and I know that we have people in the room pork is not permitted food or food that you eat, and I mentioned it to the staff. So what do we do with pork in the menu when we have a significant number of people in our program that we need. And I, in fact, I think it's a little bit disrespectful, because I know some people wouldn't want that in their in their breakfast. And I want to share a little bit. So I want to talk about culture and leadership. I was going to start off by talking about value chains, culture and leadership. Because I want to talk about this issue related to culture leadership and innovation. Okay, so, so I'll connect the dots, but here's the context. So I mentioned last night that I spent seven years, seven and a half years, as the astounding CEO and Dean of this Asia School of Business. The Asia School of Business was funded by the Central Bank of Eurasia. Nice thing about having your funding sponsored via central bank is that they have a printing press. So that was good for me as a CEO, I had a sponsor of the printing press. And so it was a partnership between the MIT Sloan School of Management and Bank of government. Banking Department to create the Asia school business. And so I went there in 2015 and one thing I want to know is that Malaysia is a Muslim majority country, and so culture is significantly different from the culture in the United States. And I had to move across cultures and learn. The idea was to bring the MIT, MIT culture and MIT curriculum to Malaysia, and try to build a school, hyperspeed, high capability school in Malaysia, but to respect to sort of bring the MIT culture, but also to respect the local culture. And also the school was named the Asia school business, not the Malaysia school business, because the idea was, they wanted to attract people from all over Asia. In fact, attract people from other parts of the world. We wanted to learn about Asia and maybe embed themselves in Asia. So we went off on this project. I was employee number one, and I was asked to start hiring people, hire faculty, find some students. So so we were given a mission. And I want to say that I think missions are incredibly important for innovation. You need to know, what are we trying to go? What's our our North Star? What's our target? What are we trying to accomplish? And so our mission they were given had three main points. One was to build a premier school management. Second to train transformative and principal leaders. And third, to focus on advancement of the emerging world, emerging economies, as opposed to advanced economies. So a student came to me and said, I want to apply to the school, because after the MBA, I want to go work on Wall Street. I would say you're not an appropriate student for us. We're not trying to train students to go to Wall Street, go to MIT if you want that, or go to Wharton, or whatever. We're trying to train people who are going to help build the emerging economies of the book. Okay? So that was a really clear mission, and I found that having a clear mission statement was incredibly useful as a leader. Because when people say, Well, why are you doing this? As opposed to that, you say, well, look at the missions, and we're aiming to be Premier, or we're trying to build this program that's literally transformative, or, because we're focused on missions are critically important. So what was the MIT culture? So this is the MIT seal in 1861 when MIT was founded, they created this school thing. Here it says there's Latin back in 1861 to use Latin University, sometimes in Latin. This is men's and honest. That translates to mind and hand. Men's is mind. Honest is hand. And so you see this person here hammer and anvil, that's the hand, right? So engineer, if you will, this person's got a book, that's the mind, right? And so the culture of MIT and the philosophy of MIT is you learn things twice. You learn things in your head, and then you learn things by doing that. You haven't really learned something. Haven't answered something, if you only learned the theory enough to learn how to put it into practice. So that's deeply embedded in the MIT culture medicine bonus theory and practice. And if you think about something like medical education, when the way doctors are trained, doctors get the theory of biology and physiology, etc, but they spend a lot of time in hospitals, working with patients. They have to bring the theory to practice. There are some universities that are more like ivory towers, and they just focused on the Learn, the knowledge part. That's not so Carly, where is trying to bring that culture other aspects the MIT culture, MIT is very entrepreneurial. When you get to tour tomorrow, you'll hear about all these professors who are hired and essentially built other kind of students to come and work with them, and they build amazing technologies, in a lot of cases, as entrepreneurs. Culture very entrepreneurial, also very egalitarian. It's not kind of very hierarchical. First time I ever thought in Asia, I taught in India, and that's quite a number of years ago, but I was on my first day as the Indian School of Business in Hyderabad, and I was at the front lectern getting my slides ready, and a student came up to me, he said, Professor, we're really happy to have you teaching here. He said, I want to share something about our Indian culture. He said, In India, we have a saying, Mother is God. Father is God. Teacher is God. Welcome to so at MIT, teacher is not God in the following sense that at MIT, the favorite sport of the students is, can we show the professor that we know more than he does? Show them up. Here's some data here. So you didn't need to get this quick, right? And so the students try to compete for who can show their smarter than any professor that was that's not the professor's God kind of culture. It's a very different culture at MIT versus kind of some of the Asian cultures also very much matter to crack. It doesn't matter how senior you are. Doesn't matter what your rank is. It's humbling your ideas, in terms of ideas went as in that sense of meritocracy. It's very multicultural. You walk around the MIT campus and it looks like this room many, many different people from many different cultures, many different backgrounds, many different ethnicities, very hands on and practical. That's the modest plot. So so our job was to bring this culture to to Malaysia and to Asia, respecting the local culture, but also trying to bring a culture that is quite different, and Malaysia wasn't particularly in the culture, entrepreneurial, egalitarian in some of the ways. So what did we do? Well, one of the things we did early on in the life of our institution was we had an off site where we said, let's establish what should be the values of our organization. In some sense that's defining the culture. The culture is partly defined by the mission, right? So here's going to partly define the culture. Here's some definition of the MIT culture. Well, what should be the Asian school of business culture? What should the culture be at the ASB? And so we had an off site with an off site facilitator who led us through two days of discussions. And at the end we had about a dozen different values that we had proposed as these are values that we think we care about, that we want to emphasize. And our facilitator said, You need to get it down to 512. Is too many, so we have a vote at least five one. And one of the things about this vote was the following, as the CEO of the organization. So first of all, in the in the culture of Malaysia, in a lot of Asia, it's quite hard, like the CEO is the boss. In some sense, what the CEO says goes. So I had the power and the authority and the moral credibility to basically, I could have said, these are the five, and I know one would have disagreed. Okay, you're the other CEO. I want the five to be entrepreneurship. It didn't make it to the top five, and I accepted them to try to communicate to them that we are moving more we wanted to be a little more egalitarian and not so much top down that the boss is going to dictate the story. So I want so these are the five who came up, and I just want to focus on the first one, which we called respect for people. And one of the things we said is that you can't respect people unless you understand. And we so there's thing called the golden rule that many of you have heard. It says, Do unto others as you have others do unto you. That works in a unicultural environment. It doesn't work in multicultural because it's not doing to others as you would have others do unto you, is doing to others the way they want to be treated, right? Want to be treated the way you be treated. We give you an extreme example. One of my students, one of our female students, was from Brazil, and every time she'd seen me, she'd come up and kiss me on both cheeks. That's the way Brazilians greet each other. They kiss on both cheeks. That doesn't work in the Muslim community, right? You don't have that kind of relationship with with your students, right? So, so, so you have to, how do you know how to treat someone? You can't know how to treat someone unless you understand their culture, because they want to be culturally treated appropriately. So now, why do we have pork in the kitchen over here? I So that was it. So two of the issues that we came up with was alcoholic pork. So we're in a Muslim country. We're in a government owned facility. Government facilities have to follow the government laws, which included No pork and alcohol. But we had a multicultural student model. We had students from 35 different countries, six different continents, and some of the students said, Well, I like to have a glass of wine for my dinner, and I like the important other students. That's why. And so how do you navigate these kinds of issues that on one hand, you want to respect everyone, you want to have a community where people respect each other, but we have very differences in terms of our our backgrounds and practices. So what do you tell here, I am leader of this organization. I'm getting this this mixed messages about, Well, should we actually do as a leader in that conversation? Can delegate that to your team. So pass the Bucky. So okay, so I'm the CEO, I'm going to delegate it to you. What's your decision? You want the team to come up with a solution that works for them, rather than dictated, offer more than one choice, right? So, so kitchen. Here we have some things before, some things out for okay, it seems to be so these kinds of issues came up a lot that, if you So yesterday, I sort of, I promoted the concept of cognitive diversity, and cognitive diversity is really good for innovation, because you have people with lots of different ideas, but ethnic diversity, religious diversity, cultural diversity, national diversity also has challenges right challenges, like we've come from different backgrounds, we have different values. And how do we how do we mesh these mesh these values? So I think one people, if you want to get the benefits of cognitive diversity, you have to solve the problems of cultural diversity. You have to address the problem so that everybody in the team or in the organization feels comfortable like they're being heard. Them being respected, and so they can work together as a team and feel like a big perspective. So I'll give you how we solve the alcohol, how we address them, and say we solve the alcohol, and then I'm saying is that the only time we would serve alcohol will be when we have business needs with outsiders who would typically expect alcohol to be served at an event. So you see, we had cocktail party out last night. Obviously, it's optional to consume the cocktail, but we said we only have a business event where people, business people coming from the outside. So we would serve alcohol in those cases, but otherwise, so we sort of had it was a compromise, right? Not like Thursday to Friday, Saturday, and everybody felt like we had to deal with these kinds of issues on an ongoing basis. And I think it doesn't make sense to try to sweep them under the rug. I think it makes much more sense so So I agree with you that let the team debate it out, but sometimes the team can come to a decision, and it's up to the boss to make the decision. As the team says we want a half. Team says we want B, that's why you have a boss. The boss ultimately has to say, I listen to the A side, I listen to the B side. I've decided it's going to be a or b, whatever it is. And here's why, here's my reason. So everybody feels heard. That is everybody feels respected, but you have to move forward comments about that. So my own personal feeling, so I sort of thought it was offensive. And I don't know if you did, but I'm gonna ask them to get rid of the message. Now I'm the power over there, I'm going to start talking about outsourcing. So we outsourced food service, so how much control do you have? Will be outsourced supplier? That's another question, which we'll talk about in a minute, value chain, strategy, outsourcing, value chain. But that's where my information is. Okay. So that was slightly off topic, but comments questions, so now we're going to do value chain stuff. last time we said a little bit about the driving word is leadership. I quit striking strategic value because I want to talk about value chains. But I think of some of the challenges that we face in organizations is we need a strategy, right? What problems are we trying to accomplish an organization? Strategies to be executed need capabilities, right? So we can't execute a strategy, and we've got to figure out what are we trying to go what capabilities do we need, then we can execute. And once we execute, we get an outcome, it worked or didn't work. And then we say, oh, let's rethink the strategy. Right? Are we on the right track? Are we going to keep going same way, or do we have to pivot, or whatever change? And so you're constantly going through a cycle like this, and I have a strategy. What capabilities do I need? How do I execute? And then check is it working? Kind of a high level framework, actually, before I get to that next slide, I'm going to talk a little bit about So this morning, kind of spent some time talking about this book, clock speed, and then I want to give you a little background on clock speed. So first of all, it was published 25 years ago, and I had a professor at grad school who said, If you ever write something and five years later, you still think it's good, it's probably time to retire. Right? I didn't have any new ideas lately. Time to retire. So, so I think some of the stuff in here is a little bit obsolete. The pages are getting yellow, but some of the ideas are interesting, I think still. And what I've done is upgraded, updated the concepts to 2024, so, so somebody. So I'm going to talk about something stuff in here, bring it up to