“Fuck a wind tunnel. The biggest wind tunnel in the world is up there. Its called reality.”
John Boyd’s OODA loop is in my opinion one of the most valuable mental models to apply in basically all aspects of life, especially where there is high stakes competition. Boyd’s life makes for an entertaining bio, and Boyd: The Fighter Pilot Who Changed The Art Of War is one of the first completely detailed versions to cover his development as a person, and strategist.. The book develops his character through a series of political battles and personal trauma”. He had an intense belief in empirically testing everything, and he was willing to struggle in the wilderness for decades until he got everything right. His bio tracks how his thinking evolved over time, culminating in several important aeronautical engineering theories, along with the OODA loop.
“Do not write it as a formula. Write it as a way to teach officers to think, to think in new ways about war. War is ever changing and men are ever fallible. Rigid rules simply won’t work. Teach men to think.”
“If you want to understand something, take it to the extremes or examine its opposites,”
The OODA loop
The quick version:
… to shape the environment, one must manifest four qualities: variety, rapidity, harmony, and initiative.
A commander must have a series of responses that can be applied rapidly; he must harmonize his efforts and never be passive. To understand the briefing, one must keep these four qualities in mind. After marching through commander must operate at a faster OODA Loop than does his opponent.
Boyd said there are two ways to manipulate information gleaned from observation: analysis and synthesis. We can analyze whatever process or event we are observing by breaking it down into individual components and interactions. And from this we can make deductions that lead to understanding. Or we can synthesize by taking various sometimes unrelated components and putting them together to form a new whole.
Key quotes on the OODA loop and related theories:
The purpose of the briefing was not to reveal the “Answer” but to jar listeners out of complacency and into thinking on their own. Boyd abhorred the idea that his briefing might be considered dogma. In fact, he often said listeners should take the briefing out and burn it before they considered it dogma.
Boyd found many such instances in history, and in these victories by numerically inferior forces he found a common thread: none of the victorious commanders threw their forces head-to-head against enemy forces. They usually did not fight what is known as a “war of attrition.” Rather, they used deception, speed, fluidity of action, and strength against weakness. They used tactics that disoriented and confused—tactics that, in Boyd’s words, caused the enemy “to unravel before the fight.”
Becoming oriented to a competitive situation means bringing to bear the cultural traditions, genetic heritage, new information, previous experiences, and analysis / synthesis process of the person doing the orienting—a complex integration that each person does differently. These human differences make the Loop unpredictable. In addition, the orientation phase is a nonlinear feedback system, which, by its very nature, means this is a pathway into the unknown. The unpredictability is crucial to the success of the OODA Loop. Only three arrows are on the main axis, and these are what most see when they look at the Observe > Orient > Decide > Act cycle. But this linear understanding and its common result—an attempt to use the Loop mechanically—is not at all what Boyd had in mind.
Application of OODA Loop:
The ability of an aircraft to perform fast transients does two things, one defensive and one offensive: it can force an attacking aircraft out of a favorable firing position, and it can enable a pursuing pilot to gain a favorable firing position. The advantage gained from the fast transient suggests that to win in battle a pilot needs to operate at a faster tempo than his enemy. It suggests that he must stay one or two steps ahead of his adversary; he must operate inside his adversary’s time scale.
Thinking about operating at a quicker tempo—not just moving faster—than the adversary was a new concept in waging war. Generating a rapidly changing environment—that is, engaging in activity that is so quick it is disorienting and appears uncertain or ambiguous to the enemy—inhibits the adversary’s ability to adapt and causes confusion and disorder that, in turn, causes an adversary to overreact or underreact. Boyd closed the briefing by saying the message is that whoever can handle the quickest rate of change is the one who survives.
The danger—and this is a danger neither seen nor understood by many people who profess a knowledge of Boyd’s work—is that if our mental processes become focused on our internal dogmas and isolated from the unfolding, constantly dynamic outside world, we experience mismatches between our mental images and reality. Then confusion and disorder and uncertainty not only result but continue to increase. Ultimately, as disorder increases, chaos can result. Boyd showed why this is a natural process and why the only alternative is to do a destructive deduction and rebuild one’s mental image to correspond to the new reality. Thomas Kuhn, a philosopher of science, and Joseph Schumpeter, an economist, recognized the destructive side of creativity. But Boyd was unique in his explanation of how the process is grounded in fundamentals discovered by Godel and Heisenberg and by entropy.
