for parliament in the UK — a lot of work being done there, in social media to get people’s petitions into parliament. So there are changes beginning to come through, but certainly not as fast as I thought would happen.

[00:49:10.03] Ben: I like that idea, too, because I think there’s sort of contrast between Twitter — again, to use that analogy — and the way we do politics it has now become enormous. And the politics hasn’t kind of responded yet. Because, you know, I think what Twitter is doing is giving us the sense that we know as much as the political class. I think we really saw that during COVID, which is everybody thought they knew as much about how to cope with this crisis, as the political class did, because it gives that impression of the narrowing of, or this sort of information asymmetry disappearing, which is an illusion. But I think what would be good would be to sort of reboot politics to be more like social media, in the sense that, as you say, we could treat it like a platform, which is, you know, we could contribute all of our ideas, and then you could build new political parties on top of a platform, which would then be much more networked and responsive to changing ideas. Is that what you had in mind, then, that it will become more networked and responsive?

Michael: In a way it is. And again, one lesson I remark on in the book with The Levellers is that they were idealistic. And parties are a result of that. I mean, they were very good at things like pamphleteering. So they were the social media geniuses of their time, but they were totally outmaneuvered by the incumbents. So I think there is a cynicism required as to how the political system works, which needs to be matched with idealism and a desire to change things. You know, I use the example of Emmanuel Macron, who is seen as being a revolutionary political figure. But I think what he figured out was that the best way to do a so-called ‘revolution’ is to take the system from the inside, not the outside. Now, he had the help of many parts of the system and the institutions in doing so. But it seems to me that that’s sort of a speedier way to changing politics than trying to do it from the outside.

[00:51:18.15] Ben: I can’t resist asking the question, which is, how satisfied are you with Emmanuel Macron? Somebody living in France? How much do you think he’s really changed politics? Because he seems to be a bit like Obama or a bit like Donald Trump. He used digital means to campaign in a completely different way. But the governing has been almost very traditional. Do you accept that?

Michael: It has been traditional in that he — I mean, he has replaced one elite with another younger one, for sure. And pretty much all the people around him reflect the fact that France is still very much elitist in terms of politics, in that they all have the same formation, the men and women have the same views, education. I mean, it’s more stark than, say, the UK is. So he and the people around him are still very much a product of the French system, the French elite. They’ve just, I think, made a lot more fresh. I mean, I think there are areas where he stands out. I don’t think in any way he’s corrupt. I think he’s absolutely sincere in what he wants to do and he’s very, very driven, in that sense, in terms of implementing his vision. I think what he has changed, in my view, compared to the two previous presidents — Sarkozy, and Hollande — I think, with both of those, there was a sense that they were kind of filling a gap and that they might not be around for the next four or five years after. Whereas Macron, I think people have a sense that perhaps he will be here for another term, and that we will have a Macron era that he has the time to implement changes. And he, I think, before [00:53:08.12] he had already implemented quite impressive labor market changes. France needs more of those. I think also, one area that’s clearly open to him is Europe and European politics. And certainly, the energy for European politics and political initiatives in Europe is very much in Paris. It’s not in Germany. We will soon have the post-Merkel era, politics will be a lot more fractured, which will leave France as the dominant country driving policy in Europe.

[00:53:46.04] Ben: If Brexit was the first sign of the end of globalization, is TikTok, the first sign of the post-globalized world?

Michael: Actually, it’s an important sign because it shows how a service that should, I suppose in many respects, be harmless and that should be global, and that people in many countries can use it, but has been used for political ends, can become carved up in the manner of this multipolar world. So, you know, in the US and China, there are clear barriers around the use and the ownership of different parts of TikTok, which begin to, at the same time, sketch out the map of this multipolar world that’s coming.

[00:54:47.12] Ben: Last question. COVID: do you think that this is, again, laying bare the fact that we have reached the end of globalization? Or do you think it’s a reason to be optimistic because it’s a crisis that all countries face and really should galvanize us to work together?

Michael: It’s certainly been a test — a dramatic test. And I think what individual healthcare companies, universities have worked together. The absence of collaboration between countries and regions, for me, has been the litmus test — a litmus test that shows that we are at the end of globalization and heading into a more singular, maybe more selfish, multipolar world. In previous crises, you’ve seen countries and governments collaborate — global financial crisis being an example. And we just had an absence of that this time. They’ve squabbled over vaccines and masks, etc. So that’s the lesson that needs to be borne in mind.

[00:55:57.08] Ben: You would just argue, then, that COVID — again, exemplifying what the new world would look like — at the same time is probably bringing it forward faster?

Michael: I think so. I think it accelerated this whole thesis, for sure.

Ben: Michael, thank you very much indeed for coming on the podcast.


Michael: It was good!

Strategy in the Post-fixed Costs Economy

Strategy in the Post fixed costs economy

Strategy in the Post-fixed Costs Economy

Evaluating strategic options in a world where businesses have never been easier to start, but never been harder to scale

by Ben Robinson, October 2020 | 15 minute read

We’ve talked often about the diminishing importance of supply-side economies of scale. In its simplest expression, digitization flips the industrial age equation. What was scarce in the industrial age was supply; what is scarce in the digital age is demand (attention).

In the industrial age, to scale supply meant mass production to spread the fixed cost of large capital investments over large volumes. And the industrial age was an age of mass produced, relatively standardized goods. This applied to goods and services provided by the private sector, but also to state-provided services, such as education and public services.

Since the advent of the internet, this is changing. We first noticed the shift in industries where both supply and distribution could be digitized (e.g. media) because supply became abundant faster and this highlighted our limited attention sooner.  But it’s becoming increasingly apparent that all industries are being disrupted as software has eaten the world. More and more physical goods have software components to them, making supply more digitized. Where supply cannot be digitized, distribution nearly always can. And where supply-side economies of scale remain important, they can be borrowed.

Renting scale and the end of fixed costs

AWS was not originally intended to be a platform on which third-parties would run their businesses. But, thanks to Amazon’s business model, it was possible to open up that infrastructure service to others. In doing so, Amazon created a massive and highly profitable business which contributes 65% of group operating profits.

But, as big as the impact has been on Amazon, the broader societal impact has been truly dramatic.

Before AWS, companies had to make large upfront investments in computing hardware – a significant barrier to entry. Even buying hardware was a major source of risk: buying too much could bankrupt a company while buying too little could cause a major bottleneck to growth. And so, AWS removed both risk and cost for new businesses. As a direct consequence, it also contributed to the creation and success of hundreds of thousands of new businesses.

This boost to global GDP over and above the value captured by Amazon itself is difficult to calculate, but it’s certainly very significant. It’s probably not an overstatement to suggest, as Charlie Songhurst does, that AWS has been the single biggest factor in the rise of angel investing.

But AWS is not the only internet era platform. From Shopify to Stripe, examples abound of platforms that share their scale economies to remove the cost and complexity of doing ecommerce – allowing companies to form and start trading faster, with reduced risk and at lower volumes than would have ever been possible.

And not all internet-era platforms are providing digital services. As Rita McGrath, Columbia Business School Professor, discussed on a recent Structural Shifts podcast, by helping establish prices and create trust, digitization is making more and more non-digital assets tradeable on marketplaces. As she put it:

“What we’re seeing with the advent of the digital economy is that more and more transactions can be conducted in markets that used to require a firm.”P

Uber was a pioneer in this regard, but we now see this “uber of x” phenomenon everywhere – even in the enterprise market. At aperture, we are very much an embodiment of this, providing strategy and go-to-market as-a-service that enables companies to avoid the fixed costs and risk of underutilization and underperformance in these functions.

In effect, it’s becoming easier to rent all services, physical and digital. All become liquid and on-demand. Capex gives way to opex or, as Younes Rharbaoui says: we have entered the post-fixed costs economy.

“Signs of a post-fixed costs economy are all around us: companies switching to full remote, increased reliance on independent workers & freelancers, on-demand software where cost matches usage, are all creating lean financial structures for growth.”

And, of course, like many other secular trends, the impact of the pandemic has been to accelerate it. If COVID-19 drew a binary distinction between online and offline services, lifting the former and sinking the latter, then it was disproportionately brutal in its treatment of those offline businesses with high fixed costs – oil companies, airlines, hotel chains and so on. From now on, all fixed cost investments will be more heavily scrutinized and, where they exist, variable costs alternatives will be more actively considered. Even Warren Buffett, a regular character in aperture blogs, is starting to consider the wisdom of some high fixed-cost business models.

The fact is, if fixed costs were already becoming passé, they definitely will be in the post-pandemic world – ushering in a faster transition to a new, internet-era economic structure.

Platforms, aggregators and the long tail

For the best explanation of the difference between platforms and aggregators, we recommend this classic essay from Ben Thompson. In it, he uses the Bill Gates platform definition, namely that: “A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it. Then it’s a platform.”

Bill Gates quote platform vs. aggregators

On this definition, the business we have already mentioned – AWS, Stripe, Shopify – are all platforms. They make the large investments in fixed costs – datacenters, fulfilment centers, payment networks, etc. – that mean their clients don’t have to. They make it cheaper and simpler to do business.

It’s this commoditization of supply and associated end of fixed costs that’s now starting to give rise to a long tail of providers. Thanks to lower and variable input costs, it’s possible to make money at lower volumes than in the past, which in turn means a higher number of providers can co-exist.

Take newspaper publishing, for example. The massive costs of producing and distributing physical newspapers gave rise to significant economies of scale and produced an oligarchical market structure. Compare that with today, when a platform like Substack allows independent writers easily and cheaply to publish, distribute, and monetize paid newsletters. These writers can make a living with only a small audience, allowing potentially tens of thousands of them to co-exist – and giving rise to a broader phenomenon, the “Passion Economy”, where more of us can pursue our craft or our talent and make a living from it.

However, the difference between the long tail as it’s conceived now and the original theory, is that supply is abundant, not demand. The constraint on all digital-era businesses is demand and the gatekeepers of demand – the most profitable actors in the digital ecosystem – are aggregators.

In a world of abundant supply, aggregators help match buyers and sellers. They are in a position to do so because they provide interactive content that rises above the noise to command our attention. When in possession of our attention, they can monetize it by charging advertisers to reach us. This has become the biggest cost for many online companies, accounting for 40% or 50% of the investments they make in growing their business.

As Clayton Christensen predicted in the Law of Conservation of Attractive Profits, as one part of the value chain commoditizes, the value is captured elsewhere. As platforms helped generate an economic surplus, aggregators increasingly captured that value – especially Google and Facebook.

While it has become cheaper to start a business, a sharp increase in customer acquisition costs more than offset these savings.

More precarious

But it’s not just high customer acquisition costs that prevent long tail companies from rising to a size where they exploit scale effects. There are other factors at play.

First, the falling costs of starting a business is a double-edge sword. If one online retailer can set up on Shopify, so can any other. Platform companies are lowering the barriers to entry for everyone, making it harder to defend a business than in the past.

Second, if a business model has network effects and a company can grow large enough to exploit them, this market leader becomes more powerful than an industrial-age leader. This is because, unlike supply-side economies of scale, demand-side economies of scale are subject to increasing returns to scale; the more they exist, the stronger they become. And so, where the industrial age gave way to oligopolies with clearly defined industry boundaries, the internet age gives way to winner-takes-most aggregators, large-scale platforms, and a long tail of suppliers operating across the economy in general.

Third, there’s also one important supply-side economy of scale which makes size important even in the absence of network effects – and reinforces them where they exist. This is the ad score. Basically, the bigger a company gets, the cheaper its relative cost of customer acquisition becomes because it pays a lower cost per lead thanks to a higher ad score (the algorithm that advertising platforms like Facebook and Google use to calculate the likelihood of a customer clicking on an ad).

Effectively, the post-fixed cost digital economy is one where is it simultaneously cheaper than ever to start a business, harder than ever to defend and scale it, and where the returns to scale have never been more important.

If it was hard to cross the chasm from startup to large, scaled business in the industrial era, in the digital age it is harder still.

So where to next?

Let’s look at strategic options for new entrants, from where to play to how to scale.

Where to play

Marc Gruber, a professor at EPFL and former podcast guest, wrote a book on “Where to Play”. At the risk of grossly oversimplifying the narrative, it argues that companies spend too little time thinking about which market opportunity to pursue – assuming a good product eventually finds a market – and instead provides a framework to select the right market before commencing activities.

Like Marc, we believe it makes sense to invest the time upfront to consider carefully where to play, even more so in the post-fixed cost economy. Marc’s book provides the methodologies for this choice, so we limit ourselves here to explaining the rationale.

In a digital world, where returns to scale are bigger, incumbents will be harder to displace. Therefore, it follows that any startup should focus either on creating a new market or, more likely, on market blind spots: the niches where consumers are underserved or overserved.

Underserved and overserved markets

In the digital age, underserved markets are likely bigger opportunities than in the past because geographical limitations are removed. A micro market in one country might be a big market when addressing all countries collectively.

B2B marketplaces are a classic example of this phenomenon.

While there are B2C marketplaces for seemingly everything, many entrepreneurs overlook B2B marketplaces because they seem less scalable. They think that it will be difficult to build a big business if your buyers and sellers are very specialized; that there won’t be a generalized pull effect. Buyers of fish are unlikely to be drawn to a specialist marketplace for, say, cement and building materials. But when you are dealing with a global B2B vertical, a two-sided network is more than sufficient to build a massive business: the wholesale fish market, for example, is worth USD150bn!

Another reason B2B marketplaces are sometimes overlooked is because it can be a long game. Many of the businesses we work with are patiently helping incumbents digitize their offering as a precursor to enabling one-to-many transactions. But their ultimate goal is to become a platform for enabling a many-to-many marketplace.

Trade Ledger Business Finance Lending Platform

There are also plenty of opportunities to target overserved customers. As Gary Pisano discussed on another episode of Structural Shifts, companies often push so far with innovation with an existing product or within an existing business model that they overshoot customer demands and leave themselves open to disruption from new entrants providing more user-friendly products or offering more convenience. He gives the example of subscription-based razor blade services like Dollar Shave Club disrupting the overengineered and expensive Gillette razors (“I can only shave so close before it’s scary!”). But this concept of overshooting is especially prevalent in B2B software where, in order to meet the enterprise buyer’s demands, traditional companies have overshot the demands of the end user creating the opportunity for disruptive innovation. This idea is brilliantly expressed in the following excerpt from an a16z article:

“Since effective top-down sales require a highly choreographed (and costly!) dance between pre-sales and the customer, product teams are incented to add more nobs to the product so these teams can sell more value and extract more dollars. Vendors get crossed off the list in vendor discovery if their product doesn’t check all the right boxes for the enterprise buyer, even if many of the boxes don’t actually deliver any value. This often creates a vicious cycle where more complex products give rise to longer sales cycles for more dollars, which then incentivizes even more complex products. For any user of legacy enterprise software, it doesn’t take long to realize that designing a seamless user experience is by no means a top priority for the vendor.”

Direct to consumer

Targeting underserved and overserved customers is what Clayton Christensen refers to as “disruptive innovation” and, as he tells us in the Innovator’s Dilemma, disruptive innovation is about simpler and cheaper products, but it’s also about marketing:

“disruptive technology should be framed as a marketing challenge, not a technological one”

This is even truer today than when Christensen wrote it because digitization opens up new routes to customer. As a result, product, monetization and customer acquisition have to align seamlessly around these new distribution opportunities.

The big trend is direct-to-consumer.

In the retail space, this mostly refers to the phenomenon of avoiding any intermediation – retailers or wholesalers or even any physical retail footprint – to sell directly to the consumer.

In the enterprise space, direct-to-consumer is different. Historically, it was not worth going directly to end users because they didn’t have much influence – or budget. Therefore, it was necessary to go through procurement teams and the choreographed dance of RFI, RFPs and workshops mentioned above.

But what is changing now is that technology products are not just sold directly, but are consumed directly. This makes software-as-a-service a much more disruptive phenomenon than people think: it’s more than a cheaper deployment method, it is a way to circumvent the central buying function and reach the end user.

In this context, it’s clear SaaS companies should have products marketed to end users, simple enough for them to consume without heavy configuration, and priced so they won’t appear on the central procurement team’s radar (e.g. freemium models to test and deliver value ahead of the paywall).

Slack is the example many cite. It markets directly to end users, who can try it for free. Once it has taken hold in an enterprise, it spreads virally thanks to strong network effects (even across enterprises). All the while Slack reaps the benefits by having a pricing structure that reflects usage.

Some argue that it’s harder to make this bottoms-up, direct-to-consumer approach work in areas like fintech, where regulation is important and IT security teams have more muscle. But we see it happening everywhere.

One fintech example that we came across recently, in the context of our upcoming wealth management report, is Hydrogen.

Hydrogen offers a classic bottoms-up approach: a user can provision for themselves a free sandbox environment from the Hydrogen website, pre-integrated with the services they’ll need (like Plaid). The customer only begins paying once they cross certain thresholds, such as API calls. In addition, that also take a jobs-to-be-done approach to solving end user problems by offering discrete services as no-code plug-ins to existing applications, meaning an end user can add a service like tax optimization in minutes.

Blake Bartlett OpenView partners quote

Avoiding the aggregator tax

Going direct to underserved or overserved consumers is the new playbook for disruptive innovation, but it doesn’t mean companies can avoid the aggregator tax. In fact, costs just get reallocated: in retail, CAC is the new rent, while in enterprise, CAC is becoming the new senior sales rep.

Nonetheless, while unavoidable, businesses can minimize the aggregator tax.

One way is to invest in brand.

A lot of startups seem to believe investing in brand is a luxury. We don’t agree. Marketing is like a pump: first, you have to fill it, if you want to draw it down. Sure, you can generate some leads from well-targeted paid campaigns, but it’s not a sustainable endeavor and you’ll end up paying more to aggregators over time. Instead, you want to run paid campaigns into a customer demographic that’s heard of your company and thinks positively about it, which will improve your ad score and lower your ad cost.

You should also invest in data. Going direct to consumers means you know more about your customers than your industrial age predecessors ever did. It’s critical to capture this information in order to:

– build proprietary routes to customers

– learn more about your users to better target and to aid self-discovery through recommendations

– learn how consumers use the solution so you can constantly improve the utility of the product, everything from ease of purchase to completeness of solving user’s problems.

You must leverage the power of networked buyers.  At the most basic level, your product should be differentiated enough that customers will want to advertise it on your behalf. That customer advocacy might come in the form of a positive review or post, but as former podcast guest Julian Lehr highlights, it may also come in the form of signaling.

In addition to advertising, the networked customer can be an acquisition channel.

Wherever possible, you should try to build into your solution the viral features that make the product better when it’s used together with others (e.g. messaging), that lead to customers acquiring other customers. And, even when it’s not possible to build these viral features into the product, it’s possible to build them around the product. A Nike running shoe has no inherently viral features, but the community it has built around its products, the millions who share fitness information, definitely does. And it’s not just consumer brands that can create communities. Consider Salesforce, for instance, which has a community of over 2 million organizing events and sharing content. This attracts others, but also binds together the users in a way which makes it hard to leave the community (by choosing a different product).

Don’t just rent commodities, rent luxuries

If you’ve read this far, it probably won’t come as a surprise that we advocate for renting commodities. Don’t buy your own servers, for example, or write your own accounting software. This will keep operating costs low and variable.

However, we also advocate for renting specialist skills. It allows more cost flexibility and avoids underutilization, but it also reflects a structural shift.

The best people increasingly don’t want to work for a single company. They like the variety and the speed of learning that comes from working across multiple companies and projects. And, platforms are emerging that go further than just matching companies with freelancers – platforms that put together, manage and take responsibility for (the output of) interdisciplinary teams. Effectively, they give businesses greater flexibility and quality at scale and specialists the security and freedom to keep learning.

Achieving internet escape velocity

Brett Bivens, a venture capitalist at TechNexus, came on the Structural Shifts podcast earlier this year to talk about his theory of “Internet Escape Velocity”.

Essentially, internet escape velocity is what happens when a company successfully executes the strategy playbook described above. That is:

– it identifies an underserved or overserved niche

– it leverages internet distribution to reach those customers directly

– it unleashes a growth loop by combining the reinforcing properties of product, distribution and monetization, and

– it uses data and marketing to avoid the aggregator tax

At that point, it hits internet escape velocity, becoming capable of crossing the chasm of precarious long tail supplier to become an aggregator itself, using the pull of its loyal customer base to pull in more suppliers or to launch new own-label services. Brett uses the example of Spotify, which he describes as follows:

“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.”

When a company hits internet escape velocity, it also has the option to invest in fixed assets. As we showed in a paper we wrote with Dave Galbraith in 2016, internet-era companies tend to become asset heavier over time as they seek to entrench their position and deliver better customer fulfillment. But the critical point is that they invest after they achieve a sustainable route to customers. Assets grow like the roots of a tree, downwards from distribution rather than upwards from production.

If, however, a company that hits internet escape velocity doesn’t want to invest in fixed assets, the good news is that it’s never been easier to rent supply in the post fixed-cost economy.

When Software has Eaten the World (#29)

When Software has Eaten the World, w/ Belén ROMANA

There is a lot of anguish over what’s happening online these days from the rise of hate groups to media manipulation, the propaganda to interference with elections — are the positives of our digital world even worth it? Well, today, your host, Ben Robinson, digs into this question with Belén Romana García — Spain’s former head of Treasury, and an economist who has worked in both the public and private sectors. Belén is also a board member for several public companies and foundations. She says that people are primarily driven by three things: power, money, and knowledge — and she is especially driven by knowledge and curiosity and a desire to understand the world and its possible future. Today, she and Ben discuss, should our elected officials have to learn how to code to better understand the world that we’re living in? Should we scrap GDP as a metric since it’s not accurately reflecting our service economy? Does democracy mean equal voting? And how does the information and infrastructure of our online world affect our freedom or a sense of freedom in real life? And more. 

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Belén recommends:

  1. One book: A world without work, Patrick Susskind
  2. One influencer: Azeem Azhar
  3. Best recent article: The geopolitics of information, by Eric Rosenbach and Katherine Mansted (Belfer Center for Science and International Affairs)
  4. Favourite brand: Spotify
  5. Productivity hack: Never waste a chance to learn something new. Listen to podcasts while driving, flying, cooking or having a walk.


Information in itself is a huge good that we have in abundance. Of course, when you have any scientific advances or new ways of creating value or knowledge, that does not come without its flaws, and without its problems. It takes time for societies to understand the real implications — good and bad, by the way — of any advance. It’s sort of trial and error. We are understanding the implications, the advantages, the disadvantages, and it will take some time until we do understand the whole thing.

[00:01:32.14] Ben: Thank you very much for joining us! So, the key thing that we wanted to pick up on today is one that you talk about a lot, which is the notion that software is everywhere, and it’s this idea that, as software’s become more powerful, it’s proliferated, and it’s become much more pervasive in our lives, our communication, our politics, our industry — and I thought maybe a good jumping-off place might be the quote from Peter Thiel, the one where he said, “We wanted flying cars. Instead, we got 140 characters.” So, has this world of pervasive software delivered on its potential? i.e. Do you think that the world is now better for having so much software in it?

Belén: Definitely! I think that we are better off. We can communicate better, we can find more data, store that data, analyze that data, deploy that data. So, I think that information in itself is a huge good that we have in abundance. So that’s a much better world. Of course, when you have any scientific advances or new ways of creating value or knowledge, that does not come without its flaws, and without its problems. It takes time for societies to understand the real implications — good and bad, by the way — of any advance. So, I think that we are better off. It’s sort of a trial and error thing. We are understanding the implications, the advantages, the disadvantages, and it will take some time until we do understand the whole thing. And so, it will take some time until we get the world right. And we will try again and again and again. And finally, at some point, we will have a reasonably good set of rules. So, I think that we are better off but we should be quite modest in terms of we have to understand that this is a journey that started, as societies, and it will take us some time to really get it right.

As human beings, we usually get to understand, control, and react. So, the fact that some advances have dangers, that’s always the case; […] And reality leads us to think that once we get to understand, then things are much better after that advancement than before. The problem, of course, it’s always the transition period.

[00:03:44.01] Ben: If we think about some of the negative applications of digitalization, we might think about, you know, its scope for manipulation, for example, or we might think about, you know, some of the scary things that people say about where AI is headed, right? You know, that we’ll be controlled by software, rather than it kind of being used as a tool by us to improve, almost. But you believe that, on balance, overall, it’s been a force for the good?

Belén: I think so. Of course, it has many dangers. But that happens with anything that you can think of. When the car started, there were so many dangers around that and there were no roads. So, it took some time — decades — to set the rules and understand what is good, what is bad, what should be done, what shouldn’t be, who should be controlling that? How should the authority control that? How can we drive around the world? So there were a number of things that happened over decades. But finally, the car gives us many things — of course, good and bad — and if you understand the real implications in groups, for example, climate change, then you get to have a much better deployment of that advance. You know, as human beings, we usually get to understand, control, and react. So, the fact that some advances have dangers, that’s always the case; that happens with medicine, that happens with pharmaceuticals, that happens with anything you could think of, basically. And reality leads us to think that once we get to understand, then things are much better after that advancement than before. The problem, of course, it’s always the transition period. So, since this is a trial and error, and it will take time for us to get it right, there will be many things that will happen that won’t be good, and people that will be harmed. That’s absolutely the case. And that’s a very difficult point because, as I said, when it’s something new, we don’t fully understand the final implications. So, this trial and error… And you see that everywhere. So, we didn’t know that Facebook could be potentially dangerous for political institutions, the suffering, that outcome to understand, “Yeah, this may happen.” And now we are starting to think, should we do something? What can we do? What are the limits? So, does it mean that social networks should be banned? I don’t think so. They should be here for good. It’s like with cars. I mean, the fact that a car is a dangerous tool doesn’t mean that you shouldn’t control it, you shouldn’t regulate it.

We are on a very, very early stage and it’s very difficult for rulers to set the rules. One of the things that I worry about around this — setting the rules — is the fact that Parliaments understand laws, but they don’t understand codes. It turns out that codes are also ruling our lives. So, if we don’t get them to understand code, to understand that language, it will be very difficult for them to set the right rules. And I think that we’re far from that.

[00:06:38.21] Ben: And if we just continue for a second with that analogy of the car, where do you think we are in this transition? You know, it took a long time before cars had seatbelts, it took a long time before cars had emission standards. How far into this digital transition do you think we are? And how good a job do you think the rule setters are doing?

Belén: We are on a very, very early stage and it’s very difficult for rulers to set the rules. One of the things that I worry about around this — setting the rules — is the fact that Parliaments understand laws, but they don’t understand codes. It turns out that codes are also ruling our lives. So, if we don’t get them to understand code, to understand that language, it will be very difficult for them to set the right rules. And I think that we’re far from that. If you had a council of wise men, old men that couldn’t read, and they had to set the rules for the printing press, they would just say, “Okay, whatever is printed that I cannot read should be fair, balanced, whatever.” But they cannot enforce it, because they cannot read the book. I think we are in a similar situation where individuals setting the rules do not speak the language, cannot read the code and hence, all they’re doing so far is giving this open recommendation of should be fair and avoid bias and these things. But then, they are driven by the outcome, and they cannot prevent it from happening, because they don’t understand. So I think that we are at a pretty early stage. We need rulers that understand code.

because of the cyber GDP that we are not measuring, we are not taxing, we are not tracking. So, we don’t know whether we are getting richer or not, we don’t know whether we have a fair tax system or not. Basically, there’s a part of the GDP that is not there.

[00:08:30.29] Ben: I think the EU Cookie Policy is a very good example of a policy that’s set by people that don’t understand the nature of the digital world. What about economists? So, you’re an economist. How good a job do you think economists are doing at understanding the new world and changing their measurement tools? To make it more concrete, we basically live in a world where we don’t think we have any inflation, we think productivity growth sucks. But is that really the case? Because you know, there might not be inflation in the price of streaming music, but there feels like there’s a lot of inflation in other areas — healthcare and such. So, do you think we’re using the right measurement tools for the digital world?

Belén: We, economists are really struggling because we are all educated in an industrial world. So, if you take GDP — GDP nominal versus real is inflation, GDP is a very industrial concept in many ways. I mean, it started as one physical thing times the price, and that is GDP. And the evolution of both the number of physical things and the prices did see it to the GDP real and nominal. We started struggling with services. So, for decades, for example, financial services were not part of the GDP because no one thought it could be measured in terms of any value added. So, with services, which is something in the middle between digital and industrial, we struggle to understand productivity to measure; you don’t have a physical thing — you know, whatever the assets times the price. It’s services. And you know what that means, in a very industrial world. So, we tried to build this bridge with services — did a very good job, but reasonably good, I think. But, if you jump to digital, you don’t have this vertical approach to sector, which has been industrial. And there’s this huge debate now in the economists’ world, around inflation and productivity as you were rightly saying. There are now two camps: some people say we’re heading into a world of no inflation forever, and some people are thinking that we’re heading into a high inflation world because finally, monetary phenomena. But, as I said, I struggle with that, and it’s difficult to get the cyber economy into this, the cyber factor into the GDP.

