Chenyi Shi

I guess I'll just add on to the perspective of a student of the seven powers framework, not a creator of that.

So one thing that struck me as the most useful way to apply the power framework is really as a cognitive leverage.

So I think, Ben, you mentioned it doesn't really tell you what's the next thing you should build or what product is going to hit the market, but it kind of tells you what's the right strategy question to focus on.

I think the way I put it is, what is not important is as important as what's important.

Naturally, as founder and operators, you will spend 90%, 95% of time on operational excellence.

It's so important you have the right team, the right culture, the right execution.

But there's 5% of time that you may spend on real important strategy questions.

And those are what determines the eventual margin structure of the business, the competitiveness of the business.

And what power structure can tell you is what is that 5%?

Out of all the things you're thinking about, what really makes the real strategic importance that you spend all the time thinking about?

That's one way I think this will be the most useful, maybe for a lot of members in your audience.

The other comment I'd have is, now that I've had the chance to work on the theory myself, it's actually amazing how it's not done yet.

I've been in Hamilton's class seven, eight years ago at Stanford.

I've been working with him for the past couple of years.

I used to think, oh, it's all in the book.

It's just there.

There are seven of them and it's all described.

But then as we dig into it, things that we don't know come up.

We talked about platform last year and

We're going to talk about transforming now.

It's about sort of the dynamics part of power and maybe even extend into corporate strategy, not just business strategy.

So this kind of life within the theory is actually really exciting and fun to explore.

I'll kick this one to you, Hamilton.

Thanks a lot.

So I think actually in our prior email conversation, David, you had the question of how do we go about research something like this?

And typically we start with looking at what others have been talking about.

This is exactly where we come across a lot of common narratives of where do you find our next level of growth?

we've all heard about, you know, go listen to your customers.

There's an Amazon school of like customer obsession that's fairly popular.

People will go after TAM expansion, you know, expand geographically, go different segments or, you know, full or core competence, et cetera.

And as we look through this, I think one issue we found is

they don't seem to be conclusive about the chance of success of these transforming steps.

So in other words, you can't say if you do X, you are more likely to succeed, right?

Like for example, there's this whole school of thought around marketing myopia that says you should define your industry definition widely, right?

The reason why railroad industry goes into decline is not because people don't have demand for transportation, but because they can't think of themselves as a broad transportation company.

They should have moved themselves into cars and trucks and airplanes and even telephone, which are new forms of transportation.

And I think this is one of the best sellers of Harvard Business Review of all time, just speaks to the popularity of it.

So the question we will ask is, does companies that follow marketing myopia all tends to be successful?

You know, does that give us a way to predict success?

And we can kind of think of examples on either side, right?

Like Disney today is not just a theme park company or animation company.

They seem to be a broad entertainment company.

They're pretty good at coming up with the next form of entertainment that people will love and want to watch.

On the other side, Uber at one point was all in on mobility, right?

It was not just about cars.

You know, if you still remember the scooters.

Bikes.

And they were serious about flying cars at one point, right?

Helicopters.

Right.

But that didn't seem to end up that well, even if it ends up in the same mobility definition.

So what that means is we can't tell whether following a certain school of thought is definitely going to be leading to success, which means we don't have a theory behind it, right?

So that sort of stays our problem is can we say something that's a bit more definitive, you know, a bit more having the predictive power there, right?

And as we thought about it, the real reason why we have this issue is a lot of these popular narratives kind of tell you about economic value, but they don't tell you much about business value.

Instead, in other words, they tell you about value creation, but not value capture.

Instead, in other words, we're basically saying product market fit is not power.

Yeah, I think that's a good way to put it, which basically means all of the common narratives out there are really useful.

They're really useful as idea generators.

They tell you where to look for the next product market fit out there.

And we think the understanding of power is the missing link here.

We have all these ways to come up with options, but how do you assess which one of them is really the best idea?

And that's what we set out to give a better structure to.

I think particularly for earlier stage companies, the three most common power types that you would find are scale economies, network economies, and switching costs.

Well, it's actually often common that you'll have counter-positioning because that's how you tackle your incumbent in a space.

But there are a couple other power types that doesn't really come in until sort of the more mature phase of the business.

And that's laid out in the book, like process power or brand power.

You really need to develop them after years and years of experience, you know, honing in on the core business.

So for the benefit of the audience today, we thought it would be more useful to focus on the three types of power, scale, network, and switching cost, which is probably the most common that we'd find out there.

Yeah.

So regardless of what's the core power prospect, I'm calling it a prospect because power is a pretty hard bar to clear.

But even if you're still in the make for you and you think this is going to be the mechanism that protects you from competition in the long run, the first step is always to get a really clear understanding of what that core business power prospect looks like.

So back to your example of Uber.

If the core power prospect of Uber is actually scale economies, which says the technology framework of doing the matching automatically is so hard and requires so much cost to build, then international expansion would have been totally irrational, right?

Because you're just spreading that fixed cost over more geographies and you're getting a head start in every single place you have.

But the truth is, it's not.

The majority of cost of that business actually lies in acquiring and maintaining their customers, which means, if anything, the route you should really try to get to is network economies, if you have one.

And the scope of that network defines each market is actually heavily bounded geographically.

And so every new country, even new city you go into is a complete new business and you have to start from scratch.

So

That's just an example of getting a definitive answer or a confident answer about where core business power looks like gives you a very different place to look on where to transform or where to take it to the next step for your business.

So I think the jurists know out whether ride sharing and food delivery belongs to the same business.

Maybe they do.

So the interesting thing here is we can also think about Microsoft as a platform, right?

You operate an operating system where on the two sides, you have users and also you have applications.

Now, the interesting concept here is the users of Microsoft's platform has a really high cost of affiliation, right?

It's not just on the hardware side.

You buy a physical machine, but also it's typically an enterprise-wide adoption.

There's a procurement process attached to it.

There's the distribution channels that, you know, similar to how the Nintendo one worked.

And because of that, Microsoft's network scope basically extends to whatever demand my user side would have without incurring more cost on their end.

They don't have to do another procurement cycle maybe or do not have to buy another hardware for.

So that naturally extends to basically maybe all of productivity software.

And that's how you see Microsoft teams create at least a competitive hassle for Slack.

I think we all have experienced that Slack is a really, really good product, but good products don't always win.

Because when there is competitive advantage from an incumbent, in the case of Microsoft, they basically have a network that can extend into the product Slack is operating in.

They create issues, you know, competitively.

Yeah, I mean, ventures just help us produce theory.

Yeah.

There's one point I want to make.

There's a reason why it's sequenced that way, and it may be obvious, but still worth iterating, which is invention is risky.

If you have something underneath your existing power umbrella, and that's what Amazon did, they had this distribution logistics.

They started with...

We all know books and then CDs and then electronics, et cetera.

It's the natural extension that not just leverage, but also intensifies your existing power.

That's way less risky.

You know you start somewhere new, but with a headstart compared to anyone that's a competitor.

But the movement into Amazon Web Services is invention.

And I loved your guy's story on how there's the four different sources of starting point of Amazon.

People would love to think it's based on some existing competitive advantage of the business, but it's really not.

It's invention.

They figured out a new thing that the market wants.

But as successful as they are in AWS, they also flopped Fire Phone, if you still remember that.

They also lost billions and billions on Alexa.

There's really no track record of a business who can continuously come up with successful invention.

And that speaks to the riskiness of that, which is why it's only the point number three or number four on the list.

Because if you don't have to go there, don't.

But if you do have to go there, co-action is the most possible place for success.

Yeah, it actually occurs to me that there might be exactly tied to switching costs.

There might be another rationale for buying, which is building takes longer than buying and timing matters, particularly for companies with switching costs.

Now, the interesting about switching costs going back to the power itself is it's non-exclusive, right?

So your competitors, if they're functional equivalent, can also have switching costs.

Now, if you go down this logic line, it creates the possibility of companies having switching costs but no profits.

And the way it happens is if a competitor was able to build the same product, roughly the same product, and they fully realize this is the lifetime value of the customer, should I acquire them?

Then it's rational to invest up to all of those value in the acquisition phase, be it discounting, partner incentives, marketing campaigns, whatever it is.

It's rational to spend up to all of that lifetime value to try to win that customer.

And then what you end up with is companies with switching costs but no profits.

Oh, and I will add to that, that it's not a good to have.

If you understand power umbrella is bigger than what you currently offer and you ignore it, you actually are creating competitive openings for somebody else to take on.

Well, I'll throw something out.

It's tough because you tend to have survivorship bias.

You only remember those companies that made it.

Maybe another example is the credit card industry and how it evolved.

It started basically as branded charge cards for a particular retail store or a gas station, and then turned into Diners Club, which is a card for many restaurants.

And then very quickly, it turned into Universal Card.

It's a card for basically everything.

Yeah, Visa's 50% margin is astonishing.

I was thinking about this this morning, it's fun.

So I think it's both.

And the reason why it's both is because you can think of Nintendo as a platform that vertically integrated into the production side.

Basically, all the first-party content is a vertical integration, and that's why they would exhibit economic structure that you would typically find in producers, which is economies of scale.

But at the same time, the third-party transactions are a nature of network economies.

Now, some question we may have to analyze there is, is this platform really stable?

Which means, is there a really high cost of being attached to this platform?

Can you multi-home, et cetera?

We have to go into that.

Right, so maybe they're just the one.

So that's why you would observe economic structure of both scale economies and network economies.

Now there's a deeper question there, which I don't even have an answer to.

Is one of them the cause and the other the effect?

Or are both of them causes for power?

I'll give you an example of intertwined real life, which is we all know Amazon in retail has gigantic scale advantage in the infrastructure, right?

Just all the warehouse and distribution centers they've built.

But at the same time, you observe what you will call flywheels on the retail, right?

The more buyers, more sellers, and the loop goes on.

And this is what I call the mixing of reality between cause and effect.

Because without a really strong distribution infrastructure, which gives them the cost advantage and faster delivery and prime and all of those benefits, there really isn't anything that makes their marketplace sticky among either side.

So the so-called network effect you observe is actually an effect of the power in scale of the infrastructure underneath.

But you would just observe economic structure of both because platform just kind of mix them all together.

Yeah, it doesn't help when the theory is never done.

You know, like it's funny, I think David, you mentioned last time we talked about platforms, it doesn't feel completed.

Like the truth is it will never be completed and it's always in the work.

I think nowadays we got a lot clearer about it than a year ago, but it's always in the make.

We'll think about something else and it comes back to a platform like, oh, that's the missing piece.

And realize it's actually vertical integration.

We were confused about the whole skill for a very long time.

And now like, oh, that's what's missing.

And the communication strategy is always a difficult piece as well.

I bet the two of you spend a lot of time on each company that you do an episode on.

And it's things like that.

And whenever you want to do an example, you're like, is this really true?

Then you have to go dig it all back and be like, am I just misperceiving what this really is about?

Thank you.