Hi, everyone. This is “Monday Morning 8 a.m. #1: Technology Companies, Pandemics, Growth, Valuation,” a newsletter that goes out—as you guessed it—every Monday. You can listen to the audio version of this Monday Morning 8 a.m. episode by searching “Strategy Skills” in any podcast app!
In this newsletter, we have one goal: to help you distill the insights from the noise out there. So here are the big themes we’re noticing in the news this week and the deep insights you should be extracting from those themes.
Tech Anti-Trust Action
The first theme is an incredible amount of action taking place against the tech sector—you could call it the “tech-antitrust-action theme.” Here are three articles that capture some of the mood out there:
The last article from Financial Times says that if a company develops some kind of platform that has a huge influence on the world and the tech space, there should be a backdoor, whereby a friendly government with good intentions can enter the platform software and—for benevolent reasons—see what’s happening in the background.
Here are some insights we should be thinking about:
We have to think about the precedent we are setting. A lot of the action against tech companies is based on the work of Lina Khan. She wrote a very good piece in the Yale Law Review. Historically, antitrust action was based on whether prices were rising—due to mergers or consolidation in the sector. And if consolidation led to a rise in prices, then the government should step in and break up a conglomerate.
What Lina Khan argued—and I agree with her to some extent—is that pricing no longer matters if something is given away for free. She says that many tech companies—Google search, for example—offer a free service. If something is free, therefore, the price charged to consumers cannot be the determinant of whether or not anti-trust action is necessary. Instead, she argues that the determinant should be whether or not there is a negative side effect, such as the accumulation and usage of personal data from consumers without their permission. I want you to understand the implication of what Lina Khan is saying, and you need to think about whether it’s right or wrong.
Let’s apply this to a non-tech sector. Let’s assume a food company is buying up other food companies. As this company moves from 20% share of the market, to 30%, to 80% share of the market, the price of the goods it’s selling falls. So before this company started its consolidation spree in the sector, the price of cured meat was $5 per pound. But after the company took an 80% share of the market, the price of cured meat dropped to $1 per pound. Now, here’s the argument that is being made against the tech sector, which we’ll apply to the food company: “Hey, hold on a second, let’s still break up this food company, not because its excess market share is leading to an increase in prices, but because there’s some other bad thing it’s doing to consumers, like selling unhealthy products.”
Are we going to go after other sectors because they’ve lowered prices during their increase in market share wave and they’ve done something else that we have decided is bad for consumers? Why have we not pursued other companies in other sectors who have lowered prices during an M&A wave, but have done something else that we think is bad for consumers? So where’s the line? What’s the precedent here? And that’s what I want you to think about.
Another big theme we’re reading about is pandemics—but I think the focus is too much on COVID. I’m not saying COVID is not important, or this virus should not be dealt with. But there are other pandemics-related problems that we need to also think about.
The Wall Street Journal did another good piece about the global divide as the fast-moving Asian economies like Korea, Vietnam, Singapore, China, Japan, have mostly brought the virus under control and how they are now consolidating on that lead to close the gap with the West.
It’s an interesting piece for a number of reasons. When I started as a consultant, before I became partner, when I would talk about risk with any of the strategy partners, they would always ask me, Why are you talking about risk? Risk is such an easy area. But this is the way I think about it and how I built my career on risk strategies:
Companies are always interested in return and risk. You can’t talk about return without considering the risk in that return. Growth, profits, revenue, market share capture, return on invested capital, share price accumulation, total shareholder return—that’s the return side, but you can’t have a conversation about returns without understanding risk.
Now, the interesting thing here is that we’re seeing a lot of companies are more open to talking about risk. They’re not just interested in talking about pandemics or COVID. They’re interested in talking about risk in general. And risk is such an immature area of strategy, that even today, if you talk about risk with a seasoned consultant, they usually invariably focus on the risk of implementation, which is like the kindergarten discussion on risk, and they ignore everything else about risk.
The insight here is that now that companies have been tuned to think about risk, if you want to have a serious discussion with the CEO, or management of any company, you should be talking about the risk of anything, whether it’s COVID or not.
