Business strategy with Hamilton Helmer (author of 7 Powers)

0:00 Buffett famously said in business. I look for economic castles protected by unbreachable modes. Power requires a benefit and a barrier. So he's taking care of the benefit part by saying a castle. You have to have a pretty good understanding of why it's a castle and not a shack. So in a lot of decks, it's like oh we have the most amazing team, we move the fastest. You mentioned how rarely is that actually a power you're on a treadmill and if you stop running that treadmill you get creep but it's not power. The things that drive operational excellence can be mimicked. Let's actually talk about achieving these powers. There's a thing called power progression. There are times when certain types of power are available. The path to power is where the rubber meets the road. Today my guest is Hamilton Helmer. Hamilton is a legend in the world of strategy.

0:49 He's the author of Seven Powers, which outlines a framework for identifying and developing sustainable competitive advantage. It is widely considered to be the best book on strategy. And people like Patrick Halson, Peter Thiel. Read Hastings. Daniel Eck.

1:04 And so many more leaders credit the book and Hamilton's teachings for helping them build durable lasting companies. In our conversation, Hamilton shares what sources of power startups can start developing early. Which types of power companies often think they have, but they don't, how power relates to strategy and motes. When to start thinking about power as a startup, and also what individual product managers and non leaders can do about these insights about power. Also how Hamilton sees AI impacting barriers to entry. and the sources of power. He also gives a preview of his new book that he is working on currently.

1:39 And so much more. With that, I bring you Hamilton Helmer after a short word from our sponsors. And if you enjoy this podcast, don't forget to subscribe and follow it in your favorite podcasting app or YouTube. It's the best way to avoid missing future episodes and it helps the podcast tremendously. This episode is brought to you by Work OS. If you're building a SaaS app, at some point your customers will start asking for enterprise features like SAML authentication and skim provisioning. That's where WorkOS comes in. Making it fast and painless to add enterprise features to your app.

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3:56 Get$1,000 off Vanta when you go to vanta.com slash Lemmy. That's V A N T A dot com slash Lenny. Hamilton Helmer, thank you so much for being here. Welcome to the podcast. Hi, Lenny. A pleasure to be here.

4:13 It's even more my pleasure. I wanna start by talking about when power becomes important. When do you recommend founders start thinking about power in terms of Pre product market fit, post product market fit. Is it worth spending time thinking about power early?

4:31 Obviously it's good to think about a little bit, but how much and how seriously should founders be thinking about it before they found something that people actually want? One of the things that has really surprised me in the last five years has been that my understanding of the answer to that question has changed. And

4:52 Before I thought it was Yeah. Do product market fit. And then and then and then you do strategy and and if you try and put strategy before product market fit.

5:04 Yeah. Uh it doesn't there y is not much you can do with it. That's wrong. Uh actually one of the I mentioned before, one of the great pleasures for me in my work is being able to talk to company founders. Um and

5:20 And One of the things that has surprised me. is that Conversations with them

5:28 Even at an early stage. About strategic matters. Have a Uh richness and relevance to me that was unexpected.

5:40 Yeah, and and Founders are practical people, right? I mean they they're the it's very hard to do what they're doing and they have to be extremely Focused and choose what what's worthwhile spending time on. And so in observing their reactions

5:57 And that dialogue I I could see that There was something going on. That was meaningful to them. And the uh this second book we're working on will tease out.

6:09 why that's so more, but But but the answer to your question is when should you thinking about I was thinking about this. Uh the answer is always. And that's an that's an

6:22 Th that's an odd answer. Right. And so even before you have product market fit. It's worth thinking about strategy. Now it's not strategy in the sense of sort of this fully articulated

6:37 strategic planning. We're gonna do this. These are gonna be the competitors. This is gonna how we're gonna answer them. This is how we'll price n not like that at all. At the earlier stage you can imagine you have wildly more degrees of freedom. And the questions are of the business propositions that you're thinking of. in trying to get to product market fit.

7:01 What are the underlying characteristics that might tilt them towards the availability of power or not. And and uh um and those actually uh are meaningful conversations. Uh and certainly by no means certain Right. You're you're tilting probabilities. You're not you're not

7:21 creating uh a determinative things. And then later on once you've already a s have product market fit. Then there's then you have to understand your source of power if you're if to understand what competitive position is.

7:37 because then you have to establish that And then later on in a a more stable phase, when you're in a stability phase of business You have to know which your what your uh source of power is if you have one.

7:50 Because you have to know how to defend it. And then also it is also the foundational knowledge that you need for if there's another step. because another thing that's quite surprising about iconic businesses is They often have

8:06 a a second act or third act or fourth act. I mean think of AWS or Intel going into CPUs or Apple going into iPhones, uh all all not the origin of business, right? And that's and that's actually common. Not unusual. And that's starting the process all over again. Awesome. You mentioned this word strategy.

8:27 I wanna set a little foundation here. How does strategy relate to power when people are thinking about these two concepts? And then do you have just like a A nice definition of what strategy is. Everyone's always just like, What the heck do you mean when you're talking about the strategy? You know, as I said, I'm I'm sort of a concept person, right? And so when you develop concepts

8:47 you have to be uh very highly constrained by their usefulness. Yeah, I'm a great fan of the great mathematician, John von Neumann, and and he uh he had a view which really irritated a lot of mathematicians, which is that If um

9:04 Yeah. Mathematics wasn't guided. by what was useful. It would become I think I think the word he used was aesthetic to aesthetic. Um and

9:15 And this And so any concept developments like that, it needs to be guided by usefulness. And so in in dealing with strategy The question is What domain of things do you want to include in that conversation?

