Chip War: The Fight for the World's Most Critical Technology

By Chris Miller, 2002

One popular Soviet joke from the 1980s recounted a Kremlin official who declared proudly, “Comrade, we have built the world’s biggest microprocessor!”

Sony’s research director, the famed physicist Makoto Kikuchi, told an American journalist that Japan had fewer geniuses than America, a country with “outstanding elites.” But America also had “a long tail” of people “with less than normal intelligence,” Kikuchi argued, explaining why Japan was better at mass manufacturing.

China spends more money buying chips each year than the entire global trade in aircraft.

Recommend: 7/10. View on Amazon

All the Worst Humans: How I Made News for Dictators, Tycoons, and Politicians

By Phil Elwood, 2024

Operators like me oil the machines that prop up authoritarian power all over the world. I help those machines function by laundering the sins of dictators through the press.

There are seven and a half PR pros for every journalist. Would you take those odds in a fight?

Recommend: 10/10. View on Amazon

The PayPal Wars: Battles with Ebay, the Media, the Mafia, and the Rest of Planet Earth

By Eric M. Jackson, 2023

Seventeen days after the devastating attacks in New York and Washington, PayPal announced plans that startled both Wall Street and Silicon Valley. On September 28, 2001, our company filed a registration statement with the Securities and Exchange Commission for an initial public offering.

Recommend: 7/10. Read on Amazon

The Times: How the Newspaper of Record Survived Scandal, Scorn, and the Transformation of Journalism

By Adam Nagourney, 2023

In extraordinary events, Siegal told him, we try to keep a certain continuity across the history of the paper: a headline that evokes the spirit of a previous page of comparable gravity. What he had in mind were historic one-line headlines, such as “Nixon Resigns” or “Men Walk on Moon.” The Shuttle Explodes, Rosenthal said. That’s not newsy enough, Siegal said, listing off suggestions: Seven Die As Shuttle Explodes, Seven Die in Blast of Shuttle. Each time Siegal came back with another idea, Rosenthal had the same response. The Shuttle Explodes, Rosenthal said. It’s stately. It’s dignified. It’s icy cold. It’s blood-curdling in its simplicity.

As reporters returned to Washington and New York from Chicago, Rosenthal sent Reston a memo warning that the newspaper faced a challenge in “maintaining its character” because of these new correspondents. It is “inevitable as time goes on that the radical or militant element in the Times staff will increase in size…. It also strikes me as quite likely that in addition to young people who are genuinely torn or confused we will have on our staff people who quite deliberately set out to radicalize the Times.

Even Rosenthal came to acknowledge that “people liked it more than they read it.”

Recommend: 7/10. View on Amazon

The Gray Lady Winked: How the New York Times's Misreporting, Distortions and Fabrications Radically Alter History

By Ashley Rindsberg, 2021

The New York Times was not scrutinized the way any institution that serves a critical public function ought to be. No one was watching the watchdog.

Recommend: 5/10. View on Amazon

Welcome to Hell

By “Bad” Billy Pratt, 2021

I didn’t choose a path, so one was chosen for me, like I let the menu screen run for too long and the game booted up on its own.

There’s a complexity to adolescence that becomes forgotten in adulthood. Like the ability to truly fall in love, once it’s lost, it’s gone forever. People who shit on adolescence—who mock those who miss high school, who swear they’d never go back while laughing at the cynicism they’ve developed over the years—are dead inside and should be avoided. If you’re so far gone that you can’t remember a time more lofty and wistful…you may as well give yourself over to the system entirely, work your bullshit job until you’re dead, and, if you’re a woman, get pounded out by every shithead with a decent opener on Plenty of Fish. Most men don’t have that luxury. If you do have fond memories of adolescence, you’ll end up doing all that just the same, but at least you’re not an asshole.

Recommend: 8/10. View on Amazon

From Third World to First: The Singapore Story: 1965-2000

By Lee Kuan Yew, 2000

We had one simple guiding principle for survival, that Singapore had to be more rugged, better organised and more efficient than others in the region. If we were only as good as our neighbours there was no reason for businesses to be based here.

Start with putting three of your friends to jail. You definitely know what for, and people will believe you.

If I have to choose one word to explain why Singapore succeeded, it is “confidence”

Recommend: 7/10. View on Amazon

McCain's Promise: Aboard the Straight Talk Express with John McCain and a Whole Bunch of Actual Reporters, Thinking About Hope

By David Foster Wallace, 2000

You can run the same kind of either/or analysis on almost everything about this candidate. Even the incredible daily stamina he shows on the Trail—this could be a function of McCain’s natural energy and enjoyment of people, or it could be gross ambition, a hunger for election so great that it drives him past sane human limits. The operative word here is “sane”: the Shrub stays at luxury hotels like the Charleston Inn and travels with his own personal pillow and likes to sleep till nine, whereas McCain crashes at hellish chain places and drinks pop out of cans and moves like only methedrine can make a normal person move.

Recommend: 10/10. View on Amazon

Note: listen to the audiobook — it’s just 4 hours, and narrated by DFW

A Supposedly Fun Thing I'll Never Do Again: Essays and Arguments

David Foster Wallace, 1998

I am now 33 years old, and it feels like much time has passed and is passing faster and faster every day. Day to day I have to make all sorts of choices about what is good and important and fun, and then I have to live with the forfeiture of all the other options those choices foreclose. And I'm starting to see how as time gains momentum my choices will narrow and their foreclosures multiply exponentially until I arrive at some point on some branch of all life's sumptuous branching complexity at which I am finally locked in and stuck on one path and time speeds me through stages of stasis and atrophy and decay until I go down for the third time, all struggle for naught, drowned by time.

Americans seemed no longer united so much by common beliefs as by common images: what binds us became what we stand witness to.

Recommend: 8/10. View on Amazon

The Decadent Society: How We Became the Victims of Our Own Success

By Ross Douthat, 2020

The left-wing dude who tries to assassinate Republicans isn’t just a little deeper into the Resistance mind-set than the average activist; he’s the guy who totally misunderstands the Resistance, who listens to all the online talk about treason and fascism and thinks that he’s really in 1940s France and his online allies are actually the Maquis instead of just the suburban-liberal cosplay version.

…it shouldn’t surprise anyone if decadence ends with people looking heavenward: toward God, toward the stars, or both.

Recommend: 7/10. View on Amazon

Unstoppable: Siggi B. Wilzig’s Astonishing Journey from Auschwitz Survivor and Penniless Immigrant to Wall Street Legend

Joshua M. Green, 2021

When Naomi found out her husband was purchasing shares of Wilshire on a regular basis, she chided him. “More stock? We can barely pay the bills and you’re buying more stock?” Siggi made excuses, but he didn’t stop buying.

Recommend: 8/10. View on Amazon

Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

By Henry Hazlitt, 1946

But such facts and their modern counterparts have led some writers to the opposite extreme of looking only at the immediate effects on certain groups. Joe Smith is thrown out of a job by the introduction of some new machine. “Keep your eye on Joe Smith,” these writers insist. “Never lose track of Joe Smith.” But what they then proceed to do is to keep their eyes only on Joe Smith, and to forget Tom Jones, who has just got a new job in making the new machine, and Ted Brown, who has just got a job operating one, and Daisy Miller, who can now buy a coat for half what it used to cost her. And because they think only of Joe Smith, they end by advocating reactionary and nonsensical policies.

Recommend: 7/10. View on Amazon

Liar's Poker

By Michael Lewis, 1989

I thought instead of a good rule for survival on Wall Street: Never agree to anything proposed on someone else's boat or you'll regret in in the morning.

Buy potatoes,” he said. “Gotta hop.” Then he hung up. Of course. A cloud of fallout would threaten European food and water supplies, including the potato crop, placing a premium on uncontaminated American substitutes. Perhaps a few folks other than potato farmers think of the price of potatoes in America minutes after the explosion of a nuclear reactor in Russia, but I have never met them.

Recommend: 7/10. View on Amazon

The Wager: A Tale of Shipwreck, Mutiny and Murder

By David Grann, 2023

In 1757, Admiral John Byng would be executed after being found guilty of failing to “do his utmost” during battle, prompting Voltaire to remark in Candide that the English believed it proper to “kill an admiral from time to time in order to encourage the others.

Yet they were compelled onward by that mysterious narcotic: hope.

Just as people tailor their stories to serve their interests - revising, erasing, embroidering - so do nations. After all the grim and troubling narratives about the Wager disaster, and after all the death and destruction, the empire had finally found its mythic tale of the sea.

Recommend: 8/10. View on Amazon

Self-Reliance and Other Essays

Ralph Waldo Emerson, 1841

An institution is the lengthened shadow of one man

The secret of fortune is joy in our hands. Welcome evermore to gods and men is the self-helping man. For him all doors are flung wide; him all tongues greet, all honors crown, all eyes follow with desire. Our love goes out to him and embraces him because he did not need it. We solicitously and apologetically caress and celebrate him because he held on his way and scorned our disapprobation. The gods love him because men hated him. “To the persevering mortal,” said Zoroaster, “the blessed Immortals are swift.”

The law of nature is, Do the thing, and you shall have the Power; but they who do not the thing have not the power.

Recommend: 10/10. View on Amazon

Scott Kupor

When Marc and Ben first started Andreessen Horowitz, they described this founder leadership capability as “egomaniacal.” Their theory—notwithstanding the choice of words—was that to make the decision to be a founder (a job fraught with likely failure), an individual needed to be so confident in her abilities to succeed that she would border on being so self-absorbed as to be truly egomaniacal. As you might imagine, the use of that term in our fund-raising deck for our first fund struck a chord with a number of our potential investors, who worried that we would back insufferable founders. We ultimately chose to abandon our word choice, but the principle remains today: you have to be partly delusional to start a company given the prospects of success and the need to keep pushing forward in the wake of the constant stream of doubters.

Recommend: 8/10

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Billionaire’s Row

Katherine Clark

Come, let us build ourselves a city, with a tower that reaches to the heavens, so that we may make a name for ourselves. GENESIS 11:4

From the epigraph

Recommend: 11/10

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So Good They Can’t Ignore You

Cal Newport

Remember, this is someone who gave away $22 million and sold his possessions after his company was acquired. Instead, as he explained: “Money is a neutral indicator of value. By aiming to make money, you’re aiming to be valuable.

Recommend: 7/10

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The Big Short

Michael Lewis

Charlie Ledley and Ben Hockett returned from Las Vegas on January 30, 2007, convinced that the entire financial system had lost its mind. "I said to my mother, 'I think we might be facing something like the end of democratic capitalism,'" said Charlie. "She just said, 'Oh, Charlie,' and seriously suggested I go on lithium.”

Recommend: 9/10

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Business Adventures

John Brooks

McLuhan, for one, was convinced that all efforts to preserve the old forms of author protection represent backward thinking and are doomed to failure (or, anyway, he was convinced the day he wrote his American Scholar article). “There is no possible protection from technology except by technology.”

Recommend: 5/10

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Red Notice

Bill Browder

I did some quick math. The share price valued this company at $80 million, while the company’s profits for the previous year were $160 million, which meant that the Polish government was selling this company for one-half of the previous year’s earnings! I was stunned. In simple terms, this meant that if you invested in this company and it stayed in business for six months, you would effectively make your money back.

Recommend: 11/10

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Hopping Over the Rabbit Hole

Anthony Scaramucci

“Gentlemen, I hear your concerns.” I paused. “Thank you for your vote. We’re doing it anyway.”

Recommend: 7/10

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Confidence Game

Christine S. Richard

Despite having no professional money-management experience, the pair began scouting for investors even before graduation. It took a healthy amount of gumption for Ackman, then 26 years old, and Berkowitz, 32, to ask millionaires and billionaires to trust them with a piece of their fortunes.

Recommend: 7/10

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By Jeff Bezos

This is a collection of Jeff's Amazon investor letters, and each one is a masterpiece of clear writing and brilliant long-term business strategy. I'm impressed how little Bezos' vision has changed since 1997—a testament to his long-term thinking.

Recommend: 10/10.

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Boyd

by Robert Coram

This book is about a man who gave no fucks. Boyd was a top fighter pilot, an aircraft designer, and a military strategist (he's the guy who invented the OODA Loop). He was hated by the Pentagon, because he would prioritize his country over their bureaucratic bs. One Boyd quote I'll never forget:

To be somebody or to do something. In life there is often a roll call. That’s when you will have to make a decision. To be or to do? Which way will you go?

Come for the biography, stay for the strategy and life philosophy.

Recommend: 9/10

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The Art of Profitability

by Adrian J Slywotzky

This is not a normal business book—it's written in the form of a dialogue between a mentor and his mentee. But it is a good look at 23 different profit models if you can get past all the dialogue stuff.

Recommend: 5/10

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The Courage to be Disliked

by Ichiro Kishimi

The underlying premise of this book: your past trauma doesn't determine your future. This book is a Socratic dialogue between a master and his student, where the master lays out Adlerian philosophy: don't worry about external approval, love yourself, don't try to be someone else, contribute to community. It's a contrast from the Freudian (etiological) mindset which assumes that the past has an overwhelming control of the future.

Recommend: 10/10

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The Art of Money Getting

by P.T. Barnum

I love this book for its clarity and simplicity. This book doesn't cover strategy or tactics but instead focuses on business and wealth principles such as debt, location, talent vs. passion. It is fascinating to see how core business principles never change as time goes on. You should be able to read this in an hour or two.

Recommend: 5/10

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The Algebra of Happiness

by Scott Galloway

Scott Galloway is a smart man. While his investment advice has a dubious track record, his book about career success and life happiness didn't miss. One big point Scott makes in this book: don't seek "balance" in your twenties. Point taken.

Recommend: 7/10

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Sam Walton: Made in America

by Sam Walton

This book follows the Walmart story from when Sam worked for JC Penney. Sam explains his business strategies and tactics in detail: his loss leader strategy with beauty items, his equity grant program to align incentives among store managers, his real estate acquisition thought process. It's a book that Jeff Bezos would make each new core Amazon hire read, and you can see why. Read this book.