Belén: Now, I’ll give you one example that I always think of: the value for Google of having Germany, where is it? Is it part of the German GDP? It doesn’t look like that because that value is not the revenue coming from the German part. But more than that it’s network — so, it’s part of the network that increases the value of the whole network. That’s not part of the German GDP. Where is it? My point is that probably it’s part of the Google market cap and that’s why, because of this cyber GDP, we are not measuring, we are not taxing, we are not tracking. So, we don’t know whether we are getting richer or not, we don’t know whether we have a fair tax system or not. Basically, there’s a part of the GDP that is not there. And you see that again, and again, and again. You gave the music industry as an example. That’s a perfect example of something like that. So, we used to have a music industry that could be measured in an industrial way — the number of LPs or the number of stores, or the number of concerts, and then you have tickets times price. Then all of a sudden comes streaming. Basically, in terms of GDP, the music industry has disappeared, because you don’t have much employment, you don’t have tickets, you don’t have LPs. So, you don’t have physical things that you can measure. However, we have never been able to access so much music in our lives. Not necessarily for free. You pay for that — Spotify, you pay for it. But you access a huge store of music that you can choose to confine whatever. That’s not part of the GDP.

The competition policy is basically based on the knowledge that if the prices are low, competition works because the prices are the final signal of a monopoly or oligopoly. It turns out that’s not the case because we’re not paying with money.

[00:13:06.14] Ben: Yeah, it seems to me that the problem that you talk about translates into consumer surplus, right? Which is, you know, by definition, not captured because it’s surplus. And I often wonder if we were able to better understand consumer surplus, and somehow feed that back into GDP, that might be a way of capturing some of the benefits. But I just wonder, in general, if GDP is just, you know, we should scrap it, if it’s just obsolete. And we should start again. Because you know what I mean? It’s like you’re saying, you know, it’s a bit like inflation — you have RPI minus x, RPI minus y. And it’s like, how many things can you augment a broken metric for, in the end, before you have to just start again.

Belén: But the fact that we are using not a perfect measurement does not mean that we should use none. So, for me, the key thing is understanding. Again, understanding that we’re missing part of the economic evolution, wealth — whatever you want to call that — and that we need to develop other means. We will still have a physical world, we will still have services. But we are missing digital. So I think that one of the key things for, first, universities and probably also statistical authorities, is developing that understanding of how to measure. This is a new thing. It does exist, it does create value. So, this is again, a very old debate: value versus price. And that impacts everything. So I’ll give you another example. It’s the competition policy. The competition policy is basically based on the knowledge that if the prices are low, competition works because the prices are the final signal of a monopoly or oligopoly. It turns out that’s not the case because we’re not paying with money. We’re paying with data, and data has no value, no price. So, they’re for free. So, all of a sudden, you have a competition policy based on a very industrial concept that needs to adapt to something different, which is we’re paying with our souls, so to speak — our data. So, I think that the key thing is for, firstly, universities to start thinking about this — and I think that some have already started — thinking of this concept of cyber GDP. And value versus price happens when you have value, but no price or a price that does not fit much with the value as in the case with data. So, I wouldn’t say, okay, we don’t use GDP anymore. But I think that we should, at once, develop other complementary ways of measuring and understanding the digital world.

when you have a huge concentration of power, you have a problem. And as a state, the concentration of power is always dangerous. So, one of the things that I really wonder is why people — that happens especially with younger generations — do not care about giving away their information to companies but they care about giving information to the state.

[00:16:03.20] Ben: I just wanted to return to that idea of regulating the digital economy, because, as you say, you know, in the past, the litmus test was, you know, our prices going up to the end consumer, therefore, there’s sign that the company has market power, and can manipulate pricing. How do we regulate networked businesses? And how worried are you about the increasing size and influence of some of the largest platforms?

Belén: Over the years, when you have a huge concentration of power, you have a problem. And as a state, the concentration of power is always dangerous. So, one of the things that I really wonder is why people — that happens especially with younger generations — do not care about giving away their information to companies but they care about giving information to the state. And if you live in a democratic state, you do have rules, you have a transparent system where you know your rights, and you have tools to defend your rights. That’s not the case with the large platforms. And there are millions of that; you have Facebook measuring video views and charging for it. So, it’s the same as the judge and the defendant is the same. Or you have no ability to prove that whatever video you’ve posted has been more or less than another one. So, you know, I’m starting to read articles on the corporation as a courthouse, because within the Amazon world, it is much more efficient to solve conflicts within Amazon, than using the courts. That’s, I think, hugely problematic, because, as a citizen, even though you know the rules, those are not the standard procedures. I mean, if you live in a democracy, and you don’t like the Prime Minister, you can vote against him or her, and at some point, the guy leaves. You cannot vote against platforms. So, you don’t have any access to understanding how it works, what your rights are, and how you can defend your rights, what kind of tools you have. Whereas democratic societies have all those things very clear. So for me, as a citizen, I would rather give my information to a democratic state than to someone I cannot access. I don’t know where I am.

The problem with data is that the value comes from the aggregation. So, on your own, you cannot get value from your data because your data or my data have no value on themselves. They have to aggregate and aggregation means something that goes farther than the individual.

Belén: So, these platforms have huge power in economic, financial, political, social, and they have no rules. So, I think that we do need to regulate those platforms. And they basically act as monopolists in different fields. So you have a set of monopolists. And that’s, by the way, nothing new. We had that in the late 19th century, where, in the US there were, again, a number of huge monopolists. And the state, at some point, reacted and they said, “Okay, hold on. We need to do something about the mobile or we need to do something about many different industries — the oil industry and then telecoms” — because the power was too much. I think we are exactly where we were at that point. And, in order to avoid that, the competition policy was born. Now, I think we need to think of another competition policy. But I don’t know whether that’s enough. All the states have a regulation for networked industries, but networked industries are something much more national. This is international, isn’t it? And we don’t have common rules. We have common rules on how do we rule the seas. And that’s similar. So, you know, there’s an international law around these. We don’t have an international law around digital and that means sometimes we don’t even have a national law about digital. So I think that we need to develop that.

[00:20:28.23] Ben: Yeah, I suppose the only good precedent there, you know, whether we think is a good piece of legislation or not, something like GDPR, even though it’s a law that’s imposed within one sovereign area, which is the EU, it does tend to have ramifications outside of that sovereign area. Because if you want to do business in the EU, you have to treat customer data in a certain way. And what tends to happen is those policies then tend to become globally applied. But I just wonder, in general, I think you said earlier on that we have politicians that understand the law, but they don’t understand code — I think is what you said — and that was never more evident than in the times that the big platforms are brought to Congress, for their annual grilling, right? And I’m just wondering, you know, if it’s difficult to impose regulation cross border, and if it’s difficult for our current generation of politicians to impose the right kind of regulation at all, is the answer maybe to devolve more responsibility down to us as individuals, and in some way try to give us more transparency so that we make better-informed decisions about the platforms we use and what we share with them and so on? So, i.e. you know, put more responsibility in our hands.

we are clearly moving into a world of fragmented internet

Belén: For a number of reasons. One is they are monopolists. So that’s the first point. The second point is the nature of data. The problem with data is that the value comes from the aggregation. So, on your own, you cannot get value from your data because your data or my data have no value on themselves. They have to aggregate and aggregation means something that goes farther than the individual. So, the combination of the two things makes it very difficult for individuals to really be responsible. So, you would be asking them for something they cannot do because they don’t have the means. I’ll give you one example. For me, GDPR is the first step. But I’d really like the right to be forgotten because that’s something that, you gave away your information, or someone gave away your information, in a situation when we didn’t really know the consequences of that. And then, you suffer those consequences. You know, the right to be forgotten was a concept that was born in Spain — it was a Spanish case that led to this thinking of ‘this is unfair’ because someone did something three decades ago, and the guy is suffering from it again, and again, and again. And the problem is, I’ll give you one example. If you have a public appointment in Spain, your number gets published. And, at the same time, it looks like that should be private. And, you know, years ago, I had an attack, and the police told me, “Everyone knows where you live, and your number.” And I said, “Yeah, but that came from the fact that I was a public official.” So, all of a sudden, you have something that was ruled thinking of a different world, and now all of a sudden becomes a threat. And you cannot do anything because that is not part of the right to be forgotten. That’s nothing wrong, but it’s part of my privacy. And even then, it’s there. So, as an individual, I cannot do much. I need infrastructure or authorities, courts, that help me protect my rights — understand and protect my rights. So I don’t think that individuals are the way out.

[00:24:18.08] Ben: So regulations are still a thorny issue. And the other issue I wanted to talk about was your idea of policing the seas, right? Because what are the seas? I think we’re getting lost slightly in the analogy, but like, you know, what’s the landmass? What’s the sea? And if Europe is a landmass and we don’t have any really large platforms, where do we stand? I mean, for example, for how long can Europe impose regulations like GDPR when it doesn’t have platform companies of its own? Because it’s a bit like, you know, we’re imposing legislation on companies that aren’t even in our jurisdiction.

This dream of an open Internet for every country I think it’s over

Belén: But that’s why I like the analogy of the seas because, in the international law, you do regulate companies that are not part of your jurisdiction. And I think that the internet has been almost a global ocean. I think it’s not anymore. The exception being, of course, China. Right from the beginning, the Chinese thought, “Oh, if this is an ocean, I want to control my ocean, I want to set the rules.” And I think that we are clearly moving into a world of fragmented internet, where we, again, have not an ocean, but different oceans or seas if you want. And you said that the Russians announced that at some point, they wanted to close their internet and have a sort of a narrow channel into their internet so that they can control both — their internet and the channeling. The Chinese, of course, control that. I think that the US is thinking also, we need to think of how we control and have a walled garden — that we know what’s going on, who’s doing what, and we can react to that. So this dream of an open Internet for every country, whatever, I think it’s over. And, of course, that worries me in terms of Europe. So Europe has advantages and disadvantages. The disadvantage is that, of course, we lack any sort of platform. That’s a huge disadvantage. The advantage is that we still are the largest market in the world. We are interesting. The problem is when you’re not interesting at all — then you’re done. But when you can add value, then you have some tools to regulate that value that you are creating. So I think that Europe has that right and that ability. And also, the tradition. I think that we do have the tradition. We may over-regulate sometimes, but we know how to regulate and we think of the individual as someone that has to be protected. That comes from a long, long tradition of European thinking, philosophy, political science, sociology, anything you can think of. So, from that point of view, Europe has a chance.

in the 21st century, those countries or regions or companies, for that matter, that will rule the world will be the ones that will be able to do the three things: produce, store, and analyze data, move around those data — the platforms — and then set the right rules.

Belén: The thing is, for me, that if we use another analogy, and we think of the late 19th century, and how the industrial power was built — and that means power or states or companies — there were three things: the ability to produce things, the ability to move those things — so you needed a physical infrastructure — and then the rules of the game. And if you look at the industrial world, the industrial powers what they did is, Okay, I produce, I build infrastructure — the train being the first one; if you look at how the trains were designed in the 19th century, you knew who was powerful in terms of countries, and who was losing the battle. And only looking at that map is clear. And then, the rules of the game, which is free trade. That, coincidentally only applied to industrial goods, not to agricultural goods. Okay, 100 years have gone, so then digital power — who can produce, store, and analyze data? Very few countries or companies. The infrastructure is the platforms — we lack the infrastructure. And then the rules. So far, we haven’t got any rules. No rules at all, not even this free trade rule. We didn’t have a rule because we didn’t think we needed it. So, in the 21st century, those countries or regions or companies, for that matter, that will rule the world will be the ones that will be able to do the three things: produce, store, and analyze data, move around those data — the platforms — and then set the right rules.

[00:29:14.16] Ben: So how worried are you about Europe? Because at the moment we’re trying to set the rules to some extent — you know, GDPR, for example, PSD2 — but we don’t produce or move the goods, right? Or we don’t have the infrastructure, so we won’t be able to set the rules very long in that case. So, where does that leave us? And do you think the game is over in terms of creating the infrastructure?

The European Union, as a project, is built on conflict, it has always evolved out of problems. It’s not when everything works, and it’s peaceful. Whenever there’s a problem and a crisis, right from the beginning, the inception, the European Union evolves and tries to build on that.

Belén: I think we’re really far behind but it doesn’t mean that we have to say, “Okay, we give up.” I think we should fight. And fighting means a number of things. One is if we could understand how to rule this right — how to read the code — we would have a huge advantage. And that’s something that we could develop. Another thing that for me is hopeful is the fact that we’re starting to listen to the European Commission talking about digitization, which is quite a new thing, in a much more thoughtful way. And I’ll give you one example. So the European authorities came to the conclusion I think — that’s my understanding, I have to say — they came to the conclusion that “Okay, we have lost the war on personal individual data, but there’s a huge wave of data coming, which is data coming from systems, physical things. We are an industrial power, why don’t we build on that?” I think that is great because, by the way, physical things you get to personal data. So even though we lack the platform for personal data, which is the case, we could build platforms around non-human data, if you want. It has stemmed from good systems. I thought this is good, because instead of wasting resources fighting something that’s going to be very difficult, because you’re on late, let’s try to build something that is not built anywhere else, and then we won’t be late.

Belén: So, for me, that’s a very useful way of understanding that. And I think that with COVID-19, that the European Union is using it in a positive way, so to speak. The European Union, as a project, is built on conflict, it has always evolved out of problems. It’s not when everything works, and it’s peaceful. Whenever there’s a problem and a crisis, right from the beginning, the inception, the European Union evolves and tries to build on that. I think that now is starting to happen that. I mean, Europe has a soft power, and Europe has someone that understands that there are two huge giants rising, which is the US and China and thinking that they don’t like each other as much as they did in the past — and Europe is in the middle; that could be a potential advantage if we are smart enough. So, for me, the worst part of it would be if we thought of it as when you have a castle on your right, another castle in your left, and you are on the plain, then whoever comes, you’re done. That is not the way to understand that, I think, because then we’re done. If we build on our chances, I think — and we do have chances — I think that’s quite clear. You know, with the cloud, we’re late, but still, Germany and France are thinking or are starting to create a cloud. Will it be like that? Will it be as competitive? We’ll see. But I think that’s the right move. We should have done that move long ago. But at least we’re starting. So, in relative terms, we are behind the US and China, but we are ahead of the rest of the world. So, I’m hopeful. And I think that Europe is built on this notion of the individual has his rights, which is differential, I think.

[00:33:34.17] Ben: It’s quite interesting what’s happening with Tik Tok because I think, you know, is probably a good way of thinking about this, which is you’ve got this Chinese castle, the US castle. Do you think what we’re now seeing is, you know, those two citadels are trying to now establish and define their spheres of influence? And so, you know, Tik Tok was a case of… That’s almost like an invading army and we’re not going to allow that into our Citadel. And then everything that’s happening with Tik Tok in India seems to be a bit like, you know, India’s kind of aligning around the US castle. And then, I think your current comparison of Europe as kind of no man’s land is quite accurate because Europe hasn’t yet, I don’t think, really decided which castle is going to align itself with. And, as you said, maybe, for a short period of time, that gives us a position of influence because we can arbitrage between those two castles. Is that the way you think about the world, which is that that’s where we are now? The idea of this, you know, Pax Americana kind of world that was global is over, and increasingly nations are gonna have to choose between which of these two castles they align themselves to — or do you think they’ll be more castles like the Russian castle, the African castle?

when we all have access to information, that does not give us knowledge

Belén: A long list of things, as you mentioned. One is India. I don’t think that India is aligning with the US. I think that India is thinking, “I’m large enough and I’m advanced enough, and I have the knowledge and human capital needed to build my own castle. So, what I think that they are doing is, “Okay, let’s create our own apps.” So then it’s much more the understanding of, this is exactly a backdoor that you can use to look around and I want you to have that. It’s not only the influence, but it’s also the information that you get. One of the things with digital, it looks like the network effects come with a huge amount of data and that huge amount of data, if we’re talking about personal data comes from large populations. India, which is a very large country has the means to create its own network effects. They don’t need to have anyone else. As it happens with China. They are large of their own, they don’t need to have anyone else to create network effects. So, I think that they have understood that and they want to build on that. And from that point of view, neither the US nor Europe, on our own, I don’t think we are large enough in terms of that sort of pool of population. Probably, we need to think of something that combines both, otherwise is very difficult. If you think of if the US thought, “Okay, I’m closing my castle, it’s only us”, that’s not enough. That’s clearly not enough. They need to think of other pools of population. And probably we will see, at least, I think that large countries will try to build their own castle. Brazil is another example of a country that thinks that they are large enough, that they have the means, they have the knowledge to do something on their own. And so, we will have that as it happens with it. If you think of the industrial world, of course, the first superpower was the UK, but then Germany reacted pretty soon and then the US. So, you end up having a short number of industrial powers, but a number of industrial powers. So I think that Google sees something similar. I think we will have a number of powers. And I hope that Europe will use that as a chance.

[00:37:36.17] Ben: I think what’s interesting about India is with Geo. They’ve almost sort of separated infrastructure from production, which is to say, “You know, since we own the infrastructure, we’ll allow foreign companies or American platforms to operate on the infrastructure, but we own the infrastructure.” So, they have a certain level of sovereignty, that Europe, for example, doesn’t have, because we need to have the platforms or the infrastructure, right? So, I wonder if that might be the model. You referenced Brazil. I wonder if that might be the model that is followed by others. At least, then, you have a stake in the digital world, whereas if you own neither the infrastructure nor the platform you have, nothing.

Belén: I agree. I think that at least you need to control the highway. And then, you get to decide which car can go through that highway and whether you have to charge or not and the whole thing. If you lack everything — if you lack the highway and the car, you’re done. So, as it was the case in the industrial world, you needed to have infrastructure for the trains that you built, controlled. Otherwise, if we didn’t have the money to build our own infrastructure in the 19th century, the British companies that built it, they did it for their own, not for the Spanish people. It was more to extract value out of mines, basically. So, we had exactly the wrong infrastructure that we did not own, not control, not design. You’re done. You cannot succeed in the industrial world, with those weaknesses.

[00:39:16.15] Ben: I want to speak of something that you talk about, which is that democracy does not equal voting. What do you mean when you say democracy does not equal voting and how is that sort of relevant to this digital shift?

Belén: People tend to think that if I vote, that’s fine, then I can defend my rights. But that’s not true. For example, you have certain rules to control propaganda or financing in a democracy or what kind of information you can give or how long — are you always in campaign or can you be bombarding people again and again and again, do you give them one day they have to think? Whatever. So a number of things that complement the voting. But I think that we have completely forgotten that that infrastructure of rules is key — and if you don’t have that, then voting doesn’t… Any dictator can organize voting. And, quite coincidentally, is always to his advantage, it’s always 95%. It’s not the voting. It is the whole thing that comes before the voting, that grants that that voting will be a legitimate exercise in terms of democratic access. So, that, for me is key. You can opt-out Facebook — that’s voting; you vote with your feet, which does not change much, perhaps, because you’re out, but that’s not much.

when information is for free, we tend to vote out of emotion

[00:41:02.27] Ben: So you’re arguing almost we’re succumbing to this illusion that because we get to vote more often and there are more referenda that we’re somehow more empowered and we have more control over our affairs, whereas you’re saying the opposite is true? Because if I understand what you’re saying, rightly, you’re saying a lot of the underpinnings of democracy as we think about it are being washed away or eroded by digitization. So, can we just delve slightly into that? So if we think about some of the things that are critical to a democracy, such as having accurate information, is that principally on information that you think that democracy is being eroded? Or do you see other areas where the waves of digitization are washing?

COVID-19 was the rise of nation states. They were reborn, and all of a sudden, people turned to them to be protected, in many ways — limiting the movement of citizens, offering healthcare, buying vaccines. So, the nation state has, again, become a key player in the economic and social world, which means that people, when in danger or in a difficult time, and in various situations, they turn to those that are closer to them and have the size to protect them

Belén: I’ll give you one example. I can access a lot of information. Does it mean that I can self-diagnose my illness? That’s completely wrong. I have information but not knowledge. So, the difference between information and knowledge now is quite clear. It has never been the case over centuries in human history. So, we need to understand this difference. And, you know, there was this very interesting exercise. IBM has this Project Debater and they created a machine that can debate with a person and they had this public exercise that you can watch on YouTube, of a guy debating with a machine.

Belén: And that exercise was arranged by Intelligence Squared US. And they have this mechanic whereby the public first says that they are against or for whatever proposition and then after the debate, they vote again. The party that has moved more wheels, if you want, or more opinions, wins. They did exactly the same. And their proposition was, “Should states finance, pre-schooling education?” And the machine was told to say ‘yes’, and why and the individual, ‘no’ and why. And the exercise was, for me, quite telling, because, of course, the machine came with hundreds of examples, of data, if you want. And the individual less, but some. But he, even though he voted he was against that proposition and most of the public was for the proposition at the beginning, he could move more opinions, because he could understand emotion. All of a sudden, when we all have access to information, that does not give us knowledge. That means that we can look at things that we would like. And, of course, you can always find data that justifies your prejudice. That’s always the case. You can look at part of the information, and that leads you to say, “Yes, I’m right!” Or the other part, which is, “I’m wrong.”

Belén: Finally, when information is for free, we tend to vote out of emotion. And when I saw that exercise that I found so interesting, I thought, “Now I understand Brexit.” So finally, is it, “Do I trust you or not? Do I think that you have an intention or not?” So, one of the things that I find quite interesting is that there’s this crisis in democracy, at least democratic states, that people are losing trust in institutions, being those private or public. And then comes COVID-19. And for me, it was quite a surprise because COVID-19 was the rise of nation states. They were reborn, and all of a sudden, people turned to them to be protected, in many ways — limiting the movement of citizens, offering healthcare, buying vaccines. So, the nation state has, again, become a key player in the economic and social world, which means that people, when in danger or in a difficult time, and in various situations, they turn to those that are closer to them and have the size to protect them. If it’s tiny, if it’s only a city, they don’t have the size to give me what I need. I need something larger. I think that’s good for democracy, of course. Any economic crisis raises the danger of populism and all these things. So, I’m not naive from that point of view. But the way I see it, I think that democracies with this huge crisis, have a chance to rebuild themselves. And, for example, the fact that the European Commission is now trying to get to buy enough vaccines, I think that increases their legitimacy. The problem was, in the beginning, the European Commission did not react at all. So it’s not only they lacked legitimacy, they lacked action. The fact that you need someone that can protect you, I think that gives a chance to democracies to react and rebuild themselves. But of course, they need to develop an understanding of the code, to control the rules. So, all these things that we have been mentioning, and of course, build your own infrastructures, as well.

[00:46:55.29] Ben: You often talk about how the conception of democracy is bound up with industrial age concepts, that I suppose the other question is, you know, if democracy depends on nation states, and nation states are with a long term view in trouble, and if democracy depends on the institutions of the industrial age, then is democracy in trouble from two sides?

Belén: The key distribution of wealth comes through wages to work, which is quite an evolution in terms of the history of the humankind. So if you work more, you get the chance to be wealthier. And that means that we are basically all the same because we can become the same over time. And so, why can you vote and not me? And you being first a landowner, then a man or a white man. So, if I am a woman, and black, and I am poor, I can become what you are. So, why can’t I vote? Now, with the digital world, it’s, again, if we find the way to assign prices to value, that can bring us again, to a situation where I can earn my living in a reasonable way, and hence, this whole structure can survive. If that’s not the case, if we cannot understand how value is created and distributed, and therefore, how fair our economies are — we don’t know how fair they are, because we don’t have the right measurement, again, so we will measure part of the fairness or unfairness; but the rest does not exist. So, if democracy is a key to grant fairness, then we need to have those tools. Some people will be helped by training. Some people won’t. So you need to think of how can you protect and help people that won’t be able to be retrained. You know, with COVID-19, I found quite interesting the fact that live sports have suffered so much, and then eSports are thriving. So, all of a sudden, you have a whole sector of eSports that is growing, and that entails employment, in many ways.

[00:49:25.12] Ben: Is that a positive? Because I absolutely 100% share your view. I’m an optimist, I believe that the world that awaits us will be more positive than the world that we leave behind. But I’m worried, like you are, about the transition, because this transition is now happening so much faster on the back of COVID-19. Does that somehow reduce the scope for wars or civil unrest or whatever nastiness that could normally come to because it’s happening now just, you know, at an accelerated rate?

Belén: In terms of the COVID-19 I’m worried about the short term economic effects it brings. That’s absolutely true. And it’s also true that is somehow accelerating these trends. But the positive side of it is that they’re becoming visible. If a problem exists, and it’s visible, you can tackle it. The problem that we have is that these trends have been there for 10 years, 20 years, and they weren’t visible at all. So, there was no public debate, public worry, nothing at all. Remote working has been there for a number of years and some companies were very good at using remote work, and some specific groups of people wanted to only work remotely. But it was sort of a lateral and receivable, but it was clear that it was a trend that at some point would affect many others. Why don’t we have an industrial organization with a service economy? That’s exactly the case. Now, all of a sudden, we have found that, indeed, we didn’t have an industrial organization. Well, now it’s visible. Now everyone is thinking of, “How can we do this? Should it be five days a week? How can we really apply this technology that we already had, but we didn’t use?” So, from that point of view, COVID is making many of these trends visible. I think that is, a tree that falls in the forest — is it falling? No one hears or sees it. It’s exactly the same with problems. And we only look at problems when they are big enough, as societies. Now they have become big enough. So, I think that that will also accelerate the transition in terms of their reaction.

[00:51:47.14] Ben: I almost feel like the furlough scheme, or you know, whatever it’s called in the country. Is, in some way, almost like an experiment in the universal income in a way, which is, how do we compensate people whose jobs are not going to exist in a digital world?

Belén: Yeah, yeah, absolutely. And instead of having the finish with this experiment, now we are all making it. And there will be things that won’t work, but we will find which ones do. So I think that’s another example of things that I think are accelerated. You will get to see that. If you use that analogy of the COVID and digital, some populations are suffering more than others. And so, they get isolated, so you need to protect them more, because they are isolated, because they need to be isolated.

we have the chance to understand better the world that we are already living in. I think that societies have stopped and are thinking — which is really, really helpful because it’s not just the elite thinking

[00:52:38.13] Ben: A lot of people use the war analogy for what we’re going through, which is, the enemy is the disease, it’s not another country. And that’s interesting in a couple of ways, right? One, because the government’s taking an unprecedented or warlike intervention into the economy to boost aggregate demand, and so on, which is interesting. But then, what a lot of people say is that won’t be the rebuilding exercises necessary after a war, which then sustains aggregate demand. But in a way, don’t you think that might also force governments to figure out how to redefine the tax base?

Belén: Not only the tax base but also the economic structure. If you look at the European Union Fund, it talks about two things. One is green, and the other one is digital, which is we need to rebuild the societies thinking of those two things, which is quite a novelty, I have to say. So, we have an enormous amount of money to rebuild the economic structure. And that, I think, is a unique opportunity. So, we don’t have physical infrastructures that have been damaged, as is the case in a war, but we have indices that have been damaged by the digital world, and they have not been able to react. And so, I think that’s a huge chance. It’s sort of a Marshall Plan effort in a different way. So, it’s not bridges and buildings, but it is platforms and data. I think that there’s no clear answer to that. It will depend on the society and how they feel that they need it and whether they have someone that will finance that.

[00:54:35.16] Ben: But that Marshall Plan, if I’m not wrong, that Marshall Plan is something that Europe is thinking about, but it’s not something… You know, whether we consider the UK in Europe or not anymore, I think in four months we’ll find out but the UK doesn’t have an equivalent of the green new deal or the digital Marshall Plan, and the US may or may not, depending on elections in November. So, do you think many countries will take this once-in-a-generation opportunity to rebuild?

Belén: Again, I think about that, and it depends on the country. But in terms of the nation states, we are seeing, again, states are not only regulating but owning and managing a large part of the economy. So, that’s more sort of the ’70-like situation where you had the state doing two things: doing things and regulating those things. And I think that model that looked completely over is back, and it has advantages and disadvantages. So, back to the network effect, much of the technological revolution in the US came from the collaboration between private and public institutions. We never had that in Europe. Now, I think we’re going to have that. And it’s a precondition. But you need to have both sides of the world collaborating. I think that’s key. When you lack both, you lack size or the ability to combine private and public forces, that country will struggle, I think. It’s not only the quality of the politicians, which is key, but also the tools that they have. Probably they won’t have the same tools.

[00:56:29.29] Ben: I want to finish on, if we can, on a really positive note. I think you started by saying that digitization has been a force for the good, right? We may not see it in our GDP statistics or our productivity statistics but we feel it. We feel it in particular as consumers. But then we got on some slightly more negative topics. So we talked about how democracy is struggling in the face of digitization, we talked about how digitization is kind of dissolving the global world into nation states, we talked a bit about how the transition is going to be tough. Maybe we started to get into more optimistic ground with how the pandemic may find a route to faster transition. But I just wanted, if you would, to finish by giving us your most optimistic projection of the future.

Belén: It’s difficult for me because, by nature, I’m not an optimistic person. I think that the problems that you don’t identify, you don’t solve. So, I tend to focus more on the problems than on thinking that there won’t be problems. So that depends on how you define an optimist. But, in my view, I think that we have the chance to understand better the world that we are already living in. I think that societies have stopped and are thinking, which is really, really helpful because it’s not elite thinking. I think the whole society is thinking. It happens — this crisis — at a time when we have already suffered some of the negative impacts of the digital world. So, we have either Facebook political things and things like that. So I think that awareness is higher and I think that’s very good at all levels of society. So, for me, an optimistic or a positive — much more than optimistic, a positive outlook into the future, would be democracies get stronger, because they understand the rules of the game. We get to measure track, and if needed, to control the value and impact of digital and hence, we really create abundance and give it away to us. I think that Europe has the size, the human capital, and now the understanding. So, we have the tools, so let’s use them.

[00:59:19.08] Ben: Belén, thank you very much for your time!

Belén: Thank you! Thank you so much!

