Business strategy with Hamilton Helmer (author of 7 Powers)

30:54And so that meant he didn't, you know, the idea of network economies and what the moat was there, he didn't understand. And so I think, but I think the concept of a mode is a good one. The idea that you have something that gives you a refuge from, from a competing forces. In terms of Warren Buffett, I found the quote about modes, Warren Buffett famously said, in business, I look for economic castles protected by unreachable modes. Right. And so he's taking care of the benefit part by saying a castle. Right. He's got a cover. But one of the tricks to understanding power is you have to have a pretty good understanding of why it's a castle and not a shack.

31:39So I'll give you a Netflix example. So a company I admire a lot. And I think if some of the things that they had to do to develop their business were so important for their business that aren't the don't guarantee a castle. So for example, UI development. It's been an enormous amount of resources on trying to get just the very best UI, I mean a Zillion AB tests, all kinds of things. The recommendation engine everybody's kind of knows the story about how that went on, you know, their interface with the content world and all this. So those things are important. There are things they have to spend a lot of time and resources on, but they can largely be mimicked.

32:31So when Netflix and an earlier phase was fighting blockbuster, when blockbuster finally threw in the towel and said, well, we darn will better do a mail order to DVD business. If you look at the blockbuster site, their UI site, you couldn't tell it different from Netflix. I just copied it. And so all that thoughtfulness about which things you put first and now you structure it and all that to make this suitable was immemicable. So that's an understanding of looking at the properties you have and trying to figure out if they're a castle or a shack. Hmm, I love that. This episode is brought to you by Paragon, the embedded integration platform for B2B SaaS product development teams.

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33:52The result? They're shipping integrations on demand, which is led to higher product usage, better retention, and more customer upsells. Visit useparagon .com slash Lenny. To see how Paragon can help you go to MarketFaster with integrations today, that's use P -A -R -A -G -O -N dot com slash Lenny. So let's take this concept of seven powers. A lot of people are sending to this are just like individual contributor product managers on teams building your product or iterating on products they already have. What do you suggest they do with this knowledge of their exist, these ways to build benefits and barriers.

34:31I'm working on saying new product. What do you recommend they do? What's like something they could do this week next month to infuse these lessons into the products they're building? I'd say they're a few and it's a little bit different. You know, I'm not a great fan of the strategically driven organization because that idea because it fuses over how this knowledge is useful at different stages in the business. And so for somebody in that position, say a product manager and an existing successful business, so it's important in terms of just understanding their business to know what their source of power is because they, and that can inform them about, you know, what it is that they're working for.

35:26And also they may see things since they're down in the weeds. They may see things that, that are important to that that they need to bring to other people's attention. Because they're the ones that really have the knowledge of what that's going on. There's another aspect I mentioned before this idea of transforming of starting up entirely new things. And usually, I wouldn't say usually, I say it's not uncommon for ideas about that to bubble up from down below, you know, and so that's another source. If you're, so let's separate a business into three phases, you know, origination takeoff and stability.

36:15So the answers I've given are more in the stability phase. In the takeoff phase, let's say you've launched a product, you've gotten customer traction. Now you're in a phase where there's just very rapid growth, probably other entrants like you. What are you facing? What you're facing is, remember that underneath all of this is a change in technology. That's what made the product market fit. possible in the first place. But that doesn't just stop. If you're in a technology way, often there are all kinds of offshoots, both for you and the compliments to your business, or else going on at the same time.

36:59And to win at that stability phase, which is really a market share of win, you have to be aware of those and understand, okay, we have to incorporate this new feature, or or maybe now things have gotten to the point where this new market segment is our product is attractive for it wasn't. This is meat potato stuff for somebody at that level. And it may well be the decisive element in terms of whether you win that market share battle with the other contenders. And so you have a very, very important role at that point. And so I'd say the first thing to do with your question is to make sure you think about the different phases of this and then ask what those responsibilities are.

37:51What about for people that are just trying to get better at being strategic, thinking strategically, something every product leader has always encouraged to do, become a better strategic thinker, get build as muscle of strategy, what do you often advise to people will just get better at the stuff. Obviously, read your book. Read the book and then have conversations with your colleagues about the topic. Because as you sort of internalize what that means and how to have conversations with them about, do we really have this kind of power? What's going on here? What's important? What isn't, you know, those conversations tend to allow you to sort of get a better grip on things.

