A strategy expert vs. a CEO

I’m going to end today’s Strategy Insights by talking about a client and some of the challenges, successes and particularly one of the deep insights we developed for this client. This client is named Raka, and she’s of Indian origin. She has worked at a very big, elite consulting firm and rose up to associate principal. She’s now head of strategy at a large industrial concern in the Midwest. She’s a nice lady. She has kids. Her husband works in the tech sector, and because he works in the tech sector, they have to commute a lot because he’s based on the West Coast, but they seem to make it work.

Not being given any positions of authority to indicate she is in the running

She views herself as a strategist’s strategist. She is a pure strategy player. Her CEO is about to retire and name a successor, and she’s been positioning herself to run the company because she believes the company needs strong strategy and she’s the best person to do that.

She has been pursuing this for a few months, and during this time, she hasn’t been working with us. I am giving you a backstory now. Over time, she’s alienated many within the leadership team at her company. She’s not getting traction with her career, even though she’s been heading the strategy department for a long time. She hasn’t been given any positions of authority to indicate she’s in the running to replace the CEO. When you’re about to be moved into a senior leadership position, you’re moved into certain roles to signal to all employees that you’re rising to the top, so they need to respect you, but to also give you the exposure to have the authority to manage the company. She wasn’t given any of that.

Her career reached a point where she was working in her department, which isn’t very big but still sizable. She feels like she’s isolated. She doesn’t understand why nobody understands that she’s the best person to run strategy and a strategist should run the company, and she feels as if she’s slid back. She believes the company is giving her signals to stay in her lane, focus on strategy, and that’s as far as she’s going to go. It’s not a good place for her to be. When she joined the coaching program about a year after this had happened, she wanted to ask me what she could do to show them the value of strategy to the company and ways to become a better strategist.

The skills the next CEO needs

Through a series of conversations, I flipped the question around. I wanted to show her that she’s not the best strategist in the company. Second, I wanted to show her that she needs to think carefully about whether strategy is the skill the next CEO needs. And third, I wanted her to ask herself whether she is the best person to be CEO.

I gave her an example about Formula One racing. The example of Formula One racing goes like this. Mercedes Benz is dominating the Formula One. Now there is a guy called Hamilton. Not Linda Hamilton, she is fighting terminators. Not George Hamilton, he is getting a tan and Alexander Hamilton found Federal Reserve and he is dead. Oh yes, it’s Lewis Hamilton. Lewis Hamilton is the reigning Formula One world champion.

Imagine if I said to him, “Lewis, you’re winning Formula One, so you obviously know what you’re doing, but I’m a management consultant, so I’m going to help you develop a strategy to be better at Formula One.” I’m going to use the typical strategy approach that all readers would know if they’ve read The Strategy Journal and followed Insider programs. “The first thing I’m going to do is a top-down analysis. I’m going to interview everyone: you, competitors, past winners, and we’re going to find out different things you can do to win more races. Next, I’ll do case studies of past winners. Then I’m going to do a top-down financial analysis to find out where there are gaps. Where are we slow, where are the costs, where are the investments going?”

We will do focus interviews, benchmarks, case studies, and a top-down financial analysis. I’ll analyze all of the data I can get access to from all of the races. I look at data that even Lewis Hamilton’s team doesn’t have access to. Maybe Ferrari is nice to me, and they give me access to their data because they will find it useful if I share some of my findings with them. I then have a workshop with Lewis Hamilton and his team and point out things they haven’t seen before.

For example, maybe Ferrari is using a slightly different technique to change the wheels when the car comes into the pit stop, and they shave off 1/10 of a second because of it. Now, 1/10 of a second is a lot when it comes to racing. The other thing I realize is that the way one of the teams, may be the Red Bull Sauber team, jumps into their cars is a little bit different, which means they shave off 1/5 of a second. I also realize the Ferrari team starts their engines in a different way. Even though Lewis Hamilton is now winning, I come up with a list of things he and the Mercedes Formula One team can do differently to be faster based on the way they organize themselves and where they make the investments to be faster. I give Lewis Hamilton and his team this big presentation and say to him, “Lewis, you’re going to win” and he wins.

Now, can I say I’m a better driver than Lewis Hamilton? That would be absurd for me to say that because I analyzed it and came up with a better strategy, I’m a better driver than Lewis Hamilton. Of course, I’m not a better driver than him. I’ve never been in a Formula One sports car. But I’m the best advisor to Lewis Hamilton.

Distinguishing between being a strategy expert and being a CEO

This is the mistake Raka was making. She needs to distinguish between being a strategy advisor—which is what you are when you’re a consultant—and being a CEO. Being a CEO is like being the driver. It’s like being Lewis Hamilton. He needs to be able to manage those G forces when he’s turning around. When you’re cornering at 160 kilometers per hour, imagine the fatigue and stamina you have to deal with. It’s very different from reading data in a nice, air-conditioned office, versus being able to read all the signs, have someone talking to you through an earpiece, and being surrounded by cars that can flip over at any second and kill you. That’s a different way to drive. I can’t say I’m a driver, but did you notice I did everything a normal strategy consultant would do? But I am not a driver, I’m the advisor to the driver.

It’s the same thing when a strategy consultant presents a strategy to the CEO, but only the CEO really knows how to use that strategy because they’re implementing it in real time. Just like the driver was to take all this information, process it and adjust it in real time. You can’t say you’re a strategy expert unless you’re actually responsible for using the strategy. But you can say you’re an expert advisor. You’re the world’s best strategy advisor. You’re the world’s best strategy thinker, but you’re not the world’s best strategy practitioner. That’s the CEO.

You won’t know everything about strategy until you’re in a position to lead a company to implement it. Click To Tweet
I had to get Raka to understand that because she’s doing herself a phenomenal disservice by thinking that she knows everything about strategy. You won’t know everything about strategy until you’re in a position to lead a company to implement it. I didn’t want her to lose this chance to learn more because she’s very smart and talented. But by thinking this way and acting this way, she’s preventing herself from truly being a good strategist.

Does your company actually need a strategy expert in the CEO position?

The second thing I asked her to do was to think about this: Does your company actually need a strategist in the CEO position? Is this what they actually need? The answer is no. What they needed was someone to reinvigorate their R&D department. That’s where the company was failing. The board wanted to bring in someone who would get innovation humming again. The new CEO was expected to reinvigorate innovation. I told Raka, “This is what’s happening. You need to show the board and the management committee that you are that person. So, as a head of strategy, why are you looking at acquisitions when you know the biggest problem is innovation?”

Long story short, when the company was making bets in innovation, they were using the kind of VC model where they would take 20 bets and invest them all in things where the technology was uncertain. It wasn’t clear that the technology would work. I asked her to separate their funding to maybe 50/50 or 60/40. They could pick the number. Let’s assume its 50/50. Then 50% should go to technology that’s uncertain, and 50% should go into investments where the technology is proven but the production is uncertain. For example, in the early days of electric cars, it wasn’t clear that the batteries could work as planned. That was a technological uncertainty. Today, if you want to build an electric car, we know the batteries work. But the question is whether your team can build a factory to put the batteries together in an economical way. That’s a production uncertainty. We know the technology works, but we’re not clear whether we have the technology capability.

