Hamilton Helmer

Oh, I'm sorry.

first one came out in 1964, 60 years ago.

Porsche wasn't sort of a sports car leader of the world at the time by any means.

And so what that enabled Porsche to do, which I don't think was conscious exactly, but sort of spun out in an evolutionary way over time, was that they took away

the design element as part of the mix in what wins over sports car enthusiasts.

So if you looked at a 911 in 1964 and a 911 today,

they kind of look the same, you know?

And so what did that allow Porsche to do?

It allowed to just constantly optimize the best performance features in the context of people would pay for that

Before you keep going, is this going to be a question of is this a scale economy or network economy?

you know, handling, acceleration, interior ergonomics, and the technology frontier was changing fairly rapidly.

Today, I'm just astonished at the performance you can get from a small-scale Honda that'll go 155 miles an hour.

you know, faster than a Jaguar XKE right back in my day.

And then there've been all kinds of parallel developments and other aspects, brakes, sound deadening and everything else.

And so they could constantly upgrade each generation, not having to think about the design aspect to it, but hit the performance envelope and people would pay for that.

You needed all those things, right?

And consequently, they end up with this incredibly durable business model, by far the most profitable automobile maker and devoted fans and great cars.

God, why are you interviewing me?

So, yes.

And then all of these elements like getting the PDK transmission just right, those are fixed cost investments.

And if they can spread that over a larger number of automobiles, it's lower cost.

So how many times have you seen sports cars that were quite interesting and then they just couldn't keep upgrading them to meet the grade?

I mean, think of the Toyota 2000 or an early version of Alfa Romeo or something.

Right.

And so Porsche was the one that just kept being right on that performance envelope because they were able to do all these investments.

And it's a phenomenal business model.

Business strategy is how to find power, if you will, in what you would think of as a single defensible entity.

And corporate strategy is how you think about strategy in a multi-business unit corporation.

And the central problem of corporate strategy is...

why is one plus one greater than two?

In other words, is there any reason from a value point of view for two separate businesses to be under the same roof?

And there've been a variety of efforts in that.

If you go back in the days of GE, wildly diversified companies, there's a theory for a while that that was really a good thing that you get sort of these diversification benefits, turned out not to be true.

And so it's really that question of why is it that if you're in one thing, it makes sense or doesn't make sense to be in another thing.

And so again, think of Amazon, AWS.

Why is that interesting?

And the static part is one plus one is greater than two.

The dynamic part, and that's what our transforming discussion is about, is what is it about the business that you currently have

that is somehow useful in doing something else.

So you guys did the all wonderful episode on AWS demythologizing, but Amazon did have capabilities that made it not completely alien territory.

So I'll give you a quick intro to transforming kind of why we think it's interesting.

And then Cheney and I can sort of pull it apart a bit and you can ask questions.

So there are really three reasons that we think about this.

The first is that if you're interested in creating businesses, it's important.

And by important, I can give you a little data on that.

So I did a study once of the S&P 100, the largest market cap companies in the world, and looked at if you pulled apart their value and looked where their profits came from.

And you asked the question, what share of their profits came from businesses that wasn't their original business?

What would you think if you were asked that?

Can you help us with a year of when you looked at this?

I did it just prior to the financial crisis.

So it was 2007.

I don't know if you consider the answer boring, but it turned out to be about 50%.

In the tech world, which you guys intersect more, you can think of all the examples.

We talked about AWS as an example.

The lead-off example in my book of Intel getting into CPUs, that's transforming, right?

They're in memories.

Right.

The iPhone, they were not in that business before.

Google into Android, Microsoft into operating systems and applications.

They were originally a language company.

But as both of you said, sometimes not.

Dr. Herbert at Harvard started right out of the gate with Facebook, you know, and so 50% is a big number.

Right.

So that sort of flags you.

And so it's important as one.

The second is that it's hard to get right.

It's a difficult area.

There are reasons that have to do with motivation and there are reasons that have to do with understanding.

And Chen Yi will talk about some of the common business nostrums that sort of fall apart in this.