38:33I mean, in the case of Netflix, Reed actually had me come in and train the top 100 people in Netflix and strategy, where I actually ran classes in the company. But that's unusual, I'd say. And I didn't have a book yet. And so I think the book gets people pretty far down that path already. And you don't do that anymore, imagine if someone wanted to do that today, not an option. I sadly don't have time. I do often do, you know, fireside chats at company meetings and that kind of thing, but not a full -blown course, and I'm not teaching at Stanford anymore either. And so I don't. I enjoyed that immensely.

39:19A wonderful people to work with, but sadly, I don't have the time. You're about to get a lot of requests for fireside chats. I hope you're ready. You mentioned AI at some point in our chat. I'm curious how you think AI is going to change your seven powers framework. Do you think defensibility goes down in general? Well, certain forms of power become more important or harder to achieve. How do you think about AI? Yeah, it's a great question. I mean, we're all in this phase of wondering exactly how genera AI is going to play out. My own view, currently, I don't see any change in seven powers from it in terms of an eighth power or something.

40:01But the issues that it brings up, like scale economies, I mean, think of scale economies. If you have to, if you have a fixed cost of trying to develop a model of a billion dollars or something, or network effects will AI models develop so that they learn in a way that for one user's interaction helps another user's interaction. That would be a powerful network economy, or if it learns, if it learns about you and becomes a better psychiatrist or something, then that's a switching cost right. So all these things are relevant to which business models will work and I find that useful. But I think in general the way I think about it is it's a sort of a standard form of potentially very powerful technology that is being introduced into the business world and just asking how that plays out.

41:10I probably tend to think of that there's sort of three types of plays. There's the company that's the technology play itself. So if you think of micro -processors, it would be Intel. There's the companies that wouldn't exist without the technology. So for semiconductors, it would be Microsoft. off. And then the companies that utilize the technology, but they have existed before and after. So for some, again, debtors, there will be automobilization, a ton of chips, but there were still cars before and after. And so I'm kind of of the view, very much uncertain at this point, that generative AI will, its biggest impact will be that tertiary class.

42:02It will be used in a lot of things that existed before and exist after but are made better by it like semi -ductors and automobile. And so it reminds me sort of, if you think of really big technology shifts like this, it reminds me sort of electricity. When electricity came, you could completely reconfigure a factory floor. right? You no longer had to have you could have the power source at essentially at the operating unit of an operator. But but that took a lot of redesigned and corporation investment learning complements all kinds of stuff. I tend to think this will be more like that. But there will be some pure cases.

42:53People will want to have them right. They're turn paper with jet GPC or something. But if you think of businesses, it's hard for me to think of a single functional area in a business that with redesign couldn't benefit. it. So, you know, accounting, HR, R &D, you know, all have uses of this, but requires incorporation, which is always, you know, troublesome. And so, so that's kind of my view. And so, but there may be, there certainly will be businesses that couldn't exist without it and there's something that are coming up but and some of those are the fact the businesses that empower the tertiary need they're the ones that bring in but if you go back this will date me but if you go back into business history that can I guess it was the 90s there was just think hopeless process re -engineering you know the idea that you would you could take a computer sensibility into business processes redesign them and get these monstrous cost savings and it was a gigantic consulting opportunity for people, whole companies got developed based on that.

44:20And it sort of feels kind of more like that to me, but it's very interesting. I could be wrong, but it feels different than crypto. So it feels like there's more in the real ultimate use case. I mean, if it really is true, what they say, that a 50 % improvement in programming efficacy is not uncommon. Just that propositional loan is worth an awful lot of money if you think how many programmers are in the world. No question. You mentioned eighth power. I just want to check is there an emerging eighth power you wish you maybe would have included or may be added in the future that's like oh maybe this is on the edge or it's like nope we got the seven.

45:14You know it's a great question. I'm always looking for it because if you find it it probably means it's so obscure that it will also be a great investment opportunity. We're looking all the time, but so far know, so far I'm pretty satisfied that seven is an exhaustive set But never saying ever, you know, you know, that's an empirical Seven, not a theoretical seven. Yeah, if we start seeing you making incredible returns You've clearly found any power I'm gonna close one thread on the power that you mentioned that is often a miss a kind of a pitfall Which is around process power and basically execution a lot of people think So in a lot of decks, it's like, oh, we have the most amazing team.