Be careful of what you think you’re an expert at

you must know what the company wants and position yourself to be that leader. At times, they want an M&A person to drive deals. At other times, they want a strategy expert. At other times, they want someone who can work with regulators. Click To Tweet

There are many insights here. First, be careful of what you think you’re an expert at. A lot of people are good at strategy, but in the same way I can’t tell Lewis Hamilton that I’m a better driver than him—even though I’m giving him the best strategy to win—you can’t tell the CEO you know more about strategy than they do because they are the CEO, and they’re the one who is driving that strategy.

Second, you must know what the company wants and position yourself to be that leader. At times, they want an M&A person to drive deals. At other times, they want a strategist. At other times, they want someone who can work with regulators. If you say, This is my skill, and I’m the best at this, and the company needs this, you’re following a very bad approach because you’re not asking what the company needs and wants. Finally, if you call yourself an expert, you automatically cut off any avenue for learning because you feel that because you’re an expert, it looks as if you don’t know what you’re doing if you ask for help, and you should never do that.

As always, I hope you enjoyed Monday morning at 8 a.m.

Other Articles

Understanding Negative Interest Rates

Chief Strategy Officer: Promotion or Demotion

The Power of Unconscious Signals in a Consulting Interview

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #27 (part 3). Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.

We use affiliate links whenever possible (if you purchase items listed above using our affiliate links, we will get a bonus).

Sanctions Are Like Punishing Your Spouse by Letting Them Date Other People

The next big theme is called, “Sanctions Are Like Punishing Your Spouse by Letting Them Date Other People.” That’s a funny sounding headline. What am I talking about? Imagine you had a spouse, and you don’t think they appreciate you for some reason, so you tell them, “For the next year, I’m going to move in with my family, and you can’t write to me, talk to me, message me, or touch my hand. We’re going to have no interaction. I’m going to go away for a year so you learn to appreciate me.”

What do you think will happen in that year? There’s a 95% chance that your spouse—who you applied a sanction to—is going to leave. They’re going to find someone else and build a bond with them. They may even develop such a close relationship that they realize that the relationship they have with you is not unique. It’s not the best relationship, and they leave you, or it damages your relationship forever.

The impact of sanctions from a business perspective

We don’t like to talk about politics, but we do want to talk about the impact of sanctions from a business perspective. When you apply a sanction to anything, from a business perspective, you make the choice to say you’re not going to provide a service to someone. You are not going to make what you have available to someone.

That only works if you live in a world where the service you offer is so unique that if you pull it away, the person will behave themselves because there’s no other way for them to get the service. But as I’ve mentioned in many other episodes, we live in a bipolar world where there are competing superpowers. Twenty years ago, if the leading nation pulled its services away, that sanction would hurt because there wasn’t another competing superpower to fill that vacuum.

Companies do this as well, but they don’t know they do it

I used this example at a country level to show that sanctions are when you pull a service away to modify behavior. Companies do this as well, but they don’t know they do it. Let’s assume a sanction is applied to Country A. Companies need to decide if they’re going to agree to the sanctions and work with Country A because it’s more lucrative, or are they going to honor the sanctions that were applied to Country A and work with the country that applied the sanctions to Country A.

I’ve done many advisory projects in the oil and gas sector with many leading companies, and it’s a difficult decision for them to make. Some of them make the right decision. Some of them make the wrong decision. Some of them pull out, knowing they’re making a bad business decision by leaving a country that has been sanctioned. They say they have no choice, but they’re making a choice to stick with the country applying the sanctions because they think the return is greater there. They always have a choice—even if they say they don’t.

That’s an explicit company sanction. I’m going to talk about explicit company sanctions and personal sanctions, which are more important and more insightful. We know that companies segment their markets. That’s a fact. It’s an old technique. When you segment a market, you choose to service that market. You choose to serve market A, market B, or market C. If you choose to not serve a market and that market comes to you and says, “Hey, hold on a second. Could you make these changes? It would be better for us.” As a business, you’re going to say, “We’re not going to make those changes because we’ve decided we don’t want to serve that market, and the changes we want to make are going to cost us money, and we’d rather invest that money in making changes to the segment we want to serve.”

That’s an example of an implicit sanction a company is applying to a market. They may not think of it as a sanction, but when you deliberately choose to make a service hard to use because you don’t want to serve a market, you’re sanctioning that market in a sense.

A very good example of this is hip hop and rock and roll music. I don’t know many young people who want to play drums or guitar. When the rock industry was in its heyday in the 70s, 80s and 90s, I don’t think any rock executive said, “You know what? We’re not interested in serving the primarily minority youth market.” I think they were agonizing over the question of, “How do we serve this market in a way that doesn’t alienate our core market?” They made the decision to segment their market. They picked their core market and invested in it. They applied an implicit sanction. Obviously, the rest is history because now hip hop rules the world. It is the most streamed genre in the world, and it’s going to get stronger.

You need to think about implicit and explicit sanctions you apply at a company level. Every time you choose not to serve a segment, and you do things that don't actually make it easy for that segment to engage your services, that's a sanction. Click To Tweet

Think about implicit and explicit sanctions you apply at a company level

You need to think about implicit and explicit sanctions you apply at a company level. Every time you choose not to serve a segment, and you do things that don’t actually make it easy for that segment to engage your services, that’s a sanction. At a personal level, when you choose not to engage someone, you apply an implicit sanction. You decide, “Okay, this person is unimportant and not valuable to me, so I’m going to pull away my availability, and I’m okay with it.” But you have to ask yourself, are you sanctioning the right person? By not making yourself available, you’re sanctioning your availability to that person. Oftentimes, I find we make the wrong decision there. Rather than having an open mind and speaking to as many people as possible, we have this view that this person is not important.

This is a good way to think about how you make yourself available and how a company makes resources available as a form of sanctions, implicit and explicit. Using those terms, it doesn’t sound nice when you call it a sanction, but it sounds nice when you say you “segmented a market.” Euphemisms sometimes hide bad strategy decisions.

Related articles you may enjoy:

Are coal, oil and gas are dead?

Can a boutique beat McKinsey, BCG or Bain

The economics of innovation and big bets

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #27 (part 2). Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.

We use affiliate links whenever possible (if you purchase items listed above using our affiliate links, we will get a bonus).

Three people that influence you the most

The first big theme is titled, “The Three Most Influential People in the World: Roula Khalaf, Gwen Robinson, and Matt Murray.” This is a very deep insight. We have a lot of coaching clients, including very senior coaching clients. I’ve asked our coaching clients, “Who is influential to you? Who do you look to for advice? Who is the person you try to emulate when making decisions?” They give me names like Elon Musk, Jeff Bezos, Jamie Dimon, presidents, Christine Lagarde. They’re all very important people. When our coaching clients are making a decision, these are the people they’re thinking about and have tried to emulate.