What will be the scene at your funeral?
Boyd was both a thinker and a doer, the quintessential man in the arena.
Boyd saw himself as a man of principal fighting superiors to do what was best for his country. He wasn’t one to suffer fools, or careerists, or bureacrats beyond the minimum military courtesy required.He took enormous career risk in order to advance the intellectual caliber of the US air force. He document and codified with mathematics techniques that truly worked in the air. This made the world a safer place.
Over time he built up a team of proteges who admired him intensely.
“Boyd’s Acolytes minimize his faults. They say it is more important that his core beliefs were steel-wrapped and his moral compass was locked on true North, that he never misspent his gifts. His motivation was simple: to get as close as possible to the truth. He would have been the first to admit there is no absolute truth. But he continued chasing something that was always receding from his grasp. And in the pursuit he came far closer to the unattainable than do most men. “
This was the description of the eulogy that one of Boyd’s proteges gave for him:
“Not many people are defined by the courts-martial and investigations they faced,” raucous laughter echoed off the white walls of the chapel. Sprey told how Boyd once snapped the tail off an F-86, spun in an F-100, and how he not only stole more than $1 million worth of computer time from the Air Force to develop a radical new theory but survived every resulting investigation. Chuck Spinney, a boyish Pentagon analyst who was like a son to Boyd, laughed so loud he could be heard all across the chapel. Even those in the congregation who barely knew Boyd took a certain pride in his profanity and coarseness and crude sense of humor. He cared little for his personal appearance and could be demanding, abrasive, and unreasonable. And while in his professional life Boyd accomplished things that can never be duplicated, in his personal life he did things few would want to duplicate.
Boyd’s work habits, were, um, interesting. Here was the perspective of one of his colleagues:
He would look up from his work to see Boyd staring at the wall, oblivious to the world, for maybe fifteen or twenty minutes. Boyd was, as he described it, “having a séance with myself.” Then it was as if a switch had been turned on: suddenly Boyd spun around in his chair and picked up the conversation, waved his arms like a windmill in a hurricane, leaned across his desk.
Boyd went to the library—it was open until 1:00 A.M.—and continued working on equations. He made a list of what had to be done next, which equations had to be written and solved, what theories must be followed up and developed. He filled sheet after sheet of his yellow legal pad. When the library closed he drove up Buford Highway, turned onto McClave Drive, entered his home and continued working. Then he called Spradling( colleague with who he worked). It was about 4:00 A.M. in Atlanta, three hours earlier in Las Vegas.
Boyd, as a senior officer, lived in a trailer. By all accounts he worked eighteen- and twenty-hour days. He bought a reel-to-reel tape deck, and every night as he did paperwork his trailer was filled with the ominous “Ride of the Valkyries” or the majestic “Entry of the Gods into Valhalla.”
His search ranged far afield. From the base library he checked out every available book on philosophy and physics and math and economics and science and Taoism and a half dozen other disciplines. He was all over the map, searching but not quite knowing for what.
It was obvious from Boyd’s phone calls that he was not only spending a disproportionately large amount of his retirement pay on books but was reading them all. Christie’s phone might ring at 2:00 A.M. and when he picked it up Boyd would say, “I had a breakthrough. Listen to this.” And without a pause he would begin reading from Hegel or from an obscure book on cosmology or quantum physics or economics or math or history or social science or education. Christie thought Boyd had taken leave of his senses. Except for the year at NKP, the past nine years of Boyd’s life had been devoted to hosing his superiors. He was a man of action. But when he walked out of the Building, he walked into a world of ideas. There was almost no transition. One day he was on the phone checking on the progress of the F-16 and the next he was calling people at 2:00 A.M. to read German philosophy. And for what? What was this learning theory he kept talking about? He said he had begun work on the thing back at NKP and he still had nothing to show for it. Why didn’t Boyd just retire?
One of John’s favorite stories, one he was to tell all his life, revolved around entering high school on September 2, 1942. He said he took a series of tests, one of which showed he had an IQ of only ninety. When offered the chance to retake the test, he refused. The test gave John what he later said was a great tactical advantage in dealing with bureaucrats—when he told them he had an IQ of only ninety, they always underestimated him.
Of course Boyd did have an advanced degree in aeronautical engineering. So he obviously wasn’t dumb. Apparently he worked harder than anyone at checking every single equation he worked on. Even if he wasn’t the smartest, his intense study over his lifetime allowed him to make all the important contributions that he did.