9:31 Because the term is ubiquitous in business. I mean uh do a Google search sometime. I've done one recently on Google Scholar for the word strategy. And you'll get Yeah. A million. Uh I'm not not exaggerating, a million yes.

9:46 Right. Ten. And so Strategy for some people might mean everything that gets to the pile, uh gets to the top of a pile in terms of what you have to do that year.

9:58 Everything is and that's a perfectly legitimate Uh definition. You know, uh But But

10:05 What what I have found is that there is a very important Narrowly. that makes it much more useful. So that's coming back to what I was saying about downline momentum, makes it much more useful to the business. So uh my view is that you you want to focus

10:24 Uh uh the uh it's very useful for a business to focus on the fundamental determinants of val of business value. And it and that's a that's an arbitrary choice. It could be something else, but but I can tell you from decades of business experience that that narrowing is very useful. And then so so once you make that

10:46 that on once you reach that understanding it tells you some important Things. If you understand what drives business value, I mean if you do the math of it, right, it's NPV of cash flow, right? Expected cash flow. And and what that That

11:02 Tells you is that Strategy is a long time concept. you you're looking far out in the future. So think of Pearl Harbor. Pearl Harbor for the Japanese was this enormous tactical con success. They just destroyed the US

11:20 uh uh ability, uh naval ability in in the uh Pacific Ocean. and the worst possible strategic move. because it completely solved Franklin Delano Roosevelt's problem of how he could get the US citizens On board too. Uh uh attacking Hill or

11:40 the strategy of it was was US's industrial might would eventually win the war. and and uh population. And the difference there is time constant. Tactical, sure. strategy law.

11:53 And so So if you focus on value, uh that that narrows what you think about and allows you to get rather concise and offer up advice. to founders about what they need to pay attention to. So then how specifically is power informing strategies like the way you think about it focus on

12:14 your power and that will inform your strategy. Earlier I talked about these Economic structures. that provide Durability.

12:24 of return uh in in terms of uh refuge from withering arbitrage of everybody who wants to eat your lunch, right? And so That's what power is. So you have to understand

12:38 What is an economics? I'm I'm I'm getting you're asking me questions to get pretty deep into theory here. I hope you don't this is too conceptual, but you have to say You have to understand how competition takes place and say, What is it? That creates uh some kind of refuge. And what it is, is there's something in what you do.

12:59 Yeah. uh gives you either a cost or price advantage. Over Uh others. So let's say you're lower cost.

13:09 And That's that's that's the benefit. And the barrier side is That there's something that is durable. About that.

13:19 That makes it over time. That you can't Um uh that competitors can't take away from you. So benefit and a barrier We call it the to be or not to be test, right?

13:29 And if you have that You can think of that immediately translating into value. Because that will give you good margins out into the foreseeable future. Uh, which is what you're after. Um and so

13:44 I I don't know if that that's uh that's we're getting into the weeds here, but that's that's what it's about. And so power is those structures. I let me give you a quick example. So one I use in the book. So So uh Netflix with scale economies, right? Yeah.

13:59 more subscribers, uh, the cost of their content is a very large fixed cost. about fifty percent of their cost structure every year. uh they can take that fixed cost and spread it over more subscribers, so their cost per subscriber is less. So versus somebody with fewer subscribers. So if they were Yeah.

14:21 If uh Um if they face the same prices. as their uh for uh subscriptions as their competitors They will be more profitable. So that that's that and and that's a scale economy.

14:34 And that that's an example of a type of power Um and uh A a common one, I'd say. But these things are hard to achieve, right? 'Cause there's kinda the holy grail.

14:47 Let's actually talk about achieving these powers. Essentially The argument here is your power informs everything you do. Because this is the thing that'll Allow you to stay.

14:57 Durable and competitive and last. There's seven powers. We're not gonna talk about all of them. If you wanna go understand each of them, go read the book. Yeah, exactly. So what I'm wondering is okay, so say you're looking at this list of seven powers. And you're a specific type of startup. Do you have kind of a heuristic that

15:17 Tells you here's most likely the power and set a subset that will most likely be of be an option for you. Like B to B SaaS companies. Is there like a smaller subset? Like probably one of these has to be one of your options versus B to C. A great question, Lenny. Um

15:35 Uh and because I think the The path the power is Yeah. Yeah, is where the rubber meets the road. And it's and it's very complicated uh and nuanced, but but I I'll give you a few

15:47 a few thoughts along it. And and frankly that So our next book, The Second Invention, that's what it's about. It's not about the power. The entire reading. So

15:58 Uh in in in a book there's a thing called power progression, which which says there are it it tells over the cycle of a business there are times when certain types of power are available. Um and and and oh the Uh Converse of that is times when they're not available. And so There's some that only are really available in the

16:21 And the when you reach a stability phase of a business pretty far out there And so if you're s if you're starting a company, take those off the table. So th those two are branding and process power. So So so I often

16:36 Uh you know I find that there's a confusion about this because brand recognition for a startup may be incredibly important. But you can get brand recognition by buying and adding the Super Bowl. That's not power. That you paid for it. And so so take take branding and and uh

16:53 um and process power off and process power is really sort of operational excellence on steroids kind of um and usually is imitable. So it's you so It's it's usually not. So take those off the table. And then a climate resource uh type of power, which is you have something That is of value. that if you transferred it to somebody else, it would be a value to them.