On the motivation side, I'll just mention that from a founder point of view, they just founded something that works, and so they're accustomed to that success.

And so sometimes they may not appreciate all the idiosyncratic, uncontrolled elements that went into that success.

And they're very creative and they want to just move forward.

And so they're inclined to do that.

And that's a great motive force.

I love that.

That's the lifeblood of an economy.

But it also means that you can sometimes get into stuff that you really don't know how to do it.

Right.

And then on the people that often sit on their boards or finance them, there's also a dissonance, which is that if you think of the VC community, the business model and VCs issue find really interesting things to invest in.

And then hopefully they go up in value.

And then there's an exit, which you profit from that increase in value, which is this wonderful engine.

If you think about what drives the US economy, it's just phenomenal.

But in the early stages of how people think about value,

there isn't yet this track record of persistence because people are often, for example, spending a lot to acquire customers.

And so profitability may not be evident yet.

And the fundamental economics haven't really asserted themselves.

And so the only thing left is kind of how the top line is doing.

So are you growing like crazy?

And so when you hear VCs sometime complain that people waited too long to IPO,

What that message really means is that all of a sudden people's perception of the company change from the top line to the bottom line, and they miss the window.

What that says is that that investor community is focused on top line growth, as it should be, because it's the best marketer available.

but it doesn't tell you much about power.

And so it's hard to do.

And then the third thing, which of course you would expect from us, is that actually understanding power tells you some interesting stuff about transforming.

So three things, it's important, it's hard to get right, and power matters.

Yeah, so Ben not only is going to supplant me in writing Seven Powers, but he's going to take over strategy capital.

I think that job falls to Chen Yu, yeah.

So we're sort of constrained about talking about our investment stuff too much, but basically the proposition of strategy capital is if you have a differential understanding of long-term competitive outcomes in places where that's really hard to figure out, that you can value things more carefully.

And so I completely agree.

And you properly constrained it.

If there's a long history of financials, it's already in the price.

So does Walmart have power?

Sure.

I'd like to meet your dog sometime.

So that's why it's important.

And I'm going to just give you a quick take on what I mean by transforming.

When I laid this topic out to the two of you, I said that if you're thinking about increasing value in a company, there are sort of two questions.

What can I do better and what can I do next?

And you spend most of your time on, as you should, on what can I do better?

So you think of Amazon developing a better search engine when you look for a product.

You've got to think about that, right?

And that's most of your time.

But then you also think about, okay, well, what can I do next?

And that's what transforming is.

And that would be Amazon going into AWS.

And you can imagine thinking about whether to do AWS is a very different exercise than optimizing the search engine.

So transforming is sort of a separate topic.

A fundamental thing in strategy is a thing called business definition, which is what really are the boundaries of your current business?

Yeah, coming back to the very first conversation about why we did this in the first place is that the point Chen Yi just made is the fundamental one, which is that creation of economic value is pretty orthogonal to capturing some of that value for yourself, which is to say the creation of company value.

So creation of economic value and the creation of company value are different animals.

And both are important.

And there's a dynamic connection in the sense that if you create economic value, it sort of creates the opportunity to think about capture and so on.

But just a single slice in time, they're very different.

But that's a fundamental point about all this.

Yeah, and so I'll just say how power kind of helps you out in a way.

So I mentioned this sort of ethereal concept before, business definition.

So it's rather important.

So if you think about Uber versus Netflix, where they go next, right?

Uber at first, their thought was this was an international business.

That means that going into China, somehow their strength would be transferable into that effort and they could be successful.

And Netflix thinking about going international, thinking that if they started streaming in Korea, that that would make a lot of sense.

So that's the question.

The key thing there is if you have an established business, is the drivers of power in that extensible to that additional segment you're considering, whether it's geographic or customer or whatever?

And because if it is,

The risk reward of doing it, the calculation beginning, is so much better, because being able to carve out value to yourself is really hard.

And if you can build onto something that already does that and it works in that environment, then oh boy, go there, because that's so much easier than doing something really new.

