The Best of Ben
For someone who claims to be a fan and student of good strategy, I have a tendency to avoid tradeoffs and a desire to do it all. So when we were discussing how to launch a new product line at Breather in 2017, my colleague Ben Rollert recommended that I read a piece by another Ben, Ben Thompson, called Netflix and the Conservation of Attractive Profits.
In it, Thompson applies Clay Christensen’s Law of Conservation of Attractive Profits from his 2003 book The Innovator’s Solution.
Thompson goes on to illustrate that new entrants capture new value when they commoditize and modularize formerly integrated system and integrate a different part of the value chain.
The point of the game wasn’t to make every block green. The point of the game was to make different blocks green. And AirBnB, Uber, and Netflix had all won the game by doing just that. AirBnB doesn’t own apartments (although they may soon), Uber doesn’t own cars (although they may not-so-soon), and Netflix didn’t own content (although they certainly do now).
We had been taking an integrated approach - leasing, designing and building space, providing search, discovery, booking, access, and payment, and operating the space with our own employees.
Had we gotten it wrong? What should we be modularizing?
But something struck me. By the time I first read the post, two years after Thompson wrote it, Netflix had moved into original content to the tune of $8.9 billion and Uber had essentially bought Carnegie Mellon University and turned it into its own self-driving car lab. All three companies Thompson cited in 2015 started by integrating two main pieces of the value chain and have since started gobbling up adjacent pieces. The framework was illuminating, but I didn’t feel that it applied perfectly to the situation at hand.
So I started digging, and I came across another Thompson piece, What Clayton Christensen Got Wrong. In it, Thompson argues against Christensen’s pessimism over the iPhone by pointing out that the theory of low-end disruption is based on business buyers, and begins to fall apart when consumers are the buyers. While business buyers seek out a checklist of necessary features at the lowest price, there are many consumers who “inherently know and value quality, look-and-feel, and attention to detail, and are willing to pay a premium that far exceeds the financial costs of being vertically integrated.” It felt like I was getting closer. And then I came to the conclusion:
“…differentiation based on design which, while it can’t be measured, can certainly be felt by consumers who are both buyers and users.
It’s time for the theory to change.”
Eureka! This is true for Apple, and it is also true for a new wave of companies built specifically with vertical integration and brand experience in mind. Away has built a line of thoughtfully-designed suitcases into a company worth $1.4 billion by integrating brand, design, production and distribution. Sonder and Lyric have raised hundreds of millions of dollars to build AirBnB with more controlled supply, or a hotel chain with more direct distribution. They integrate space, design, operations, distribution and booking in the service of a more seamless, consistent customer experience. According to 2PM, the key to Harry’s growth lies in vertical integration, or what they call v-commerce. '“Simply put, the company now owns the entire process - from R&D to manufacturing to selling direct to the consumer. ‘It creates this virtuous cycle that makes for really happy customers, and then they become our best advocates,’ says (co-CEO) Katz-Mayfield.”
And certainly, at Breather, where design is in our DNA, and where all of the employees of a company who use our meeting and office spaces are both the buyer and the user, integrating the space, design, operations, discovery, booking and access leads to a more seamless and productive work experience for our customers.
I have avidly read Stratechery and listened to the Exponent podcast ever since that first exploration in 2017, applying the applicable and using Thompson’s thinking to challenge my assumptions and prod my ideas.
As you begin your own exploration, you can find everything that Thompson has written, broken down:
By Concept: https://stratechery.com/concepts/
By Company: https://stratechery.com/companies/
And by Topic: https://stratechery.com/topics/
But there’s a lot there, so to get you started, I want to share five more of his posts and podcasts that have resonated the most with me:
START HERE: Aggregation Theory
This is Stratechery Patient Zero. If you can only read one post to understand Ben Thompson’s thinking, this is that post. Many of his others have sprung from this one. In it, Thompson argues that traditional incumbents across all industries “lose value in favor of aggregators who aggregate modularized suppliers - which they often don’t pay for - to consumers/users with whom they have an exclusive relationship at scale. Think Uber, Facebook, Google, Amazon and AirBnB. Control demand, and you can control supply.
In the days following Amazon’s acquisition of Whole Foods, grocery stocks tanked while everyone scratched their heads and wondered why the country’s largest online retailer bought a high-end grocery chain. Thompson goes back to the basics of Amazon’s strategy and deftly frames how the Whole Foods acquisition filled their biggest hole, the biggest consumer spend category that Amazon struggled to fulfill - grocery delivery.
In the Valuing Value Chains episode of his podcast, Exponent, Thompson and co-host, James Allworth, revisit the deal almost two years later to re-examine their original assumptions in “Amazon’s New Customer” and 8 other posts (all linked below for easy reference, of course). Turns out that grocery delivery is different than cloud computing, and that the truth was right there in the value chain all along!
Another example of a company starting by integrating new pieces of the value chain before expanding into adjacent ones (in this case, iBuying), this interview is as enjoyable for Thompson’s knowledgable questioning as it is for Barton’s thoughtful, long-view answers. I finished reading this article and bought Zillow stock.
Why would Uber allow its users to find a non-Uber bus ride in the app, why does it make sense for them to deliver food, and how do self-driving cars fit into all of it? In this post, Thompson answers those questions and discusses that while Ubers new CEO, Dara Khosrowshahi, faced a difficult situation even after he won the board room fight for the role, bundling was a compelling, but still-difficult, strategic choice.
Ben Thompson won’t give you all of the answers. That would be boring. He gives you a series of novel and consumable frameworks, and just as he has done with Christensen’s theories, you need to wrestle with them to determine which apply to your unique challenges and opportunities, and how.
If you get as much out of that process as I do, you can subscribe to Stratechery here.
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