What we learned from doing the Structural Shifts Podcast

What we learned from doing the Structural Shifts Podcast

What the world looks like when seen through “a great series of conversations with people who are building the future”
September 2020 | 5 minutes read

In the break between seasons — season 2 starts again on September 24th — we thought we’d take stock and reflect on some of the things we’ve learnt from making our podcast.

When we started Structural Shifts (initially without a name, that came from episode 14), it was just an excuse to reach out to and chat with people whose life and work we found interesting. What surprised us was two-fold: firstly, that people liked it and recommended / introduced other people we should interview, making the whole endeavour sustainable; and, secondly, that many of the evergreen topics we set out to explore bubbled up to the top of the people’s agenda and consciousness.

The fundamental transformations that used to quietly shape our world — over years or decades — suddenly became topics for mainstream conversations. The acceleration everyone’s talking about — we felt it too and it has influenced how we make and develop the podcast.

It’s safe to say that doing the podcast has taught us valuable lessons.

“I found this podcast borderline post-modern, and refreshingly frank. A profound look into what’s next. Love every bit! The guests, the music, the format.” — Simone Cicero, Co-Creator of Platform Design Toolkit

A crisis can be clarifying

The worldwide lockdown had wide-ranging effects, some of them even on the positive side. For example, it enabled us to interview thinkers we greatly admire, but who are geographically remote — like Rita McGrath and John Hagel — as well as to grow our audience.

In a world already hungry for meaning, the pandemic triggered a pressing need for strategic thinking. First, it made people pause and reflect on what truly matters — for their lives, work, for the planet.

Then, because institutional and private reactions to the pandemic left many disillusioned, they became determined to gain a stronger understanding of big topics — fintechinternet business models, geopoliticsthe climatethe future of work.

We had profound, unhurried conversations with people who are thinking and doing things differently. Their thoughtful observations, distilled from decades of practice and reflection, challenged our received wisdom on a range of topics — from innovation to marketing — as well as encouraged us to entertain contrarian viewpoints.

Instead of a just-do-it mentality, the pandemic reinforced the timeless value of reflection and flexibility, reflexes that all our podcast guests share. If you keep an eye out for it, you’ll notice that in every episode we publish.

Good questions are catalysts for change

Good podcasts depend on two key ingredients: interesting guests and good questions.

Our listeners increasingly took care of introducing us to great thinkers, some of whom — like Brett Bivens or Julian Lehr — we caught on the rise to becoming big stars. And we concentrated on trying to get the best out of the conversations.

In the past six months, we’ve spent a lot more time on research. As our audience grew, so did our sense of responsibility to get the best out of every conversation. Many weekends and late nights were spent reading the books our guests had written, which made us well-prepared — and hopefully improved our the return on our listeners’ time.

Some of the book authors we had invited at Structural Shifts podcast

Our goal was also, for ourselves and our listeners, to delve into diverse topics such as the ethics of technological change or building a safety net for the self-employed. A risk because many podcasts listeners like to keep digging into a given topic like investing, we hoped to create the context for the cross-pollination of ideas, frameworks, and viewpoints that can serve both professional and personal pursuits.

As the inner workings and implications of the networked age leapt into view for the entire planet, we developed an even keener focus on asking questions that help us have better, more stimulating conversations. Questions are essential to decode, deconstruct, and rebuild our vision of the world as it is — and as it might become.

The case for techno-optimism is one of our favorite examples of such a conversation, providing signposts to use when engaging in mainstream conversations around key topics in tech and their society-wide impact.

“A great series of conversations with people who are building the future. Each one is like having a dinner conversation with a smart friend who has come back from a voyage. I listen when driving or jogging — the miles just melt away and I arrive with a refreshed mind.”

It’s easier to connect when you share purpose and focus

Another thing we noticed while doing the podcast, especially in the past 6 months, is that people who share the same principles tend to resonate (or “click”) more easily when having conversations remotely.

It was surprisingly easy to delve into complex topics with them because everyone was eager to dive in. Maybe you’ve also noticed how small talk takes less and less time in online meetings as we have more of them.

This desire to have important conversations, to support clarity and good decision-making translated into our guests sharing personal perspectives more openly.

What’s more, it was easier to connect with new guests who dedicated even more time than before to share their expertise and experiences. We’re grateful for every minute they spent with us!

Capturing attention in a roaring world is a big challenge

As Herbert Simon predicted, a wealth of information gives way to a poverty of attention.

Our response to this has never been to compete on giving information, but to focus on carefully curated insights. A great fan of craftsmanship, we meant for the conversation — except for maybe the couple we did on previewing the post-pandemic world — to be timeless; as relevant now or in two years’ time as they were the day they were recorded

We also found that the lockdown period — or more specifically the extra time that many people gained through not travelling and commuting — opened up more demand for the long-form product we offer.

“Always insightful and informative. It is a relaxed conversation with people who have had interesting experiences and something to say. Ben Robinson, brings out the best in each guest.”

The Structural Shifts podcast remains one of our favorite projects, in which our enthusiasm for the topic and our guests’ generosity combine to help you see farther — and more clearly.

Helping ourselves and our network to move from scalable efficiency to scalable learning and, in do doing, to prosper in our networked age is why we do the podcast.

We hope it helps you achieve the same.

“I really love this podcast series. There’s not much content like this coming out from Europe. Should serve as an example to others” — Bozidhar Hristov

Our thanks to all of our guests and listeners and to Sarah Mikutel, our podcast editor. In series 2, we’ll be back with more mind-expanding conversations, covering the token economy, the future of finance, the end of globalization, the startup community way, the new precariat and much more…

Igniting Entrepreneurial Sparks (#28)

Igniting Entrepreneurial Sparks,
w/ Michel JORDI

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Full podcast transcript:


We were four people at the launch of Le Clip. Six months later, in November, we were 50 people, and we produced 10,000 watches a day.

Ben: Michel, welcome to the podcast!

Michel: Hello, everybody! Thank you for having me here! I’m looking forward to a great talk with you!

[00:01:37.17] Ben: So Michel, in preparation for this podcast, we read your book — we read ‘Ignite That Spark’. I mean, it’s a wonderful book! You could call it a self-help book for entrepreneurs, but I think it’s more than that. I think it’s really a celebration of entrepreneurship. And so, we’re going to talk about this book, in quite a lot of detail. But I hadn’t realized, until you arrived this morning, that you’d also written an autobiography because my impression of this book was that, you know, I loved it, I would advise everybody to read it. It’s a very easy, compelling read, but the bit that it misses a bit is your life story. And then, when you arrived this morning you said, “Actually, I’ve got this massive tome, which is my autobiography.” And so, if you don’t mind, can we start there? Can we start with just a little bit of your background? How you entered the watch industry? You did your first startup at 23 in Japan — how did you end up in Japan? So, if you don’t mind, could you fill in the gaps on Ignite That Spark and tell us how you started in this industry and why you were in Japan in the first place?

my dad was my first role model, the perfect example of what I really did not want to do with my life — Michel JORDI

Michel: Yeah! It sounds interesting, thank you very much! You know, life is a journey and it’s a learning process. We learn every day. I’ve been a very, very curious person, enthusiastic, loving life. When I grew up, my dad had eight-to-five jobs, leaving every morning at 7:30, coming home for a one-hour lunch break, and go back to work until 5 PM. And when I saw him in action, my dad was my first role model, the perfect example of what I really did not want to do with my life.

Ben: Yeah, sometimes happens.

Michel: I mean, I decided right there in my teens, “This is not what I’m going to do. I want to be independent, to break free, to be my own boss in planning my day.” This was really my goal. Fortunately, I had a fantastic mother who, when I was 18 or 19, she said, “You have to go to England. You have to study English because if you don’t speak English you’ll never get anywhere in your life.” So I went to England — actually, not in London. I was at Leeds University, which was great because nobody spoke German or French there, so I was forced to speak English every day and to learn it quite quickly. I must say, it’s a great language — the language of Shakespeare, which I love very much. When I came back, my sister had already moved to Geneva because she wanted to improve her French and she said, “Why don’t you come down here?” So I still remember, 16th of April 1969, I ended up and I slept on the floor in my sister’s studio. That was my first night in Geneva. I immediately was very quickly in a company in Geneva, a watch factory. It was a time when the Japanese watches became very strong — Seiko, Citizen — and all their watches had metal bracelets, except the Swiss watches. We had only leather straps. And I remember, they put me in charge of the purchasing department there, at that watch company. And our salesmen always complained that we did not have any metal bracelets. So they told me to seek for metal bracelets. So, I looked around and I realized that the manufacturers in Switzerland, first of all, they were only very few and very expensive — 50 francs or more a metal bracelet. So, I looked around and I realized that all these bracelets came from Asia — Japan, Hong Kong, Korea.

[00:05:14.28] Ben: At that point, was the Swiss watch industry losing competitiveness because it didn’t have metal straps?

Michel: The Swiss watch industry was in deep trouble — really threatened by the Japanese watch manufacturers. As I said, Seiko, Citizen, Ricoh, Orient — these were the four big ones. But it was not only the bracelets, but technological changes. Number one, there were the quartz watches because the Swiss, although they invented the quartz watch, they didn’t believe in it. The Japanese used that technology and they made the watches always thinner, and thinner, and thinner. And the Swiss watches were big potatoes, heavy potatoes. Nobody wanted them in the world markets. And in addition, in all those warm and hot countries, humid countries, a leather strap is dead after three or four months. So that’s why the Japanese have metal bracelets. And I wanted to bring those metal bracelets to the Swiss watch manufacturers, as well.

Michel: So, I left for Japan — I was 23 years old — made a joint venture which was my first startup at age 23. And there, in Tokyo, I remember I had 10,000 Swiss francs in my pocket, and I knocked on the door of the biggest major bracelet manufacturer in Japan — 3000 people. And I remember as if it was yesterday, the president of the company, the chairman of the company, he received me there, I explained to him about my dream, what I wanted to do. He did not even let me finish my sentence. He just came out and said, “Jordi-son, you must have a big dream!” And so, he told me, “Look, if you don’t have big dreams, you never get anywhere.” You know, I expected that we would discuss five or 10-year plans. The guy spoke of the 21st century and the Silk Road long before it was a thing. He said, “Jordi, I’m going to make a silk road to Europe and you will be my first link.” That’s where it started. The bracelet was my first business. I founded that in 1971. And after about 15 years, I kind of got tired. I mean, business was flourishing, we made 25 million Swiss francs in sales with metal bracelets. I was the biggest supplier of metal bracelets to the Swiss watch industry. Everybody used my bracelets.

Michel: And then, Le Clip was my second company. The way Le Clip came along: I was always looking for new designs for watch bracelets, and we worked with a lot of freelance designers. And one day, I came into an office of designers, here downtown Geneva, and there was a drawing of a clock in the shape of a closed pack. There is a big clock, those taper clocks which you put in watch stores as advertising. And when I saw that clock — this was in 1985 — it was just shortly before the Swatch watch was launched. And when I saw that, it was within one night; it was a spark, really. A spark. I saw the whole business plan, I saw this, instead of a heavy brass clock, I saw that in plastic with colorful fancy designs, and to be clipped on and wore anywhere, everywhere except on the wrist. And so, the next day I went back to these guys, I bought the drawing for 1000 Swiss francs. And then, I developed the whole thing. And that was in September 1985. Le Clip was launched on June 10th, ’86. I mean, seven, eight months later, we were on the market.

[00:08:55.11] Ben: When did the Swatch watch come?

Michel: ’82 or ‘83.

Ben: Okay. So you were riding the wave.

Michel: Yeah. I was riding the wave. It’s true.

[00:09:06.25] Ben: Yeah. One of the anecdotes I loved from the book is that… So, you’ve spotted the opportunity to do something a bit different with Le Clip and you got some investors on board. And then, you said those investors became a bit nervous and they wanted some external party to validate the opportunity. And they called on McKinsey to do so. And McKinsey pretty much rubbished the idea, right? Or at least said that you couldn’t price it at any sort of premium. And you chose to just completely disregard the McKinsey report and just launch anyway, at the price point you’d already thought.

Michel: Yeah. I’ve mentioned this in my book, Ignite That Spark. For me, everything starts with a vision. And my vision was so clear about this Le Clip watch. I mean, as you said, I took the Swatch watch as a benchmark. But it was not a wristwatch. And our slogan, actually, was “The watch to be worn everywhere except on the wrist.” That was our slogan. And, for me, it was clear I had to position it at the same price as the Swatch watch — 50 Swiss francs. Not 49.95 or 51. It had to be 50 — exactly the same thing, with the same very, very trendy, colorful, advertising and promotions. And I was just sure. I work a lot with my guts. I listen to my guts. And I had the gut feeling that this was the thing to do. And I put 35,000 watches in production.

Michel: And in the beginning, the problem was I couldn’t find any retailers. Nobody wanted to buy that watch because it is not the watch you sell at traditional watch retailers. They didn’t look at it as a watch. So, I went to see department stores. And department stores loved the idea because it was colorful, they saw the success with the Swatch watch. And the big advantage that you have with the department stores is you get a lot of frequency. People come through. They just go through these stores, they see it, they look at it. And at 50 Swiss francs, you impulse purchase. But still, my two partners were afraid. They said, “Michel, you have to make market research.” So we did market research by McKinsey. And the report came out just about a month before the launch. It was devastating! “No one will buy the product. Totally useless. It’s a gimmick. Who the hell cares about a watch in a closed pack, and what is the watch for if you can’t wear it on the wrist?” And I used that, actually, as my promotional slogan: “The watch to be worn everywhere except on the wrist.”

[00:11:49.26] Ben: There’s a great photo in the book, with “You’re wearing it everywhere but the wrist”.

Michel: Yeah. Actually, we made the front of the People Magazine in the United States. Front page! And People Magazine into circulation is three and a half million, with 46 million readerships. We made the front page of People Magazine! It was amazing!

[00:12:10.10] Ben: So, please buy the book, but if you don’t — this is a photo of Jordi and he’s got watches hanging off his mustache, his hair, his eyebrows, his ear, his finger. It’s a very impactful image.

Michel: Yeah. And if you turn the page, you see Andy Warhol, who came as a special guest for the launch in New York, in October 1986. And, actually, he told the journalist, “I’m waiting for Michel to make a version to clip on my contact lenses.” I loved that one! He was a great guy!

[00:12:48.06] Ben: So your lesson from the McKinsey incident — we’ll call it that — was that you can’t put too much stock by market research. It can essentially prevent you from doing what your gut tells you — and your gut is sometimes a better yardstick of what might work than market research.

Michel: Yeah, for me, at least. I mean, I listen to my gut. Everything I do, I listen to my gut. Which, of course, it doesn’t mean that you’re always 100% right. I mean, sometimes you know, it is a little bit trickier. What market research does not do is it does not take into consideration your advertising expenditures and your promotions. I mean, we sponsored the Montreux Jazz Festival. We had an advertising budget of a million Swiss francs in 1985 or ’86. That was a hell of a lot of money. We had TV commercials, billboards, and the Montreux Jazz Festival. And people just loved the product! I mean, it took off like a rocket. We sold 1 million watches for 23 million Swiss francs in the first year. I mean, imagine, that’s almost 2 million per month for a startup in which the McKinsey report did not believe in the product at all. We were four people at the launch of Le Clip. Six months later, in November, we were 50 people and we produced 10,000 watches a day. I mean, just structure-wise, organizational-wise, everything was just so fast. It took off like a rocket. In all of my life, I’ve never lived anything like those first six months. It was just absolutely unbelievable! The sky was the limit — I can say that!

[00:14:42.29] Ben: And how did that feel?

Michel: It felt fantastic! It was so motivating! It was actually uplifting. We were like on a cloud. We were just running through the world on a cloud. It was unbelievable!

[00:14:59.08] Ben: One of the things I also liked about your book, which resonated with me was — I mean, it’s obvious when you talk about your dad’s life story that you wanted something that was in opposition to that rigid corporate life. But then, what you say in the book is that, as an entrepreneur, you feel the highs so much more and also the lows so much more. And so, I can just imagine how it felt to, first of all, prove all the naysayers wrong. And then, to get something out there, where you’re producing, 10,000 watches a day, and everybody wanted it. I mean, I can just imagine how that felt.

Michel: Yeah! I mean, department stores like Grand Passage in Geneva or Globus in Zurich, they had to empty their cash register on big days — Friday, Saturday — they were doing it three times a day. There was so much cash, they couldn’t put the cash anymore in. At that time, you didn’t pay by credit cards. You paid cash.

a lot of people say, “The business plan is dead, forget about the business plan.” I think it’s totally wrong. — Michel JORDI

[00:15:53.28] Ben: Yeah. That’s wonderful! So I guess, also, you were very much part of the renaissance of the Swiss watch industry at that time, right?

Michel: Yes! Which, as I said, was initiated by the Swatch watch. And this came along. It was in the same trend.

[00:16:09.29] Ben: So, in this story in the book, you talk a lot about your gut instinct. You also have this — you call it, ‘ready-fire-aim’, right? This idea that if the timing’s right, you’ve got to get something into market, and then you can iterate after that. But, at the same time, you talk a lot about the importance of writing a detailed business plan, documenting the mission, the vision. How do you reconcile the ready-fire-aim mentality with having really detailed business plans? Because this was one thing where I kept reading those two statements in the book and thinking “I’m not sure they’re completely consistent.” So I just wonder how you, yourself, reconcile those two.

in discussing with young entrepreneurs who always say “I have a great idea, I want to do this and this.” I say, “Put it on paper.” — Michel JORDI

Michel: The book is divided into four parts. Part one talks about the lucky clover, which is the first four commandments. And those first four commands are vision, guts, different, and timing. And I think these four are so important — and what I’m telling all young entrepreneurs is, “Fill this out — that lucky clover — and evaluate it with notes from zero to 10, for each of the four leaves. If you hit 40, you’re gonna have a home run.” In those three companies, I always had 40. And that’s why the three companies became international successes. I mean, Le clip, The Swiss Ethno watch, the Twins Heritage — they all were 40 point measurements on the lucky clover. But if you’re below 30, I think you should really worry about what you’re going to do as an entrepreneur.

Ben: Yeah.

The only thing that changes all the time is the market. So adapt to it. If you want to be successful and stay in business, you have to adapt to the market. — Michel JORDI

Michel: Then you have to start to measure what is missing, which of the four parts are not correct? What I’m trying to say in this book because a lot of people say, “The business plan is dead, forget about the business plan.” I think it’s totally wrong. Well, what I think is, it’s almost impossible to do and what is not right is when people ask you to make sales projections for the next three to five years. This is extremely difficult, especially for a new business. But what is important in writing your business plan is going through the thinking process of your business. It’s like what I also explained afterwards in my rainbow target, which talks about marketing, price positioning, and all these different things. It is very important, when you write a business plan, it forces you to go through the thinking process of your business, and then, suddenly, you get stuck somewhere. Did you think about distribution? Did you think about marketing? Did you think about the point of sale? All these things, you have to think of it. And I felt, in discussing with young entrepreneurs who always say “I have a great idea, I want to do this and this.” I say, “Put it on paper.”

Ben: Yeah.

Michel: The minute they put it on paper, they get stuck. They don’t know what to write on the paper. That’s what I’m trying to say, if you cannot put it on paper, that means your vision is not clear and it’s going to be very, very difficult to reach your goal. But then, as I also said, ready-fire-aim means you cannot always get all the parameters 100% the way you would like to have them, because there’s some gray zones. You don’t know exactly what to do. If you want to, just aim all the time, you can aim for 2,3,4 years — you never shoot. So there comes a time, there’s a certain factor of risk involved, you have to shoot and then aim as you go along because then, you really, in the real world, you’re in the market, and you have to adapt to that market at all times. Markets are changing. The only thing that changes all the time is the market. So adapt to it. If you want to be successful and stay in business, you have to adapt to the market.

[00:20:16.16] Ben: Yes. Jeff Bezos talks about this idea of being able to take decisions when you’ve got 80% of the available data.

Michel: Yeah. Exactly!

[00:20:26.15] Ben: So what you’re saying is a business plan for you is making sure you understand the big blocks that will be needed to be successful. So, understanding your go-to market plan, understanding how you’re going to do marketing, distribution — but it doesn’t have to be completely precise. And there’s no point in doing five-year projections.

Michel: Absolutely! I totally agree! No, I mean, as I said, you cannot always have everything right. There is a gray zone, which you only know once you’re in the market. That’s what I’m saying. Then you start to aim.

part of the problem is when you make a disruptive product — like Le Clip and also the Swiss Ethno watch — if you want to make a market research, you’re going to meet some people. They all say ‘no’. Do you know why? There are no benchmarks. They cannot compare with something existing. — Michel JORDI

[00:20:56.29] Ben: Tell us a bit more about the Swiss Ethno watch.

Michel: Well, as I said, I mean, from Le Clip, the problem with Le Clip was it grew so fast that I just couldn’t finance the whole project. I ran out of cash. So, I had to bring in an investor. And I was very naive and believed everything he said, instead of taking a lawyer or an advisor with me to make sure we all do every step properly. I trusted my two former partners, that they will take care of that part. But instead, they partnered up with the new guy, and they kicked me out. So I mean, a naivete. I concentrated on business, whereas they concentrated on what is the best way to kick him out so we can take control of the business, you know? And then, of course, I didn’t know what to do.

[00:21:55.29] Ben: You’re right! I’ve missed an important step, which was exactly this point, which is, you lost control of your own company. And I think this is, again, one of the lessons you draw in the book, which is around managing cash flow. Because this is a classic case of, you just grew so fast, there has been such working capital pressures on the company, that in the end, you had to take in what we might now call ‘vulture capital’ — you took in capital that came with, ultimately, in this case, really horrendous repercussions. So, talk to us a bit about some of those lessons. I mean, I think there’s a whole section here.

Michel: Yeah, it’s commandment number 10 — Cash Flow. Cherish your cash. Cash is your oxygen, as in if you run out of it, you die. But again, I went to IMD, I went to Harvard. That is exactly what they tell you everywhere: “Be careful. Don’t run out of cash. Grow slowly, because if you run out of cash, you may lose control.” That was the situation with Le Clip. And there was just no choice. It just went through the wall! You can’t stop it. You can’t stop it. But then, I mean, maybe today, what I would have done differently, I should have immediately taken my personal lawyer or advisor and make negotiations myself instead of my first partners doing it. Because, in the end, they just partnered up, as I said, with the new investor and kicked me out. I mean, the guy promised to invest seven and a half million Swiss francs in 1987. That was a hell of a lot of money. He brought two and a half million. The rest never came. So, I took a lawyer, I started to attack him, but I had already lost the majority when the deal was done. I was below 50%. And he brought only two and a half million. What can you after it? It was too late! I couldn’t come back. I mean, I was kicked out but as I said, in hindsight, you’re always smarter, you know what you should have done differently. I just had to acknowledge that this was one of my learning curves, one of the things which did go wrong, but I knew should have been done differently. But I can also say that had there not been Le Clip, there would never have been the Swiss Ethno watch because I couldn’t do this with the Ethno watch, without all the lessons, everything I learned from that first experience.

[00:24:34.06] Ben: And so, talk to us about the Ethno watch. First of all, where the idea came from, how you executed the idea, what you did that was different from Le Clip? So, building on the learnings from Le Clip.

Michel: Well, first of all, Le Clip was sold at 50 Swiss francs, it was a fashion accessory wore everywhere except on the wrist, but the Swiss Ethno watch was a classical wristwatch to wear on the wrist with a leather strap. But, what I did differently because after Le Clip, I made a trip around the world to see former friends, to get ideas, brainstorm what should I do next. I mean, I was devastated, I lost my ground, I had a family to feed, I had two kids. And I knew only one thing: that I wanted to remain free and independent. So, no way that I would go and work for somebody else. So I went around the world, saw old friends, and asked for advice, “What do you think I should do?” And several of them said, “Make your own watch. Why don’t you make your own watch?”

Ben: Yeah.

Michel: As I said, “Who is ever going to buy a watch where it says ‘Michel Jordi’ on the dial?” I just couldn’t envision that at this point. I didn’t have the confidence to put my name on the dial. It was my wife, actually, who convinced me. She said, “You have to do it!” She felt it was a great idea! She’s Korean origin, she has a big spirit and can think big. After a few months, I decided, “Okay, let’s have a go!” And then, these people I met around the world in Singapore and Japan said, “Why don’t you make a typical Swiss watch? Like the Swiss Army knife.” Now, what is so typical about Switzerland? The most typical symbols we have in Switzerland are the cows and the edelweiss. So I took to cowbell, embroidered the edelweiss on the strap, and the cows went in circle around the bezel of the watch — That’s exactly it. It was amazing! It was an amazing timepiece. But, again, part of the problem is when you make a disruptive product — like Le Clip and also the Swiss Ethno watch — if you want to make a market research, you’re going to meet some people. They all say ‘no’. Do you know why? There are no benchmarks. They cannot compare with something existing. So, they said, “This is a kitschy tourist trap. No Swiss will ever buy the product. Maybe you can find some tourists in Interlaken or Lucerne.” But I decided to do it anyway. I put 10,000 watches in production before I even had an order.

I did not sell folklore, I sold lifestyle — Michel JORDI

Michel: And, again, retailers didn’t want to buy it. I decided to make it rare and limit distribution to only 100 product sets. But each one of them had to invest in a package of 100 watches for 20,000 Swiss francs. And I managed to get them together. It was very, very hard work, a lot of persuasion, a lot of traveling, but finally, thanks to Bucherer — the big retail chain store, Bucherer — they ordered 1500 watches as a starter. And once I had Bucherer on board — the best retail in Switzerland — all the other followed because if Bucherer says that’s fine, then, I think it must be something good. So, I managed to put them together. I made an amazing launch. I invited them to launch the product to the cradle of Switzerland, at the shores of Lake Lucerne for an unbelievable launch party, for which they had to dress in their Swiss national costumes. They were all motivated and joyful. They all went home and said, “We’ve got to spread Swiss Ethno fever”, and suddenly the product took off. I can also say, one thing is, we spent one and a half million at the launch party, advertising, and promotion-wise. If you cannot advertise heavily in promotion, you don’t have a chance to bring the message across.

Commitment is 200% and you never think about the plan B, when you start. It’s impossible. — Michel JORDI

[00:28:47.04] Ben: Yeah. Because you’re trying to persuade people to change their buying behavior.

Michel: It’s a must. You have to make it a must. I wanted it to make it a must. But I did not sell folklore, I sold lifestyle. The most important thing was to sell it as a lifestyle product.

[00:29:04.23] Ben: There’s a few things to delve into, here. So, one is marketing. I mean, I’m a marketer myself, and so, I loved some of the things you were saying in the book about marketing, because my frustration or my critique of a lot of marketing efforts is they put too much emphasis on just one of the P’s — promotion. And what I liked a lot in your book is you talk a lot about the other three P’s. And one of the things you talked about a lot was these launch events and the impact you can have of getting something on the radar of people, of the consumer who’s time-poor, of the publications who are stretched in terms of resources. And so, a big launch event could catalyze the branding and the marketing of something new. So, can you talk to us about that? Because I think that, again, there’s a lot on this in terms of these launch events.

Michel: Yeah, it’s crucial. I think it’s crucial in our success. If you only advertise or communicate through classical marketing, you have those beautiful pages in magazines. But today you open a magazine, there are tons of advertising. Tons of advertising, also, of watches. But people don’t talk about an advert. They just turn the page. But when you make a crazy event, like what we did — we made a fashion show at Piccadilly Circus with cogs, a Swiss Folk group, and Swiss flags, as well. I mean, Piccadilly stood still. And then we made the Swiss Primetime Evening News. I made an advertisement at the foot of the pyramids, in Egypt. We took a sailboat up to the foot of the Matterhorn. All those crazy events. Then, what it does is, first of all, it projects the company as being very dynamic, disruptive, unusual. And, at the same time, people talk about it: “Did you see what the guy did? It was cows and edelweiss and camels in front of the pyramids or a sailboat at the foot of the Matterhorn!” People talk about things like that. So you can stretch it for quite a while. And especially, also, I always invited my retailers — the network — to these events, because I wanted them to be part of it. And very often, we didn’t just invite the owners, but the sales personnel because suddenly, the sales personnel was there at the launch with the owner of the company — with Michel Jordi. They could talk to him. You know, you have to be very humble in these situations. We’re all the same. And the retail, if you want to sell something, it is a long chain. Many people are involved and important for a sale. And I always say, a chain is only as strong as its weakest link. And, if at the front of the sales point, the salesgirl, the salesman, doesn’t believe in your product, doesn’t propose your product, you’re not going to make any sales. So, that’s what I say. Then you advertise. The last ‘p’, as you mentioned before, is the point of sale. If when you advertise, you cannot have a really optimal presentation, your product doesn’t stand out on the point of sale. You’re not going to sell it.

[00:32:29.23] Ben: And I suppose this idea of hacking — we might call it hacks or guerilla marketing — it’s actually become probably more, not less important, right? Because we’re all on our devices, we’re all even more distracted than we were in the past. So, it’s even harder to get on to the consumer’s radar because the consumer is more attention-deprived than ever. So I think the lessons in here are, you know, it’s not like because you were launching watches in the ’80s that these lessons are not applicable today. I would say they’re even more applicable today. And the other thing I liked a lot when you were talking about marketing was the importance of price on the one hand, but the other thing was packaging.

in my age, it was a shame to fail. It was a real shame. People looked down on you […] I mean, I failed four times. So what? Give yourself a chance to fail because, as I said, the most important thing when you fail is that you learn a lesson every time. — Michel JORDI

Michel: The packaging is very important. The first contact your customer has with your product it’s the packaging. First of all, you have to stand out! Of course, I mean, I’m lucky. I mean, I’m a Swiss citizen. What are the Swiss colors? It’s red and white. And red is the color of passion. Red was always involved in my packaging and everything. So red stands out. My books are red.