Pandemics / COVID is a global risk, but there are risks that are specific to a company maybe in Australia, Botswana, Brazil, Chile, Argentina, the United States, Russia, whatever the case may be. The issue here is that you need to figure out how to analyze that risk and how to measure that risk.
Now, if you are a FIRMSconsulting Insider, who has access to our knowledge management system, we have several things that can help you:
If you want to see how to analyze pandemics, and how to build a business case around tracking pandemics, treating employees, and understanding the return you would extract by making that investment in treating employees, we have a full editable study where you can see from start to finish, slide by slide, what was done.
We have several proposals where you can see how we go about helping a company understand how risk is going to impact their cash flows, credit ratings, borrowing cost, their share price, how they can prioritize risk—we have several proposals related to that.
At the macro level, if you work for a government, naturally, revenues are falling. This means that the amount of money you aim to generate for a certain government agency is going to be less than what you typically had. We have several proposals, for example an infrastructure fund for roads, where we show you how you go about helping these government agencies understand the impact of the shortfall.
For example, for a long time, people wanted to own the movies and music they had. There was a time when people were so proud of showing you their DVD and CD collections. There was a time people would love to show you the mp3 files they downloaded. There was a time when people were so proud of the fact that they owned homes in multiple locations. Some people are still proud of that, but they’re a minority. And one of the reasons they are proud of owning is because there’s still value appreciation there. So now you have Spotify, whereby you don’t own anything, you just stream it. You end your subscription, you lose everything. Now you don’t own your kitchen, you simply lease it. Consider the long-term shift. The question becomes: if you can get the maximum value you want to create, not by owning something, but by leasing it, why wouldn’t you do that?
So if you were seeing all of these articles, you’ve got to ask yourself: What is next? What is the next product? What is the next service that’s going to move to a business model where ownership is not the most valuable thing for consumers, but being able to have access toit? And who’s going to get there first? That’s what you have to think about. Will your business model be upended?
Life Goes On
The fourth thing we’re seeing is a rise in M&A.
There was initially a drop in M&A activity, and now we’re seeing a massive rise. Financial Times has an article about a merger in the oil sector, which has seen terrible pricing recently. These dirty fossil fuels—coal, oil—are not going anywhere any time soon. Maybe big companies are withdrawing, but there’s going to be a lot of money to be made in coal for the next few decades until coal disappears.
But the point is: capitalism has not ended with the COVID lockdowns. Capitalism did not end during the great financial recession of 2008. Capitalism did not end during the Asian financial crisis in the 90s nor during the tech crisis in 2000-2001. So if capitalism does not end, are you taking a position in life—whether for your company or personally—and saying, “You know what, nothing’s happening. So I’m not going to do anything. I’m just going to wait it out to see what everyone else does.” Everyone else is moving on. They are adjusting. They may stand up and talk about how much they care about consumers and that their consumers come first. But the reality is, they’re moving on, in the sense that they’re building new products, developing new services, and acquiring companies to develop skills that they couldn’t build from the bottom up. The leaders are not waiting.
You have to think about how your business or you, personally, can make the most of this. Look at the precedent: 2008, 2001, 1997. What do you do in a crisis? You certainly don’t do nothing. Ask yourself, “If I make this investment, what’s the business case?” Look at some of our books, especially The Strategy Journal and Succeeding as a Management Consultant. They list out, step by step, what you need to do to act. But more importantly, to convince your peers that you need to act.
Now if you look at the series we have in which we help a client build a luxury brand business, you can see that with COVID, while it really hurt us initially, it was a little bit of a gift because it forced us to develop a business model in which we’ve dramatically minimized the amount of working capital we need to have. Our margins have actually gone up, and our revenues will go up. So COVID has hurt us, but we’ve used it to think about what’s happening and become better. We did not let the crisis go to waste. We did not wait to see what would happen.
One-on-One Coaching Sessions with Michael
There are five rules I have for clients when they do the one-on-one coaching with us. One of them is what I call the hedge fund rule. The hedge fund rule is this: Nobody is going to tell you the implication of something for your business or for your life. You have to pay attention and figure it out.
