To turn Adversity into Advantage, Banks need to Renovate in Winter

Renovate in Winter

To turn Adversity into Advantage, Banks need to Renovate in Winter

by Ben Robinson | March 30, 2020 | 8 minutes read

Crisis is not the time to stop all IT projects, but to double down on the ones that really matter.

Don’t pull up the drawbridge

Beware risk and opportunity cost

Bag some quick wins

Enterprise Software Stack Systems of Intelligence
How the Banking Enterprise Software stack is splitting

Consider Impact on the future

The Future of Banking
The Future of Banking and the Strategic Imperative

This a data play. It requires understanding customer context (interaction preferences, financial situation, needs) and be able to match to the right offering. In the first instance, financial services companies will do this for their own labelled services, but increasingly — to maximize utility and convenience — they’ll need to do it for third-parties services as well (requiring an extensible product catalog) and intermediating and bundling if necessary (which necessitates managing real-time risk). As a third phase, these same institutions can then orchestrate value between the different parties on the platform, stepping back from intermediating and becoming a system of collective intelligence.

Don’t waste a crisis

Articulate the change narrative

Use stop/go triggers

In summary

Introducing Aperture

Introducing Aperture Herbert Simon
Herbert Simon advocated for insight, not abundance

Introducing Aperture

by Dan Colceriu | May 14, 2019 | 7 minutes read

We use them to look at organisations, at markets, at societies, at the world. They absorb information. We use them to choose what to see, and more importantly, what not to see. By doing that, we understand trends and create recommendations and plans that organizations of all kinds can follow.

Looking at the same information from different vantage points reveals key insights. As such, we often hear strategists ask — what if we look at this through a different lens? And so yes, we do like to change lenses often, so that we can absorb information differently. Some do it to be able to absorb more information, or to see it differently, and some do it in order to adapt to the zoom in / zoom out approach to strategy eloquently described by John Hagel.

As Hagel pointed out, since we’re facing a socio-economic shift, organizations must find an alternative approach to strategy which looks at the world from a dual perspective — one focused on the near-term, six to twelve months, and the other focused on the much longer term, ten to twenty years ahead. The key is then to focus on these two horizons in parallel and iterating between them.

This latter approach to strategy is designed to account for the increasing speed of change, but also to enable a link between long-term strategy and execution. It is without doubt one of the major upgrades to strategic thinking that we’ve lately.


But does the zoom in/zoom out framework go far enough? It still assumes that markets, organisations, societies, if they change, somehow change towards a point of equilibrium, from where it won’t have to change anymore, at least for a while. In practice, however, this state of equilibrium that we seek through our lenses, is, in fact, constant change.

Therefore, strategists are faced with the risk that the tools they use are downplaying two major areas:

· one is speed of change: the world moves at unprecedented speed, which requires more agility than organizations think they need.

· the other one is in the nature of information: it is either abundant in such a way that it creates a poverty of attention. Or it is scarce, in a way that creates a poverty of actionable insight.

One condition makes it hard to change lenses on the go — due to the time this takes — and the other makes it more difficult to use the lens you currently have with any meaningful results.

And in practice, smaller companies can only afford to resource themselves with only one lens anyway — as the privilege of having multiple, interchangeable strategy lenses exists mainly within large organisations.

As my colleague Ben Robinson wrote, we now face the conditions where strategy should pivot to a function that creates the conditions for maximum agility so to impose as few of these constraints as possible; from a preservation strategy to a continuous growth strategy.

This creates the imperative for strategists to develop more execution skills, as they are faced with the task to create the conditions where organisations can experiment at fast speed.

Faced with these conditions, strategists need to transform their lens from a static window of the world, to complex adaptive systems — which account for speed, execution and feedback loops, as well as experimentation. Specifically, they need upgraded skills that allow for filtering abundant information (or expanding insufficient information), while also creating the right depth of insight, but at much higher speed than before.

In other words, in search for meaning where equilibrium is represented by constant change, strategists will need to up their game and learn also to use the aperture of their lens. Or find people who do.


In the new networked world, the best talent, resources, and sources of information sit both inside and outside organizations, not exclusively inside them anymore.

Jet d’eau de Genève, captured right before evening shutdown, May 2019 | Photo by Dan Colceriu, on film - because some noise is good

With that being the case, there is a gap, and need, for some kind of vehicle that could bring together information about how the world is changing from people making this change happen. And this is how, brainstorming on the shore of Lac Léman with Ben Robinson, we conceived the platform we’d wanted to join but couldn’t find and which we believed was critical to exposing new thinking from a newly-forming community.

Aperture is an independent content hub and a community, built on the exchange of ideas around technology, strategy and the dynamics of the platform economy.

It is both a virtual community — sharing and discussing ideas through articles, podcasts and news digests — and a physical one, organizing meetups in Geneva, Zurich, Berlin and Bucharest.

It brings together strategists, marketeers, growth enablers, entrepreneurs, investors and policymakers. And its content platform has a clear focus on highlighting the ideas of those thinking and doing things differently — we like to call them theorist-practitioner professionals. It therefore bridges the world of strategy with the world of execution.

Its aim is to improve collective intelligence by subjecting ideas to multiple exposures — establishing the right context, narrowing down the arguments and encouraging contrarian viewpoints — all within a safe, non-polarizing environment.

Because as much as we like to think that with the advent of social media, we have that kind of environment, we do not. In fact, social media as we know it has already peaked, creating the space for small-scale, networked communities that interact in a more orchestrated manner, allowing for sequential narratives to form.