Conscious vs. subconscious

There are people who influence us that we’re consciously aware of, and there are people who we don’t know are influencing us. This is an important insight. You may know Elon Musk because he’s all over the news, and he’s doing amazing things—and I hope he continues to do amazing things—but that doesn’t mean he has the biggest influence on you. You have to know how you make decisions.

Let’s assume you read a lot of newspaper articles about how Germany is a bad country. Germany is not a bad country, but let’s assume that, for some reason, the press decided to write negative articles about it. You’ve never been to Germany. You read all these articles, and then someone asks you what you think about Germany. If everything you’ve seen about Germany is negative, you’ve been subconsciously wired to use a negative filter when you think about it.

The conscious is what I choose to think about. The subconscious is how I’ve been wired to think about something. This is a fact. If you have a group of friends who only say negative things about another person, and you’ve never met that person to judge them for yourself, you will have negative sentiments toward that person. When you see that person, you’re probably going to interact with them as if they’re negative, and then maybe you’ll be pleasantly surprised, realize they’re not so bad, and wonder why you acted negatively in the first place.

You are likely largely influenced by what you read in the news

This matters because if you read a lot of news, you are to a large degree influenced by what you read in the news. In my case, it’s the Financial Times, Nikkei Asia, and The Wall Street Journal. I only read business publications. Occasionally, I’ll read The New York Times, but it’s not entirely a business publication. Even though I can tell you the many books I’ve read, and the interactions I’ve had with authors—because I’ve also spoken to many authors and interviewed some of them for our podcasts—the most influential people in my life are three people: Roula Khalaf, who is the editor in chief of the Financial Times; Gwen Robinson, who used to work at the Financial Times but is now the editor in chief of Nikkei Asia; and Matt Murray, who is the editor in chief of The Wall Street Journal.

It’s interesting that Roula Khalaf and Gwen Robinson have both developed their thinking skills at the Financial Times and are now influencing me. They’re so influential because of the size and scope of these newspapers. Even when they cover a story that another newspaper is not covering, other publications will pick it up. Remember that a newspaper has finite resources and capabilities, so it can’t cover everything. When the editors say, We’re going to cover this story, this country, this sector, this industry. We’re going to assign these reporters, we’re going to pull back these reporters, they’re making a decision about what stories they want us to read. And if they tell us we shouldn’t read about a story because they’ve decided it’s not important, they’re making that decision for us.

Who is influencing you and how they’re influencing you

I read these publications because I trust the editorial teams. When making decisions, it’s important that you understand who is influencing you and how they’re influencing you. It’s not as if the influence is negative. I firmly believe all these editors in chief have good intentions and are doing the best they can, but they’re ultimately human and they’re going to err. That’s normal. I’m sure they have meetings where they talk about what they could do better. But it’s important that you as a business leader know who’s influencing you, and you make a conscious decision about who is influencing you.

For example, I could read any magazine or newspaper in the world, but I have made a choice that these are the three I want to be influenced by. If you have followed FIRMSconsulting publications over many years, you know that we have talked about The Wall Street Journal and The New York Times continuously. But over time, as we’ve taken a more international view of the world, we’ve brought the Financial Times onto that list. We brought in Nikkei Asia because Asia is so important, and we felt we need to read a publication that’s covering Asia solely by Asian writers from an Asian perspective. We made a conscious decision to allow the Nikkei Asiateam to be one of our most powerful advisors.

You need to think about who you’re going to allow to advise you. That’s probably the most important decision you can make as a leader.

Other Articles

Understanding Negative Interest Rates

Chief Strategy Officer: Promotion or Demotion

The Power of Unconscious Signals in a Consulting Interview

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #27. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.

We use affiliate links whenever possible (if you purchase items listed above using our affiliate links, we will get a bonus).

Coal, Oil and Gas Need the Best Minds

This week’s theme is called, “Coal, Oil and Gas Need the Best Minds.”

If you read any major news publication, you’re going to see two big trends. One is due to activist pressure, major banks like the Japanese company Mitsui—which is a trading house that owns banks—are withdrawing their funding of coal-fired plants and their funding of coal mines.

The other trend you’re seeing is big mining companies are divesting coal, oil and gas. Well, not so much oil, but they’re trying to push out quite a lot of coal. They’re bundling them up into separate companies, selling them to people and so on.

You’re one of the smartest people in the world, obviously. You’re someone who actually takes the time to listen to new insights. I want you to think through what we’re doing. And I want you to think about the opportunities that come up because of this and the problems we’re creating.

We know that coal is going to be phased out over time, but it will take a long time

Let’s assume that I’m a good parent, and I want my children to have a bright future in the world. I don’t want them to be coughing and suffering from all kinds of problems because a coal mine leeched heavy metals into the ground or a coal mine did not extract the gas and the noxious fumes from a smokestack that was coming out.

Who do you want managing something that you know is dangerous? We know that coal is going to be phased out over time, but it will take a long time. We know that if it’s not managed well, it’s going to cause tremendous damage to the environment. That’s a fact. Who do we want managing an oil field when there’s a spillage that could destroy the environment? Who do we want managing a gas field that if they don’t capture carbon correctly, it’s going to cause untold damage?

Do you want the world’s top mining companies who have the brightest minds, the best engineers, with boards of directors that have some of the most critical, well-governed processes in place? They’re listed in Western stock exchanges and have some of the highest reporting and disclosure requirements. They’re scrutinized by hedge funds, private equity firms and investment funds. They’re held to account by a fair and viable free press that reports on everything they do. They have the money to fund the best research to manage these facilities in the best way. They have diversified portfolios of commodities and assets, so that they can take some losses to do the right thing in managing coal. When they want to shut down a mine, or when they want to build a new mine, they know they have to do it right because of extreme pressure.

Who will do the right thing in managing coal?

The question is, do you want that team managing it?

Or do you want a team managing it that’s sitting in a country where they want to buy coal assets because for whatever reason, the governance requirements, the disclosure requirements, the investment community, the press and the consumer isn’t worried about whether the coal is as clean as it could be? They’re not worried about whether the mine is as well developed as it could be, whether everyone is as safe as they could be. If a new mine is developed, the environmental procedures are rushed through.

This country has so little reporting and disclosure requirements that even if the free press wants to report about what’s happening, they cannot. They can’t get in. The government is supporting the company to do whatever is necessary to kickstart growth in this economy.

Who would you want? The A team, or the B, C or D team? There are a couple of insights here about what’s happening with the whole discussion about oil, gas and coal.