[00:33:39.15] Ben: Yes, that’s true! And also, for the Ethno watch, timing, again, was very important because you timed the watch to coincide with Swiss anniversary, right?

Michel: Yeah. Again, it’s part of the lucky clover — the first four commandments — as I said, vision, guts, differentiation. If you’re not different, if you don’t have a USP or a competitive advantage, you don’t stand a chance. And then, the last of these four is timing. And I realized that all these companies, which have been very successful, the timing was just perfect. And there’s a market research by American Venture Capital Group who revealed that 42% of startups fail because of bad timing. And I must say, sometimes it takes a portion of luck. I mean, the Swiss Ethno watch, without the 700 years anniversary, will probably not have been as successful as it was. Because we got a lot of write-ups from the press because we linked it with this 700 year anniversary. And if I come back to Le Clip: Le Clip was because I could jump on the bandwagon of the Swatch watch. And then, the Twins Heritage — I mean, imagine, my third watch, the Twins Heritage. I made Le Clip 50 Swiss francs. The Swiss Ethno watch, gold plate — 395. And then, after that, I come with the Twins Heritage — the price is ranged from between 70,000 to 220,000 Swiss francs for watches. When you go to any university, any business school, they just tell you, “This is simply impossible. You cannot, with the same brand, Michel Jordi — Le Clip was different — but from 395 you go up to 70,000 or 200,000!” Everybody said it’s impossible. And that’s what the press told me: “You’re crazy! It’s simply impossible. You’ll not be able to do it!” You know what? We made a fantastic launch event, with a great write-up in the Tribune de Geneve, production for Twins Heritage was booked out for a whole year within only two weeks after the launch. And we sold over 4 million Swiss francs of watches, in the first year. It was amazing! And because it was, again, something different.

[00:36:12.06] Ben: I just want to get back to the idea of guts, which is one of the four parts of the lucky clover. How do you rank guts? Because clearly, you’ve shown massive guts, putting a 10,000 order for Swiss Ethno before you’d even had a single retailer prepared to take it. It shows massive bravery. But, how do you rate guts out of 10? Because I can see how you could see what’s in the market and you get a sense for, this is 10 out of 10 differentiated. I can see how you can look at the timing and say, “Okay, there’s something I can hang this on.” There’s some market change or some technological change, and that’s the perfect timing. I can see how the vision you could rank it out of 10. How do you rank guts out of 10?

Michel: Well, I guess everybody has his own way of measuring his guts’ capacity or whatever. I mean, I just kind of developed it. Somehow I developed this and that was always very daring. I mean, guts is daring courage, risk-taker. I mean, guts has a lot to do with risk-taker. I took a hell of a lot of risks in my life. It also failed sometimes. I mean, that’s why I’ve fallen on my nose. But the good thing about guts, it’s like when you eat: sometimes you bite up a little bit too much than you can chew. So, you have to work your way through, to be able to chew it down and digest it. It’s the same thing with guts. Sometimes, you maybe took a bite a little bit too big. But it forces you to find solutions. You just have to go because giving up is no option. My book, actually, the autobiography, the English title, actually, is “Guts” and the subtitle “Giving up is no Option.” That’s the only thing, just guts. I envision things, I fix myself objectives. And then, of course, you have to weigh “How far can I go? How much can I bite up and hope to be able to digest?” And then you just have to run for it. You just have to work. It’s very, very hard work. And you just don’t give up. There’s no choice.

the best product in the world is of no use if people don’t know that it exists and where to buy it and why should you buy it — Michel JORDI

[00:38:36.20] Ben: Yeah. And another part of the book is where you were interviewed, and somebody said, “Well, what’s your plan B?” And you laughed, and you said, “There is no plan B”. So it’s gut almost like a proxy for just how committed you are to this?

Michel: That’s a very, very, very good question. As you say, correctly, this TV presenter asked me, “What’s your plan B for when you start your new company?” No. Commitment is 200% and you never think about the plan B, when you start. It’s impossible. That means you have two business plans. You have, “This is what I want to achieve” and “This is what I do when it fails.” That means that you plan to fail there in the first two weeks or the first two months. Forget it! Then you’d better don’t start. I mean, when you launch something, you plan to be there at least for a year or two or more. And since the markets are moving so much in six months, once you choose this, the market will be so different, everything’s so different than when you started out, that you cannot foresee what will be your plan B by then. So, just focus and concentrate on your success and make it happen.

[00:39:53.09] Ben: In the book, you point out that the pace of change is accelerating all the time, which is, I suppose, a good and a bad thing, right? Because more and more opportunities are opening up for entrepreneurs. And then, you say that also, that it’s become cheaper and cheaper to launch startups because the barriers to entry, the tech costs of creating a startup are falling. So, is your advice now, still the same as it was — i.e. create a business plan, have massive conviction, do the research, understand if it’s differentiated? Or is it more trial and error, now, because there’s so much change, to do more startups, to try more things?

Michel: Of course. Of course. I mean, time is now! I mean, your time is now. Of course, the thing is, you cannot stop progress, and we cannot stop where we are moving now. But I think every era, every period has its pros and cons and its advantages. I would say, today it’s so much easier to start a company, than in my time. First of all, in my time, it was almost impossible to find the money. We didn’t have the same technology. We had no computers, we had no iPhones, we had nothing. No smartphones. Today, all the tools are there. They are at your disposal. And also, I mean, in my age, it was a shame to fail. It was a real shame. I mean, people looked down on you, “Look at this guy! He failed!” I mean, I failed four times. So what? I mean, give yourself a chance to fail because, as I said, the most important thing when you fail is that you learn a lesson every time you fall. And, as I said, without Le Clip, I could never have done the Swiss Ethno watch; and without the Swiss Ethno watch, I could not have done the Twins Heritage. Everything became an evolution and was a fantastic learning curve. And what I can say, also, in hindsight, I don’t regret anything. I had a fantastic life. I enjoyed myself. I never looked at my watch. I never felt that I was working. Yeah, as a watchmaker, I never looked at my watch.

Ben: Yeah, as you say, it’s an irony.

Michel: I really had fun. I just lived my passion — and I think that’s the most important thing: people living their passion. I mean, life is so short and it gives so many opportunities. And also, when I mentioned the event marketing and all that stuff — today, things have not changed. Event marketing is still there. But it’s different because today you have the social media. With social media, you can make so much noise! You have Instagram, you have Facebook, you have all these things. We didn’t have that. So, the enormous opportunities and the advice I could give to young entrepreneurs who want to start their own business, start as early as possible. Start in your teens. The greatest thing to teens — 13 to 19 — because maybe you’re still in school, but you have peers, you have colleagues. You have no responsibility, no family responsibility, you have no kids. And it gives you a chance at 19 or 20 — you can fail two, three times and you’re still young to make it to the next point. And every time, you learn something, until you finally hit the jackpot!

in all of my companies, the most important for me was to surround myself with competent people — Michel JORDI

[00:43:31.13] Ben: I think this is, again, a really salient point, which is, you talk in the book about always being curious, always learning — which I’d say is, again, universally applicable probably more important now than ever, right? You know, you talked about your father’s life, this sort of rigid eight to five type setup and you wanting to do something different and be your own boss, and so on. But actually, almost like the option to have that rigid corporate life is disappearing, right? Because I mean, there aren’t so many jobs that you can do for your whole life anymore, right? So, it’s almost like more of a need to become entrepreneurs through necessity than was the case before. And one of your definitions of an entrepreneur is somebody who’s just constantly curious and constantly learning. Do you think you can teach that? Or do you think that’s just something that’s inherent intrinsic to individuals?

Michel: I think everybody has the ability to cultivate it. It’s an attitude. It’s an attitude to be curious. I mean, I’m so curious. I always ask a lot of questions. I want to know more, and I never take no for an answer. I want to know what is behind. And I think today, for the kids, they just have to be alert. Be alert. Eyes open, ears open all the time! And learn. Because, in the end, what is important is know-how. Through all the experiences we do, we learn a lot of things — which today we call know-how. And know-how is maybe one of the few things you don’t learn at the business school or universities. You only learn it by doing. So do it. Break your neck. Stand up and try the next thing. You know, without failure, there will never be any progress. You have to understand that. You know, the Wright brothers, the people who started to fly — how long did it take until you could fly an airplane? How long did it take until you could lift up and fly? How many people died? I mean, unfortunately, it’s the same thing, but the damages are not the same because you don’t lose your life. Those pioneers lost their lives.

[00:45:57.06] Ben: Yeah. Maybe we should talk about one of the things that didn’t work for you, which was the Swiss Icon. What was the reason it didn’t work, from an approach point of view? Did you apply the same methodology, the business plan, etc. to that business? Or was that one where you knew it was riskier because it didn’t score so well on the lucky clover? Talk to us about that.

Michel: It’s the perfect example. And I think it really rounds up my book because if I look at that lucky clover, at least two out of the four leaves were not optimal. The number one was timing — it was the worst time.

Ben: If you could just elaborate on that.

Michel: We launched it in August 2011. It was exactly when the Euro collapsed and so did the Swiss francs. And suddenly, you could buy Swiss watches cheaper in London or Paris or anywhere in the world, because the drop was over 20%. It was unbelievable! That was, even, at that point in time was almost par: one euro for one Swiss franc, for a couple of weeks. And so, of course, everybody stopped buying. I started to sell only on the Swiss market, concentrate on the Swiss market. So, time was definitely very bad.

Michel: Another thing was differentiation. It was a beautiful product. This is a beautiful product, I have it on my wrist every day, but it was not as different as all my other products. And when it is not that different, then what you need is you need very, very heavy advertising. You need a hell of a lot of advertising. And what we did, I had two partners in that company. So, what we did when the Swiss franc collapsed, we cut our advertising expenditure. Huge! We just crossed and stopped everything. And that was the first big mistake. And what we should have done is, if you cut the advertising budget, you should also reduce the price because suddenly that price — 7900 for a chronograph would only be paid if you advertised strongly so people would want to have it. But if you reduce your communication budget, your price should also come down, your retail. So maybe we should have sold it at 4900 or whatever, 3900. We didn’t do that. So it was definitely a mistake, a misjudgment, or whatever. But as I said, I also had two partners. I couldn’t do everything. I mean, the launch wasn’t the way I wanted to. And then came my bicycle accident where I lost consciousness and I had three broken ribs and things were going to get very, very difficult and more complex. And I decided, in the end, to sell the company to the partners and get out of it.

[00:49:08.10] Ben: So, was one of your learnings that when you’re launching a disruptive product, the advertising budget should never be seen as discretionary? Because it’s just trying to do something really disruptive — without the air cover of a big marketing budget is Canute-like, impossible to do.

Michel: Absolutely! You have marketing expenses — they are very, very important. You have to communicate, because the best product in the world is of no use if people don’t know that it exists and where to buy it and why should you buy it. Of course, I mean, there’s several ways of marketing. Also, what’s important is, I always try to first have trendsetters to wear your product because when you have trendsetters to go around and talk about you, it’s visibility. You need a lot of visibility. And you can only get that visibility when it’s the thing to have, which means you have to communicate.

[00:50:07.04] Ben: I would say that that trendsetter part is more important now than ever, also, right? Because we live in a world where branding is so tied to individuals. So yeah, having influencers wear your stuff. And when you were getting trendsetters to wear your stuff, did you pay for that? Or you just created a product that was so desirable that people wanted to wear it?

Michel: No we didn’t pay for it.

Ben: That’s what I expected, yeah.

Michel: But it was just so good, people bought it to have it. But we made it sexy. You have to communicate it in a sexy way and you have to package it properly. I mean, in the end, the product almost has to sell by itself. When you take it in your hand, there’s an emotion going through your body. You feel it. That’s the difference when you’re wearing a Swiss watch. A Swiss watch has a soul. If I buy a watch made in Japan or Korea or China, there’s no soul in it. It also gives the time, but it is no soul on it. I mean, the Swatch watch at 50 Swiss francs I think it’s the greatest consumer product ever made. Ever made. Because at that time, the watch was 50 Swiss francs. What other consumer product gives you technology, precision, mechanics, time, and lifestyle, for 50 bucks? It’s amazing! I think it’s a great product still today!

[00:51:42.02] Ben: Why do you say that Swiss watches have a soul in a way that other countries watches don’t have a soul?

Michel: The way we communicate it, the way we market it.

Ben: Yeah, because I think one of the things that Switzerland does brilliantly is packaging, right?

Michel: And communication. It’s communication. I mean, most big companies, they have a great slogan around. Look at the Rolex advertisement — it’s amazing!

[00:52:08.07] Ben: So, I just want to get you in a couple of other things that you talked about in the book. There’s a really nice soundbite where you say ‘talent wins games, but teamwork wins championships.’ Can you talk to us about the importance of building great teams and how you cultivate those teams?

Michel: I think it’s essential for every company to have a great team. And that’s exactly the slogan you just said: a team wins championships because, if you compare it with an army, there’s no use to be a general when the troops cannot follow you. Napoleon could never have won if the troops were not right behind him. And in all of my companies, the most important for me was to surround myself with competent people. You can read about them; I get a lot of testimonials in my book here. One of my guys is now CEO at Rolex Australia, another one is CEO at Bucherer in Lucerne, about 10 of them have started their own company. I have regular contact with them and they always tell me, “Michel, without you, I would have never been there.”

[00:53:26.12] Ben: So there’s two functions there. One is spotting raw talent. How did you do that?

It’s beneficial for the company to take a vacation, to take off. And this is what I think we have to understand. You cannot perform when you’re tired. Enjoy life! — Michel JORDI

Michel: Empowered them. Empowering people.

[00:53:37.17] Ben: But empowering people presupposes that they’re good in the first place. So how did you spot the great people? And then we can talk about how you empower them.

Michel: You know what? It is very fun and very interesting: I believe that a lot of people have much more talent and are much more capable than they think. But you have to give them the confidence. You have to detect and see where the strength is and let them go, let them loose. You know, I realized, when you let them loose or ask for them big things to do, it’s very motivating. Because they’re like, “My boss has confidence in me! He thinks I can do that!” I mean, the one who is now in Australia, the Rolex CEO, he was a watchmaker repairing watches at a retail shop in Zurich, and he was about 22 years old or 23. I said, “What are you doing here?” I mean, you know, as a watchmaker at his age, I saw that guy had potential. And I wanted to have salesmen going out to sell my watches, who know what they talk about — watchmakers. So I took him, I trained him on the Swiss market, then I sent him with my best salesman internationally, to the Middle East to learn about the international salesman. Then I told him, “Now you’ll go to Hong Kong and you’ll open my affiliate office in Hong Kong.” He opened my affiliated office in Hong Kong, and then made a business plan. We showed him how to do it. And the guy, he was 26 years old, he was trembling. He said, “Can I do it?” I said, “You will do it! Just go!” Throw them into the water, give them a chance to maybe make mistakes. But you learn from the mistakes. Again, they learn to swim.

[00:55:28.19] Ben: The impression I get when I listen to you is not only were you very much part of the renaissance of the Swiss watch industry, but also to the longevity of that Renaissance because of all the people that you coached and all the people to whom you gave opportunities? Would you say that’s fair? I know you’re a modest man.

Michel: I’m a very, very small part of that. And in the end, it’s still the guys who have to do the job. But if we come back to Bucherer, now the guy who is CEO, his second man below is also a guy from me because he was looking for a number two man. And I had him, he was a guy who worked in another company, in the Twins Heritage. So now Bucherer’s number one and number two, both come from my team. So these guys, once you give them the opportunity, they have to see their opportunity. They have to grab it. But very often, I think a coach’s job is to detect the ability, the talent and give them the confidence to really develop all their potential. Very often, they don’t even know what they’re capable of. So, develop that potential.

[00:56:48.11] Ben: The confidence and the opportunity, right? Because you did both, right?

Michel: Yeah. See it, have your eyes and ears open.

[00:56:56.03] Ben: And then what about leadership? Because it seems like you’re the sort of leader who leads by example, right?

Michel: This is leadership. Show them the example. Exactly. I mean, for example, you know, most of the time, I was the first guy in the office. Most of the time I was the guy who closed the door. You have to show them how to do it. Get your fingers dirty yourself.

[00:57:21.27] Ben: But having said that, you also talk about the importance of work-life balance in the book.

Michel: Yeah.

Ben: So, live by example, show the level of commitment to the business, but at the same time… Or would you say also lead by demonstrating to people the importance of not burning out, of pacing yourself off, as you say, eating well, living well, exercising.

Michel: I never had anybody in my company who had to burn out. But I must admit that I have been close to burnouts a couple of times. One of them was at Le Clip. I remember I arrived once in Vancouver on a Friday night and I stayed in bed the whole weekend and on Monday I traveled on to Japan, to Tokyo. I didn’t see anything of Vancouver except the airport. I was just so completely tired. So you have to listen also to your body. When you’re down, you’re down, then you have to rest. And what I learned over time is that when I grew up, you were a hero, and you wanted to show that you work hard and you work long hours. Today, I realize — that’s what I’m also trying to tell people is that the art of doing a good job is of knowing when to relax and when to slow down. So, I started to take long weekends, and that’s what I could suggest to anybody. A long weekend, let’s say three, four days, when you’re in the 30s or 40s. I mean, it can do wonders in regenerating yourself. Or take a week vacation — whatever — because when you come back, your mind is emptied, you know, and you have just so much energy. And it’s only good for the company. It’s beneficial for the company to take a vacation, to take off. And this is what I think we have to understand. You cannot perform when you’re tired. Enjoy life! That’s all I can say. I love to drink a good glass of wine. You work like hell during the day and in the evening, a good glass of wine — hey, what a pleasure! What a relaxation!

[00:59:31.07] Ben: Talk to us about why you ended up calling it a day when you realized that you didn’t want to do any more startups — and the conditions that then gave rise to you writing this autobiography, which sadly, is only available in German, right? At some point, maybe you’ll publish the English version. So, talk to us about that realization that enough is enough. It was now time to take a step back.

Coaches are so important, because, as I said, a lot of people lack the confidence. They don’t see all their potential and that’s what a coach is for. And I think, if I can help people detect their potential and live also, as I said before, a balanced and a rewarding life, then I think it’s a fantastic way to end the fourth part of my life. — Michel JORDI

Michel: Like I said, the lucky clover has four parts. Our life has different segments. There’s our youth, there’s education, then you start to get into the corporate drive, then you become independent as me, but then, I’m 70 years old now. I mean, you have to think how much longer you have to live? It’s 10 or 20 years if I’m very lucky, if God wanted. So, what do I do with the rest of my life? And I think the rest of my life is not going to be behind the desk and doing operations stuff. But coaching people, or consulting companies, detect talents or detecting opportunities. Coaches are so important, because, as I said, a lot of people lack the confidence. They don’t see all their potential and that’s what a coach is for. And I think, if I can help people detect their potential and live also, as I said before, a balanced and a rewarding life, then I think it’s a fantastic way to end the fourth part of my life. First of all, life is not a 100-meter dash. Life is a marathon. And it’s not like a football game where you have two halves. I think it’s more like basketball where you have four quarters or something like this. So I’m maybe a man now in my fourth quarter. And I think there’s still a hell of a lot to do and I’m looking forward to it.

[01:01:40.20] Ben: Fantastic! That’s a wonderful optimistic note on which to finish the podcast. So Michel, thank you so much for coming. Buy the book — Ignite That Spark — it’s full of sage advice, and it’s really a great read. You can read it in a single sitting. I think it’s also a reference — you can keep coming back to it.

Michel: Yeah, it’s like a Bible. You can take it back anytime. But also, what I said is, the book costs 19 Swiss francs — roughly $20. What I say to everybody who buys my book is that if you don’t get 20 bucks value or wisdom out of this, write to me, and I refund it.

Ben: You get your money back, guaranteed, from the man himself. Okay. Thank you so much again, Michel!

Michel: Thank you! It was great!

Brand Conversations and Creativity at Scale (#27)

Brand Conversations and Creativity at Scale,

Podcast also available on:

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Full podcast transcript:


We keep on hearing about the fact that consumers are in conversations with brands. We keep on hearing that it’s a two-way street and everybody’s saying, okay, brands have to rethink everything, etcetera. And it’s true only to an extent because what people tend to forget is that yes, it’s a conversation. But as a brand, you’re the first one who speaks…

Ben: [00:01:51] Youri. Thanks very much for joining the podcast. Wanted to kick off with a pretty broad question, which is what is the role of a brand in the digital age?

Youri: [00:02:04] If we look at branding before the role of brands before the digital age, It’s very much about trust, right? If you were in the fifties, you wanted to go travel to a Hilton. So you thought, well, if I go to Hilton, I’m going to have hot shower and nobody’s gonna rob me. So a brand was very much about identifying quality service for people in the digital age. This has changed a little bit because it’s much more transparent, right? You don’t need to stay at Hilton to be sure that there’s going to be wifi. Right?

So the role of branding is a little bit more subtle. It’s more about building up association of ideas, right? If we think about B2C, right? If I buy this brand, what does it say about me? If I am a customer from this brand, what signal do I send to the people around me? And that’s pretty much the role of brand, which is going to be more about increasing the perceived value. I think fundamentally our brand is about reducing perceived risk and increasing perceived value at the same time. In a B2B setting, it’s still very much about decreasing perceived risk, right? Let’s say you want to buy machine tools for millions, from a new supplier.

It’s very hard to decide which one’s the best because you look at all the criteria. So the brand is this thing that’s going to make the difference. Thats going to make you feel “okay, I can trust them”. So I think in a digital era, the branding is a, is more and more about increasing, perceived value, and maybe a little bit about reducing the perceived risk in a B2B setting.

Ben: [00:03:42] If branding is about creating an association of ideas, then it doesn’t really work, does it, to try to micro-target? Right. And because, you know, we, we might be able to stimulate demand maybe by micro-targeting, but we can’t create brands by micro-targeting. Right. Because as you said that they are a statement of ourselves and the sort of lifestyle that we aspire to in many ways.

Youri: [00:04:07] I think all marketing practitioners will not fundamentally agree with what I’m going to say, but marketing is very tactical. You know, it’s about defining your own, your four Ps type of thing, you know, product you have or what price, which channel you use cetera. But what we miss most of the time is that these levers that we can use in market coherent with something bigger, which is what the brand is.

Right. And which is much more strategic. So what is your positioning? What do you stand for in the market? What are your key messages? How do you frame a brand? How do you present it to the world? And once this is clear, the strategic level, then you can go down to the operations of the tactic and decide, okay, we’re going to distribute our, our whiskey brand, we’re going to distribute it more into exclusive concept store rather than in duty-free to show that we are an exclusive brand because we are [00:05:00] positioned as an exclusive brand. So I think that two different things, right, and this whole microtargeting really comes at a, at a very tactical stage.

Ben: [00:05:10] So do you think that, you know, we’ve seen a rise of, you know, just on a kind of short term tactical proceeds versus the longterm strategic stuff like brand building?

Youri: [00:05:20] Well, I think we see obviously a lot of short term type of tactics anyway, but I think that they’re not going to build brand equity in the longterm. Because, you know, I mean, yes, you can increase your followers by 20% in a week, but what does it say about your real brand equity?

Maybe not much. What I think is really interesting when we speak about a digital era is that you mentioned it. We keep on hearing about the fact that consumers are in conversations with brands, right? We keep on hearing that it’s a two way street and everybody’s saying, okay, brands have to rethink everything, et cetera.

And it’s true only to an extent because what people tend to forget is that yes, it’s a conversation. But as a brand, you’re the first one who speaks you are the first one who speaks, which means you can define who you are. You can frame yourself, you can position yourself and then people can react to this. They can agree with it, not agree with it, and it’s good and it’s bad. And then the conversation starts, but the framing, you know, the positioning upfront of a brand at a digital level, it’s still a one way streets and I think people tend to really, really forget that and kind of just think that the brand is just something that you know, is going to be a completely shared, that intangible thing.

But actually first is something that is created by someone, a brand doesn’t appear because people think it’s their first, someone give a direction and then people have association of ideas. And then yes, the brand is in the mind of the people who are the audience, but. You know, to have an audience, you need to produce something first.

You see what I mean? And I think it’s something that’s completely overlooked in this digital marketing era, where you have all those digital driven agencies that just speaks about engagement and conversation, but they totally missed the point about it. What is the message you have and what is the content? Just this morning, I was in conversation with one of the big digital agencies in Switzerland and those guys trying to sell me services to take care of my Facebook ad and Google ad cetera, but by discussing with them, and you know, they were charging four, five, six, 10 K a month as a retainer. And then I’m really trying to understand, and maybe I sound a bit stupid, but what is it exactly that they do?

And then it comes down to, yeah, we look at key words and we can make recommendations and be like, well, that’s a lot of money for, for just looking at things. But then they’re like, yeah, because you know, then you’re going to push some really good content and I’m like, but who does the content? Oh yeah, this you should provide to us.

So it really goes down to something that was there before digital, and is still here after digital, which is what you have to say and do the value you offer through content is going to, in my view, definitely overtake all those short term tactical exercise you can do.

Ben: [00:08:07] What about separating products from brand. If you’ve got a great product, people will tell each other. So is in a world where everything’s more transparent. Does it shift the balance towards investing more in product marketing, you know, or to put it another way? Can you have a) a mediocre product, a good marketing team? and b) a company with good products and a mediocre marketing team?

Youri: [00:08:30] It depends what’s your internal benchmark for quality and value is, but if you have a mediocre product and a very strong brand chances that you’re not going to last forever are very high. So I think from the worst, which will be a fad to something, to be a trend to something which might be around, but then it’s going to die off.

Uh, at some point it’s not going to fly and it’s not going to be a brand that will really get people to invest in. I think, especially because then you create a gap between the messaging you sent saying, Oh, we have amazing brands, but actually product is crap. And, and this gap. Into messaging and reality needs to be managed very, very carefully in a digital era, you know, back then it wasn’t the case, but good product is a key success factor you needed to, you needed to be in the game, right.

But a good product alone. It’s not going to cut it. You know, if you have a very good fashion brand or a very good academic program, I have some example about this. Oh, you have a very good boats rental service. It’s not enough. And we sit over and over and over again. We’ve got companies big, smallest that come to us.

They have a really, really good strong offering, good customer service, good product, but they just don’t manage to try to prove them out of it. And then we can help them with the commercial work we do increase that perceived value and reduce the perceived risk of buying them. But we can [00:10:00] only do this because the base product is good.

And when the base product is shaky when, when advertising is basically a misleading and lying advertising type of thing. And that thing, it’s a very, it’s a very dangerous slope to be on,

Ben: [00:10:12] So, you know, a brand starts the conversation, but it is a two. It is, you know, it is a two way conversation and arguably the customer is much, much more influential than they were, you know, pre-digital both in, in terms of, you know, acting as a ambassador for the products, but also I guess, in a sense in shaping the product, right? Because you can get feedback in a way that you couldn’t, when you didn’t have so much direct access to the consumer. So how much, how important is it consumer become in, shaping the brand in the, you know, as in, like now that that two way street is possible.

Youri: [00:10:45] Depends. Really? Which type of companies we’re talking about in reality. Yeah. In theory, yes, consumers are involved in everything, et cetera. In reality. There’s only big, big groups that can afford, for instance, different focus groups and having different market testing, et cetera, only big FMCG companies can afford. As soon as you are in the mid side, uh, segment companies don’t have the time or the cash to do these type of things.

So yes, they’re gonna involve the customer in the sense that they will collect the feedback for instance upfront, but you won’t have that collaborative process. I think there’s two schools of thoughts when it comes to involve the customer. Actually, I am on the one that has the feeling that you should not involve them too much because people actually don’t really know what they want.

They don’t really know why they buy things. And if you ask them, they don’t give you the right reasons. The typical example is the iPhone or the iPad that everybody knows, you know, nobody would have said, uh, Well, I want an iPad or I want an iPhone. You know, I think it was Henry Ford who famously said, if you had asked people what they wanted, they would have said a faster horse.

I think we need to be careful with involving too much people in the, in the creation process, because we need to test it when we can. But from the creative inputs, I’m not sure how valuable this is. We need to understand who the people are and what they want overall. But. I wouldn’t make them co-creator. Long time ago, there was a very small business in Geneva, actually, it was called Leman Loisirs and, um, what they do is boat rental service, right?

So basically you pay money upfront in order to rent a boat over the summer, quite expensive, because you need to have a boat license. You know, you pay at least 3000 bucks minimum for the season. And the business was not going so well. And the owner asked a bit my help. We kind of had an agreement when I help him out.

It’s very small local business. If I had to ask the current customers, what do you think about the service they would have said? Yeah, it’s great. I’ve got my boad, its a good money. There’s not too many people. You’ve got nothing to be changed. So the things that is absolutely not valuable from a brand building point of view, however, what we understood was, well, there is money left on the table because this businesses is positioned as a local hobby, when it should be positioned as a private club. And if you position it as a private club, we can drive the revenue up and we can make it much more attractive for a target segments. So we rebranded the whole thing to Boat Club Geneva, and then, which is not original, but which does the trick, it corresponds to what target audience expect.