45:54We move to the fastest, we're earliest. You mentioned how rarely is that actually a power actually being able to execute and create a process that is an actual barrier. You just talk a bit more about that to help people understand, okay, it's probably not our power. One of the great thinkers in strategy was this Harvard professor, Michael Porter, and he, and probably 40 years ago made the very controversial statement the operational excellence is not strategy. You got a lot of people of Harvard Business School faculty really mad at him because that's what their careers were and it sounds like he was dissing him.

46:30But the point he was making was when you get to kind of this end state, if you already have power, that things that drive operational excellence can be mimicked because you can hire a consulting firm with who has best practices and all the just the coming and get you up to snuff, you can hire people from your competitors who know how to do it better and that, and that's kind of true. But it's also true in the take -off phase in a business that we talked about before, when you're trying to attain competitive of position, operational excellence is everything. And so if you think of not strategy, not statically, endpoints like Professor Porter was, but if you look dynamically, how you get there, operational excellence is essential for a strategy.

47:28And so think of those things I mentioned before about Netflix, about their UI and recommendation editor and so on, our international rollout, all those things. there were in a battle to get more subscribers than other people. And those were critical for that, right? But in themselves, they're critical and obtaining competitive position, but in themselves, they're not sources of power, typically. Unless there's some very tight considerations here, are very demanding considerations for the endless. If they're really there have to be material, but they also have to be opaque or some way people can't easily imitate them either.

48:19They don't understand what's going on or it might be opaque. So for example, think of TSMC. So when they put up when they put up the latest fab, there's, uh, uh, and, and get that operational. Are there, are there a lot of steps in doing that? They kind of know how to do with their staff is training to do, but it's not documented necessarily. And not, and you can't imitate it. Yeah, then maybe, Maybe they have it. I don't know if they have process or not, but it takes that level of complexity. In my book, I use the example of Toyota and a car manufacturing is complex enough that you can have this opacity in terms of material steps, but it's not common.

49:24If you're day is on those issues and it should be because if you if you if you don't do it, a competitor can and they can end up better than you. And so you're always you're on a treadmill. And that's the way businesses that's fine. And if you'd stop running that treadmill, you get creamed. And so you got to do it. It's most of your day, but it's not power. And And there are those rare cases where it's so material and so inimitable that it can be power, but they're rare. I like the heuristic that if you haven't written it down or you can't describe it, that might be a sign that maybe process power is a power of yours.

50:12Yeah. Yeah. And there isn't a consulting firm that offers to bring you up to speed. Making more like Amazon as a service. Yes. Right. Kind of along these same lines, you talk about how the only three things they create value in a company are power, market size, and operational excellence. And I think hearing that will blow a lot of people's minds because they think there's so many things that contribute to the value of a company and you would all add down to these three things. What can you say about that insight? So I'd say they're right and I'm right. They're right because there are this incredible, I mean, businesses really hard, right?

50:58And there are just a multitude of things you have to pay attention for. I'm right because all those things fall into those three categories. So it's an exhaustive set. And it's just, it simply comes out of the math, you know, you know, it's, it, it, so, so we're both right. Let's say. Final question. and the intent of a lot of your work is to empower founders. I'm curious if you've noticed any broad economic trends or shifts that you think will make life easier or harder for founders in the coming years. Personally, I am very, very concerned about the debt trajectory of the United States and many countries around the world, but I'll pick on the United States, but it's a trend going on everywhere.

51:50We're on a trajectory for this extremely high indebtedness. And so if you think about the last 30 years, right, there's been a crisis about once every 10 years. So there's the dot -com bust, there's the financial crisis, there was COVID. You know, I have nothing makes me think that the frequency will be a lot less. I don't know what it is. Who knows? These are all uncertain events. But imagine if we got to one of those and we had no dry powder. And dry powder for us is the ability to heavily deficit spend, take on debt. But unfortunately, our government did that in both the financial crisis and in COVID.

52:38And because that people had jobs, my own view about the financial crisis is that if we hadn't done that, plus having Ben Bernike as the head of the Fed, we would have gone into another great depression. It was that ugly. So this current debt trajectory, you don't know how long it will take exactly what it Eventually that will mean we will not have drive out or people will not respect the credit worthiness of this country and so so I'm that worries me a lot and and and it utterly will affect You know the idea of company founding because if you get into a crisis like that It just you know the capital markets lock up and it gets very difficult to do anything and To really stretch my credibility here Oh, pine on just how hard a problem this is to solve.