The right side of history
The 1960s were years of protests and demonstrations on college campuses across America. But not at Georgia Tech. In 1961 the president of Tech called a mandatory all-student meeting and announced that the first black students had been accepted, that all students would welcome them in friendship and cordiality, and any student who behaved otherwise would be dismissed and there would be no appeal. Thus, Tech became the first desegregate peacefully and without being forced to do so by court order. Tech and its students were too serious about academics to become sidetracked by such issues. During the 1960s the most avant-garde activity at Tech was the English professor who sometimes held classes at Harry’s Steak House on Spring Street. This professor’s “liberalism” was the talk of the campus.
Unconventional technique of internal politics and internal diplomacy
If your boss demands loyalty, give him integrity. But if he demands integrity, then give him loyalty.
In his new job, Boyd saw problems that needed immediate attention everywhere he looked. But 7th Air Force sent down paperwork daily that took hours to answer. Boyd thought Air Force bureaucracy was keeping him from the job at hand. His solution was to respond but to add material that caused 7th Air Force more paperwork than 7th Air Force caused him. “Pain goes both ways,” he said. In only a few weeks the time-consuming requests from 7th Air Force shrank to almost nothing.
John Boyd as a diplomatic representative
Then there was the story of the junior officer who was having an affair with a Thai woman. There was nothing unusual about this. Thai women are extraordinarily beautiful and many American officers formed close relationships But this particular officer was married and soon was overcome with guilt. He broke off the relationship. The woman in question was the daughter of an influential village official who felt his family lost face when his daughter was spurned. He was about to charge the young officer with rape. Boyd said he called in the young officer and gave him the big picture of how many base activities depended on the good will of Thai officials. He ordered the young officer, guilty or not, to continue the relationship.
“I’m giving you a direct order to screw her every night until you are transferred out of here,” Boyd said he told the officer. “Sir, I don’t believe that is a lawful order,” the officer said. “Goddammit, I issued it and you better obey it. We’re at war and bigger things are at stake here than your guilt. Your dick can cause you problems but it is not going to cause problems for America. You do as I say or I will make your life a living hell
Hey, sometimes a guy needs to take one for the team.
Boyd also thought the Base Exchange (B-X) at NKP was an unnecessary indulgence. He said a store selling everything from hair dryers to television sets to stereos had no place on a combat base—that such things made Americans “soft.” Persky recalls that once, he and Boyd were talking when Boyd pointed at the B-X and said everything in the store should be loaded aboard C-130s and parachuted into North Vietnam. “Let them get used to the good life and then we can just walk in and take over,” he said. Boyd also dealt with situations
Seems Capitalism did sort of do this in the long run.
In a Blitzkrieg situation, the commander is able to maintain a high operational tempo and rapidly exploit opportunity because he makes sure his subordinates know his intent, his Schwerpunkt. They are not micromanaged, that is, they are not told to seize and hold a certain hill; instead they are given “mission orders.” This means that they understand their commander’s overall intent and they know their job is to do whatever is necessary to fulfill that intent. The subordinate and the commander share a common outlook. They trust each other, and this trust is the glue that holds the apparently formless effort together. Trust emphasizes implicit over explicit communications. Trust is the unifying concept. This gives the subordinate great freedom of action. Trust is an example of a moral force that helps bind groups together in what Boyd called an “organic whole.”
Carl Icahn is one of my favorite capitalists. For all his flaws, his glory days were epic. He shook up the corporate aristocracy, and created massive value for his early financial backers. The economy has benefited from the disruption of complacency led by corporate raiders like Icahn.
Below are some of my notes from Icahn’s bio:
The importance of philosophy
Icahn studied philosophy in college. This proved useful in understanding markets and navigating high stakes situations. He focused on the concept of empiricism.
Empiricism says knowledge is based on observation and experience, not feelings,” Icahn said. “In a funny way, studying twentieth-century philosophy trains your mind for takeovers. “. . There’s a strategy behind everything. Everything fits. Thinking this way taught me to compete in many things, not only takeovers but chess and arbitrage.
It seems to me that the quest for an explication of the empiricist meaning criterion, as it has progressed, may be likened to the tale of the city that suddenly finds itself in possession of a great homogeneous mixture of gold and sand. If the gold could be separated from the sand it would prove a great deal more valuable to the inhabitants. The wise men of the city diligently search for a method of separation. By so doing they not only vastly increase their insight into the nature of gold, sand, homogeneous mixtures, etc., but also produce a series of increasingly potent methods of separating the chaff from the gold, the meaningless from the significant.”