Then once we rebrand this whole thing to Boat Club Geneva and told the story about an exclusive club in the center of Eaux Vives in which you can be a member, not a client, a member, the sales picked up. And picked up because we didn’t ask the client what they wanted. So that’s why I think, yes, we need to listen to customer. Yes. If we see that something doesn’t work we definitely need to tweak and test in trials, it works a hundred percent, but at some point you need to take the cat and say, okay, we aren;t going to do it that way because that’s not how we can drive a premium. Branding is about driving a premium. And if you ask customers, they’re never gonna tell you, Oh, I would love this product was 25% more expensive because you tell me a better story about it, even though we know we can do it.

Ben: [00:13:55] Is that how you measure the success of a, of a brand to the extent to which it creates loyalty and the ability to charge a premium?

Youri: [00:14:03] The way we look at it. We look at branding from a very business perspective, which is if you do branding, you need to be able to drive a premium on your business. I need to be able in the longterm to lower your marketing cost because people want to be part of it.

So you don’t have to advertise so much because people want to speak about you, being the price et cetera. So, yeah, I mean, we see it now with an MBA program we worked on in Switzerland, we really had them reposition their brand, their whole program. We didn’t touch the syllabus because that’s not our job. And we’ve seen an increase of 30 or 35% of applicants.

And this is just by branding. And we’re talking about the MBA in a top university in Switzerland. You would think people are rational when they look for an MBA, they would look at the syllabus, look at who the professors are in the syllabus and decide based on the syllabus and the fees, whether this makes sense or not.

But that’s not how people choose an MBA. They choose it [00:15:00] because: does it tell a story I want to be part of? Is it something I’m proud to walk around with?

Ben: [00:15:04] How do you persuade people to come to you and how do you win clients and how do you also charge a premium for the work that you do?

Youri: [00:15:11] You mean us as Creative Supply?

Ben: [00:15:12] Yes. Or a branding agency in general

Youri: [00:15:15] The way we get, we manage to get clients and really build the reputation of the firm because we only are five years old company, but we really, really growing strong.

It’s really two steps process. Actually, it’s so simple, but I’m happy to share it because nobody’s going to do it. You need first to have really clear, good content. And when I mean content, I’ll speak about intellectual property, which means models, frameworks, analytical skills. We’re not selling a vacuum cleaner where I can tell you, try it, if you like it, you buy it. What I’m telling you, what I’m selling you is intellectual capacity to, to build your brand. So the best way I can do. I can do that is by sharing with you some models, some frameworks, some reports, some things where you thought, okay, those guys understand what this is. It’s very easy to do.

It’s very easy, in theory, it’s very hard in practice because one, you need to have the capacity to do it, two the discipline and three distribute it. And then once this is done, while you distribute it and you share your content to as many people as, as you can, and you use that content to open doors. And for us, the doors have been pretty much, uh, I don’t know, half of the startup incubator in Switzerland, some of the top universities, uh, in Europe and in Switzerland, the trade associations, magazine trade press because we provide them with valuable content, which is not selling our service. Right. Nobody wants to be sold. Everybody wants to buy it. Well, I read it in a book from the thirties, he was right. Nobody wants to be sold. Everybody wants to buy and we have, and we have to provide that.

And we’ve been very, very good from the beginning from day one in investing in content. And I’m not talking about just writing random articles to crowd everybody’s Google, but really think what are the models? How do we look at branding? How do we do branding for B2B, for instance, and then we’ve done interviews of 20 executives across Switzerland about the question: B2B branding. And the result is a report on the topic that we’ve made in collaboration with the eMBA of EPFL. And once you have that and you go to clients and you say, Hey, you want us to help you in BTB branding? Oh, if you want, you can have a look at our report on B2B branding that we’ve done with, guess what, the second best technical school in Switzerland. The pitch is very high. So now you can have someone who just become a B2B branding consultant, but what premium can you charge? And we are basically reducing the risk, right? Earlier in the discussion, I was saying a brand is about reducing the risk and increasing the perceived value by bringing those discontent pieces, we reduce the risk.

You think if you’re a potential client, okay. Those guys are able to actually publish something with EPFL, they cannot be that bad. So they trust us.

Then step two for me, so one is content. Two is a channel if you want to stay in contact. Oh, yep. Yep. So it’s content channel and then the third is closing, because then you get the clients.

Ben: [00:18:18] Yep. And then after that community, right?

Youri: [00:18:21] Yeah. If you want a four, you need the currency because you know, it’s getting project is as much about getting than giving. And you cannot have a short term mentality where everybody you meet is about selling them a project, because then you are a traveling sales guy.

Nobody wants that. But if you look at it, we look at it a very long term and we say, what is the vision for Creative Supply in 10, 15 years? And our vision in 10, 15 years is we want to be the reference in branding, at least in Europe. And if we want to become the reference in branding, we cannot have a mentality where we just moving from one project to the next, because that is just called cashflow.

It’s not called being the reference. So we grew an ecosystem, a community to pick up on what you said, and this community is made of what… people we teach at universities pro bono work we do with young startups that are promising. Direct coaching, publication, et cetera, and need to have all of these as part of our ecosystem, some will drive projects some months when in the longterm we can become a reference.

And a lots of our competitors don’t think that way because they have such a high payroll that they’re just driven by getting the next project to pay the bills. But since we have a very different structure, we don’t have that. I don’t need to send you a 3D rendering because my 3d guys are sitting, doing nothing, I don’t care.

So I can focus on, on growing Creative Supply as the reference in the industry rather than just getting more projects, which is a very short and we are looking at [00:20:00] it.

Ben: [00:20:00] So community view is a bit also a bit about creating multiple revenue streams. Right. But one of the things you just said there, it was quite interesting. Cause I was going to ask you that when you said you were working with startups, which is how do you monetize relationships? And I think you answered it right by saying a lot of it’s pro bono, because I guess, you know, you help them as they grow, you know, they come back to you.

Youri: [00:20:18] The way we did, with startups, we actually had to draw the line is we do pro bono work with startups which are involved with sustainable developments. That is very clear. Any startup that has, that has something linked to green startups, sustainable development. We work, we do typically workshop program with them. But other type of startups. We don’t do pro bono, but we cannot, uh, do full project for them because. We are too expensive and it doesn’t make sense for a startup to spend 50k on a, on a branding project.

You know, you just need to, you’re very smart with your resources. What does make sense for a startup is to do half a day workshop where we can give them the key tools to direction, the clarity. One, two hours of coaching here and there. The budget remains very, very valid and then they can grow with it. And actually a lot of startups weve had and some of them, you know, two, three years down the line, they come back and then they got the funding funds. That’s going to say, well, now we need to professionally. And then they come back. So I think different types of options, clients of companies have different types of needs and you cannot just sell a full branding and a strategic audit to a mid company in Neuchatel. You know what I mean? So we need to adapt.

Ben: [00:21:28] And how repeatable are some of the, some of the work you do? Because I think it’s know it’s interesting. You’ve created all these different revenue streams, which is great, but the sort of core engine of, of your business, which is branding work, you know, how, how often, how, how longterm is that? If you find a client, you know, or do you just do a rebrand and then move on to the next client

Youri: [00:21:46] Interesting that you ask this because you really hit the spot in term of how we’ve changed our strategy in the last six months is we used to be, I call it a Tinder agency, a one night stand or one type of project, right.

They come to us, they have a problem. The burn is not clear. The message is not clear. We do the work and then we bill and we disappear. And then we move on to the next one, right? The next swipe to keep the Tinder analogy. And, um, couple of months back, we realized that there’s a few problems with this.

Well, The lack of stable cash flow is one, but also from the client’s side, we realized that we did really good work at the strategic level and then implementation really failed because they went for the wrong provider. The one supplier didn’t manage the process well, or they didn’t have the skis all the time.

And it was not so much a question of budget, more question of focusing coherence. And so we thought it’s really stupid because then we do all this work, which is very good, not a shiny powerpoint and then comes to reality and it just doesn’t look like that. And we thought, okay, let’s, let’s, let’s go away from being a Tinder, uh, agency.

And let’s, let’s become a true creative partner, branding partner for all our clients, where we handled everything from strategy to implementation, uh, in agency jargon, we speak about the long tail, which means that you don’t do, you also do the small things, you know, like kinda like a motion design and a webpage design.

So we do these things now. It;s just that we’ll never do it for a client that needs just this. Right. So if someone comes to us and say, Oh, we need a poster design. We;re definitely the wrong agency to do that. But if someone comes to us saying, we need the branding and then we need someone to work throughout the year for our needs.

Like we can really, really be good at that and make sure that we, we ensure all the touch points. we werked for example with a private school in Geneva, we’ve reached a level where we have this role of kind of final think. All the branding and communication efforts. And I think it’s, it’s really a, it’s really paying off

Ben: [00:23:53] In preparation for this podcast I was watching something, a video of you talking about storytelling. What’s what’s the role of storytelling in branding.

Youri: [00:24:00] The role of storytelling in branding is essentially storytelling is a tool to explain, share what your positioning is to your audience. So storytelling alone depends from your brand positioning.

And depending on the story you tell, you can influence again, the perception and the, uh, association of ideas that people have with your brand. I think the main difference between storytelling, where we speak about branding versus, uh, you know, movie stories and movie, is that a story in a brand should never have an ending.

Cause, you know, in all the movies you have type of a linear structure, right? The hero does something. They have some challenge in fights and again, he wins and the printer stops there. And then it’s the end. But as a brand, you can;t think like this because you’re a brand, you don’t want yourtbrand to end. So your story at its heart at its center must have an idea, a concept that a brand can never, never fully [00:25:00] reach.

Right? I did ask there’s as for instance, impossible is nothing. Which means there’s always a way to get something further. So it’s a story that never ends. Yeah.

Ben: [00:25:11] And you don’t feel like some of these, some of the storytelling’s a bit kind of contrived? Like it’s a fabrication. It’s like, it’s, it’s clearly a marketing tool for us to engage with the company. It doesn’t feel authentic.

Youri: [00:25:26] Storytelling is a bit like a, I guess, a murder, you know, as long as you don’t get caught, it’s fine. And I think if you take, I can mention you at top of my mind, a couple of brands that I know Ted Baker, have you heard of them Ted Baker? There’s no Ted Baker, right? You would assume that that’s the name of the designer, right? this guy doesn’t exist simple as that. Right. So there is, there’s so many, so many brands that, how can I say this? That. That are telling story that actually are not true. Or Hollisted, maybe you know, it’s like a bit of a teenager fashion brand. It says that Hollister is from California and it was founded in 1922, but actually the brand is not from California and it was not founded in 1922.

It’s just that, you know, people don’t check because imagine how many decisions you have to make every day. And if you had to do a full due diligence on every brand, you buy. This would take you a lot of time and consumer don’t do it. They don’t one because they don’t have the time, but two, they also don’t do it because they don’t want to because, you know, it’s so nice to, to be, to buy from this Hollister brand from California since 1922, you don’t want to know that this is a lie, right?

It gives the fenders to the brand, especially in consumer branding. What I’m talking about is more consumer branding. I think when it comes to storytelling in B2B, we’ll have to much, much more careful with the reference that we use, but the logic is the same. There’s a very strong example in B2B, actually from Holcim, a cement company and I love it because really you would not expect a cement company to be, actually be a benchmark in branding. So when you sell cement, you basically sell stones, crushed stones, right. And those, those are called ready-mix and. They all have very rubbish numbers, right? They call Alix 205 Alix, 206, and those are the product number.

And that’s how they’ve been known in the industry. But in one day, one guy in Holcim thought, well, what if we give names to our cement? So let’s call the very strong one Robusto and let’s call the one that’s a bit red Rosso. And then they spinned those names, those Latin name for each of the products or some of the product line… and all the industry laughed at them.

They took the piece saying, can you believe you are selling ALX200? Why do we need to call this Rosso? What do you think you are, an espresso? Right, but the client didn’t think that way. This, this is very good. The red one is Rosoo, everybody knows what I speak about. I like it. So then what happened next is the clients of Holcim but also other cement company went to other cement company and say, Hey, we would have to buy some whole Robusto or some Rosso from you, but the company had no choice but to say, Oh sorry those ones are from Holcim, but we have Elyx 205 for you. If you like. So the story is very different. I will speak about ingredient branding in technical terms.

And so I think you can tell a story at so many levels. It’s just a difference, right? From a B2B or B2C.

Ben: [00:28:25] What makes a good hotel brand? Because I notice that you guys work with a lot of different hotels. What stories should a hotel be selling? What, what, what are the association of ideas? What’s the lifestyle association that’s important for a hotel?

Youri: [00:28:38] Hotels have a high in a very difficult situation because at the moment it’s a, I think it’s a whole different topic actually, but overall, it’s very tough to build brands in the hospitality industry. For the one reason that people only stay with you once and even the best hotel brands out there. And they will never want to share the numbers, but maybe five, 10, 15, 20 for the best one for us of the customers actually returning customers. But most of them are just out of one to one nightstand for literally. So how’d you be the brand with people who never come back. The industry just doesn’t want to accept that, but they still try to build brands based on that operational proposition, which is so dumb if you think about it, because nobody cares about it since you only stay once. So what would hotels have to think about? And I think it’s, this, this, this virus is gonna really help them think through. And I think the strongest and the more, agile we’ll really be surviving. After that, they have to think if we were not selling rooms, what would we be about how do we there attract people to us?

And that’s a very, very tough question for most of the hoteliers, because most of the hoteliers branding pitch, or the communication pitch is. Hey, come to a hotel. Great for family, business, couple or whatever you want. We are good. We have a nice swimming pool, fast wifi, and a [00:30:00] breakfast is included. Come stay with us.

This is pretty much the messaging of every virtually, every single hotel brand in the world. Some will throw the word luxury in there or exclusive in there, bespoke or tailored, but they’re telling you the exact same story. You take an advert of Ritz Carlton vs an advertising of Four Seasons.

Those things are the same. Just the room designs, slightly different. One is beige than one is blanc. You know what I mean? So once you start thinking about what the hotel is doing, you know, check-in checkout and housekeeping. When you start to think what is our role? Can we be a creator of something? Can we be an educator?

How can we contribute to our larger community? Not just the local one. Right. What role do we take and find, since we worked with these clients in Paris, building a full new brand for them called French Theory and. We thought about it saying, well, it’s not a hotel brand with something between a, probably a media company, a retail company that happens to have rooms.

And our role is to relay the culture and intellectual life of Paris fifth district. So once you think about a place like this, you not about your role is not about selling rooms. That’s the outcome. That’s what happens next, but issue about relaying. The cultural life of a district.

There’s so many more things you can do. And that’s where I think you can build strong hotel brands because people don’t come to you because you have a room with wifi anymore. So yeah, I think it’s a bit, I know I have a slightly controversial view on stuff. If we actually just published it, talking about publication, we’ve recently published last week, a full hotel concept handbook in collaboration with the École hôtelière de Lausanne which really shows what other, those trends happen in the hospitality industry coronavirus aside. And then what are the steps you need to take in order to build a strong hotel concepts, strong hotel branding, ultimately,

Ben: [00:31:58] is that what you propose enough to see off the Airbnb phenomenon? Let’s pause for a second about how Airbnb fairs posts lockdown, but like just ignore corona for a second.

Youri: [00:32:12] I love that you bring this because you know, what’s what have Airbnb been doing? It’s it’s dematerializing the hotel offering. It’s saying, well, you don’t need to go to a hotel in order to have a room, you can do this through different settlements.

And a lot of attention has been focused on Airbnb in the past years because most of the hotel revenue comes from rooms, right? 70, 80%, most of the time. However, what hotels failed to realize is that. It’s not just the rooms business that is being dematerialized. Hotel pickup is now called Uber. The in room entertainment is called Netflix.

The concierge service is called Google maps. The business corner is called zoom, et cetera, et cetera. So the entire offering an added value of a traditional hotel is actually being dematerialized. So if you think about it, you can book yourself an absolutely amazing Airbnb in Paris, top luxury, you can get picked up with a limousing from Uber. You can have delivered to you some of the top Indian food with a delivery of uber eats. You can have your personal trainer that comes in to, with you to help you to the thing you can use your meditation app in the morning. So do you still need to go to a hotel, questionable right? So once hotels agree to that analysis, they need to say, what is our role?

What can we offer that those digital, uh, offerings cannot. And that’s when branding starts to be very interesting because branding becomes a compass for what’s next, maybe to draw around, not to completely speak just about hotels, if you’re a hairdresser, for instance, right. Depending on how you frame yourself, depending on how you position yourself.

You can also have very different types of services. So a hairdresser typically before the coronavirus would say, I’m a guy who cuts hair in a hair salon, right. That’s how it will be positioned right now. There’s no salon anymore. So what are you? Well, you can be a guy who does cuts hair without the salon, but that’s not a good value proposition.

So you could say, well, actually I’m a guy who knows how to take care of hair. So that’s a very different brand promise. So once you reframe it and you say, I’m the guy who knows how to take care of air, what are the things you can offer, where you can have? I don’t know. an e-shop that shows people how to do that, or that sells a shampoo to people.

You can have a tutorial about taking care of your hair. You can sell a home kids to do braids yourself. I don’t know. It’s endless because your branding is different. And I think hotel, you have to understand that it’s tough. 80% of your business comes from rooms. Why change?

Ben: [00:34:53] Not to go down this rabbit hole too much, but how should marketing branding respond to [00:35:00] the pandemics? So you’re saying, you know, post pandemic, you probably have to reposition a brand reposition the brand promise in some cases, but what about during the pandemic? You know, look. We can take an example of the hotel if you want. But right now you’ve got, you’ve got very little business, I would say. almost zero business. Therefore do you just stop marketing or do you, or do you market knowing that eventually customers will come back and this is the chance to, you know, to gain, share a voice, for example, what are you telling your clients?

Youri: [00:35:30] I’m obviously biased, right? Because the more you’re stopping marketing the more we are going to go through that crisis as well. Okay.

Ben: [00:35:37] So make the case, so we know your biased, you have to make a really good case.

Youri: [00:35:40] But I can make the case by simply telling you that we put our money, where our mouth is. And we are doubling down at the moment. Everything into marketing, as a company, we are changing our website. We are pushing up new content. We are reaching out to new partners and we really doing this using a timeline that, that is really fast because it’s very easy now to just like, Lack the discipline and just let it slip through one day, two day, five weeks type of thing.

I really want to use that time to, well, number one, top of the mind of everybody we work with, number two, prepare the, after, you know, a seat like the army was not fighting now. So let’s make sure those guys really retrained instead of just having everybody chill. And I think that’s a good moment to, uh, to get in you call it share of voice, we call it awareness share, but same thing, right when everybody’s panicking you need to make sure you’re not, and we can get more visibility. You get more publication out there. Get more leads. I don’t expect much in term of business conversion in the next six months. I think it’s unlikely that we’re going to. We’re not going to do a record. Yeah. These being said, we just had a very, a major project coming in literally next week that we just signed in middle of the pandemic for a client. Who’s launching a robot, a co-bot is called, which is about automatization of supply chain for foods. So some industries are very resilient and those industries will need branding as well. And those ones are also pushing the branding.

So yeah, I think that’s what, that’s what brands have to do it, you know, I mean, besides the obvious survival thing, which is about protect your cash and make sure I don’t go do anything stupid, if you can afford it. I think it so much to reach out, but nothing to a, let me try to sell you my product to survive type of way, because you know, you should never try to sell something when you are needy because people feel it.

However, you can share a lot of value to a lot of people. We’ve been organizing a couple of online sessions for free, actually to kind of give people advice about how to run with the brand during this time of crisis, simple, personal branding, et cetera. We have grown our audience. I think you have three, 400 new people in our database since the beginning of the pandemic.

I don’t know if Icould sell out a lot,or not, but it’s definitely people that we would not have reached out if we hadn’t moved our asses. So I think that’s what really brands have to do. And we’re going to double down on branding and marketing efforts in the next six months. We’ll see how it goes for us. I mean, we have a very, very strong pipeline and we have the chance to be very diversified, actually, something I was very often critical criticize for by my peers.

Uh, because, you know, we acted in so many different things, different countries, different industry, and it’s always something that people kept on telling me, you need to focus. You need to focus. You cannot be an agency doing hotel industry and luxury and education, investment branding. But right now I’m very glad that we have doing this because some industries are picking up, some are not, and we have those levels,

Ben: [00:38:38] would you work with tobacco companies? Would you work with arms. Where do you draw the line in terms of the ethics?

Youri: [00:38:45] We don’t draw. We don’t work for tobacco and anything weapon related. We had to turn down a couple of times and it actually would, you know, from a fees point of view, you know, that they pay you for your loss of soul, so it’s very profitable, but then you gotta tell me well if you worked for UBS, which we do well, some of the money they invest is maybe not in the best place.

So then for us, it’s very, very hard to draw the line. We tend to have better conditions for companies that are involved in sustainable development. So we want to emphasize that with having a check out and saying anybody who’s not in a sustainable development, we don’t work with, for instance, while it’s economically not viable.

So, yeah, it’s a bit of, um, you caught me a little bit here because as I think as a, as an industry, the marketing and branding industry as a whole, we are really guilty for, uh, the, the state of the world in which we are. Right. Because you should look at global warming, which now is less of a topic because there’s something called COVID-19.

But if you look at global warming, this is so much linked to over consumption, right? If people were not traveling as much buying so much clothes and eating so much beef, we would not have a problem. And the reason why they buying so much is because they are incentivized to do so by the branding and marketing [00:40:00] industry.

So yes, we are not the one who pulled the trigger, but we provide the gun.

Ben: [00:40:03] Part of the, of the solution to that over consumption will be marketing related, right. I mean, we’re going to have to create a new narratives.

Youri: [00:40:12] The problem at the moment is the whole narrative about green consumption is only, it’s a very negative narrative basically saying, don’t do this, don’t do that.

Don’t do this, can’t do that. And this is really so not attractive. And if you, if I tell you all think about the sustainable fashion brand for instance, They kind of all look the same and you have this image of, you know, something with the linen badly cut, and then you look like some sort of hippie, so the association of ideas linked to anything sustainable are not sexy.

So how can we reengineer the narrative, change the story so that we can emphasize consumption that are more reasonable. I know I’m issue, issue, uh, do much more wellness and meditation. This is consumption, but it’s not hurting the planet. So I think there’s a lot of things that can, that can be done at that level.

And we’ve been doing a bit of work with Climate Kick, which was one of the major European agencies, which is funding and giving grants to sustainable projects. And we really saw the potential because you know, it’s people in those industries, they are, so they are in there because they want to make a difference.

And so they think that their value proposition is the fact that they’re making a difference. And this is true for very small niche audience, but for the mass, it’s not the case. I met a couple of years ago, I think the co founder of Fairphone, a smartphone that use like material that are sourced responsibly? Not, not destroying the planet, but the whole pitch they have is we are, we are nice and we are fair. And I told him, well, the problem with that. I said, who are you clients? You say, well, 70% of our clients are people with PhDs. So highly educated people who think the cause matter, which is great, but you’re not going to make an impact.

Because in order to make an impact, you need to get the mass. And the problem as sad as it is, is that the mass will not react to a message of restriction. So the messaging has to be difference.

Ben: [00:42:09] The answer is probably not to consume less, but to consume more sustainably, right?

Youri: [00:42:14] Yeah. Constant, more sustainably, constant things that mostly dont need resources. Yeah. If you consume education, for instance, if you were consuming lentils instead of beef, if you consume a super fancy, uh, secondhand shops like they have in Tokyo. It’s different. Right. So I think there’s a lot that can be done at that level. And it’s not, I make it sound like it’s very easy to solve or actually so many different facets and dynamic in that, in that question.

But. I think that’s actually the contribution that the branding industry can do to that. I think that’s why I said,

Ben: [00:42:46] I want to talk to you about your business model. Cause this is, this is really interesting and it’s, um, it’s something that we have talked about quite a lot on this podcast. Right. Which is essentially you’re moving away from a sort you know, static kind of hierarchical model, to something which is much, much more networked, right?

Because, so I’ll give you the chance to describe how it works. But basically if I’m in the marketing team of a company, the likelihood is overtime my skill set is going to, you know, going to diminish because I’m not challenged because I’m working for the same company doing the same thing every day.

Right. And then there’s, and then you’ve what you’ve also understood is that there’s a sort of, there’s a gap, right? If I, if I try to sort of unbundle my, my marketing team and source them using freelances via Upwork. I still have to manage the overhead of managing all those people. So what you’re doing is you’re sort of creating some sort of platform that mediates and transfers risk from both parties, right?

Because, because you are matching the best companies with the best creative talent, but you’re doing it in a way where you take responsibility for the deliverables, you take responsibility to make sure the people that work on your platform are looked after financially in terms of mental health and so on.

So it’s, it’s like a new category of platform company. That, of which there aren’t many examples yet. That’s the way I would describe it. How would you describe it?

Youri: [00:44:06] I think we’re definitely a hybrid actually in the sense that we do work with independent creatives. I tend not to use the word platform because it’s too associated to a kind of peer to peer type of model.

And we don’t offer this a client who worked with us. Don’t get to choose which designer they work with. Right. So we don’t have. Were not a matchmaker, we, the best we come up with so far is that we are a branding company as far as it, as it goes. And the fact that we work with this creative network, it just about how we do it, the client come to us because they trust Creative Supply to be the best partner for them, to meet their branding meets.

And how will you make this happen? To an extent is secondary. It’s secondary because we run the entire project from strategy to implementation. We project manage it. If there are problems on the client side or actually creative [00:45:00] side, we handle that. So from a client it’s super smooth, they will never have the feeling that they are working with independent creatives.

You know what I mean? They don’t get that field. So yeah, we, we bridge both worlds because we can access too. We really kids specialists, you know, let’s say top 3D guy motion design. Copywriting transaction services. Illustrators is a good one. And, but even graphic designer, because the graphic designer who is very good for a food festival is not going to be the best person for a corporate website for banks.

It’s most of the traditional agency they’re stuck with one or two art director. You know what I mean? Like the things chef in the kitchen, and then they all, they just send the same person over and over and over again. And then one day the art director leave and they have no design capacity anymore. And this is something we wanted to avoid from beginning.

We work with a pool of different people who have different skill sets, different interests. You know, we have people who are really good art director, but they just cannot do web. But that’s fine because we have someone else that can do web et cetera. And this, this really allows us to assemble like genuinely the right team for our clients.

And because we don’t have a hidden agenda of sending certain skills or discipline because we have to pay for it because you know, we study first and then we source them your way. The way it works is very nice because we have standardized processes, you know, in term of what type of project of products of services we sell, what is the process for a brand platform, a brand entity, all of these things have been super streamlined, you know, so we like a product company in house,uh, the timing needs the number of rounds of review, et cetera, in all the people who work with us, you know, down to how you save your files. Everything has been streamlined, which means that we can not actually just, just a couple of hours before our call. I had a kickoff with a team of seven people, uh, for new projects and everybody’s remote.

And everybody’s on board and in what’s going to be happening, et cetera. So we have the capacity to have very big creative team, like the biggest agency, right? You never have more than 10 people because it’s just, it’s just not needed even for very, very big projects. And, and we have that capacity in watch.

The amazing about this is that now we have this 10 people working on something tomorrow. We have another big project that we have. We don’t have a major capacity issue. Because we have a pool of people. Where we get the bottleneck is in the project management and the core consulting team is Zurich so far we are managing and the company we grow, we grow its core as we go.

So yeah, I think it’s a very good model and the client love it because you know, they have one point of contact, they have one email address and they say, Hey, we need to do some 3D renderings for a new machine. Oh, we need to do a photo shoot for our new offices. Or we have some transition done to be done. And they know that we pick the best people.

So they come to us and the quality is there. The pricing is right. Yes. There’s a premium of price, but you pay the premium for us because we reduce your perceived risk. Now of course, all of them know about Upwork, but if you try to book a designer on Upwork, good luck. You’re going to spend half a day, just sorting out another half a day, discussing with them half a day to brief them, but then you’re not even trying to get it.

And then it works. If you’re a small startup makes total sense. If you’re a small to midsize company or big company, it just doesn’t make any sense. You better have strong partner that handled this for you.

Ben: [00:48:26] A hundred percent because you don’t know if they’re good or not. So. You don’t save any time there. And then when you actually want them to do something, cause you say, no, you have to brief them.

So there’s not a time saving with the briefing. And then if you want to make them part of a team, then you have to assemble the other parts of the team. And then you have the overhead of managing that team and managing the outputs. So it’s like, yeah, it Upwork for me doesnt work. it doesn’t work.

Youri: [00:48:45] I think it works for very specific clients

Ben: [00:48:48] or very specific projects, very narrowly defined projects, but where you really want to run marketing at scale or branding at scale, it doesn’t work.

Youri: [00:48:57] Yeah, because, you know, I mean, if you think about it, if you have a company you don’t want to rely on random people. To do your brands. You know, it’s a bit like who handles your files? You know what I mean? Is this secure? If you need something, is she on holiday or is she still around, or is she now doing other freelancing work too?

You know what I mean? You don’t want that as a partner, you need something that’s more stable and that’s the role that Creative Supply have for those clients.

Ben: [00:49:23] But I also think the converse, which is everybody works for me is on my payroll. It doesn’t work either, because as you say. You know, you don’t have access to a large enough pool of people to deliver everything that a customer might want or everything your, your, your company might want.

And secondly, the people that work for you because they, because they don’t have, they don’t see the variety of projects that, you know, they stop learning and they stop developing new skills. And so I think it’s got to be, you’ve got to create this arbitrage, right? You’ve got this concept. You’re uncomfortable with platform, but there’s gotta be some party that sits between the sits between [00:50:00] the body of freelancers and the corporates.