One, we are pressuring the best companies in the world to withdraw from dirty power. But if we think a few steps ahead, it becomes clear that we want the best people and best companies there. Because if this is as bad as people say it is, let the best people manage it. Making the best companies withdraw from coal, oil and gas only works if these coal, oil and gas assets are going to be shut down. But if all we’re doing is transferring coal, oil and gas assets to companies that we know aren’t the best, then we’re handing over a dangerous substance to someone who is not best equipped to manage it.

But it gets a little bit more layered than that. If you create a standalone coal company that is not part of a diversified conglomerate, that coal company is going to do everything in its power to stay in business. The shareholders of that coal company, the workers of that coal company, the management of that coal company don’t have a fallback plan. They can’t say, “We’re managing coal as part of a process to do phased drawdown over 10 years, and we know we can do this because we have a diversified portfolio of other commodities that we’re going to reinvest in and grow.” No, if we’re creating standalone coal companies as a mechanism through which the majors are going to divest, we’re creating standalone companies that have a high self-interest in keeping that asset running as hard and as long as they can. Again, I’m not saying these managers are bad, but if you don’t have the A team, clearly, they’re not going to run it as well as the A team would run it.

That’s what we have to think about here. There have been many newspaper articles about how we are celebrating the withdrawal of the best minds in mining, resources extraction and power production. We’re celebrating the fact that the best minds, the most accountable investors, are not going to be focusing on it. But you actually want the best minds focusing on this.

Why is this happening? The world has changed in two significant ways. World War II, which was traumatic for every possible reason, led to two significant changes. One is the withdrawal of the British Empire away from its role as a global power, and the arrival of the United States. The United States created a set of global institutions that locked the US in as the central and most prominent player, and it locked in the levers of American control, which is the dollar as a lever of power. There’s nothing wrong with that. That’s what you should do if you’re the most dominant country. Of course, whoever is going to come after the US is going to do the same thing. That’s the way the world works.

Bretton Woods, IMF, World Bank are American-led institutions. If I remember correctly, America has veto power in all of them. But if it doesn’t have veto power, it has the dollar and the largest military in the world, and for a long time it had the world’s largest consumer market.

So what are the two changes taking place? The first change is that, previously, if you pressured a Western country—usually thought of as Canada, the US, most of Europe, Singapore, Japan, Australia, New Zealand—to not do something, the rest of the world had to follow in lockstep because if you blocked those markets, if your product was no longer available there, you hardly could go anywhere else and replace the income you lost. If you were sanctioned by the US government, that was a significant issue. Such provider could not use the swift banking system, could hardly do anything in the world because everywhere you go, the US has some interest or allies.

In the old model, the system of activists pressuring Western companies and consumers to do things worked because that was the only viable market, and as soon as you blocked access to that market, there was basically nowhere to go.

The first big change is the West is no longer the world’s only viable market. You now have China, which is enormous. In some cases, it’s bigger than the US. It’s not just China anymore. You have countries like India, Indonesia, the Philippines and Vietnam, which is posting crazy double-digit growth rates. The world has changed. Previously, you could block one market, and it was the only market—which is the Western alliance—and constrict and modify behavior. Now, if you block people from a market, they’ll just go to another market. It’s not about which market is right or wrong. It’s about the reality of having more than one market.

Now you have activists who are running the same playbook they’ve run for many years, and they expect the same outcome, but the world has changed. The point is, right now there are big enough markets outside the so-called Western alliance that if you force the Western alliance to do something, you haven’t actually fixed the problem. You have simply shifted to another part of the world.

And to be fair, in parts of the world, activism doesn’t always work, and there’s not even a culture of activism. Even in Japan, which is part of the Western alliance, shareholder activism is a pretty new thing there.

That’s the first insight: How do we work in a world where there are two decision-making authorities? There are two centers of power. You can actually arbitrage that. You can go to one place, and if you don’t get what you want, you can pull out your roots and say, “I’m going to serve this other market, and I’m not worried about the former market I served.” It’s going to come to that. You can’t change that.

The other insight is that it doesn’t matter if we limit supply if there’s demand for it. If there is demand for it, there will be supply. That’s the law of markets. The supply may be under the radar. It may be vilified. It may be ostracized in the press. We may not even talk about it, but there will be supply.

I mentioned this in a previous Strategy Insights piece. Basically, I said that if Indonesia, the Philippines, China and so on want that to be successful and to take care of their citizens, they need to move them up the income curve. To do that, they need cheap power. Even if it’s a little bit dirty, they’re willing to do it. Are we saying that these countries are going to deliberately give up their growth just so that they don’t use coal, oil or gas? Of course not. They’re absolutely going to do whatever it takes to get those commodities to drive their growth because the more they grow, the more money they have to eventually fix the problems they think they’re going to create. There’s a precedent for that. In places like London and New York many years ago, when there were no proper sewage systems and there were horses all over the streets, they were pretty grimy, terrible places. London was covered in smog for a large part of its industrial life. As it got wealthier and people demanded more, they developed things to fix it.

What Does It Mean For You?

Insiders—smart people, capable people, leaders of the world who want to do big things—you know it’s not enough to just have this insight. What does it mean for you? What does it mean that we are now in a bipolar world? Not just a bipolar world because of military conflict and China is buying a lot. It’s a bipolar world because the decisions that were made, the institutions that existed, the assumptions that were made for a world led by the Western alliance. You need to rethink that.

This is what you need to do: Whether it’s for your personal life, your career, your business, whether you’re putting together a letter for your CEO, which maybe you should do. You have to ask yourself, what were the four or five biggest assumptions that underpinned all of the biggest decisions you have made, your division has made and your company has made?

On one side, list three or four big decisions. Then list five big assumptions, and I’m talking about big, macro, underlying assumptions. I’ll give you an example of this. One underlying assumption is that to grow, you just need to manufacture more. No, to grow you need more people who are becoming adults, getting married, and so on. You can’t do anything unless you have people. If you’re investing in a country where the population is dropping, you need to rethink that very carefully, or at least be aware of how you’re going to extract value in a place where the primary driver of growth is being pulled away—like in the case of China and suburbanization. So the first thing you need to do is think about these assumptions.

The next thing you have to ask yourself is, who is going to benefit from these changes? I don’t mean just which countries are going to benefit. Also think about which sectors are going to benefit? Which types of companies will benefit? Which types of consumers will benefit? Think about that very carefully.

The third thing you have to do is ask yourself how do you personally benefit from this? Do you want to work for those companies? Do you need to serve these companies? I’ve spoken about in the previous episode—do you need to create a law practice helping with divorces in China? How does your company get exposure to these companies, these sectors which are going to benefit? Do you get exposure by going all in in green-fields, M&A or joint ventures?

The final step is, what are you going to do to act on it? These are long-term, secular trends. They’re not going to change soon. The world isn’t going to go back to a one-consensus model any time soon. If you’re planning for that and making decisions for that, you have to change that.

What does it mean for lobbying? Let’s start with the most basic one. Lobbyists are paid consultants that speak to politicians. Lobbying is big business, but what happens for lobbyists when their lobbying doesn’t lead to the results they want? Yes, coal companies and coal assets are being divested, but they’re not being closed down. Someone’s going to pick them up.