17:17 But you own the rights. So the the barrier is law. For example. Um or or or lack of knowledge. from others. So

17:28 And and there are classes of businesses that are like that. So prescription pharmaceuticals, right? If you have If you if you're the first person to come up with Viagra, that's worth a lot of money. If you took that license and gave it to somebody else, it'd be worth a lot of money to them. But that's a different class and it's usually not the types of things that um

17:49 that I'm I'm dealing with. And it's and it and it's and it's kind of obvious to everybody. So the key challenge there is can you invent a pharmaceutical that uh that's that's effective for a for a large market. And so So um So you can take those three off the table and that then leaves counter positioning

18:09 scale economies, uh uh switching costs and network economies. And the important thing to keep about in mind there is that they're sequenced. So Almost every startup. That you

18:22 want to deal with starts with uh counter positioning. Because remember what Mar product market fit. is primarily

18:32 is uh substitution. It's you are coming up. With A way to satisfy A more or less existing need.

18:43 In a novel way that creates more value. Now there's sometimes you Mm. c you tap into entirely new needs, but it's not so often.

18:53 I mean You know Amazon was up against brick and mortar stores, you know, uh Google was uh was was up against uh um Yahoo. Um Uh you know, um and so on. Uh yeah, uh

19:08 And and so you're usually substituting and that's and that substitution Uh so you so your competition at that point is functional competition. And and if you don't have counter positioning at that point Your uh pretty high risk.

19:26 From an incumbent who already has the capabilities necessary to do that. They just have to extend their product or You know, do this or that. And and so So but counter positioning is the refuge from that. And then you go into the other three types of

19:43 Power uh scale economies. And uh account and uh network economies. And those depend on on your your scale relative to Um the this is

19:54 pretty cursory, uh, you know, but but that but that's what I'd say. Uh focus on those four. And and I would I would recommend that you think pretty hard about whether you think there's UF counter positioning to start. Awesome. I actually want to double down on that thread, but just to summarize. I have the list here. Basically you're saying if you're an early stage startup.

20:15 The for it to really That are actually potential. powers for you, at least early on or Counter positioning, which your point is you could just start with that. That's essentially positioning and business model design. Which happens at the beginning. And then

20:29 You can start to think about network economy, scale economy, switching costs. has powers. Right. And and and I uh you've done the right thing by not having me go through and define each of those, but but we'll But your listeners will we'll need to sort of go back to my book and see what those things are to get the we're we're going through the shorthand as we should, but But uh but all of what we said won't be completely obvious to them.

20:54 Yeah, I think a a simple Google search I find just gives you a very simple definition of all these passes. Yeah, that's right. There there's some people have done some really good summaries of the stuff. Or or chat GPT. Even better in a lot of cases. Cat GPG. If they if they get it right, sometimes I find they're they're they hallucinate the hallucinate an eighth power. You mentioned how some companies think they have a certain power Or they or it's common To think you have a certain power.

21:21 If you look at every startup deck, there's always like Here's our moat. Here's the way we're gonna have barriers to entry. I'm guessing in almost every case they're delusional about the power that they actually have and the power they think they'll have. Do you

21:33 also find that to be true that often Like wrong about how much Barrier they've actually created. And is there a power you often find most?

21:41 Wrong and mistaken. Yeah, so I I I agree with your observation, but I don't want to be unkind. So I mean there there are two things to keep in mind here in terms of Making people feel better about. Yeah. That uh

21:56 That incorrect slide in the deck. One is that Founders have to be optimistic, right? I I think it's an important quality that they they maybe understate the risk a little bit. No, but but they're so committed to I'm going to do this thing that they they they go through that and that may give them an advantage over a large corporation trying to do the same thing. The other is that

22:19 Um Despite the name Seven Powers, which makes it sound like oh you can gotta sort this out. Actually understanding whether or not There is a type of power in place is hard.

22:34 Um Uh I mean if Uh I I did it with my colleagues here at Strategy Capital and we're looking at a well known company, it might take us weeks. To answer that question. for a single company.

22:47 Uh, and it it comes down to the hard part is industry economics is what really are the economic relationships and it's very hard. So so with with those caveats that sort of uh Uh give them some courtesy. Uh I'll say some some of the obvious ones are I mentioned before people sometimes think they have branding power, which uh but but another one that I think I've s heard you mention is is uh People often think that they get uh scale economies through data.

23:17 And I'd say that that's Uh possible But it's rare. And and the reason it's rare is not because there aren't scale economies in data, but rather that the

23:30 range. of uh scale that the existing competitors have Or Of large enough. to be able to put them in in

23:42 in uh shouting distance of each other so that the the differences in their cost per unit is not that great. The curve flattens, in other words. Which is typical of any'cause the most common scale economy is you've got a big fixed cost. And then you and you prororate that and uh and as you get more and more scale The uh

24:02 a percentage cost advantage of a fixed cost. the vanish like that goes down. And not that often. So that's that's a that's a pretty f frequent one that we see. w we sort of laugh whenever we say we hear somebody say they have a flagwheel.

24:18 Which kind of gives you the the idea of network economies. There are often flywheels, the ones that really are material Rare

24:29 The key thing here is materiality, not whether the five wheels, but whether it's the effect is strong enough to really tilt returns. Mm. I was actually gonna ask about that one,'cause it's software. And social consumer products.