53:34The reason this is so difficult for this country to solve in other countries is that it is right at the crux of the delicate dance between capitalism and democracy. So if you think about the problem, of course, that's driving all this entitlements, there's sort of discretionary spending, you know, the, you know, certain recovery programs and stuff. But those can go away. The thing, the underlying trend that people just can't get their arms around us entitlements and anybody who looks at the numbers can see that every economist knows that. But that's not an easy fix. And the reason it's not an easy fix is there are two opposing views of kind of what's going on and there's no way to resolve those two views.

54:29One is that capitalism is repatious and results in more and more inequality and the government has to do something about it and the other is that the government is on a path that that is creaking socialism that will undermine our freedom and economic sufficiency. And the poster child for the rapacious capitalism, one is, I don't know if you've seen the recent analysis of inequality in the United States, it just came out much more robust analysis than it said that basically inequality in the last 60 years in the United States is unchanged. But that's post transfer post tax inequality, which basically says the amount of taxing and transfer going on was about right.

55:18So it says that the amount we're spending is about right from that perspective. That compensates for the other inequities and we should be spending that much. So we should tax more. And the other poster child for the other point of view of the dangers of government is the steadily increasing without interruption percentage of the economy that is government and at two levels, 75 years ago, people would have thought absolutely impossible. So there are these two views about what's going on. One is that we're compensating for the normal inequities of capitalism and the other is that we're headed down a path to socialism and ruin.

56:04and that leads to a deadlock, which is you don't tax anymore and you don't cut spending, and that leads to deficits. So anyway, a long rant, sorry, but that trend is extremely politically difficult to deal with and extremely threatening and that concerns me immensely. not to leave listeners with a very sad state of affairs. Sorry, no, I think this is important. I think it's important people think about this and know these things. Is there anything that gives you hope? Is there anything that gets you excited about either for founders or anyone in general just to kind of leave folks with maybe on a happy?

56:50Yeah, I mean, I am an optimist really in a way. And I do, there's a famous Austrian and an eventually American economist pending Joseph Schumpeter who wrote this wonderful book theory of economic development way back when, over 100 years ago, where he took the unusual view of saying that the vitality and economy depended on entrepreneurs. And I ascribe to that. I think that creativity and action are the ways society and people advance. And I think the U .S. and a pre -society has huge advantages in that. And I think that I'm feel very lucky to be in a place. I mean, so it's a valley, but it would be in a place in a country where that is vital and active.

57:55And that's, and I think that's that's sort of ground zero for me. And so, so I think you see that alive and well, I think, and there are people that are very enthusiastic about that and as I am. Beautiful way to close that or chat. Is there anything else you want to share before we get to our very exciting lightning round. Is there anything you want to leave listeners with or any last tidbit of advice? I sort of alluded to it before, but just remember action is the first principle of business. You do stuff. And my book is very oriented towards that. The idea was not to tell you what to do, but to give you sort of guideposts, follow your on that journey.

58:41And so I just to people that are enthused about it, I encourage you to do stuff, you know, that's where it all starts. And I can think about it and maybe help a little bit, but it's mostly doing stuff. I love that point so much. It was something I was going to touch on, but I didn't get to. There's so many people that just sit around and theorize about a strategy of their business, especially in their early stage. that cheers our grand master plan here's an amazing strategy, or just read about startup ideas and don't actually try it. I love this final note, just try it, just do it. Don't just sit there and enjoy it.

59:18Yeah, just do it. And life is full of surprises. You'll end up in a place you didn't expect. Amazing. Speaking of ending up in a place you didn't expect, it's time for a very exciting lightning round. Are you ready? Oh, sure. I'll do my best here. I'm not very good on lightning, but... First question, what are two or three books that you recommended most to other people? One book that is extremely wonky, and I can only take it in very small doses, but is magnificent, as one called the road reality by Roger Penrose, who is this brilliant mathematician. and it will be very daunting for anybody unless you're a deep math person, but his brilliant scenario edition just shine through in this thing, and it's just, it's an amazing book.

1:00:13I would say there's another book, boy, I wish I could remember the name, maybe you can get the name of the author of book, called Gene, by this geneticist, and I think it's a Harvard medical school professor that's about the history of genetics. And he is an absolutely luminous writer. I mean, it puts me to shame. I'm embarrassed when I read it, because I think how pedestrian my writing is.