Aperture | Hub is no technological revolution.

It is merely calling it as it is: the two main vehicles for professionals to seek meaning and make sense of the world are flawed.

One is the corporate stamped collateral (reports, events) that are either too self-serving or way too edited (in other words, censored). These are stable environments, but lack vibrancy, to quote Ian Hathaway.

The other vehicle is the wild, wild west of social media, which is neither self-serving nor censored, but the trade-off for these features is that it is polarizing, aggressive and built on the wrong engagement mechanisms that promote information abundance over return on attention. It is stuck in instability. Most people simply back out from engaging through it — creating the conditions for group-think and self-enforced bubbles.

The biggest confusion that we see is that, in order to build up social capital for the fast-changing business environments of today, strategists and by extension other professionals plug themselves into sources of instant and real-time information. But, despite popular opinion, doing so does not lead to self-empowerment, but rather diminishing utility, for the sake of social status.

While we do not oppose any of the two major forms of organizing communities, we do feel there is space for a healthier layer on top — one that introduces instability for the benefit of vibrancy, but with a path of becoming more stable in time. One that is more inclusive and co-creates for and on behalf of its audience, re-introducing utility back into networked communities.

Hence, what strategists need is reputational devices, and Aperture | Hub, through its content and events, aims to be one, by bringing transparency to the act of professional self-publishing and creating context by adopting a much calmer approach to how everyday events are being digested. It aims to inspire and to satisfy people’s intellectual curiosity, as well as to be execution-oriented by facilitating best-practices.

Consequently, by creating the perfect conditions where noise is good, we aim to create a content platform that offers voice to professionals that sit inside organizations — to be able to share expertise and projects they are passionate about in a free manner — and empowerment to the ones who sit outside organizations, such as freelancers and independent consultants — so that they can continue to learn from interaction, while also differentiate their work through mechanisms that are more complex than 5-star ratings.

Aperture | Hub is a place that fosters the right patterns of interaction and crowd-sources the right content for strategists and growth professionals to learn how to properly use their strategic lenses.


Aperture is committed to distributing the best and most diverse content, regardless of the status of the user producing it. As well, we’re committed to distribute the work of individuals, rather than more established brands. This means including our readers in mechanisms that enable them to become content producers.

We’d like to know more about the work you do. And here’s our email to reach out: [email protected]

Sign up to our fortnightly newsletter where we curate and discuss the most relevant reading materials around strategy, marketing, evolution of the firm and broader tech context.

Discuss with us on Twitter (@aperture_hub)or attend one of our events.

How Marketing Adapts to the Networked Age

How Marketing Adapts to the Networked Age (spoiler: it’s not adtech)

by Ben Robinson | Sep 12, 2018 | 13 minutes read

For father’s day this year, HP released a specially commissioned advert. It depicts a father telling his baby son there’s someone he’d like him to meet. He then introduces the baby to his grandfather for the first time. As the baby seemingly touches his grandfather’s face, the camera zooms out to reveal he’s just looking at a photo. The father says, “I really wish you could have met him.” The ad finishes with the tagline, “Keep memories alive”.

This is a moving ad for sure, but prevailing wisdom tells us it’s a total waste of time. Platforms like Facebook have changed the marketing game, they say. Rather than spending on big-budget, brand-building ads shown to wide audiences, companies need to embrace the new paradigm of perfectly targeted, perfectly measurable micro-messaging. This is, after all, what won Donald Trump the US election, delivered Brexit and launched Warby Parker.

But is that really true? There can be no doubt that digitization is changing marketing. Marketers can gather more data on their customers, which can help them to target more effectively. But, in the digital era, attention is increasingly scarce, making it harder for marketers to land those targeted messages, let alone build engagement. And, some aspects of marketing remain stubbornly true, like customers will pay more for brands with which they feel an emotional connection.

The truth is, in the digital age, marketing craft and strategy matter more, not less. And, as if to underline this point, Facebook — the virtual embodiment of the micro-targeting phenomenon — has just hired Antonio Lucio, the man behind this father’s day ad, to be its global CMO.

Attention

In his superb Long Now talk, Paul Saffo eloquently explains how our economy has moved from one centred on maximizing production (to meet a shortage of “needs”) to one centred on financialization and mass marketing (creating and fulfilling “wants”) to one centred on engagement (to hold people’s finite “attention”).

In this context, it is clear that firms can no longer rely on supply-side economies of scale to mass-produce commoditized goods at the lowest possible price nor enter into undifferentiated mass marketing to boost demand. Instead, in the digital age, demand-side economies of scale (network effects) are the golden source of competitive advantage. And while network effects rely on personalization, it does not necessarily follow that the corrective to mass marketing is personalized marketing — or, at least, not in the form the adtech world purports.

Even if you can microtarget the right message to the right person, there is no certainty the ad will get through (as ads have become more prevalent, so have ad blockers); if the message isn’t compelling it probably won’t be viewed; and even it is viewed, it probably won’t be enough to change customer buying behavior (which is essential to grow market share).

The fact is that to trigger network effects and overcome attention scarcity, marketing needs to be highly strategic and highly crafted. It needs to focus on the macro and the micro, the long term and the short term. Practically, this means customer activation needs to take place under the umbrella of brand-building. The reason is that marketing has to do more than getting one customer to buy something, it needs to leverage the power of networked buyers to improve the product and induce others to buy.