Waiting for the right opportunity to pounce
He waits until someone is so stretched out and in need of a deal that he can come in and buy under the most favorable terms.
From the PPM/pitchbook for Icahn’s first fund:
It is our opinion that the elements in today’s economic environment have combined in a unique way to create large profit-making opportunities with relatively little risk. Our nation’s huge need for energy has resulted in a massive flow of dollars abroad. This, coupled with huge deficit spending and decreasing productivity, has caused a high inflation rate and a sharply declining dollar. As a result, the value of gold and goods in general has skyrocketed. An obvious corollary to this is that the real or liquidating value of many American companies has increased markedly in the last few years; however, interestingly, this has not at all been reflected in the market value of their common stocks. Thus we are faced with a unique set of circumstances that, if dealt with correctly, can lead to large profits…
Non linear thinking
Like most great investors, Icahn is a non-linear thinker.
In part, his success is based on an intellectual skill that enables him to plot dozens of moves in advance. While his adversaries are thinking in linear fashion—”If I can get from A to B, then I’ll proceed to C”—Icahn sees dozens of possibilities on a single screen. The mental agility that enables him to zigzag from C to F to Z and back to R, leaves his opponents so thoroughly confused and frustrated they are on the verge of shorting out. “In trying to beat Carl, and failing to do so, people come away baffled,” said Brain Freeman. “But I can tell them why they fail. Because they think they know what Carl’s goal is when in fact he has no fixed goal.
Presented with an ultimatum in which he is told to choose between evil A or lesser evil B, Icahn moves into intellectual overdrive, expanding the range of options. In this way, he turns the tables on his adversaries, who find themselves facing a more ominous threat than they hurled at the raider.
Limitations of Icahn’s approach
Icahn was a great liquidator, a great investor in asset intensive businesses, but sticking too closely to his methods would cause a modern investor to miss great opportunities to invest in rapidly growing businesses. Additionally, based on the performance of IEP, its possible that he has failed to adapt to recent technological disruption, and the age of asset lite businesses.
Carl is a smart Neanderthal,” said Marty Whitman. “He’s a Neanderthal because he doesn’t listen. He has fixed ideas. He doesn’t see that you can’t make money by investing in a business. He only wants to cash out—to get cash flow. He doesn’t understand that most of the great businesses built in this country were cash consumers. They used public markets and consumed cash to build fabulous wealth for their owners. But Carl just wants the cash-out approach.
As with most corporate titans, sometimes his ego gets the best of him. He nearly went bankrupt messing around with airlines, for example. Nonetheless his story is valuable and entertaining, and he wrote the playbook for many situations faced by investors today.
Sam Zell is the patron saint of contrarians and poet laureate of dumpster divers. He has one of the best track records of any real estate or distressed asset investor, and helped pioneer the use of REITs, NOLs, and other key strategies and structures. His excellent autobiography is a valuable lens from which to understand the last 50 years of economic history.
Although he built up his reputation in off the beaten path markets, his sense of macro timing is also surreal. He loaded up on multifamily properties at the bottom of the market in the 1970s. He sold out of a large portion of his holdings near the top of the market in 2007(although that story was a bit more nuanced than I realized prior to reading the book).
Here are my notes and highlights from the book:
A full throttle opportunist
This isn’t a dress rehearsal. I try to live full throttle. I believe I was put on this earth to make a difference, and to do that I have to test my limits. I look for ways to do that every day. After all, I think it was Confucius who said, “The definition of a schmuck is someone who’s reached his goals.” It’s up to me to keep moving the end zone, and go for greatness.
….At some point the guy I was sitting next to turned to me and asked, “So what do you do?” I replied, “I’m a professional opportunist.” And that has been my response to that question ever since.