Youri: [00:50:02] In any case, you need it? Either its a client who does it directly, or it has to be someone like us who handles it for, for big projects or midsize project, for sure.

Ben: [00:50:13] Was it like on your part, a major insight that, you know, if you want to get the best people, then you know, you have to, you have to look outside of your company,

Youri: [00:50:22] you know, it’s funny. It’s very personal actually, because I started my career in a small consulting firm where I was one of the junior partner. So it was a very traditional type of company. And then I moved to a big branding agency and I only stayed two months and I just quit the place.

And I realized that the agency model is dead and it took me two months? Actually it took me a week when I tried to convince myself for the remaining weeks that everything was going to be ok but then I realized there’s no point because you know, the typical agencies, everybody shows up on Monday, there’s a brief, then everybody has lunch together on this big, long communal table.

And then there’s beer ping pong on Friday afternoon. And if you look, thats the cliche of creative agency and from Sydney to Shanghai, they have the same pitch. And I was like, this is so weird. We, as branding company, we are meant to help our clients stand out yet we all communicate in the exact same way. We do the exact same thing than all of our competitors.

How can we be trusted by our clients to help them stand out if we’re not able to do it for ourselves? No. It’s like all the people who tried to sell me digital services, but I have more LinkedIn followers than they have and be like, Hmm, not sure I can trust you on that. And I saw all these people who are so comfortable in the job, you know, you have the creative, you know, he’s a bit there, then a bit coffee, a bit chill.

And then the copywriter and they be cheap and nobody has their ass on fire because they are hired. And if you, and so the connection between the work you do in the results gets loosen up. it is even more true in a big company, but even already in an agency of 30, 40 people, you see it, you know, and then people have to fill in time sheets, they have to say, Oh, on Monday morning, I work four hours in this project. So everybody’s cheating on those sheets to make sure they look like they’re doing some work. Right because you don’t want to be the one that has not the right profitability ratio as they call it. And I was thinking, this is so dumb.

It’s treating people like children. It’s making sure they’re very comfortable. So when people are comfortable they are not out of the comfort zone, which means they don’t get creative and at the end they don’t develop themselves. And they’re just gonna, you know, be there. So I quit that whole time. And then I promised myself that I will never go back to any agency that works like this.

And then I saw that I need to create mine. And that’s how Creative Supply was born. Actually, it was born out of frustration, a frustrating experience, which give me the, the courage. If I’m honest, the courage to go out and say, well, Let let’s do this. And then I went out there and I really looked for people, it took me so much time, middle creatives.

You know, you have to fill them, test them. Some are good, some are bad, some say they are, but they’re not, you know, announcing and build a team, which now can grow because you know, people know good people and the people are going to bring new people. Now it’s very easy to grow, the beginning was tough, but now it’s very, very easy.

And once we had that, now we are able to deliver. And it’s funny because I see sometimes those agencies that were on my radar as dream employer, like five to six years ago. And now we are winning pitches against them because we have a proposition which is to some kind more attractive, some kind of more, the more conservative one are very hesitant because they’d be like, wait, what how does it work cetera. But, you know, it’s a very good filtering mechanism because the client who reacted that way, we know they’re not for us, because if they cannot accept already this, how are they going to accept that we will transform the business branding. It’s too much. So they are out already.

Ben: [00:53:57] I mean, I don’t want to, I do want to revisit the conversation we had earlier or in any way undermine the importance of branding, but what you’re telling me, and I totally agree with is that you’ve got a business model that’s winning in a market because it’s superior to everybody else’s business model.

Cause it’s based on a distributed workforce that allows you to get just access to better people at scale.

Youri: [00:54:17] Yeah, that’s it. And that allows us to scale as well, because if now you tell me, Oh, we have a three major projects coming in tomorrow. Well I’m going to be in a rush for three, four days, just to arrange the project plan and to line up sthe resource.

But after that we can run it. There’s no problem on time on track because everything has been, so, yeah,

Ben: [00:54:36] I mean, you’re, you’re in a way you’re bringing a sort of, you know, sort of digital phenomenon to the non digital world in a way, right. Because you know, why, why is Amazon so successful? Because it delivers better quality at scale.

And it’s, it’s kind of difficult to do that in a service industry, but that’s what you’re doing here. You know, you’re taking a technology business model and applying it to the service industry and that’s why it’s trumping the others.

Youri: [00:54:58] Yeah. I mean, I wouldn’t say that [00:55:00] it’s fully done yet because I think we have so much room for growth ahead, you know, and saying that this is done now, it would be. Yeah, it would not be correct you. Yeah. It’s not like done. And now we can just relax. I think from a backend point of view, from a, you know, it’s always in development, you know, from how you communicate with the team, how your quality, quality control is a huge topic with us. Yeah. Yeah. You know, how do you make sure that the designer don’t misspell the client name?

You know, those very simple things. So operationally, you know, how to make sure that the consultant puts the right dates on the documents, you know, in those little things at the moment, the core consulting teams spensd too much time policing around. So we will have to. The client doesn’t say this because at the end we deliver something that’s great. But on our point of view, we could be much more optimal. So I think that’s where this whole internal streamlining has to, has to get much, much, much better, but, you know, we are so much far ahead than the others well, competitors, I think because they are. Now, they;re just, after coronoavirus, I think a lot of agencies are just panic because they don’t have the usual place where they all meet.

The canteen is no longer there. Uh, all their files were on an internal folder. Some of the employees don’t even have their own computer. So they used to work on a desktop, you know, and you have all that thing in there. They must be so challenged. And for us, it’s a bit like business as usual, you know?

Ben: [00:56:24] How do you create an adequate sense of belonging with the team that’s distributed?

Youri: [00:56:28] Yeah, we, we spoke about that. The choice we’ve made early on is to not to pick creatives from everywhere because you know, the tempting thing to be say, Oh, let’s get creatives from anywhere. Right. Because we can. We can but, there’s a couple of problems with this. The first one is a timezone problem, right? If you have the best guy in Mexico in Shanghai, good luck coordinating the project because we mainly work in Europe.

The second one is from a cultural point of view. It’s nice. If people can, can see each other sometimes. So we made the deliberate choice to build the creative networking in, Paris, Paris, because it’s, who’s the strongest market after Switzerland. And because the, the level of people you get in Paris is so high.

There’s so much competition that if you are a director in Paris and you survive, you must be good. In Switzerland you just sit there in Zurich, and you know Stefan, Fabienne and Urs. And you went to school together and you charge everybody 200 bucks an hour and nobody blinks. Because the market is so protectionist.

If you are in Paris, you cannot do this. If you are in Paris, you must deliver. And that’s why we build the network in Paris, which allows us to actually have 90% more or less of the creative skills in Paris. So typically we can do every year, a Christmas party in Paris, we bring all of them together every night.

And then we have meetups where not always everybody meets, right. But some people meet physically in Paris to try, you know, dissolve the zoom lifestyle that the whole world is used to now. It’s actually very strongly in building a culture. You know, you have the internal Slack channel and et cetera. Uh, so it not that bad.

If you think for a big company. Yes. If you have your colleague that you see severyday, but you don’t see, you see you every day. Right. So I think. I think we manage it fairly well. In the future I would love to be able to offer much more value to the people who are the member of our network. Right. So that’s, can we offer them discount on further education? You know, what are the things that we could offer them? Could we help them with their accounting, for instance, you know, what’s the service we could offer, not, not as a revenue source for us, but more as a strengthening the link we have with our people. Cause you know, you have people you’re working with for four or five years now and, and it’s going strong and they just love it.

They still do their thing sometimes next week, sometimes they have their client, their own project, but they like Creative Supply because it gives them access to projects they could never get otherwise.

Ben: [00:58:46] Yeah. And then you take care of the customer acquisition costs.

Youri: [00:58:48] Exactly, they’re not so deep then, you know, when the client don’t pay on time, which happens at the moment 95% of the time we are running after the bids, but we are paying the creative sometimes.

So yeah, there’s, it’s a very, it’s a win, win situation for everyone actually.

Ben: [00:59:03] Definitely. Great. Thank you very much for taking time out of your busy schedule to speak to us.

Youri: [00:59:07] Thanks Ben. It was a pleasure.

Debunking Innovation Myths (#26)

Debunking Innovation Myths,
w/ Gary PISANO

We discuss with Gary Pisano, professor at Harvard Business School and author of “Creative Construction: The DNA of Sustained Innovation” — a book about how large companies can construct a strategy, system, and a culture of innovation that creates sustained growth. We discuss how organizations learn, innovate, and compete — and these are fundamental questions that Gary has been exploring throughout his career. Today, you will learn the four archetypes of innovation, Gary’s definition of a business model, who in the company should own a business model innovation and more.

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Gary recommends:

  1. One book: An Evolutionary Theory of Economic Change, by Richard Nelson and Sidney Winter
  2. One influencer: Jon Gertner
  3. Best article: “Strategic Planning — Forward in Reverse” by Robert Hayes in 1985
  4. Favourite brand: Ferragamo®
  5. Productivity hack: no traveling!!

Full podcast transcript:


Creative construction is, really, the art, if you will, of balancing the need to maintain the existing business, but then explore and create completely new innovation opportunities. It’s different than a startup because a startup gets to start from scratch, but larger, more established enterprises can’t.— Gary PISANO

[00:01:23.25] Ben: So, Gary, thank you so much for coming on the podcast! As I was saying to you before, I absolutely loved the book! I think what’s kind of special about it is it’s obviously very instructive about how to do innovation in the face of uncertainty, and imperfect information, and everything else. But it also challenges and debunks a lot of our received wisdom about innovation, including the central idea of constructive or creative construction. How do you define creative construction?

Gary: For a company, it’s like rebuilding the house as you’re living in it. So, for established companies, the knock on established companies is that they are so consumed with their existing businesses, they can’t do true innovation. So, this book tries to debunk that myth and provide some ways in which bigger companies can do that. But they face challenges, obviously, because they have existing capabilities, existing businesses. So, creative construction is, really, the art, if you will, of balancing the need to maintain the existing business, but then explore and create completely new innovation opportunities. It’s different than a startup because a startup gets to start from scratch, but larger, more established enterprises can’t. So I guess that’s how I would define creative construction: is that act or that art of searching for transformative innovation opportunities, all the while maintaining your existing business.

[00:02:56.12] Ben: Even though it’s harder for large companies to innovate and they have this treadmill effect of a bar that’s being constantly raised, they nonetheless do have many advantages when it comes to innovation, right? So, as you say in the book, they’ve got resources that startups can only dream of, and they can actually have a portfolio of different innovation projects they can work on at once. What other advantages would you say that large companies have when it comes to innovation?

I always say that strategy is where you spend your money and an innovation strategy specifies very clearly, “Here are the top priorities we have for how we’re going to innovate, the kind of innovations we’re going to do, and this is where we’re going to place our chips.” At a very simple level, that’s what an innovation strategy is. — Gary PISANO

Gary: I mean, they have a lot of skills and capabilities that often get overlooked, just things that are in some ways written off as blocking and tackling, but they’re incredibly important. So, logistics and distribution, salesforce that can cover the world, and knowledge about regulations, and experts in the company — the expertise in larger enterprises is actually quite deep. I mean, I’ve been involved in a lot of smaller companies and you get great people, but you’re smaller so you don’t always have the world expert in a particular market or a particular technology, so you’re always trying to reach out. But in a larger company, you actually do have a pretty deep bench. And so, there’s people to draw from that can be extraordinarily helpful in all facets of innovation, whether it’s the technology or the commercialization, the supply chain, the marketing. And I think that’s often overlooked as well, in thinking about their advantages.

[00:04:24.19] Ben: Do you think one of the most dangerous tendencies with strategy is to apply inductive logic? You know, this idea that just because a company over here did something in a certain way, and it worked for them, therefore, it must work for our company. Because, as you say in the book, there is no magic formula for strategy, and there are no universal sets of best practices for innovation. So, would you say that’s a really dangerous road to go down, that idea of ‘because it worked here, it must work there’?

Gary: Yeah, absolutely! I mean, you have to be thoughtful. You can use analogies — and people have written about that, and we all use analogies to reason in all aspects of our life, including business and including strategy — but you have to be thoughtful about how those analogies apply and what is applying, and most importantly, what is different. A lot of times, we focus on what’s the same, but we don’t focus on what’s different. I tell this funny little story to my students about it, because they often get the analogy, and I’ll say, Well, I play a game — my daughter is now four — I played this game with her called, “Are you a bear?” And I’d say to her, “Are you a bear?” And she’d say “No.” And I’d say, “Well, do you like honey?” She goes, “Yes.” “Well, bears like honey. Do you like to swim in the water?” She says, “Yes!” “Well, bears like to swim in the water. Do you like tuna fish?” She said “Yes.” I said, “Well, bears like tuna fish. I mean, you like to play outside — you like to do all the same things bears do so you must be a bear.” That’s the analogy of focusing on what’s the same. And we laugh about it, but that’s what companies do all the time. They look at what is the same and say, “Well, this is the same, this is the same, this is the same, therefore we must be the same.” It’s like, “No, you have to look at what’s different!” It’s a logical flaw that is so commonly made in strategy-making. And so, yes, you do want to use analogies, but you want to be really thoughtful and then understand what’s different here? And then, how do you adapt your strategy to what’s different about this situation?

[00:06:27.13] Ben: How would you describe an innovation strategy?

Gary: At a very simple level, it’s a commitment to how you’re going to spend your resources or focus your resources on the kinds of innovation you’re going to go after. I always say that strategy is where you spend your money and an innovation strategy specifies very clearly, “Here are the top priorities we have for how we’re going to innovate, the kind of innovations we’re going to do, and this is where we’re going to place our chips.” At a very simple level, that’s what an innovation strategy is.

Gary: At a more nuanced level, it’s also the kinds of values you’re trying to create, the similarities or the pattern of how you’re going to address the market. So, for instance, Apple has historically focused on ease of use. That’s been part of their whole business strategy. They have historically tried to innovate, to make things easier to use. Some companies have focused on safety and that’s been a pattern over time. It’s tying the innovation strategy to the business strategy. But it creates a clear set of priorities in everyone’s mind about what’s important and what’s not important.

a lot of innovation is not about the technology, it’s about the change in the business model. — Gary PISANO

[00:07:34.04] Ben: In your book, one of the quotes I liked was you said, “Without an innovation strategy, innovation improvement efforts easily become a grab bag of much-touted best practices.” What exactly do you mean by that? Just that they’re sort of completely unconnected?

Gary: Yeah. I mean, think about today. You know, you go into a lot of companies and you say, “How are you approaching innovation?” And they say, “Well, we’re doing open innovation, we’re doing crowdsourcing, we’re doing design thinking, we’re doing empowered teams” — and these are all perfectly reasonable practices but it’s like building a car by taking a bunch of components, really good components, and just throwing them down and say, “Well, but that’s not a car, that’s just a bunch of components.” You’re connecting those practices to the kinds of innovation you’re going after. So, for example, design thinking is great, but it doesn’t work for all kinds of innovation. And so, if your strategy is about a different kind of innovation, don’t do design thinking. Open innovation is terrific for certain kinds of innovation, but not for others. So, you have to ask yourself, “Is that the right tool to solve the strategic problem we’re going after?”

[00:08:36.06] Ben: Why do you think that happens, though? Do you think it’s just because there’s external pressure maybe from shareholders or the board to be doing something? And so, it’s very easy to self-demonstrate that you’ve opened up an innovation lab or whatever. And so, that almost supplicate some of those external parties, and it’s, in reality, much harder to come up with this integrated innovation strategy?

business models are, in a sense, promises to others. So, they’re kind of a promise to your customer about what’s the value we’re going to create for you. It’s a promise to your shareholders about the value you’re going to distribute, it’s a promise to your employees about the value you’re going to distribute to them. In a sense, a business model is really a set of contracts— Gary PISANO

Gary: Well, I think it’s partly that, but I think it’s partly because we all want simple solutions to complex problems. I probably fall into this trap myself when I think about my workout regime and what I’m reading and I want the perfect training program to get me ready for a marathon with as little effort as possible. Is there the once-a-month training program that will have me ready to run the marathon or something? I think we all, at complex problems, we want simpler solutions. And I understand that executives are busy, there’s a lot of pressure, there’s a lot going on. So, that kind of magic bullet, that universal solution is very appealing. And then, what ends up happening is you have people who sell these to you. Not to be cynical here, but there are consulting firms who make their money selling you a particular tool. And so, they’ll say, “This is design thinking.” And it all seems so easy: “If you just adopt this, your problems will be solved.” And I think what I tried to do in the book is get folks to realize it’s a lot harder than that. And, as I mentioned in the book, innovation is hard. That’s the value of it. If it were easy, everybody could do it and if everybody could do it, every company would be innovative, and it wouldn’t be a source of advantage. You know, there’s a reason companies like Google and Apple have market caps, I don’t know what they are these days because the market’s all over, but, you know, close to a trillion dollars — because they’re innovative and other companies have been less innovative. And so, it’s never going to be easy but I hope to make it a little easier, or maybe not quite as hard. And so, I think we have to dispel that. I think if you go into the innovation journey with that sense of, “This is actually not easy at all, and we’re not going to sell it as easy, and it’s going to take a lot of concerted effort, and we’re going to have a lot of stumbles along the way, but it’s our strategy to get there, and we’re going to keep focusing on it”, then I think you stand a reasonable chance.

[00:10:55.17] Ben: In the book, you include an Innovation Landscape Map, which I found to be really, really useful. Can you quickly just talk us through that Innovation Landscape Map?

Gary: Sure! Yeah. It’s based on not just my research, but many, many people have worked on trying to characterize innovation in the field, for decades now. So this was really a synthesis of both my thinking and many other people’s thinking. We often think about innovation in terms of the technology and the technical dimension: how big of a leap is this, technologically, for us? Are we a hardware company that’s now forced to do software? Etc. But there’s this other dimension, which I think we’ve learned about in the last 20 years, which is, there’s also a business model dimension. So a lot of innovation is not about the technology, it’s about the change in the business model. And so, you kind of put those together and that’s how you get the two by two of, is this a big change from a technology point of view or not? Is it a big change from a business model point of view?

Gary: And I think where that gets helpful is you get these four archetypes of innovation: routine, radical, disruptive, and architectural. You can, at least, start to understand or have discussions about, what is it the lever that we’re going to push on? Are we pushing on the technology dimension because we think our business model is actually quite strong, but we need better technology or new technologies to reinforce it? Or the problem is that our business model is obsolete, and we need to radically change our business model and do more disruptive things? Or is it a combination? And I actually think the combination gets interesting, as I think many times we fail to realize how technological change has implications for our business model. We put a graft on the technology, on our existing business model, when in fact, technology changes what we can do from our business model point of view.

[00:12:50.07] Ben: One of the things that I really liked about that map is it sort of gives almost equal importance to business model and tech, which is not something that normally happens, right? And, I suppose, one of the questions is, if a company should be constantly assessing its business model in the same way it constantly assesses the adequacy of its technology, whose job is it, within an organization, to be looking constantly at the business model? Because it seems a bit like that’s a blind spot.

Gary: You have hit it right on the head! I mean, if you ask in any company who’s in charge of technological innovation, they can literally point to a person; they could say, “So and so is the Head of R&D. So and so is the Executive Vice President of R&D, they ultimately have responsibility.” Then, if you ask the same question around, well, who’s responsible for business model innovation — you’ll either get no one or everyone, which actually means the same thing. And so, you’re right. So, no organization really has that. I think that’s why Senior Executives, Senior Leaders, General Managers really need to own business model innovation. So, just like the way you think about the Vice President of R&D or the Head of R&D owning technological innovation or being responsible for it, I think the business unit leader — the General Manager, the CEO — they own business model innovation. I think that’s the only solution. I think you can have groups that help you do it but I wouldn’t want to set up a separate group called ‘business model innovation’ because it’s really so part and parcel of everything the company does that I think it just belongs in the hands of the General Manager. That’s just an opinion. People haven’t really done a lot of research on it. But I think organizations that are good at evolving their business models, it’s really, they do come from the general management, the CEO or the business unit leaders.

[00:14:40.28] Ben: It is considered best practice to spend, I don’t know, like 80% of your R&D budget on routine bets versus 20% that should go on more radical bets or whatever; that there’s some sort of pre-determined formula for deciding which of these boxes to concentrate on. But, in reality, what you say in the book is that you need to be very careful in making the allocation because allocation looks different for every company. What’s the counsel that you give to companies about where to invest across this map?

Gary: Yeah. While there’s no universal formula, there are some things you can think about, there are some factors. I mean, certainly one is, you have to look at your core technologies and really understand their headroom for improvement. So, some technologies have been around a while, they’re running out of steam, you’re running into diminishing returns, and improving them in ways that would create value for customers, that’s got to worry, right? I mean, once you start to see that — and you can map some of these, actually quantitatively, if you have certain performance dimensions, and you can look at incremental improvement, and ask yourself, how much more can we improve this? You start to see this happening in semiconductors as you reach the incremental line with reductions and Moore’s law, and you say, how much more power can we get out of this, with the given technology we have? You could start to see these things somewhat in advance.

Gary: The second part, though, is really on more of the market side: what do customers want? And what are they willing to pay for? So, sometimes technology can improve, but the customer is not willing to pay for any more functionality there. They’re saying, “I’ve got enough!” I use the example in the book about the Gillette razor and how much closer do we want to shave. And, you know, I won’t pay that much more for a closer shave because, at some point, I can only shave so close before it’s scary. But I will pay for convenience. I will pay for other things. So, you have to look at that dimension as well: where are you in the market cycle?

Gary: And then, you know, you have to look at competitive dynamics. What are competitors doing? And how are competitors changing? So, several of those things kind of come together to help you plot out where you may want to lay your chips and say, look, the opportunity for us to create an advantage and create value is maybe more in business model innovation and technological innovation. Or maybe it’s the opposite; maybe, really, our business model is pretty rich and it has got a long way to go, but our technology is not able to deliver it. Or maybe you discover in this analysis, look, it’s both — if we push the technology in a certain way, the only way we’re really going to create value is by changing our business model. And that would then get you to start to do experiments with your business model, as well.

[00:17:37.06] Ben: Do you think is harder for a company to change its business model than to change its tech?

Gary: Yeah, absolutely! Because I think the business model really gets to a lot of the core DNA, the financial DNA of the company. And business models are, in a sense, promises to others. So, they’re kind of a promise to your customer about what’s the value we’re going to create for you. It’s a promise to your shareholders about the value you’re going to distribute, it’s a promise to your employees about the value you’re going to distribute to them. In a sense, a business model is really a set of contracts. I don’t think it’s ever been formally posed that way. My economics training is in a branch of economics, it’s actually in Contract Theory — Oliver Williamson, the Nobel Prize who I heard just died this past week, who started Transaction Cost Economics. That’s essentially what I was trained on. I was a student of one of his students. So, I always tend to think about things contractually and a business model, really, is a set of contracts, implicit, if you will, promises about the value you’re going to create and capture and distribute. And a business model change means changing those promises and there can be costs to changing those promises. Your shareholders may say, “Well, we don’t like that. That’s not what we signed up for.” Or employees may say, “That’s not what we signed up for.” You may have unhappy employees and that can get costly if you have to make changes there. And sometimes customers don’t like it. We’re living this now, in education, as we, in the last few months had to shift a lot of things online because of COVID. Our customers, our students were like, “But we did sign up for online. That’s not what we paid for.” I think you’re hearing this around the world, students saying, “We signed up for a different experience. That’s a different value proposition.”

[00:19:20.23] Ben: And, in some senses, is it also harder to spot when your business model is becoming obsolete? Because, in a way, if you spot that there’s a big technology chain coming, like, you know, cars are being electrified or whatever — that you have some time to react, and you can map out how that might impact your business? But, in some ways, it’s like, it’s more difficult to get the early-warning signs that your business model is not optimized, right? So, how does a company check-in and routinely test whether its business model is optimized?

Investing in flexibility when uncertainty is high is a really good idea. — Gary PISANO

Gary: Yeah. I agree. I think it can be more challenging, and I think the work of my late colleague, Clay Christensen, really bore upon this. He highlighted this issue around why companies were vulnerable. Disruption, was really, as he described it, was business model disruption. That’s why I call that ‘the business model disruption’. He was really the one who identified that phenomenon where it’s the business model change that companies can’t react to. And I think he had some things to say about that, which I think are still very relevant. For example, when you’re missing certain segments of the market, or certain segments of your customer base are defecting and don’t seem profitable, and you say, “Well, we don’t need them anyway.” That’s always a little warning sign that he mentions that when you’ve got customers that, I think he would describe it as you ‘fire those customers’, you say, “Well, we don’t need you. We have more profitable customers.” That can be the beginning of a vicious circle. I think you’re seeing some of this in some areas today. Again, the example I use in the book is with shaving, and I mentioned Gillette competing against players like Harry’s and Dollar Shave Club. I mean, they’re offering a different value proposition and I think, initially, the folks like Dollar Shave Club and Harry’s, they were viewed as “Yeah, they’re just taking the customers who are less profitable for us anyway, so who cares?” But then, it starts to grow and then it starts to become a bigger segment of the market. It’s not that it happens really fast. It’s actually the opposite. It happens really slow. Until it doesn’t. So, it’s like the boiling frog, which is, we start losing a few customers, we’re like, “Oh, I don’t even notice that.” So, I think you do need to track fairly carefully what’s happening with customers, but also, who are the customers you’re not addressing? And are there segments of the market that you’ve never thought about addressing, that might actually be quite attractive to others, serving them in a very, very different way.

[00:21:55.13] Ben: When you see that you’re kind of suffering from that kind of Clayton Christensen’s type disruptive innovation, you know, where somebody’s come from underneath, almost in your blind spot and then starts to take market share, then the natural conclusion is, you eat your own lunch or you cannibalize your own business just before the new competitor can? But, another section of the book I really, really liked was the one where you challenged that notion that is always best to eat your own lunch. And I found myself when I was reading, thinking, okay, I’ve also been guilty of this many times, and lazily thought that, okay, it’s always best to cannibalize your own business. Why is it not always a good idea to do that?

Gary: So, one of the problems with cliches like that is they grossly oversimplify in ways that can really blind us. And so, there’s really two reasons why I think that advice doesn’t always hold up. So, one is, these things, these disruptions — whether they’re business model disruptions or radical changes in a technology base that make your technology obsolete — they tend to look a lot more obvious in retrospect than they did in prospect. So, the advice of ‘eat your own lunch before anyone else’ assumes you have some foresight that most of us don’t have. And so, there’s lots of examples where companies have abandoned technologies that had a lot of room to grow and they committed the opposite error. IBM was being told in the ’80s, “Get out of mainframe computers.” Well, mainframe computers today process 90% of the world’s transaction, and they are the workhorse now if we’re talking about big data and AI. It’s all mainframes. You need a lot of big iron to do that. IBM has that. So, it’s a good thing they didn’t get out of that market. The market isn’t what it was relative to the ’60s, it isn’t what it was, then to now. I mean, relatively speaking, it’s smaller, but it’s still a good market. I mean, it’s still a very big market, and it may get bigger. In fact, it’s very likely to get bigger. So, a trouble I have with that is it gets you out of thinking about hedging your technology risk.

Gary: But then, the second thing — and it’s more troubling — is that even if you do that perfect foresight and something’s happening, there are often profound implications for profitability. There’s this assumption in the ‘eat your own lunch’ argument that the new thing that comes along is somehow got to be more profitable or as profitable. And there’s no law of economics that said that, there’s no theory in economics that said that, there’s no empirical evidence. That’s not necessarily true. So, an example I gave in the book is when digital photography came along. Digital photography hasn’t been profitable for anybody. I mean, it’s just been a bloodbath because the components are commodities, they’re out there, anybody can get them, they’re modular technologies — and it’s a bloodbath. And so, if you were Kodak and you had perfect foresight, it’s still not clear to me what you would have done to say, “Let’s get out of our really lucrative film business, to dive into this market, which is going to be a bloodbath.” So, sometimes you really are stuck between a rock and a hard place. And what I try to offer in the book is just some ways to think through those contingencies. So, you know, there are some times where the technology’s changing, or the business model is changing, but it’s going to be good for you anyway, so you might as well embrace it. Sometimes, that’s eating your own lunch to get an even better dinner, right? I mean, that’s just a better future. But sometimes it’s the opposite. Sometimes the technology is changing, or the business model is changing in ways that are just not going to be profitable for anybody. It’s a lot more complex than just, “Let’s just dive right into the new thing and eat our own lunch.”

[00:25:42.20] Ben: Do you think it’s really dangerous when CEOs kind of consult futurists? I don’t know what the record of futurists is, in terms of being able to successfully predict the future, but I guess it’s small, and yet nonetheless, you see a proliferation of these people. And so, is that one of the things you advise, to just avoid futurists?