That’s what you need to think of as an Insider. That’s the deep insight, and now you have to unpack each step. Remember, the most important thing you have to do is act on this. Knowledge without action is just scribbling on a piece of paper. Knowledge without action is setting yourself up to feel regret. And knowledge without action is an opportunity that you saw first, and then later you’re going to kick yourself because you didn’t respond to it.

Here’s a final thought. Notice how whenever I look at things, it’s not about what is happening. It’s about why it’s happening. What are the implications? How will this play out? We have a Western mindset to score things. That’s the way we’re taught. If you go to an MBA program, they teach you to look for flaws and criticize, that’s the Western model. That’s the whole model behind peer-reviewed papers. A peer reviews the paper, looks for flaws, criticizes, changes it, or asks for you to never publish it or maybe to retract later.

It’s a good model. It’s served us very well. But the problem with a critical mindset is that we’ve assumed that “critical” means to critique things. No, every time you read something, you have to ask yourself, “This is being done for this stated reason. They’re doing X to solve Y. Will Y be solved with X?” That’s what you have to ask yourself. Then you have to ask yourself, “What’s going to happen seven moves down the chessboard?” What will happen seven years down the line? I would look at it and say, “Okay, this year, what’s going to happen if this coal mining company spins out?” What are they going to do? How are they going to manage it? Did it solve the original problem? No. Did it made the problem worse? Yes. You now have people incentivized with their salaries, jobs and shares in a company that is only focused on coal. Of course, you’ve incentivized them to keep this running as long as possible, and you’ve incentivized people who are not the best at doing it.

Then you can ask yourself, “What’s going to happen in two or three years to this company, and to other companies who follow this activist route?” Again, it’s not that activists are wrong. They are doing the right thing. They are forcing companies to make good decisions. But even if they do it perfectly well on this side, it’s not going to fix the problem because of the two changes. The first is that we don’t live in a world of one alliance anymore. Two, you have to think about what will happen if demand is going to be there for a long time.

Related articles you may enjoy:

Are coal, oil and gas are dead?

Things don’t change much – or do they?

The economics of innovation and big bets

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #26. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.

We use affiliate links whenever possible (if you purchase items listed above using our affiliate links, we will get a bonus).

The next big theme I want to talk about is a pretty interesting one called, “Understanding Negative Interest Rates.” If you go to a bank and take out a loan, the bank charges an interest rate to give you that money. And if you have a credit card and use a $100 and the interest rate is 20%, that means if you don’t pay it off, you have to pay the $100 plus the 20% per year.

Now, the idea here is that if an economy is doing very well and there’s a lot of inflation, the central bank will raise the interest rate. So, the amount of money you pay for the amount of money you borrow is going to be higher. But if the economy isn’t doing well, nobody wants to borrow, inflation is low and prices aren’t rising, the central bank will say, “One of the biggest reasons nobody wants to borrow is because money is too expensive, so we’re going to lower the interest rate.”

If you know a little bit about economics, you know that for a long time, it was assumed that zero was the lowest interest rate you could go to. People assumed that once you cut the interest rate to zero, you couldn’t make it negative because it would have no impact. When you go to zero, you’re saying that if people leave their money in the bank, they’re not going to earn interest. But also, banks would charge you less money for the money you borrowed from them. So, there are two sides here. One is the amount of money you are charged for interest when you borrow it. The other side, which most people are worried about now, is that if you’re a consumer and leave money in your bank, you’re not going to earn interest from the bank because interest rates are zero.

Let’s focus on the second one because this is where it gets interesting. If the interest rate goes to minus one, that means you have to pay the bank money to leave your money there. Previously, when the interest rate was plus one, the bank would pay you money. The idea was that if you made the interest rate negative, the consensus was mostly that people would pull their money out and do things with it. Very few central banks went negative. In fact, I think it was only Denmark, Sweden, Switzerland, Eurozone and Japan.

There are two interesting insights here. First, due to the way banking has changed, the impact of a slight negative interest rate hasn’t modified people’s behavior in the way central banks expected. At least that’s what we think. Let’s say you have $5,000 in a rural branch of a bank, and you have to drive 45 miles to get there. If interest rates are negative, and you get scared and want to take your money out of the bank because you think the bank is robbing you, they are not giving you any interest, to take the money out you have to drive 45 miles, bring your money home, put it under a mattress or do something with it, and then if you want to change your mind, you have to go back to the bank. That’s a very big inconvenience factor.

Here’s the insight. Now, with the rise of digital banking, it’s possible that people will see the .1% or .2% negative interest rate as a convenience charge. Let’s unpack the insight. When we look at how policy or products are rolled out, it’s very important that we don’t just look at it from a rational perspective. The rational thing would be to say that if interest rates went from plus 0.5%—which means the bank is going to give you 0.5% for your money—to minus 0.5%—which means you have to pay the bank 0.5% to keep your money at the bank—we shouldn’t assume that people’s behavior will be the opposite because all other things are not equal.

It’s still to be seen whether this convenience factor is true, but we know that because banking and shopping is run differently versus how it used to be, people’s behavior will be different, and we need to think carefully about how changes in any policy, like privacy protection, will modify behavior if people are interacting with the world differently. The fact that central banks in Denmark and Japan have done this, their economies haven’t collapsed, and people haven’t taken their money out of the banks, tells us that people are not going to behave in the opposite way once you switch the interest rate from plus 0.5% to minus 0.5%.

It will be different in different countries. Japan is not very digitized but Denmark is. The question we have to ask is why hasn’t behavior changed? Think about what that means for the decisions we’re making in the world. More importantly, we have to think about what it means as more of the world becomes digital.

The final example is the rise of Airbnb. People assumed that nobody would want to stay in a private home versus a hotel, for a number of reasons: a hotel is well-managed, safety issues, etc. But if you look at the numbers today, Airbnb is worth far more than the largest hotel chain in the world. They don’t own any rooms. But what changed? Technology. It’s not just that technology allowed them to do this. That’s fairly obvious. It’s that the behavior modification people expected was different when consumers transacted using this technology platform, and that’s what we need to think about.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #25. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.

We use affiliate links whenever possible (if you purchase items listed above using our affiliate links, we will get a bonus).

The next big theme is titled, “CVC, Toshiba and What’s Really Happening There.” CVC Capital Partners, a private equity firm, is using their Asian fund to make something in the range of a $20 billion dollar bid to take Toshiba. I’m not going to talk too much about the mechanics of the deal because it’s been covered very well by good publications like the Wall Street Journal, The New York Times and Nikkei Asia.

I want to explain the insight of why deals happen. A CEO has many different ways to manage a company. They can do a merger, break apart the company, do an asset optimization program, roll out a new strategy, undertake an operations review of the company, or do a share buyback. A CEO can do many different things.