Zell’s Jewish parents were on one of the last trains out of Poland, just hours before the Nazi’s bombed the train tracks and took over. Many of his ancestors perished in concentration camps. His parents reminded him of this, and it appears to have had a significant impact on his world view
Did you ever wonder how the Jews allowed the Nazis to come into Poland without taking action? I asked my father that when I was little, and I’ll never forget what he said. The Jewish community in Poland at the time was extraordinarily myopic—it had little idea what was going on in the world. And it cost most of them the ultimate price. In contrast, my father’s macro understanding of world events and the conviction to act saved the lives of my family. I apply the same strategy on a much less life-and-death scale. I rely on a macro perspective to identify opportunities and make better decisions, both in my investment activity and in leading my portfolio companies. I am always questioning, always calculating the implications of broader events. How will worldwide depressed currencies affect capital flows and world trade? Does it create opportunity for international expansion among multinational companies? What real estate needs will they have? How can we get a first-mover advantage into new markets? And on and on.
Avoiding the crowd
Zell was clearly unafraid of career risk. Several times in his career he safely sat out major bubbles, and pounced later when it all burst.
The industry has a long history of overbuilding when there’s easy money, without regard for who will occupy those spaces once they’re built. At the same time that construction cranes were dotting the horizon of every major city, the country was just starting to tip into a recession. Supply was going up and prospects for demand were not good. I was certain that we were headed toward a massive oversupply and a crash was coming. That’s when I just said, “Stop.” I was done. I stopped buying assets, started accumulating capital, and got ready for what I was sure would be the greatest buying opportunity of my career thus far. My thesis was that over the next five years, we would have the opportunity to make a fortune by acquiring distressed real estate. So I established a property management firm, First Property Management Company (FPM), to focus on distressed assets. Everyone thought I was nuts. After all, occupancies were still over 90 percent. Absorption was high. Companies were hiring. It was one of many times I would hear people tell me that I just didn’t understand.
I didn’t listen. I just stepped aside while the music was still playing. It was the biggest risk I had taken to date in my career. After all, I had a stable of investors by then. What would they think if I bowed out and the end didn’t come? That would mean I was forgoing a lot of upside for them. It was a true test of my conviction. But I had to follow the logic of supply and demand. Turns out I was right. Less than one year later, in 1974, the market crashed. Hard.
Overnight, we were buying assets at 50 cents on the dollar. At the time, financial institutions did not have to mark to market. In other words, they didn’t have to adjust the book value of their assets to the current market value those assets could actually sell for. If you were an insurance company, instead of marking to market, you could avoid taking a hit
By being contrarian, Zell avoided competition.
In 1980, Bob and I sat down and listed the reasons we didn’t like where the real estate market was headed. First, the key to our prior success had been an inefficient market. The real estate industry had always been fragmented, with valuations and projections that often varied widely. That started changing rapidly with the debut of Hewlett-Packard’s financial calculator. All of a sudden, any owner could hire an MBA with an HP-12C to run ten years of cash flows, none of which considered recessions or rent dips, and make an elaborate and sophisticated case for investment—and a bunch of eager investors would show up to check out the property.
That was not an arena we wanted to compete in. Second, up until then, lenders made long-term, fixed-rate, nonrecourse loans. But as a result of inflation in the 1970s, they got scared and switched to short-term, floating-rate loans. We believed the real money in real estate came from borrowing long-term, fixed-rate debt in an inflationary scenario that ultimately depreciated the value of the loan and increased the position of the borrower. Finally, we had always looked at the tax benefits of real estate as what you got for the lack of liquidity. All of a sudden, sellers were including a value for tax benefits in their asset pricing. So we said, “If we’ve been as successful in real estate as we have been, aren’t we really just good businessmen? And if we’re good businessmen, then why wouldn’t the same principles that apply to buying real estate apply to buying anything else?” We checked the boxes—supply and demand, barriers to entry, tax considerations—all of the criteria that governed our decisions in real estate, and didn’t see any differences. So we set a goal that we would diversify our investment portfolio to be 50 percent real estate and 50 percent non–real estate by 1990.
We narrowed our universe by targeting good asset-intensive companies with bad balance sheets, a thesis similar to real estate. We liked asset-intensive investments because if the world ended, there would be something to liquidate. The low-tech manufacturing and agricultural chemical industries were perfect fits for us—the former driven by Bob with his expertise in engineering and passion for anything mechanical.