Virality & Big ideas

In his autobiography, Confessions of an Advertising Man, David Ogilvy talks of the importance of big ideas. He says,

“Unless your advertising contains a BIG IDEA, it will pass like a ship in the night…Once you decide on the direction of your campaign, play it loud and clear. Don’t compromise. Be strong. Don’t beat around the bush. GO THE WHOLE HOG”

He wrote this in 1963. But is remains truer now than ever. Where once spending enough on TV commercials and newspaper ads could get the blandest advertising onto the collective consumer radar, now the name of the game is rising above the attention deficit and activating the power of network effects. And big ideas are core to this.

Donald Trump Big Idea

To illustrate this, compare the two 2016 presidential campaigns. Donald Trump’s campaign was built on a big idea — that globalization had left millions of Americans feeling left behind. And he went the whole hog — grabbing people’s attention with polarizing messages delivered directly through social media, producing strong emotional responses that mobilized his network of supporters. In contrast, Hilary Clinton led a much more conventional campaign with safer, focus group-driven policies, an anodyne slogan “Better Together” — all of which relied on heavy, TV-based mass marketing for reach. And, as much as we like to point the finger at micro-targeting, it was a big idea that won Trump the election.

The best brand campaigns are also built on big ideas. Nike is exactly the kind of brand that adtech should have theoretically seen off, as micro-targeted new shoe brands picked off its heterogeneous consumer base. But it continues to flourish in large part thanks to its willingness to take risks and embrace big ideas (look at its decision to hire Colin Kaepernick). With Nike+ Running, a groundbreaking campaign kicked off in 2006, its BIG IDEA was to realize that sport is more fun with others. But it went beyond just an advertising campaign. It used technology — allowing people to record, track and share their runs — and wrapped it with the experiential layer of taking part in races all of the world — to unlock the power of connected consumers and create an engaged global community.

Nike’s latest “Just Do It” campaign shows it is not afraid of stirring controversy or going the whole hog

And we shouldn’t underestimate the impact of content marketing to build brand and create an engaged community — all the more so when based on big ideas. Andreessen Horowitz, the VC firm, is a great example. Its content isn’t just informative, but frequently leads and shapes opinion on major new trends – just consider Marc Andreesen’s seminal article “Why Software is Eating the World”. As such, the content isn’t just consumed and valued, but sees people actively engage with and share it, turning them into the distribution engine. In turn, this generates massive long term brand equity, which while not directly or immediately convertible into revenue, creates the bedrock for mobilization and monetization (in AH’s case, raising money, attracting the best people and finding the best portfolio companies).

False precision and displaced spend

Adtech is to the marketing profession what mathematics is to the economics profession — a bogus attempt to make something precise that inherently isn’t.

For a thorough and entertaining debunking of many of the adtech industry claims, I recommend following Mark Ritson on twitter and reading his weekly column. Suffice to say here that, beyond the issues of reaching the audience, there are problems in measuring the impact, not least separating causation and correlation. For example, if someone clicks on an ad for a Porsche and then buys one, the data would indicate causation. But the likelihood is that the person was already intending to buy one since, for most, this is not an impulse buy induced by an online ad. And so we must be cautious not to overstate the effectiveness of online targeted ads — noting that many big companies have seen little impact on sales from reducing their spend. As Marc Pritchard, P&G’s chief brand officer, said in a WSJ interview,

“As we all chased the Holy Grail of digital, self-included, we were relinquishing too much control — blinded by shiny objects, overwhelmed by big data, and ceding power to algorithms.”

Another inconvenient fact of paid advertising is that while it may have once been a relatively inexpensive customer acquisition channel, this is no longer the case. This excellent Inc article on the rise of Direct-To-Consumer (DTC) startups makes the point that the price of advertising on Facebook is increasing fast — by nearly 200% in the first six months of 2017 alone. To quote the article:

“ Comcast’s Gulati has a phrase for this phenomenon: “CAC is the new rent.” In other words, for companies reliant on paid marketing, their digital customer acquisition cost (CAC) is a lot like paying for brick-and-mortar stores in the old model, or selling wholesale. Essentially, this undermines one of the most basic precepts of the DTC movement, that these companies are cutting out the middleman and therefore can afford to charge much less for higher-quality goods.”

The analogy with the wholesale sales model is especially interesting since, if social networks become the shopfronts for many companies, these companies lose the direct customer relationship. This not only locks them out of many demand side network effects, but also — like their indirect-to-consumer forbears — means that brand-building becomes critical as a means of creating loyalty and repeat purchases.

Wastage works

If you fly into Geneva airport, you’re likely to see one of several giant billboard advertisements for Nespresso featuring George Clooney.

According to proponents of adtech, these ads are wasteful — they’re expensive, there’s no way to track their effectiveness and they’re reaching a much broader audience than the narrow segment that a brand should be targeting.

This is wrong, for several reasons.

First, there is a signalling effect. George Clooney is expensive to hire. George Clooney is well known and respected. Thus, we infer Nespresso is a high quality product.

Second, there is a value in broad targeting. As Byron Sharp illustrates in his book, “How Brands Grow”, buying behaviors are much more skewed than we may think between heavy buyers and the long tail of light buyers, such that there is more scope to get a large number of light buyers to buy a bit more than to get heavy buyers to increase spend. As he puts it, “sales growth won’t come from relentlessly targeting a particular segment of a brand’s buyers. Yet this targeting fantasy continues to appear in marketing plans.”

Lastly, brand-building through above-the-line promotion remains important to create an emotional connection. This emotional connection is born of common social and cultural associations which, by extension, need to be created at a collective, not solely individual, level. It is triggered through distinct imagery and carefully crafted copy — since making us think, laugh or cry is key to making a brand memorable. And it is this collective emotional connection which translates into higher loyalty and the ability to charge more.

Emotions and pricing

Indeed, one could make the case that brands as a navigational device are even more important in the attention economy, since we are now so overloaded with choices and content. However, that said, the ability of advertising alone to create a reliable signal of quality, to change buying behaviors and to create an emotional connection is not what it was. This is a great quote from Jeff Bezos in an interview with Charlie Rose,

“Before you could win with a mediocre product, if you were a good enough marketer. That is getting harder to do. The balance of power is shifting toward consumers and away from companies…the individual is empowered… The right way to respond to this if you are a company is to put the vast majority of your energy, attention and dollars into building a great product or service…If I build a great product or service, my customers will tell each other.”

It’s difficult to argue that product isn’t more important than in the past, nor that a great product with mediocre marketing wouldn’t win most of the time over a mediocre product with great marketing. However, even if we accept the power of advertising might not be as strong as before, this doesn’t necessarily change the importance of marketing overall. Instead, it places more importance on doing marketing well — what you want is a great product and great marketing — and it changes the relative importance of promotion vis-à-vis the rest of the marketing mix.

Hidden marketing

Such emphasis is given to promotion that we sometimes forget that marketing has three other P’s — price, product and place. And such is the emphasis given to promotion that companies that market in other ways — like Tesla — often claim not to spend anything on marketing.

But all companies spend money on marketing, even if it isn’t recorded in the sales and marketing expense line. Every time Elon Musk tweets about Tesla, this is marketing but isn’t recorded as such. And Tesla — like Zara — does most of its marketing by dint of its stores. Strategically located in the most prestigious parts of town with giant windows showing off their prized products, why would either company invest in billboards? Even Brandless, the SoftBank-backed retailer which as the name suggests has jettisoned branding (but which is in itself a conspicuous act of branding), is engaging in lots of marketing — from price promotions to product curation.

Zara store at 666 Fifth Avenue in NYC: a building which was once the most expensive ever sold in Manhattan

The fact is that so much of marketing gets overlooked because it is practically invisible.

The customer feedback loops it provides get translated ever more seamlessly into product design, development and placement — think of Amazon’s personalized recommendation engine.

But it is in customer acquisition, notably pricing, that marketing is maybe most underappreciated. Since customers today represent not just consumers, but an essential part of the product itself, customer acquisition and retention is both critically important and highly strategic. Many of the tools marketers use today, traditional ones like email campaigns or new-fangled ones like paid online ads, don’t cut it. Instead, new levers are needed to get the flywheel of network effects started. Here are some examples:

Giving the product for free. One obvious way to this is to charge advertisers instead. But, not only have advertisers been oversold, but this model creates a conflict of interest between customer and advertiser. There are better alternatives, such as freemium pricing. If you have a great product, then letting customers experience it for free is an excellent way to spread the word. And once a customer is hooked on the product (and since the relationship is direct), the firm can upsell them premium features (e.g. Dropbox) or give them access to a premium service (e.g Spotify).

A Facebook advertisement
A Facebook advertisement in a non-digital medium apologizing for its use of customer data (illustrating the conflict between advertiser and consumer)

Shared-value transactions. Perhaps a better model still than freemium might be what Eric Feng calls shared-value transactions. This a pricing model wherein a firm gets almost all revenues from the heaviest users of its service and uses this revenue to improve the product for all. This in turn attracts new users, most of whom will pay little or nothing, but some of whom will become heavy, very profitable customers. It is superior to ad-based marketing, where increasing revenues involves hitting all consumers with more advertising (i.e. making no differentiation between customer types) and gives an advantage over many subscription-based models, where all users — again regardless of level of usage — tend to pay the same amount.

Spotify is the king of Freemium — its conversion rate is almost 27%

Giving money away. Cruder, but still effective are referral fees. Paypal built its network of customers in part thanks to giving money to people for referring their friends (which were paid into the recipient’s PayPal account). Dropbox does the same — only giving referrers extra storage as compensation

Making customers investors. One way to build initial excitement for a product launch and acquire an early group of engaged customers is to give them to chance to invest through crowdfunding platforms like Seedrs. This is what challenger banks like Revolut have done. Another way, still nascent, will be to issue utility tokens to simultaneously raise money and build a customer base. By meshing together investing and consumption, tokens provide a way to reward financially the users on which network effects are built.

The future

It may be that one day, we have surrendered enough data about ourselves for a bot to be able to make better choices than we can. But up until that happens, marketing remains critical to attracting and engaging consumers.

Marketing has become harder. Many of the marketer’s tools have been blunted. The media over which to reach customers have both changed and proliferated, putting attention at a premium. But this calls for greater craft and more strategy, not a search for snake oil.

Marketing has also become more important. Marketing today is more than just about finding a buyer for a service. It is about activating the power of networked consumers, which form a central part of the service creation, promotion and distribution.

To be effective, marketing needs to do more than translate consumer insights into more accurate targeting. It needs to work above and below the line -building brand equity and mobilizing consumers – as well as making full use of the marketing mix. And over time it is likely to rely more on behavioral science, a move from objective analytics to a rational understanding of irrationality and what drives an emotive response to capture attention — building on Tony Schwartz’s idea of “the Responsive Chord”.

But, for now, marketing is definitely not dead.

An Unpretentious Case for Blowing Some Tailwind into Airbnb

An Unpretentious Case of Blowing some Tailwind into Airbnb
Robert F. Kennedy sleeps on the floor of a plane during his 1968 presidential campaign

An Unpretentious Case for Blowing Some Tailwind into Airbnb 

by Dan Colceriu | Aug 1, 2018 | 19 minutes read

August 2018 marks ten years since Airbnb was founded. The company is now facing a perfect storm of challenges, but it is precisely in storms that its future might lie. This article explores new opportunities, as well as the obligations the platform has to its stakeholders.

At the end of the article, as per the custom with low-cost airlines, please don’t forget to clap.

When almost-broke, early-millennials Brian Chesky and Joe Gebbia decided ten years ago to turn into an online business model their initiative of renting air mattresses in their flat to the attendees of an upcoming conference who might have otherwise struggled to find hotel rooms, investors were pretty skeptical about the potential.

After all, people renting out their properties, especially in shore locations during the summer or in the mountains during the winter, was long-established in the offline world, and there were already some internet businesses at the time that were trying to move this world online. It was through this old-fashioned prism that Brian and Joe’s vision was found to be wanting to operate.

But slowly, and with a lot of unscalable effort, their idea took shape and the hotel industry started to feel the initial wave of impact in their economics of conferences: a surge in demand vs. a limited, not enough supply of hotel rooms was allowing them to charge higher rates during these events. However, the Air Bed and Breakfast business was now absorbing that extra demand, lowering therefore the ceiling of how high hotel price surges could go.

Brian and Joe didn’t see Airbnb as a vacation rental company (by vacation meaning the traditional rental of an entire beach house or a mountain cabin for 1–2 weeks), but rather as the embodiment of the new dynamics of urban life and travel: fast-paced, millennial-driven, price-sensitive, centered on personalities and experiences rather than comfort, yet still authentic and artisanal.

Of course, the hotel industry was serving a different clientele, and besides the limitations on the price surge during big events, they didn’t foresee any loss in actual market share. “What is Airbnb?” is how CFOs were replying to industry analysts even in 2013, when asked about the threat.

But Airbnb was-smartly-also focusing on the supply-side of its two-sided marketplace, positioning itself as a way to enable the ever-growing population of (young-)tenants to monetize their rented urban real-estate (a feature which was mostly available only to property owners), by mainly sharing rooms (and hence co-living, rather than renting out the entire flat) to travellers who, if not for Airbnb, would not make the travel in the first place as they couldn’t afford (or couldn’t find) hotel rooms, or they would simply crash in at friends or family (yes, that crazy uncle).

Fast forward to present times, Airbnb is now a global platform, considered as a real threat by the hotel chains, as it has moved aggressively, in pursuit of growth, to target, on the demand-side, anyone from the conference-goers, the one-night standers, the city breakers, the business travelers, to the long-form beach-house vacationers.

Starting from a beautiful idea, an urban safety layer to cover excessive demand during peak times, Airbnb created an incredibly successful, fast-growing and profitable business, projected to sell circa 250–280 million room nights in 2018, which in turn generates incredible consumer surplus, while also enabling the supply-side to monetize an asset that was otherwise very expensive to use and generating exactly zero-income. That is, before the supply-side got seized by wealthy multi-property owners, professional landlords, real-estate investment vehicles etc.

Lately, Airbnb seems to have reached its invisible growth asymptote, as it faces multiple challenges, a perfect storm believed to have already contributed to carving out some 10%-15% of its current growth rate in 2018. This pressure is exacerbated by an upcoming planned IPO:

  • backlash from local communities over the platform’s increased role in driving up housing prices, by shifting long-term rental supply to more lucrative short-term tourism (locals who might not want to, or be able to partake in the extraction of benefits from tourism by making available their owned/rented house);
  • increased scrutiny from regulators, who are trying to limit/ban the supply-side of short-term apartment-rentals, to mitigate the effects described above;
  • increased pressure for sustainable growth, both from private investors who are now willing to liquidate their venture investments but also potential new pressure from future investors as the company prepares to go public;
  • increased competition from hotels who are adapting their offering by either reducing prices (in some markets it can now be even cheaper to take a hotel room than Airbnb) or by making the experience more personal, with plans to even aggregate available housing stock from apartments nearby and distribute them through the hotel reception/website;
  • increased competition from other aggregators, such as Booking.com and Priceline.com, who have successfully started to move beyond the traditional aggregation of just hotel rooms by using their proprietary distribution channels to move into the aggregation of private properties such as apartments and houses, or otherwise known as “alternative accommodations”.

Of course, Airbnb will continue to diversify (experiences, restaurants) and grow into emerging markets like Africa, China, India and Latin America, but the reality is that, in order to grow faster in its core business, it needs more sustainable supply to be available, as well as it needs to find the most efficient acquisition cost (on both sides of its marketplace).

That is, the platform needs to manage its imminent product/market unfit: convincing more people to try out hosting, while managing the housing impact dilemma, as well as finding ways to embed itself more deeply into where future customers who might never try Airbnb are found.

Inside a passenger aeroplane (1926). No seatbelts. More legroom.

Some of the world’s first passenger airplanes were built as luxury aircrafts and flew somewhere in 1913/1914. The first such planes were built to offer a great deal of comfort, with spacious fuselages incorporating the passenger saloon, a washroom, comfortable chairs, a bedroom, a lounge. But gradually, the focus on comfort shifted more towards security, and then to operational efficiency, to lowering prices and eventually to adherence to timetables.

The airline industry expanded to provide services to every country in the world, playing an essential role in the global economy, eventually becoming a public utility and being regulated as such in some countries (meaning route and price control). The deregulation that started in the 1970s led to the creation of the low cost airlines, started by the American domestic carrier Southwest, proliferation of which led to a more market-driven industry, where the levels of service and price are allegedly determined by customer.

The first airline to offer cheaper transatlantic fares was Icelandic airline Loftleiðir in 1964, often referred to as “the Hippie Airline”. Many young Americans travelled to Europe after graduation, to experience the “old-world culture”, and they were more concerned with getting there cheaply than comfortably or even exactly on time. Loftleiðir were not famous for speed or punctuality, but flying with the company became a sort of rite of passage for those young “hippies” Source: Wikipedia; Photographer: Gary Miller

Indeed, the incumbent players saw a big hit in market share and profitability, which forced them to enter a downward price spiral (made possible also by the efficiency innovations that were constantly deployed to lower the cost of air travel), or launch their own low-cost brand satellites to compete against the new competitors.

Faced with this new competition, traditional airlines have also discovered the strategy of co-operation (Star Alliance, Sky team, oneworld) which contributed further to lowering operational costs (through code-sharing ticket-office sharing, linkage between frequent flyer programs etc.) that would increase competitiveness and which would be later on extended cross-industries (with hotels, car rental agencies etc).

The real cost of air transport has more than halved over the last 40 decades
The real cost of air transport has more than halved over the last 40 decades, Source: ICAO, IATA, via Aleksandra Fedosova’s Thesis

It is true that the democratization of both long-haul and short-haul flights brought about by the appearance of low-cost airlines meant that consumers, faced with the novel opportunity to travel the world, would ignore things like comfort or scheduled times for departure/landing. It was the experience of flying that mattered.

But in present times, flying has become a part of life for the urban class, it is so ubiquitous, that it no longer represents an experience in itself, no matter how hard some very few airline companies still try to differentiate the in-flight service.

The value has shifted entirely to the place of destination, and so, in most cases (in the economy class), for both leisure and working-travelers, their main expectations from the airline industry (being it traditional or low-cost) is simply a minimum of comfort (a floor, however, for which every year consumers seem to be willing to go lower) and paramount safety. With the advent of flight aggregators like Kayak, the airlines were commoditized even further, with the only differentiation when choosing a flight, in the eyes of most consumers, being reduced to: 1/ departure, landing time; 2/ direct or with stops; 3/ what is the airport of departure and landing. Probably in this order. Of course, there are variations, like a very good frequent flyer programme might make one trade-off the flight schedule and choose a certain airline to accumulate further points. But in reality, most FFPs are useless and stuck in a different era.

So it seems that, with airlines, consumers are happy for the time being to allow this trade-off: in-flight comfort and quality of services to be sacrificed in return for safety, affordability, adherence to timetables and choice, at scale. In an ever-challenging competitive landscape, airlines are happily shifting investment from comfort to operational efficiencies, safety procedures, and route optimisation, hence more value is distributed to the customers in the form lower prices.

The only problem appears that when airlines fail to do the one thing that consumers expect them to do, which is move them from point A to point B over air, safely and on time—be it because of extreme weather conditions, union strikes, missing pilots, delays followed by inability to depart since the destination airport does not allow night-flights etc. — , the tacit agreement is no longer valid. Consumers should expect the best possible comfort and quality of services, at scale. In this situation, exhausted airlines have no excuse for not acting like a tech company, offering ever-increasing quality and personalization at scale, to manage the unpleasant situation.

However, there are plenty of cases where cancellations and delays end up with having lots of passengers stranded overnight in a city where they weren’t supposed to be. And in this situation, the whole airline/airport experience is simply, awful: lack of (personalized) communication despite being active users of airline mobile-apps, long queues, and a high chance of ending up sleeping in an airport — mainly because of the same equation I discussed at the beginning of this article: excessive demand vs. limited supply of hotel rooms.

Later on, they changed it to ‘stormy weather’
When they keep you for three hours with no information, standing in queues, of course you miss any chance of finding any accomodation. By the time you would want to search one on your own, it’s already too late.

As I was flying from Munich towards home, and so after one hour of waiting at the gate with no feedback, two hours of staying in a queue, tired and dehydrated, we were told that the hotel rooms have been exhausted and we should feel free to grab pillows and blankets from “over there” and find our way in the airport until the next day.

Of course, some airports might have some sleeping beds (usually occupied), but some not. But generally speaking, in today’s world of increasing customer expectations, if one is not on a political campaign tour like Robert F. Kennedy above, one should not sleep in an airport. Even worse than the poor in-flight experience, airports themselves have, in general, the worst possible customer experience. Sleeping in one is simply dehumanising (unless you’re Tom Hanks shooting The Terminal).

So how does Airbnb’s challenges (the locals’ backlash, the regulators scrutiny, the growth slowdown, the loss of initial strategic vision, the increasing acquisition costs) link with airlines’ incapacity of acting like a tech company (at least when they fail in their main activity)?

It has to do with Airbnb’s recent strategic re-positioning, announcing its intention of becoming a company that operates on an infinite time horizon and also one that truly caters to and is therefore measured on metrics relevant to all stakeholders (not just the shareholders): but also to its employees, to local communities, to its partners ecosystem.

“We think that a company should survive to see the next century, not just the next quarter. A 21st-century company should eventually become a 22nd-century company. By having an infinite time horizon, a company can be more audacious, take more responsibility for what they make, and create more lasting change. […]

What is the purpose of a company? I would say its purpose is to realize its vision. But even this is no longer enough. We must realize our vision and ensure our vision is good for society. This means that we must have the best interest of three stakeholders in mind: Airbnb the company (employees and shareholders), Airbnb the community (guests and hosts) and the world outside of Airbnb. To be a 21st-century company, we must find harmony between these stakeholders.

[…]

If people are good and mostly the same, then we should be able to offer more than people sleeping in one another’s homes. We imagine a world where every one of us can belong anywhere. A world where you can go to any community and someone says, “Welcome home.” Where home isn’t just a house, but anywhere you belong. Where every city is a village, every block a community, and every kitchen table a conversation. In this world, we can be anything we want. This is the magical world of Airbnb. We will probably never fully realize this vision, but we will die trying.”


1/ The airline industry represents the industrial-era model of supply side economies of scale, focused on driving operational efficiency at the expense of quality. When airlines fail to deliver on their primary role, they become reliant on the hotel industry.

2/ The hotel industry is the embodiment of depersonalised customer experience, with pricing power derived from scarcity of supply. The problem is that, in the digital age, poor experience due to limited supply is no longer acceptable.

3/ Airbnb is a tech company that has specialised in matching supply and demand on the short-rental accomodation market (and relative to hotels, Airbnb can tap into a much larger supply).

A leap of faith

The sequence above alludes to the role of tech companies. When certain peaks in demand exceed the fixed supply, rather than accepting a suboptimal experience (sleeping in airports) or a pricing disadvantage imposed by the licensed professionals (expensive hotel rooms in emergency situations), tech companies such as Airbnb can tap into the multitude, activating amateur-hosts as a third safety layer to absorb the excessive demand, all while offering superior experience and fair pricing.

This has happened in the taxi industry as well, where Uber and Lyft acted as a layer serving previously underserved segments by the taxi industry (either certain neighbourhoods or, unfortunately, certain races). In a way, as I remember reading on Twitter, now infamous Uber CEO Travis Kalanick might have done more against black and poor neighbourhood discrimination than our favourite activists. Furthermore, in cities like Paris, a new layer was developed by startups like Heetch, who operate at the frontier, where Uber drivers (in pursuit of better returns to make up for their increasing costs as they transition towards semi-professional), have stopped serving night-time party goes who need to get back in the suburbs in the morning. Heetch, operated by amateurs, serves that peak in demand.

As articulated by Nicolas Colin in his latest book HEDGE, technology business models enable an alliance between the professionals and the amateurs:

“…we should explore the idea of how amateurs could become allies of licensed professionals instead of foes. In my view, technology is showing us ways in which it will be possible to put a ceiling on the number of workers while satisfying consumer demand even in the most extreme circumstances. The stake is to prevent rent-seeking and ensure that demand is always served at the highest quality and largest scale. The goals should be to impose occupational licensing to professionals in exchange for certain benefits… while simultaneously using amateurs as a backup.

[…]

If an additional workforce is needed to match certain peaks in demand or serve particular segments of the market, the solution is there: inviting amateurs so that they focus on those slots and segments where demand cannot be met by the professionals alone. If contained on this part of the market, amateur supply can reinforce the professional workforce instead of weakening its bargaining power.”

www.flightstats.com

I understand that the most optimistic, libertarian people out there would rather invent tech to fix the weather, or would lobby to dismantle pilot unions or remove pilots altogether, or would double down on streamlining airport and fleet operations in the hope that all of these will completely eliminate flight cancellations and overnight delays. But, unfortunately, as the number of flights worldwide is only going to increase, it is fair to assume that these cancellations are going to stay with us. And airlines are ill-equipped and lack the incentives to create a process for the scenario that is outside their core: the actual flying. So all they do is customer-service-washing.

Many of these flight cancellations, due to the chaos they create and due to inadequate mitigating processes on the airlines side, will result in people having to sleep in airports overnight, since more often than not, one of the situations will incur: 1/ the hotel supply in the area will be exhausted; 2/ by the time the airline organises itself, it’s already too late to leave the airport; 3/ in some cases, airlines might not even have the obligation to provide accomodation, as they would rather wait for the consumers to claim financial compensation instead (which doesn’t necessarily happen and that process itself is painful, since regulators don’t actively work to enforce and streamline it).

Airbnb’s opportunity, as well as obligation — Heathrow cancels more than 200 Sunday flights and warns of further disruption, January 2013, source: bbc.co.uk

Banking on the idea that people are inherently good and would step in to help others while in need, and that strangers can trust each other, providing the right identity verification mechanisms are in place, Airbnb could and should go back to its roots and take the ambitious effort of enacting this safety layer.

First, it could engage airlines to explore platform integration, while providing in the same time design-thinking consultancy to these companies to help them streamline the digital process post-flight cancellation: in a world where smartphones are the norm, consumers should have the option to choose between queuing or engaging with the airline over their mobile — both the list of next flights available for the next day, and the list of available accomodation, either at a hotel or through Airbnb, can be made, almost Tinder-style, available to users in real-time.

Not only can Airbnb help both airlines and the hotel layer re-design the process of allocation emergency accomodation during overnight flight cancellation through smartphones, but it can also provide the necessary extra supply of accomodation (either rooms in shared flats, or entire flats) to absorb the extra demand (while also serving it in a highly personalized fashion, based on a better understanding of the preferences of end consumer). In the end, what other entity is better placed to list, at any given situation, be it emergency or not, all available, un-utilised housing stock, in pretty much any city in the world?

Second, it should engage regulators and local politicians, to convince them of the societal value of this initiative (since it is basically making possible the enforcement of consumer protection regulations which otherwise would be impossible to be respected). This will in turn create the necessary political pressure for airlines to undertake this modernisation (otherwise, airlines don’t have much incentive to do it, since no matter how badly they treat consumers, there is limited impact on the decision of those consumers to avoid that airline in the future). This can also be a better-starting point for Airbnb to launch discussions on obtaining some sort of a licensing procedure for its hosts (particularly the ones that are willing to join this specific programme).

Third, it should launch a targeted campaign especially with locals living in proximity of airports, to create this reserve army of emergency hosts. New conditions must be agreed, different from the current vacation-oriented hosts have, since emergency hosts must be willing to answer midnight-calls, allow showering at night etc. This can be either converting existing hosts into the new programme, or convincing a new cohort of people to join the platform as emergency hosts, people who otherwise would have never done it: due to many reasons, such as they don’t think they need it, they don’t think the hassle of sharing flats for the whole summer is worth it etc. But faced with the opportunity of hosting, on rare occasions, a traveller in need, while generating income at a premium with no real marketing effort, this could break the ice.

MPs vote on expanding London Heathrow Airport, June 2018, https://www.georgeherald.com

This is also a way to give something back to the people who live near airports and have to deal with the unpleasantness of it (noise, air pollution). It also creates the possibility for Airbnb to convert, at a later stage, these emergency hosts into more permanent vacation-hosts, to further fuel its growth-based business model (we established that it is critical for Airbnb to find more supply, if not build it from scratch).

Also, through the integration with the airline platform (technological, consensus, data sharing etc.), Airbnb can be embedded in the flight check-in process, and can better communicate with the airline which passengers have a history of using Airbnb, and therefore, in the case of an overnight cancellation, who would be most inclined to accept such an accomodation, instead of a hotel. This way, hotel rooms could go to the fussy ones, while Airbnb rooms could go to the others who would rather sleep in a “trusted home” than an airport. It also gives Airbnb the opportunity to obtain some kind of consent for data-sharing for passengers who never used Airbnb before (i.e. “in case of flight cancellation and no hotel supply, would you be willing to receive alternative accomodation options from Airbnb?”). This, in turn, is a channel for acquiring future Airbnb vacation-guests, who might have never used the service hadn’t been for the pleasant surprise they had when Airbnb saved them that night.

Add UberPool’s ability to create in real-time routes for multiple passengers depending on the direction of their destination, and you already have a much faster way to organize collective transport to the accomodation, in the middle of the night, rather than the slow process of contracting emergency coach-buses that leave every 45 minutes.


It does feel like a gargantuan effort, but Airbnb has proven once that it is willing to do unscalable things (i.e. visit apartments to take better photos) to convince people of its value. Furthermore, it now faces the perfect storm of challenges, and this kind of strategic re-positioning helps to mitigate some of them:

  • Backlash from local communities — Airbnb can find an ally in people living close to the airport, by giving them an opportunity to monetize their real-estate asset in an infrequent, almost effortless way. This can also shift some of Airbnb’s growth, at least temporarily, away from entire-flat vacation-rentals in the city centers (since emergency-hosting can be preponderantly in shared-flats, near airports).
  • Increased regulatory scrutiny — Without sacrificing growth, Airbnb can re-position itself as a safety layer for absorbing extra demand and reduce, if not eliminate, the big number of people sleeping in airports due to flight cancellations / delay. This can also help create a new licensing mechanism for emergency-hosts, further legitimising Airbnb’s business.
  • Increased pressure for growth — This creates a new market for Airbnb, converting hosts that would have otherwise never converted, and similar with guests.
  • Increased competitive pressure—By being the controlling node in this layered network along with airlines and hotels, Airbnb can embed itself in today’s ever-growing flight industry, and become the de-facto safety layer for emergency accommodations. This in turn re-establishes the public perception that Airbnb is a friend (and a saviour) of the hotel industry, which increases its competitiveness in the areas where they compete head-to-head.

It is normal to be skeptical about this, but if, against everyone’s opinion, Brian and Joe proved 10 years ago that inflating mattresses and renting them online can evolve into a multi-billion business, we should not underestimate their ambition and power.

It can start as small experiments (with selected airlines, at selected airports), and then further iterated upon. This not only raises the potential of increasing the frequency of interactions between guests and Airbnb (on top of the few times guests interact with Airbnb, maybe 2–3x per year for vacation-rentals, Airbnb can grab more share-of-mind if it manages to embed itself in the airline check-in process). Scaling this by working with airlines, with regulators and politicians would create a reserve army of hosts, as well as a streamlined process of matching supply and demand, which could potentially absorbe even the most extreme conditions:

Air Travel Disruption and Porte Ouverte

Achieving this safety layer is possible, especially if it combines an infinite time horizon with the power of the multitude and its potential in bringing together professionals and amateurs, but most importantly, the attractiveness of a world where, anywhere you might be stranded for the night, there is a welcoming community where someone says — “Welcome home!”

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!

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

Smart Focus of Pivot Later?,
w/ Marc GRUBER

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

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

Full podcast transcript:

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ben: Yeah.

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

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

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

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

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

Ben: Yeah, that’s right!

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

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

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

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

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

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

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

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

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

Marc: Exactly!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Marc: They can listen to the other podcasts.

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

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

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

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

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

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

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

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

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

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

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

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

Marc: Absolutely!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strategy and innovation are two sides of the same coin

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

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

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

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

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

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

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

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

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

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

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

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