Richard Rumelt: evaluation

Transcript context

…Makes sense. So in your book, you have this whole list of types of power. I'll just read them real quick. Leverage, proximate, objectives, chain link systems, design, focus, growth, advantages, dynamics, inertia, entropy. There's also the book, obviously The Seven Powers, that a lot of people are aware of. I guess how do you think about just the spectrum of types of power you can have? Is this it? Are there others? I started to make a list there in the book and I wrote up a bit about chain link systems and today, I mean the power that new business models are exploiting is the power of the user base. What we called years ago, network effects, where the more users you have, the more useful a product is. So I think the idea of network effects first arose with the telehealth system, which the idea was that you don't want to be connected to a telephone system that only connects to two other people. It's not all that useful. It's got to connect to the world to be useful. And my colleague Marvin Lieberman was taking the economics course at Harvard University at the same time that Bill Gates was a student in that classroom. Professor's going on about network effects and of course that's what catapulted him, had his software, MS DOS at the time. Not MS DOS, he had something called basic that... The network effect was huge. He got angry about the network effect because people wouldn't pay him. They kept stealing it and using it and pretty soon everybody in the microcomputer industry had M Basic. Then we get the network effects from not just software, but user base is now with the internet and so you get network effects with big social media. No one wants to be on a social media if only three other people are on. So having a large network... Amazon. Get big fast because the economics are amazing. So we used to say, well, in a department store, economics are that you're saving people the cost of going out of the store and walking down the street to another store. So now it's all in one place. Supermarkets, the same thing. But look at a thing like Amazon where there the ease of shopping on Amazon keeps people from leaving it and going to another website. Now other websites have gotten better and better and some of that is less strong than it used to be and this is a constant struggle with it. Nevertheless, the size of the user bench there is an important source of a symmetry and power for the people that have come out ahead and won that battle for this round, this five years to 10 years. How long does it last before some other thing begins to take precedent. And now we have two-sided markets, whether it's credit cards or places where both buyers and sellers get together. And so here these big forces that companies are playing with right now are these network effects. And when the new generative AI, we have the possibility of stronger effects than we've ever seen before, but we don't know yet. But the suspicion is that size is what matters, that the size of the data that you could put into the learning algorithm is going to make your AI better. And so again, a big... It's going to matter. Just think of Google and their ability to improve search based upon all the searches that go on on their base every day. It's very hard for Bing to catch up because Bing doesn't have as much data to train on. nk of Google and their ability to improve search based upon all the searches that go on on their base every day. It's very hard for Bing to catch up because Bing doesn't have as much data to train on. And so unless there's some new innovation there that isn't just the amount of data, the leader again has this asymmetry working for it. Now, the way you get around all that is by being specialized, by owning a particular approach that isn't the market leader's approach. And it's always been that way in business, but our attention is often attracted by these giants. So yeah, sources of power today where we look at the new business models that are part of the fabric are these network effects and things like that that are very, very strong. And people are trying to get those in startups and in small firms within a certain market space and build it as fast as possible to get ahead of others. There's been venture capital available to try those experiments and some of them work and some of them don't, but that's this new age we're in now, where the speed of building a market position with network effects is a dominant game in the tech space.…

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