24:43 Network effects is always the pitch once we get big enough. We create this huge barrier. You mentioned just now You often find that's not actually true. It's rarely something that'll Yeah, become a bearer. Is there anything else you find with

24:55 Network. And I know uh your power is called network economies, not network effect. I guess just to be clear the Are these kind of the same thing in your mind? With different words or I mean I I I I mean I I have called it a type of power. So I so so for me

25:11 It's only those things which clear the significance barrier. uh uh hurdle rather. on the their a large material, right? And so uh uh there are there are lots of things that I would say have network effects, but not network economies. Oh, interesting. Wait, can you speak to that? So there is a difference between these terms, network economies. Yeah, so for me the difference is materiality.

25:32 You know, is that That uh whether it's a Whether the uh The v the value benefit. is large enough.

25:41 to engender a a price delta significant enough to to give you materially different margins into the future. Basically like does that network effect have an actual impact on your business and your ability to price. Yeah, it's not an impact. It's a material impact. So it it could have if it's a penny to your bottom line, that's one thing. If it's if it's a billion dollars or something else.

26:05 Wow, that's actually really interesting. Is there an example of a company that comes to mind like they had network effects? But not network economies as a power. Oh, I I think you could turn almost anywhere and get some some modest network effects and you know, any any platform business would probably likely have some modest network effects.

26:26 uh you you asked me or in the material you sent me about Uber and Lyft, I'd say that, you know, they probably have Mm uh network effects involved, but but uh not network economies. Wow, that's interesting. And the reason you're saying they don't have network economies is because they're still so competitive. They're still s have to spend so much money to stay ahead.

26:49 And so then. Yeah, the Um right, the the advantage that they get it's not Uh uh not material. Right.

26:59 Wow, that's so interesting. Kind of along those lines. It's so interesting. To see Uber and Lyft. These days.

27:06 In theory, they both had Some sort of strong network effect. I was just looking at the Uh five percent

27:14 the market cap of Uber. Is there a lesson from just what it is that allowed? Uber two. Just win and kind of run away with the market, essentially. I'm not entirely sure. I'll I'll take a guess, but I I'll cons but take it as sort of a

27:32 Uninformed, guess I haven't really studied it. Carefully, um Uh I think that over time they're they're uh if I had to guess, I'd say they're probably modest scale economies.

27:47 in the business and over time Uber has just uh very successfully played a war of attrition. And that's both been in how they run their business they they they made one sort of initial misstep.

28:02 which is they misdefined their business. They said it was international transportation and it's not that business is extremely Geographically specific. You know, if you're if you have a a

28:16 you know, a a a great position in the Bay Area doesn't help you in London, right? And so So their foray's into China and everything really didn't make but but I but they pulled back on that. focus down on on understand uh understanding their source of power, which was a geographically specific scale economy.

28:36 And then they've done interesting things like Uber Eats where they've tried to you know, utilize The platform that they have to uh get other opportunities for the the

28:48 one side of their platform, their drivers. And so So I I I I you know if if I had to if I had to guess, I'd say it was a well played War of attrition. with modest scale economies.

29:02 And is that attrition? Coming from a source of power, or is that just like a broader more stupid? Yeah, it it it it only works because they d there are modest scale economies. If there weren't any, then if they if they did all this stuff, they'd still have equivalency. Got it. Let me go in a slightly different direction. Uh, we've talked about power, we've talked about strategy. There's also there's this word moat.

29:23 That comes up a lot. Everyone's always trying to build a moat. In your mind is a moat equivalent. To a power, is there a difference when people talk about these two? Power requires a benefit and a barrier. Right. You have to you have to have something that you do Yeah.

29:37 That uh the that gives you a better outcome than your competitors, lower cost or higher price. And then something that Uh makes it impossible for somebody else to mimic that.

29:49 So mode is the second So it's It's not Uh it's not synonymous with power because you could have a you could have a motor around a very undesirable piece of property and uh wouldn't get you far. So so but Uh and and but I think it is pretty synonymous with barrier.

30:11 I I you know, I think uh Warren Buffett sort of uh Charlie Munger get who I admire enormously. I think uh get credit for sort of popularizing those concepts and and and I think the way they think about it is is is good. I'd say that That um Seven powers is

30:29 Uh probably more systematic. incomprehensive in saying that. I don't think There's this wonderful I I don't know if you read any of the Microsoft antitrust literature that came out of the the their lawsuit, but

30:44 But There was a uh communication between Bill Gates and and Warren Buffett were Warren Bum was saying why he couldn't invest in Microservice. He just didn't understand it, right? And so that meant he didn't

30:56 you know, the idea of network economies and what the moat was there he didn't understand. So I I think uh but uh but I d but but I think the m uh concept of a moat is a good one. The idea that you have something that gives you a refuge from from uh uh competing forces. In terms of Warren Buffett, I found the quote about motes. Warren Buffett famously said in business I look very Economic castles protected by unbreachable motes.

31:22 Right. And so he's He's so he's taking care of the benefit part by saying a castle. Right. He's got a cover. And but but 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. Mm.

31:39 Give me I'll give you a Netflix example. So So a company I I admire a lot, you know, and I I think if some of the things that they had to do to develop their business were so important for their business. Uh

31:54 That aren't uh that don't guarantee a castle. So So for example UI development. There the the uh they spent an enormous amount of resources on trying to get just the Very best UI, I mean a zillion A B tests, all kinds of things.

32:11 their recommendation engine. Everybody's kinda knows the story about how that that went. Um you know, their interface with the content world and all this. So those things Uh those things are important. There are things they have to spend a lot of time and resources on. But they can largely be mimicked.