date, and I'll tell you a little about the background, so my background, Operations Management Group here at MIT Sloan School. The operations management group focuses on supply chain, manufacturing operations and service industries and product development kinds of things. And and so that's been my field since, since I got my PhD, and some of the subjects I so the first 20 years of my career, I mostly taught operations, manufacturing, supply chain. The last 20 years has been more innovation, entrepreneurship. And here's some of the things that I've worked on, the stuff I talked about last night, the nail at scale and sale, which is came out of this, trying to think about, how should we teach entrepreneurs about operations? But anyways, so this book came out of this value chain dynamics piece and and I was trying to study the following question that. And this was back in the 1990s even Asia. 1983 at that time, the biggest issue in American business was Japanese competition, all these industries, electronics, automotive, etc. Japanese companies were being American companies, and American companies were a little bit frantic about that, and so it's a big issue of, how did the Japanese do so much better than the Americans in their manufacturing industries. So I had a particularly hypothesis. Hypothesis had to do with their manufacturing technology. That my feeling was that the Japanese companies in source their manufacturing technology, whereas the American companies were outsourcing their manufacturing term. So the Japanese companies, so Toyota would make all their and design all their machine tools and all their all their internal equipment to optimize and coordinate product their product development, infection development, the electronics companies with the same thing, the American companies, the product companies, the chip companies, like Packard at the time, auto companies like Ford and GM, they were outsourcing all the manufacturing technology. And I thought the closer connection between the technology and manufacturing technology and the product technology gave the Japanese companies in advance, that was my hypothesis. So I started studying two industries, the semiconductor industry and the automotive industry, that I wanted to kind of compare and look in both of those industries at the way they did product development, technology development and manufacturing systems development, to try to see if I could verify or disprove this hypothesis. So I started doing some case studies and some visits to companies in Japan and US, and semiconductors and automotive and try to collect data. At the time, I wasn't tenured. When you're not tenured, early in your academic stage, the name of the game is publish or perish. It'll write a lot of papers. And to get right a lot of papers, you need a lot of data. So I was trying to get data from these companies, and lo and behold, what I found was that in the semiconductor industry, things moved really quickly, and there was lots of dynamics in terms of new generations of technology coming out all the time. The automotive industry moved really, really slow, and that's where I got this idea. Different industries have different clock speeds. Different industries move at different speeds. The semiconductor industry was moving really fast and the automotive industry is moving really slow. Now that's not true today. So today consumer electronics really slow. Last time I said iPhone, 14, 1516, slow clock speed. Whereas you look at the automotive industry today, it's moving really fast, right? So, so 30 some years ago, when I started this research, consumer electronics was faster, automotive was slow. So that raises a couple of questions. One is, what drives the clock speed? How do we think about the speed of industries, and what's the implication for innovation? And I think innovation is a driver of speed. That is, the faster you can innovate, the more you're going to drive change in your industry, but it's also a result of competitive pressures. So we want to unpack and understand what drives the clock speeds in your different industries, what makes things go faster, slow and and why might that change over time? And so the way the intellectual approach I took was the following. So I said, let me draw an analogy with the natural world in the following sense, I was trying to study the evolution of industries. Why does the auto industry evolve in the solar speed? Why does the electronics industry evolve? In fact, I said, Well, who studies evolution? Well, Phonologists study evolution, right? And why? And why do they study evolution? They want to understand human genetics and human genome genomics, right? Why? Ultimately, because we want to understand human disease, human health, how to make people more healthy, how to cure diseases, etc. And it turns out, a lot of biologists don't study humans directly, even though all the money in biology is human biology, there's not a lot of money in fruit fly biology. If you're gonna figure out how to make fruit flies healthier, not a lot of fruit flies gonna pay you much money, right? So why do people study fruit flies? Because they're apologeed species fruit flies, you follow very, very quickly. Your lifespan is a fruit fly is a week. So you put a bunch of fruit flies in a cage and you watch them read over time, you get lots of data on how the genetic material goes from generation to gesture, because Fast, fast evolution. So you want you learn faster about the principles of genomics. If you study this fast clock speed species, now we can put humans in cages and watch them breed over time, but that's a very slow process. It's not legal in all countries. And so what do we do? We do it with fruit flies, and then we say, then we have to do this cross species benchmarking, right? We have to say, what is it about the genetics, the genetic principles that we can learn from the fruit flies that actually carry over to the genetics of humans in which things don't care. So I said, Okay, let me apply that same idea to industries, that if I if I believe, or I have a hypothesis, that different industries have different clock speeds, then maybe if I study the industry fruit flies, that is the fast evolving industries, I'll find some principles of industry dynamics that then I can apply to lots of other industries. So that was a principle that I tried to do and so, so what I want to share with you is one case study that came out of that of looking at a fast clock speed industry, trying to look at it over time, seeing if we can draw some conclusions about the evolutionary principles of all the dynamics of that industry work, and then try to apply that to other industries, to try to ultimately best be better at predicting how your industry is going to change. So there's a saying in business about seeing around corners. We can just see around the corner and see what's going to happen in our industry or technologies, then we have a better advantage. How does that innovation well, how do you decide what where to invest your innovation investment? You want to invest your innovation dollars, if you will, in the places that are going to be important in the future, not the thing, but if you invest in what's important today and the world changes, then you're obsolete. By the time your investment comes to fruition, you want to invest today in what's going to become important tomorrow. And so how do you see what's going to be important tomorrow? How do you see around the corners? So I said, if I can understand the dynamic principles of how these industries evolve, maybe that's that helps in terms of figuring out where do I invest, and where do I make my innovation investments or my innovation jobs. Okay, so that's the agenda question. So what am I just thinking back in time? Trace fast costume industry as it evolved? Say, what do we learn from this in terms of the principles potentially underlying that, and then try to apply that. So the industry I'm going to look at is computers and consumer electronics. Is when I started this research, it was early in the life of the personal computer. The personal computer was evolving very quickly at the time. Okay, this up to date at the end. What's evolving fast. So let me go back. Take you back in time to 1980 44 years. So I was a still a grad student, and 1980 IBM introduced the IBM person, IBM PC. Now, that IBM was not the first company to launch a personal computer. Apple had a personal computer before that. There were a few other companies and econom that were no longer in resistance that had personal computers, but IBM was the giant of the industry. In 1980 the market value of IBM was equal to about 85% of the market value of the entire computer industry. They were 85% of the industry by by economic down. Okay, that's that's good, that's incredibly dominant. And IBM stands for International Business Machines. So their clients were businesses, big businesses, big governments. And they sold big mainframe computers to these organizations. And they said, in 1980 Well, it looks like personal computers might become important. Maybe we should have one now, if you're and they were already a very large, fairly bureaucratic company, and they said to themselves, we're a big bureaucratic company, and we're sort of slow. How can we innovate in this fast moving Personal Computer Space. And so they did something that is still considered today to be a reasonably smart practice, which is, they said, let's set up a separate unit. It's sort of like, treat it like a star created the IBM PC division. They called it. They said, We're going to locate you in Florida, which was 1500 2000 kilometers away from headquarters. We want to give you a small team. We're going to give you some money, some engineers, some resources, but act like a startup. Think like a startup, and don't be contaminated by the big bureaucratic center of the organization. And that's not a bad thing to do if you're a big flow company, and it's sort of a variation of the sandbox idea that we mentioned last night that they basically said, You guys have a sandbox down to Florida, far away from headquarters, act like a startup and move out. And so that's what they did. So they had a team that developed design prototypes on the IBM PC, and then they had to create a value chain. They needed a supply chain, right? So, so they had a small team. They couldn't make computer chips by themselves. They couldn't write a lot of software by themselves. And it turns out, in 1980 the largest software company in the world was IBM, and the largest chip making company in the world was IBM. So if you're the head of the IBM PC division, sitting down there in Florida, and you come up with your PC design, IUD to supply chain. Where's the first natural place to go? Go back to the mothership, right? So imagine the president of the IBM PC division gets an airplane, flies from Florida to headquarters, and knocks on the door of the head of IBM software development. The head of IBM software development, we will make software for my little PC. What kind of response you expect to get? Yeah, it's like you want me to spend my scarce resources on that. I've got multi billion dollar projects to support. I've got a limited number of engineers. So if you want me to do this work for you. It's going to be slow because you're going to be low priority, and I've got to charge you IBM overhead rates, so it's going to be expensive, right? It's going to be slow and it's going to be expensive, right? You go down the hall, you have to ask the head of the IBM chip division, we make chips around little PC, same answer. It's going to be slow, it's going to be expensive. So then you go talk to this guy called Bill Gates. So Bill Gates is that started this little company called Microsoft. At the time, Microsoft had 16 employees. IBM had 500,000 employees. IBM probably had 10,000 software engineers for every employee at Microsoft. And you ask Bill Gates, will you give me an operating system? He said, I'll do anything you want. Right? I just want the business. In fact, Bill Gates said to the IBM folks, I'll give you 30% of the equity in Microsoft if you do a deal with me. I said, that's okay to keep your equity. That was about $200 billion so, so basically, you know, these two little hungry companies, Microsoft and Infeld, and they could deliver speed and lower lower cost than the internal supplier, right? And so IBM outsourced to Intel, Microsoft the PC chips. And we all know how this story turned out right, phenomenally successful product design that is the IBM PC went on to become the dominant design for computing platforms within it for the coming decades, but a disastrous value chain design for IBM. So what happened IBM? So while Intel and Microsoft, total market share market value was approaching about seven $50 billion by two the year 2000 IBM lost $90 billion in market value. IBM went down. These guys went up. Now the CEO of IBM got fired in 1992 and IBM shrank from 500,000 in place to 250,050% shrinkage of the company over the next decade, as basically all the clone makers that Michael Dell comes along and says, Oh, I can go buy chips from Intel on operating system for Microsoft, and I can make a PC cheaper than IBM can. And so you got all these other companies making PCs undercutting IBM. IBM eventually gets out of business. Elsevier, Lenovo, and so, so, so what, how we how do we interpret this story? So what one interpretation, or what would I think about it, is that IBM, I mentioned I put on the board yesterday. I'm sorry that they raised the boards. I put on the board at one point, create value and capture value, right? So I would argue that in this case, IBM created a lot of value by launching the PC, right? IBM being the giant of the industry. They said the PC is a business machine, so businesses should buy that and and the industry exploded from a millions of dollars of industry to billions, to hundreds of billions of industry because IBM entered the industry, so IBM created a huge amount of value in this industry, but they didn't capture that value. The value was much more captured by Intel, Microsoft and eventually Dell, not by IBM, right. So, so when we're thinking about innovation, we want to think about both creating the value and capturing the value. And in this case, I think IBM created it, but didn't count. And so, so how do we understand this, and how do we sort of avoid these errors? So let me ask you the following, and I know I had a very brief history for people unfamiliar, but given what you know, given what I just said, Do you think we should blame for the I said, the the CEO of IBM eventually got fired. They laid off half the people. Kind of corporate disaster in some ways. They eventually came back to significant degree, but not never again, as dominant as they were, but we might think about how this might have evolved differently. Well, let's first ask was it was the fault of the CEO and the senior team we in retrospect, 40 years later, it's easy for me to stand here and say, look how stupid they were, right? Because I know what happened. But is it reasonable if standing there in 1980 is it reasonable to have expected that the leaders of IBM should have had enough foresight to have avoided this? Or should we say, gee, it really wasn't their fault. Nobody could have kind of predicted. Yeah, I think that when they when they controlled 85% of the market share, they thought they were like, nobody's gonna be able to topple so they lost that position and that ability to recreate more state relevant to the parking place. So I think that maybe they didn't have support that because they were gonna get any bigger than this. Because I like that answer, and let me expand on a little bit. Imagine the CEO of IBM gave the following speech to his senior team. The future of computing is small computers. The writing is on the wall. It's going to be small. In fact, here's a little bit of data in 1965 so 15 years before this, there was a guy named Gordon Moore. Gordon Moore was a co founder of Intel, and he wrote a paper 1965 that mapped, they looked at the over time how powerful are the semiconductor chips. And his the paper triggered the title Moore's law. Moore's law basically says approximately every year the power of these chips is going to double. That's an approximate, right? So he had 10 years of data, and back in 1965 then he then he updated his paper in 1975 with another 10 years of data. He said, Look, it's still happening. Every year the power of chips is going so by 1980 it was out there that chip, these little microchips are coming more and more powerful. So that means computers should shrink, and now the iPhone is more powerful than the IBM mainframe back in that time, right? And so, so, so the data was out there. And so if you're the CEO of IBM, the largest computer company, you certainly should be aware. So imagine the CEO of IBM and given the following speech to the senior team, the future of computing is small computers. And because we know the future of computing is small computers, we have created the IBM PC division that's going to be the future of now. If the IBM PC division comes to one of you and one of my senior team and says we put them first in line, because that's the future of our company, right? If he had given that speech, history might have been different. Now let me bring you all the way to today, the the head of Microsoft. So so he invested $13 billion give or take in open AI, and my sense is he made the following speech to his employees. He said, The future of our business depends on AI, we just invested $13 billion in open AI and chatgpt. If chatgpt comes to you and says, we need more help. We need more cloud storage. We need support for this and for that, put them line, make them highest priority. So Mandela, my sense is doing that as CEO, he's telling his whole organization, our future depends on this new thing, and we have this new thing. And yeah, you're making lots of money on Windows. You make lots of money, but we have to prioritize this investment in open AI and chatgpt, because that's our future. So I think the leadership posture with regard to not only what innovation investments you make, but how you communicate what and why we're doing an innovation strategy in the direction of PCs back in 1980 or AI today is incredibly important. Comments about that questions. All right, so now I want you to take a few minutes at your table and talk about what speech should my CEO be making? Right? That is what should my CEO be thinking about and telling the organization, this is what we need to prioritize. This is where we need to invest our innovation efforts, because this is our future. And how much clarity do you have about that? So talk about that in your groups, are we still considering a tech company or No, whatever, whatever, whatever organization you are, what should your CEO be prioritizing and communicating to the whole company that this is important for everybody to be thinking about? So you don't make the arguments. mistake. Okay. CEO any insights here about what you should tell your CEOs? Okay, what we're just discussing about is it's about the power industry, the power industry. So the traditional tower code is just about the power and the power. But today, the telecom industry is even reshift because a lot of mobile networks are outsourcing, basically the core network itself. So they want to have somebody that will come in there with the capital, build the network, and bring a lot of mobile network upgrade. So to use that now, the key decision for CEOs, for power those CEOs, is, should we move from the from the traditional talk. There's also the network, or should we not? And that decision depends on a lot of things. It's a lot of it's capital intensive, because you have to invest a lot to build that, and you have to make sure that it's a profitable investment that you're doing. You also have to make sure that the regulation allows you to do that you will be able to you need to make sure that your customer as well are willing to pay, because it's for you. It's an asset, right? It's an asset that you put money in, and you need to get the profitability. So the message that I was, what we're discussing is, if I'm the CEO of doverco and I'm on the market, what I need to do first is, okay, yes, I have a traditional power. These are all opportunities around. I need to make sure I before taking the decision to move there, I need to make sure that the regulation is okay and that my customer willing to take the offer that I'm going to give them building the asset before making them so let me ask you one question. If I was a telecom CEO, should I be outsourcing my network to you, or are you going to become the Intel Inside on me? That is, you're going to become more important than the value right? So over here, what happened is Intel Microsoft became more important in the value chain than IBM. If I'm the telco and I outsource all my telco network to you, or you're going to become more important than me. Am I gonna, as a telecom make the same? Thank you The Intel inside. Is that gonna happen? You also, right? That's the reality today. So it's hard both ways. Let me give you another example. So little article here. General Motors ditches Apple CarPlay on electric vehicles as a fight for your car screen intensely. So what's going on here? So General Motors makes cars Apple, makes Apple CarPlay, that is the electronics to interface with the customer who makes the money from the customer in that car, right? So, who controls the customer? And I'll give you a second example. Think about, think about more generally, in the car industry, you've got these OEM, Volkswagen, General Motors, Toyota, etc, and BYD, intensively, relatively young, these guys being old and traditional, but then you've got all these suppliers of electronics, control, entertainment, autonomous driving, tech, batteries, etc. Who's going to control the value chain, right? So Waymo, owned by Google, they make automated driving systems. Right? Now, if you're rental motors or Toyota, Volkswagen, do you want Google inside your car? Right? Right? You get Google inside your car. What are they going to do? They're going to suck all the profits out. Right? What Google knows how to do is pay attention to what the customer is thinking, doing, acting, and make money off that customer. And if you're one of these guys, you want to hand your customer to Google or Apple or one of these other folks, right? So similar kind of question, right? That if you're in this business and you sort of control the customer, have a significant amount of customer relationship, how do you access this? Now, if you don't access this. So we mentioned Volkswagen last night. What one of the we had Volkswagen in this room 10 years ago, talking about this problem 10 years ago, and they spelled itself. And the problem was, they said, we're really good at making engines, bodies, powertrains, and we know nothing about software. We don't know how to do software and the value and the value chain used to be here, and increasingly, it's here, just like in the computer industry, the value used to be here, and it moved here, right? So if you're a auto company, you have the same issue 40 years later, how do we retain control but still access this technology. So, so what the Volkswagen people said when they were here was, we're we're in deep trouble, because, on the one hand, we don't know how to do this very well, and the companies that do know how to do it are going to have better cars than we have, because they're going to have better electronics. But if we outsource it, then it's going to take us many, many years to build that software capability. But if we outsource to one of these folks, then we we run into the, beware of Intel inside and Microsoft inside problem, right? So it's a, it's it's a hard problem to solve, right? That what you said, right? The telecom company might say, Gee, it's really hard for us to build towers. But on the other hand, we outsource the towers. Are we putting ourselves in a situation? Value Chain question, I don't particularly care if Google is in my car or not, as long as I don't have to pay, right? You don't care. But General Motors, I don't care if it's Google or Apple or whoever I just don't want to pay, right? But if I don't give my customer the option of mirroring the screen to the screen in the car, I'm going to lose that sale. I will not buy a car that I can't I understand I have Apple CarPlay, and I won't buy them, and Apple CarPlay either, and I have a Tesla, and my Tesla does not have a power play, interesting, but if you're in general, so how are you going to make profit? What's your business model to make profit as a as another company going forward in time? Part of that is capturing the profits that are, that are going to be in this part of the value chain, owners or Toyota or Tesla give that profit stream away to Google or Apple or whoever else you're you're potentially short changing your shareholders out of the opportunity to get all that revenue stream right. This exposes absolutely right? But so you need an innovation strategy to address this question. So that's a really brilliant answer, right? That is, as I said, Bill Gates said all gave me 30% of my equity if you do the deal with me, right? So now it's too late. You can't buy Apple shares cheap anymore. You can't buy Google shares cheap anymore. But once upon a time, when IBM was negotiating with Microsoft, they could have thought, if we're going to make these guys rich, we should take a piece of it, right? That's one way to solve this problem, but you have to do it early. You can't wait until it's kind of too late, and they're already big and powerful. If you have to think about this early in your value chain design process, that while we're doing product innovation, or we have to be thinking about Value Chain Innovation, thinking about what's going to be the structure the value chain, who's going to create the value, who's going to capture the value. How are we going to do that? So I'm not advocating for a particular solution. I'm advocating for thinking about this firmly in your innovation strategy, that it's not good enough to just offer the customer a great product you've got. You want to offer the customer a great product where you capture some of that value to capture all the value, but you have to say, how do we make sure we get a share of that value? We were talking here at the table that maybe there's a survival bias, because probably at the same time there were, like, maybe 10s of similar ideas or opportunities around the idea that. So how can you know as a company which wants to pursue or not? Because, by definition, they're all certain, right? And you can play no no voters, yeah? So I could go down that rabbit hole that will take a while. So let me just first of all validate that that's a really important question. And we, we did some work in the telecoms industry where Telefonica, it came to us. This is like 10 years ago, said, and some of them the chairman's office of Telefonica, and he had the following problem statement. He said, virtually every day, somebody comes to the chairman of Telefonica and says, there's this new technology out there, and if we don't do something about it, it's going to completely disrupt us, right? So it's like Chicken Little, you know this little story, Chicken Little, the sky is falling. The sky is falling, right? How do you know when a threat is a real threat, and how do you know? And it's a threat that's just going to fall by the wayside because We can't pay attention to all of them. How do you tell truly threats, right? And if you're IBM, you're the giant in the industry, lots of things going on on the periphery, how do you know which which ones that really have to pay attention to, and which one's not? Right? So that's the subject of what I want to talk about basically this morning and continuing. And so I'm going to move on from this to give some answers, at least more, hopefully a few more insights. But the question of, how do we think about innovation strategy in the context of a little bit of future proofing, or a little bit of, how do we see around corners? How do we think about that's why I wanted to go back to the evolutionary principles. Right industry likely to evolve? How is this technology likely to evolve? So we can sort of try to forecast where things are headed and make sure we're in the right place at the right time when the future gets right. Now, we're going to give you have a little graduation ceremony on Friday. As a part of the graduation ceremony, we will not give you a crystal ball. We don't have the ability to see peer into the future, but I think we can give you some frameworks and models to help you think, look around these corners. Okay? And so, as I said earlier, all models are wrong. Some models are useful, so I'm going to give you a few models to help you think about these questions. So I want to make one point here. I wrote, the locus of value chain control can shift in unpredictable who control the value chain at one point in time? Who control the value chain point in time that the high when we think about value chains, we want to recognize that some parts of the value chain make more money than other parts of the value chain. Some parts of the value chain have more control over what goes on on this whole value chain than others, right? And you look at some industries, like the retailing industry, Walmart is a really powerful player in the value chain. You look at me say, Volkswagen, there are powerful players in the value chain, right? And IBM was at its time, right? So, so this question about where, which part of the value chain will control the value chain, and how will change over time? Will it move from one part of the value chain to another? So what, one way I want to frame, what I want to do is to say, how do we take what looks unpredictable and make it more predictable? That is, how can we kind of sear on these corners? So to do that, I'm actually going to go backwards in time first. So I'm going to go all the way to the Dark Ages, 1975 right? 1975 we didn't have any PCs, we didn't have any cell phones, laptops, etc, right? We just had these big mainframe computers and and I want to look at the structure of the value chain as it changed over time. So back then. So now that the products are all these big mainframe computers, there's IBM, which we mentioned digitally cooking was the second largest company, as far as unidact, NCR control data, Hewlett Packard, bunch of they were called the bunch. Each of these companies was vertically integrated. By birth integrating, I mean they each made their own microprocessor, they made their own operating system, they made their own peripherals, etc. They made all the pieces and the system architectures were integral. What I mean by integral? By integral, I mean that with IBM, the pieces, the IBM pieces, only work with IBM pieces. The heel of pieces only work with Hewlett Packard piece. You couldn't mix and match. You couldn't buy hardware from IBM, software from digital peripheral from Hewlett Packard and put them together. You had to buy it all IBM, all digital, all HP, whatever. Okay, so you go shopping for a computer system, you have to buy the whole stack. That was the way the structure the value chain worked in those in so we call that vertical and integral, okay? Structure The value chain. Now, when the PC was launched, they it changed the value chain to what I want to call horizontal and modular, right? Because, and I mentioned Michael Duncan long, and he says, Oh, I can buy the same chips. I can now. You can add them to mix and match. Now, now you have this modularity of the system architecture. So you can buy hardware from one company, software, another company, services from another company, right? And so you So now, in this era, the competition was column versus column, integrated system versus integrated system. And here it sort of component versus component, right? So if you're a doll, you say, Okay, well, I'm going to find the best deal. I got a disk drive which, who has the best printer, who has the best chipset, right? You can buy piece by piece, and you can and you can make some match, right? And, and Michael Dell started his company with $1,000 of capital in his in his university dormitory bedroom, and built a $60 billion company. With $1,000 of investment. What do you do? He just bought standard parts off the shelf, assembled his own little VCs, VCs. And the people said, Oh, I this works just as good as the IBM PC, but it's a lot cheaper, right? And so that that was the really the disruption to to IBM was that that these other companies could come in and make copies of the IBM PC at a lower price. And that made Intel and Microsoft valuable because they were the only one. They were the ones supplying chips and software for all these other companies that were making the PCs. So, so very, very different value chain structure. Value Chain went from vertical integral. And so competition in this environment is components like component, who has the best chips, who has the best operating system, this printer, disk, drive, etc, who has the best overall PC? And think about competition like that. And each row has competition. Now, over time, some companies come to dominate their role, right? So Intel came to dominate the microcress of row. Microsoft can dominate right now, if you, if you're in this kind of an environment, and you're and you're really successful, and you dominate your row, and you say you've got a lot of market share in your row, how do you grow after that? Yeah, you said, How do I leverage the market power in my row to take over somebody else's row, right? And that that Microsoft was really good at that. So Microsoft, oh, we got comfort the operating system. Now let's go after software. So we got office now, let's get Windows right and basically say, okay, he said to the customer, look, the news is, if you buy Office, you're gonna be a lot better off buying windows as well, right? And how should they charge for this? Right? So, in by 1995 Microsoft dominated the space, and a copy of Windows costs about if you wanted to say your your company that has 10,000 people and everybody has a PC, you hire another 1000 people, you have to buy another 1000 PCs. How would you have to pay Microsoft? About a copy for each copy of Windows? How much does it cost Microsoft to make 1000 copies of Windows? Nothing, right? It's copy paste, right, right? So you can make 1000 copies of Windows for nothing, because it's just copying software, right? So what's the profit margin? Not too shabby, right? Okay, so that's where Microsoft was at this point in time. Now think about the business model. Here. The business model IBM. How did IBM get to be so rich? So back in the 1970s when companies were first computerizing, they went shopping to buy IBM chip by deck, etc. You make your choice, you say, Okay, let's buy IBM. So lots of companies that will buy IBM. So you put IBM, you install IBM computers in your business, and then suppose your business starts to grow. It's really successful. And it grows so much. You say, gee, we have to expand our computer system. We've grown so much when you have to expand the computer system from, how many vendors can you choose one? Right? You can only buy because of this vertical structure. If you're very bought IBM. You want to expand your system, you go to buy more stuff from IBM. How's IBM going to set their prices at that point? Good? Like a monopolist. They are a monopolist, right now? Is that business model obsolete? No, right? How many people have an iPhone? Right? You have an iPhone. You decide, gee, I want a tablet computer. Which tablet computer you're going to buy? You're going to buy an iPad, and you're going to pay $300 more than if you bought an Android tablet computer, right? So you lock them in, and then when they want to add to their system, you nail them with high prices, right? Because they're locked in, right? So the strategy of idea from 1970s still in play, ecosystem that's a fancy name for value chain. Value Chain, value system ecosystem, right? Same story, right? So, so it's alright, you walk someone into your ecosystem. You control that ecosystem and and in fact, Microsoft controlled that ecosystem by 1995 so we had a period of time where IBM had this dominant model with the vertical integral that disrupted the horizontal modular. And then Microsoft became the dominant Microsoft and Intel together became the dominant player in this in this era, in some sense, it went back to this model, but now it's Intel and Microsoft that control enough of the stack so they can make sort of monopoly profits, because they've captured the customers, and now it's evolved to where Apple has that role to significantly fit it. Not that Microsoft doing so shabby. They're not doing bad at all, but, but you see this model kind of repeating itself at different points in time. So now here's the see around corners part. So this can be generalized this, right? That is, can we? Can we use this to understand other industries? So, so this is a chapter for the book called The Gold helix, and let me describe the dynamics. So let's start up here. So we mentioned that sometimes the third point in time where industry has integral product, vertical industry, proprietary skin, right? That's this picture. Now I like to call these companies the big fat slow dinosaurs, right? Why? Because dinosaurs adapt very slowly. They're they're big and fat, that is, they're really profitable, they're large. Dinosaurs were large, they were powerful, they were dangerous, but they were slow, right? And what happens when you're slow? Well, if the world is not changing very fast, if you live in a stable world, then being big, fat and slow is fine. But if the world starts changing really quickly. You want to be slim and nimble, right? You want to be more like a mammal than a dinosaur, right? And ultimately, the mammals took over the world and the dinosaurs fell apart, right? So let's apply that too. So let's go back to the auto industry, let's say 1970 General Motors and Ford, big fat, slow dinosaurs. So General Motors was the most profitable company on earth. From the 1930s to the 1970s had more people, more employees, more profits and more sales than any other company. From the 1930s all the way to 1970s and even into the early 80s, General Motors big, fat, slow dinosaur and the world was stable. Then. What happened in the 1970s oil prices quadrupled a fairly short period of time. Quadrupling of oil prices and General Motors made very fuel inefficient cars. And then there were these mammals in the ecosystem, Toyota, Honda and Nissan. Toyota Honda and Nissan were more nimble, had more fuel efficient cars, and all of a sudden, all the people are driving the big fat fuel guzzlers from General Motors and Ford said, you know, we don't want to pay this much for fuel. We want a more fuel efficient car. And so Toyota, Honda and Nissan, just like the mammals ate the dinosaurs ate Ford and General Motors, and Ford Motors, market share went down. Toyota, Honda, Nissan, market share goes up, right? What have what's going on with Sporting General Motors? Lots of complexity in their organizations, many layers of bureaucracy, complex organizations, organizational rigidities. They're slow. They just can't move that quickly because they're large. Every every decision has to be approved layer by layer by layer. So you get this situation where these these large companies, when the world is stable, they do fine. When the world is is dynamic, they get into trouble, and they have to they often start disintegrating. They start divest and outsource different parts of the business to try to get more lead, to try to compete. Now it didn't just happen the auto industry, let's say the telecoms industry. So, pre internet, most countries have one major telecom company, right? So at&t In the US, British Telecom, press Telecom, every company, every country had their national telecom. And what was the largest profit mark, profit item in these telecom companies? It was something called Long Distance dialing. Everybody familiar with long distance dialing, pre internet, you pay $3 or $4 or $5 a minute to talk to someone in a different country, right? How would you pay today to talk to someone in a different country? Zero? Right? Use FaceTime or WhatsApp or Skype or whatever it might be, right? And who invented FaceTime, WhatsApp at Skype? Was it the big bet? Full telecom companies? No, right? It was these nimble competitors, right? And what happened to telecom companies disintegration, right? They said that we can be profitable anymore the way we are at T in the US. They broke up into Verizon and baby dolls, and then they broke the lucid which was the technology piece of the company. So you get this disintegration, right? Another industry is the banking industry. So you go back to 2000 United States, we have these really large banking conglomerates, and then we had the financial crisis, eight, 2009 and these companies didn't even know they had such complex balance sheets. They didn't even know how much risk was on their balance sheet. They got into deep trouble. They divested, outsourced that these niche competitors called the hedge funds, basically the banks right? The banks began to disintegrate. They shred on the CEOs got fired, and hedge funds made tons of money. The facts disintegrated significantly. They've reintegrated since. But you see this in many industries, from the computer industry, automotive, telecoms, etc. So, so that's the first half of this dynamic. The first half is if you have an industry that's dominated by the large, successful, profitable, vertically structured companies, and the world is stable. They do fine. The world becomes too dynamic. They get into a lot of trouble, and eventually start to disintegrate. And I like to say there's two ways to disintegrate. Disintegration under pressure. That is, if you're losing money. All of a sudden, you're in deep trouble. Your shareholders say, Look, if you don't fix this thing, we're going to fire you and put somebody else in charge, right? And so it's divest and outsource under a lot of pressure. There's also what I call disintegration with grace, graceful disintegration. What's graceful disintegration? Graceful disintegration is you say, you start looking at yourself in the mirror and you say, Gee, I'm getting a bit of big fat and slow. What should I do about this? Should I wait till I'm in deep trouble? Or should I start thinking about, how do I restructure, or how do I structure myself before I'm in trouble? To give you an example, so about 10 years ago or so, Google created alphabet. So alphabet is a whole new company that so Google, because they made tons of money. Let me first tell the right side of the story, and I'll bring Google. So the right side of the story. Okay, so you get this disintegration, and now the computer industry, or the auto industry, or whatever, you get this more horizontal, modular structure lots of different players. It's happened in the oil and gas industry. Oil majors weren't making a lot of money. They were selling off all services companies, etc. So, so you get this disintegration, and you end up with a structure that looks more like this, modular product, horizontal industry, open standards, so like this. And then what happens? Well, you get competition going on. All these companies are starting to maneuver themselves. How do we innovate? How do we win share? How do we become successful? Some of them are successful. So to go back to the PC industry. Intel was really good at Innovation technical advances in microprocessors. So Intel raced ahead of everybody else in terms of the capability of microprocessors that gave them a lot of supplier market power. What did they do with that market power? They, as did Microsoft, started to integrate more pieces. So Intel went from they control the microprocessor, the math co processor, the architecture, the motherboard, the Wi Fi chips, that is, they said we're going to control more and more of this value chain. We're going to integrate, integrate, integrate. Microsoft did a similar thing where they try to add more and more things. And what happened is they became the next generation dinosaurs, right? So 10 years ago, Microsoft and Intel were big, fat and slow, and furthermore, they both completely missed mobile phones. So PCs, Intel and Microsoft dominated to a stream degree. Everybody thought of cell phones just like a little PC. But Intel didn't dominate in chips for PCs and Microsoft didn't dominate them the operating system because they got fat and slow, right? Other players came in so, so that kind of closes the loop. And this is the tragic story that no matter where you are, you're going to end up fat, slow. Is this a bad place to be, to be a viewer, as I said, General Motors is the largest, most profitable company on earth for 40 years. That's not a bad thing. Apple's the largest, most profitable company today. Not a bad thing. It's a temporary thing, right? As you can't stay there forever. Question around that, if you are a specialist, like you're really good at something cutting edge, the natural cause, like, next step is to grow your business. I think Michael Porter said more customers and so important. So isn't that like a natural cycle? Absolutely, I don't think indel did anything wrong. Where's Nvidia to it that's starting to use over here, right? They've got a huge advantage. And what are they doing? They're integrating into other parts the ecosystem they want to control more and more the value chain, right? Is that a bad thing? No, it's incredibly profitable. But where's the engineer going to end up? They're going to end up maybe five years from now, maybe 10 years from now. I don't know when they're going to end up big, fat and small, right? And then somebody, then the world's going to change again, and somebody else is going to come in and innovate faster than they do. So the key is to know where you are. Yeah, so first, know where you are, and we'll get to how fast is the clock speed? How long is it going to take for this thing to work its way through? Right? That is, if we're in a really slow clock speed industry, maybe we're fine for the next 1020, years. If we're in a fast clock speed industry, we better be thinking right away about where things going. What should we be? And I'll propose in a few minutes that clock speeds in most industries are getting faster for a variety of reasons. Other questions, yeah, I was curious, what in your studies have shown is the niche advantage, like, within a very dynamic environment, is it? Is it their tolerance for risk, because they don't have, like, a baseline of profit margin that they have to worry about so they're able to, you know, take a dangerous step forward, more so than some of these bigger companies have shareholders that they have leads, yeah. So they're less constrained in a lot of ways. So give me another example, the chatgpt and the generative AI stuff, right? So you got open AI, which is this little company right there, and they come up with this technical advance. Google actually invented the transform the transformer model is the fundamental technology that underlies generative AI, it was invented by Google. Eight guys at Google worked together. They published a paper on the transformer model, and they didn't productize it, and along comes open. AI, why didn't they productize it? Too risky, when you were making a search. Nobody's gonna threaten us at search. We have 99% market search, just like IBM had 99% market share in mainframe computers way back when, right? So nobody can touch us and search as Google, right? And if we put out this AI too early and to defend somebody, or gives bad answers or something like that, we can get into trouble. So let's be conservative. Open AI, you have nothing to lose, right? So let's take the technology. Let's run ahead with it. Let's put it out there, even if it's not that perfect, so they have less to lose and more gain. So that's the advantage and disadvantage of being big versus small. I mean, the big guys have lots of resources, but the small guys can move faster, and they don't have the main things to worry about. It's like, Let's go for it. What else have we got nothing to lose, and that's gonna when we do more of the nail and scale and stuff this afternoon, and tomorrow afternoon we'll talk about the sailing company. So I would say General Motors was sailing. Google was sailing as a sailing company. How do you avoid getting an ability and inability to still do nailing? We'll get to that yes question. So I understand the cycle. But is there a way, or have you seen any companies that, in order for them to be lighter when they spread to them is to stop some of the businesses that's not profitable anymore, so they can keep going in the same pace that they're trying to do exactly. So that's graceful disintegration. So we think about, let's talk about Google for a second. So So Google, Google didn't invent search. Yahoo invented internet search, but they got distracted, and then Google came along. They had innovated Yahoo. And so Google dominated search, that is, they were the one who had the innovation special events. What did once Google dominated search, what did they do with their market power? They said, Okay, we got lots of money. We got lots of market power. Let's integrate into lots of other things, in mobile phones and their cars and their health and their this and that, right? They integrate, integrate, and then maybe they're a little bit slow, right? They're not moving as fast. Open. AI is coming up with new applications of AI much faster than Google, right? They're being into the market. They're coming out new, new, new versions faster than Google is. So they're a little bit slow and but 10 years ago, as I was saying earlier, they created alphabet. They said, Okay, let's, let's recognize that we have, now we have all these different lines of business and may and maybe we should split them off. But they did, and I think that was a mistake. It might be for the following reason, that even if the guys who run Google are the smartest guys on earth, and the two founders obviously really, really smart guys, right? Even if they're the smartest guys on Earth, you have more and more businesses, and you say, Gee, they have to be best in this business, best of this business, this business says, the bigger the scope, the harder it is, absolute best in all these different things. And in fact, I would argue they kind of missed the opportunity to lead an AI driven search because they were complacent and too distracted across too many different things. However, had they been broken up into these smaller pieces, and each piece, in some sense, had to just focus on its own, as opposed to have somebody overseeing and say, Why are you doing this? When I do that, maybe they would have been able to move fast. I can't guarantee that, but, but I think the when you become this large, large company, it's very, very hard to be excellent in everything you do, right? And you're competing against focus companies who are saying, we're just going to be excellent at one thing that we're going to go after. In some sense, Deacon mammals saying, let's find the juiciest dinosaur. Let's go eat that juicy dinosaur, right? And that's what, what happens in these markets now. Yeah, so they're successful, but even more successful, they would have taken that idea in Florida approach and broken up, instead of having a global overview of the headquarters. So I think that when you're that big, that's a sensible thing to do, because I've yet to see a huge company that moves quickly. It's like, the bigger you get, the slower you get. And slow is death in a fast spot industry, slow is it's it's not who's biggest, it's who's fastest that wins these games and big. It's hard to be big and fast, and you see that in a lot of domains. I'll say a little more about that. So that's my argument. You can disagree with that, and probably find some examples of industries where big companies that are able to be fairly nimble. And you look at Microsoft today, they've sort of reinvented themselves, that they're moving pretty fast, and they're moving pretty fast partly because of open AI. And they're giving OpenAI a lot of license to be their AI arm. And they seem to have avoided the AI inside that. Remember I said, if you're going to get your supplier rich, take a piece of them, right? So they did. They invested 13 billion more by now in open AI. So if open AI ends up be worth a trillion dollars. Microsoft owns a fraction of that, and they didn't do what IBM did, which was not take a piece, right? So Microsoft gets the benefit of we've invested in this fast moving panel that we're going to let run as fast as they want, and they get to import their opening algorithm. Co pilot, always being big means of your employees. I can take one example of one of the largest banking agent operating with the mindset they are, they are very big. They are maybe the biggest, but they are operating with the start of my mindset, and they are like an elephant running in a state of cheap. They can do everything that they have a lot of power. They acquire companies aggressively. If you are big and agile at the same time, you can work. So I won't disagree with that, that you can find examples of big companies that maybe can move quickly. But on balance, I think bigger is slower. But so if you've got a really good leadership sort of a CEO who's really smart on the ball or leadership team that that is emphasizing speed, then maybe it's not easy. You add more layers and layers and layers, and everybody has to be important, and everybody has to sign off on the approvals. Just a question around the double units loop. If your Microsoft was example, where does their venture into something like Xbox? So I would say Microsoft, Xbox was part of this story. So Microsoft said, too, we got lots of money. We control lots of the value chain. Let's get into something else. They integrated into games, right? Yeah, it's sort of outside the core, but it's consumer electronics. I mean, should they have gotten in or not? I don't know that. They've never become number one. I think they're two number three majors that clearly their presence. But should, should Microsoft, Xbox, be part of Microsoft? Maybe there's no compelling reason, and just slow them down. Those are the kinds of questions I think you want to ask, and that's what the graceful disintegration is about to say, gee, if there are parts of if we've expanded so much that we now have these different lines and they're relatively independent, they were off setting each one free, we'll maintain some ownership. We'll let them act like a more small startup, then be part of this big conglomerate. And I've talked to, I've talked to entrepreneurs who sold their company into a to a larger company, right? So over here, what this integration often means, buying up smaller companies and integrating them into your business, right? You talk to the entrepreneurs who sell their companies, and they almost always say, my life is a lot more miserable. I'm a lot richer now because they bought my company, but it's no fun anymore, and there's many layers on the floor. And it used to be I find somebody I want to hire. I hire them that day. Now I have to go through the HR system for for three months before I can hire the personnel, and I want to compensate someone so they don't lose them. I have to go through this bureaucracy, right? So you just move so much more slowly in many aspects of organization life, when you're at a large company and and that can be deaf dynamic environment where you're competing against companies that can move much more quickly. Is it possible to disintegrate without disintegrating. Can you silo your businesses with them to make the meeting business? So my sense is, that's what alpha, what Google, is trying to do with alphabet, but it didn't prevent them from kind of getting skunked in AI search. Theoretically, yes, but ultimately, if all the all the resource allocation decisions are coming up to a small senior leadership team, that senior leadership team then has to be on the ball with regard to all these different disparate businesses. And that's where the challenge becomes, a bit that, see, we really need time to think about what, how do we split more money on this one versus that one? Since lay down, I example to see the result of that. Yeah, so if we go, just go back to IBM for a minute. So IBM, I'll tell this and then we'll take a break. So IBM, as I said over here, was integrated around the mainframe computer. So they made all these different components all went into once the PC came by the time. So 1990 the PC came out. 1980 1992 was when the CEO got fired, a new CEO came in at the time by 19 and they reported $20 million loss that year, and they had Trump from like, half a million employees. Okay, so a lot of dynamics that happened, and the new CEO at that time, most of the business press was saying the following. They're saying, you look at IBM today, they have some separate businesses. They have a district business, they have a software business. They still have their VC business. They have an anchoring business, but they're not integrated. They're sort of separate freestanding businesses. And the advice that the new CEO, Lou Gerstner, was given was just sell off these separate pieces. Each of these can be an independent, freestanding company, sink off significant size, sell off the pieces. And that's probably how to maximize shareholder balance. Okay, so he was saying complete the disintegration. But what Gerstner did is he reintegrated IBM around software and services. He said, Okay, we've got all these different pieces. What they have in common is software and services. Let's connect the pieces back together. So IBM sort of completed the circle. Went back to be more integral, but now integral around software and services, rather than integrating around the main trend computer. Now that was with a lot of pain, right? Because they shrank and you lost those money. The second largest company Digital Equipment, they didn't serve up. They broke up and they went back up. And Intel bought a piece, and a few other companies bought pieces. They disappear, right? So, so you either, I think, go through a fairly major and sometimes traumatic corporate restructuring, or you just disintegrate. It's very hard, I think, to once you General Motors is another interesting example that they broke up. They outsource that type of answered that address a lot of pieces of their business, they retain the core piece. They went bankrupt and then they go, US government bail them out, and then they reconstituted themselves in there reasonably successful now. At the top, top of the league, and we're seeing also I go through right now. Speaker 1 Does the slowness come from organizational breadth or organizational depth? Is the slowness because you have a lot of layers in the organization, or because you have a lot of different businesses, and I think there's some of each that if you have a lot of layers, then approval processes tend to get slowed down, and somebody lowering the organization wants to do something innovative this level, this level, this level, and I can slow things down. But if you have a horizontal even if you're fairly flat, but you have a lot of different businesses, then resource allocation becomes challenging, right? Because you've got, say, 20 different lines of business. Each line of business has a fairly independent business manager or business leadership team, so it's relatively flat, but each one of them is asking for capital reasons, right? So some of them may be profit, some of them may be mature and profitable, but some of them may be immature and needing more capital. So we have to make capital allocation decisions, right? So, and if you have to make it capital allocation decisions when you got 20 different businesses, then in order to making that set of decisions, has to understand those 20 businesses and think about the trade offs, right? So, so if you have more breadth that can make you slower, and if you have more depth that could make you slower. So, so it's different. The dynamics are different. But each one of them, I think, has that effect, comments, questions. Speaker 1 Okay, so I want to talk a little bit about two things. So I said at one point, it's not bad to be here, right? That is, if you're the largest, most profitable company in your industry, your general motors of the 1980s or your apple of today, whatever, or Google of today. You're a large company, but you're very profitable. That's a good thing, right? But my point so the subtitle of my book is the age of temporary advantage. So what I want to propose is that it's great to be really rich and really profitable, but it's temporary. So for example, you look at the automotive industry. Henry Ford dominated the auto industry in the 20s, temporary, General Motors in the 50s, temporary, temporary, we've already said IBM was temporary. Windows and Intel temporary, Apple temporary. Look at empires. The Greek empire came and fell. Roman Empire came and fell. British Empire came and fell. American empire looks a little shaky these days, and even the phases don't wait every year anymore. You look at no matter where you look, you see dynasties come, dynasties go, but all advantages seems to be temporary. We can't name any dynasties that have lasted forever, right? And I want to assert the second point here, the faster the clocks be, the shorter the rain, right? How long can you be the king or be the dominant player in your industry? And I think if it's a slow clock speed industry, then you can dominate for a long time. But if it's a fast clock speed industry, it's really hard to and I'll get to what drives clock speed in a minute, but I'll give you an example here. So take commercial aircraft. All right, so commercial aircraft, relatively slow. Commercial aircraft is high tech, but relatively slow clock speed. As you look at some company like Boeing, go from the 750-770-6777, 87 it's about 10 years, 10 year cycle to get a new product. Compare that to an iPhone. Every year you get back on 12, 1314, 1516, right? So the So, the speed at which a company can come up with a new product is much faster, say, for mobile phones, compared to commercial airplanes. So you look at commercial airplanes like the Boeing 747, was launched in 1969 and for 40 years, that was the dominant jumbo jet, and nobody had anything, anything anywhere like the 747. Dominated that market segment. It wasn't until 2009 when Airbus came down to 8380. That all was in 747. Is, is a dominant dominating the market. But 40 years, it's a high tech product, but slow clock speed. 40 years, they dominated that space. 2007 Apple comes out with a new kind of phone touchscreen, App Store. How long is it before somebody else had a touchscreen in App Store? Literally 18 months before the Google Android phone, with their marketplace comes out. So is Apple iPhone going to dominate for 40 years, the way the 747, did, probably not right? It's just it's a much faster clock speed space, right? So that. So that raises the question as well, how do you think about the clock speed in your industry? What drives the clock speed? How do I know if I'm going to be fast or slow speed enough, or slow it down, and that's going to affect how fast this process happens? Okay? So, so I want to address the question of, what drives plastics. How do we think about the speed at which one industry might lose, as opposed to so I'm going to give you a relatively simple example. I'm going to take consumers who buy apps, okay, Speaker 1 and they buy assets on some kind of handset or PC. That handset PC connects to a communication network that communication semiconductor chips. The semiconductor chips need semiconductor manufacturing equipment. So this is kind of a one simple slice of a more complex ecosystem. You Speaker 1 so this is not a whole value chain. It's just kind of a slice to give an example, right? So I want to describe a number of different forces that drive costs, right? So the first one I want to talk about is what I call technology or innovation push right? So I'm going to say this is the technological end of the chain, and sometimes it pushes clock speeds through the chain. So let me explain that. So I mentioned earlier Moore's law. So Moore's Law was this thing about the power of computer chips is doubling every year, kind of thing. So so that was driven to a significant degree by a technology down here called photolithography, is a technology that determine how tightly you could pack transistors onto a chip, sort of how finely you could slice the chip into lines that become circuits that become transistors. Okay, so, so photolithography was a technology in semiconductor manufacturing equipment that affected the power of these chips and more, so, so, so, so suppose let's do the following thought experiment. Okay, suppose we're in a world where every two years we can double the density of the lines on the chip through improved photolithography. So every two years we can double the density. So that's been our pattern for a period of time. And now all of a sudden we get a new technological innovation. So now every year we can double the density. So instead of thinking two years to double the density, now every year we can double the density. So that's a technological innovation down here. What do you think would happen to the rest of the chain? It's not a trick question. It's going to go faster, right? So now you get more powerful chips more frequently. You can have more powerful networks more frequently. You got more powerful answers. You have more powerful apps, more value to customers, right? So you increase the rate of technological innovation. Here it speeds up the whole chain. Now, how many of your businesses have slowed down in the last couple of decades? Probably not right, partly because of this phenomenon. Right that we've got information and communication technologies that enable us to go to do virtually everything that we used to do faster than we used to do. We can develop products faster. We've got the customers faster. People can access their information faster, etc, etc, right? So, so this phenomenon has pushed lots of not just the communications and electronics value chain goes faster, but virtually all your value chains, no matter what business you're in, because you use information and communication technology in your business. Your business has gotten faster. You can talk to your customers fast. You talk to your employees, fast, dealing competitors, fast. So that's, I call that technology question. So that's now, that's one example. Is communications and electronics. But give you another example. Take pharmaceuticals. So let's imagine, this is now a picture of the pharmaceutical chain, and down here we have biotech, right? So biotech is the engine that has sped up the pharmaceutical chain, right? So, so we have a pandemic a few years ago, and it was because of the innovations in biotech that were able to develop vaccines in a very, very quick process, right? So biotech is the engine here. Now another engine that's in many of your chains is going to be AI, right? So now what we've seen way down here, there's been all these innovations in AI, and that's going to work its way through lots of value chains and your businesses are going to get even faster, because AI is going to infiltrate your values. So So even though you probably will never see me again after this week, I'm going to give you a homework assignment. Whether you go back to there's your homework assignment when you get back to your office, whenever you get back next Monday, or whatever it might be, some of your colleagues might say to you, so what did you learn at MIT? Now, your first reaction might be to say, Oh, I'll email you the PowerPoints. How much is that worth? Right? So I would argue it's not where the whole lot, right? PowerPoints, I gotta understand what we talked about, right? So here's my proposal, here's your homework assignment. So when you get back to work next week, or whenever it is, Gather your team, whoever your team might be, who wants to learn what you learn next week, and say, let's go into a conference room with a whiteboard. Let's draw a picture of our value chain, and then we'll start doing some analysis. Now, is drawing a picture of your value chain? Easy? It's actually not. So we have two kinds of executive education here at MIT, Sloan and IMD is similar. We have what we call open enrollment and custom executive education. Open enrollment is like this course. So we have, it's open to anybody. We have people from 40 to 50 different companies here. And so we have a wide variety of industries and companies represented. But we also do executive education that we call custom, where we'll get a set of people all from the same company. So I mentioned Volkswagen. So we had people from Volkswagen here, 3040 people just involved a week with them. Now, when I have, when I do custom executive education, I do the following exercise, not for homework, but in the classroom, I'll divide them into groups. So maybe we have 40 people who make five teams. We'll put each team on the conference rooms in there with a whiteboard, and ask each team draw a picture of your value chain, and then we'll ask them to come back and present their value chain to the other group. And the pictures you get of the value chain are sort of like the blind people in Yelp, right? And each team sort of understands a piece of the value chain, and they draw a picture that's a piece. So we have all the teams present to each other, so everybody gets the perspective of each other. Then I send them back in the room and I say, do it again, right? So now they're redoing their value chain, having heard everybody else's presentation, usually by the third iteration, everybody's got the same value chain, right? And that's sort of an accomplishment that now the whole group has this common view of. This is a picture of a value chain. And then so this is the homework assignment, draw a picture of your value chain. Maybe it's going to take a few times. And then you can begin to ask questions of that value chain. You begin to ask, well, who has the power of the chain? Why do they have the power where? What's the clock speed of this part of the chain? What's the clock speed of that part? What's going on technologically here? So then you can begin to ask things like, is there something deep in the technological balls of our industry, if it's AI, or whether it's biotech, or whatever it might be that's going to come and and impact impact us, right? So you try to get this end to end view of what are the dynamic forces that are potentially going to that's part of your homework. And now I want to share a couple of other dynamic courses, right? So technology push is technological innovation software down here that hits the whole chain. So what's customer pull? So that's down the other end here, right? So your customer so, so let's think about the consumer end of the chain. To do that, let me tell you about my grandmother's telephone. So so my grandma was no longer with us. Passed a while ago, but I remember as a child and as a young adult, in my grandmother's living room, she had a telephone. That telephone was black, it had a dial on it, and it had and it sat on a little table right next to the wall with a little wire that plugged into the wall. If you want to talk on the telephone, yeah, it's telephone, you have a sit at that table and you dialed it right? And for 40 years, she had the same telephone in her living room, same telephone, zero clock speed for 40 years now, was that because there was no technological innovation in the phone industry, no, there was lots of technological innovation in the phone industry, none of which seems to make to my grandmother's living room. Why? No customer power. My grandmother couldn't go to the phone company say, Hey, I'm tired of this dial phone. I want to push button phone. I want to mobile phone. I want to touch screen. Not happening, right? No customer thought, then, Speaker 1 what about now? Customers have power in the phone industry today, absolutely. So customers know that I want a bigger screen, you know? I want watch TV on my phone. I want why? Broadband, Wi Fi on my phone, whatever it might be. And what happens is these app companies and these handset companies and these community they all race to innovate, to give the customer what they want, because now the customer has lots of power in the photo, right? So you've got, so the more powerful the customer, the faster the innovation, right? So the customer has, the customer says, you know, I always got the best, best handset, are the best app. So I'm going to buy, in order to get the handset I'm going to buy, if you can go from 4g to 5g faster, I'm going to take 5g from them, on and on, right. So more powerful customers are going to make the whole chain go faster, because everybody's competing for a more competitive intensity. Now, what's happened to customer power in many industries over the last few decades is it's gotten stronger in most industries. Why? Because today, customers can shop globally from their from their desktop, or from their from their their top right. So customers have more information. They can and they can shop globally. It used to be American customers bought American products, German customers bought German products, etc, etc. Today, everybody can buy products from everywhere in the world, because everything's accessible, so the customers have a lot more power, because they have a lot more information and access to these global networks, right? So your customers are more powerful, that's going to drive more competition and more innovation faster clocks. So the more powerful the customers, the faster the clock speed, the more technological innovation down here, fastest clocks right now. What slows clock speed down? This is an absolute unique day in the history of this program, and I can't believe that our Coke person isn't here. Where did she go? Too bad she's gonna miss this anyways. So we've never had somebody here before, and I always use this example. So this costs about $1 right by $1 for a kid. So there's a new innovation on the market called Professor Charlie finds brown sugar water. You get this much Professor Charlie finds brown sugar warrior for 50 cents, half the cost of this. Who wants to buy it? Nobody. Oh, you do. Yeah, very innovative. But guess how hard it was for me to get a venture capitalist to fund it impossible, right? Who's going to find a competitor to this, right? This is a powerful brand. Powerful brands slow the clock speed, right? Because they discourage competition, right? Nobody wants to compete with with this. How can you possibly begin with coke as a brand? It's really, really hard, right? So, so powerful brands are going to slow the clock speed down. Now, some brands think when they're not really. Some of you may remember a company called Blackberry. So Blackberry, people used to say, oh, BlackBerry, that's a really strong brand. It wasn't a strong brand. It was a strong product in the sense that the product features of doing email on your on your on your phone were just better than email on any other device. But as soon as the email was better on other devices, nobody needed Blackboard. So there wasn't loyalty to the brand, per se. It was just loyalty to the features of the product. Now there are products where I think there's truly brand loyalty aside from code, I would name BMW as one. So BMW, BMW has a strong brand because they had a high performance view, right? So we developed these high performance vehicles. They got a great reputation, and it made their brand strong. But today, there are many people buying BMWs who don't care about the performance. They just want to BMW in their driveway to show off to their neighbors, like I got a BMW, right? So, so people are buying so some people buy the BMW for the vehicle performance, but some people buy it just because they want to show off the brand. That's true brand value. That is nobody was buying BlackBerry's. Now, look, I got a Blackberry when blackberries were no longer very, very good at adopting an email anymore, but people will still buy BMWs, even if they lose a little bit of their their edge, if you will, because of the reputation of the brand, pure brand value. Okay, so, so, so, so, I think a lot of companies realize this, and they think, well, we're going to invest in our brand because it discourages competition. It's hard to compete with with a really powerful brand, it's hard to attract investment to compete with that. So it's not an absolute, but I think it's something that does slow down the clock, speed strong brands questions or comments. Is that the only thing that slows the clock Speaker 1 system complexity, okay, so remember the Boeing 747, right? So the more complex the system, the slower the clock speed. And one aspect of system complexity is integral versus modular. Remember I said before the IBM mainframe computers were integral of the PCs are modular. So integral versus modular is one dimension of complexity. I'll explain it in the following way. Imagine you're you want to have a desktop computer system in your office, right? That's a modular system. You can choose to buy a big screen or a small screen. You can choose which which CPU to buy. You can choose which disk drive you want. You It's a module. The PC is still you can buy it as a modular system to customize it to the way you want for your desktop. So, so you want a bigger screen on your computer system in your desktop, you just, you can buy a bigger screen. You don't have to train the whole system. You just buy the bigger screen. Okay? Now imagine you're buying jet fighter airplanes, and you want a bigger screen in the cockpit of your jet fighter airplanes. Can you just swap out the old one and put in the new one? Absolutely not, right? That's an integral architecture, right? That you're gonna have to redesign the whole cockpit, which is a very, very complex device, and so that's going to be slower class speed, rather than you can't you can't read, you can't replace the the the screen, hand the screen on your and your gender plane, the way you can replace the screen your computers. So, so, so the more integral, the more complex the system, and the more integral the system, the slower the clock speed. Same story here that if you want to bring, if you want to, if you're in the handset business, and you want to go from 4g to 5g not that hard to engineer 5g handset. You want to build your make your network go from 14 to 5g that's a much bigger project, right? That's a much more complex system, right? So the board complex, the system slower the clock. Speaker 2 So I can understand how clocks are always going to be going faster and faster, because how the world is going they example of how equipment for class being slower. Speaker 1 So let's talk about climate change. So some people say that the fight against climate change will speed, will speed things up, that people will have to do more technological innovation to help energy saving devices and things like that. But other people say, if we, if we really severely limit the use of petroleum, let's say, or hydrocarbons, then we won't have global travel. We don't have as much global travel. We won't make we won't have as much global trade that might slow things down. We don't have we say, okay, we don't want ships going across the ocean anymore unless they have sails. They cannot engines anymore. So then you're not going to have this. You're not going to have global trade in chips and airplanes, right? That's an extreme case. So if you, if you said you're really going to limit the use of hydrocarbons in transportation, and we're not going to have global supply chains anymore, that's going to slow things down. Now, is that going to happen? I'm not sure, but, but it's an example of how one one force that could actually slow down commerce, which would slow down cost, because now you have less competition. You cannot. You don't have global competition anymore. It reverses this thing about customer power, and then things will Speaker 3 slow down. Yeah, so Speaker 1 I'm not a student of the Concord airplane, but as I understand it, it was very expensive, it was very polluting the environment and noise pollution as well as air pollution that mock fuel took. The market was relatively small, and then they had some technical problems. They had a crash, or not a crash, but some defects on the airplane spins so and I read recently that somebody's trying to re restart the concrete airplane at the consequent design, but that would obviously speed commerce if you could do it at the same price, right? So if you could go from Tokyo to New York or something like that, in a couple of hours, more people would probably the same price. More people would probably do that. That might increase trade and business deals, etc. Speaker 4 So if you look at the Aviation today, I think it's like way behind. It hasn't been disrupted. It took, I'm sure, most of us getting here at least 16 hours or something, you know, and this is something that hasn't been started since, I think, the 1990s Speaker 1 or 19 so aviation, let's say we could have three of these, right? We could have this is the horse, this is the car, this is the airplane, if you will. Right, how long it takes to go a certain distance and the airplane's up here somewhere, right? It's mature. It's not, you're not getting, I mean, the amount of time it takes to go from here to the Middle East hasn't changed very much in the last 2030, war years, right? So if we think about this vertical axis as performance, and for the performance measure that you care about is, how long does AB get from point A to point B? Doesn't change very much. In fact, because of congestion, maybe it's actually slowed down, right? Sometimes, because we get more airplane delays, or whatever it takes longer to go for so I mean, unless we get Beam me up Scotty from Star Wars or something. It'll be a great innovation, if we can figure it out. We may be stuck, yeah, or the Concord comes back, or something like that. Speaker 4 But it's just even the time consuming to travel, sometimes getting to the airport and then flying. I think only two companies out there, major companies flying in Airbus, dominating this industry. We're seeing China. I was recently, it's airplane for the first time after takeoff, we were in Norman when I was reading about before wasn't in a crash. So I was like Speaker 1 for seven years. I flew back and forth between Kuala Lumpur and Boston about seven times a year. Speaker 2 I just have a comment to reiterate drones. For example, look at drones when they came about, which is in the aviation sector. There's only one manufacturer now you can buy a drone that's actually used in an Air Force or $5,000 that's made in some countries. Now, a lot of countries are investing on this. So I think we're getting there. There's going to be some renovation. We don't know what it is that's going to stop a new era. Speaker 1 So I think that's a really good point. And people are working on personal taxi, personal air taxis too, right? So, yeah, they're early prototypes out there, etc. It's not dominant yet, but, but that that's not going to help your problem of getting from from the Middle East to here faster, I don't think, but for some kinds of travel, it might help a lot. If you have a personal air tax or drone Gary, the Speaker 2 company virgin, the Python rule was they, a lot of people invested in it. They do not brief research and all that, and then all of a sudden stops. It's part of innovation, but who knows, they might come back and with different ideas or solve issues. Speaker 1 So factor that into your homework assignment, right? So your homework assignment is think about your value chain, and what are things that might speed it up, and are there technologies in aviation or products in aviation that might impact your industry, even if you're not in the aviation industry. Is there something in aviation impact? Okay, so we did technology push, customer, pull, landing, supervising. So environment, so there are two examples in environment. One is the climate change, one that I just mentioned. Maybe climate change will speed things up because we have to change how we do things quickly. Maybe it will slow down some aspects of how we run our businesses. Another example of environment is the pandemic. When the pandemic hit the rate at which companies went to digital transformation and digital work accelerated dramatically, right? So every company, virtually overnight, had to figure out, how can we coordinate all the work that we do digitally without face to face meetings for in many cases? So that was the case where the environmental change sped up the plot. Speed a lot of things, a lot faster. And like turns out, transformation. Speaker 2 Just adding another example to the kind of major industry, the rate at which the vaccines came out, Speaker 1 yeah, that was Yeah, customer demand, partly Yeah. And that's a combination of customer demand, technology pushing and environment, other comments or reactions, Okay, last one I'll put it here is regulation. Regulation is more complicated. Let me give a couple examples. So in the automotive industry, if the regulator says we want tighter emissions standards and tighter fuel economy standards. So we're going to require that vehicles get more miles per gallon or kilometers per liter, so more fuel efficient and less pollution. So if the government tightens those regulations, what would happen to the client? Speed of innovation in automotive industry. Speed it up, right? Because the government basically say, if you don't innovate, we're going to put you in so you got to figure out, how do I be more fuel efficient, through aerodynamics or electric cars or whatever. So tighter regulations. Speed things up. Now aviation was mentioned. So glad I mentioned aviation. Example, prior to 1978 there were two kinds of aviation regulation in the United States, economic regulation and safety regulation. So safety regulations are all about making sure the airplanes stay in the air, very important to those of us who fly right, the economic regulations were quite extreme that in the United States, at least, prior to 1978 an airline had to ask the government permission for which airplanes I can buy, where I can fly them, what fares I can charge, all the economic decisions of an airline company were subject to government control prior to 1970 1978 in one legislative act, all the economic regulations were repeated. Now, airline companies could buy whatever plants they want, flywear, any groups they want, charge whatever prices they want, and that. So that's loosening the regulations, and that actually sped up the clock speed that business class was invented, frequent flyer miles were invented, oven spoke system was invented. There are lots of innovations that came out from loosening the regulations. So there's the puzzle, right? The other one ministry, we said, we tighten the regulations and things speed up aviation industry. We lose it, regulations and things speed up. So how do we think about Speaker 5 that? Do we really think that with regulation, that the automotive industry really sped up? Because I think by 2035 All vehicles are supposed to be electric, but then you have the technology, technology push, the customer, Biden, the branding of that, the system complexity. So I feel like every single one of those things is affected by regulation. So does it speed up, or does it slow down? Regulations? Come I have these gears. I'll use this picture for a second. Speaker 1 My view is there are lots of different dynamic forces that we're talking these are some of them, but not all the ones developing dynamic customer dynamics, regulatory dynamics, double digits, the structural dynamics, or capital markets. And my idea was that the reason I drew these as gear into Lockheed gears is one of these things start to move. It starts moving the other ones, right? So if there's some new technological innovation that may change what customer wants, it may cause the regulators to change the regulation policies. It may cause the capital markets to say, we're going to invest more money in this sector, right? So one of these things start to move, the other one starts to move. So I put it as gears here. The first time I do this, anybody here background in mechanical engineering, you just have to leave the room for a few minutes, so you can tell my background is not mechanical engineering, but this picture, right? And first time I drew the picture, I had all the gears touching every other, and I presented it to a group of General Motors. They were all mechanical engineers. They hated the picture. They said that system's gonna block off because they did too impatient with me. But in fact, it's not really a mechanical system. It's mechanical system. It's a socio technical economic system. And the point is, one of these things start to move, and a lot of other things, right? And so, so to address Devon, just to G's question, there's a lot of things you have to think about simultaneously. I'll show you a model. I'll show you a model that that tries to look at all these things simultaneously. But it's not that simple or pretty but my but I would assert that if you want to do this thinking around corners and think trying to think where things are going, you want to try to factor in a lot of these different features simultaneously, and that's why you need to go in your room, do your homework soon, right? That is, go in the room at first, get a picture of the value chain, and then begin to talk about these different dynamic courses. What's going to happen with technology, what's going to customers regulation? And you're doing this under uncertainty, right? You don't know. But my point would be that if you're going to have the best shot to try to figure out, where should I make my innovation investments, where's our industry going? Where's our opportunities going to be? The better you can integrate thinking around these different courses, the better off you Speaker 4 and the ambitious goals of, let's say, electrifying, a big percentage, you know, some Some countries had, like, very high, let's say ambitious numbers. Because they're unachievable. But I think you don't have to look at today who controls the sector, like what you've mentioned, the people we have mistakes, Toyota, you find mostly on the streets today. These Japanese cup, but it took them at least 20 years. But can I Yeah, so I think you know, there is a lot of stakeholders here, suppliers, even more on Speaker 4 display, chain, match, supply chain control, and how do you deal with it? Because power is always shifted, depending on raw materials, depending on the customer, depending on the labor, you know, fake labor, UAW labor force, and you want to make sure that you keep everyone satisfied with the supply chain. But, you know, looking into this, I think you know, the sector is quite complex. Needs a lot of time. You need to have the best, the best implementation plan for implementing easy thing. You have a lot of regulations, a lot of stakeholder management to actually have good quality comments. You have good quality. Everything today is always moving something from point A to point B in our life, like the Coca Cola you mentioned, it's 50 cents, but it's moving it from point A to point B costs maybe $1 so it's, it's, it's a complex thing that you're dealing with. But I Speaker 1 think we make good points I want to underscore. So one point you just think is that the automotive industry has a lot of system complexity, right? And if you're going to change the entire automotive value chain from petroleum driven to electricity driven. There's a lot of complexity to doing that. There's lots of pieces of that value chain. They all have to work together. You gotta be able to generate the electricity. Gotta be able to build the electric car. You gotta be able to build the batteries. You gotta dig a little lithium right on and on and on, right and so coordinating the change of that larger value chain with that much complexity is going to be a long, slow process. And I agree with you that people who think that it's going to be all done in 2030 and 2035 it's just it's not realistic, right? So we can, but we can ask, what might make it go faster? What may make it slow, right? Regulations might make you go faster. Some technological innovations might make it go faster, but the system complexity is very high. And if we look at the automotive industry over the last, I would say 100 years. So I said earlier, the computer industry. In the 1970s it was IBM. 1990s it was Microsoft and Intel and 2020, 2000s it was apple. So roughly every 20 years we returned the whole cycle the automotive industry, I would say, in the last 100 years, we went once to this takes 20 years. So the computer industry goes to cycle the automotive industry 100 years. Now, is it going to take 100 years to do this electric transition? If we do that? I think less right? But there are a lot of things about the automobile industry that is sort of a bit slower, but it's going faster. So I was in Shanghai in August, and I was in an electric vehicle that felt incredibly advanced compared to Tesla or anything else. That's just, they really are pushing the envelope of China with the development of Western beers. And they they are driving the market to a very significant degree. Speaker 4 And they're moving fast, and they make it very cheap, you know, you know, I think without the tariffs today in the US, they could come in, they would meet every single animal. Japanese car, very cheap because, yeah, of course, the cost of ownership today, it's not just the car insurance. There's many, many things in revenue and even all these OEMs going into China, they're they're coming back with all these regulation changes, because the tariffs, the the excess burdens that you and you find the Chinese OEMs trying to save themselves by going outside of China, looking for new locations so they can actually establish their base of Speaker 1 manufacturing. So these are the kinds of things I think one needs to think about. That is, if you're formulating an innovation strategy for your organization, you want to think broadly about where, where is our industry, or where is our ecosystem, where do we play? What are the other folks doing? What are some of these other forces? And try to be as comprehensive as possible and and respecting Jesus comment that too is a lot of stuff going on. It's not so easy to sort through it. But I think struggling to sort through it all is better than just being oblivious to certain things and then getting lines up. Speaker 2 I think what speaking this very complex is politics, because you can predict politics. If anybody could predict politics, then it wouldn't be politics. Would be logic. So I think that's a regulation. We say regulations there. Who sets regulation is, you know, countries and governments, and so it's very difficult to predict what's going to happen, and that's what's making everything ridiculous. So Speaker 1 co author and I have rebuilt a system dynamics model of the political system, rather only interest groups, and this maybe I can take that out for tomorrow, show you my model of trying to bring predict politics. Again, all models are wrong. Some models are helpful. It lays out who the players. What are the dynamics? How do you think about the different interest groups? To try to make some sense on it's not that I can predict like it's going to be Trump or Kamala, but it gives you a framework to think about. See, how do we think about all these plagues of the political process? And obviously, there's national politics and there's global, international politics, other questions or comments issues. So give me something. Is this? Is this just way too complicated and think, help you think about these things, or is this something that you could actually, can you actually do the homework assignment that I've given you to kind of go back to your groups and try to figure out the value chain and think through some of these dynamic courses? Is that going to help innovation strategies? We have some examples in the service sector that we use this framework. Speaker 1 What service sector would you like? Financial Services? Financial Services, yes, well, so I mentioned briefly. Let me give you one example, financial services. So when I was in Malaysia, we were doing some work with the Chinese construction Bank of China. The Chinese construction bank, at that time, they had about $2 trillion in assets, so a really, really big bank, and they had the problem of General Motors and Google inside in the following sense that they said, we're really good at banking, but we haven't got a clue about how to do FinTech, and they're all these little FinTech companies that want to sell us their services. And we're afraid that if we let FinTech inside, they're going to, they're going to learn banking from us and capitalism, and they'll, they'll get the value from the customer. But we're also afraid that it's going to take us a really long time to learn how to do sort of FinTech by ourselves, and so we have this exact same trade off of, do we outsource FinTech to these FinTech startups, and then we can offer things to the market really quickly, but we have to share some of our secrets with these FinTech partners who could potentially go around us and take some, take more profits from our customers, or do we go more slowly, try to develop internally, but recognize we're gonna be a we're gonna be behind the industry leaders in FinTech. So that was an example that I thought matched pretty well onto this question of, should we be vertically integrated value chain, or should we be outsourced, and how do we protect ourselves? And again, this thing about buy, if you buy one of these fintechs or buy shares, buy a certain ownership for action that might help you, but you always get some leakage. The founder can take money and then go start his own company or whatever. That's one example, another example in finance that I've used to think about some of this dynamics I talked about here. If I look at a long last, say, 100 years of banking in the United States. In the 1920s we had very, very light regulation in financial services, and that led to the stock market crash of 1929 and the Great Depression in the 1930s so that was a period of very loose regulation. And so I think of regulators as having to balance innovation and safety and security right. If you have too much regulation, you stifle innovation. You have too little regulation, you get in trouble with safety and security. So the banking industry United States and 1920s very little regulation, but they weren't paying attention to safety security. We had the Great Depression and the stock market crash. Then by 1933 when 5000 banks went bankrupt in the United States. In 1933 then the new democratic administration was elected, came in and passed very, very strict regulatory laws in the financial services. They've basically said, we're going to separate investment banking from commercial banking, from insurance companies, from brokerages, each are going to be have to be separate firms. Each one is going to be regulated very tightly. And you have things like for the next 40 years, by regulation, banks could pay 5% interest on on savings account, nothing more, nothing less, right? And so, so So for 40 years, you had zero clock speed of change in the banking industry in the US, from the 1930s and 1970s 1970s we had high inflation, partly because oil prices went up by the 1980s the banks, a lot of banks, were deep trouble, because they can only pay 5% on deposits, and inflation was 10% so who's going to put their money in a bank when you get 5% when inflation is 10% right? So the banks all started complaining to Congress and the regulators, you got to loosen the regulations. You got to let us be able to compete. And so during the 1980s and 1990s the American government continuously reduced the amount of regulation on the banking system, culminating in 1998 when they repealed the glass steadily. That act said, you have to separate investment banks and commercial banks. They repealed that in 1998 and assuming half a decade, most many investment banks bought commercial the separation disappeared, and the gambling started again, culminating in 2008 where we had the next big financial crisis, because they loosened the regulator so, so you see this pendulum swinging of the regulator made it too loose, and they made it too tight, and they made it to loose, really hard to get it right in the middle, and the costs are incredibly high. Now you think about cyber currencies, different countries are making different decisions. So China has basically said no cybercrime juice at all, right? Totally disallowed. Whereas the US, you got Bitcoin, you got ether, you got all these others, there's a fairly loose regulation, but the SEC is is going after the worst place. So there's, there's a lot of action, I think, in the financial services with regard to regulation, affecting the clock speed of the industry and affecting where you can innovate and how fast that helpful. Okay, other questions or comments you Speaker 6 else. Other gears were not complicated enough for you. Here's a few more. Speaker 1 We have political so here's politics, right here, right polarization, climate change. We have global trends. We have public health and well being, equity and socialized politics, also technology and society. So lots of different dynamic things that one can think about and begin to ask, how does that affect our value chain? Who are value chains can affect like be affected by some things that are going on, and how do we think about where we want to innovate so that we can play a useful role and ultimately be good for society and good for our organization? I can't. It could be more than one chapter. It doesn't be one, absolutely. That's why I have the interlocking gears to say that all these things are are forces that we have to think about, and they affect each other. So you say climate change in some parts of the world is causing migration. Migration is causing social, social stresses. So these things, so I thought also wrong. But some models are useful. And so what I'm trying to do is give you some models, so models to think about innovation, development. So we looked at the IBM model of thinking about the value chain. Who controls the value chain? Where's the power? We looked at the at the speed. What drives the clock speed? We looked at the interfaces here. We look a little bit at the different kinds of innovation, and we looked at the structure of the value chain of the value chain structure dynamics. So we'll use these more during the course of the week, but trying to give you a library of things, and I will assert that all these balls are going to be useful for everybody, for what you do, but for your homework assignment, this is your your cheat sheet. It's the kinds of it suggests questions you can ask in your team, both to stimulate thinking about how should we be thinking about our value chain, but also to the extent that you want to share some of your learning from this week to your colleagues, it's a way to do so, I have to say, all conclusions are temporary, right? And so we have to keep trying to learn right over time, we want to continue to think about what are these dynamics make a roadmap make the strategy.