(Much of this blog post draws heavily from In Their Time, by Anthony Mayo and Nitin Nohria, HBS Press, 2005. I’d highly recommend reading it!)
I’ve been reading Harvard Business School Dean Nitin Nohria’s latest book, In Their Time, which tells the stories of some of the great American businesses of the last century. The difference between Nohria’s creation and almost every other business book I’ve read, however, is that he puts each story in the appropriate historical context. Much like Malcom Gladwell’s conclusion in Outliers, that your success largely depends on the context into which you were arbitrarily born, my takeaway is that entrepreneurs owe much to history, even when they don’t realize it. It’s no coincidence that some of the best entrepreneurs have been the most adept at figuring out their place in history before others do.
Nohria calls this intuition “contextual intelligence.” He goes on:
Context is vitally important because it shapes the opportunity structure of any time. The demography, technology, regulations, geopolitics, labor conditions, and social mores of any given time powerfully influence the business opportunities available. (pg. xv)
To illustrate my point, here are a few vignettes from the book, as well as a few from recent investments we’ve made.
Clarence Saunders (1881-1953), Piggly Wiggly Stores
Clarence Saunders started the first self-service grocery retailer Piggly Wiggly in 1915. The historical context of the 1910’s was characterized by increased urbanization, which meant more people coming off of farms and moving into factories. With more time in the factory, and consequently less time at home to cook and clean, American families put a premium on convenience. In response, the consumer packed goods (CPG) industry was created, and with it a new model of distribution and retail was required.
The typical grocery store in 1915 carried maybe 1,000 products, and its business model was based on high margin and low turnover. Stores often competed on liberal credit policies, which was how many got into trouble. Going to the grocery store in 1915 would be a remarkably foreign experience to the modern shopper:
The shopping scenario required the customer to provide a grocery clerk with a list of desired products, which were then gathered and bundled by the clerk currying about the store….Most items for sale were not individually wrapped or packaged and had to be secured and measured from large barrels or crates throughout the store. The entire purchasing process required the intervention of several individuals and the completion of a multitude of tasks. (pg. 61)
With the advent of CPG, this model of using skilled labor to “break bulk” was no longer necessary or efficient. Saunders saw the opportunity to cut out most of the grocer labor by allowing customers to select their own merchandise. To implement such a system, he designed the first serpentine, aisle-based grocery store, with check-out at the end. He provided price tags on products, which was another first. Finally, because customers had to pay on the way out, he eliminated credit policies. He passed on the cost savings to customers, heralding the modern low margin, high volume model of grocery retailing, which Walmart perfected decades later.
Henry E. Singleton (1916-1999), Teledyne
Henry Singleton started electronics conglomerate Teledyne in 1960 with the acquisition of the bankrupt Amelco Semiconductor. The historical context was the interventionist government policy of the Kennedy and Johnson administrations, particularly towards antitrust issues. Nohria points out that the antitrust court “succeeded in blocking all significant mergers, with the exception of one, in an eight-year period.” (pg. 212) With burgeoning cash reserves, rising stock prices, and the inability to purchase competitors, American corporations opted to grow horizontally into new and unrelated product categories. Enter the American conglomerate.
Starting with a $1 million investment from famed venture capitalists Arthur Rock and Tommy J. Davis, Singleton adopted the anti-trust friendly strategy of purchasing “under the radar,” privately held electronics companies. He then drove them to profitability by implementing professional management practices, often leaving these divisions to run on their own, so long as things were going well.
Between 1961 and 1964, he acquired 17 companies and grew revenues from $4.5 million to $38 million. By the end of the decade, he had created a $1.3 billion conglomerate of 130 individual companies. Most of the M&A activity was funded by a rising stock price, fueled by investor optimism around buying stock in the biggest conglomerates.
Searching for a modern context
The tricky part of contextual intelligence is that it’s almost always attributed post facto. Those who are better at it than others aren’t usually vindicated until after they’ve built their empire. For example, Vinod Khosla often references a particular McKinsey & Co. study from 1980 that predicted there would be no more than 1 million cell phones by 2000, an estimate that was of course off by a factor of 100x. Thomas Watson himself was quoted in the 1940’s as saying, “I think there is a world market for about five computers.” If those of us in technology are bad at observing technological context, how can there be any hope at all?
That said, I’ll venture a guess for 2011 — one that will sound obvious for anyone under the age of 30. Collectively, our context is an incredible financial crisis, and in a short time it has affected the way we think about purchases and money.
As a result, I believe that a generation of young Americans has begun a shift towards (1) less credit and (2) less ownership.
To the first point, many have hypothesized that GDP growth during the last decade was largely financed by undesirably low (even negative) savings rates:
In this context, what’s happened to the way people pay for things? As expected, credit has ceased to grow, supplanted by debit and alternative methods of payment:
In addition, non-cash payments have continued to shift towards the electronic variety, which is more convenient and more easily tracked and audited by individual consumers:
Digging into the composition of those electronic payments, we find that they are driven predominantly by growth in debit and ACH, with credit effectively flat:
We are also moving towards an era of more renting, and less owning. For many young Americans, the idea of taking on debt for the privilege of ownership is unpalatable, even if the lifetime cost of a purchase is lower. The new Zeitgeist is to maintain financial flexibility by renting whenever you can do so at a reasonable price.
The best example of this effect is home ownership, the rate of which is projected to fall towards 1993-1994 levels over the next few years:
Our recent investment in RentJuice is a testament to our belief that owning a home is no longer “the American dream” it once was. Similarly, Rent the Runway brings the “rent, don’t own” mentality to high fashion.
In short, while it’s hard to know where we stand in history, it’s worth taking a guess sometimes. Often, your greatest asset may be the time in which you’re born. Try to recognize what makes that moment in time special.