I’ve spent my career trying to avoid its destructive consequences. Competition skews people’s assessments; as buyers get competitive, the demand for assets inflates pricing, often beyond reason. I jokingly tell people that competition is great—for you. Me, I’d rather have a natural monopoly, and if I can’t get that, I’ll take an oligopoly. Not long after we got involved with GAMI,
Micro Opportunities in Macro Events
As an investor, Zell has a unique way of combining macro insights with bottom up research.Several examples in the book highlight this. He was “all about seeing micro opportunities in macro events. For example:
In this case, the macro event was legislation similar to the impact of the Economic Recovery Tax Act of 1981 on NOLs. But I find implications for opportunity everywhere—in world events, economic news, and conversations. I’ve always been on the lookout for big-picture influencers and anomalies that will direct the course of industries and companies. But first-mover advantage requires conviction. While the rest of the radio industry was deliberating about what the telecom bill meant and how it would be implemented and whether it was a good change or a bad change, we moved and bought up
Zell’s abiliy to see the big picture gave him an edge in international investing. He was the first gringo in town buying real estate in a lot of the bigger emerging market stories of the past few decades:
This is our primary premise in international investing—the transformation of businesses into institutional platforms. We started in Mexico, then went to Brazil. Then to Colombia, India, and China. So far we’ve brought about thirty companies in fifteen countries along for the ride, with four IPOs. I’m drawn to emerging markets because of their built-in demand. I’ve always believed in buying into in-place demand rather than trying to create it. To me, international investing is largely a story of demography. Just look at population growth. Most of the developed countries (e.g., U.K., France, Japan, Spain, Italy) have aging populations and are ending each year with flat or negative population growth rates. For instance, we don’t spend much time looking at Western Europe. It’s Disneyland. It’s great for wine and castles and cheese, but there’s no growth there. Further, Europe has the largest population of pensioners in the world. The number of retirees who don’t work is close to double what we have in the U.S. and most of those European countries fund each year’s pensions from taxes. It begs the question, with a shrinking workforce where will that money come from? In contrast, most of the emerging markets (e.g., India, Mexico, Colombia, South Africa, Brazil) have younger populations and higher growth rates. And while growth rates across the board have fallen off a cliff opportunity there as well. In particular, we are drawn to Mexico. After the Fukushima nuclear disaster occurred in Japan in 2011, nearly every multinational executive I talked to was bemoaning the cost of delays and availabilities in exports coming out of Asia. I couldn’t help but think that companies would not want to get caught in that type of scenario again, so they would be looking for an alternative manufacturing option closer to home. The only logical place was Mexico. Also, Chinese labor costs were steadily rising and eroding the margin for U.S. companies to manufacture there. So we invested in a Mexican warehouse and logistics company to support what I believed to be a pretty good bet on future growth. Sure enough, within four years, Mexico was in a manufacturing boom with a double-digit increase in exports from Mexican factories. We continue to view opportunity on a global scale. I see international investing as a challenge of connecting multiple dots to reach a conclusion. My job has always been to identify the dots we should pay attention to as well as the incentives that will connect them—all to get maximum possible results
I was cleaning out some files and came across notes from Alibaba: The House that Jack Ma Built.
The Iron Triangle
According to this book, Ali Baba’s rise has been the result of a combination of three strengths : E-commerce, logistics and finance. The author refers to these as the “Iron Triangle”
E-commerce, logistics, finance.
Ali Bababa’s e-commerce sites offer an unparalleled variety of goods to consumers. Its logistics offering ensures those goods are delivered quickly and reliably. Finance subsidiary ensures that Alibaba can get paid via a process is easy and worry free.
One can’t help but notice that there are many companies that have one or two parts of the iron triangle, but few that have all three. Of course there were several unique characteristics of China that Jack Ma has profitably exploited. It will be interesting to see if he succeeds in bringing this model abroad to other emerging markets, and to developed markets.
China’s retail market is highly fragmented and inefficient.
“Key factor in success of e-commerce in China is the burden of real estate on traditional retailers. Land is expensive in China because it is a crucial source of income for the government. Land sales account for one-quarter of the government’s fiscal revenues. At the local government level they account for more than one-third. A prominent e-commerce executive summed it up “ because of the way our economy is structured, the government has a lot of resources. The Government decides the price of land…. The government relies too heavily on the taxes and fees associated with selling land. That almost destroyed the retail business in China, and pushed a lot of demand online. They deprived offline retailers of the opportunity to benefit from rising consumer demand- which they effectively channeled to e-commerce players. “
As a consequence, there has been far less investment in marketing, customer service, human resources or logistics in China’s traditional retail sector in the West. The result? China’s retail market is highly fragmented and inefficient. In the United States, the top 3 grocery chains account for 37% of all sales, In China they account for just 7 percent.
