The Thing That Doesn't Change

Before going into the article, something personally important. I’m studying for a Graduate’s Degree in Finance and Economics, in Boston. I’m about to start my second semester and, when the third one begins, in January, I’ll be legally allowed to do an internship. I’m looking for an asset management firm that might be looking for someone that performs equity research, preferably in Boston or New York. If you happen to know of anything, I’d be really grateful if you let me know.

E-mail: giulianomana@0to1stockmarket.com

Article

Research was made and a potential answer was found. A couple of weeks ago, in The Dichotomy of Disruption, we went over a very curious idea. In The Innovator’s Dilemma, Clayton mentions the fact that sustaining innovations are mainly performed by companies who lead the market. The object of study is the disk drive industry:

“Established firms were not only leaders in innovation with regards to the development of risky technologies, but literally every single subsequent sustaining innovation that was registered in the history of the industry”.

What this means is that, once the zero to one move is done, the odds of making marginal improvements for the product are highly in favor of those who created and lead such market. Furthermore, also observed by Christensen, when a new product emerges and gets to the point of displacing the old technology, the most likely thing is that new firms are the ones that lead the charge, and that old ones end up failing.

Both points allowed me to theorize a bit. I started to visualize what could actually be the closest definition for a true compounder. Imagine a company which already leads an industry that cannot be disrupted anyhow, or it’s almost impossible to do so, that has high returns on capital and high margins. In essence, a good business, but with this newly-added factor. Such company would be able to compound capital for an extremely long time and at very much attractive rates.

I’ve been thinking on how to find a business and industry with these characteristics. Almost all products have been disrupted across history, for which trying to find those that haven’t and cannot be disrupted is quite complex. Nevertheless, by listening to all conferences Clayton gave, I came across a fabulous out-of-the-box thought that might help answer this.

Customers are the wrong unit of focus

Customers are the wrong unit of focus. Obsessing over the customer is predicated all around the globe now, and with good reason. People believe that, because clients are those who pay the bills, it is what should make up for the subject of study. However, as the book’s thesis goes, doing so indefinitely ultimately condemns businesses. But why?

Being customer obsessed, even though it’s a good managerial practice, might lead towards the wrong path. People do not know what they want, nor why do they engage with certain activities,or buy a particular product. Therefore, asking clients how to improve the product they are buying will almost always be a futile endeavor. Clayton told a very illustrative anecdote on this:

At a McDonalds, managers were trying to increase milkshake sales. They hired surveyors to ask some questions to people that bought milkshakes. They asked, in a very general manner, how could McDonalds better suite them, totally reasonable; how could McDonalds improve the milkshake they were buying so that they would buy more or lead other customers to do so. Surveyors gathered the feedback and told managers what was needed to be done. Curiously (or not), time went by and milkshake sales did not increase a single bit. That’s when McDonalds’ managers hired Clayton’s team to solve the puzzle.

The team started by observing and taking notes. After a couple of days, they noticed that 70-80% of people that bought milkshakes did so at 7:30-8 in the morning. That piece of data made them think why could this be the case. They then went to McDonalds early in the morning and stopped people that bought milkshakes to ask them:

What job are you trying to do?

Why did you hire the milkshake to do this job?

Think of the last time you hired a milkshake, when was it and what is the common pattern?

Jobs needed to be done

After dozens of answers, the team arrived to the conclusion. What almost always followed the buying of a milkshake was a long and boring drive to work. Customers have two hands and use one for the wheel, but they need to do something else with the other. Moreover, they know they need to get something into their stomach so that they are not hungry by 10am.

That’s the job people needed to get done. People that bought milkshakes did not consciously know this was the job they needed to get done. Consequently, their advice on how to improve the milkshake was oriented towards the milkshake itself, not the job. Now, properly defining this is crucial. Framing and defining the job people are trying to solve can help managers improve the customer experience.

At the same time, it helps get a better glance of the product’s competition. In this case, it’s not other restaurant’s milkshakes, but also bagels, fruits and anything people think could perform the job. One of the customers, funnily after getting to this realization, said:

Last time, I hired a banana to do the job. Trust me, never hire a banana. You finish it in less than a minute, you will feel hungry after 2 hours and your hands get all dirty.

In essence, it did not do the job right, which can lead to a wonderful quote:

“The customer rarely buys what the company thinks it’s selling them”

Going back to the article’s point of interest, the context just provided helps address disruption. The additional advantage of thinking in these lines is that jobs are stable across time. For instance, one of the oldest jobs is getting from point A to point B as fast as possible. Originally, the job was done by walking, then by horses, then by cars, or boats, and then by planes. The solution people gave to the job evolved across hundreds of thousands of years, but the job didn’t change. It is getting from point A to B as fast as possible.

We need to find jobs that are already done in a superb manner, so that there’s little to no place for disruption to occur.

Personal commentary

I’m absolutely fascinated by the set of ideas we’ve been covering in the newsletter. All of these will help us better frame and understand problems, manage and invest. Ultimately, the mission of the newsletter is in track, learning how to think to yield better investment results.