Let’s assume there are heavy rains in Thailand. There are blaring headlines across The Wall Street Journal, Financial Times, New York Times, Washington Post, and Nikkei Asia about the devastating floods. Now the average person is going to say, “That’s sad.” A smart person is going to say, “Hold on a second, what are the drivers in my business of value? What are my cost drivers? What are my revenue drivers?”
We know that Thailand is famous for certain things. It is the anchor of the automotive industry and the supply chain industry in Southeast Asia. If you’ve got flooding, you’re going to disrupt the automotive industry in Southeast Asia and other parts of the world to where Thailand exports. So if you know there’s flooding in Thailand, and it’s disrupting the supply chain for automotive parts, you know, that is a leading indicator—meaning that it’s happening before the main disruption down the value chain—that there’s going to be a disruption to the supply chain of automotive industry in Southeast Asia. Now, if you live in the United States, and your company supplies parts to a company in Germany, that supplies parts to a company in Japan, that ultimately ships parts to Thailand to assemble cars, you know that a few days or a few weeks down the line, there is going to be a ripple effect into your drivers of value. If you can see this before anyone else you can act on it. You should and you must.
I call this the hedge fund rule. It is what many hedge funds do. Whenever I’m coaching clients and get them to read what’s happening in the world, they often ask me, “What do I do with this? I can’t see what to do.” I tell my clients that they have to think about how some hedge funds work. They look for signals in the market.The first thing you have to do is think about how what’s happening in the news is going to affect you. It’s not going to be obvious. And you’re not going to be good at this until you know what are the drivers in your industry, and think about how a global event is likely going to be impacting you.
Educational Sci-Fi Novel on Productivity Strategy: Mavis
We’ve released a new educational novel called Mavis. Mavis reads as a dystopian sci-fi thriller about a productivity paradox. But, ultimately, it is a novel about productivity strategy.
If you want to understand productivity, you should read Mavis, which is now available on Amazon. We also released The Strategy Journal, which guides readers, step-by-step, to understand the problem, develop a structure, develop hypotheses, design the tests for the hypotheses, track daily and weekly tasks, plan the message for your team and manager, manage the project, guide you through critical update meetings, calculate the benefits case to convince your colleagues and start the pilot implementation of your recommendations.
Both books are available on Amazon! If you end up reading Mavis, loving it, and supporting it with the review on Goodreads (and Amazon reviews are, of course, very much appreciated) by the end of October 2020, email a link to [email protected], and we will include you when we send out a gift to our most loyal readers, which is one-month access to the accompanying course. If you end up reading The Strategy Journal, loving it, and supporting it with the review on Goodreads (and Amazon reviews are, of course, very much appreciated) by the end of October 2020, email a link to [email protected] as well, and we will include you when we send out a gift to our most loyal readers, which is one-month access to a different accompanying course.
New Release: Advanced Knowledge Management System
And the other big update that’s coming up is we are launching an advanced full-knowledge management system, which is going to have editable PowerPoint documents, including editable proposals (which can be downloaded as PDF) available as an add-on service to selected FC Insiders. But it’s much more than that. As many of you know, the ability to be able to see a complete study, use it as a blueprint for the work you are doing is often a difference between not only whether you’re a successful consultant, but whether you’re successful in industry. Same with proposals.
It’s one thing to want to meet a client about strategy.
It’s another thing to know how to sell it and to see a blueprint.
A Leader Versus an Analyst
Finally, as a closing thought, make sure that you’re always thinking about whether you’re a leader versus an analyst. There’s a time to be the best analyst in the world, but the end game is not to be an analyst. Every member of FC community should have intention to be a leader, and a leader gets things done. They bank the benefit. They work through themes. So as you are thinking about this, ask yourself, “Am I a leader, or am I just an analyst? What is my endgame?”
So let’s see how this new Monday Morning 8 a.m. format goes. Every week we will look at 4 themes. What are the big stories and what are the big implications. Let us know if you like or dislike the style.
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Have a great week,
Kris & the rest of FIRMSconsulting team (Monday, 10/26 8:00 AM)
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