Gary: Yeah. I mean I think I sort of say that in the book, I take a real shot at futurists because they tend to look back to all the time. And the bias of somebody who’s a futurist is to tell you how the world’s going to be different. You’re not going to hire a futurist to tell you the world is going to be the same. So, in some sense, you’re getting a biased view. By bringing in a futurist, you’re basically pretty sure going to be told the world’s going to change. The world always changes. So, I think that’s true. I mean, we know that. The world will be different tomorrow than it is today and it’ll be a lot more different further out in the future than it will be just tomorrow.

startup life is consumed with the fear that you’re going out of business because you’re generally running on fumes, in terms of resources and cash. And so, you are focused on one goal — surviving. And the people you attract to the enterprise are extremely comfortable with the ambiguity that they may not be in business the next year. So, you select people who are very comfortable with that calculus. If you’re in a major corporation, if you’re in Microsoft, with 20 plus billion dollars of cash on the balance sheet, you’re not going anywhere next year. That, I think, changes some of the tension and pressure. And you cannot replicate that in a large company. — Gary PISANO

Gary: I think you should listen to people who have interesting and provocative things to say about the future. Absolutely. Because they may stimulate your thinking in ways that you hadn’t before. So, actually, let me walk that back a bit before every futurist sends me nasty emails. There are so many folks that I’ve interacted with, that are very, very, very smart. And they do have provocative things to say. I don’t necessarily think they’re right. And I don’t think the value of what they have to say is in the prediction. So, if they say something’s going to be the case with electric vehicles, I don’t bet on what their vision of the future is. But listen to what they have to say, as a way just to challenge your own thinking about what the future might hold. And I do think it’s a helpful exercise for organizations and people to constantly be thinking about that and disciplining yourself, because you’re trying to prepare and it’s not that you can predict correctly — most of the time we get things wrong — but we can start to prepare ourselves and understand where the contingencies are, and what we might do today to prepare ourselves.

Gary: For example, right now, all businesses and universities and schools are going through this. We don’t know it’s a short-term thing, but what’s the COVID situation going to be like in the fall? Should we be online? We don’t know. So, the best thing you can do if you have the resources is, prepare, create options, build flexibility, because it’s going to have a high payoff. Choosing one or the other now, when there’s uncertainty, is not a good investment. Investing in flexibility when uncertainty is high is a really good idea. So, that’s where I think it’s helpful to be listening to futurists and others, and challenging yourself and listening to scientists. And I guess, I’d have to say my bias is more to listen to people who are content experts rather than futurists. Talk to customers. Farmers could probably tell you a lot about what’s going on in the farming world. They live it. And so, go talk to them, go watch them, go watch how people live. And again, it doesn’t hurt to start to imagine some futures as a way to stimulate your thinking, but just be careful to not confuse that with a prediction or a scenario.

[00:28:56.23] Ben: Up until now, we’ve talked mostly about putting in place an innovation strategy. What you say is there’s three parts to innovation, right? The first one is the innovation strategy and then the second part is the innovation system. What is an innovation system? And how does that support an innovation strategy?

Gary: Yeah. The system is really the way you start to execute. That is really, at a very simple level, your innovation system is how you search for ideas, how you combine ideas — what I call ‘synthesize’ — and how you select. So, it’s really, how do you go from ideas, find the ideas, digest the ideas, and pick the ideas to go forward with. So, it’s really internal because sometimes you’re involving lots of external people in it, but the system provides the capabilities to execute that strategy.

[00:29:43.19] Ben: Is the key to finding great ideas this, what you call in the book, ‘intellectual arbitrage’, or surrounding yourself and maximizing the number of inputs to every decision?

Gary: What I meant by intellectual arbitrage is just exposing yourself to ideas and people who you don’t normally get exposed to. We tend to talk to people and the experts in our particular business without thinking about what others from very different fields might have to say. And they have different ways to look at the problem and that can stimulate really interesting ideas. And sometimes they’re technology ideas. So, we see things move across fields all the time in terms of technology, but sometimes it’s business model ideas. An interesting one I just came across most recently in some new research I’m doing is, during World War Two, during wartime production in the US, car companies, which knew how to do things with mass production, but did not know much about making airplanes, were actually asked to make airplanes — B-29 bombers. Aircraft companies who knew quite a bit about making planes but didn’t know anything about mass production actually learned a ton from the auto companies about mass production. So, in the 1930s, airplanes were not produced with mass production techniques, at all. I mean, some of them didn’t even have interchangeable parts.

Gary: And so, it’s a great example of learning across sectors. They were kind of forced into it, in this sort of artificial setting, but, in that case, the aircraft companies learned from automobile companies a lot about production techniques. I think those examples are out there in all sorts of settings. We see today in healthcare, for a while, there were healthcare companies trying to learn from manufacturing companies; hospitals trying to learn about quality procedures from companies who manufacture cars. And, again, one has to be careful because analogies break down, sometimes. They’re not always perfect. But there is learning. And so, the idea is, can you expose yourself and expose your organization to a broader and richer mix of people?

Gary: Now, you mentioned lots of input into the decisions. The only thing there to be careful about is you don’t want to paralyze yourself either. So, I’m a big fan of having lots of input into decisions, but you need a decision-maker to make the call and move forward. But I think, in terms of exposing yourself and getting ideas on the palate of the organization or on the radar screen, I think most organizations need to broaden where they look and who they talk to. I’ll take a good example from my own world, in education. I think we have a lot to learn from companies in the entertainment business who produce fantastic multimedia content. We need to learn more about that. We don’t talk enough to people in Hollywood or the movie industry about that — how to tell a story. Maybe cases become more like that, they may become what we write down. We don’t normally think about that as a party we would talk to. But I certainly know that in my own experience as an academic, just the interactions I have with people outside — I’m trained as an economist and I work in a business school — but interactions with physicists interactions with people who do artificial intelligence, scientists or biologists. That’s where I suddenly get interesting ideas that connect back to my own field. So, it can be very, very stimulating.

[00:33:20.29] Ben: What you’re saying is that, if not maximize the number of inputs, at least you want to be exposed to different fields and different disciplines? And, at the same time, you make the point in the book that innovation is very infrequently linear, right? It goes perfectly from problem identification to solution. How does one build a system when the process is a bit random?

Gary: Yeah. So, the outcome is randomness, but the approach itself has to be very disciplined. And I use the analogy of evolution in life forms. Evolution, as a process, produces a massive variety of outcomes. It’s very innovative. We get everything from the smallest Amoeba to the largest Sequoia trees, to humans — complex forms of life. And yet, if you think about evolution, it’s a very rigorous process. It just works the same way all the time. There’s a few sets of letters in the genetic alphabet and there’s some rules for how things combine and replicate. And there’s not actually a lot of variance in the process, but there’s a huge variance in the outcome. And I use that analogy to think about, in organizations and in innovation, we want variance in the outcome, we want the breakthroughs. But to do that, we need to have a very disciplined and rigorous and repeatable process of design — test — iterate — design — test — iterate — design — test — iterate over and over and over again. And you need organizations that have not just that mindset, but you actually need processes to do that. So I think that sometimes gets forgotten. People feel like that’s bureaucratic, but it’s actually not. And when you look at how really great scientists work, they work with very strict discipline and rules. And it’s the same with artists, they work with really strict discipline and rules that they follow. The outcomes vary, and there’s creativity in the outcomes, but they’re often exceedingly rigorous and exceedingly disciplined and regimented in their approach.

[00:35:27.10] Ben: I’m not suggesting there’s an inconsistency, but on the one hand, you suggest in the book that you can’t just take a large bureaucratic organization, break it into smaller parts, and then to quote you, “it becomes magically endowed with entrepreneurial spirit.” That’s a fallacy, right? But, at the same time, you say, to do innovation, you need self-structures, you need temporary teams, you need project teams. So, what’s the difference between decomposing an organization into small parts and running project teams or small teams?

Gary: Yeah. Again, nothing wrong with small teams. I like small teams and you can do them in big companies. But I think the point I was trying to make in the book was that many times, companies confuse what is a cultural problem for a structural issue. So, they say, “We’re bureaucratic, and we’re slow, so let’s break this down. Let’s attack it structurally. Let’s make these smaller units. And now, suddenly, we’re going to be like a startup.” And the answer is, no, you’re not. You’re just going to be smaller versions of your old bureaucratic self. It’s actually hard to recognize what you can’t replicate about a startup. So, startup life — and I’ve been involved with startups, I’ve been a co-founder of a company, I’ve served on the boards of startups — startup life is consumed with the fear that you’re going out of business because you’re generally running on fumes, in terms of resources and cash. And so, you are focused on one goal — surviving. And the people you attract to the enterprise are extremely comfortable with the ambiguity that they may not be in business the next year. So, you select people who are very comfortable with that calculus. If you’re in a major corporation, if you’re in Microsoft, with 20 plus billion dollars of cash on the balance sheet, you’re not going anywhere next year. That, I think, changes some of the tension and pressure. And you cannot replicate that in a large company.

everybody loves the discipline until that discipline is applied to them — Gary PISANO

Gary: If you’re a large company, let’s think about what it is you really think make startups innovative — those are the things you can borrow. Create a sense of urgency. We’ve seen that in large companies. Today it’s fascinating what’s going on there. Big companies are being forced to be very urgent, because their worlds got changed dramatically. Look, I come from an academic institution that’s… Well, it’s a University — Harvard University is 350 years old or something and Harvard Business School is 100 years old — and we had to go online in a two-week period. Our students were on spring break and when the University president said because of COVID we could not have classes in-person, it would be risky and irresponsible. And so, in two weeks we had to figure out how to deliver education online. I think, if you had said to me last year, could that happen in a two-week period? I would have said no. But it had to happen. So, we made it happen. That’s the sense of urgency you can get. So, in a big company, you can do it. And we’ve been seeing this happen. So that’s what I encourage companies to do is, forget the whole startup thing; focus on the key attributes of innovative cultures — and those are some of them.

[00:38:23.12] Ben: When you talk about culture in the book, you talk about the paradoxes of innovative culture. One of the quotes you say is, “When it comes to innovation, the candid organization will outperform the nice one every time.” I suppose the question here is, how do you stop candor becoming aggression?

Gary: Yeah, great question! And absolutely you have to do. I mean, you have to watch for it. If you’re the senior leader, this is where you have to just be really attuned and you have to watch the visual cues — it’s a little harder these days if you’re remote — you’ve got to be able to, if you’re in the room, watch the body language of how people are reacting and be prepared to step in. And you have to model it yourself, that delicate balance of treating people with incredible respect and dignity but being very clear about what you think is a good idea, what’s working, what’s not working, how things can be improved. It is a delicate balance, and in an organization where people are passionate — which is what we want them to be — emotions get involved. And we know that emotion can get the best of us, at times, in a negative way. So, I think, as a leader, you have to be really comfortable with stepping in and being able to pull somebody aside and say, “Look, Ben, you were a little rough in that meeting. I get your point, but you might have ventured into, you were just brutal, not brutally candid, which is different. We’ve had the good argument, we’ve thrashed this problem out 100 different ways, and now we’re going to move forward and we’re still connected.” I think you have to build good personal relations between people in the company.

[00:40:14.07] Ben: So you need obviously candor with respect but if you don’t have the candor, then you’re just going to move too slow, because you’re going to be too nice and you’re not going to get to the point, and the whole pace of change will be too slow. Is that it?

Gary: Absolutely! And problem-solving requires candor. It’s, how do we make this better? You have to tell me what’s wrong with my idea. If I give you a book of mine, to read my next book, I give you the manuscript and you say, “Great job! Great job!” Yeah, you just don’t want to hurt my feelings. But that’s not going to help me. But if you say, “Look, I’ve got to be frank with you. Here’s three points in the book that don’t make sense at all” or “I don’t understand” or “They’re badly written” or, “They don’t add anything”, whatever. And you are clear about it. I might not want to hear that. In fact, I’m pretty sure I wouldn’t want to hear that. But the only chance I’d stand to make the book better is actually hearing that. That’s why candor is so critical to innovation. For any creative process, and particularly for innovation, it’s extraordinarily important!

[00:41:14.07] Ben: There’s another great quote I loved from the book, where you say, “An organization chart gives you a pretty good idea of the structural flatness of a company, but reveals little of its cultural flatness.”

Gary: Yeah.

[00:41:24.25] Ben: How do you lever this culturally flat organization?

Gary: That’s where the leader’s behavior is everything. What are their expectations of you and others and their role and how much autonomy they really give you? So, in some organizations, leaders make it clear that they want to be involved in every decision. So, I don’t care what the org chart looks like, it’s not flat. And they’re going to get involved with every detail, and people are going to learn and be conditioned over time that ‘you’d better ask the boss before you do anything’. In other organizations, the leaders say, “Look, here’s the direction I want to go on. I think I’ve made it pretty clear the general direction or the principle or the strategy. It’s really up to you how you do that. And it’s really, within broad latitude, I just want you to go forward. And if you need my counsel, I’m absolutely willing to provide you that counsel and help you, but don’t feel you have to ask my permission.” So there’s clear boundaries about where you have to ask permission and not. “I trust you.” It’s trusting people to make decisions, and then giving them feedback on those decisions, later.

[00:42:27.22] Ben: Two other paradoxes I wanted to pick up on. One is this idea of, you call it ‘tolerance for failure, but no tolerance for incompetence’. If you’re going to do experiments, you have to be allowing competent people to do them, right?

Gary: Organizations that are innovative have really high standards of people. So they draw a distinction between, something failed because biology got the best of us or physics got the best of us or the market. We tried something new. They draw a distinction between that and just, we were sloppy. We did a bad design. We did bad engineering. I didn’t motivate my team well. I didn’t listen to people who were giving me an impact. That’s incompetence. We’re not going to tolerate that. Innovation is hard enough. And that’s a harder edge. Everybody loves tolerance for failure but when organizations start talking about, look, we’re also not going to tolerate incompetence, that’s a scarier environment to be in, for a lot of people.

[00:43:28.13] Ben: You also talk about how there’s a given that experimentation is good, but you argue very strongly that, if you’re going to experiment, those experiments need to be bounded by a sense of what they’re going to teach you and how much you can afford to lose through those experiments, right?

Gary: So, it’s, what are we experimenting? Why are we doing this? And then, we’re going to generate data. We have to treat the data as sacred. We can’t just run an experiment, look at the data, and say, “Well, that’s not what we wanted. Let’s do this. Let’s keep doing it.” You have to ask yourself, if you’re getting results that you didn’t expect or that are less than optimal, why is that? What’s going on? And learn from it. And that’s the discipline. And I think there’s got to be a real discipline to experimentation. And everybody, again, loves the discipline until that discipline is applied to them.

[00:44:19.11] Ben: One of the things you said in the book is, as a leader, you have to be great at strategy, execution, and culture. And what I wanted to ask you was, how many people does that apply to? And then, do you think that kind of leadership only really comes in waves? I don’t know if you have ever read that Steve Blank article where he sort of says, you get one wave where somebody is great at innovation, and they surround themselves by people who are great at execution, and then when that person retires, or leaves, then you have a period where the company kind of sweats the asset or milks the existing innovations. And then, there’s not until the next generation of leaders that you then become innovative again. So, sorry to ask such a long question, but do you think it’s really difficult to have those qualities in a leader? And do you think they come in waves?

Gary: I agree with that observation. I do think they come in cycles. I think what happens is you do get the visionary leader, the innovative leader, who then surrounds themselves with people who are execution-oriented to kind of counterbalance them, which is probably a reasonable thing to do. But then, the problem is those people become the heads of the company, and there’s less innovation. And then, the company gets in some trouble and an innovative leader comes back. I think Microsoft’s a great example. I mean, I think they’ve gone through that cycle. How many leaders are good at strategy, systems, and innovation? It’s a great question! Probably very few. I think, as a leader, your task is three-fold: you’ve got to master strategy, you’ve got to be a good architect of the system, and you’ve got to be a good architect of the culture. But if they had to choose, I’d say, focus on strategy and focus on culture. Systems — there’s enough other people who can probably help you get that right. So, focus on strategy and focus on culture.

[00:46:06.16] Ben: We’re in a world now, where, the pace of change is constantly accelerating, we’re on a treadmill. And sustaining innovation is kind of like the new source of sustainable competitive advantage. Do you think that’s fair? I.e., this is really what makes or breaks companies today, and therefore, the leaders that are good at this kind of almost deserve to be paid whatever they’re paid, because this is just so critical?

Gary: Well, I want to be clear, because in terms of sustaining innovation means — and Clay Christensen used that term, ‘disruptive versus sustaining’. I’m not talking about sustaining innovation the way he did it. Sustaining your capacity for innovation is critical. I mean, that is what is really, I think, the skill that is in scarce supply. So, it’s not just being good at innovation. It’s building an organization that is capable of innovation. I think that’s the fundamental difference. The leaders should worry about building the organization that’s going to outlast them.

[00:46:57.09] Ben: So, the way you finish the book is you talk about innovation as agency, right? So, we all have a role to play in innovation. Is there a way for us to become, as individuals, in a practical sense, for us to become better at innovation and also to make our businesses more innovative?

Gary: Yeah, absolutely! Look, innovation starts with yourself and organizations want us to be innovative. I’m not innovative, but I want other people to be so. So, you kind of have to open it yourself, for sure. But I think, how do you do it individually, and in all walks of life? I go back to some of the things I talked about in the book: expose yourself to a wide range of people and ideas. So, get out of your comfort zone, get yourself in contact with people you’re not normally talking to. I think that’s probably the most important thing. The second thing is, get comfortable yourself with experimenting. And I think we’re all trying things and learning from them as an individual skill — getting comfortable with that I think it’s a prerequisite for having your organization be comfortable with that.

Gary: There’s lots of these things individually, you can practice. I mean, you can practice candor and learn how to do that, and challenge yourself to start to follow some of those cultural attributes. Get yourself comfortable with receiving candid feedback and not taking it too personally when your ideas are criticized. Learn how to do that. And again, I think some of it is, get yourself in situations where, if you’re outside your comfort zone in something you’re doing individually, that you’re not going to be very good at, and that you’re going to fail at it, and you’re going to learn that humility that comes from it — I took a drawing class two years ago. I’m a terrible artist, but my wife is an artist. So, she was taking me to a drawing class, and I took it, and I failed a lot at it, but that’s okay. I mean, I think it’s no fun to fail, but you have to realize that failing at things isn’t so bad — and innovating requires that. So, if you get comfortable with some of that yourself, you’ll become a more innovative person in everything you do. I think that, in an organization, you will be a better agent for innovation.

Ben: Fantastic! Gary, thank you so much for coming on the podcast and sharing all of your insights from your book! Just to reiterate, Gary’s book is called Creative Construction: The DNA of Sustained Innovation — and we highly recommend it!

Mimetic Theory And The Future Of E-commerce (#25)

Mimetic Theory And The Future Of E-commerce, w/ Julian LEHR

Your host, Ben Robinson, is virtually sitting down with Julian Lehr, an ex-Googler, startup founder, and current startup partnerships lead at Stripe. Julian and Ben get into all sorts of interesting behavioral psychology related to buying and how digital companies can use physical elements to take advantage of signaling. You will also learn Julian’s tactics for staying productive, why advertising budgets are shifting from celebrities to micro-influencers, why the Berlin startup scene hasn’t quite lived up to the hype — and much more!

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Julian recommends:

  1. One book: Finite and Infinite Games by James P. Carse
  2. One influencer: Dan Romero
  3. Best recent article: The Arc of Collaboration,, August 16th 2019
  4. Favourite brand: Kleid Stationery®
  5. Productivity hack: Treating your email inbox like a to-do list.

Full podcast transcript:


How do you stand out of the crowd? How do you make sure that other people see your content? And this is something that the most successful digital products have done as they monetized signal amplification. — Julian Lehr

[00:01:19.06] Ben: Thanks so much for coming on the podcast! I wanted to kick off by talking about Europe and the European startup scene. So, your job at Stripe gives you quite a lot of exposure to up-and-coming European startups, and I just wondered how excited, how bullish you are about the European startup scene?

Julian: I’d say I’m generally an optimist. So, I think things are moving in the right direction. Are we close to Silicon Valley, yet? Probably not. Will we ever be Silicon Valley? It’s like, in Paris or London or Berlin, is there going to be a new or next Silicon Valley? I don’t know. I guess I’m less bullish on that. But, on the other hand, I don’t think there has to be a Silicon Valley in Europe. So, that would be my answer, I guess.

I’d say Berlin, in general, has been a bit of a disappointment, in the sense that, I think 10 years ago, we looked at Berlin like, “This is going to be the next startup ecosystem. It’s very cheap, there’s a lot of talent, there’s a lot of international talent, and there’s a lot of crazy people. ” And we haven’t really been seeing that, at all. — Julian Lehr

[00:02:04.17] Ben: And what about Berlin — the city in which you live? What’s the startup scene like, there?

Julian: I shouldn’t be saying this, probably, being part of that ecosystem. But I’d say Berlin, in general, has been a bit of a disappointment, in the sense that, I think 10 years ago, we looked at Berlin like, “This is going to be the next startup ecosystem. It’s very cheap, there’s a lot of talent, there’s a lot of international talent, and there’s a lot of crazy people. And crazy people will work on crazy ideas, and the next big thing will look like a toy first, and we’ll see a lot of very interesting innovation from Berlin.” And we haven’t really been seeing that, at all. Like, in the sense that the most successful companies in Berlin have been sort of like rocket internet type copycats, which is interesting. So, this is a famous Peter Thiel quote: “We were promised flying cars and all we got was 140 characters.” And, in Berlin, it’s sort of like we were promised flying cars and all we got was the guy trying to copy 140 characters. So, I wonder, where’s that crazy innovation that we were promised? I don’t know if it ever will come. I think there’s a couple of reasons why we haven’t seen what we expected but I thought that was interesting.

[00:03:22.24] Ben: What are those reasons then? Because it sounds like you’ve got all the ingredients, right? You’ve got weirdos, you’ve got talent, is cheap enough for people to live inexpensively. So, it sounds like it should all be coming together.

Julian: Well, I wonder — and this is sort of my pet theory — I wonder if the low cost of living is actually more of a barrier. And if the high cost of living in San Francisco is more of a feature than a bug, and it’s like, a) there’s the high cost of living, so you have to be serious about the work that you do. And then, on the other hand, there is very little to do in San Francisco. The quality of life is pretty bad: there’s not much of a nightlife, there’s not great parks you would spend a lot of time in. So, in a lot of cases, the best place to be is literally your office, whereas, in Berlin, there are all these distractions: there’s great nightlife, there’s great bars, there’s great parks — there’s a lot of other things you can do. And so, you don’t need to work hard to enjoy all of the benefits because it’s so cheap.

I’ve seen a lot of people who have moved to Berlin with the intention to start a company, and then they get just sucked into the nightlife and they do some other job because life is pretty great. — Julian Lehr

[00:04:22.24] Ben: And, I guess what you’re saying is if it’s very cheap to live, that gives you a long runway and kind of takes away that pressure to getting things done every day.

Julian: Yeah, exactly. Exactly. You don’t need to raise venture capital from day one. You can just see what happens. I’ve seen a lot of people who have moved here with the intention to start a company, and then they get just sucked into the nightlife and they do some other job because life is pretty great. I think there’s another Peter Thiel quote: “People move to Berlin in their 20s to retire.” That’s not necessarily a bad thing, right? It’s a good thing for a city to have a great quality of life. It’s just, the side effect of that is we probably won’t see as many companies as in other ecosystems.

There’s a trend in Eastern Europe, where entrepreneurs, because their home market is too small or too insignificant, they start selling to US consumers or businesses from day one. And they actually pretend to be a US entity. — Julian Lehr

[00:05:05.01] Ben: And then, why do you think Europe hasn’t produced more top-of-the-food-chain platform companies?

Julian: I don’t know if this is a question about platform companies. It’s more about larger companies, in general. And maybe the lack of funding might be one reason. There are other things, like, the average European might be more risk-averse than the average American. But I think the larger problem is that it’s just a very fragmented market. So, if you’re a German entrepreneur, you’ll probably start a product that works for the average German consumer. And that is a big market. It’s a big enough market to raise venture capital, but it’s not the same as the US. And it’s not just language barriers, but there’s different user behavior — like in-payments for example. This is really interesting and this is something we see at Stripe, of course. The average German uses very different payment methods than a person in France or in the Netherlands, for example. And there’s a lot of these tiny differences. So I think there’s an interesting trend in Eastern Europe, actually, where these entrepreneurs there, because their home market is too small or too insignificant, they start selling to US consumers or businesses from day one. And they actually pretend to be a US entity. So, they have US headquarters, which is one guy in San Francisco or New York, but then the entire team is somewhere in Romania or Belarus — cheap engineering talent that they just sell to the US market from day one.

[00:06:43.18] Ben: How confident are you that we can overcome that fragmentation? So, I’ve been noticing that over the last few weeks has been a number of initiatives coming out of the European Union to try to overcome these obstacles that startups face when they do business across borders. Do you think this is something that we can fix, we can make it a more homogeneous market?

Julian: Well, I think you can fix parts of it. And I do think that, on average, people’s English skills probably improved. And so, you can just release an English product that’s going to work for most markets. I think those things will get better over time, but I think it just takes time. I am optimistic in the long term. Probably not so much in the short term.

the idea is more to connect with businesses that you’ve purchased from before to increase lifetime value, which is one way to work against high user-acquisition costs from aggregators in the channel, which are Instagram, Pinterest, etc. — Julian Lehr

[00:07:28.21] Ben: Okay. So, your last two blogs, which I really enjoyed, both have been about Shopify or at least eCommerce. When you’ve analyzed Shopify, you sort of correctly identified that it’s a platform, it’s not an aggregator. But, in a way, you suggest that that might leave it open to an aggregator, to somebody who might sit on top of it, and kind of suck away its margins or gradually kind of move downstream and gobble up some of its market share. And then, you’ve also talked about ‘Shop’, the app it just launched. So, how do you see Shop? Do you see Shop as an attempt by Shopify to try to aggregate demand and therefore protect its business — so, go upstream to protect its business and its margins?

Julian: Yeah, Shop is interesting. So, I think people have misinterpreted what Shop is. So, Shop has been interpreted as sort of like a demand aggregation play, sort of like a discovery platform and you log in and you see different products, recommendations across different Shopify stores. I don’t think it is. So, the way I see it is, you can only really discover shops that you’ve bought from, previously. So it seems to me that the idea is more to connect with businesses that you’ve purchased from before to increase lifetime value, which is one way to work against high user-acquisition costs from aggregators in the channel, which are Instagram, Pinterest, etc. So this is how I see Shop. That being said, over time, I could see it becoming more of a discovery platform, perhaps. I think that is interesting. It’s definitely something that I would assume Shopify is interested in experimenting with. The question is, how successful will that be? Ben Thompson had a few good articles on this. He was like, they should focus on the supply side. There’s very few cases where the supply side aggregator has then successively become a demand-side aggregator — it’s just not what they’re good at. It’s more of a distraction. I don’t know. I don’t disagree with him, but I think it will be interesting to see Shopify trying things in that space because I do think that there’s room for innovation in the product discovery space.

I don’t think you have to become a demand aggregator to be successful as a platform that aggregates supply. — Julian Lehr

[00:09:50.24] Ben: I suppose the argument is, if they just remain a platform, then they can build massive economies of scale, right? But, as you know, in your article, those that aggregate demand always have a stronger position than those that aggregate supply. And I suppose the argument is, if you’re a platform, you kind of don’t exist to the end consumer. Nobody should theoretically know whose Shopify is. But, nonetheless, if its job is to serve those businesses as best as possible, then that might mean, over time, that they have to become a demand aggregator, otherwise, there’s no way out of paying the aggregator tax to acquire new customers?

Julian: Well, it depends. So, I don’t think you have to become a demand aggregator to be successful as a platform that aggregates supply. If you’re able to diversify the demand side, so if the demand was spread across hundreds or thousands of different channels, then it doesn’t matter. Yes, there will always be a tax that people have to pay, but that’s just normal. I don’t think there’s a way around that. There’s always going to be some user acquisition cost. You have to pay your distributors, in a sense. It becomes dangerous when there’s one or two very powerful aggregators — like Instagram — and they capture all of the value, I think that is a potential risk, not so much for Shopify itself, but for its individual shops and suppliers.

we look at someone that we admire, and we look at what are the things that they have or the things that they want, and then those are the things that we want, as well. — Julian Lehr

[00:11:28.08] Ben: It was a two-part blog, and the first-part blog was really talking about these dynamics, of how does Shopify coexists with Facebook, with Instagram. And then, in the second part, you were talking about Shopify in the context of Mimetic Theory. What is Mimetic Theory and how does that play out with influencers and helping curate better recommendations for us, as consumers?

Julian: So, Mimetic Theory is this theory from this French philosopher called René Girard. A few people might be familiar with him — he has gained quite a following in tech in recent years because he’s one of Peter Thiel’s mentors. And, basically, the theory is that what sets us humans apart from other species is that we observe others and we learn by observing and copying other people or people around us. And according to Girard, that also includes copying what other people desire, what they want. So, basically, what we do is we look at someone that we admire, and we look at what are the things that they have or the things that they want, and then those are the things that we want, as well. Which is not something that we are aware of. We think there’s a direct relationship between myself and an object that I want to have. So, what he argues is that it’s not a direct relationship, but it’s more a triangular relationship. So, there’s a so-called mediator that I look up to, and then I look at, “What does this person have? I want the same thing.” Because, in the end, I sort of want to become that person. So, the object that I buy is more of a means to an end. I’m just buying that thing to eventually become that person. If you take that theory, and you look at the way that eCommerce works, it’s not really set up that way, in the sense that if I look for a product on Amazon, I just get a list of products. I can rank them by relevance, I can rank them by price, I can’t really rank them by what I apparently am interested in, which is, who of my mediators is using which products?

[00:13:36.25] Ben: But that’s true on any platform, isn’t it? I mean, it’s particularly acute on Amazon, because you have to start with an idea that, you know, I want to buy a blender, for example, right? Whereas, it’s easier on Google or other platforms to search for a variety of things: what’s the best blender? And what you’re saying is there’s actually a third way, right? So, rather than just kind of know what I want and seek the cheapest option on Amazon or have an idea of what I want and seek recommendations from others via Google, you’re saying there’s the third way, which is “I want to see what blender Kanye West uses.”