And so Netflix streaming in Korea, it built on, so you're saying you can share content across countries, right?

It built in the same fixed cost economics of content development and worked.

Ubers, if they have a source of power, it has to do with geographical density in a specific area like the Bay Area or something.

Right.

Exactly.

And if it turned out that the engineering part was 75% of the cost structure, I mean, content for Netflix is 75%, then it would have been fine.

But it's not, just as you said.

And so when you're thinking about business definition, in some businesses, international is part of the same business, which is to say it's under the same power umbrella.

And in some businesses, it's not.

And you have to understand that in terms of what you're doing.

And if you're thinking about what's next, if you can go to things that are under your current power umbrella, oh boy, is that great.

If Porsche wants to sell cars in China as opposed to selling them in the U.S., no brainer.

Yeah, and a Chinese competitor would have to go through the same calculation, you know.

So the first point of this conversation is that to properly assess...

transforming directions, the first thing is carefully understanding your current base of power and then looking at this new segment, whether, as I say, it could be customer, geographic, technology, whatever product, and seeing whether it relies on that as well.

Because then, oh boy, a world looks rosy.

But on the other hand, if you think it does and it doesn't,

It's like Uber and China.

I don't know.

What did they lose?

A billion dollars or something.

I don't know what it was.

Yeah.

And so they used to be compensated by the shares.

And I don't know what their shares are worth now.

So anyway, so that's the starting point.

Right.

And that's such an interesting case, David, because oftentimes.

It's that kind of subtlety about locking in a distribution channel, for example, that's sort of kind of invisible, but may actually be the very thing that makes that such an... I mean, if you think of Sony, on the other hand, when they went into game consoles...

That was a different business, I'd say, and brutally hard.

And it relied on some capabilities.

So it shows why the capability thing doesn't get you there.

I mean, yeah, some engineering at the time, analog was king there and digital was thought of as a backwater, but it was a very difficult.

And now it's, of course, the source of their profitability.

And like all these things, there were a few principal actors, a few leaders that had they not been there, it's hard to imagine it ever happening.

Some innovative, hard-driving people.

Let me just weigh in here for a sec.

I agree with her sort of leaving it off because to have power, right, you have to have it versus all potential and existing competitors.

The counterpositioning one is typically the type of power that you would have against incumbents.

But it doesn't work against wannabes because they don't have the same problems.

And so the one that you have to think hardest about is versus other companies that are doing it just like you.

And so for Bulmar, it would be Texas Instruments doing calculators.

And so that's why she left it off the list.

So Uber Eats, right?

Right.

But it's more plausible than different geographies.

Ben, that's such a great example because it speaks to the point of the complication of the phenotypes, that until you peel back the covers, it just sounds, oh yeah, Uber Eats and Drivers sounds all the same.

But when you start peeling it back, it may not be.

So what that says is you have to have

quite a lot of nuance in your understanding of whether you have power to begin with.

And of course, for Uber, it gets into the nature of platforms and exclusiveness of the sets that occupy either side of the platform and whether they overlap and all that kind of stuff.

And so without that nuance, you just, you miss it.

So where we're heading in this conversation is we're saying transforming is a worthwhile topic.

And then we're saying that a starting point is understanding the power of your current business, because if you can build off of that, it creates a wildly preferable risk return prospect for something you're getting into.

And so that then takes us to the next topic, which is

What if you can't build on your current thing and you need to get into something that doesn't build on your current source of power?

And the two of you, with all your interviews, actually have so much.

You know, you have this wealth of information about what goes into people's minds doing that.

But if you think about that.

What are you into?

You're basically, you're starting a new business, right?

Right, exactly.

And so remember that thing I said about the S&P 100?

Yeah.

If you look at what they went into that generated a lot of value and ask the question, could you generalize it all about that?

I'll create some definitions here a little bit, sort of three categories.

If you think of, does it satisfy the same needs or does it use the same skills?

Those are the two dimensions, right?

Because I have a consulting background and the whole world is always two-dimensional, right?

And if it has neither the same skills nor the same need, I just call that pure diversification.

And rarely does that work.

That's a very high-risk proposition.

You're basically creating a new business, something you don't know how to do at all.

The skills of your company.

So what your engineers know how to do, what your salespeople know how to do, all those sorts of things.

And as a big company, you have all the agency problems of trying to get something off the ground with a lot of bureaucracy and everything else.

Right.

There's some advantages, but there's more disadvantages.

Right.

There's probably more disadvantages than advantages.

And data supports that, that unrelated diversification is typically not a great thing to do.

You got it.

Right.

And then if you look at the upper left, which is it's the same need.

but different set of skills, you can call that reinvention.

And sometimes you're forced to do that, but the opportunity set isn't that great, really.

It's not like you're opening up the whole world to opportunities.

And so those are pretty rare.

It does happen.

I mean, Netflix into streaming is reinvention.

It can happen.

It's hard to do.

You're usually counterpositioned because you've got a whole group of people that wants to do it the old way.

Right.

And they have a lot of power in a company typically because they've got the P&L.

Yeah, that's very insightful.

That's exactly right.

Otherwise, you get swamped by agency problems.

And so the different needs, skills sharing, same skills or not same, but shared skills, you can call that category co-action.

And that's where all the action is.

Yeah.

That's AWS for sure, right?

Exactly.

AWS.

Right.

Wait, so this is the lower right?

This is kind of the lower middle.

It's a bunch of not perfectly shared skills, but you know quite a bit about the stuff you need to do to get in there, but it's a different need.

And that accounts, I don't have the numbers in front of me, but I think it's 90% of the value in the S&P 100 of the new stuff came from co-action.

And that's saying something that's pretty straightforward.

Ah, God, you're too fast for me.

That's right.

Same business.

And then the extra credit on this will be why are these axes not quite orthogonal?

But I'll leave that to another discussion.

So if you think of Sony going into PlayStation...

That was not the same as Sony going into cars.

It was a different business, but they did have a lot of stuff.

And so that basically says that you want to constrain yourself to areas that sort of meet with your current capabilities.

Now, occasionally there are companies that have capabilities that are so proprietary

that actually that aligns with power automatically, but that's very rare.

I mean, I'd say like corning and glass technology, for example, it's such a weird material science so they could do glass stuff that other people couldn't do.

So my view of 3M is that they're basically a material science company.

And material science is weird.

It's not fully, or at least it used to be, I'm not so current on it so much, but not fully developed theoretically.

They're all kinds of niche-y companies.

idiosyncratic aspects to it and so they were able to invent stuff so if you think of post-it notes right that was a not so sticky glue right and then they didn't know what the hell to do with it

And it went on for years.

There is a champion in the thing that just said, no, there's something great here.

And they almost missed it.

It came down to a final marketing trial where they almost didn't follow up on it.

Wow.

Well, I'd characterize it a little different.

I'd say it was a very interesting technology with no product.

Yeah, it's funny.

I guess we share a view in that.

I don't find myself very popular in that view, but I agree with you.

There's all this hand-waving about the wonders of decentralization and the world will be a great place and everything, and I'm waiting for the— We need the sticky note.

We need the sticky note, right.

Anyway, so I think that is just a simple observation, which is that the stuff that's most likely will get you there is a different need, but using some of the skills that you have.

Yeah, yeah.

Delighted to do that.

And nothing very complicated about it, but I think data bears that out.

So as I've said, I think on other episodes, my understanding as an economist is that ground zero for economic vitality is the strength of the entrepreneurial sector.

So a really interesting question.

I mean, way back when, before the idea of core competencies, there's a writer that wrote about, I think they used the term distinctive competencies, which is exactly what you're getting at.

And I would say that that was probably true of coring and glass technology, but it's rare.

And I agree with you that a lot of tech companies have a lot of similar sort of stuff.

And if you had a distinctive capability,

and that that had an application in an area so it led to a good product, then, oh boy, that's great.

But it's hard.

That's not common.

And so if you're in this place where you can't build on your current power, you just have to realize, as you were saying before, Ben, you're back in event space.

And yeah, you can build on current capabilities, but that's sort of table stakes, you know?

You're into that level of risk.

And like all those things, it's adaptive.

You know, you sort of try stuff and move forward in a positive way.

Right.

Brutally honest and very granular.

I love it.

Yeah.

Did you write that down, Cheney?

I think we should remember all that.

Right, right, right.

Yeah.

No, I think you nailed it.

So there's a famous economist called Joseph Schumpeter who sort of posited that, and it was different than sort of normal economic theory at the time because it was very dynamic and not sort of mathematical.

Right.

I just want to underline what Chinese rightfully kind of pulled that out as kind of a key point here is that the risk level of doing something that's under your current power umbrella or not

The difference is gigantic.

So that should be your starting point because it is absolutely gigantic.

And I think since we're back into invention, and I am a huge fan of Amazon, the fact that they've been able to do what they do, I would argue that they couldn't have done it if they weren't willing to take the risk and have some failures, right?

Absolutely.

And so when Cheney and I talked to companies recently,

will often, when we hear it, if they have been successful at transforming, and we talk about future transforming,

The narrative that makes us think, oh boy, this has really got our problem is, oh, we have a really defined process for innovation here, and there is a 17-step process, and we know exactly who to assign to it, and blah, blah, blah.

And so I believe that very strongly.

That's the red flag of all red flags, right?

And then there are other in-company things.

You worry about sort of screening criteria.

For example, some companies, when they're thinking of doing new stuff, say, well, I won't do it unless it will move the needle corporately, which means the market has to be a certain size.

And of course, Silicon Valley is a center for that.

Right.

And usually if it's already a billion dollar market, you're too late.

But this is just a highlight that invention is really hard.

It's hard for a large company to do it.

It's hard for individuals to do it.

And corporate strategy is asking a question on the transforming side, at least, of if you do it, are there cases in which your current platform are significant benefit to you?

So the thing that really interested me was, can I contribute to that in any way?

Oh, iPhone and the iPod are straight up co-action.

Similar capabilities, but I mean, they are computers in sort of a generic sense, right?

But the iPhone, in a functional way, it does compete a little bit with the desktop.

Yeah, right.

Yeah, I mean, I would say that one of the things when you're trying to do business definition, there's the theoretical side is the power shared.

And then there's the empirical side is to look at the composition of competitors and see if they're different.

And that's suggestive that they're sort of different.

And so the competitors for the iPhone are different largely than the competitors for the MacBook Pro.

You know, again, it's not perfect, but because sometimes that doesn't develop in exactly economic ways, but it's a pretty good way to look at it.

Is there anything that I can do that helps with that?

And my discipline is sort of,

business strategy.

And so there's a real question about, is there anything useful that business strategy can add to that sort of creative, dynamic effort of all these people?

And I'll cue it up with an example that I used to use in my class at Stanford sometimes, which is that

That's closer to pure diversification, right?

So if you think of that horizontal axis, that thing I was talking about, that's a spectrum from zero to 100%.

If you can imagine me holding up two devices.

If you're in the car business, if you go from green cars to red cars, you have almost 95% shared skill.

Go from luxury cars to compacts, high sharing.

So Toyota can do it.

Go from cars to tanks,

pretty different.

Right, right.

It's not impossible, but quite different.

And then if you go from cars to refrigerators, it's really different.

So yeah, no, I agree with that analysis.

But remember to not to forget the importance of the entrepreneur in this.

because they are the locusts of inventiveness, and it doesn't happen without them.

And this isn't an automatic process or something mechanical.

There's individual human creativity involved, and it's especially evident in Apple.

But it's really true everywhere for all entrepreneurs.

And so that's why Janine and I have to be fairly modest about what we're doing, because what we're really trying to do is to provide pattern recognition for those people, but it doesn't substitute for them.

It's just a tool.

Right.

So that's the first handheld calculator in the United States, Bomar.

Well, it's very related.

If you're acquiring a company, the primary question you have to ask yourself is,

is why is this worth more to me than to the seller?