Despite all the shopping malls, offline retail penetration is quite low. In China there is six square feet of retail space per person, less than ¼ the amount in the US. Nature abhors a vacuum, and online retail filled in the gap left by inefficiencies.
“China’s e commerce market differs in important ways from the US and other western economies, the legacy of decades of state planning and important role played by state-owned enterprises. Alibaba has sought out and exploited inefficiencies these have creates, first in e-commerce, now in media and finance. “
Yiwu wholesale market was the template for first e-commerce operations. E commerce had started out with non-standardized products for mom and pop businesses.Lack of national supply chains removed barriers to entry that exist in west, making it possible for individuals to make a money.
Now China has greater e-commerce penetration than the US. Its always fascinating to see the leapfrogging phenomenon in action.
China post laughed at Jack Ma’s attempt to enter logistics.
Zhejiang, where Ali Baba is headquartered is now home to most of China’s largst curior companies: Shentong(STO Express), Tuantong (YTO Express), Zhongtong ZTO Express, Yunda. This small cluster, referred to as the “Tonglu Gang” delivers 50% of all packages
Note that Wells Fargo had its own parcel delivery service in California gold rush.
Having its own financial services arm, Alipay diffuses trust throughout e-commerce empire. The rise of the smartphone was huge for Ali Baba’s financial services segment. Many financial innovations happened in nearby Wenzhou.
Ali Baba exploited inefficiencies in the financial services market, just like it did with online retail. State owned banks paid little heed to needs of individuals and small businesses. Alibaba has access to entire trading history of business customers, much better position to assess credit risk than traditional banks.
Jack Ma’s story is quite inspiring for entrepreneurs.
In 1978, only 728 foreign tourists visit Hangzhou. Jack Ma went to the one hotel where foreigners went and read an English book, starting at 5 am. Every . Single. Day. He’d give free tours of West Lake to foreign tourists in exchange for English practice . He did this day for 9 years.
Long before Ali Baba, Jack Ma had an online directory business called China Pages. When he launched China Pages hardly any one in China had the internet.
Instead Jack came up with an alternative approach. First, he spread the word through friends and contact about what the Internet could do for their business. He then asked those interested to send him marketing materials to introduce their companies and products.
Then he mailed them to Seattle, had a company put them online. Then he printed out screenshots of websites and mailed them to friends.
People treated him like a con man, because he would get people to pay him $2,400(in RMB at the the then exchange rate), to design and host a website, even though the clientele couldn’t see the internet. That was a lot of money in China back then. He must have been a great salesman if he could get customers to pay that much for something they couldn’t see
Key lessons from Jack Ma’s early internet businesses
“It is difficult for an elephant to trample an ant to death as long as you can dodge well. “
More tech entrepreneurs began to emerge as China invested in telecom infrastructure. But internet bubble came and went. How did Jack Ma navigate this?
“ for Jack, the bursting of the bubble represented a great opportunity for Alibaba “ I made a call to our Hangzhou team and said “Have you heard the exciting news about the Nasdaq? … I’d like to have had a champagne on hand. This is healthy for the market, healthy for companies like us
He felt confident that now the IPO gate had closed, venture capital would stop funding Alibaba’s competitors. “In the next three months, more than sixty percent of the internet companies in China will close their doors, he said, adding that Alibaba had spent only $5 million of the $25 million it had raised. “ We haven’t touched our second round funding. “ We have lots of gasoline in our tank.”
Once the bubble burst, Alibaba started using the cash it had built up. Jack started hiring foreign talent and travelling around to tradeshows.
Tao Bao’s Iron Triangle Crushes E-Bay
Two key lessons from Ebay’s failure in China:
- Localize, Localize, Localize
- Its critical to have a faster product development cycle( this fits with John Boyd’s OODA Loop)
Ebay in China was led by foreigners and foreign educated with little knowledge of local amret. They tried to force feed American website standards.
Ebay’s arrogant disaster in China is a valuable business lesson. They continued to represent to investors that they were winning in China, but they lost disastrously. Alibaba had a faster product development cycle(ie OODA loop), and it adapted more quickly to local needs than eBay. eBay burned a lot of money. In the process, E Bay made everything look great on powerpoints and conference calls , but at odds with situation on ground.