32:31 So when when Netflix in her earlier phase was fighting Blockbuster when blockbuster finally threw in the towel and said, Well we we darn well better do a mail or to D V D business. If you look at the Blockbuster site Their UI site. You couldn't tell it different from Netflix. They just copied it.

32:50 And so all that thoughtfulness about which things you put first and how you structure it and all that to make this suitable. Was mimicable. Uh 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. 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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33:56 which has led to higher product usage, better retention, and more customer upsells. Visit use paragon dot com slash Lenny To see how Paragon can help you go to market faster with integrations today, let'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 listening to this

34:16 are just like individual contributor product managers on teams building new product or Iterating on products they already have. What do you suggest they Do with this knowledge of there exists these ways to build benefits and barriers.

34:31 I'm working on say 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 there are a few.

34:43 And it's a little bit different, you know, I I I I'm not a great fan of the strategically driven organization because it it that idea uh Because

34:58 Yeah. Fuzes over how this knowledge is useful at different stages in the business. And so for somebody in that position

35:08 say a product manager in an existing successful business. So uh it's important in terms of just understanding their business to know what their source of power is because they And and that can inform them about Yeah.

35:25 what it is that they're working for and 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 attentions'cause they're the ones that really have the knowledge of what the heck's going on. There's another aspect I mentioned before this idea of transforming.

35:47 of starting up entirely new things. And usually Uh not I wouldn't say usually I'd say Uh It's not uncommon for ideas about that to bubble up.

35:59 From uh Down below. You know, and so So that's that's that's another source.

36:08 If you're so let's separate a business into three phases, uh you know, origination, takeoff, and stability. So the answers I've given are more in the stability phase. In the uh 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.

36:33 What are you facing? What you're facing is remember that Underneath all of this is uh change in technology. That's what that's what made the product market fit. possible in the first place. But that doesn't just stop.

36:49 that ki if you're if you're in a technology wave, often there are all kinds of offshoots, both for you and the compliments to your business and everything else going on at the same time. And And uh to to win at that stability phase, which is really a market share win. You ha you have to be aware of those and understand, okay, we have to incorporate this new new feature, or maybe

37:13 Now things have gotten to the point where this new market segment is our product is attractive for whereas before it wasn't. This is meat and potato stuff for somebody at that level. And and it may well be the decisive element. in terms of whether you win that market share battle with the other contenders. Um and so you're

37:34 you're you have a very, very important role at that point. And so So I'd say I'd say the first thing to do it with your question is to make sure you think about the different phases of this and then and then ask what those responsibilities are. What about for people that are just trying to get

37:54 Better at Being strategic. Thinking strategically. Something every product leader is always encouraged to do. Become a better strategic thinker. Can build his muscle of strategy.

38:04 What do you often advise to people to just get better at the stuff? Obviously, read your book. Re read the book and then have conversations with your colleagues about the topic.'Cause it Is she sort of Yeah, internalize. What that means and how

38:20 You know, is 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 it those conversations tend to to all allow you to sort of get a better grip on things. I mean Uh

38:34 in in the case of Netflix uh Reed actually had me come in and train the top hundred people in Netflix and strategy. We actually r I actually ran classes. the company. But that's unusual, I'd say. Um and I didn't and I didn't have the book yet. And so So I think the book uh gets people, you know, pretty far down that path already.

38:55 And you don't do that anymore, I imagine, if someone wanted to do that today, not an option. I sadly don't have time. I I do I mean, I do you know, fireside chats at company meetings and that kind of thing, but not a full full blown course. And I'm not teaching at Stanford anymore either. Um and so So uh I I I don't I I'm I enjoyed that um immensely.

39:19 wonderful people to work with, but But uh but I 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.

39:31 I'm curious how you think Yeah, is gonna change your seven powers framework. And you think defensibility goes down in general. Will certain forms of power become more important or harder to achieve? How do you think about Yeah. Yeah, it's a great question. I mean, we're all in this phase of wondering

39:48 exactly how generative AI is gonna play out. Um My own view uh currently, I I don't see any change in seventh hours from it. um in terms of uh an eighth power or something but But the issues that it brings up like scale economies, uh I mean, think of scale economies, you know, if if you have to If you have a fixed cost of

40:10 Oh. of uh trying to develop a model of a billion dollars or something. You know, or You know or uh network effects, you know, will Well

40:20 uh AI models developed so that they learn uh in a way that for one user's interaction helps another user's interaction. That would be a p a powerful network on me or if it Warns If you think of um

40:35 Uh. You know, if if it learns about you and and becomes a better psychiatrist or something. then that's that's a switching cost, right? So all these things are relevant to which business models will work in And I find that useful.

40:51 But I think in general the way I think about it is it's a It's sort of a standard form of of potentially very powerful technology. that is being introduced into the the business world and just asking

41:09 How that plays out. I Yeah, I I currently tend to think of that the sort of three w three types of plays. There's the There is the

41:19 company that's the technology play itself. So if you think of microprocessors, it would be Intel. if you there's the companies that wouldn't exist without the technology. So for Micro for m for uh s semiconductors, it would be Microsoft. And then the companies that That uh

41:38 utilized the technology, but they have existed before and after. So for semiconductors of the automobiles, they use a ton of chips, but there were still cars before after. And so So Uh I'm I'm kind of of the view Very much uncertain at this point that that generative AI will

41:59 its biggest impact will be that tertiary class. It will be used in a lot of things. That um Uh that existed before and exist after, but are made better by it.