Recommend: 10/10

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Shoe Dog

by Phil Knight

No one I've recommended this book to, regrets reading it. Phil Knight is a relentless guy and in this autobiography it shows.

Recommend: 10/10

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The One Thing

by Gary Keller

Gary Keller was once a 14-hour-workday type who later realised that working on the right thing (and usually just focusing on one single goal) has far more impact than the number of hours you work. This formula from Gary sticks with me: "What’s the one thing I can do, such that by doing it everything else is easier or unnecessary?"

Recommend: 8/10

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The Great Gatsby

by F. Scott Fitzgerald

This book is the best real-life example of the bookend strategy: the first page is one of the most captivating pages of literature, and the last page is one of the most memorable. I love Fitzgerald's writing because every character is developed through the lens of what they yearn for. Gatsby is full of brilliant quote-worthy dialogue: “All I kept thinking about, over and over, was 'You can't live forever; you can't live forever.”

Recommend: 11/10

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Building a Story Brand

by Donald Miller

Ignore the clickbaity title, this book is a must-read for a business owner looking to learn the principles of branding and messaging. Donald Miller shows how the best brand messaging takes the form of a story, and why this is the case, from an evo psych perspective. Every novel and every great film follow a 6-step storyline, and when you apply the same framework to a brand, great things happen. I use lessons from this book often.

Recommend: 10/10

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How to Get Rich

by Felix Dennis

This book is seriously underrated. Scammy-sounding title aside, this book is a breath of fresh air from the traditional "think and grow rich" book category. Felix Dennis (who was properly wealthy) breaks down his uncomfortable advice on becoming wealthy, and provides his input on hiring, firing, raising capital, taking risk, diversifying, and more. Read this book—it will either change or offend you.

Recommend: 11/10

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Striking Thoughts

by Bruce Lee

This is a collection of wisdom from Bruce Lee. The over-arching theme: it is simpler than you think, dedicate yourself to your craft.

Recommend: 6/10

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What Matters Most is How Well You Walk Through Fire

by Charles Bukowski

Bukowski is a master poet and philosopher. One excerpt: "When a hot woman meets a hermit one of them is going to change" If you haven't read Bukowski, buy this. If you love Bukowski, buy it also.

Recommend: 8/10

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Never Split the Difference

by Chris Voss

This book is written by a former FBI hostage negotiator. He shows the techniques used to work out deals with hostage takers and other bad actors, and how that might be applied in business. Not as actionable as I'd like, but it's a good, quick read.

Recommend: 6/10

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Turning Pro

by Steven Pressfield

This book pairs well with Pressfield's earlier book, the War of Art. In this book he develops on his themes of the artist vs. the addict, the amateur vs. the professional. It's an exploration of self-sabotage and the mental warfare that sometimes must take place to "turn pro". This book will confront you. Read it.

Recommend: 9/10

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Getting Everything You Can Out Of All You’ve Got

by Jay Abraham

This book changed how I view and look for business growth opportunities. Instead of traditional growth tactics, this book focuses on more creative strategies, such as mutually beneficial partnerships and referral systems.

Recommend: 7/10

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The Alchemist

by Paulo Coehlo

The Alchemist has divided people: some think it is woo-woo new-age fluff, and some think it is peak literature. I appreciated this book because it is a metaphor of life and career. This is a quick weekend read. "It's the possibility of having a dream come true that makes life interesting."

Recommend: 9/10

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A Million Miles in a Thousand Years

by Donald Miller

For me this was a quake book—one that changed me as a person as I read it. The premise is that your life is a story, and you write the chapters. Therefore, it's up to you to write a great book, complete with big goals, challenges, protagonists, antagonists, and achievement.

Recommend: 10/10

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Greenlights

by Matthew McConaughey

McConaughey is a brilliant storyteller. This book is great. Bonus: get the audiobook—it's narrated by Matthew himself.

Recommend: 8/10

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Introduction to Unmanned Aircraft Systems

by R. Kurt Barnhart

Great for those interested in the tech behind UAS. Don't read this if you don't love drones.

Recommend: 4/10

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Conspiracy

by Ryan Holiday

This book will leave you with a little bit of admiration for all the characters: Hulk Hogan, the mysterious "Mr. A", Nick Denton, and Peter Thiel. It's a story of power, indignation, rebellion, and strategy.

Recommend: 9/10

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The Bitcoin Standard

by Saifedean Ammous

This book can take you from not knowing what fiat money is, to knowing more about bitcoin than most bitcoiners know. And it's a compelling read. It follows the story of money, from the days when money was stones and salt and cattle, to the present day.

Recommend: 9/10

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American Kingpin

by Nick Bilton

I binge-read this book, and gave the book to my friend who did exactly the same. It's the story of Ross Ulbricht and the Silk Road, and the massive effort to take him down. It's a story of smart criminals, smart law enforcement, and corrupt justice as well.

Recommend 10/10

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Zero to One

by Peter Thiel

I've read this book five times, and I come away with a better understanding each time. If any book has shaped the way I choose which business to build, it is this one. You can find my detailed book notes here. Quote: "Monopoly is the condition of every successful business"

Recommend: 10/10

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Chaos Monkeys

by Antonio Garcia Martinez

Antonio is an entertaining writer, and pairing that with an inside look at Facebook and Twitter makes for good reading. You'll learn a surprising amount about acqui-hires, adtech, IPO's and FAANG compensation, and you'll get a good dose of workplace drama as well. Some chapters slowed down though.

Recommend: 6/10

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The Cult of We

by Eliot Brown

The story of Adam Neumann and the WeWork implosion reads like fiction. This book doubles as entertainment and a cautionary tale involving dishonesty, misdirection, private jets, and nannies who looked the same (in order to make it seem like Neumann's family didn't have so many nannies).

Recommend: 10/10

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The War of Art

by Steven Pressfield

This book precedes Pressfield's book "Turning Pro". It's about overcoming "the resistance" which prevents us from putting our best work out into the world. This book is not strictly for artists, but for writers, content creators and founders.

Recommend: 9/10

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Poor Charlie’s Almanack

by Charlie Munger

For some reason this book sells on the secondary market for $250, but it's worth it. It's not tactical; instead it's a collection of decision-making heuristics that are useful in life and business. Much of Munger's philosophy boils down to avoiding catastrophe. My favorite Munger quote: "Don't do cocaine, don't race trains, and avoid AIDS situations"

Recommend: 7/10

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Outwitting the Devil

by Napoleon Hill

This is one of Hill's lesser-known books, but it's his best. To sum up the book's message: don't be a spectator, don't drift, have a definiteness of purpose.

Recommend: 6/10

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The Sovereign Individual

by James Dale Davidson

This book was written in 1999, and in the last two decades its predictions about the future have been amazingly accurate. This book predicted the rise of large-scale terrorism in the 2000's, the advent of Bitcoin, and the pandemic that started in Wuhan in 2019. All this gives weight to the predictions in the book which haven't yet happened, such as the government treating the individual as a customer, rather than a subject.

Recommend 10/10

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Blue Ocean Strategy

by W. Chan Kim and Reneé Mauborgne

The Blue Ocean Strategy is about becoming lopsided—offering a huge increase in value in a certain area that your competitors don't. It may involve adding something to your product, or it may involve taking things away in order to deliver a simpler, more inexpensive product.

Recommend 9/10

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The Carnivore Code

by Paul Saladino

Dr. Paul Saladino makes a strong case that an all-meat diet is a great health choice for many people. He dispels well-funded and common myths such as "red meat is bad" and "cholesterol is bad" and explores how the carnivore diet can heal chronic illness, improve brain function, and more.

Recommend 7/10

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Always a Soldier

by Rob Smith

This book destroys narratives. Rob Smith is known to some as "America's favorite black, gay Republican"...and you could add Army veteran and contrarian to that list. Rob recounts his lower class American upbringing, his service in the military during the "don't ask, don't tell" era, his coming out, and his subsequent political evolution. This book aims to shatter stereotypes, and it does.

Recommend 9/10

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Story

by Robert McKee

The common thread between all great books and movies is a compelling story. And contrary to what many outsiders (and underachieving insiders) think, all great stories follow a near-identical structure. “If the story you're telling, is the story you're telling, you're in deep shit.” Even if you have no intention of writing a novel or a screenplay, this book will help you appreciate more the next movie you watch.

Recommend: 7/10

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Laws of UX

by Jon Yablonski

Jon Yablonski's book was the inspiration for the breakdown of the bedrock UX principles that I put together here. If you are even tangentially involved in design, read this book.

Recommend 8/10

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The Upside of Stress

by Kelly McGonigal

This book changed how I work. Too often we fight stress in an attempt to reach a state of equilibrium. This book shows you that stress is your friend, and that it is to be leaned in to. Please read this book. It could unlock a solid 50% more potential in you.

Recommend: 11/10

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Liftoff

by Eric Berger

This is a great view into the early days of SpaceX when the team was launching rockets from a tiny Island in the Pacific. This book will give you a greater respect for space pioneers, and for Elon Musk. The personal risk he took on to make SpaceX happen is impressive.

Recommend 6/10

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Founders at Work

by Jessica Livingston

In this book Jessica Livingston interviews internet founders about their early days. Great book.

Recommend 8/10

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Risk Game

by Francis J. Greenburger

Risk Game is the story of a brilliant real estate entrepreneur and the risks he took to become a billionaire. It's a story of impressive grit.

Recommend 9/10.

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Swimming Across

by Andy Grove

This book is exceptional. It's the account of Andy Grove's escape from occupied Hungary to the United States. If nothing else, this book will make you deeply thankful for the problems you have.

Recommend 10/10.

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Warfighting

by A.M. Gray

Masterpiece. A must-read about strategy. Quote: "Finally, since all decisions must be made in the face of uncertainty and since every situation is unique, there is no perfect solution to any battlefield problem. Therefore, we should not agonize over one. The essence of the problem is to select a promising course of action with an acceptable degree of risk, and to do it more quickly than our foe. In this respect, 'a good plan violently executed now is better than a perfect plan executed next week.'"

Recommend 10/10

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Breath

by James Nestor

This book shows how the way we breathe affects everything from our lifespan to our facial aesthetics. Read this, and also implement. This book fully supported my thesis and habit of taping my mouth shut at night.

Recommend 8/10

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Behind the Cloud

by Marc Benioff

Marc is a master marketer. This book will inspire you to get a little more brash with your marketing, and a lot more.

Recommend 9/10

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Sapiens

by Yuval Noah Harari

I bought this book to impress my friends. I'm kidding, it's actually good.

Recommend 7/10

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The Hard Thing About Hard Things

by Ben Horowitz

This book surfaces the business problems that are too sticky for textbooks to cover: IPO's on the brink of failure, employees who want to quit, markets that collapse at just the wrong time, and more. Read this if you are a business leader.

Recommend 10/10

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7 Powers

by Hamilton Helmer

This book contains just enough calculus to keep the normies away, but if you can see past the math equations this book is a masterpiece in strategy. One idea that's stuck with me: don't just develop an advantage, but rather a non-arbitrageable advantage.

Recommend 10/10

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High Growth Handbook

by Elad Gil

Dense and valuable book which is just as mucha a reference as it is a cover-to-cover read.

Recommend 8/10

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David Bowie: The Last Interview

by David Bowie

David Bowie refused to be put into a box. He reasoned from first principles and held nothing as sacred—except the truth, it seems. This is a collection of Bowie's press interviews.

Recommend: 4/10

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How Ronald Reagan Changed My Life

by Peter Robinson

Ronald Reagan was an extraordinary person and leader. "'The thing about Reagan,' Tony continued, 'is that he was able to make the leap from acting to reality. He understands open-endedness and contingency. He sees that life is a drama in which a lot of the scenes still haven’t been written. And recognizing the open-endedness of life makes Reagan a lot more unusual than you might think.'"

Recommend: 10/10

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Working Backwards

by Colin Bryar and Bill Carr

Jeff Bezos may be the greatest entrepreneur in history, and this is a look inside his first company. This book gives a look into Jeff's mind and the processes and standards he developed to sustain innovation while Amazon grew into a giant company. Highly actionable.

Recommend 10/10

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The Singularity is Near

by Ray Kurzweil

Our sole responsibility is to produce something smarter than we are; any problems beyond that are not ours to solve …

Recommend: 8/10

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The Everything Store

by Brad Stone

Jeff Bezos is the understudied founder of this generation. This book is fast-paced, entertaining, and dives deep into Bezos’ ruthless management style and customer-centric philosophy.

“Your job is to kill your own business,” he told him. “I want you to proceed as if your goal is to put everyone selling physical books out of a job.”

Recommend: 9/10

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Electronic Value Exchange

by David L. Stearns

Despite the academic cover, this book is a compelling read. It tracks the origin of VISA, from the days when it was a computer-less card system serving suburban California. It’s a story of power brokerage, mutinees, negotiation, and the overarching, opinionated vision that Dee Hock had.

Even if you don’t work in fintech, this book is worth a read.

Hock recounts that on the fourth night he began to realize that if the methods of biological evolution could produce such complex organizations as brains and immune systems, not to mention larger and more diverse systems such as rain forests, marine and weather systems, the same sort of principles employed by humans might be able to create the kind of complex, self-organizing system he wanted to achieve.

Recommend: 7/10

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Bloomberg by Bloomberg

by Michael Bloomberg

Bloomberg is missing from the Silicon Valley canon because he has stayed away from Silicon Valley. But this book is a powerful account of the rise of a hardware-software monopoly and how Bloomberg got there. It’s written in his own no-nonsense tone of voice.

Did I want to risk an embarrassing and costly failure? Absolutely. Happiness for me has always been the thrill of the unknown, trying something that everyone says can't be done, feeling that gnawing pit in my stomach that says ‘Danger ahead’.