1:00:44He's incredibly knowledge about the history of genetics. And I think that's such an important topic. So those are two that I would recommend. I would fairly wonky, but I like them both. I love them. The author just looked him up said, Arthur Mukherji. Yes, just amazing. You just you read it and you'll go, how did he think of that phrasing? I mean, it's just amazing. Do a favorite recent movie or TV show you really enjoyed? I'm a huge movie fan and have been all my life. And I'm particularly keen on animated films. But the movie that I've recently seen that I liked particularly was American fiction.

1:01:27I thought that was it didn't make any of sort of the easy choices in a movie and as a result was just incredibly interesting and thoughtful I thought. Do you have a favorite product you recently discovered that you really love? In my office, just this last week, we actually put a Persian rug in our entry room. And this is what's called a Farahun Sirik rug. And it's 150 years old. And it had an effect on me that I didn't expect, which is it is a work of great. beauty. And it was before, it was all hand done before machines. You get all this wonderful variation of the actual icons in a rug and the different die colors.

1:02:25And I find that every morning when I walk in, I go, that's really beautiful. And it's a blifting. And it shows you the importance of, or the the value of the quality of art. I mean, it's just kind of blows my mind actually. So that's probably not the usual product of discussion that you get. Now I love that answer. Recently we've had some really unique choices. One is a very nice Mercedes and a Rivian and a Venevian. Recently we've got a lot of very nice things. Oh that's good. I'm a card guy too. So I didn't answer in the card. Oh man, I love that. We have a Rory Sutherland coming on the podcast soon.

1:03:09He's one of the leaders of Ogle V and he has a whole thing about how buying a home is like the best value of art to buy art. If you live in a home that makes you feel inspired and is beautiful. Yeah, I'm a big believer in that. I mean, I think that you know, it's sort of your place and how you connect to it has an important grounding effect. and then before I talked earlier about creativity and I think surrounding yourself with an environment that stimulates that is really important and so I couldn't agree with it more. Two more questions. You have a favorite life motto that you often think about come back to share friends or family.

1:03:58One is what Clint Eastwood advice to actors which is don't just do something stand there and so there are a lot of things that are long termish with kind of low signal to noise and you can be often just do a lot of stuff that you think makes a difference, but it really doesn't. And so that's one. The other one, which is somewhat not profound, I think, was one that I had a famous Sri Lankan journalist who was a mentor of mine and a very dear friend. And he had a favorite expression that I had here too all the time, which is everything is always about something else. Wow. Deep. And that's so true if you're dealing with this power stuff.

1:04:55When if you're really dig down, everything is always about something else. Speaking of power, final question. People that have a lot of power are leaders in the world. I'm curious. Do you have a favorite historical leader? So yeah, so I have some that I admire a great deal. I'm a tremendous fan of Winston Churchill's. You know, a quirky, a most leader, most really great people are quirky, you know. And he call up by their things you could say about him that, you know, you might have liked that so much. But he was a genius and at great fortitude, human sense, he understood things long before other people.

1:05:35I've given him high marks. Some of the great artists I admire enormously. I'm just I'm reading a book right now and sort of the last 20 years of Michelangelo, which is a wonderful book actually. And which is a very interesting period because in his first 70 years he sort of finished, you know, he finished up all that he wasn't going to do sculpture anymore. He just finished the last judgment, which was the wall of the cysteine chapel. And I think the last major fresco he did. And a lot of his friends at that time he was exiled from Florence and living at Rome. And the end of this Roman community.

1:06:21And a lot of his close friends had recently died or had difficulty. So he's at this inflection point in this life at 70, which in those days was very old. And yet he went on to do some of the most remarkable architecture in the history of world. And so that, you know, you've got to admire that, you know, I mean, just, I'm sort of doing that, which is that rare second act. So, but I think for world leaders, Winston Churchill is very high. I'm a fan of Teddy Roosevelt, I must say, too, in this country. I love that. Hamilton, you are wonderful. I feel like we have helped a lot of people up level their ability to think about strategy and modes and power.

1:07:07Thank you so much for being here. Two final questions. Working folks find more online if they want to dig in further. And how can listeners be useful to you? Yeah, so as I say, I'm an idea person and I'm about trying to empower company founders and so, so, uh, uh, the only thing I can say is, um, you know, read the book, spread the ideas, start your own company. Those are the things that would make me happy. Amazing. Hamilton, thank you so much for being here. Good. My pleasure to many. Bye, everyone. Thank you so much for listening. If you found this valuable, you can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app.

1:07:52Also, please consider giving us a rating or a leaving review as that really helps other listeners find the podcast. You can find all past episodes or learn more about the show at Lenny's Podcasts .com. See you in the next episode!