Because there will always be an information asymmetry.

The seller will always know more about the asset than you will.

There's a ton of financial analysis work on this.

And, you know, you can't get it perfectly, but basically they look at the stock price before and after acquisition and all this stuff.

And if you distill all that, what it basically says is, you know, the acquirers kind of break even or whatever, and the seller does very well.

And the fact that they figured that out for a large segment of business was genius.

And so here's the issue, is that here are these two devices.

And so that then question of what do you bring, you can imagine how that touches on this subject of business definition and so on.

And that's why antitrust authorities get so upset about it.

If you horizontally acquire in something with scale economies,

That just makes your advantage that much more.

And so people get upset about it and people would love to do it.

But, you know, Hart, Scott, Rodino, we'll let you get away with it, right?

And rightfully so.

But you have to be very, very disciplined because often what happens if you're inside a large company and facing these decisions, and I've been involved in many of them, what happens is the argument that's often made to advance that is, oh,

They were wildly successful to begin with.

Well, we don't have to have the same number of accountants or we can kind of reduce their sort of these cost reduction personnel overlap thing.

Never works because they're diseconomies of being in a large organization as well as economies.

And they're sort of a wash is a good assumption about it.

And how much money are you really going to save?

Right.

And so that analysis doesn't get you there.

You need something more fundamental.

And usually it's related to power or something like that.

Incredible product market fit.

Well, I'll add something to that, which is that the cost of that revenue is favorable.

Bomar went from maybe $3 million to $100 million in a couple of years, which back in those days was real money.

So think of Disney.

So think of getting Lucas and Cameron's stuff and... Marvel.

Oh, wow.

Marvel is incredible.

You know, Ivor created a huge amount of corporate value by doing those things and Pixar.

And that had to do with...

him taking franchises, like LVMH was taking powerful brands that weren't fully exploited and figuring out how to economically exploit them, right?

And Disney was taking branded entertainment that was powerful and being able to fully exploit it.

And so it answered the question, why is this worth more to me?

So you could take Star Wars stuff, which you sort of had the feeling George Lucas kind of

wasn't so interesting to sort of exploit it.

He was kind of a creative genius, right?

And yet Disney could take it and run with it.

And so I think that wasn't that you bought revenue that already existed.

It was that you were able to exploit that.

And of course, calculators are an interesting starting point because the Japanese calculator, Busycom, was sort of what started the whole CPU revolution.

Right.

So examples like that, they plug completely into the power structure of the current business.

So, you know, high switching costs stuff, right?

And so that they can deploy it to all their customers and get the same economics of high switching costs.

I understand.

Do you want to add to that?

And so tremendously successful.

Right.

And so that's why if you have switching costs, the key strategic challenge is to acquire customers when the cost of a customer does not fully arbitrage out the profit stream that you would expect from them.

And you all know the story of the iPod.

That was the beginning

So I think sort of a non-obvious point of all this is that if you're thinking of doing something new, getting into stuff, that understanding business definition is critical.

of Apple as an incredible business model, but it also was the precursor to the iPhone.

Which is to say, into what areas does your current power umbrella extend?

You got to understand that.

Then the next one is the point that Chen Yi made, which is that expansion into areas where that umbrella extends is radically more attractive than starting something utterly new.

Oh, that's a really important point.

Absolutely.

You're failing if you don't exploit it.

Right.

Because you can assume that eventually somebody else will, and that may completely ruin your competitive position.

And for example, if it's based on scale.

So point one.

Go to business definition.

Think very hard about where your power umbrella is, too, that if it does extend into an area you're considering to go there because it's really attractive.

And then the third one is that if you don't have anything there and you still want to do something new, co-action's the name of the game, but understand that you're now into invention of a new business.

And with all the things around it, risk, adaptation, you know, everything, and entrepreneurs matter.

Bomar, on the other hand, and this speaks to why Seven Powers- Not exactly a household name today.

So Jenny, that was such an important point about how if you miss a business definition, I'm going to ask you for an example.