42:11 semiconductors and automobiles. And so it reminds me sort of if you think of really big technology ships like like this, it reminds me sort of of electricity. When electricity came, you could completely reconfigure a factory floor. Right. You no longer h uh had to have Yeah, you could have the power source.

42:30 Yeah. Essentially at the operating unit of an operator. But But that took a lot of redesign and corporation investment learning. Uh

42:43 compliments, all kinds of stuff. Um I I I I tend to think this will be more like that. There will be some Pure cases people will

42:54 Wanna You have them write their term paper with Jet GPT or something. But But But if you think of

43:02 uh businesses um It's hard for me to think of a single functional area in a business That with redesign Can

43:12 Benefit. So Yeah. accounting H R R and D

43:19 You know, all Have Us uses of this, but requires Incorporation, which is always Yeah.

43:28 Um. troublesome. Um And so so uh that that's kind of my view. Uh and and so I but But there may be uh there certainly will be businesses that couldn't exist without it. And there's some that are coming up, but

43:42 But uh And and some of those are the in fact the businesses that empower the tertiary need, they're the ones that bring bring in. But if you go back this will date me, but if you go back into uh business history back in I guess it was the nineties, there's this thing called business process reengineering. You know, the idea that you would You can

44:03 uh computer sensibility into business processes, redesign them and get these monstrous cost savings. And and And it was a gigantic consulting opportunity, right, for people, uh, whole companies got develop based on that. Um And uh

44:20 It it sort of feels kind of more like that to me. But but but uh but it's it's it's very interesting. It I I could be wrong, but it feels different than crypto. You know, it it feels like there's more of a a real uh ultimate use case. I mean if if if it really is true what they say

44:40 That it's uh A fifty percent. improvement in programming. efficacy is not uncommon. Just that proposition alone.

44:51 uh is worth an awful lot of money if you think of how many programmers there are in the world. No question. You mentioned Uh eighth power. I just want to check.

45:01 Is there an emerging A 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 these seven. Uh you know, I it's a great question, L'habiting for it. 'Cause if you find it it probably means it's so obscure there'll also be a great investment opportunity.

45:23 We're looking all the time. But so far no. So far I'm pretty satisfied that Seven is an exhausted set. But never say never, you know, you know. That's an empirical. Uh seven, not not a theoretical seven. Yeah, if we start seeing you making incredible returns, you've clearly found infinity power.

45:43 I wanna close one thread on the power that you mentioned that is often a mis a kind of a pitfall, uh, which is around uh 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, we move 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 a actual barrier. Just talk a bit more about that to help people understand okay, it's probably not Our power.

46:09 One of the the great thinkers in strategy was this Harvard Professor Michael Porter, and he And probably forty years ago made the very controversial statement that operational excellence is not strategy. He got a lot of people of Harvard business school faculty really mad at him because that's what their careers were about. And it sounded sounded like he was just seeing. But

46:31 the point he was making was when you get to kind of this end state, if you already have power Um Yeah. That the things that drive operational excellence can be mimicked because you can hire a consulting firm with who has best practices knowledges to come in and get you up to snuff.

46:50 You can hire people from your competitors who know how to do it better and that And that And and that's that's kind of true. But it's also true in In the

47:02 This takeoff phase in a business. when the we talked about before, when you're trying to attain competitive position Operational excellence is everything. And so so in if you think of not strategy not statically endpoints like uh Professor Porter was, but if you look at dynamically how you get there.

47:24 Operational excellence is essential. for strategy. Um, and so Think of those things I mentioned before about Netflix about their UI and recommendation agent and so on, or international roll out, all those things.

47:39 I they were in a battle to get subsc uh more subscribers than other people. Um and And those were critical for that, right? But In themselves

47:51 uh they're critical in attaining competitive position but in themselves are not sources of power typically. Unless Uh, there's some very uh tight considerations here are very demanding considerations for the NS. Uh if they're really

48:09 uh they're they're they have to be material, uh but they also have to be op opaque or some way People can't easily imitate them either. The you don't understand what's going on. Or the it might be opaque. So so for example, think of TSM C. So when they put up

48:29 uh when they put up the latest Fab. There's Uh uh and and get that operational.

48:38 Are there Are there a lot of steps in doing that? Th they kind of know how to do with their staff is trained to do, but it's not documented.

48:51 And not and You can't imitate it. Yeah, then maybe maybe they have it. I don't know if they have processed power or not. But it's but it takes that level of complexity. I'm in my book I use the example of Toyota in a car manufacturing is complex enough. that you can have this opacity

49:10 uh in terms of of material steps, but it's but it's not common. And so so you're so n so if you're in a stability phase business, you're you're You're stuck with this this funny thing which is Most of your day is on those issues. And it should be.

49:28 Because if you if you If you don't do it. Uh a competitor can and they can end up better than you. And so you're always you're on a you're on a You're on a treadmill. And that's the way business is. That's fine.

49:43 And and if you stop running that treadmill, you get creamed. And uh So you gotta do it. It's most of your day. But it's not power.

49:53 And and the and there are those rare cases where it's so material and so inimitable. that it can be power, but but they're rare. I like the uh heuristic that if you Haven't written it down. Or you can't describe it, that might be a sign that maybe

50:09 Process power is a is a power of yours. Yeah. Yeah, you know, I um And there isn't a consulting firm that offers to To bring you up to speed and make you more like Amazon as a service.

50:23 Right. Kind of along these same lines. You talk about how The only three things that create value. In a company are Power. Market size and operational excellence.

50:34 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 whittle it down to these three things. What can you say about it?