Corporate headquarters demoralized local talent, (they ran a site called EachNet in China)
“This gap was reflected in the design of the two rivals’ websites. eBay moved quickly to align the EachNet site with its global site, revamping how products were categorized and altering the design and functionality of the website. This not not only confused customers, but also alienated a number of important merchants who saw their previously valuable China account names had been deleted. This invalidated their trading history and forced them to reapply for new names on an unfamiliar global platform. Worse still, the Chinese websites lacked a customer service telephone number. Ebay’s China site, modeled closely on eBay in the States looked foreign to local users, who found it “empty” when compared to local sites.
In website design, culture matters.
Taobao structured like local bazaar. Edge in e-commerce(see iron triangle above). Better understanding of country’s merchants. Let them do initial listings for free. Eachnet gave into short term shareholder pressure to charge for simply listing products online.
“Ebay just wouldn’t take Alibaba seriously, questioning the reliability of mounting data that showed Taobao was selling more goods than eBay in China. Taobao now had more listings, but eBay convinced itself that because these listings were free, they must be inferior. Jack vigorously rejected that thesis: “The survival and growth of Taobao are not because of the free service. 1Pao[the joint venture of Yahoo and Sina] is also free but it is nowhere close to Taobaol. Taobao is more eBay than eBay China [because] Taobao pays more attention to user experiences.”
Sensing it was over Alan Tien concluded, “Taobao’s product development cycle is much faster. Jack Ma’s right. We cannot fight on his terms.”
Jack Ma’s Iron Triangle had won.
In Grinding It Out: The Making of McDonald’s Ray Kroc tells the story of how he built McDonalds into a behemoth. The key themes that run through it are his persistence and obsessive attention to detail. There are also some interesting strategic insights on how he views store operators differently than the typical franchise business, and how he selected real estate locations. If the book is too long, there is also a movie, and a country music song telling the same general story. The book is unique, however, since it provies a direct view into Ray Kroc’s thought process.
One of the basic decisions I made in this period affected the ehart of my franchise system and how it would develop. That was that the corporation was not going to get involved in being a supplier for its operators. My belef was that I had to help the individual operator succeed in every way I could. His success would insure my success. But I couldn’t do that and, at the same time, treat him a a customer.
There is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other. Once you get into the supply business, you become more concerned about what you are making on sales to your franchisee than with how his sales are doing. The temptation coud become very strong to dilute the quality of what you are selling him in order to increase your profit. This would have a negative effect on your franchiesees business, and ultimately, of course, on yours. Many franchise systems came along after us and tried to be suppliers, and they got into severe business and financial difficulty. Our method enabled us to build a sophisticated system of purchasing that allows the operator to get his suplies at rock-bottom prices. As it turned out, my instinct helped us avoid some antitrust problems some other franchise operators got into.
On selecting locations for new stores:
Back in the days when we first got a company airplane, we used to spot good locations for McDonald’s stores by flying over a community and looking for schools and church steeples. After we got a general picture from the air, we’d follow up wit h a site survery. Now we use a helicopter, and its ideal. Scarceley a month goes by that I don’t get reports from whatever districts happen to be using our five copters on some new locations that we would never have discovered otherwise. We have a computer in Oak Brook tat is designed to make real estate surveys. But those printouts are of no use to me. After we find a promising location, I drive around it in a car, go to the corner saloon and into the neighborhood supermarket. I mingle with the people and observe their comings and goings. That twlls me what I need to know about how a McDonald’s store would do there.
The Fish That Ate the Whale: The Life and Times of America’s Banana King is the biography of Sam Zemurray, known in the early days as Sam the Banana Man. He was an Russian Immigrant turned American Banana Tycoon.
Sam’s philosophy was ” get up first, work harder, get your hands in the dirt and the blood in your eyes.” He had an exceptional ability ability to think abstractly and to translate ideas into actions.
Here are a few highlights from his bio:
1)He built his empire by starting with bananas that were too ripe, and therefore discarded by his larger competitors:
Sam grew fixated on ripes, recognizing a product where others had seen only trash. It was the worldview of the immigrant: understanding how so-called garbage might be valued under a different name, seeing nutrition where others saw only waste. He was the son of a Russian farmer, for whom food had once been scarce enough to make even a freckled banana seem precious”
He later expanded beyond this strategy, which resembled deep value “cigar butt” investing, to build a massive fruit empire. This is one of several reasons that the Investor Field Guide compared him to Warren Buffett.
2) He was resourceful and tenacious. He once built a long dock when he couldn’t get permit for a bridge: