Full Transcript

Darren [00:00:01]:
Hi everyone. Welcome to another episode of One of One. I’m your host, Darren Gold, CEO of the Triumph Group. My guests today are Hamilton Helmer, author of Seven Powers, a book that I consider to be the best book on company strategy and a must read for any founder, CEO or leader interested in understanding how you build a winning business, and Chenyi Shi, Hamilton’s incredible colleague. I first discovered Hamilton’s work a couple years after Seven Powers was published in 2016. Until then, I had spent over two decades trying to understand and implement strategy. First during my consulting years at McKinsey & Co. As a private equity investor for over a decade, in my three CEO roles and in my work with founders and CEOs helping them think through the strategies of their own businesses. Hamilton’s work finally gave me a complete mental model to understand strategic power as he defines it. A route to persistent differential returns over time in significant markets. I’m so delighted to bring the nuance and subtlety of his work to life in this episode. You’re in for a real treat. Please enjoy this wonderful in depth conversation with Hamilton Helmer and Chenyi Shi.

Darren [00:01:18]:
Hamilton, Chenyi, it’s so nice to see you again. So appreciate you being here and I’m really excited for this conversation. Thank you. I wanted also personally just maybe start Hamilton with a note of appreciation to you for your immense contribution to the field of business strategy. I’ve been in my professional career for 30 years in various roles. I was at McKinsey as a strategist. I sat on a bunch of boards. I was a private equity investor three times as a CEO. So the question of strategy has been central to me for now three decades. And it wasn’t until until I discovered your work that I finally had what you call a simple but not simplistic model, mental model for really actually understanding strategy. So I wanted to thank you and I wanted to maybe. You’re very welcome.

Hamilton Helmer [00:02:08]:
Oh, it’s very nice. You know, my ideas are my babies and so one always loves to have their babies admired. So, so thank you.

Darren [00:02:17]:
Well, and I know you know the admiration is widely shared and hoping that in this conversation we can contrib contribute even further to people’s understanding of your work and their use in building great businesses. Yeah. So you’ve come up with this term power, and as I believe you define it, it’s sort of a route to persistent differential returns over time in significant markets. And I think you’re offering what you call kind of a complete and exhaustive list of these Seven Powers, which does make it simple to work with and yet it’s quite nuanced. So not simplistic. But I was hoping you could bring to know. A number of our listeners are probably either deeply familiar with or somewhat familiar with your work. But if you could bring to life the, the notion of power, what it means for the CEO that’s thinking about building a company and building value over time.

Hamilton Helmer [00:03:12]:
Yeah, so. So it’s a tough world there. You know, I’m in business. My I, my clients used to tease me because I always used to say business is hard. And they say, you mean we’re paying you for that? And everyone is, is always trying to eat your lunch. And that’s the capitalist model. And if you’re looking at it from a societal point of view, eventually it results in solid economies and good jobs. But at an individual company leadership model, it means that the arbitrage is always there and withering. And so the question facing a leader in terms of the attractiveness of long term outcome is what offers refuge from that? Because refuge from that leads to these attractive outcomes of high margins and high market share which drive company value. And Warren Buffett famously called these things moats, or maybe it was Charlie Munger, but I think it’s Warren Buffett. And so it’s sort of what would characterize, you know, a moat. But thinking about it broadly, about all, not saying, not looking back retroactively and saying this business has a moat, but imagining yourself in a leadership position and saying, I’m not sure I have one. What do I do to get one? Do I in fact have one? What are its characteristics? What are its primary threats? You know, understanding that kind of in real time with all the uncertainty bars around it. And so the notion of power is really a notion of that. It’s a position in a business that has two characteristics. It has what we call benefit, which is there’s something about the way you conduct your business that results in a superior outcome to the way your competitors can conduct theirs. So higher prices or lower costs. But that position also has a durability around it. So not just a benefit, but also a barrier. Just other people can’t take it away from you easily.

Darren [00:05:28]:
Now, Reed Hastings wrote the foreword of your book, former CEO of renowned CEO of Netflix, and describes your first encounter, but also the work that you did with him and the company to identify what their source of power was. Could you maybe bring to life power through that example? Or if there’s another example? Sure, that would be wonderful.

Hamilton Helmer [00:05:50]:
Yeah, I can do that. I mean, in first My hats off, hats off to Netflix and Reed and Ted and Greg and everyone there. I mean it was very enjoyable thing for me. I did sort of, as I as mentioned by Reid in that forward, I did a training session there with maybe the top hundred people or a friend of colleague of mine and I trained them in strategy and I so enjoyed the interaction. They just built such a great team, great company. So in Netflix they were just this tiny little pipsqueak. And so I’m now dealing with a streaming business. So in the red envelope business there, the 800 pound gorilla was blockbuster, right? So they had it. So but in the streaming business, you know, there was hbo, there was linear tv, you know, all the cable assemblies and so on. And these were huge companies by comparison, way more profitable. And so your first counterparty is, is in substitution against incumbents. And that, that’s, that’s the nature of when, when technology changes and new businesses emerge, that’s what happens is that you figure out a better mousetrap. Right? Product market, that’s a product market fit is basically a statement about substitutive competition. And, and so the first phase was just coming up with something that had some kind of benefit for, for people that, so that they liked that streaming was attractive. And this is a platform business. So it’s basically, platforms are essentially privately owned markets and in this case Netflix was the intermediary between entertainment consumers and entertainment assets. And the first thing for them was they had to have a superior value proposition. So and, and, and there’s, and, and they’re there and it’s kind of this complex simultaneous equation of getting both lots of attractive content and also lots of users. And, and, and so they had to get the content first, which was hard. They did this deal, proprietary deal with Stars and then eventually later with Epics and, and got a lot of content. And, and that’s not, that wasn’t trivial, but they also had to ease a lot of the friction and sign up. And so they had to get other platforms, particularly gaming platforms, to have Netflix available and Netflix available on lots of devices. But that was just the first battle, right? And when you have that first battle, the natural impulse of the incumbents, their larger, more profitable, is to eat your lunch. And so you actually need to have some. So the benefit of the new technology may be there, but if the incumbents can adopt it, there’s no barrier. The barrier is what our book refers to as counter positioning, which is that there’s something about the business model that you adopt that for an incumbent to adopt it would be so upsetting that they want, and for their P and L, they wouldn’t do it. So in the earlier business, the red envelope business, you know, the Blockbuster was, was counter positioned because they, their business model was a brick and mortar store, you know, density economy scale, economy business. And so they just would have to have to say, oh, those assets aren’t worth anything. In the case of streaming, if you think for example of hbo, what was unusual about Netflix, of course is it went over the Internet or the term used for it is over the top. They went over the top, whereas HBO went through cable providers. And for them to start going over the top, the cable providers, Comcast and all would say forget that, you’re off our. And they lose their customers and stuff. So it was a very hard, you know, thing for them to do. And, and, and that allowed Netflix to, to, to gain edge. And so, but that’s, but now that’s, that’s, so that’s substitutive competition. That’s one counterparty, but they’re, but that they’re not the only counterparty. You win that war and then you have companies that, that are doing it just the same way you do it. So other streamers, right?

Darren [00:10:29]:
Yeah.

Hamilton Helmer [00:10:30]:
And so, so you know, Disney plus and Amazon prime and whatnot. And then you get into the scale economies of platforms that, you know, if you have, you know, more users and more content, you can get better matches and you get more hours watch per entertainment asset and therefore lower cost. And you can see that Netflix now of the streamers is I think the only profitable one. And that essentially means that the number of hours watched per asset expenditure, in other words per hour of purchased content or developed content is hours watched is higher. And so that’s a whole completely different realm of advantage and another type of power. But even that isn’t the end of the story because Netflix, 50% of their cost structure is content. And so in that, so you have to look upstream and say are we really beholden, for example, if there’s only one studio? Or you look, see what Spotify faces, where they have three music companies they got to deal with. That’s very concentrated. And it’s both whether they’ll price aggressively against you and also whether they’ll even make stuff available. And so Netflix early on had a preemptive move to assure greater ability against the counterparties in that, which is they went into exclusives and originals and so they partially backward integrated and that gave them some leverage in the, in a vertical way. And so, so what you see there, Darren, sorry for the long explanation, but, but it’s a long story. Is a very long, complex, multidimensional effort to assure a strong position against all relevant counterparties.

Darren [00:12:37]:
Yeah.

Hamilton Helmer [00:12:38]:
And so, so it’s, it’s, you know, this is not easy stuff. And each of those required enormous commitment of the organization. I mean, just, just the up. I’ll stop in a minute. But just such an interesting story. But, but just the transition to streaming. Chenyi and I were in, interviewing some of the senior people at Netflix because we’re using the case also in another book we’re writing. And what we were told was when there was this transition from the red envelope business, which was the bread and butter based business of Netflix, to streaming, the basic command from leadership was in, in everything that you do, if, for every team, if you’re not disrupting red envelope and moving towards streaming, you’re not doing your job. So this, this powerful directive and, and because, you know, the normal incentive would be, you know, I can kind of make money doing this and, and you know, I wouldn’t bother. So, so anyway, it’s, it’s, it’s, it’s fraught, it’s hard. But, but, but great clarity about, you know, what, what is an attractive position. I mean, think and, and, and I mean just for example, the exclusives and originals. I mean Ted at Netflix, Ted and Reid are both quite brilliant strategists. They don’t need help from me particularly. I mean, they’re both, I mean, really amazing actually. And Ted, you know, just sort of had, just kind of knew intuitively that that was kind of a piece of the puzzle and it wasn’t necessarily a popular piece because people said, oh, we’re, we stream content, we’re a marketplace, we should have the most content available possible. And if you do originals and exclusives, that’s higher priced, you have less content. So you know that that’s stupid. Don’t do that, you know, but he had an intuition that that strategic intuition that, that that was part of the puzzle and it’s correct intuition.

Darren [00:14:50]:
Yeah.

Darren [00:14:51]:
This is such a rich example and I, I want to actually spend a little bit more time here pulling on a number of threads and maybe play back to you a few things as a way of synthesizing and then maybe going down a couple paths here with you. The first thing I heard was, you know, power is important, of course, but it has to be preceded by some innovation, right? Some new product or service that has a demonstrably better value proposition such that customers are going to choose you. You name two powers in particular, counter positioning and scale economies. And I want to maybe talk about each of those. The streaming business, we’ll get into this at some point was a sort of a classic definition of a second act. Right. Which is a whole other subject that I want to touch on with you. And then I think there’s something in this, the role of strong CEO and strong culture that sets a directive that I don’t want to miss in our conversation. So what thread there would you want to pull on? And I think maybe we could try to pull on as many as we can.

Chenyi Shi [00:15:56]:
So.

Hamilton Helmer [00:15:56]:
So I think one of the odd things that I think Chenyi and I have turned up in our current research, which was sort of unexpected, was that, that the. The need to think about strategy early. I. I would. If you asked me a couple of years ago, I would have said you get product market fit and then you figure out strategy. Well, that’s wrong, actually. While you are considering what product to do, in other words, before you’ve realized product market fit, you need to think about the strategic implications of the product that you’re thinking of, because product is product market fit. Right. So think about all that locks in. So product kind of locks in what kind of production process, manufacturing, whatever it is, fit means you’re sort of locking in a customer segment and preference patterns. And so that locks in a lot. And those things actually set the stage for whether or not these various types of power are possible. So is. Is it. Will it be possible eventually to have scale economies or network economies or switching costs? You. You have. When you’re getting to. When you’re getting at product market fit, you have a lot of degrees of freedom. You can think of different approaches to different businesses. Once you’ve set that, you’ve substantially limited your choices. And it’s not that you can nail it down at that stage with great specificity, but you can understand sort of the general terrain. So that’s an unusual perspective, I think. Not that you sort of have a business and then you devise a good strategy and everything’s fine. Lemons into lemonade is rare.

Darren [00:18:05]:
Yeah. Yeah.

Hamilton Helmer [00:18:06]:
And. And it’s. It’s more. It’s more the case that you. But it’s also quite possible to have an attractive position that you don’t capitalize on. And that just shows how hard leadership is. Right. Jenny, I’m going to ask you if you wanted to comment on those threads of Darren’s, because we’ve been in this journey together.

Chenyi Shi [00:18:32]:
Yeah. I think Darren kind of commented on the importance of leadership here and I kind of want to highlight, sort of Hamilton mentioned how hard it was for a business to really give up what you’ve been building before and go into something completely new. Netflix is so successful today in streaming that people probably don’t realize how big of a shift it was to essentially kill red envelope and hop onto the new technology frontier. I think more often than not it doesn’t happen within a company. And that’s sort of what counter positioning, where that kicks in is people realize that copying the newcomer actually causes collateral damage or self displacement. Think sort of Nokia dying a couple years to iPhones and Android. And those examples are. There’s many of them in the history of technology. So strong leadership, we think oftentimes bounded by the founder is extremely important in those moments on sort of hopping on the new technology frontier. But it’s sort of both challenge and opportunity. Right. It could be opportunity for the newcomer to actually break in and it’s also challenge for the incumbent. Can you effectively respond to it?

Darren [00:19:46]:
Yeah, in some ways it feels like somebody else had the potential to use counter positioning against Netflix. Right. Because of all of the reasons that existed for it to protect its core business. Absent, you know, really powerful and strong leadership, that would have been a good play for somebody else. And Netflix sort of seized that opportunity for itself. So there’s so much on this particular streaming.

Hamilton Helmer [00:20:10]:
I’m sorry, Darren, go ahead. That’s such an interesting comment. Can I spin up on that just a little bit?

Darren [00:20:15]:
Yeah, yeah, please.

Hamilton Helmer [00:20:16]:
You’ve touched on something that’s quite subtle and very common and material, which is that that if you think about a company going into new stuff, right. They’re kind of. It turns out that’s an important source of shareholder value. You know, long time ago did a study of the S&P 100 and what share of their profits came from businesses they weren’t originally in. And it was half incredibly. And those three piles are. Are reinvention, which is what Netflix did with its streaming business. In other words, same set of needs, completely different approach to it. There’s pure diversification, which is you just go into something that you don’t have any particular skills in and you don’t even have the. And it’s not satisfying the same need. And then there’s coaction, which is different set of needs, but building on current capabilities. So the iPhone would be a good example of that. Or AWS would be good examples of coaction.

Darren [00:21:26]:
And that’s needs of. When you say needs, that’s Needs of your, your existing customers.

Hamilton Helmer [00:21:30]:
Needs of existing customers. Yeah. With, with obviously extensions beyond that.

Darren [00:21:35]:
Of course.

Hamilton Helmer [00:21:35]:
Yeah, but and, and, and as you would expect, pure diversification is typically a bad bet. You know, you, you just don’t have any strength going into it and, and you suffer all the advantage disadvantages of a large, of an existing company with you know, a value prop and, and newcomers can take it over. And so the bulk of successes like AWS and iPhone are or Microsoft into OS or whatever is is in the coaction space. What the thing that I liked about your comment that was so interesting is it was an example of reinvention and for exactly the reasons you said. It’s quite rare because of you know, just, just what you said that, that it is others can typically counter position you. Yeah, anyway, sorry, no, but it’s such an interesting comment.

Darren [00:22:31]:
Yeah, great great elaboration. And I think we’re going to get into second acts, if that’s what you call it. In a moment, I want to stay with the streaming example and pull on the thread because I imagine as they were, as you said, in this product market fit stage, they were either explicitly or intuitively evaluating what is going to be our source of power in this new business if we do indeed develop something that, that, that gets them, that gets product market fit, it turns out, scale economies for the reasons you suggested, both, you know, significant per user, lower costs as well as, you know, the recommendation engine and the sort of success they’ve had with that. How, whether it’s the actual example of Netflix, but how present do you think those questions were as they were going through that effort? Because it’s oftentimes so easy to look backwards and say, well of course they built this and leveraged this particular power of scale economies.

Hamilton Helmer [00:23:29]:
Right. So I think as I said, you know, Ted and Reid are, are strategy intuitives. And so, so I, I think I, I think they can be present in the following form, which is somebody who’s thinking of an activity can say to my, say to themselves what will it take for somebody to take that away from me? Just answer that question. Yeah, and, and, and, and if you say they can’t, then you go down the, the, you know, the analytic and say why not? And see whether you feel like that’s persistent. And so, so I think, I think that you know, sort of strategically and intuitive, whether they register seven powers, you know, leaders kind of go through that analytic and, and either explicitly or sort of intuitively and I, I am quite certain that you know, read, you know, sort of processed that that way, you know.

Darren [00:24:31]:
Yeah.

Hamilton Helmer [00:24:31]:
I mean, I had conversations with him where, you know, I sort of thought, well, why don’t you do this and say no, that Hamilton, that’s really dumb. And, and you know, and, and, and because he had this ability to, to say that the outcome would be unattractive.

Darren [00:24:49]:
Yeah.

Darren [00:24:49]:
I think that’s the value I see in the mental model that you’ve developed, which is it can sort of sit in the background during whether it’s product market fit as an original founder or in a second act or and you know, just expanding your power in certain ways and inform the almost day to day decisions and choices you’re making about the product you’re building and how you’re structuring your business. Is that a fair way to.

Hamilton Helmer [00:25:15]:
Yeah, I mean, I think my hope is, and I think in what I’ve seen so far is that it stimulates the right questions.

Darren [00:25:22]:
Yeah.

Hamilton Helmer [00:25:22]:
And, and it’s, you know, you. And these things are to. There’s very high uncertainty bars. To a certain extent it’s unanswerable. So it’s more like a directional compass, you know, it’s sort of senses the right way. But keep in mind that if you’re a leader, you’ve got this whole other responsibility of keeping the ship afloat and that’s in most times is 95 plus percent of your time and it should be. And so you have to sort of be able to balance that incredible commitment to operational excellence at the same time as keeping alive this sort of more inventive part.

Darren [00:26:10]:
Yeah, it really does, I think, highlight the point you made, Chenyi, about the importance of leadership. I mean, not only, I think, has Netflix become a case study in strategy. It’s been a long time case study in culture. But I just want to put a fine point before we move on to second act, you know, particularly in the reinvention space where you may have existing customer needs, but having to reinvent new capabilities, the kind of leadership that’s required to catalyze action that may be against people’s self interest, is pretty extraordinary. And I have to say I imagine that without that culture and leadership that came from Hastings and his team, we would be talking about probably a different company in this podcast.

Hamilton Helmer [00:26:59]:
Yeah. And the balance is really hard because you can top down push. In this case, they kind of made the bet on streaming so that you could push that direction. But if you’re getting into a new area, you also have to allow for enormous flexibility and you can’t. It’s not like you run this metric driven, all fully planned out operation, you have this balance, which is really hard. And if you’re, and if you’re at the earlier stage of, you’re not even knowing what the major choice is, you don’t know that it’s streaming, you’re sort of looking for something else, then you have to show a commitment to doing new things, but you also have to show a commitment to doing your usual thing really well. And so that balance, individually and in an organization is a leadership challenge.

Darren [00:28:05]:
So we’ve mentioned this notion of second act. You’ve talked a little bit about reinvention and coaction. You referenced quickly a possible second book that you’re working on. And I know this has been an area of intense focus and research for both of you, Hamilton and Chan Yi. Can we turn our attention to that and maybe talk a little bit about this new book you’re, you’re writing, what you’re learning? Because I think a lot of CEOs and many founders and CEOs I work with are at a point where they’ve either discovered they don’t have power or that their power is being arbitraged away because forces are changing and they’re confronted with this notion of I need to figure out what my second act, or maybe in some cases third act is. I’d love to hear a little more from you on that.

Hamilton Helmer [00:28:51]:
I’ll do a quick take and then I’m going to let Chenyi talk a little more about it just so quickly. The current title that might change of our book is Second Invention. And that actually doesn’t refer to, and maybe it’s a bad title because it misleads people. It doesn’t refer to Act 2. It refers to the fact that the first invention of any business is product market fit, but that if you do that without power, it doesn’t end well and that developing power is a different muscle. And so the second invention is Getting power with product market fit. And so we’re really trying to understand what is really the playbook for power. And Jenny, I’ll let you carry on a little bit on top talking about this.

Darren [00:29:43]:
Nice.

Chenyi Shi [00:29:44]:
Yeah. So the, the initiation of this project that Hamilton and I have been working on for the past couple years is to answer the question of sort of seven powers stated, where do you want to get to? You know, at the end, that has attractive economics for the business, but there’s always the question of how do you get there. We just went through this, you know, very rich example of Netflix. There’s So many things they have to get right and you know, over a very long period of time. So are there patterns that we can develop that’s useful, like simple but not simplistic for leaders and entrepreneurs to understand? Where am I today? Where do I focus on? I think part of that understanding kind of covered it is a business actually go through different phases. And in each one of those phases you have very different key competitive interfaces, which means you have different focus on strategy and different focus on leadership. People are familiar with the S curve thing. Like the business go through a slow start and then sort of explosive takeoff and then kind of slow tapers off into maturity. What we’ve learned is that is more than a description of different growth rates. It’s a description of, we call it the origination, takeoff, stability phase. It’s a description of sort of distinct phases where you face different key competitors which we’ve talked about. You know, substitute of incumbents, there’s direct competitors, there’s kind of the vertical battle you have to fight by the end. It also distinctly tell you in this phase what is the key strategy focus of the business and hence what’s the thing you should be focusing on for your organization. And sort of by the end of that and that comes to your second act point Darren, there’s always sort of this ability or this chance of re kicking start this whole cycle again and that the term we use for that is transforming which is similar to second act. Because if you think about companies like Microsoft for example, it was a language company, then operating system company, then kind of application company. Today it might be more a cloud company, maybe in the future it’s an AI company. There’s sort of leaps you make depending on where technology frontier is. And it can be reinvention, it can be co action leveraging your existing customers need or existing capabilities. And the point of that is try to start with the position of strength into the new thing. And that’s the benefit of you having existing business in place that allows you to potentially capture the next technology wave. Opening up the what we call a positive sum game window for business to invent the new thing that may have power into the next cycle. So that’s sort of the overview of how we see the broad pattern happening. There’s obviously a lot of details we’ve touched on, but that’s hopefully a kind of new a framework that we, you know, will be useful for leaders of businesses.

Darren [00:32:35]:
Okay, well, I’m excited. Any idea when when that’s going to be the hands of people to read.

Hamilton Helmer [00:32:40]:
You do have to ask that, Darren.

Darren [00:32:42]:
I mean, I did. I. I’m a zealous. I’m a zealous fan, so I’m asking from a fan’s perspective.

Hamilton Helmer [00:32:50]:
So. Yeah, well, we’ll have a draft.

Darren [00:32:52]:
We’ll see for sure. Okay.

Hamilton Helmer [00:32:54]:
You know, got it.

Darren [00:32:55]:
Well, I’m sure there are a lot of people eagerly awaiting and curious when it does. I’ve heard you both and Chenyi, this is a question for you to address. Warn people before they become too excited or enamored with a second act, or as you call it, a transformation to focus on areas where they have existing power and where they can extend into that existing power. Can you describe that a little bit and bring that to life?

Chenyi Shi [00:33:20]:
Yeah. So I think, as I mentioned, I think the most the position you really want to be in is to start with your advantage. It could be either your capabilities or it could be your existing customers. That allows you to start not from scratch. And that’s oftentimes what we see as the most promising path and the easiest path to inventing the second piece. I’ll give an example, which I think is. Is fairly interesting. So Google actually has two parts of their business. There’s a part of business where they are providing you with a search service in return for your mindshare and eyeballs. And there’s a second piece of the business where they’re then selling that mindshare to advertisers with their superior data and matching capabilities and getting higher revenue, essentially per impression. And those two businesses actually depend upon each other. And the ability to develop the second advertising business is actually leveraging what we call competitive position, which is essentially the scale of their search business. It’s sort of a positive flywheel, per se. You have this very good search business which attracts all these people into your portal, and then that gives you the ability to have a large pool of inventory and with the superior knowledge about, you know, what people are looking for, that gives you intention. They can actually sell one impression for more dollars than anybody else can. That gives them sort of the ammunition to actually go back and eventually buy more search traffic. You know, they actually paid a lot of search portals in the early days to be there, to be their default search engine on the screen. The paid Apple, obviously to be what’s by default on iPhones, et cetera. And that kind of gives you an interesting, complex, but extremely strong transforming act into a second piece of the business. The interesting test we looked into was if Google never had the second piece, if it was just search, would that have been equally powerful. I think intuitively we probably know, probably know that the answer is no. But a good test to it is Microsoft in 2009 came out with Bing and Bing, I think there were reports that said they essentially copied Google results in training their search algorithm. So that essentially brought search efficacy to equity for both companies. Yet Microsoft couldn’t copy the second part of the business because Google had such a lead in their inventory volume that leads into a very powerful advertising business. You know, we see sort of examples of this manifesting a lot of different ways in business. But the general idea of try to start with somewhere of advantage kind of applies to kind of good transforming acts for businesses.

Darren [00:36:17]:
Yeah, and I was also referring to, I think what you call kind of the upper right quadrant in some of the talks that you’ve given, which is are there examples where people are prematurely trying to look for their second act where they haven’t yet fully exploited the power that they already have? Because the probability of success of a power you already have is so, so much higher than either a reinvention or a co action transformation. And I’m wondering if you’ve seen examples of that.

Hamilton Helmer [00:36:49]:
I sort of think of them those two things as sort of roughly orthogonal. You sort of, you know, you, you, you must execute well on what you’re, you’re. If you have a, if you have a current path to power, the execution part of that often is achieving competitive position. Right. So if it’s a scale economy or network economy or switching costs, it’s. You basically need a high market share. Right. And that requires enormous execution skills. And if you’re thinking about a second act, often you’re not. If that’s, especially in a especially high growth phase, you may not be incredibly motivated to do it. But ironically, it also may well mean the time when the opportunity is best. Because what gets your original business going is a technology change that opens up the possibility for a new space, new solution, new product. And you’re kind of probably have capabilities that are kind of around that technology. And so it’s often, there’s often much richer target set in those early phases than there is if you’re, you know, 40 years in and have a very mature, successful business. Often not off, not always, but most of the time the technology that you’re expert in is no longer in flux there. Not a lot of new stuff’s opening up. So it’s one of the ironies is that it’s in those early phases you have possibilities for new stuff. But also the challenge of Doing of executing your original business well is also the hardest.

Darren [00:38:39]:
Yeah. I mean, AWS may be an example of that. And Amazon was very much in a growth period at that time. A takeoff stage.

Hamilton Helmer [00:38:48]:
Yeah. Or think of the iPhone. I mean, these are giant. I mean, Apple was still doing pretty well with the ipod and things. I mean, it wasn’t, you know, it was okay, you know, but they didn’t rest in their laurels.

Darren [00:39:04]:
Yeah.

Chenyi Shi [00:39:04]:
I would mention there’s sort of one potential mistake here is to try to sort of enforce your existing strength onto the new market without considering sort of what really is the best solution, you know, for, for, for what’s coming. Example of that would be Windows Phone.

Darren [00:39:24]:
Right.

Chenyi Shi [00:39:24]:
Like trying to, you know, leverage Windows for mobile phone. That turn out isn’t just a. It just isn’t the right solution or isn’t sort of the best feature set for that technology paradigm. And that’s sort of thinking about power ahead of product market fit even. And that’s also not right by itself.

Darren [00:39:46]:
Yeah.

Darren [00:39:47]:
I’ve come across the following phenomenon I’d love for you to sort of comment on, which is founder CEOs that become familiar with the model, do a cursory analysis and then say, aha, I’ve got the following three, you know, powers. I’ve got process power, I’ve got switching costs. I’ve got, you know, I’m making things up, of course. And you know, they haven’t done quite the disciplined analysis and digging into the nuance and the second and third order effects that I think you need to, to do to truly appreciate whether you have power or not. What do you find? Do you find that to be the case? And what would be your advice to a founder or CEO who’s, who’s really thinking hard about these questions?

Hamilton Helmer [00:40:27]:
Yeah, I’ll comment and I’ll let you comment as well. So, Darren, I observed the same thing you have. I had one of my board of advisors for Strategy Capital, one of my members is, I hope you won’t mind me quoting a fellow Adam D’Angelo, who’s very thoughtful in these matters and intersects the founder community a lot. One time we were having coffee together and he said, hamilton, you’ve got a problem. He said, he said, I probably. This is him speaking. I probably have a better than average understanding of seven powers. I talk to a lot of founders and I find that nine times out of 10, they assert something about the power they have and they’re wrong. And as a, you know, as somebody providing concepts, that worries me because it means that we haven’t explained it well enough. And that’s exactly. That is actually that motivation that’s driving the second book, I think. But, but I agree with you that that usually is the case. And, and the reason is, is that truly understanding whether you have power is pretty complicated. I mean, so if you, if you go under the covers of Netflix and say what are sort of some of the critical conditions for that business model to work? So you get into weird things like it’s, so it’s, it’s a platform model. So high heterogeneity on both preferences and product features in this case what kind of entertainment genre it is is essential. Another one that’s quite interesting is that, that if you, if you look at the concept of exclusivity, which is to say if I consume something, does it prevent my consumption later or prevent somebody else’s consumption? The interesting thing about digital products is there is no inter user exclusivity. Basically marginal cost is zero. That’s an important part of that model. But in Netflix’s case, which is different than for example, music streaming, there is intra user exclusivity. If you watch something once, it then loses a lot of its utility for watching. Again for most types of content, not all types. So children’s stuff, not so true. But for most watching it’s true and you get into suggesting example of sort of fine points and without those things the model changes completely. And so, so you have to get very far down in the weeds and just put another spin on it, you know, as you know, I, Jenny and I are involved in an investment company called Strategy Capital and we look for whether companies have positions of power. It will take a group of us weeks for a publicly traded company to figure out the answer to the question. And often we can’t even figure it out. And so I don’t know, Chetney, do you want to, do you want to expand on what I’ve said?

Chenyi Shi [00:43:38]:
Yeah, you know, just despite everything’s in the weeds, particular business. I think if we’re talking from perspective of a leader or a CEO, you know, what we do think is oftentimes useful is what we call a 3s test. So it’s sort of putting a critical view on what really differentiates you and is that sustainable for you? So the 3s refers to superiority, significance and sustainability. So it’s really asking the question of what do you have that’s unique to your business, that gives you either higher price or lower cost? Is that significant to your whole margin structure? Like if you are talking about 0.5% increase. That’s probably not significant. But you have to pass the significance test to say this is something really meaningful and will be in favor of me in the long run. And the last test is sustainability. You know, what prevents your competitors. And again, there’s a wide range of them. There’s your incumbents, there’s your sort of also rents. There might be people from all kinds of, you know, all around you trying to eat your lunch. And what prevents all of them from mimicking you? And this can be different mechanisms. It could be a counter positioning against incumbents, could be a scale economies against direct competitors. And that 3s test is also oftentimes we found very helpful for leaders to dig very deep into their business and really question sort of okay, you think you have scale economies, but are you really delivering much margin difference? Is it true that nobody else can operate at a scale that delivers similar margin as you do? Because think about airlines, high fixed cost industry, but turned out to be commodity. Turns out multiple players can operate at a similar scale and the unit cost basis isn’t that different among them. And sort of that test kind of really allows you to as a first step to dig deep into, you know, what you may think of as power, but are they really power by the end of the day?

Hamilton Helmer [00:45:38]:
And I think in terms of people sort of thinking they have power but might not. Frequently missed one is the second size is significance, which is materiality.

Darren [00:45:50]:
Yeah.

Hamilton Helmer [00:45:50]:
And a common one we have sort of a joke about it in the office is network effects is network effects are basically an attribute of any market. And so they’re everywhere. And, and, and, but they’re very infrequently material. And so, so it’s not enough to say there’s a flywheel in my business and this makes this better and that makes, gets this better and that gets this better. The question is not whether that exists but just how material is that does it how much? And again materiality, lower cost or higher price. And, and, and so that’s, that’s often missed. And as I mentioned before in product market fit, the, the one, the third S is all is not part of product market fit is sustainability. That, that’s not in there.

Darren [00:46:42]:
Yeah.

Darren [00:46:42]:
I think that’s the difference you created between network effects and network economies. The latter being that it passes the significance test.

Hamilton Helmer [00:46:52]:
Exactly.

Darren [00:46:52]:
And that network effects are pretty widespread. That’s such an important distinction. So I’m curious, number one, it sounds like power is relatively rare. I would love to get your take on that. And to the extent it is, or at least not omnipresent. What do you advise the CEO who actually does dig deep and identifies that they, they don’t really have power? What are they, what do they do in that case?

Hamilton Helmer [00:47:22]:
So if you’re the leader of a company and you, you dig deep and you decide you don’t have power, there are two. The first thing is to examine. You’re already in that business, you don’t have any choice. Let’s say it’s a commodity or something. So there are two reasons you might not have power. One is that nobody in that business has power, it’s a commodity. Or the other is that there is a source of power, but somebody else has it. Like there’s some competitor that’s 10 times your size in their scale economy companies. Right?

Darren [00:48:04]:
Yeah.

Hamilton Helmer [00:48:05]:
And, and so in the, in the commodity case, you can un, you can look around and see if there’s any, anything that might, any segment of the market or there might be something different going on. I think, you know, if you look at, you know, Box and Dropbox or something, you know, what, what, what would you do, you know, and so you might try and find a segment where, you know, they’re high switching costs or some special characteristics or something. So there’s a variety of things where you might look for some refuge from the withering arbitrage or competition. And if it’s a competitive position situation where there is power, industry economics are favorable to power, but you don’t have it, then you know, obviously if somebody is, if the person with power is doing what they should do, you’ll never get it. But, but you always want to be open to the possibility they’ll make a misstep, you know, and so you just want to be aware of that. And then, and then you also know that on your agenda has to be a next steps, right. An Act 2. Right?

Darren [00:49:23]:
Yeah.

Darren [00:49:24]:
Chenyi, anything you would add to that?

Chenyi Shi [00:49:27]:
Yeah, I’d say in the case where essentially we call like industry economics is not there, which is saying nobody has power in the industry, you know, operational excellence will, can or may take you a long way. Because the light at the end of tunnel is if you do end up through really good operations excellence, you know, end up a game of two, a game of three, you might have enough vertical leverage by the end that allows you to start claiming more margins, you know, against your suppliers, your partners towards the end of it. It does mean you kind of have to sustain through the takeoff phase where you don’t have sort of scale as your Benefit in a way unlike companies with network economies or scale economies, the larger you are, the easier it gets against your competitors. Right. If you don’t have it, you can just have to execute your way through. And by the end you may have sort of vertical leverage that gives you sort of some, some refuge by the end, which gives you the ammunition and resources for always sort of what’s next by the end as well.

Hamilton Helmer [00:50:28]:
So just to plug this, I think if you think about sort of a seven powers view of a business in that situation as a leader, you want a lot of clarity of exactly the game you’re playing. And because if it’s a treadmill, that’s fine. You should, you should know it’s a treadmill. But, but you, you need to know the game you’re playing. And, and you know, I think, I think as Warren Buffett said, I’m, as you can tell, I’m a great admirer. You know, he said, said that if you put a, a bad business together with a good manager, it’s not the business that loses its reputation, you know, and, and so because you, you need to know if this is a situation where you actually can’t manage your way out of it because that will just affect your own psychology and how you run the organization. And you can’t sort of keep thinking to yourself if I just run faster in the treadmill, this is all going to turn up roses.

Darren [00:51:30]:
Yeah.

Darren [00:51:30]:
The other scenario might be a business that’s underperforming industry average. Even in a largely commoditized industry where there is meaningful value to be captured just by improving the economics of that business, that’s a perfectly worthwhile endeavor. Right.

Hamilton Helmer [00:51:47]:
If there are efficiency gains to be made, if you’re, if you’re not up to snuff and efficiency, that’s absolutely, is a wonderful thing to do.

Darren [00:51:57]:
Yeah. Yeah.

Darren [00:51:58]:
Is there a question you’ve been interviewed now a number of times and asked lots of questions. Is there a particular question you wish you would have been asked that you, that you haven’t or maybe one that you ask yourselves that hasn’t gotten a lot of attention?

Hamilton Helmer [00:52:14]:
Well, I think the thing we push ourselves hardest on is, I think Chenyi mentioned it before was, you know, in one of our board of advisor meetings and you’ve, and you’ve touched a lot on a lot of it. During this interview, one of, one of the members, our board of advisors, well, it’s kind of well known entrepreneur turned to us and said, you know, Hamilton, I. What are sort of my degrees of freedom, you Know what? What can I do with this? You know, and so, so, and, and a lot of the conversation today has, in a way, been sort of been about that, you know, and, and I think I. So I. I think you’ve sort of asked the thing that’s really on our minds, which is that if you think about things that we sort of want to improve because we feel our mission is to just to help business people have better businesses, and our mission is to greater clarity about the concepts. So people don’t think they have power when they don’t, when they don’t. And also when they’re in a point where they have degrees of freedom, making them aware that they have those and telling them how to think about the problem, that might be a better outcome.

Darren [00:53:35]:
Yeah.

Darren [00:53:36]:
Chenyi, anything you’d add, I’d echo with that.

Chenyi Shi [00:53:40]:
It’s really the what do I do question. The what can I do question. And I think the important part of that piece is almost the flip side is out of the hundred things on your plate, you have to do kind of a hundred of them to keep the companies afloat. But there may be really a handful of them that’s strategically really important for the future of the business and the ability to tell the handful from the rest. Not saying you won’t deal with the rest, but the mental clarity of that is the piece at this stage really matters to your business, and you have sort of your degree of freedom right now to deal with it, which you won’t have later on because those may be locked in. I think that’s where we were trying to push our work to give more clarity to. To business leaders.

Darren [00:54:31]:
Yeah.

Darren [00:54:32]:
Yeah, really well said. If I were to summarize it, it’s. There are those businesses out there that have already discovered their powers, and I think your model is giving them greater insight into how to exploit that right for economic advantage and for the good of the customer. There are probably leaders out there that have yet to really grasp the inherent power that’s available to them. And I think this model gives them the insight to do that. And then there are probably a lot of leaders which are in businesses or industries where power is going to really be hard to come by. But having a really accurate sense of that and what their degrees of freedom are and aren’t is going to be immensely important to sort of where and how you place your bets and where you spend your time. Is that a fair way of summarizing?

Hamilton Helmer [00:55:22]:
Yeah, that’s. Yeah, I think. Yeah, that’s very true.

Darren [00:55:25]:
Yeah.

Darren [00:55:26]:
Yeah.

Darren [00:55:26]:
And it Sounds like your second book is going to just be the next level of depth to help people really explore those fundamental issues. So I’m so excited that you’re doing it, so appreciative that you’re putting your time into doing it and I imagine there are many others that would echo that. So.

Hamilton Helmer [00:55:43]:
Yeah, just, just don’t ask us when we’re going to finish.

Darren [00:55:45]:
I won’t, I won’t do that again. I might nudge you by email or something. Not that you need it.

Hamilton Helmer [00:55:52]:
Okay, fair enough.

Darren [00:55:54]:
Yeah. Anything else as we, as we wrap here that you, you would want to add or put a finer point on before we do close?

Hamilton Helmer [00:56:01]:
No, I, I Again, the comment that as probably you’re getting what, what you’re paying for is, is that this is hard.

Darren [00:56:11]:
Yeah, it really is.

Hamilton Helmer [00:56:13]:
I mean, a position of power is, is it makes for such a nice situation for a leader because it basically creates a little bit of slack. Maybe I shouldn’t be saying that, but you know, you can pay your employees a little more. You can, you know, you don’t have to worry about your, that whether your P and L next quarter is going to be disaster. You know, you, there’s this feeling and that so it’s, it’s just so much easier to manage and, and, and, and the outcome for all your parties, for yourself, your own job, your employees and your owners, your shareholders. It’s all, it’s all, all points in the right direction, but it’s hard.

Darren [00:56:57]:
Yeah.

Darren [00:56:57]:
There’s a, probably a fourth class of leader I might want to just add here and get your reaction to really quickly, which is it’s the founder considering founding a business and the CEO that’s considering their next role. I imagine if I were in either one of their shoes today, this model would be such an important tool for evaluating what opportunity we want to take on. Oftentimes the shorthand is great market. Right. Just enter a great market. But you’re pointing to something, I think that’s distinctively more nuanced. And I think, you know, having the opportunity to assess your next opportunity as a leader probably is another really good example of how to use this.

Hamilton Helmer [00:57:40]:
Yeah. If you’re thinking about what kind of business, what the opportunity is, this is something you’d want to think about very, very carefully.

Darren [00:57:49]:
Yeah. Yeah.

Hamilton Helmer [00:57:49]:
Because you can, you know, I think the poster child of that for me is I think his name was George Fisher, who went in to take, take over in Kodak. Right. And, and he was a phenomenally good leader, I think. And, but, but took on a business that basically didn’t have a future.

Darren [00:58:10]:
Yeah.

Hamilton Helmer [00:58:11]:
And I think when he joined, if I’ve got my story right, the stock price went up immediately. But, but then, you know, you basically, you were, he, he’d been dealt a very bad hand. And so you want to, you want to think very carefully about that, about the potential for it. And so, yeah, I agree with that assessment.

Darren [00:58:31]:
Yeah. Hamilton Chenyi, it’s been an absolute delight. I’ve loved geeking out with you on what is an incredibly important topic. Again, thank you for your contributions and particularly for your time in this conversation.

Hamilton Helmer [00:58:45]:
Thanks so much.

Darren [00:58:46]:
Thank you.

Darren [00:58:56]:
As I’m sure you can appreciate, while we covered a lot of ground and went deep into the nuances of Hamilton’s model, there is so much more to his work. I encourage you to read the book if you haven’t already. And if you’re in a leadership position where getting strategy right matters, I invite you to dig deep into the fundamental nature of strategic power. I look forward to being with you on the next episode of one of One. Until then, I hope you live and lead with courage, wisdom, and above all, with love.

One of One is produced by Erica Gerard and Podkit Productions. Music by John LaSala.