Julian: Right! Or any other influencer, for that matter.

Ben: Yeah. Beyonce or whatever. I think you used Kanye West in your article, that’s why I mentioned Kanye West.

Julian: Right! So, yeah. A mediator could be a celebrity, it could also be a friend or someone else you look up to. But, if you think about Girard’s theory, basically perfectly describes what influencers are. The name is perfect, if you think about it. So, basically, the way I see it, a lot of shopping or eCommerce decisions are made by browsing an Instagram feed — I’m going through a feed of mediators and look at what they are interested in, and that’s what I want to buy as well — which is exactly why Instagram works so well as a user acquisition channel for Shopify products, especially because the products that are typically sold on Shopify are things that are visually appealing, they’re products that you didn’t necessarily know you wanted in the first place. So, I think that’s why it works really, really well. I think there’s a bunch of other products that aren’t necessarily discovered on Instagram, but they’re discovered on Twitter, for example, blogs, newsletters, podcasts, etc., that you would then go to Amazon trying to find it later, but I still feel that there’s potentially room for an aggregator that specifically just does product recommendations based on people that you follow.

[00:15:53.07] Ben: Yeah. And they would have lists of the products they’re using and all the products they recommend?

Julian: Yeah, exactly. So, I think if Shop app eventually does become a product recommendation engine, I think that’s what they should try to build — sort of like collections or lists of things that I might be interested in, based on people I follow on various social networks.

[00:16:19.04] Ben: Because, again, not only differentiates them from Amazon on the one hand — which is really about the cheapest and knowing ex-ante what you want — and Instagram — which is, you know, I don’t want to say cluttered, but it has many, many people sharing many things on it — with something which is dedicated to a curated list of recommendations from influencers?

Julian: Exactly! And I think there’s a few products that have tried to build something similar. None of them have really been successful. So, maybe there isn’t room for a product like that. Maybe that’s not something that people want to use, but I do wonder if there is room for a product in that space.

a lot of advertising budgets have shifted from very big influencers or celebrities, almost, to more of like micro or nano influencers that only have a couple thousand or a couple of hundred followers because that is perceived as being more authentic. — Julian Lehr

[00:17:00.24] Ben: And how do you square that with authenticity, because the big buzzword is authenticity, which is, people are becoming skeptical when they think that an influencer is paid to promote a product. So, how would this sit? You know, if I was an influencer, and I had a list of products I’d recommend, how would you, as the consumer be able to infer whether or not they were genuine recommendations or paid-for recommendations?

Julian: I think that explains some of the trends that we see in online advertising, where a lot of advertising budgets have shifted from very big influencers or celebrities, almost, to more of like micro or nano influencers that only have a couple thousand or a couple of hundred followers because that is perceived as being more authentic. But that could also work in a product recommendation engine. It doesn’t have to necessarily be someone like Kanye West that I follow. It could be, literally, the guy next door that I think is interesting.

[00:18:03.14] Ben: What about voice? So, you also wrote a blog about emerging platform opportunities. Why do you think we haven’t seen more breakout applications with voice?

Julian: I think the mistake that we have made is we’ve looked at voice as a new kind of interface that replaces a normal screen or other types of interface. And I just don’t think that that makes a lot of sense, in the sense that talking to an assistant just takes a lot more time and it’s less convenient than doing things on a screen. There’s no room for discovery. I have no idea which voice commands I could use. We might get there at some point if these voices systems get better, with time. I’m a bit bearish about voice as a primary interface.

Julian: What I do think is interesting is voice as a secondary interface. So, one of the most interesting applications that I’ve seen in the device space was at a Hackathon, where a team built a voice interface for Starcraft. So, the idea is that you’re so busy with your hands on your keyboard and your mouse, that you would use an additional interface to command your troops with a couple of voice commands. And I wonder if there’s room to replicate that for other applications. What if I could edit my Word document, as I’m writing it with voice commands? I think there could be something interesting in that space. So I think voice is interesting — just not as a primary interface.

[00:19:46.26] Ben: When you look at finance, where do you see the big platform opportunities there? Do you think, ultimately, finance is something that just gets embedded in other products and services? You know, i.e. do you think that we will always have an interface directly into finance? Or do you think that, for an SME, it’s easier to take a loan out through their accounting system or, if I wanted to pay you, it’s easier for me to do it through WhatsApp? Do you think, ultimately, finance becomes just a layer in the internet infrastructure, which is what a lot of people are predicting?

Julian: I think there’s a few interesting apps that do have a social component. Like, if you think about Venmo or PayPal, to a certain degree, they’re basically messaging, but based on money, to a certain degree. There are a few interesting investment apps in the US that have a social component to it. So, you have a feed and you see what your friends have invested in. So, I think there’s a few interesting ideas in this space. I think the question remains, is that a mainstream application or not? I don’t know.

At some point, your inbox will become crowded with too many newsletters and then content providers will look for the next best thing — Julian Lehr

[00:21:00.07] Ben: I want to talk to you about content, now. So, you also wrote an essay talking about the proliferation of newsletters and podcasts. It’s quite difficult to get access to the end consumer when you go via an intermediary like Facebook because it’s so crowded. And then, ultimately, an idea that I guess was a bit more popular last year, which is, we’re all retreating a bit from some of these mainstream platforms because there’s so much noise and trolling, etc. So, why do you think we have seen such a proliferation? Do you just think it’s a functional all-of-the-above or do you have a different theory?

Julian: Well, I think those are two different things, sort of like dark forest theory of people moving into private chat groups. There’s a different problem there than people wanting to reach an audience and not being able to because the platform is so crowded. So, I think those are two different things. The main trend that I see is people looking for a new platform because they want to reach their audience, which is difficult if you’re new to a platform. It’s very similar to that Shopify — Instagram problem that we discussed earlier, if you think about it. If you rely too much on one demand channel, then that can become difficult. And so, I think newsletters aren’t necessarily better than blogs. It’s just that they have distribution built-in and as long as people don’t have too many newsletter subscriptions, then that’s great for content producers. At some point, your inbox will become crowded with too many newsletters and then content providers will look for the next best thing, which might be Telegram, it might be some other platform we aren’t even aware of. It might be audio. But I think that’s just sort of like an ongoing thing where people just constantly look for an additional trade route, so to speak.

[00:23:00.23] Ben: Do you think, in this case, actually, because people will pay for newsletters, they kind of have more sustainability this time? Because I guess, what happened in the past was people weren’t prepared to pay for content, so it was really difficult for people to stick at these things for a long time. But I’m just wondering, since there is more willingness to pay for content, maybe this theory of the long tail could actually happen after all?

Julian: Yeah. I think there’s room for that. There’s 7 billion people on this planet, so even if you have a super tiny niche, you can probably make a living. But I do think that we will see bumbles over time in the newsletter space or content space, in general, because there are some power laws and there can only be so many Ben Thompson’s who actually made a decent living off of newsletters. I think that still remains to be seen how many people will actually be able to make enough money to make that a sustainable source of income.

[00:24:15.04] Ben: And if we, again, compare it with this Amazon versus Shopify kind of analogy, if Substack is Shopify, the Facebook of newsletters — is that Facebook itself? Or do you think there’s a gap?

Julian: That’s a good question! I guess, maybe, your inbox will be that. If you receive 100 newsletters, will there be a dedicated newsletter inbox in your Gmail account? And we’ll just rank those newsletters by date? Will those be ranked by relevance? Or will there be ads so that your newsletter shows up on top? And so, it’s like a separate newsletter. I wonder if Google is working on a product in that space. That’ll be interesting. And then, yeah, I guess the question is where do you discover newsletters in the first place? There’s a product called ‘Stump’, I believe. It’s trying to build a demand-side aggregator for newsletters. I’m pretty sure we’ll see someone trying to build that discovery engine. Maybe that will be Substack itself, trying to build that.

[00:25:29.05] Ben: You’ve written a lot about email. I suppose we think email is being a tool that’s kind of old-fashioned, right? Because it was the first use-case for the web in many ways, right? And everybody has email. And, in some ways, we’re dissatisfied with email, right? Because you have this constant struggle to keep up with emails. But you seem to think that emails could almost be like this meta-tool that sits above all these other productivity tools, which, in the work that we do, is a problem, right? Because, as you said, we’re using Trello, we’re using Slack, we’re using all these different tools — Teams, Zoom. How do you keep track of everything? And one of your ideas is that we don’t have to reinvent a new tool. In fact, email might very well be the right tool to do that, to perform that metafunction of aggregating all the tasks and information and conversations from all these other different applications. So how would that play out in your mind?

Julian: So, I think of email, and calendar, and To Do’s as sort of the same thing. Sort of like different sides of the same three-dimensional coin. And people have built great to-do apps, they’ve built great calendar apps, they’ve built great email apps, but nobody has really integrated them. I think Superhuman are in an interesting spot where they could build that product. So, basically, what they’ve done for those who are not familiar with Superhuman, is they have a command-line interface. So, instead of having 100 different buttons in the interface, you can basically trigger a command-line interface, and then just write whatever action you want to do, with a bunch of really clever keyboard shortcuts that just makes you very, very effective. And so, I wonder if we’ll move to a world where we can trigger certain actions directly from your inbox. So, something that we’ve seen in the last couple of years is we can now snooze emails, and they come back and so, the emails become to do’s. But if we want to interact with their actual content, we still have to switch to whatever application we’ve received the initial email notification from. I think what we’ll see next is, when you receive a GitHub notification, you can basically close an issue directly from your email. Or you could, maybe if you receive an invoice, you can trigger a payment action that pastes that invoice instantly, without you having to switch back to your bank account. I think there’s a lot of interesting room for innovation in that space.

I think email is, for me, at least, it’s sort of like an underrated tool. If designed right, I think it can be super powerful! — Julian Lehr

[00:28:17.24] Ben: All conversations just get aggregated up to email, and you just control everything from there?

Julian: It could be email, it could be something else. People thought that Slack might become that place, sort of that meta layer that sits across different apps. It hasn’t really. And Slack, to me, is mostly a distraction. Email is better. I’m in control to whom I answer, when. So, I think email is, for me, at least, it’s sort of like an underrated tool. If designed right, I think it can be super powerful!

[00:28:51.16] Ben: In a way, this problem of fragmented productivity applications is getting bigger, right? Because, as we try to coordinate the activities of workforces that are increasingly distributed and not in the office, then it becomes harder and harder to do this, and are more urgent, at the same time?

Julian: Yeah, 100%. This is what I think: Microsoft — and I get Spark there as well — given that they do have their own email client, and they have all these different productivity apps, they have started to build some of these things that I’m describing. But I do hope that there will be something like Superhuman that combines different products that aren’t necessarily from the same company.

[00:29:38.09] Ben: I’m amazed at how well Microsoft’s done. I suppose I’m not surprised they’ve done well, but I’m still surprised they’ve done as well as they have. And for me, Microsoft is like the case study for bundling, right?

Julian: 100%. Yeah.

[00:29:55.12] Ben: Because, I mean, none of those applications work very well in themselves. And I suppose, where I’m slightly surprised, is that we’re moving to this world where, since everything’s easier to integrate now, we’ve increased the mix of buying the best of everything, but still, the power of bundling should still never be underestimated, right?

Julian: Yeah! I guess the problem is that it’s risky for any business to open up their product to other apps. It’s very easy to become commoditized and then there’s like that one tool that just makes you redundant, but you’re still an input of that demand aggregator that captures all the value. So, as a startup, I’m just probably reluctant to open up my platform to others, and just trying to build it myself. And so, you end up with all these different walled gardens that don’t really interact with each other, which is a pity.

[00:30:52.17] Ben: And just while we’re still on the topic of productivity, you seem to be somebody that, based on reading everything that you’ve written, somebody who is extremely focused on productivity, and making sure that you waste as little time as possible and automating things. What kind of productivity tips do you have? And what would have been your major discoveries in the last few months?

Julian: So, I’ve been looking for a to-do app that works for me, for basically the last 10 years, and I’ve never found one that really works for me, that I found useful. And so, I’ve actually made my email inbox my to-do list. So for a to-do list, I just send an email to myself, and then I snooze it for the day that I think I want to get that task done. And that works pretty well for me. I mean, I already spend quite a lot of time in my email inbox, so that’s just a good place for me to keep my to-do’s as well. And then, I do work a lot in Google Calendar, as well. So, yes, I have my meetings in Google Calendar, but then I would also add specific to-dos to my calendar. So, at the beginning of each week, I would go through my to-do’s and my email inbox and then block out time in my calendar so that basically the whole day is blocked with different events so I know exactly when I need to get what tasks done.

[00:32:17.06] Ben: Do you have notifications set up to come into your email?

Julian: I don’t. I’ve turned almost all notifications off. So, Slack Direct Messages is turned on, but I would then sometimes just close Slack for an hour or two when I want to get deep work done. The other thing that works really well for me, it’s just using an actual pen and paper for my writing, for example. I do it on actual physical paper, with just no distractions.

[00:32:44.28] Ben: So you write in pen and paper and then copy it?

Julian: Yeah, mostly. Otherwise, it’s me writing two sentences and then it’s like, “Let’s see what’s on Twitter!” And then I waste 30 minutes on Twitter.

[00:32:57.08] Ben: Yeah. Okay. Because there’s this constant challenge of synchronous and asynchronous, right? And the problem with email is, is synchronous. So, basically, what you’re saying is you don’t just switch off all the apps because you don’t trust yourself. You actually take a pen and paper, write what you’re going to write — the blog, the essay — and then you type it up afterwards?

Julian: Yeah. It just makes me a lot more productive.

[00:33:18.15] Ben: Okay. And then music, again, is something that is conducive to productivity, right?

Julian: Yes. I haven’t actively looked for music that makes me more productive. It’s more that I noticed when I looked at music data — I log everything I listen to with Last FM — I saw this trend that there are certain genres of music that have just increased over the years, like classical music, ambient music. And so, it seems like that’s a good proxy for my productivity. I can look at which weeks or months I spent most of my time listening to music and then compare that with my notes of how productive did I feel on a given day — and, yearly, that correlates pretty well, which is interesting.

I have about 50 to 60 things that I track on a daily basis, things like mental well-being, physical well-being, media consumption, how fit I am — all sorts of things I’m just interested in. And people assume that that’s a lot of work. It actually isn’t.— Julian Lehr

[00:34:07.28] Ben: So, every month, you share data on what you’ve been reading, what you’ve been listening to. But you also sometimes go further, right? I can’t remember what you called it, but during the quarantine, you released data on all sorts of different things: your sleeping patterns, your commuting, what you’ve been eating. And I suppose one question is, how do you even track that data? And then, the second question is, why is it you choose to be just so open about sharing all this information? It’s almost like a mini Truman Show, where you just sort of lay yourself open for public consumption. So, how do you do it and why do you do it?

Julian: I use a pretty big air-table spreadsheet for most of the things that I track. So, I have about 50 to 60 things that I track on a daily basis, things like mental well-being, physical well-being, media consumption, how fit I am — all sorts of things I’m just interested in. And people assume that that’s a lot of work. It actually isn’t. So, when I started with this, initially, more than seven or eight years ago, I carried around a physical notebook with me and I would just take notes as things happened. And then, at some point, you just get into the habit of being more present and realizing what you do. So, at the end of the day, I know exactly how many cups of coffee I drank, or how many beers I had on an evening, just because I subconsciously counted those, and then, each morning, the first thing I do is just open the spreadsheet, put in all the data from the previous day, which takes me three to five minutes, tops. That’s it. And, yeah, I’ve decided to share some of the data. I found that people find that type of data interesting. There’s only certain things that I’ve shared publicly. There’s a lot of things that I track — personal data that I wouldn’t share publicly on the internet. How many books I’ve read or how many podcasts I’ve listened to, I’m very much willing to share that with other people and it doesn’t seem like giving up on a lot of privacy.

[00:36:18.29] Ben: Why do you track all that stuff, yourself? Is it, again, in pursuit of productivity and well-being?

Julian: No, not really. So, it started as more of an experiment to just find out how much you do in a year. So, when I started with this, I was just curious how many cups of coffee do you drink in a year? How many people do you talk to? How many buildings do you enter? How much time you spend in the shower, etc. So, I had this pretty big project, where I tried to quantify pretty much every single aspect of my life — and I did that for an entire year. And then, as I was doing it, I sort of figured out that the data is interesting — there’s all these interesting patterns that you can see — and it’s almost like keeping a diary, I would say. It just makes you a lot more present. So, off the last seven years since I’ve been doing this, it feels like I remember more day-to-day activities than I did previously.

[00:37:16.02] Ben: And you don’t feel like the act of recording it changes your patterns in themselves? A bit like there’s a lot of evidence that this happens in economics, right? The minute you start to record something, then people’s behavior changes, right? A bit like, if I were to record how many beers I drink, I might naturally reduce consumption, right?

Julian: 100%. So, initially, when I started with this project, the idea was for the data not to influence my behavior, but then, it definitely does, like, you realize that “Oh, actually, I do drink a lot of alcohol. I should probably reduce my alcohol intake”, etc. So over time, I’ve started to introduce yearly goals where, at the beginning of the year is like, “This is how much I want to swim this year. This is the maximum amount of alcohol that I want to drink, etc. And then, the data just becomes a good way to see if I actually achieved all of those different goals.

[00:38:11.28] Ben: So, this might seem like a random shift of gears, but since we have been in quarantine, I can’t remember what the exact figure was, but I think Zoom went from 10 million daily users to 300 million daily users or whatever, and probably, as we come out of quarantine — some places already have — likely we’ll see a reduction in the number of daily users. But it feels like we’ve accelerated that trend towards remote work. We’ve accelerated people’s comfort levels with video conferencing. I’m just wondering, do you think Zoom is a big platform opportunity? Do you think we’ll get all those yoga teachers that started doing yoga classes online and suddenly realize that they, thanks to the internet, could reach a much larger customer base or consumer base? And I suppose there are hundreds of hundreds of other professions that have realized that they can reach a bigger audience. So, do you think there’s a platform opportunity in Zoom, that maybe people have underappreciated?

Julian: I think there’s definitely a platform opportunity. I do wonder if Zoom will be the one who’s actually building that platform. I’m a little skeptical. They don’t strike me as a company who’s been thinking about that. I think they’re busy working on everything. But I do agree that there’s definitely a platform where you probably should have different interfaces for different use cases. You know, it’s not just meetings, but as you say, it could be yoga instructors, or whatever it is that would need a platform. And there’s all these things that you can build on top of Zoom. I think there’s a payment opportunity, sort of like in-app purchases for Zoom calls where you can upgrade to premium content or different things as you are on the call. I think that’s an opportunity. I haven’t actually seen anyone building something in that space, but I think there’s definitely an opportunity there.

[00:40:22.16] Ben: And what about audio in general? You said that you listened to the podcast with Brett Bivens, and one of the things that he talks about is that he thinks the ear is under-monetized versus the eye. Do you agree that there’s a lot of untapped opportunities in audio? Just because we can do it alongside, it’s kind of less all-consuming and therefore, we can do it alongside other activities that we do.

Julian: Yeah, I think there’s definitely an opportunity there. Like, all that time we spend not in front of a screen, we usually have Airpods or some other headphones plugged in. So, there’s definitely opportunity to just consume content, and then, also to monetize that content. I’d say audio is overall probably under-monetized. There’s probably room for more. I think Spotify is in an interesting position there, where it seems like they’re trying to become the Netflix of podcasts. I think there’s room for an AdSense-type ad network for audio ads. That isn’t really something you could build with podcasts being very decentralized. But, if you have one aggregator dominating the space, I think there’s some interesting monetization opportunities there for sure.

[00:41:45.18] Ben: Are you bullish on Spotify? Because Brett is super bullish on Spotify!

Julian: Definitely in the non-music space. For music, they’ve been in a tough spot, given that there’s only so many suppliers, and they basically control what you can do and what you can monetize. But everything that’s not music, I think there’s huge opportunity to monetize. And it’s not just podcasts, right? It could be meditation apps, some other things that we aren’t even thinking about. Maybe there’s room for stuff like audio-based social networks. There’s a few popping up these days. I think there’s still a lot of interesting ideas that haven’t been explored yet.

[00:42:34.05] Ben: Yeah, I mean, that’s one of the things that I most like about your monthly update of what you’ve been listening to because Spotify it’s getting better, but that kind of stuff is not very salient on Spotify. It’s not easy to see what other people are listening to. But I suspect, as you said, there was almost this disincentive to get people to spend too much time on Spotify, because the more time they spend on Spotify, the more they have to pay the record labels. But when they have a more Netflix catalog of content that they own outright, then yeah, you basically want to drive people to the site and have them spend as long in there as possible because once it moves out of just listening to music they don’t own, then they can take up gross margins quite a bit, right?

Julian: Exactly! Yeah.

[00:43:17.14] Ben: When do you listen to podcasts? Because I noticed that during quarantine, thanks to all the data you shared, you hadn’t been listening to as many podcasts as you normally would. Is that because you weren’t commuting?

Julian: Yeah, exactly! So I usually listen to podcasts while I’m commuting — so, before and after work. I’ve now started to basically go for a walk before and after work to simulate a commute. And so, my podcast consumption has gone up, again, as well. So, it seems like we’re almost at pre-quarantine levels, at this point.

Everything that we do is sort of a signaling aspect. We’re just trying to let people know that it’s a hidden message in what we do, and that that’s why we actually do these things. — Julian Lehr

[00:43:50.08] Ben: I want to talk to you next about signaling as a service. You wrote another great essay talking about signaling and how signaling is mostly associated with physical products, and you were talking about how we can translate that into the online world, right?

Julian: I read a super interesting book called, “The Elephant In The Brain”, which talks about signaling and basically makes two arguments: everything that we do is sort of a signaling aspect. We’re just trying to let people know that it’s a hidden message in what we do and that that’s why we actually do these things. And then, the other argument is that we’re not actually aware of doing that. So, a classic example of this was conspicuous consumption, where you buy a Rolex watch, not because it’s a great watch, but because you want to signal something about your social status and your place in society. And what they claim is that is not just luxury goods, but pretty much everything that you do has a signaling component — whether it’s green products that you buy, whether you’re giving to charity — basically everything that you do, you just do it for the sake of signaling something about yourself.

Julian: And so, I wondered if that also applies to digital products, and if so, if that explains why digital products tend not to monetize it, as well as their physical counterparts. And the way I look at signaling is there’s basically three components to it. So, the first thing is what I call ‘a signal message’ — that’s whatever you want to convey by using or buying a product. So, if you think about a pair of sneakers, the signaling message is something along the lines of, “I live a healthy and active lifestyle.” Now, as a next step, you need some form of ‘signal distribution’ so that other people know about that message you’re trying to send. So again, with the turf sneakers, you just wear them in public where other people can see them. Great! It works pretty well. This is why people are willing to spend a lot of money on sneakers, but not on socks — nobody can see your socks so you’re not incentivized to spend a lot of money on them. And then, the third thing is, if everyone is wearing cool sneakers, how do you make sure that your sneakers stand out? So you need some sort of amplification to make sure that you stand out of the crowd. In the example of the sneakers, it might be a very unique design, it might be flashy colors, whatever.

Julian: So, physical products do really well having a signal message because they’re tangible, they’re physical, they just represent something. There’s certain limits to your signal distribution, in the sense that there’s only so many people who can see you wearing a pair of sneakers, for example. Just because it’s physical, there’s a certain limit to that. And then, signal amplification is also something that seems difficult in a physical world. For digital products, it’s sort of the other way around, where, because they’re intangible, you don’t really have a signal message, or at least it’s difficult to distribute that message to other people. So, if you think about a fitness app, which is also about living a healthy and active lifestyle, it just lives on your phone. Nobody can see the apps on your home screen. So, therefore, the willingness to pay is just a lot lower. You wouldn’t spend $150 on a fitness app, probably.

Julian: What digital products have done, though, is what you just mentioned: basically signal distribution at scale. So, what Instagram, and Facebook, and Twitter do is basically they allow you to share things about yourself. You can just take a picture of your sneakers, and now, a million people could potentially see that you own these sneakers. So, that works really well. The problem is, they can’t really monetize that signal distribution. The more people you reach, the more powerful the signal gets. So, if you were to monetize that signal distribution, then you wouldn’t reach as many people because you’re only willing to spend that much money on it.

Julian: Now, there’s a third thing, which is signal amplification, which means that what they monetize is standing out of the crowd, which just goes back to the discussion we had earlier around, if you have so many content producers, how do you stand out of the crowd? How do you make sure that other people see your content? And this is something that the most successful digital products have done: they monetized signal amplification. So, it’s a network that’s free to use, but if you want to make sure that you stand out, that’s when you have to pay. So, for example, Tinder is generally free to use, anyone can join. If you want to stand out with super likes and other in-app purchases, that’s when you have to pay — and that works really, really well for them. I would also argue that Fortnite is a similar example. So, again, it’s not really a game, it’s more of a social network. It’s free to use, it’s free to play. It’s not something that’s common in gaming, typically; it’s free to win — that’s also not common. The only thing that you have to pay for is signal amplification. So, if you want to have special skins that stand out or have these emote dancers that make your character special, that’s what you have to pay for.

what’s interesting is combining a digital product with a physical product. So, I think that’s something that Neo Banks such as N26, or Revolut have done really, really well, where, if you subscribe to a premium plan, you get a really nice-looking metal card. And that’s what people pay for.- Julian Lehr

[00:49:28.13] Ben: Did you ever read the article that was called, ‘Shared Value Transactions’?

Julian: I have not.

[00:49:34.29] Ben: It’s funny because this is what I thought when I read your article, which is like, it looked at this from a different vantage point, which is, actually, the Free to Play, and then when you charge, for add-ons is all about maximizing the number of users because you have network effects, and so on. And then, getting basically your most active users to subsidize the platform for everybody else — and you didn’t need that many active users. But actually, I think your take is more interesting. It’s almost one that I suspect a lot of people overlook when designing applications, which is, it’s almost like, if you had a whole bunch of things that you thought of when you were strategizing, the signaling effect of your product and the importance of that in its marketing and distribution is critical. And that’s one of those I was so fascinated by the essay because I suspect that this is something that most people under-appreciate.

Julian: Yeah, I agree. And it’s not a difficult problem to solve. I think what’s interesting is combining a digital product with a physical product. So, I think that’s something that Neo Banks such as N26, or Revolut have done really, really well, where, if you subscribe to a premium plan, you get a really nice-looking metal card. And that’s what people pay for. The premium benefits aren’t that great — you get a few more free ATM withdrawals, but they don’t really justify the 15–17 euro a month price hack. What people pay for is to be seen with a nice card. And so, I wonder if there’s room for other products to introduce an additional physical element to their digital subscription. If it’s a fitness app, maybe that’s t-shirts or some other fitness gear that they sell together with a subscription. I think there should be more experimentation in that space.

I think there’s going to be an interesting trend where you modularize eCommerce, where you don’t buy from a specific shop, but you buy directly from an influencer. — Julian Lehr

[00:51:32.01] Ben: Well, one of the podcasts we most recently recorded was on the whole craft movement, which is a really big thing — this whole move. We had a couple of companies on: one that does craft beer. And, we talked about this movement as being a function of growing affluence of the internet giving more information, and therefore, enabling people to make better choices, desire to have more sustainable products, and so on. But I suppose there’s a different take, which is craft is just really about signaling. It’s about signaling that I can afford better maybe, or I’m more worried about the provenance of what I eat and drink and where.

Julian: I think that’s part of it. And then, this is something I’ve been thinking about a lot: how do you marry the signaling theory with mimetic theory? Because they also seem to be sort of the same thing, like, you use mimetic theory to learn what you can signal later, and becoming a mediator that other people follow is sort of a signaling play. I think that’s super interesting! I wonder if you look at other people coming up with their own brand for whatever it is, and so, I want to use it as well, sort of like a network effect, the mimetic network effect where, because my friend has started a craft beer brand, I want to have my own brand, perhaps. And this explains why we’ve seen all of these microbrands in general, not just for craft beer, but all sorts of things.

[00:53:19.27] Ben: And I’m convinced that that’s how you scale these craft products, right? Which is the end of the mass consumer, right? So, we don’t sort of mass produce, mass advertise, and mass sell relatively standardized goods. Instead, we sort of cater increasingly to smaller demographics, and so on. But actually, those demographics can be quite similar across many different locations. And, how do you reach those demographics at scale without paying a lot of money to Facebook and Google? And I think it comes back to your same point, which is, you find the influencers. So I really do agree that the signaling and mimetic theory, they could coalesce.

Julian: Yeah. I actually think that the products, in a lot of cases, remain the same. They just have a different packaging and a different brand. So, it’s the same product, but you buy it for a different reason because everyone is a little different. And so, you see a lot of these influencers becoming brands. And so, I think there’s going to be an interesting trend where you modularize eCommerce, where you don’t buy from a specific shop, but you buy directly from an influencer. And it’s the same product that you would buy from another influencer, but it’s branded in a slightly different way. So, we buy the same things, but we buy them for different reasons. It looks slightly different, even though they’re just kind of the same thing.

Ben: Which, again, comes back to your point that if everybody becomes an influencer, even if we only have very small followings, then we would just have this massive proliferation of influencers, which means we need an aggregator for influencers?

Julian: Right! Exactly, yeah!

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

Julian: Thanks for having me. It was fun!

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!

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

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:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

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!