50:45 About that insight. So I'd say they're right and I'm right. They're right because There are this incredible I mean, business is really hard, right? And 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.

51:05 So it's an exhaustive set. And it's just it's it simply comes out of the math, you know. Um Yeah, it's Yeah, uh it it so so we're both right. Um

51:16 Final question. 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. four founders in the coming years. Personally.

51:33 I am Very, very concerned. about the uh debt trajectory. of the United States, uh and many countries around the world, but I'll pick on the United States, but it's a trend going on everywhere.

51:50 We're on a trajectory for this. extremely high indebtedness, and so If you think about The last thirty years, right? There's been a crisis about once every ten years. So there's the dot com bust.

52:05 There's the financial crisis, there was Covid. You know, I nothing makes me think that the frequency will be a lot less. I don't know what it who knows. These are all uncertain events, but But Imagine

52:21 If we got to one of those And we had no dry powder. And dry powder for us is the ability Uh So uh

52:30 heavily deficit spend take on debt. Unfortunately our government did That in both the financial crisis and in Covid and And because that people had jobs of I my own view about the

52:42 financial crisis is that Uh if we hadn't done that plus having Ben Bernike as as as the head of the the Fed we would have gone into another Great Depression. It was that ugly. So Uh

52:55 This current debt trajectory. You don't know how long it will take exactly when but eventually that will mean we will not have dry powder. People will not respect the creditworthiness of this country. And So

53:09 So I'm uh that worries me a lot. And And uh 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 uh to really stretch my credibility here, I'll I'll opine on just how hard a problem this is to solve.

53:34 The reason this is so difficult for this country to solve in other countries is is that it is right at the crux. of the um delicate dance between capitalism and democracy. So

53:48 If you think about these uh uh the uh the problem, of course, that's driving all this is entitlements. Um there's there's 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

54:05 People just can't get their arms around his entitlements. And And uh and anybody who looks at the the numbers can see that. Every economist knows that. Um and But that's a that's not an easy fix. And the reason it's not an easy fix is there are two

54:21 opposing views of of kinda what's going on. And there's no way to resolve those two views. One is That um

54:33 Yeah. Capitalism is rapacious and re 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 is uh creeping socialism that will undermine our freedom and economic sufficiency. And And the the poster child for the

54:52 the uh rapacious capitalism one is the I don't know if you've seen the recent analysis of inequality in the United States just came out much more robust analysis than has said that basically inequality in the last sixty years in the United States is unchanged. But that's post transfer, post tax inequality, which basically says The amount of

55:14 taxing and transferring going on. So it says the the amount we're spending is about right from that perspective. compensates for the other ine inequities. Um, and we should be spending that much. So we should tax more. And the and the other the

55:32 the poster child for the other point of view of the uh Yeah, dangers of government is the Steadily increasing uh without an eruption percentage of the economy that is government. And at at two levels that

55:47 Seventy five years ago 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. And and that

56:06 leads to a deadlock. Which is you don't tax any more and you don't cut spending. And that leads to deficits. And so so anyway A long, long uh uh rant, sorry, but But

56:18 But that That trend is extremely politically difficult to deal with. and and extremely threatening. And uh and that concerns me.

56:30 Uh men's flu. Not to leave listeners with uh Very sad state of affairs. No, 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?

56:44 About Either for founders or anyone in general, just to kind of leave the folks with maybe on a on a happy Yeah, I mean I I I am an optimist, really, in a way, you know, and and I I I I do There there is a of uh

56:59 famous uh Austrian and eventually American economist by named Joseph Schumpeter. Co Right. this wonderful book, Theory of Economic Development, way back when, over a hundred years ago.

57:12 Where he took the unusual view of saying that the the vitality of an economy depended on entrepreneurs. And uh Yeah, I ascribe to that. I I think that That uh creativity

57:27 And action. are the ways society and people advance. And and I'm and I think the the US is uh and uh and a free society has has huge advantages in in that and And I think that uh I'm

57:45 I uh I'm feel very lucky to be in a place I mean Silicon Valley, but uh but to be in a place in a country where where that is vital and active. And that's and I think that's that's uh that's sort of ground zero for me. And so so I I think

58:03 uh you see that alive and well, I think, and and they're They're People that are Very uh enthusiastic about that and as I am.

58:12 Beautiful way. To close out our 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 I sort of alluded to it before, but just remember Action is the first principle of business.

58:29 You do stuff. And and my books is very oriented towards that. The idea was not to tell you what to do, but to give you sort of guideposts while you're On that journey. And so I I just to people h uh that are enthused about it, I

58:46 I encourage you To do stuff. You know, that's that's where it all starts. Um and And th and I can think about it and maybe help help a little bit, but it's mostly doing stuff.

58:58 I love that point so much. It was something I was gonna touch on but I didn't There's so many people that just sit around and theorize about a strategy of their business, especially in early stage. Here's our grandmaster plan, here's an amazing strategy. Or just read about startup ideas and don't actually

59:13 Try it. I love this. final note of just like just try it. Just do it. Don't just sit there and and life life is full of surprises. You'll end up in a place you didn't expect. Amazing. Speaking of

59:27 Ending up in a place you didn't expect. It's time for our very exciting lightning round. Are you ready? Oh, uh sure. I I I'll 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 but

59:43 But Is Extremely wonky. But But

59:47 And I know I can only take it in very small doses, but is magnificent as one called The Road to Reality by Roger Penrose. Who's this brilliant mathematician. And Yeah, yeah.