Recommend: 7/10

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The Philosophy of Andy Warhol

by Andy Warhol

Andy Warhol was excruciatingly honest in his writings. His worldview bordered on nihilistic, but his odd way of thinking about things might spark some new ideas for you as it did for me.

Sometimes people let the same problem make them miserable for years when they could just say, So what. That's one of my favorite things to say. So what.

Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art.

Recommend: 5/10

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The Crack-Up

by F. Scott Fitzgerald

F. Scott Fitzgerald went from obscurity to fame to brokenness. These collected pieces trace his journey in his stunning writing style.

Before I go on with this short history, let me make a general observation– the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function. One should, for example, be able to see that things are hopeless and yet be determined to make them otherwise. This philosophy fitted on to my early adult life, when I saw the improbable, the implausible, often the "impossible," come true.

Fitzgerald’s personal trajectory seemed to follow the optimism of the 1920’s and then the pessimism of the 1930’s. Read this book for a first-hand account of what the Roaring Twenties felt like.

And lastly from that period I remember riding in a taxi one afternoon between very tall buildings under a mauve and rosy sky; I began to bawl because I had everything I wanted and knew I would never be so happy again.

Recommend: 7/10

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A Billion Years

by Mike Rinder

Mike Rinder was the international spokesperson for the Church of Scientology until he escaped in 2007. It’s a hypnotic read and an exploration into the mind prisons we are all susceptible to.

The fight for the very survival of scientology became even more real and urgent. And I believed it was my duty to mankind to take that fight to the mat and sacrifice whatever was needed to ensure we prevailed.

Recommend: 8/10

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Industries of the Future

by Alec Ross

Alec Ross served as Obama’s Senior Advisor for Innovation to the Secretary of State. Unfortunately this book doesn’t dive deep enough to learn much of substance.

If international norms and treaties are not agreed to, setting definitions and boundaries for cyberconflict, a cyberwar is just as likely to be fought between a country and a company as it is between two countries.

Recommend: 3/10

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Kelly: More Than My Share of it All

Clarence L. "Kelly" Johnson

Kelly Johnson joined Lockheed in its earliest days and stayed to spearhead the design of the CIA’s U-2 and other impressive aircraft.

This is a story of inspiring discipline, work ethic, creativity, and leadership ability.

Fortunately, the worrisome nature that produced immediate ulcers during a crisis was overridden by my naturally strong Swedish constitution, and the ulcers would heal in about a week.

Recommend: 8/10

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The Third Wave

by Steve Case

Steve Case founded AOL after a stint as Pizza Hut’s manager of new pizza marketing. This book outlines Steve’s thesis that the next wave of the internet and technology will happen in today’s real-world industries such as health, education, transportation, energy, and food.

The Stone Age didn’t end because we ran out of stone. It ended because we invented something better.

Recommend: 5/10

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Preface

Every moment in business happens only once. If you're copying Zuckerberg or Gates, you're not learning from them.

The result of fine-tuning existing ideas (vs. making bold bets and creating radically new businesses and things) threatens to result in a catastrophe far worse than the crisis of 2008.

Today's 'best practices' lead to dead ends; the best paths are new and untried.

If American business is to succeed, we will need miracles. And miracles = technology.

A formula for startup success necessarily can't exist. Being innovative has no prescribed route.

The single most powerful pattern, though: "successful people find value in unexpected places, and they do this by thinking about business from first principles, instead of formulas."

Chapter 1: The Challenge of the Future

Peter Thiel's job interview question: "What important truth do very few people agree with you on?"

Bad answers to this are either not in fact unpopular, or take one side in a familiar debate.

Good answers "are as close as we can come to looking into the future."

Vertical vs. Horizontal Progress: horizontal = copying, vertical = creating.

No reason why "technology" should be limited to computers. Technology = new and better ways of doing things.

Peter Thiel's own answer to the contrarian question: while most think that the future will be defined by globalization, technology (vertical progress) matters more.

In a world of scarce resources, globalization without new technology is unsustainable.

New technology tends to come from small groups of people bound together by a sense of mission.

Why not large companies? Bureaucracies shy away from risk, and entrenched interests can prevent change.

Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.

Chapter 2: Party Like It's 1999

Conventional beliefs (like the late 90's tech bubble) only seem wrong in retrospect.

Also, the dot com crash distorts thinking around technology today; we need to question what we think we know about the past.

Dot com mania was intense but short (18 months, Sep 1998 to Mar 2000). Money everywhere, exuberance, sketchy characters.

PayPal's first idea: beam money from one PalmPilot to another—unsuccessful idea.

PayPal's pivot: money via email.

Their growth strategy: $10 sign-up bonus, $10 referral bonus.

The 2000 crash seemed to cast judgement on the technological optimism of the 90's, and resulted in smaller thinking and a "fundamentally indefinite" view of the future.

The crash resulted in flawed thinking that persists in tech today:

1. Make Incremental Advances: Be more humble, don't have such big ideas

2. Stay lean and flexible: Planning is arrogant and inflexible, so iterate instead

3. Improve on the Competition: Don't try to create a new market, improve on existing products

4. Focus on product, not sales: Don't worry about distribution, and the only sustainable growth is viral growth.

The opposite principles are probably more correct:

1. It is better to risk boldness than triviality

2. A bad plan is better than no plan

3. Competitive markets destroy profits

4. Sales matter just as much as product

The market high of March 2000 was obviously a peak of insanity; less obvious but more important, it was also a peak of clarity. People looked far into the future, saw how much valuable new technology we would need to get there safely, and judged themselves capable of creating it.

We still need new technology and may need some of that 1999-style hubris and exuberance to get it.

We must abandon the dogmas created after the crash.

"The most contrarian thing of all is not to oppose the crowd but to think for yourself."

Chapter 3: All Happy Companies are Different

The business version of the contrarian question: What valuable company is nobody building?

Question is harder than it looks, because a great company doesn't just create value—it captures some value as well.

Example of a bad business: airlines (they made $0.37 per passenger trip in 2012).

Example of a great business: Google (21% profits in 2012).

As a result, Google is 3x the value of all US airlines combined.

Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition: Monopoly.

Capitalism and competition are opposites.

The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don't build an undifferentiated commodity business.

Most businesses are much closer to the extremes of the monopoly-perfect competition spectrum than we realize. Why? both monopolies and undifferentiated businesses are incentivized to bend the truth.

Monopolies lie to protect themselves from antitrust.

Example: Google claims it is an advertising company, not a search engine company (where it owns majority market share).

Non-monopolies aim to differentiate themselves with their claims.

Example: Indian restaurant claims their naan is the best.

Monopolists will find the largest market possible to appear a small fish.

Non-monopolists will claim their dominance over an intersection of several markets.

Monopolies are better for company mission and employee satisfaction, as all value isn't bled away to competition.

Monopolies create an environment for positive creation. Example: Apple products

The history of progress is of incumbents being replaced by better monopolies.

Monopolies provide the incentive to innovate.

Monopolies give the ability to create long-term plans and engage in ambitious research.

The model of perfect competition is outdated and flawed, and does not reflect business accurately.

Metaphor: in physics, perfect equilibrium results in the heat death of the universe.

In business, equilibrium means stasis, and stasis means death.

Every new creation takes place far from equilibrium.

Every business is successful exactly to the extent that it does something others cannot.

Monopoly is therefore not a pathology or an exception.

Monopoly is the condition of every successful business.

All happy companies are different: each one earns a monopoly a by solving a unique problem.

All failed companies are the same: they failed to escape competition.

Chapter 4: The Ideology of Competition

Why is competition held up as good? It's rooted in ideology.

The education system is rooted in competition, and creates conformists competing for the same set of prizes.

All Rhodes Scholars had a great future in their past.

As Shakespeare illustrated, people fight because they are similar ("two households, both alike in dignity")

Real-world example: while Microsoft and Google focused on one-upping each other, Apple overtook them.

Non-conformists have an advantage—they are less driven to mimesis and competing for the same prizes as everyone else.

Competition can make people hallucinate opportunities where none exist (90's online pet store market).

In Feb 2000 Elon Musk and Thiel were both more scared of the impending tech bubble than they were about each other, so they negotiated a 50-50 merger.

Chapter 5: Last Mover Advantage

A great business is defined by its ability to generate cash flows in the future.

The value of a business today is the sum of all the cash it will generate in the future (and also discounting for the passage of time).

Old Economy businesses (newspapers, nightclubs, restaurants) are risky by this measure.

Most of a tech company's value will come at least 10 to 15 years into the future.

Many entrepreneurs succumb to "measurement mania"—they measure at-hand short-term metrics while overlooking deeper, harder-to-measure problems that threaten the business's durability.

If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?

Every monopoly is unique, but they usually share some combinationof the following characteristics:

1. Proprietary technology: the most substantive advantage because it is most difficult to replicate. (e.g. Google's search algorithms) Rule of thumb: it must be a 10x improvement over existing tech. Once you're 10x better, you escape competition (e.g. PayPal and also Amazon, offering 10x the number of books over a Barnes & Noble, and the iPad offering a 10x improvement over existing tablets)

2. Network effects: paradoxically, you must start by dominating a small market (e.g. Facebook starting with Harvard)

3. Economies of scale: a monopoly gets stronger as it scales. Software businesses are the best example—marginal cost of reproduction is near zero. A good startup should have the potential for great scale built into its first design.

4. Branding: Polishing the surface only works if the underlying substance is great too. Beginning with brand over substance is dangerous.

Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.

Always err on the side of starting too small.

If you think your initial market might be too big, it almost certainly is.

Perfect target market for a startup: small group of particular people concentratedtogether and served by few or no competitors.

Any big market is a bad choice, and a big market already served by competing companies is evenworse.

Scaling up: gradually expand to adjacent markets.

Good examples of scaling: Amazon with books, then other items. PayPal with eBay power sellers, then other hobbyist groups.

Sequencing markets correctly is underrated, and it takes discipline to expand gradually.

The most successful companies make the niche/market progression a part of their founding narrative.

Don't "disrupt." Disruption is becoming a buzzword but it is flawed because it views your product within the frame of competitors.

If you want to make something new, the act of creation is more important than the industries you hope to "disrupt."

If your company can be summed up by its opposition to already existing firms, it can't be completely new and it's probably not going to become a monopoly.

Good example: PayPal didn't seek to attack an incumbent, but rather expanded the market for payments. PayPal gave Visa far more business than it took.

Moving first is a tactic, not a goal.

Much better to be the last mover—to enjoy years of monopoly.

Chaper 6: You Are Not A Lottery Ticket

Luck or skill? The success of serial entrepreneurs (e.g. Jobs, Musk, Dorsey) suggests that skill plays a large part.

If you believe that fate controls you, why read this book?

An indefinite view of the future results in the current state of un-specialization, process over substance.

A definite view of the future results in specialization, creating a monopoly of one.

Four views:

1. Indefinite Pessimism (Europe, present): Looks out at the bleak future but doesn't know what to do about it. Eurozone is in slow-motion crisis and bureaucratic drift.

2. Definite Pessimism (China, present): Wealthy Chinese are trying to move their money outside China. There is a sense of worry about the future.

3. Definite Optimism (U.S. 1950's-1960's): Example: the Empire State Building was built in under 3 years. People welcomed big plans.

4. Indefinite Optimism (U.S. 1982-present): The future will be better, but we don't know exactly. Growth of finance tech and rearranging existing tech. Optimization over innovation.

A definitely optimistic world calls for underwater city engineers; indefinite optimism calls for more bankers and lawyers.

Finance epitomizes indefinite thinking, as it's the only way to make money when you have no idea how to create wealth.

Only in a definite future is money a means to an end instead of an end.

In politics, indefinite mindset causes elections to be about week-by-week public sentiment, instead of a 20-year vision of the future.

Instead of becoming the funder of great ideas, the government has become essentially a huge insurance provider

indefinite attitude. In philosophy, politics, and business, too, arguing over process has become  a way to endlessly defer making concrete plans for a better future.

Historically death has been viewed as something to defeat...an indefinite outlook accepts death as inevitable.

Modern drug discovery is failing—Eroom's law (Moore's law spelled backwards) posits that the number of new drugs approved for every Billion dollars of R&D spend has halved every 9 years since 1950.

Americans aren't saving, and American companies are saving and not investing—due to an indefinite view of the future.

Of the four outlooks, Indefinite Optimism is the one that seems unsustainable—how can you attain the positive future if you no one plans for it?

Lean strategy is not an end.

Iteration without a bold plan will not lead you from zero to one.

A company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen?

Steve Jobs forgot MVP's and rather executed multi-year plans to create amazing products. The greatest thing Jobs designed was his business.

Long-term planning is generally undervalued.

The iPod was designed as the beginning of a mobile future, but few saw this at first.

When a startup is acquired, it is almost always under- or over- valued: either the startup founder has run out of vision, or the startup founder doesn't want to sell and wants to continue the vision, in which case the company is undervalued.

A startup is the largest endeavor over which you can have definite mastery.

You can have agency not just over your own life, but over a small and important part of the world.

You are not a lottery ticket.

Chapter 7: Follow the Money

Money makes money.

Einstein: compound interest is the 8th wonder of the world. Message: never underestimate exponential growth.

Even VC's don't understand: we don't live in a normal world, we live under a power law.

The common VC error: assuming returns among portfolio companies will be distributed (i.e. that the best companies return, say, 4x)

This results in the "spray and pray" approach which usually results in a portfolio of flops.

If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you'll miss those rare companies in the first place.

Founders Fund results corroborate this: the Facebook investment has returned more than all other portfolio companies.

The biggest secret in VC: the best investment in a successful fund equals or outperforms the rest of the fund combined.

This results in two rules for VC:

1. Only invest in companies that have the potential to return the entire fund

2. Because rule number 1 is so restrictive, there can't be any other rules

Example of a "failure": A16Z put $250k into Instagram, but that size of investment would require them to find 19 Instagrams just to break even.