We shouldn’t be looking at the mechanics of the private equity deal. We should ask ourselves, why did this CEO pick this option? What is it telling us? Let’s look at what we know about the deal. But before we do that, we need to remember one thing. In any MBA program, they teach us that the number one goal of a company, the CEO’s number one goal, is to protect shareholders and create the most wealth for shareholders. I’m not saying that’s right. I think companies need to spend more time focusing on workers and communities, but that’s what Milton Friedman has taught the world, and MBA students are indoctrinated in that.

But it isn’t true, and it’s a very easy thing to disprove. The number one thing CEOs are interested in is not in how to protect shareholders and increase their wealth. The number one thing CEOs are interested in is keeping their jobs. That’s human nature. If you want to get into a CEO or a leader’s psyche and understand why they do things, it’s to preserve their job.

Many CEOs have undertaken bad decisions and strategies simply to keep their jobs. If this isn’t true, then somehow we’ve created a world where the rest of the world is a little bit selfish and behave driven by self-interest, but CEOs are paragons of moral rectitude—and that can’t be true. So, the question becomes, why would the CEO do this? Well, what do we know about Toshiba? We know that the former head of CVC Capital Japan is now the head of Toshiba. There’s nothing wrong with that—private equity fund managers are obviously incredibly talented people with deep knowledge of the country’s regulation in certain sectors, so it makes sense that they would sometimes move back into industry.

At the same time, we know that the company has had a pretty difficult time in the last few years. They’ve faced activist shareholder pressure. They’ve had problems with accounting issues. I’m not going to say whether it’s right or wrong, but they’ve had accounting issues, which has led to shares almost being delisted. They almost went bankrupt two years ago.

On top of that, Toshiba has a large nuclear division. Given how important that is to the Japanese economy, whichever company buys Toshiba —which would be one of the largest private equity deals if it goes through—would need to get government approval. On top of that, the way private equity firms work is that each firm has a fund, and they use that fund to make a deal. It’s not as if all of CVC Capital’s entire balance sheet can be brought to the table. Whichever fund they have allocated to Japan needs to do the deal. Maybe it can take money from another fund they have, but I’m pretty sure there are rules around how much money can be transferred out of a fund, and I don’t think they could do too much of that.

Now, given all of this, we could argue that the deal—which seems very unlikely—could be a way to draw attention away from the difficulties Toshiba is going through. If it’s drawing attention away from the difficulties so management can focus on things, and if the deal is right for Toshiba, there’s nothing wrong with that. It’s common practice. When a management team is under crisis or is distracted by unnecessary noise, it’s encouraged for them to bring their attention back to what is important. If this is a way to do that and reset the conversation, which shareholders would regulate, then it’s a good thing for Toshiba.

But we have to remember that at the end of the day, many leaders do what’s good for them. I don’t know the CEO of Toshiba. I’m going to assume he’s a good guy, and he knows that this is good for the company. But as we look at the deal, don’t just look at the mechanics of the deal. Look at why the deal is happening and if it’s good for Toshiba—and the only people who would know that are the shareholders who follow Toshiba very closely. The Japanese government obviously has a big say in this, and of course the CEO and the private equity firm. Let’s hope they’re making the right decision.

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The first theme is called, “COVID-19 Is the World’s Best Contraceptive.” It’s been assumed for a long time that if you get two people to talk to each other and stare into each other’s eyes for long enough, they will eventually develop a bond. This connection starts with awareness and leads to empathy, friendship, and then a deep emotional connection—you could call it love if you wanted to—and then eventually a romantic relationship. I’ve read this in so many different places that it’s almost like conventional wisdom.

But this isn’t true. Look at the numbers from global data on birth rates in the last nine months. Any major news outlet will have these numbers. They may be slightly different, but the range is approximately the same. Basically, births are declining in major economies by 10-20%. That means 10-20% fewer babies were born as a result of COVID in some of the biggest economies in the world—like Japan, France and Spain.

The numbers are pretty similar across the world. Taiwan has seen a drop. Hong Kong has seen a drop. I read that Hong Kong saw a decline of over 50%. That means the year-on-year change from January to January was about 50%. China is probably going to see a drop. All major economies are seeing a drop. The United States is a little bit different, but it still has one of the slowest growths on record.

Why should we worry about whether or not people are having babies?

Why does this matter? Why should we worry about whether or not people are having babies? First, let’s leave aside the insights and implications of declining birth rates, of which there are many. Let’s start with the precedent that we’ve set in the way we analyze data.

We’ve always assumed that people have babies, or more babies, when they’re financially secure, and when people aren’t financially secure, they have fewer children. That’s the underlying premise of most newspaper articles. But that’s actually not true. If you look at countries with major declines in birth rates, and if you look at countries that are much poorer, where the standard of living isn’t great, and the future does not look so promising—like in Africa, for example—the majority hasn’t seen accelerated decline in birth rates beyond what was normal before COVID.

In this situation, for wealthy countries where birth rates are already low, when the economic outlook gets worse, the birth rate lowers. In many poorer countries where the economic outlook was not good before COVID but got worse during pandemic, we don’t see accelerated decline in birth rates beyond what was normal before COVID.

Where did we develop this concept that when the economy does worse, people want to have fewer babies? It seems to only be true in wealthier countries; it doesn’t seem to be true in many other parts of the world. That has implications on the way we make decisions in terms of product launches, how we choose to invest in economies, and where we build regional and global headquarters. It matters to the world. But we can cut this data in an even bigger way because the declining birth rates don’t mean the same thing for all countries.

Let’s look at Hong Kong, Taiwan, China, Japan and South Korea. Hong Kong is a part of China, but it’s treated differently in the press. What’s the difference between all these countries? You would say they all have declining birth rates with significant numbers, so they’re all in the same boat, but they’re not.

Why countries grow

Countries and markets grow because people are consuming something. Semiconductor chip companies’ share prices are going through the roof not just because car companies and electronics companies are buying more chips, but because people are buying electronics. Therefore, electronics companies are buying more chips. It all starts with the people. If more people are being born, there are more people going through the cycle of being a young adult, going to university, getting married, having children, growing a family, buying homes, buying furniture, buying cars and so on. That’s what drives consumption. The more there is young people who have the ability to earn money and spend that money, that’s what drives an economy.

Economies also grow in other ways. If you have the same number of people, and they become more wealthy, it’s not as big a driver as more people going through the system. But Japan, South Korea, and even Taiwan have already seen big jumps in their productivity. For lack of a better word, they are wealthy countries. So, yes, they’re probably going to be more wealthy in the future, but it’s not going to be as big of a driver as they want. There are some exceptions to the rule—for instance, Singapore tends to crank out big productivity gains each year—but that’s quite rare.

Will the urbanization trend for China outweigh the negative effects of aging for China? That's what many people need to think about. Click To Tweet

China is different because they still have to go through urbanization, or what some people call suburbanization. This means that as China brings in more people from rural communities and puts them into semi-rural, urban environments, those people will not only consume more, but the process of building those suburban or urban centers drives growth. That’s what makes China a little bit different. China has problems with aging because its population is getting older before it becomes richer. It has a totally different problem than Korea and Japan.

Now, the question becomes: Will the urbanization trend for China outweigh the negative effects of aging for China? That’s what many people need to think about.

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I want to end today by talking through some lessons from a client who is leading a large-scale change program at a very reputable investment bank. Part of the work he’s doing is to get the bank to relook at the clients and sectors they want to serve. It’s an important piece of work because this determines where they would allocate capital, deploy partners, whether it opens offices and so on, and we have many discussions about this. The client is of an Indian background. I’ll call him Rajesh, but that’s not his real name. He came to the United States on an H1B visa, did his MBA, worked at a tech company, worked as an analyst and then worked his way up in the investment bank. He has a wife, two children, his mom lives with them, and he takes care of his extended family in India as well. He’s definitely trying to do well in the world. Good husband as well.

But the point is that he has never been as successful as he thinks he should be—for a number of reasons. One is that, given his age, he’s behind the curve. Most people who serve in this internal strategy role for investment banks tend to be a lot younger. It’s a staging ground for a career. In his case, he was sent here from another role to allow him to find his feet at the bank. This is not a promotion. He’s not going up through strategy into operating. No, he went up to an operating role, didn’t do so well, and came back to strategy. He’s doing a good job in strategy so people are saying, “Maybe everything is going well with this guy,” but he knows he can do better. And the challenge he faces is, how does he live up to the enormous sacrifice his family made to send him to America? I know a little bit about his background. His family is not wealthy. They had to put up a lot of money to send him here. Some of the children at home had to make sacrifices so one child could make it through. His whole family suffered. A lot of effort went into this.

He feels that he should do better. He doesn’t just compare himself to people born in America. He compares himself to the legacy of the sacrifices his family had to make. He couldn’t go home when his father had cancer. It just wasn’t possible for him. He has a sense of failure because he’s tried different things to reboot his career. He’s read all the books on strategy and leadership. He’s tried all these techniques from Amazon and Facebook in terms of how to manage single-threaded teams, how to focus, how to do the right kinds of analysis and so on. He’s at the point where he’s developed a new strategy for the bank, which has been endorsed by the CEO and the executive committee. He’s been given a very big opportunity to drive this initiative. It hasn’t been handed off to another executive. He’s been told to drive this, and he convened a strategy get-together with the leaders of different parts of the business. These are the high performers—the rainmakers, as they call them. He presented the strategy, which is very logical and well thought-out, and they rejected him. They basically said all the right things like, “Yes, you did a good job,” but nothing is happening. Nobody wants to follow him. He obviously feels bad about that. There’s a sense of despair.

When I started working with him, this was a few months after he had tried to present a strategy to operating leaders, and he had failed. He definitely feels as if he’s stuck. Everyone is saying that he’s doing everything right, but he’s not getting the rewards. He’s not being promoted. People don’t want to follow or listen to him.

First, I had to understand him. I always tell clients that every client is different. I have to understand why he feels like a failure. I have to understand the legacy of his life. He’s different because of his background and the unique challenges and expectations that exist in American-Indian families. I have a lot of clients who are Chinese or Indian, who were the first in their family to come to America, they studied hard, they’re under enormous pressure to perform because of expectations. We have to unpack those things.

The starting point is trying to get him to understand that he has not failed. It’s just that the first attempt didn’t work. Many of us are led to believe that if we try something and it doesn’t work, we have failed. No, your first iteration has failed. The idea is still sound. If this is a must for the bank, then you have to figure out how to do it. If this is what the bank must do to succeed in the long term and fend off big, entrenched competitors, then you have to figure out a way.

In football terms, a quarterback doesn’t walk off the field and say he’s failed if he gets sacked in the first play. No, that’s normal. He gets up and calls for a new play. He keeps calling for a new play until he finds a way through the team’s defense. Unfortunately, in business, we tend to think that if we failed at something, we’ve failed. No, if what you tried to do makes sense, you’re like a quarterback. You’re going to get sacked many times. That’s normal. That’s why you wear football pads. It’s not like they say, “You’re the world’s greatest quarterback. You’re Tom Brady. So, don’t wear football pads. Go out there in satin pajamas and play football.” No, even the world’s greatest quarterback is going to get sacked a million times. That doesn’t make them a failure. The first thing is to understand what failure is. He didn’t fail. He just tried one route. You have to try other routes.

Now, let’s talk about the plan I developed for him. The first step is to get him to understand who he is and why he is doing this. What is his purpose in life? That’s absolutely a function of his culture, heritage and family expectations. The way he thinks about the world, what he wants for his family, and what he wants for the world is a function of his experiences. Coming to America, taking care of his family, and being a minority is who he is. We have many discussions about trying to understand what he wants in life. Why is he doing this? Is he just doing it for the money? Is he just doing it because he went to Wharton Business School, and he needs to show people that he didn’t squander his Wharton MBA? If those are the reasons, it’s okay. There’s nothing wrong with that, but I need to know.

We can do all of this wonderful, feel-good stuff, which makes him feel like he’s a gladiator and going into combat wearing his gladiator suit, but we have to give him a plan where he can deliver. Here’s the big thing we did here. Previously, when he was talking to the operating leaders, he was talking to the highest performers. There’s a difference between someone who performs well and someone who’s influential within the organization. That’s a very big difference. Oftentimes, when you see someone is a high performer, you think they’re influential, but that’s not at all the case for the very simple reason that high performers are outward-facing. They face clients, often traveling to clients, they are on the road. But the question is, do they have influence within the organization? Will the organization listen to them? Does this high performer encapsulate the culture, the soul, the spirit and the DNA of the organization? Because if they don’t, why would the organization listen to them?

Many companies hire high performers to help them enter a market to win in a certain geography to get into a new client, but they will never allow that person to dictate the culture of the organization because they know that person’s role is purely an outward-facing sales role. But what happens is we define high performers purely by the revenue they bring in. But in many companies, the people that are responsible for bringing in revenue are not guardians of the soul of a company.

The first thing I got him to do was rethink who he would call into a meeting. Don’t call in the highest performers. You have to identify the influencers. Who are the most influential people. He had to work with them.

Secondly, you can’t tell people what to do, even if they’re influential. You have to show them how you’re going to do it. At the end of the day, it’s not about the analysis. It’s about trusting you. Think about this very carefully. If you went to the head of the Japanese office and said, “I want you to do this,” the head of the Japanese office is basically trusting his or her career to Rajesh. They’re trusting the careers of their analysts, associates and so on at the bank to Rajesh. So, when he’s asking these influencers to do things, he’s not asking them to do something that’s going to bring about money and profits and so on. No, he’s asking them to put their careers in his hands. He’s saying, “Look, if you follow me, I believe this can bolster your career, and you won’t be laughed at for following some ridiculous strategy.” Every time he interacts with someone and gets them to want to do something, he’s asking them to trust him. But he’s also asking them to take their career out of their pocket—or heart for many people—put it in a box, and give it to Rajesh, so he can put it in a safe deposit box and hopefully protect it and preserve it. If you understand that when you’re working with people, and you have a way of convincing them to do that, they will work with you.