1:00:00 It will be very daunting for anybody unless you're a deep math person, but But his uh brilliant scenario edition just shine through in this thing and it's just it's an amazing book. Um I would say uh there's another book boy, I wish I could remember the

1:00:18 the name of the author, uh called Jean. By this um geneticist and I think Harvard Medical School professor that's That's about the history of genetics. Um And

1:00:33 He is an absolutely luminous writer. I mean I it it puts me to shame. I I'm embarrassed when I read it because I think how pedestrian my writing is. He he's uh he he uh and and incredibly knowledge about the history of genetics, and I think that's such an important topic that So those are two that I would I would recommend. Highly fairly fairly wonky, but But I like them both. I love them. Uh the author I just looked him up said Hartha. Mukhair G

1:01:01 Yes. Uh just uh uh amazing. You you just you read it and you go How did he think of that phrasing? I mean it's just he's amazing. Do you have a favorite recent movie or TV show you really enjoyed? I I'm a huge movie fan. Um and have been all my life. Uh and

1:01:19 I'm particularly keen on uh animated films. But the movie that I've recently seen that I liked Particularly it was American fiction. But that would

1:01:29 It it uh didn't make any of sort of the easy choices in a movie and 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?

1:01:43 In my office just this last week, we actually put A Uh Persian rug. in our entry room.

1:01:54 And Uh this is what's called a Farahan Saruk rug. And it's uh a hundred and fifty years old. And uh Yeah.

1:02:05 Had an effect on me that I didn't expect. Which is It is It is Uh a work of great beauty.

1:02:14 And it was before the those all hand on before machines, you get all this wonderful variation of the actual icons in the rug and the different dye colors. And And I find that every morning when I walk in

1:02:29 I go That's really beautiful. And it's uplifting. And it It shows you the

1:02:37 importance of or the value of so the quality of art. I mean it's just it just uh kind of uh Kinda blows my mind actually. So that's probably not the usual product. it discussion that you get, but No, I love that answer. Recently we've had some really unique choices. One is a a very nice Mercedes.

1:02:55 uh an a Rivian and a and a minivan recently. We've got a lot of very uh Very nice thing. Oh man, I love that. I am we have uh Rory Sutherland coming on the podcast soon. He's one of the leaders of Ogilvy and he has a whole thing about how buying a home is like the best

1:03:15 Value of art. To buy art if you live in a home that makes you feel inspired and And it's beautiful. Yeah, I I'm a big believer in that. You know, I mean I I think that You know.

1:03:25 Yeah sort of your your place than And how you connect to it has an important grounding effect in the before I talked earlier about Creativity.

1:03:37 And I think Surrounding yourself. W in an environment that stimulates that. is um

1:03:46 Yeah, uh is really important. Um, and so I I couldn't agree with him more. Two more questions. Do you have a favorite life motto that you often think about come back to share with friends or family. One is uh what Clint Eastwood uh

1:04:01 Advice to actors. uh which is don't just do something stand there. And and uh So There there are a lot of things that are

1:04:13 long term is with Uh How low signal to noise. And and you can he often just do a lot of stuff that

1:04:23 think makes a difference, but it really doesn't. And so that that's That's that's one The other one, which is uh somewhat more profound, I think, was one that I I had a a uh a famous um Sri Lankan journalist was a mentor of mine and very dear friend.

1:04:41 And he had a favorite expression that that I adhere to 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. When if you really dig down, everything is always about something else. Speaking of power, final question. People that have a lot of power are

1:05:02 leaders in the world. I'm curious Do you have a favorite historical leader? So yeah, so I have some that I'm I admire a great deal. I'm a a tremendous fan of Winston Churchill's. you know, a a quirky a most leader most Really great people are quirky, you know.

1:05:19 And he and he qualified there are things you could say about him that You know, you might not have liked that so much, but But he was a j a genius and uh at great fortitude. human sense.

1:05:32 He understood things long before other people, but I I'd give'em high marks, um Some of the great artists I admire enormously. I'm just I'm reading a book right now on sort of the last twenty years of Michelangelo.

1:05:47 Which so wonderful book actually. Um And which is a very interesting period because In his first seventy years he sort of finished you know he Finished up.

1:05:58 All the He he wasn't going to do sculpture anymore. He just finished the the last judgment, which was the wall of the Sistine Chapel, and that's I think the last major fresco he did. And m a lot of his friends in the at that time he was exiled from Florence and living at Rome and

1:06:18 And uh And yeah, it does. Roman community and a lot of his close friends had had recently died or had difficulty, so he's at this. inflection point in this life. uh at seventy, which in those days was very old.

1:06:32 And yet he went on to do some of the most remarkable Architecture and the history of the world. And so that But yeah, you

1:06:41 You've got to admire that. You know, I mean just I started doing that, uh which that rare second act. Um So but but I think for world leaders Winston Churchill is very high. I'm I I'm a

1:06:55 fan of Teddy Roosevelt, I must say, too, in this country. Uh. So 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 motes and power. Thank you so much for being here. Two final questions. Where can folks?

1:07:11 Find more online if they want to dig in further. And how can listeners be useful to you? Yeah, so I as I say, I'm I'm I'm an idea person and I'm about trying to Empower

1:07:23 company founders and so So Uh Uh uh only thing I can say is um, you know Read the book, spread the ideas, start your start your own company.

1:07:35 Those are the things that would make me happy. Amazing. Hamilton, thank you so much for being here. My pleasure, Lenny. 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.

1:07:52 Also, please consider giving us a rating or leaving a 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 podcast dot com. See you in the next episode.

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