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:

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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,
w/ Youri SAWERSCHEL

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, kwokchain.com, 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:

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

Full podcast transcript:

 
 

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

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

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

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

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

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

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

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

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

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

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

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

Marc: Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Marc: Yes. Yes, exactly.

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

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

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

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

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

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

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

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

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


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

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

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

Ben: Like in your bathtub?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Arthur: Thanks, man!

From Scalable Efficiency to Scalable Learning (#22)

From Scalable Efficiency to Scalable Learning,
w/ John HAGEL

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

Podcast also available on:

Apple PodcastsSpotifyGoogle PodcastsAnchor.fmSoundcloudStitcherPocket CastsTuneInOvercast

Resources:

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

Full podcast transcript:

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seeing Around Corners (#19)

Seeing Around Corners,
w/ Rita Gunther McGRATH

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

Full podcast transcript:

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jumping S-Curves and Inventing the Future,
w/ Bill FISCHER and Ian STEWART

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

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

Full podcast transcript:

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ben: Nature I think.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ben: Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ben: Not enough time!

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

Ian: As it sometimes already is.

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

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

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

Ian: I agree.

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

Ben: Yeah.

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

Bill: Right!

Ben: Or three months.

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

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

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

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

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

Bill: It’s a great book!

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

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

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

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

Ben: What’s that term?

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

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

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

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

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

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

Ben: Fast throwing away shirts after single-use.

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

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

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

Ian: It makes sense to me.

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

Ian: Experimentation also leads to knowledge.

Ben: Touché!

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

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

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

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

Bill: That’s a good question!

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

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

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

Bill: Ian?

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

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

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

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

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

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

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

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

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

Bill: That’s right!

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

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

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

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

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

Bill: Oh, yeah, I think so, too.

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

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

Bill: Yeah, right.

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

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

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

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

Bill: And it is not the first time.

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

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

Ben: Quite extraordinary!

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

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

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

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

Bill: I think China is a global superpower.

Ben: Preeminent. Voilà!

Ian: Again, it depends on what preeminent means.

Bill: Yeah.

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

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

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

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

Ian: Often used by politicians.

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

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

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

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

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

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

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

Ian: It is a tourist destination for Chinese people.

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

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

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

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

Ian: Yeah. Everybody should travel!

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

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

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

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

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

Bill: Our pleasure! Thank you!

Ian: Thank you for having us!