Many years ago when I was brought in to head up one of the largest boutique firms in the world, the partners wouldn’t listen to me. That’s normal. Why would they listen to such a young person with all these radical ideas coming from outside the organization? To get them to listen to me, I had about 8-12 meetings with what I identified as the most influential person in their entire organization. The interesting thing was he wasn’t the highest performer, or even close to it. He wasn’t the rainmaker. He didn’t bring in the most amount of money. He went home at 4 o’clock on most days. Probably had a nap, and then eat dinner, had a nap again and then fell asleep. But people listened to him, so I targeted him. I spent a lot of time not explaining to him what I wanted to do, but why I wanted to do it.

Once, we were driving to a meeting with one of the largest infrastructure companies in the world, and we were talking about our favorite movies and actors. I told him my favorite actor was some modern guy like Tom Cruise or Dwayne “The Rock” Johnson. And then he told me his favorite actor was Gregory Peck. Everyone knows Gregory Peck. I think he mentioned the movie To Kill a Mockingbird. We arrived early for the infrastructure meeting and went to lunch. I remember making a comment like, “Wouldn’t it be nice if everything worked out well, and you had enough time to watch these movies and do these things you like?”

At that time, there was a shift in the conversation, and I could see it in his face. He stopped eating, put his fork down, and said, “Do you really mean that?” I said, “Yes. I know that you have made an enormous sacrifice already just by engaging me. All of the other executives have seen you have lunch with me, because they all have lunch in the same place, in this little restaurant outside of the head office. Every Friday, we have lunch, and sometimes we meet during the week. They know you’re working with me. They know that my ideas are different. You’re like the person in the cafeteria at school who sits down with the radical new kid who has unpopular but useful ideas.

“Whether or not you join me on this quest, you’ve already given so much. You’ve already put your career on the line. You’ve already done enough just taking my meetings and sitting with me and being seen with me. I want for you to benefit from this. I want you to be successful. I want you to have a great career. And my job is to give you a better career, and working with more clients at higher margins is the route to do that.”

That is when the mood changed because after the meeting with the infrastructure company, immediately he came back, spoke to the head of energy and said, “You have to spend time with Michael. He’s doing some very interesting things. I want you to meet him. I want you to see some clients with him because I think his ideas will make an impact.”

This is an important thing you must remember about life. It’s not about the strategy. It’s not about what’s good for the company. It’s about whether you understand that every time you interact with someone, every time you want to take them on a journey, they’re giving you their career in a nice blue box, and they’re asking you to take care of it. Your job as a leader is to acknowledge that from the beginning, to understand that they’ve spent years getting to where they are, and they want to know that you’re not going to squander it. If you do that, you will always be able to get people to follow you into battle. They will risk a lot to make you successful because they know that your success is to see them successful.

That’s what you have to do. That’s what you have to think about as a leader. If you want to understand and have the same impact as Rajesh, to avoid the mistakes he made, to avoid the feeling of failure—and he’s not a failure—but to avoid that feeling of being trapped, not seeing a way out, not understanding how to motivate and lead people, then I would say that it’s my moral duty to remind you that if you become an Insider, these are the kinds of skills we impart to people.

You can avoid the traps that Rajesh has set for himself because the best thing you can do is not learn from your mistakes, but to learn from other people’s mistakes and learn from the guides and tools we provide.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #24. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.

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The next big topic is “LG Exits the Smartphone Business.” This has just been announced, and of course, there’s a lot of hand-wringing in South Korea and so on—wherever LG has their production facilities because it’s not a small business. It’s a multibillion-dollar business. Even though it’s losing money and hasn’t made money for a long time because it’s been squeezed out by Samsung and Apple at the top end and by Chinese manufacturers at the low end, it’s still a multibillion-dollar business with a multibillion-dollar supply chain. Careers are made and probably ended in this business. People have maybe worked here for most of their lives. Families have built their futures on a salary that would come from this business to send their children to university. Political leaders have staked their careers on ensuring that LG keeps the plants open because massive unemployment makes them look like poor political leaders.

There are a lot of entrenched interests doing everything that they can right now to tell LG, “Yeah, you’re losing money. It’s not good for you, but it’s good for me, so why don’t you keep it open?” In a sense, they’re asking LG’s profitable business lines to subsidize its unprofitable business lines.

We can even take that thinking further. Let’s assume there’s an LG factory making some profitable product in Berlin. They’re asking that profitable factory in Berlin to subsidize the unprofitable factory, maybe in Korea, that’s making unprofitable phones. They’re asking workers in Berlin to give up a bigger share of their profit-sharing or bonus structure, whatever incentive program exists, so that they can transfer that money to subsidize employees that are producing something the world doesn’t actually want.

In a manner of speaking, the world is now asking LG to take money from successful employees and give it to employees who cannot make something the world wants to buy. If your spouse is a terrible cook and wants to open a restaurant, would you encourage your family to give them the money if you know they’re never going to make food that people will want to eat? If you think they can improve, that’s a different case, but let’s assume they can’t improve.

Let’s assume they’re on a street where there’s a low-cost Chinese restaurant competing with great food at a great price. On the other side of them, there’s a Michelin-starred restaurant serving fancy food at a top-end price point. Next to them, there’s a restaurant at their price point serving better food. You probably wouldn’t let your spouse open a restaurant there because it’s a bad business decision.

This is basically what the world is asking LG to do, but we should be celebrating what LG is doing because they’re making the call to withdraw from a place where they cannot compete. They’re liberating their suppliers. They’re basically throwing a party for the suppliers and saying, “I don’t want you to spend the rest of the year and the next two years planning and building things for a phone that’s not going to sell. I’m going to free you to now start to date other potential customers so maybe you can find a good fit and start building products and components for them so that as they grow, you grow. I’m liberating you to find a better way.” It’s the same thing with these employees.

If LG stays in the smartphone business, let’s assume the smartphone business consumes $2 billion of capital a year. That’s $2 billion a year that LG won’t deploy to a business where it could maybe get a 10%, 20%, or 30% cash margin. Now, would you take $2 billion and put it in a bank account, which has no interest, and maybe the bank will even charge you for the privilege of keeping the money? No, you wouldn’t do that.

LG is doing everything right. They’ve done a very brave thing, and they deserve all the credit for that. I would ask them to be bold and exit other categories and products where they know they cannot win. That’s the decision they have to make. It’s the right decision they have to make. It’s the only decision they can make if they want to be a world leader.

For SLIDES members, we have a big update coming where we’re going to have a very detailed analysis on how to respond to competitive threats. For Insiders, we have a very big update coming as well.

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