VCs must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource.

Founders Fund: focus on 5-7 companies per fund.

Whenever you view each investment strictly from the view of whether it fits into a diversified hedging strategy, you're getting closer to viewing investing like buying a lottery ticket. And once you think that you're playing the lottery, you're psychologically preparing yourself to lose.

Why is this power law sometimes unclear to VC's? It's because winners only become apparent up to ten years into the future.

The power law in action: <1% of businesses are venture-backed, but 21% of the GDP is created by venture-backed businesses.

The top 12 tech giants are larger than the rest of tech combined.

Investors who understand the Power Law make as few investments as possible.

Life is not a portfolio. An entrepreneur cannot diversify himself across several companies.

You should not necessarily start your own company—due to the Power Law you can earn far more becoming an early employee at the next Google than you can by starting your own company.

The difference between companies dwarfs the roles inside a company.

Chapter 8: Secrets

Every one of today's most familiar ideas was once a secret. Example: the Pythagorean Theorem.

Most people act as if there are no secrets left to be discovered in this world.

If everything worth doing has already been done, you may as well feign an allergy to achievement and become a barista. 😂

In all fundamental thought there is a "zone of hard truths" which is deemed untouchable (evident in religion, environmentalism, free market theory).

Why is there an accepted view that there are no secrets left to be discovered? It could be that there are no uncharted places on a world map.

There are four social trends affecting this:

1. Incrementalism: if you didn't go step by step, you don't receive credit (a pillar of the education system)

2. Risk aversion: people are scared of being wrong. If your goal is to never make amistake in your life, you shouldn't look for secrets.

3. Complacency: why search for new secrets if you can collect rents on the ones that already exist?

4. Flatness: if it was such a good idea, surely someone else has thought of it.

Forty years ago it was easier to find cults—people were more open to the idea that there were secrets left to be discovered.

To say that no secrets exist today would be to say that we live in a society with no hidden injustices.

Disbelief in secrets leads to disbelief that there can be a bubble.

If you think something hard is impossible, you'll never even start trying to achieve it. Belief in secrets is an effective truth.

Many secrets left. We can cure cancer, dementia, all diseases of age and metabolic decay, better energy, faster travels, new frontiers.

Only by believing in and looking for ideas could Airbnb and Uber be started.

There are two kinds of secrets: secrets of nature, and secrets about people. So when thinking about which company to build, there are two distinct questions to ask:

1. What secrets is nature not telling me?

2. What secrets are people not telling me?

Secrets about people are generally under-appreciated, perhaps since there's no education requirement.

Look for secrets where no one else is looking.

Ask, are there any fields that matter but haven't been standardized or institutionalized? Example: nutrition—likely full of secrets.

If you find a secret, do you tell anyone? Or do you keep it to yourself?

Unless you have perfectly conventional beliefs, don't tell everyone.

Who do you tell? Tell a company.

Every great business is built around a secret that's hidden from the outside.

A great company is a conspiracy to change the world. Whoever you share your secret with becomes a fellow conspirator.

Chapter 9: Foundations

Thiel's Law: A startup messed up at its foundations cannot be fixed.

Like the USA, precedents set and decisions made in the beginning have lasting effects.

As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.

Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.

Founders should share a pre-history (don't meet at a networking event and start a company).

Distinguish between three concepts:

1. Ownership: who owns the equity?

2. Possession: who runs the company?

3. Control: who formally governs the company's affairs?

Incentives should be aligned among all parties.

Every single member of the board matters—choose carefully.

A board of three is ideal, and should never exceed 5 (unless you're a public company).

On the bus or off the bus—everyone you involve with your company should be involved full-time or not involved at all (lawyers and accountants are exceptions).

Anyone who isn't drawing a salary or doesn't own stock options is fundamentally misaligned.

Working remotely should be avoided to avoid misalignment.

A company does better the less it pays the CEO.

In no case should the CEO of an early-stage venture-backed startup be paying himself more than $150,000.

Low CEO pay also sets the standard for the rest of the company. Example: Aaron Levie at Box paid himself less than everyone else in the company.

High cash compensation teaches employees to extract value from the company as it already exists, instead of making a bet on and building the company's future.

Startups don't need to pay high salaries because they can offer something better: part ownership of the company itself.

Giving everyone equal shares is a mistake.

Keep equity grants secret to reduce resentment.

Equity is often un-popular, but this reveals those who believe strongly enough in your company to appreciate it.

Chapter 10: The Mechanics of Mafia

Why work with a group of people who don't even like each other? Don't spend your time working with people you don't plan on working long-term with.

How Peter hired for the PayPal Mafia: they had to be talented, but they also had to be excited about working together specifically within that group.

Recruiting is a core competency that shouldn't be outsourced.

The first four or five employees might be lured by the promise of big equity chunks, but a useful question to ask is: why should the 20th employee join the company?

Even better question to ask: why should the 20th employee work here, instead of Google, with far better pay and prestige?

The only good answer to this question is one that is specific to your company, but two general kinds of good answers:

1. An answer about the mission: why you are doing something important that wouldn't get done otherwise.

2. An answer about the team: you should be able to answer why the company is a good match for him personally, and if you can't, it's probably not a good match.

Don't fight the perk war—it attracts the wrong employee.

Max Levchin: early startup employees should be as personally similar as possible.

Everyone should be sharply distiguished by her work—responsibilities should be clearly demarcated.

Best thing Peter did as a manager at PayPal: give each employee just one task that didn't overlap with any other task.

Most fights within a company happen as a result of two employees competing for the same responsibilities. Defining roles allows relationships to last and the company to survive.

Startups should be viewed like slightly less extreme versions of cults.

Chapter 11: If You Build It, Will They Come?

Even though sales is everywhere, most people underestimate its importance.

When engineers see salespeople laughing on the phone with customers or going to dinners they suspect no work is being done, but it takes hard work to make sales look easy.

"Salesman" can be a slur, but we only react badly to poor salesmen.

Like acting, sales works best when hidden.

It's better to think of distribution as something essential to the designof your product.

If you've invented something new but you haven't invented an effective way to sell it, you have a bad business—no matter how good the product.

Superior sales/distribution alone can create a monopoly, but the inverse is not true.

Customer Lifetime Value (CLV) must exceed Customer Acquisition Cost (CAC).

If avg. sales price is 7 figures or more, the deal will require close personalized attention.

Enterprise sales is often necessarily methodical.

Personal sales: start small, gain trust with small deals. i.e. start by selling to a small department in a company.

Distribution Doldrums: products with a price point around $1000 are difficult to sell, because they don't warrant personal attention, and marketing alone can't make the sale.

Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution.

Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.

Startups should resist the temptation to compete with big companies by doing elaborate TV spots or PR stunts.

A product is viral if its core functionality encourages people to sign up too.

Virality isn't just cheap—it's fast too.

Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.

Distribution follows a power law of its own—one channel will work far better than the others.

If you can get just one distribution channel to work, you have a great business. If you try several and don't nail one, you're finished.

There's a fundraising version to selling: clamor and frenzy is rarely an accident.

Selling your company to the media is a necessary part of selling it to everyone else.

You should never assume that people will admire your company without a public relations strategy.

Any prospective employee worth hiring will do his own diligence; what he finds or doesn't find when he googles you will be critical to the success of your company.

Chapter 12: Man And Machine

Computers are complements for humans, not substitutes.

The most valuable businesses of coming decades will be built by entrepreneurs whoseek to empower people rather than try to make them obsolete.

Men and machines are good at fundamentally different things.

Humans have intentionality and make plans, but aren't good at processing large amounts of data. Computers are the opposite.

Human-computer complementarity was critical to the anti-fraud system that allowed PayPal to succeed, and it is the core product at Palantir.

Computers can find patterns that elude humans, but they don't know how to compare patterns from different sources or how to interpret complex behaviors.

Actionable insights can only come from a human analyst (or the kind of generalized artificial intelligence that exists only in science fiction).

Indefinite fears about the future shouldn't stop us from making definite plans today.

Chapter 13: Seeing Green

Cleantech turned into a bubble, and crashed because companies neglected one or more of the 7 questions that every business must answer:

1. The Engineering Question: Can you create breakthrough technology insteadof incremental improvements?

2. The Timing Question: Is now the right time to start your particularbusiness?

3. The Monopoly Question: Are you starting with a big share of a smallmarket?

4. The People Question: Do you have the right team?

5. The Distribution Question: Do you have a way to not just create but deliveryour product?

6. The Secret Question: Have you identified a unique opportunity that others don't see?

Any great business plan must address each of the seven questions above.

If you don't have great answers to these questions, you'll run into a lot of "bad luck" and your business will fail.

If you nail all seven, you will succeed.

A 20% product improvement is not sufficient—your claim will be assumed to be hyperbole.

Only with a 10X product improvement can you offer the customer transparent superiority.

Exaggerating your own uniqueness is an easy way to botch the monopoly question.

Every entrepreneur should plan to be the last mover in her particular market.

That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?

Each of the casualties of the green tech boom and bust described itself using widely-accepted conventions; great companies have secrets—specific reasons for success that aren't readily visible.

Social Entrepreneurship doesn't work. Doing something different is what's truly good for society.

Chapter 14: The Founder's Paradox

Founders' personalities fall within an inverse bell curve.

Almost all successful founders are simultaneously insiders and outsiders.

We should be more tolerant of founders that seem extreme.

The lesson for founders is that individual prominence and adulation can never be enjoyed except on the condition that it may be exchanged for individual notoriety and demonization at anymoment—so be careful.

Don't overestimate your power as an individual.

The single greatest danger for a founder is to become so certain of his own myth that he loses his mind.

An equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.

Conclusion: Stagnation or Singularity?

Four possible scenarios:

1. Recurrent Collapse: alternating between prosperity and ruin

2. Plateau: Globalization will continue, and the future will look a lot like the present.

3. Extinction: uncontained global disaster

4. Takeoff: accelerating takeoff towards a much better future

Recurrent collapse is unlikely, extinction results in no future to consider, and plateau threatens to result in increased conflict. That leaves the fourth scenario: create a much better future.

What matters more than the singularity is the stark choice we face today between the two most likely scenarios: nothing or something.

We can't take for granted that the future will be better—we have to actively create it.

The essential first step is to think for yourself.

Introduction

The arc of any celebrated business is underpinned by decisive strategy choices that are few and typically made amidst the profound uncertainty of rapid change.

• getting them right is a constant process

• planning cycles won’t get you there

Strategy is best not as a process, but best when it’s embedded in a prepared mind of those executing

• To achieve this, a strategy framework must be “simple but not simplistic”

• This book’s focus on “Power” makes it simple enough to be learned/retained/used by any business person

If your business doesn’t have at least one of the 7 Power types, you lack a viable strategy and you’re vulnerable

Intel

Market cap of around $150B

Strategy: the study of the fundamental determinants of potential business value

Strategy can be divided into two topics:

1. Statics: “Being there” — What makes Intel’s microprocessor business so durably valuable?

2. Dynamics: “Getting there”—what yielded this state?

Intel didn’t start in microprocessors

• started as “The Memory Company”

  • only got into microprocessors from a contract job done to provide cash for the memories business

  • eventually Intel dropped memories and went all-in on microprocessors

Why did Intel succeed in microprocessors but fail in memories?

• both were:

  • first-mover items

  • large

  • fast-growing

  • in semiconductor space

  • same management, technical, financial backing

• Competition wasn’t the factor either

  • microprocessors had intense competition

The answer must lie elsewhere

• we can only assume microprocessors had some characteristics which:

  • improved cash flow while

  • inhibiting competitive arbitrage

• This is what’s referred to as “Power”

  • Power: the set of conditions creating the potential for persistent differential returns

  • Power:

    • Notoriously difficult to reach

    • microprocessors had Power, memories didn’t

The Mantra

strategy [small “s”, and as in, a company’s strategy]: a route to continuing Power in significant markets

• by narrowing definition of strategy this way, we gain clarity and usefulness

• the Game Theory version of strategy ignores the business imperative of creating value

• Game Theory version isn’t sufficiently constrained, therefore

Value

value: absolute fundamental shareholder value

• the ongoing enterprise value shareholders attribute to the separete business of an individual firm

• best proxy: NPV (net present value) of expected future FCF

Potential Value = [Market Scale] * [Power]

For:

• Intel’s memories business:

  • competitive arb drove long-term differential margin negative

• Intel’s microprocessors business:

  • Power enabled Intel to maintain high and positive long-term differential margins

Upcoming Topics

• Persistence

  • Value comes from the years ahead

  • This is more accentuated with high-growth businesses

  • growth is only valuable if it’s here to stay for some time

  • Intel’s current market cap reflects high returns for a very long time

• Dual Attributes

  • Persistence has 2 factors: magnitude and duration

• Benefit (magnitude)

  • The conditions created by Power must increase cash flow

  • Can manifest as any combination of:

  • increased prices

  • reduced costs

  • lessened investment needs

• Barrier (duration)

  • some aspect of the Power which prevents competitors from engaging in value-destroying arbitrage

  • Benefits are far more common than Barriers

  • Always look to the Barrier first

• Industry Economics and Competitive Position

  • Power involve the interaction between these two

  • Will help with understanding role of “industry attractiveness” in creating value potential

• Complex Competition

  • Power is entirely relative (to competitors or a specific one)

  • Good strategy involves assessing Power with each specific competitor

  • one arbitrageur is enough to drive down differential margins

• Single Business Focus

  • each individual business within a business must be evaluated

  • The interplay of multiple businesses under one roof concerns Corporate Strategy, which is outside scope of book

• Leadership

  • Power lends itself to Warren Buffet’s view:

  • “if you combine a poor business with a good manager, it’s not the business that loses its reputation”

  • Leadership remains important in creation of value

Conclusion

The ascent of great companies is not linear but more a step function.

• there are critical moments when single decisions shape the co’s trajectory

Part 1: Strategy Statics

Chapter 1: Scale Economies: Size Matters

Netflix Cracks the Code

Author invested in Netflix in Spring, 2003.

• Netflix was successfully disintermediating Blockbuster’s brick-and-mortar business model

• Blockbuster faced unpleasant choice of losing market share or eliminating late fees, but late fees was half of their income

• Investment hypothesis:

• Blockbuster would drag their feet in facing up to these consequences

• Netflix would continue this cannibalization

• This hypothesis played out perfectly

A strategy must meet the high hurdle of “A route to continuing Power in a significant market.”

• Netflix had this power

But there was a long-term time fuse to Netflix’s 2003-era mail-order distribution

• DVD’s would inevitably be taken over by digital streaming

• the timing was uncertain, but Netflix could see it

• The problem: mail order and streaming have different sources of Power

• streaming’s Power prospects weren’t as encouraging

• Moore’s Law meant lower cost of cloud services, hence diminishing barriers

• Netflix understood this, but also acknowledged that streaming was inevitable

• So in 2007 Netflix slowly moved into streaming to test the waters

• But smart tactics don’t constitute strategy, and the source of the new form of Power remained opaque at first

• They could only remain vigilant for where they could establish that Power

• The crucial insight didn’t come until 2011: original content

• previously, they only distributed other’s content

• launched their first original with House of Cards in 2012

• At first glance, the push for original content looked risky/ambitious:

• more expensive

• Red Envelope Entertainment experiment in the past had flopped

• But this push was game-changing

• Exclusive rights were a fixed-cost item

• Any new market entrants would have to match such fixed costs to compete on content, regardless of their subscriber base

• Cost-per-customer was their advantage

Scale Economies—the First of the 7 Powers

Scale Economies: the quality of declining unit costs with increased business size

Why do Scale Economies result in Power?

• Benefit: lower costs (straightforward)

• Barrier: (more subtle): Incumbent would be able to lower costs in response to new entrants, thus destroying value for new entrants with inferior Scale Economies

In Intel’s case, Intel was able to fight off AMD by tapping into their Scale Economies

Benefit:

• Cash flow is improved by:

• Enhancing value (enabling higher pricing) and/or

• lowering cost ceteris paribus

Barrier:

• Competitor fails to arb out the Benefit because

• They’re unable to, or

• They can, but refrain due to unattractive economics

Scale Economies emerge from other sources:

• Volume/area relationships

• occur when production costs are closely tied to area, while their utility is tied to volume

• examples: bulk milk tanks, warehouses

• Distribution network density

• As density of a distribution network increases, delivery costs decline as more economical route structures emerge

• example: UPS

• Learning economies

• If learning leads to a benefit (reduced cost or improved deliverables) and is positively correlated with production levels, then a scale advantage accrues to leader

• examples [Eric]: ScaleAI, Forward Health

• Purchasing economies

• A larger buyer can often command better pricing

• example: Walmart

Value and Power

Netflix’s move to original content propelled them to immense market capitalization.

• but the performance was a roller coaster

• in situations of high flux, it often takes time for cash flow to reliably reflect Power, so investor expectations fluctuate

• Netflix’s plummet in 2011 was the result of operational errors

• after all, Power is the potential for value

Surplus Leader Margin (SLM):

• The profit margin the business with Power can expect to achieve if pricing is such that competitor’s profits are zero

• Surplus Leader Margin = [Scale Economy Intensity]*[Scale Advantage]

• first term is tied to the intensity of scale economies in that industry, faced by all firms

• second term is tied to position of leader relative to follower

• for Power to exist, both these terms must be significantly positive

• i.e. scale economies don’t help unless you actually have scale

Chapter 2: Network Economies: Group Value

BranchOut Takes on LinkedIn

BranchOut launched in 2010 as a professional networking Facebook app

• $6M Series A

• CEO knew: rapidly scale or die—this was a Network Economy

Catch-up is usually impossible if there are Network Economies

• LinkedIn already had 70M members

• But BO CEO wanted to build on Facebook’s base that was 10X of LinkedIn’s

BO quickly attracted 500k users, raised an $18M Series B in 2011

Users peaked at 14M in 2012 but then fell off a cliff

In 2014 Hearst acqui-hired BO, ending the company

Facebook and LinkedIn could co-exist because they served very different purposes

• Users wanted to maintain a wall between personal and professional lives

The Benefit and the Barrier

Benefit:

• A company in a leadership position with Network Economies can charge higher prices than its competitors bc of the higher value resulting from more users

• Example: the value of LinkedIn’s HR tools comes from the number of LinkedIn users

Barrier:

• The barrier for Network Economies is the unattractive cost/benefit of gaining share, and this can be extremely high.

• The cost of offering something else to make up for the network size disparity can be unthinkably high

• what would BO have had to offer users to make them use it rather than LinkedIn? probably money haha

Industries exhibiting Network Economies often exhibit:

• Winner take all

• Often once a single firm achieves a degree of leadership, then the other firms just give up

• Even Google lost to FB with Google+

• Boundedness

• The boundaries of the network effects determine the boundaries of the business

• Facebook: personal network

• LinkedIn: professional network

• Neither have much Power over each other

• Decisive early product

• Early relative scaling is critical in developing Power

• who scales fastest is often determined by who gets the product most right early on

• example: Facebook beating MySpace

Network Economies: Industry Economics and Competitive Position

Surplus Leader Margin used here again to measure Power

Not all networks are uniform

• Not all nodes in the network are relevant to a given node

As the installed base difference gets large, the SLM balloons (to 100% at the limit)

Some comments on Network Economies:

• There can be network effects but no potential for Power

• The incremental benefit to each existing user when a new member joins the network needs to be large enough relative to the potential installed base and the cost structure for there to be even one profitable player.

• if network effects are the only value source, then if [number of nodes]*[benefit to each existing user when a new member joins]<[variable cost per user], a firm can’t reach profitability

• ex ante it’s often difficult to size potential network size and “incremental benefit to each existing user when a new member joins”

• you’re left with a situation that can require significant up front capital but uncertain ability to monetize

• example: Twitter

• Demand side (or indirect) network effects:

• If a business has important complements and these complements are somehow exclusive to each offering, then a leader will attract more and/or better complements

• As a result the entire value prop to a customer is improved

• example: smartphone apps

• a new smartphone OS would start out with no good apps, and devs wouldn’t be incented to develop there due to a small market

• [Eric] example: advertisers on Twitter, or HR orgs using LinkedIn

Chapter 3: Counter-Positioning: Scylla and Charybdis

Bogle’s Folly

Author’s own development

Avenue for defeating an incumbent who appears unassailable by conventional wisdom metrics of competitive strength

Vanguard’s assault on active equity management

• 1975: John Bogle made an equity mutual fund that simply tracked the market, with no pretense of active management

• Vanguard would operate “at cost”

• all returns passed on to shareholders

• later became a no-load fund (no sales commissions)

• Lukewarm first years

• depended on others for distribution

• brokers didn’t like it for obvious reasons

• Vanguard’s advantage by design:

• average gross return of active funds must equal market return, and since their expenses are much higher than passive funds, their avg. net returns will always be less than those of passive funds

• also for active investors, track record is only loosely tied to future performance

• active funds are on average a loser’s game

• Eventually Vanguard accelerated to $3T AUM by 2015

But: ETF’s flooded the market

Counter-Positioning: the Benefit and Barrier

3 characteristics to Vanguard’s rise:

1. Upstart with a superior, heterodox business model

2. that business model’s ability to challenge incumbents

3. the steady accumulation of customers all while incumbents fail to respond

This pattern can be seen in:

• Dell vs. Compaq

• Nokia vs. Apple

• Amazon vs. Borders

• Netflix vs. Blockbuster

Common theme: the incumbent responds either not at all or too late

Benefit:

• the new business model is superior to the incumbent’s model due to lower costs and/or the ability to charge higher prices

• Vanguard:

• much lower costs → higher avg. net returns

• realized value from market share gains rather than differential profit margins

Barrier:

• often, incumbent’s failure to respond results from thoughtful calculation

• it’s when the question “am I better off staying the course, or adopting the new model?” is answered “No”

• The barrier, simply put, is collateral damage

• In Vanguard’s case, Fidelity concluded that the new passive funds’ more modest returns would likely fail to offset the damage done by a migration from their flagship products

The Varieties of Collateral Damage

Several possible reasons for an incumbent’s failure to mimic the upstart

Stand-Alone Unattractive is Not Counter-Positioning

• If the business isn’t “stand-alone attractive” then collateral damage doesn’t account for the incumbent’s rejection of the challenger’s approach to the business.

Kodak:

• Legendary business

• Anyone could look at Moore’s Law and see that chemical film was doomed

• Kodak was aware of its fate but digital photography simply was not an attractive business opportunity for the company

• This situation can be characterized by 3 conditions:

• A new superior approach is developed (lower costs and/or improved features)

• The products from the new approach exhibit a high degree of substitutability for the products from the old approach

• The incumbent has little prospect for Power in this new business

• either the industry economics support no Power (a commodity) or:

• the incumbent’s competitive position is such that attainment of Power is unlikely

• Kodak had little relevance to semiconductor memory, and those new products were on an inevitable path to commoditization

Kodak’s failure to respond had nothing to do with collateral damage within their film business

• it indicated only that digital photography as a stand-alone business failed to offer even the faintest promise of Power for Kodak

• Even if Kodak had avoided “marketing myopia” and viewed themselves in the “image storage” business, this wouldn’t have fixed their lack of semiconductor capabilities

Milking: Negative Compined NPV

CEO is deciding to “milk” their current situation even though the new model is attractive

Fidelity:

• Unlike Kodak with digital cameras, Fidelity could have easily made and distributed passive funds

• However, the impact of entry into passive funds would have been subtractive

• Fidelity assumed that any gains with passive funds would have been more than offset by their losses (reasonable)

This is a dynamic process:

• as the upstart cannibalizes:

• the incumbent’s original business shrinks

• the uncertainty surrounding the viability of the challenger’s approach diminishes

• the risk-adjusted size of expected collateral damage therefore declines

• such delayed entry happens frequently

• often characterized as foot-dragging, but often a rational response to the changing dynamic

History’s Slave: Cognitive Bias

Two reasons that an incumbent might choose to not counterposition, despite it seeming like the rational choice:

1. The challenger’s approach is novel and at first unproven

2. shrouded in uncertainty

3. The incumbent has a successful business model

4. this heritage is influential and deeply embedded

5. comes with a certain view of how the world works

6. CEO can’t help but view circumstances through this lens

These two items frequently cause incumbents to belittle and underestimate the new approach

• Fidelity CEO on Vanguard: “Why would anyone settle for average returns?”

Job Security: Agency Issues

Differences between the objective of the firm (maximum value) and that of the CEO or other decision-makers

Counter-Positioning vs. Disruptive Technologies

They’re not fully intertwined:

• Kodak vs. digital photography (DT but not CP)

• In-N-Out vs. McDonald’s (CP but not DT (no new tech))

• Netflix streaming vs. HBO cable (CP and DT)

Observations on Counter-Positioning

• Power must be considered relative to each competitor, actual and implicit

• With CP, this is especially important bc it relies on that specific firm making a decision

• Remains only a partial strategy

• to assure value creation it must be complemented by a route to Power respective to other similar competitors, as it is not a “blanket”

• Cognitive Bias can be influenced by the challenger

• avoid the temptation to trumpet superiority

• adopt a tone of respect toward incumbent

• this can delay objective cognition, giving a headstart

• Counter-Positioning is not an exclusive source of Power

• often dependent on many independent actors

• Incumbents often follow these five stages of CP:

• Denial

• Ridicule

• Fear

• Anger

• Capitulation (often too late)

• An incumbent feels strong pressure to do something—while not upsetting the apple cart of the legacy business model

• this results in “dabbling”—incumbent refuses to commit in a way that meaningfully answers the challenge

• CP often underlies situations in which this is observed:

• For the challenger:

• Rapid share gains

• Strong profitability (or promise of it)

• For the incumbent:

• Share loss

• Inability to counter entran’s moves

• Eventual management shakeups

• Capitulation, often occuring too late

The Challenger’s Advantage

An entrenched incumbent with established Power is formidable, obv.

• Unless incumbent is incompetent over a long period, challenging it is often a loser’s game

• i.e. AMD challenging Intel

• That said, there are fighting styles which work

• The only bet worthwhile for a challenger is one in which even if the incumbent plays its best game, it can be defeated

• A challenger must take advantage of the strengths of the incumbent, as it is this strength which creates the collateral damage

Counter-Positioning Leverage

It’s binary: you’ve adopted the new model, or you haven’t

Intensity of Power is determined by: What governs profitability of the company with Power when prices are such that the company with no Power makes no profit at all?

If the unit gains for an incumbent moving into the challenger’s space are more than offset by the losses in the “old” business:

• CP is unlikely; for CP the margins would have to be attractive enough in the new business to offset both the lower prices and the volume loss

Irony of CP:

• the higher the incumbent’s margins, the higher the SLM and the more the incumbent has to lose

• CP can therefore present a potent challenge to an entrenched, highly successful incumbent

• Incumbents will often exhibit a cognitive bias that raises their margin expectations, thus increasing challenger’s SLM

The potential for agency effects (Job Security) can be affected thus:

• Example 1:

• An important decision influencer is the division head for X

• X has been the firm’s bread and butter, so this person’s voice carries a lot of weight

• but the new challenger business results would be attributed to another division or group

• This disincentivizes the decision influencer to push for adopting the new business model

• Example 2:

• A CEO may be incentivized financially in short-term increments

• CEO will prioritize the near future at the expense of the distant future

Dynamic effects:

• Over time, unit gains to be had by an incumbent counter-positioning, deplete and can disappear altogether

• The risk to the incumbent is increasingly seen to come primarily from the challenger, vs. a self-immolatory action

• The agency and cognitive biases toward avoiding “collateral damage” decrease as the threat of the challenger becomes more apparent and those who run the incumbent business or item lose credibility/influence

Chapter 4: Switching Costs: Addiction

Agony at HP

SAP is an ERP software company that has terrible customer satisfaction ratings, yet it has significant market share and retention

• “No one ever got fired for sticking with SAP”

Example: Apple and iTunes

• Apple customers forfeit their prior purchases

Back to the ERP model—high switching costs:

• Integrated into business

• employee training is extensive

• relationships with service team established

In 2004 HP migrated their NA server sales divisions to SAP

• despite major preparation, major hiccups for a month

• HP lost $160M of business to Dell and IBM

SAP has every incentive to hike the price of their services, given that switching costs are so high

Switching Costs on the 7 Powers

Switching Costs arise when a consumer values compatibility across multiple purchases form a specific firm over time

• can include repeat purchases of the same product or purchases of complementary goods

Benefit:

• Co. with embedded SC’s for its current customers can charge higher prices than competitors for equivalent value

• this benefit only accrues to Power holder in selling follow-on products to their current customers

• no benefit w/ potential customers

• no benefit if no follow-on products

Barrier:

• To offer an equivalent product, competitors must compensate customers for SC’s

Types of Switching Costs

Financial

• monetary outlays a customer must make when they switch

• example: for ERP, would include purchase of both a new database and sum total of its complementary apps

• [Eric] “Implementation Fees” from most enterprise SaaS’s

Procedural

• Murkier, but just as persuasive

• Stem from loss of familiarity w/ the product or from the risk/uncertainty associated with the adoption of the new product

• Retraining

• Switching could breed internal discontent

• Switching could cause errors

Relational

• the breakage of emotional bonds built up through use of the product

• customer can identify as a user or enjoy the camaraderie which exists among the community of users

Switching Cost Multipliers

SC’s are a non-exclusive Powwer type

• all players can enjoy their benefits

As a market matures, the benefit of SC’s becomes apparent to all players

• this often leads to greater competition to grab new customers

• this arbitrages out the Benefit for new customer acquisitions

• therefore, the major value contribution comes from capturing customers before this process happens

SC’s offer no Benefit if no upsells/cross-sells are made

• one tactic might be to develop more and more add-on products

• another might be to acquire products

• doing this both:

• extends revenue coverage of the SC’s and

• increases the intensity of the SC’s

• increased retraining costs

• deeper integrations

• deeper emotional bonds

Switching Costs: Industry Economics and Competitive Position

Intensity of SC’s is derived from “Industry Economics”

• competitive position is binary: you have the customer, or you don’t

the SC advantage can be swept away by major technology shifts

• e.g. SAP and Oracle are working hard to make sure they’re not leapfrogged by cloud-based products

SC’s can pave the way for other Powers

• connecting users and building a large supply of complementary goods may generate Network Effects

• if the product preference of users tied down by SC’s spills over to a wider pool of potential customers, you can enjoy Branding Power

Chapter 5: Branding: Feeling Good

Tiffany & Co. diamonds are objectively 25% better than Costco rings, but are double the price

• Tiffany can do this via Branding

Tiffany

• Founded 1837

• won awards starting in 1867

• carefully crafted their image since

Branding

Branding is an asset that communicates information and evokes positive emotions in the customer, leading to an increased willingness to pay for the product

Benefit:

• A business with Branding can charge a higher price due to one or both of these reasons:

• Affective Valence

• the built-up associations w/ the brand elicit good feelings about the offering, distinct from the objective value of the good

• e.g. Coke: people will pay more for it than generic, despite indistinguishable taste

• Uncertainty reduction

• customer attains peace of mind knowing that the product will be just as expected

• e.g. Bayer aspirin: people will pay more for the certainty

• Unlike Switching Costs, Branding doesn’t require you to have the customer for it to work

Barrier:

• a strong brand can only be created over a long time of reinforcing actions (hysteresis)

• Tiffany has been around since the 1800’s

• copycats face a long investment runway with uncertainty that it’ll work

• efforts to mimic another brand can backfire legally

Branding—Challenges and Characteristics

Brand Dilution:

• Firms require focus and diligence to guide Branding over time and ensure consistency

• Biggest pitfall lies in hurting brand through shoddy products

• Moving “down market” to achieve volume can reduce perceived exclusivity

• e.g. Halston was a big high-end women’s designer brand in the 1970’s

• but they accepted $1B from J.C. Penney to expand into mass production and destroyed the Halston brand

Counterfeiting:

• can undermine a brand

Changing consumer preferences:

• customer preferences can shift in a way that undermines brand value

• e.g. Nintendo built a family-friendly video game, but the market shifted to primary adults

• Nintendo’s Branding didn’t extend to this segment

• The problem: Branding can’t shift quickly to accommodate these shifts

Geographic boundaries:

• e.g. Sony had a Branding advantage in the US, but it didn’t extend to Japan, where rivals such as Panasonic thrived

Narrowness:

• even if “brand recognition” is very high, there may not be Branding Power

• Scale Economies could be creating this high brand awareness

• e.g. a smaller soda brand can’t justify a Super Bowl commercial

Non-exclusivity:

• Branding is a non-exclusive type of Power

• a direct competitor may have an equally impactful brand targeting the same customers

• e.g. Prada, Luis Vuitton, Hermès

• however, all competitors with brand Power will earn superior returns to those without

Type of Good:

• only certain types of goods have Branding potential, as they must clear two conditions

• Magnitude:

• the promise of eventually justifying a significant price premium

• B2B goods can’t take advantage of affective valence effects as well as B2C, since purchases are made more objectively

• Consumer goods are more associated with a sense of identity, and are more driven by affective valence

• uncertainty reduction is most important for products associated with bad tail events

• safety, medicine, food, transport, etc.

• Duration:

• a long enough duration to achieve such magnitude

• [Eric] e.g. booths at a county fair

Chapter 6: Cornered Resource: Mine All Mine

To Infinity and Beyond

Pixar’s Toy Story:

• Budget of $30M, box office of $350M

Pixar followed it with numerous major successful films that far exceeded industry averages in commercial succes

The Brain Trust

In 1986, George Lucas sold The Graphics Group to Steve Jobs for $5M and was renamed Pixar

• brought together 3 exceptional people

• John Lasseter, Ed Catmull, Steve Jobs

Cornered Resource: the Benefit and the Barrier

Benefit:

• can emerge in varied forms

• preferential access to a valuable patent

• common in pharma

• a required input

• e.g. a cement producer’s ownership of a limestone source

• cost-saving production manufacturing approach

• e.g. Bausch and Lomb’s soft contact lens manufacturing technology

Barrier:

• In Pixar’s case, it was a personal choice to stay as a team

• Can also be fiat

• e.g. patent law

The Five Tests of a Cornered Resource

1. Idiosyncratic

2. if a firm repeatedly acquires coveted assets at attractive terms, it begs the question, why are they able to do this?

3. e.g. Exxon being able to consistently gain the rights to great hydrocarbon properties

4. understanding their path to access is more critical

5. Non-arbitraged

6. If a firm gains preferential access to a coveted resource, but then pays a price that arbitrages out the worth of that resource, they fail to achieve Power

7. e.g. if you get Brad Pitt to star in a movie, most if not all of resulting revenue is absorbed by Pitt’s price tag

8. whereas, the Pixar Brain Trust was compensated far below their value, producing Power

9. Transferable

10. a coveted resource is only truly coveted if it is transferable

11. e.g. Pixar’s team could transfer to Disney upon acquisition

12. Ongoing

13. do the differential returns suffer if you remove the source of Power?

14. Sometimes the origin of the Power is separate from where it currently sits

15. guy who invented the Post-It wasn’t the Power source; the Post-It patent was

16. Sufficient

17. for a resource to qualify as Power, it must be sufficient for continued differential returns, assuming operational excellence

Chapter 7: Process Power: Step by Step

It’s rare

Toyota Motor Corporation

• Toyota Production System (TPS) allowed Toyota to steal major market share from American auto manufacturers by building superior cars

• GM partnered with Toyota to adopt the TPS

• but while Toyota offered full transparency, the system would not replicate

• American manufacturers adopted the tech but failed to adopt the hidden underlying processes that formed the bedrock of TPS

Process Power

Benefit:

• A company with Process Power is able to improve product attributes and/or lower costs as a result of process improvements embedded within the organization

Barrier:

• it’s hysteresis: these process advances:

• are difficult to replicate

• can only be achieved over a long time of sustained evolution

• this speed limit results from:

• Complexity

• Opacity

• In Toyota’s cases, the process was developed over years and never formally codified

Process Power and the Discipline of Strategy

Strategy vs. Operational Excellence:

• Operational excellence is not a strategy

• improvements that can be readily mimicked are not strategic

• heuristic: Process Power = operational excellence + hysteresis

The Experience Curve:

• Experience often results in efficiency gains, but there is no edge gained relative to another firm, so this should be attributed to operational excellence, not Process Power

Routine:

• “Routines,” or new processes added to an organization, are valuable, but don’t contribute to Power, as they don’t build a barrier

Part 2: Strategy Dynamics

Chapter 8: The Path to Power: “Me Too” Won’t Do

What must I do to establish Power?

When can I establish it?

Power starts with invention

Out of the Frying Pan…

When author invested in Netflix in 2003, investment hypothesis was:

1. Netflix’s DVD-rental business had Power:

2. Counter-Positioning to Blockbuster

3. Process Power

4. some modest Scale Economies relative to some copycats

5. This Power was under-appreciated by other investors

Hypothesis had 2 caveats

• DVD rentals had a time limit before replaced by the internet

• Netflix had no yet-evident source of Power in the streaming iteration

Netflix’s streaming had solid demand, but no Power source yet

Operating Excellence is essential and rightly occupies most of management’s time

• however, it doesn’t assure differential margins combined with a stead or growing market share, as competitors can easily mimic such excellence and arb out the difference

Examples of Netflix’s great operational excellence:

• UI development

• significant attention paid to this, very data driven, but can be ripped off

• Recommendation engine

• Some aspects of Scale Economies here, but with diminishing returns as a smaller competitor could achieve most of the same benefit

• IT infra

• understood this shouldn’t be their core competency and rightly outsourced it

All this was not enough; all of this could be mimicked by competitors

Netflix realized that exclusive or original content would dramatically raise the fixed cost requirements for market entrants

• Netflix pursued exclusives in 2010

• but early deals were subject to being poached to other services such as Amazon]

• so Netflix invested in originals

• invested $100M to create 26 episodes of Deadline Hollywood

The Rudder Only Works When the Ship Is Moving

Netflix’s rise exemplifies a long-term adaptation

• “crafting” not desigining or planning

• the route to Power initially wasn’t just unknown, but unknowable

Getting to Power (Dynamics) is completely different from being there

• it’s a mistake to conflate the two

• e.g. assuming that high relative market share alone leads to attractive returns

• this feeds the instinct to gain market share via aggressive pricing, which doesn’t create value by itself

In other words, you must have the destination in mind, and the 7 Powers are the only worthwhile destinations

Netflix’s acquisition of Power can be broken into getting there and achieving Power:

1. Competitive Position: an attractive new service:

2. Netflix’s new streaming service excited customers and gave Netflix an early relative scale advantage

3. Industry Economics: originals and exclusives:

4. Netflix converted some content from a variable cost to a fixed cost, cementing Power by creating Scale Economies for the first time

Netflix demonstrated that action is the first principle of strategy

• very far removed from orderly analytics of strategic planning

Invention—the Mother of Power

What must I do to get to Power?

• Scale Economies:

• you must simultaneously pursue a business model that promises Scale Economies, while at the same time offering a product that’s differentiated enough to gain market share

• Network Economies:

• similar to Scale Economies, but installed base, not sales share, is the goal

• Cornered Resource:

• you must secure rights to a valuable resource on attractive terms

• often comes from having developed that resource in the first place

• Branding:

• over a long time, you make consistent creative choices which build an affinity that goes beyond the product’s objective attributes

• Counter-Positioning:

• you build a new, superior business model that ensures collateral damage for incumbents if mimicked

• Switching Costs:

• you must first attain a customer base

• Scale and Network Economies factor in here too

• Process Power

• you evolve a new complex process which is not easily mimicked

Common theme above: the first cause of every Power type is invention

• can be invention of a product, process, business model, or brand

• “Me too won’t do”

• Passion, monomania and domain mastery fuel invention and so are central

• Planning rarely creates Power

• it may boost Power if it exists, but if it doesn’t yet exist, you can’t rely on planning

The Topology of Invention and Power

Elements of this interplay of Power and invention:

1. Flux in external conditions creates new threats and opportunities:

2. e.g. Netflix: the eventual decline of their DVD business was the threat, streaming the opportunitiy

3. The nature of flux demands that it happens in fits and starts

4. any company wishing to take advantage must invent

5. these tectonic shifts don’t occur frequently for a company, but they’re inevitable

6. Amidst the chaos, you must find a route to Power

7. Netflix didn’t win by fine-tuning their DVD-by-mail business

The Dynamics of Power, Netflix version:

• Resources:

• you must start with the resources on hand

• Netflix had a recommendation engine, UI, customer data, relationships with content owners, platform

• External conditions:

• For Netflix, the exponential advances around streaming was the external condition

• Invention:

• For Netflix, the inventions were their new product directions

• streaming, originals, and associated complements

• Power:

• For Netflix, it was the thrust into exclusives/originals

• Most inventions don’t assure Power, but this one did

If you want to develop Power, the first step is invention, but it can’t be the last step

• if Netflix had invented the streaming product without introducing originals, they’d have been a commodity business

In the midst of invention, you need to be ever watchful for Power openings

Invention: the One-Two Value Punch

Power only arrives on the heels of invention

But success requires Power and scale

Value = [Market Size]*[Power]

Compelling Value

Invention improves the company’s economics, but it’s the gain customers experience that will shape the market size

• e.g. if Netflix customers had been lukewarm to the streaming pivot, no opportunities for Power would have helped

Product differences must be dramatic in order to achieve a “gotta have” response from customers

• Andy grove suggests that it should be a “10X” improvement

• but can be lower than 10x; even a 50% increase in battery efficiency can be sufficient

Capabilities-Led Compelling Value: Adobe Acrobat

3 paths to creating compelling value:

1. Capabilities-led compelling value:

2. When a company tries to translate some capability into a product with compelling value

3. e.g. Adobe’s Acrobat

4. Adobe used their expertise at the intersection of software and graphics

5. but this type of initiative is risky, as the customer need is unknown

6. therefore, should probably only be undertaken if an assured Barrier appears early on

7. success requires that a company stay in the game for some time, morphing the product to suit customers

8. Customer-led compelling value:

9. when a company sees an unmet need that no one knows how to satisfy

10. e.g. Corning’s fiber optics

11. Corning was not a big player in fiber optics, but saw a need for enhanced glass clarity in the market

12. uncertainty: can we invent it?

13. Competitor-led compelling value:

14. when a competitor has already released a successful product and the inventor must produce something so superior that it elicits a “gotta have” response

15. e.g. Sony’s Playstation

16. Nintendo and Sega were big rivals, but 3D graphics was the “gotta have” step change

17. uncertainty:

18. will the new features be differentiated enough?

19. will competitors be sufficiently delayed in their response?

20. often must make formal arrangements with exterior complements

21. e.g. Sony having to make commitments with game developers

22. e.g. iPhone having to make agreements with telecom giants

Equity INvesting and the 7 Powers as a Strategy Compass

The 7 Powers can result in alpha where there’s opacity in the market, but such opacity can be penetrated by the 7 Powers

• most common in high-flux scenarios

Author’s investing track record shows how he’s been able to outperform the market for decades

Chapter 9: The Power Progression: Turn, Turn, Turn

When can you attain Power?

Intel Starts from Scratch

Intel’s route to power was long and arduous

Internally there was pushback

• head of sales and marketing and the board tried to stop the semiconductors push

Intel pulled of a long-shot goal of landing IBM as a client for their first PC

• was wildly successful

From Invention to Power

Intel’s rise to resulted from 3 of the 7 Powers

1. Scale Economies:

2. the IBM deal gave Intel a scale advantage that enabled lower per-unit costs:

3. Fixed cost of chip design:

4. design costs are high

5. Fixed factory design costs:

6. factory setup is expensive

7. Early movers in lithography advances:

8. Intel’s higher demand forecasts allowed them to justify upgrading their plants to newer tech sooner than competitors, enhancing their per-chip cost advantage

9. Network Economies:

10. IBM’s MS-DOS and the spreadsheet Lotus 123 was written specifically for the Intel processor

11. when other PC makers came on line, they had to use IBM clones, which meant using Intel or Intel-compatible chips

12. Switching Costs:

13. PC consumers would be forced to stay with an Intel machine to keep using the same programs

Over time, OS’s and apps became chip-agnostic, eroding the Network Economy and Switching Cost advantages, but by then Intel had a massive scale advantage

“The one-sentence story of Intel is a single design win, then a decade and a half of very high Switching Costs,then Scale Economies."

How did Intel get there?

• Scale Economies:

• Intel rode the PC market wave

• deal with IBM

• Network Economies:

• Intel was the PC standard

• Switching Costs:

• got there first

The Power Progression: Takeoff

All of Intel’s sources of Power were rooted in the takeoff period

• this is when customer acquisition is done at favorable terms

• Intel’s massive sales/marketing push made a crucial difference to Power only because it was early on

• Intel pulled away from the pack just in time

• if they hadn’t won the IBM contract, they would not have dominated

Takeoff period can be deceptive:

• companies in the explosive growth stage will exhibit attractive financials, but if they haven’t attained Power, competitive arb will catch up to them as soon as growth slows

• the concept that you should be pleased by a new and well-financed market entrant because it “validates the market”

• you’re in a race for relative scale, and there can be only one winner

The Clock for the Power Progression

3 time windows for calibrating the acquisition of Power:

1. Stage 1: Before—Origination:

2. occurs before a company clears the “compelling value” bar at which time sales rapidly increase

3. Stage 2: During—Takeoff:

4. period of explosive growth

5. Stage 3: After—Stability:

6. business may still be growing considerably, but growth has slowed

Power must be established within a certain window; however the Power can extend well into the “stability” phase

• e.g. Intel’s Power endured long into “stability” phase, hence Intel’s durability

The Power Progression: Origination

Two Power types typically become available during this period:

1. Cornered Resource:

2. In Intel’s case, it would be the invention rights to their microprocessor project they did for Busicom

3. and also their cornered resource of Andy Grove et al

4. pre-takeoff Cornered Resources underlie many important transforming successes

5. e.g. drug patents often precede the company

6. Counter-Positioning:

7. Requires the invention of an attractive business model that presents a “damned if you do/damned if you don’t” quandary for incumbents

8. therefore must occur during origination

These types of Power are great because the “route to Power” is locked in early—so long as you execute well.

The Power Progression: Stability

Two Power types typically become available during this period:

1. Process Power:

2. Only emerges when a company has scaled sufficiently and long enough to have evolved processes which are sufficiently complex or opaque to defy speedy emulation

3. Branding:

4. necessarily takes a long time

5. it’s possible for branding to happen quickly in the origination stage, but unlikely

The Time Character of the Four Barriers

Each of the four generic Barriers (Collateral Damage, Share Gain Cost/Benefit, Hysteresis, Fiat) is specific to stage

1. Hysteresis:

2. Barrier: a structural time constant facing all players

3. hysteresis requires sufficient build-up time that the Origination stage doesn’t afford

4. Collateral Damage:

5. must occur in origination, as it’s baked into the very business model of the challenger

6. Fiat:

7. critical issue is, is the Cornered Resource fully priced?

8. As the resource’s value becomes more widely known, probability that it will be underpriced is reduced

9. must be underpriced to qualify as a Cornered Resource

10. [Eric] example: PayPal’s recruiting strategy of <30yo eccentric people

11. therefore, generally occurs during takeoff period

12. Cost of Gaining Share:

13. by definition can’t occur in the origination stage, as sales haven’t yet materialized

14. during the stability stage, customer acquisition strategy across the market shifts from “can I get it?” to “what’s the best deal?”

15. all players grasp the value of share, thus arbitraging out its value

16. therefore, share gains on attractive terms generally only occurs in the takeoff stage

The Power Progression—the Data (Frequency Histogram of Power Type)

When does each Power source occur?

• Origination: Counter-Positioning and Cornered Resource

• Takeoff: Scale Economies, Network Economies, Switching Costs

• Stability: Process Power and Branding

The Dynamics Difference

Operational excellence alone is not strategic—it can be imitated

• however, operational excellence via a concerted push during the takeoff phase can be highly strategic

• e.g. Apple’s underwhelming Apple III launch cost them the lead to IBM’s PC and cost Apple a high Power position

• conversely, Intel’s “Operation Crush” (sales and marketing blitz) landed them the IBM contract and gave them a route to Power

When you step back to consider how Power is established, there are numerous factors: leadership, timing, execution, cleverness, luck

Conclusion: The Strategy Compass and 7 Powers

Overall Power Dynamics is tied to 7 perspectives:

1. The Value Axiom:

2. Strategy has one and only one objective: maximizing potential fundamental business value

3. this view improves the usefulness of the discipline

4. still requires operational excellence

5. The 3 S’s:

6. Power is created if a business attribute is simultaneously:

7. Superior—improves free cash flow

8. Significant—the cash flow improvement must be material

9. Sustainable—the improvement must be largely immune tocompetitive arbitrage

10. The Fundamental Equation of Strategy:

11. Value = Market Size * Power

12. this thinking clarifies the value of Strategy by tying it to value

13. The Mantra:

14. A route to continuing Power in significant markets

15. “continuing” is important here, as the process is ongoing

16. The 7 Powers:

17. There’s only 7

18. If you do not have at least one of these for each competitor (current and potential, direct and functional), you cannot satisfy The Mantra and hence are lacking a viable strategy

19. 2 additional characteristics of the 7 Powers enhance its usefulness:

20. Small set:

21. The key strategic questions:

22. What Power types do i now have?

23. What Power types do I need to worry about establishing now?

24. at any given growth stage the max number of new Powers that are on the table is 3

25. Observable ex ante:

26. the potential for a Power type is usually evident long before detailed forecasting is possible

27. “Me Too” Won’t Do:

28. The first cause of a strategy is invention

29. can be a product, business model, process or brand

30. eventually such inventions lead to a Benefit:

31. Benefit is sufficient if it delivers a “gotta have” response from customers

32. The prospect of Power is a critical motivator of invention

33. Silicon Valley exists because potential investors saw the possibility of Power

34. The Power Progression:

35. Knowing when a window opens for establishing a Barrier is useful for seizing the opportunity

‍

Warfighting is a 1989 U.S. Marine Corps document. It’s 77 pages of articulate war strategy and doctrine, written by four-star general A. M. Gray. Here are my notes.

Foreword

Book is short by design—not intended as a reference manual, but a cover-to-cover read.

Doesn’t contain specific techniques or procedures, but rather broad guidance. Requires judgement in application.

This is guidance for a way of thinking, not just guidance for combat.

Chapter 1: The Nature of War

“In war the chief incalculable is the human will.” —B. H. Liddell Hart

“Positions are seldom lost because they have been destroyed, but almost invariably because the leader has decided in his own mind that the position cannot be held.” —A. A. Vandegrift

War Defined

State of hostilities that exists between/among nations characterized by use of military force.

Mutual imposition of wills.

Object of war: impose our will on enemy.

Means to that end: organized application or threat of violence by military force.

Absolute war/peace rarely exist.

War encompasses covert hostilities which barely reach threshold of violence.

Friction

War appears simple, but becomes extremely difficult.

Friction: “the force that makes the apparently easy so difficult” (Clausewitz)

Friction is the force that resists all action: makes the simple difficult and the difficult seemingly impossible.

Enemy seeks to resist our will and impose his own will on us

This dynamic interplay is what makes war difficult and complex, and very high friction.

Friction may be mental (indecision) or physical (terrain must be overcome).

Friction may be external (ie weather or enemy) or may be self-induced (lack of clear goal, lack of coordination, unclear plans, complex org relationships or complex comms)

Because war is a human enterprise, friction will always have a psychological as well as physical impact.

“While we should attempt to minimize self-induced friction, greater requirement is to fight effectively within the medium of friction.

“The means to overcome friction is the will; we prevail over friction through persistent strength of mind and spirit.”

“Positions are seldom lost because they have been destroyed, but almost invariably because the leader has decided in his own mind that the position cannot be held.”

Only through experience can we appreciate the level of will required in war; training can never fully duplicate level of friction found in real combat.

Uncertainty

A source of friction, but worth it’s own section.

All actions in war take place in uncertainty—the fog of war.

Unknowns about: enemy, environment, own military even.

We can never eliminate uncertainty; war makes certainty possible; all actions will be based on subpar information.

At best: determine probabilities. But it’s the improbable actions that often have greatest impact on war’s outcome.

In uncertainty: develop simple, flexible plans, plan for contingencies, develop SOP’s and foster initiative among subordinates.

Risk is inherent in war, and is related to gain. Greater gain potential usually = higher risk.

Acceptance of risk doesn’t mean acceptance of foolishness.

Part of risk: chance—a universal characteristic of war.

Chance creates psychological friction.

Chance affects all parties; so view chance not only as a threat but also an opportunity that should be exploited when able.

Fluidity

Each episode in war is a temporary scenario requiring an original solution.

No episode can be assessed in isolation, but rather viewed as a “fluctuating fabric” of activity.

Success depends in large part on ability to adapt to changing situation.

It is physically impossible to maintain high tempo of activity indefinitely, but there are times when limits should be pushed.

As a result, tempo of war will fluctuate from intense activity to non-combat periods of information gathering, replenishment or redeployment.

Disorder

War naturally gravitates to disorder.

Disorder can never be eliminated.

By historical standards, modern battlefield is particularly disorderly.

Extended range weapons have increased dispersion between units, straining limits of positive control and exposing gaps and flanks.

Best we can hope for: to impose general framework of order on the disorder, to prescribe general flow of action rather than control each event.

Must seek to generate disorder for enemy.

The Human Dimension

War is a clash between opposing human wills, so necessarily there’s a human dimension.

War must consider danger, fear, exhaustion, privation.

But these effects vary greatly by case.

An act that may break the will of one enemy may only serve to stiffen the resolve of another.

“No degree of technological development or scientific calculation will overcome the human dimension in war. Any doctrine which attempts to reduce warfare to ratios of forces, weapons, and equipment neglects the impact of the human will on the conduct of war and is therefore inherently false.”

Violence and Danger

War should never be romanticized.

Means of war is force, applied in form of organized violence.

Violent essence of war will never change.

“Since war is a violent enterprise, danger is a fundamental characteristic of war. And since war is a human phenomenon, fear—the human reaction to danger—has a significant impact on the conduct of war. All men feel fear. Leadership must foster the courage to overcome fear, both individually and within the unit. Courage is not the absence of fear; rather, it is the strength to overcome fear.”

Leaders: study fear, understand it, prepare to cope with it.

Courage takes many forms (stoic courage vs. fierce courage from high emotion)

Strong leadership which earns respect and trust of subordinates can limit effects of fear.

Leaders should develop unit cohesion and self-confidence of individuals within unit.

In this environment, Marine’s unwillingness to violate respect/trust of peers will overcome personal fear.

Moral and Physical Forces

War: interaction between moral and physical forces.

(Moral means non-tangible aspects to war, e.g. psychology)

Moral forces: difficult to grasp, impossible to quantify.

Cannot easily gauge moral forces such as resolve, conscience, fear, esprit, but they exert greater influence on outcome of war than the physical.

Example: fires often do more “moral” damage than they do physical.

Because moral forces are difficult to measure, it’s tempting to exclude from study of war—but this is a mistake.

The Evolution of War

Drastic changes in nature of war are result of major developments such as rifle and railroad.

Technology is major evolution catalyst.

First belligerent to exploit a technological development gains significant advantage.

Art and Science of War

“The conduct of war is ultimately an art, an activity of human creativity and intuition powered by the strength of the human will. The art of war requires the intuitive ability to grasp the essence of a unique battlefield situation, the creative ability to devise a practical solution, and the strength of purpose to execute the act.”

Chapter 2: The Theory of War

War as an Instrument of Policy

War does not exist for its own sake; it’s an extension of policy with military force.

Therefore, the original policy aim must be determinant guiding conduct.

War must serve policy.

Aim in war: achieve our will.

Immediate requirement: overcome our enemy’s ability to resist us (a product of enemy’s physical means and strength of will).

We must either eliminate their physical ability to resist, or destroy will to resist.

Means in War

At national level, war involves use of all elements of national power: diplomacy, military force, economics, ideology, tech, culture.

Must not consider military force in isolation of other elements.

The Spectrum of Conflict

Conflict falls on a spectrum, from restrained to intense (e.g. nuclear war).

Where conflict falls on spectrum is determined by:

• policy objectives

• military means available

• national will

• density of fighting forces or combat power on battlefield

In general: greater density = more intense conflict

A modern military capable of high intensity war may not be well prepared for “small” low-intensity war (guerilla warfare).

Levels of War

Strategic level

Focus on national policy objectives.

applies to peace as well as war

National Strategy: national power overall

Military Strategy: military force

Therefore, military strategy is subject to national strategy.

Tactical Level

Application of force to defeat enemy at particular time/place

Can be thought of as art and science of winning engagements/battles.

Includes use of firepower and maneuver, integration of different arms, immediate exploitation of success to defeat enemy.

Technical application of combat power consists of techniques/procedures to accomplish tasks within a tactical action.

There’s an overlap between tactics/techniques.

Tactics: product of judgment and creativity

Techniques/procedures: generally performed by routine

Operational Level

Art of winning campaigns.

Links the strategic and tactical levels.

Use of tactical results to attain strategic objectives.

Includes deciding when/where/under what conditions to refuse battle.

Offense and Defense

Each includes elements of the other

Offense: striking power

Where we seek to impose design on enemy.

Defense: resisting power

Aim of resisting enemy’s will

Defense is inherently the stronger form of combat.

While defense is stronger form of combat, the offense is the preferred form, as it’s where we can pursue a positive aim.

We resort to the defensive when weakness compels.

An effective defense must assume an offensive character, striking at the enemy at the moment of his greatest vulnerability.

The decisive element of defense is the counterattack; therefore offense is integral component to concept of defense.

Also, defense integral to offense, as offense cannot continue indefinitely.

Concentrating forces for the offense often means taking a defensive position elsewhere. Therefore, defense is integral part of offense.

Culminating Point: as advance increases, weakness of offensive force usually increases, and balance tips in favor of defender. Attacker must revert to defense. This is the moment most vulnerable to counterattack.

No clear division between the offense and defense, and we should not attempt to impose one artificially.

Styles of Warfare

Two essential components of combat: fire and movement.

Once cannot exist without the other; they’re complementary and mutually dependent.

Movement allows us to bring fires to bear, and fires defend our ability to move in face of enemy.

Two styles of warfare: attrition style (based on firepower), or maneuver style (based on movement).

Both styles can exist simultaneously.

Example: island-hopping during WWII was attrition battles within a maneuver campaign.

Attrition Warfare

Seeks victory through cumulative destruction of enemy’s material assets by superior firepower and technology.

Attrition approach: methodical, almost scientific. Gauge progress in quantitative terms such as terrain captured, body counts, etc.

Attritionist seeks battle under any/all conditions to exact maximum toll on enemy.

Centralized control, focus on procedure/techniques

Greatest necessity: numerical superiority

At national level, war becomes as much an industrial as a military problem.

Maneuver Warfare

Stems from desire to circumvent problem and attack from position of advantage rather than meet straight on.

Goal: application of strength against selected enemy weakness.

Relies on speed and surprise.

Tempo is often most important weapon.

Need for speed necessitates decentralized control.

Object of maneuver includes shattering enemy’s cohesion, organization, command and psychological balance.

Success depends on ability to identify/exploit enemy weakness.

Skill trumps numbers

Therefore, maneuver places high value on military judgment

While potential success is often disproportionate to effort made, failure carries disproportionate risk of catastrophe.

Combat Power

Combat power: the total destructive force we can bring to bear on our enemy at a given time.

Some are easily measured (number of troops) while some less so (effects of surprise).

Concentration and Speed

Concentration

Convergence of effort in time and space.

Doesn’t apply only to combat forces, but to all available resources (intelligence, logistics, preparation, etc.)

Willingness to concentrate at decisive place/time necessitates strict economy and acceptance of risk elsewhere.

Concentration applies to time as well as space. Decisive location, but also decisive moment.

Physical concentration (massing) makes us vulnerable to enemy.

Therefore, a pattern: disperse, concentrate, disperse…

Speed

Also applies to both time and space.

Relative speed is what matters

Speed over time is tempo: consistent ability to operate fast.

Speed is a weapon.

Speed allows us to seize the initiative and dictate terms of combat.

Speed provides security, is prerequisite for maneuver, surprise.

Speed is necessary for concentration of forces at decisive time/place.

Cannot maintain high tempo indefinitely, so pattern develops: fast/slow/fast

Concentration * speed = momentum

Surprise and Boldness

Surprise

Not essential that we take enemy unaware, but in a manner for which they are unprepared.

Desire for surprise is basic to almost all operations

Surprise is a multiplier of strength because of the psychological component.

Surprise can decisively affect outcome of combat far beyond physical means available.

It is a mistake to depend on it alone for margin of victory, as it depends on enemy’s expectations and preparedness.

Means doing the unexpected thing, which is often more difficult.

Does the anticipated advantage gained compensate for certain loss of efficiency in executing?

Boldness

“Boldness must be granted a certain power over and above successful calculations involving space, time, and magnitude of forces, for wherever it is superior, it will take advantage of its opponent’s weakness. In other words, it is a genuinely creative force.”

Must be tempered with judgment.

Exploiting Vulnerability and Opportunity

Seek to strike where most vulnerable.

Avoid his front, seek out flanks and rear where he doesn’t expect us and where psychological effect is greatest.

Destroy that which is most critical to enemy

“We should focus our efforts on the one thing which, if eliminated, will do the most decisive damage to his ability to resist us. By taking this from him we defeat him outright or at least weaken him severely.”

Most critical object may not be most vulnerable—not an easy decision.

Enemy’s most critical vulnerability will rarely be obvious; may have to exploit all vulnerabilities to find an opportunity.

Initial action in war is rarely the decisive one.

Ability to take advantage of opportunity is function of speed, flexibility, boldness and initiative.

Chapter 3: Preparing for War

“The essential thing is action. Action has three stages: the decision born of thought, the order or preparation for execution, and the execution itself. All three stages are governed by the will. The will is rooted in character, and for the man of action character is of more critical importance than intellect. Intellect without will is worthless, will without intellect is dangerous.” —Hans von Seekt

During times of peace the most important task of any military is to prepare for war.

Planning

Key to any plan is a clearly defined objective.

Must plan a campaign to reach objective within specified time.

Unity of effort is as important during preparation for war as it is during conduct of war.

Organization

[Marines-specific content]

Doctrine

While authoritative, doctrine is not prescriptive.

Leadership

Must be skilled at “getting things done” while at the same time conversant in military art.

“Resolute and self-reliant in their decisions, they must also be energetic and insistent in execution.”

Military profession is a thinking profession.

“Boldness is an essential moral trait in a leader, for it generates combat power beyond the physical means at hand. Initiative, the willingness to act on one’s own judgment, is a prerequisite for boldness. These traits carried to excess can lead to rashness, but we must realize that errors by junior leaders stemming from over-boldness are a necessary part of learning. We should deal with such errors leniently; there must be no “zero defects” mentality. Not only must we not stifle boldness or initiative, we must continue to encourage both traits in spite of mistakes. On the other hand, we should deal severely with errors of inaction or timidity.”

Trust is an essential trait in leaders.

Trust must be earned, and actions that undermine trust must be dealt with strictly.

“Trust is a product of confidence and familiarity. Confidence among comrades results from demonstrated professional skill. Familiarity results from shared experience and a common professional philosophy.”

Until a command has been made, each subordinate should consider it his duty to provide their opinion. When decision has been reached, junior must support it as if it was his own.

Yes-men will not be tolerated.

Training

Purpose of training is to develop forces that can win in combat.

Training is the focus of effort during peacetime, but must not stop at commencement of war.

“Because we recognize that no two situations in war are the same, our critiques should focus not so much on the actions we took as on why we took those actions and why they brought the results they did.”

Professional Military Education

All commanders should consider professional development of their subordinates a principal responsibility of command.

Equipping

[USMC-specific content]

Chapter 4: The Conduct of War

The Challenge

To identify and adopt a concept of warfighting consistent with the modern battlefield, that encompasses the broad range of battlefields, enemies and fluidity of war.

Maneuver Warfare

Doctrine based on rapid, flexible, and opportunistic maneuver.

Maneuver: exists in time, not just space.

“Maneuver warfare is a warfighting philosophy that seeks to shatter the enemy’s cohesion through a series of rapid, violent, and unexpected actions which create a turbulent and rapidly deteriorating situation with which he cannot cope.”

Aim: render the enemy incapable of resisting by shattering his moral and physical cohesion rather than to destroy through incremental attrition.

“The greatest value of firepower is not physical destruction—the cumulative effects of which are felt only slowly—but the moral dislocation it causes.”

Enemy must be made to see his situation not only as deteriorating, but at an ever-increasing rate. Ultimate goal is panic and paralysis.

Once gained or found, an advantage must be pressed relentlessly and unhesitatingly.

We must be ruthlessly opportunistic

Actively seek out signs of weakness against which to direct all available combat power.

When decisive opportunity arrives, we must exploit it fully and aggressively, pushing ourselves to the limits of exhaustion.

In order to appear unpredictable we must avoid set rules and patterns which inhibit imagination and initiative.

In order to appear ambiguous we should operate in a way that leaves multiple routes of action possible

Philosophy of Command

In order to achieve the speed required, command must be decentralized.

Subordinate commanders must make decisions on their own initiative based on understanding of senior’s intent.

“Our philosophy must not only accommodate but must exploit human traits such as boldness, initiative, personality, strength of will, and imagination.”

Implicit communication is key; involves using minimum of well-understood phrases or even anticipating thoughts of others.

Key people should talk directly to one another when possible, rather than through communicators or messengers.

We should communicate orally when possible because we communicate also in how we talk.

Commander should command from well forward to gain firsthand view of combat and an intuitive appreciate for situation.

This allows commander to exert personal influence at decisive points and to avoid delays in communication.

Only by physical presence—by share danger and privation—can commander fully gain trust and confidence of subordinates.

Command from front does not equate to over-supervision of subordinates.

Maneuver warfare is unusually disorderly due to speed and decentralization. We must be prepared to thrive in chaos, uncertainty, friction.

Must not strive for certainty before we act.

Must not try to maintain positive control over subordinates

Decentralized system requires leaders at all levels to demonstrate sound and timely judgment.

Shaping the Battle

Since our success is not based on attrition, we must conceive vision of how we intend to win.

First requirement: establish intent (what we want, and how)

Must identify critical enemy vulnerability

Then determine steps necessary to achieve.

Try to shape events in a way that allows us several options

Decision Making

If we fail to make a decision out of lack of will, we have willingly surrendered the initiative to our foe.

Any decision is generally better than no decision.

Whoever can make and implement his decisions consistently faster gains a tremendous, often decisive advantage.

“We must have the moral courage to make tough decisions in the face of uncertainty—and accept full responsibility for those decisions—when the natural inclination would be to postpone the decision pending more complete information.”

Don’t squander opportunities while trying to gain more information.

We must have the moral courage to make bold decisions and accept the necessary degree of risk when the natural inclination is to choose a less ambitious tack, for “in audacity and obstinacy will be found safety.” Finally, since all decisions must be made in the face of uncertainty and since every situation is unique, there is no perfect solution to any battlefield problem. Therefore, we should not agonize over one. The essence of the problem is to select a promising course of action with an acceptable degree of risk, and to do it more quickly than our foe. In this respect, “a good plan violently executed now is better than a perfect plan executed next week.”

Commander’s Intent

Two parts to a mission: the task to be accomplished, and the reason, or intent.

Intent is predominant, as it is more permanent and continues to guide action, regardless of shifts in task.

Focus of Effort

Of all the efforts going on within our command, we recognize the focus of effort as the most critical to success.

Focus forces us to concentrate decisive combat power just as it forces us to accept risk. Thus, we focus our effort against critical enemy vulnerability, exercising strict economy elsewhere.

“Each commander should establish a focus of effort for each mission. As the situation changes, the commander may shift the focus of effort, redirecting the weight of his combat power in the direction that offers the greatest success. In this way he exploits success; he does not reinforce failure.”

Surfaces and Gaps

Surfaces: enemy strengths

Gaps: enemy weaknesses

Whenever possible, exploit existing gaps. Failing that, create gaps.

Expect enemy to portray surfaces as gaps, and vice versa.

Gaps are usually fleeting, and require a quick and flexible response

We must seek out gaps through aggressive reconnaissance.

Combined Arms

Full integration of arms in such a way that in order to counteract one, the enemy must make himself more vulnerable to another: a dilemma for the enemy, and a no-win situation.