Can you think of a good example of companies that didn't understand the full extent of their business and got taken out as a result of it?

Right, right.

Yeah.

Who was that?

Balmar never heard of him, right?

My take of Blockbuster is if they'd done a red envelope business a year earlier, Netflix wouldn't have survived.

Right.

You'd never heard of it.

Oh, I love that.

Right.

So that dates me and you.

Right.

So do either of you have diners clubs cards?

I do not.

No.

Right.

And so they missed it.

Yep.

I mean, it's a great example.

They didn't understand that it was actually a platform where you want to cover as many types as possible and it shouldn't be constrained.

And so they missed the business definition.

And Visa is one of the highest margin businesses in the world right now, right?

That is nice and actual.

Were they owned by banks?

Yeah, innovation or disruptive technology is not sufficient.

It was very disruptive.

If you were an abacus maker or a Monroe calculator maker, it puts you out of business.

Very disruptive, but completely went out of business after a while.

Right.

I love the answer.

And I think she's right.

I mean, when we look at platform things, there is the business of running the platform.

So think of, for example, the fixed cost in Uber of their modeling and all that kind of stuff.

And then there's the network economy aspects of a two-sided platform with people, you know, and so on.

And it had tremendous brand recognition was the thing and this huge spin-up.

And you could have power in either one of those.

But if it turns out that the cost structure is not, there isn't a huge lump of fixed cost, then it doesn't matter much.

But I think, Jenny, you got it right.

And that speaks to strategy.

Yeah, and this isn't sort of a pointy-headed kind of issue because it gets back to if you find the thing that's cause rather than effect, that's the thing that you've got to defend, right?

And my intuition about this, and I don't know if it's right, is that you have to introduce time as a variable in this to correctly understand the problem.

And so what you wonder is if you were...

But I think Jenny and I are involved in this deep debate right now about sort of the boundaries and relationship between scale economies and network economies.

If you want to get even more confused, just remember that scale economy typically is defined as a situation which, as scale increases, cost per unit goes down.

That's often true of network economies, right?

Right.

but the structural economic conditions that created are quite different.

And understanding those, if you're a business operator is really important because then you're less likely to get taken out by your better,

Helping the people founding those companies, is there anything that you could say that would maybe guide them to be a little more iPod-ish and a little less Bomar-ish, right?

Well, what we're talking about right now is there are a variety of topics.

that are extremely difficult phenotypes, if you will, to tease out and delayer.

And we seem to have enough of those that actually we probably could write a book about it.

And so it's a topic of conversation.

Yeah, yeah.

We've thought about certain white papers and this and that.

I'm pretty lazy.

That sounds like hell.

I'd say my passion, and I think probably Jenny's sort of aligns with this too, is getting the theory right.

It's very satisfying and extremely hard to sort of go through and figure out, you know, how this kind of all fits together.

And of course, that's how you get to simple, but not simplistic.

That's the only way you get to simple, but not simplistic.

And so that's kind of the satisfying part.

But I don't know, the idea of writing another book scares the hell out of me.

But the problem with that is that the nature, as the two of you know from your acquired site, as well as all the other things you've done,

Yeah.

How did you de-layer AWS?

Yeah.

So and channeling Kurosawa, right?

the nature of developing business is adaptive and evolutionary.

It's not like you sit a bunch of bright people in the room and you figure out the strategy and say, okay, we're just going to execute from now.

It's you go forward in time and effort and new information comes in.

Oh, that customer didn't do what I thought.

This competitor is coming in this way.

The technology frontier has changed, all this stuff.

And you have to adapt to that over time

And so the problem with that is that, okay, well then, if it's that way, how does a body of thought contribute to that?

And the answer to that is that if you can provide a useful mental model, or as Jin Yi calls it, pattern recognition.

Yes.

You provide something so that as entrepreneurs are moving through space and time, they can see what's a little more likely to end up iPod-ish and a little less likely to end up Bomar-ish.

That kind of metal model is actually hard to construct.

And what I say in the book is that the very high hurdle that it has to clear is that it has to be simple but not simplistic.

So simple, it has to be that way or people won't remember it.

If it's some complex theory that you have to go back and look it up every time, it's not going to help a lot when you're making business decisions.

And not simplistic means that it's got to cover most of the situations you face.

In other words, it has to be relatively exhaustive.

And that's a high hurdle.

So there were a number of strategy frameworks before that were extremely interesting and made great contributions, but weren't simple but not simplistic.

Probably the most prevalent was Porter's Five Forces, focused on what he calls industry attractiveness.

It was a tremendous contribution, but it's not insufficient.

If you're in an attractive industry, it doesn't get you the kind of security that an iPod has.

Right.

And there's been statistical work just buttressing that point more generally, that industry attractiveness doesn't explain a lot of firm differences in profitability.

Oh, damn.

Another one was Christensen's work on disruptive technologies, which is just phenomenally interesting and highly erudite.

But this example is perfect.

Disruptive is actually not correlated with long-term profitability.

It has to do with product market fit.

It basically says you've come up with a better way of doing something that takes out the incumbent.

It disrupts it.

So very interesting in that frame, but not for the Bomar iPod problem.

And then there's a whole strain of thought around capability analysis.

You can do a lot of things with capabilities, but it's not common that that's the basis of why you build great business models.

Other people have those capabilities as well.

So what that meant from a concept development framework is that I sort of had to go back to square one and say, okay,

I'm thinking about pattern recognition for entrepreneurs.

What's simple but not simplistic?

And one of the keys to that question is persistence, which is that if you were to say Apple's profitability next quarter, it's not a random draw, right?

It's highly persistent.

And there's statistical work on that that suggests that's generally true for, you know, very successful companies.

Yeah, there's that.

But I think also the fact that he says that this quarter is baked also sort of tells you about something about the business model in a way.

Go for it, Jenny, because I don't know the answer.

And so that persistence tells you that there are economic structures that

that create attractive outcomes and you then ask the question can you generalize about those because if you even generalize about those then you know maybe you can get to something sufficiently simple and yet comprehensive that is useful to entrepreneurs and so after

Looking at that for decades, my conclusion was that actually it is simple.

There are only seven of them.

And in fact, if you're dealing with startups these days, it's usually a smaller subset of that.

And so that to me was a fairly profound insight.

And that's what Seven Powers is.

It's just those structures that if you can get there, make you more iPod-ish and less Bomar-ish.

That's right.

Gee, I wish I had said that.

So product market fit and power are more or less orthogonal.

There are some complexities in that statement.

And I'll tell you something, Ben and David, that has occurred to Chen Yi and myself over the last year, which is a little bit different maybe than what's said in the book, which is that I used to think that it was sequential.

You get product market fit, and then you deal with power.

But my biggest education is talking to founders.

I love their intelligence, their creativity, dare I say their youth, and their deep thoughtfulness about stuff.

And what I'm finding is that the proper path is actually to be thinking about those things kind of simultaneously.

Because what's going on is you're trying to figure out, okay, what am I doing with this business?

You know, I've got this choice and this choice.

And in the mix of that, there are both product market fit questions and power questions.

And you don't just say, well, I'm just going to do the product market fit stuff and think about power later.

You actually need to start thinking about it.

You won't solve it completely at the beginning.

You won't know, oh, yeah, I have power for sure, but you should be thinking about it.

So persistence then leads you down to those structures.

And part of the reason that it's really cool that you're sort of thinking about this in your interviews and we think about it in our work is one thing I've said to you before is that the genotypes of power are simple.

There are only seven.

My partner, Bill, says that it turns strategy from an essay question into a multiple choice question, although I don't know with chat GPT the difference anymore.

But the phenotypes, that is the exact

granular way in which they are articulated and carried forward are complicated.

Yeah, and we might struggle for weeks trying to figure out whether something has power or not.

I'll give you an example of how the idea of power is so important.

So, you know, I'm sort of a sports car nut and I used to drive too fast.

And Porsche is a great example here, which is, think of that, the 911