Ep. 834: Karim Lakhani and Marco Iansiti Interview with Michael Covel on Trend Following Radio

Foreign.

This is trend following radio where great thinking comes alive. Nobel Prize winners, legendary traders, best selling authors, and the pros that know what drive us irrational human beings. I am your host, Michael Covell. Not filtered, raw, honest. That's my passion.

My guests today, two very, very bright guys from Harvard, Karim Lakhani, Marco Ianciti. Their new book, competing in the age of AI Artificial intelligence. That is strategy and leadership when algorithms and networks run the world. Look, everyone catches the headlines. Everyone sees where tech is going. Everyone knows that some form of artificial intelligence is either here or is coming right around the bend. And what will you do about it? What will your business do about it? How will you handle it? You probably won't make it if you don't handle it, if you don't adopt it, if you don't have an understanding of what your new operating system should be based on AI arriving, you're probably toast. Karim and Marco go into an assortment of issues today, starting with what's the framework, what's the rethinking of business and the operating models. Even bigger picture, what are the opportunities presented? And of course there's always challenges. This is life, not just AI. But hey, challenges are a good thing. Again, challenges are an opportunity. Let's jump right in without any further delay with Karim Lakhani and Marco Ianciti and start to understand a little bit more about competing in the age of AI. I was thinking about our conversation in advance and I was in the Sony showroom, their flagship showroom in Ginza in Tokyo the other day. Yeah, they've got this dog in there, the Ido dog. And I was like, oh my God, I want to buy this thing. $3,000. I would have bought it except they have it hooked up to the cell system and it will only work in Japan or the States. On top of that, I'm calling you guys and you're in Boston. You got that Boston Dynamics group up there doing their dogs. I'd buy one of theirs too. That's some form of AI, isn't it?

I think what the interesting thing there is, as you mentioned, Sony, we have this example about Nokia in our book about how Nokia was not able to change from a product company to a platform company and use the benefits of ecosystems and data and analytics to drive their growth. In many ways, Sony was actually the first of those companies that didn't figure it out. If you thought about Sony in the 80s and 90s as the leading consumer technology company and today nobody cares about Sony per se, as a brand or as an Innovator. It tells you the story of what's going on, which is that many of the giants have stumbled and are facing irrelevance in light of the changes we see happening in the book. This view of you should be thinking about ecosystems and platforms and data and analytics and AI as part of your core strategy and your operating model is something that Sony doesn't get, I don't think yet. I don't know, Mark. I don't know what you think.

Yeah, no, I mean, I think it's one of those things where Sony and Nokia both, in very much the same way or a similar way actually, where at their heyday, the quintessential product companies, we're really driving fantastic product innovation in a very focused and in some ways bounded sense. Sony had amazing products, Nokia had amazing products. I mean, it really defined smartphone innovation for many years. And we're very, very much sort of an exciting company to work for. Inspired in all kinds of ways. I think what happened is a very different kind of company came along in both cases. With Nokia, you've got Apple with iPhone and especially iOS, Google with Android. And you had these companies that were built in a fundamentally different way. There were platform companies, they had what we call in the book digital operating models. In a way, they're driving innovation in a fundamentally different way. It's not about having these incredibly cool integrated products that totally optimized a very narrow range of things. It was kind of about using digital technology to really blow out what companies mean.

It's funny that you guys go ahead and you take my example and you think about something else with it. You think about the company that I mentioned. Now, for me, I wasn't really thinking about the company so much. I was thinking that that was the coolest piece of electronics, consumer electronics that I've seen since perhaps picking up the iPhone. And I couldn't buy the damn thing because Sony had put it only on two cell systems. I would have given them my $3,000. So in some kind of odd way, perhaps that speaks to a still kind of odd thinking, if you're going to build that damn dog, why not let everyone buy it?

Yeah. And also, like, I mean, I think it's not enough to have AI in your product that's going to give you some functionality and some features. But what we're arguing in our book is that your entire operating model, how you do things has to change. It's relatively easy to create one off products with some set of AI built into them. But that's not going to be your savior.

There's a lot of stuff, I think the product, in some ways. An example, you can take AI and do some really cool things with it. People have focused on all kinds of interesting examples. Here's a particular use case that AI can do and push the envelope on what people have been able to do before. Here's a way that we can do predictive maintenance, or here is where we can predict cybercrime or doing really amazing things. What we focus on in the book is partly that, but I think we take a much broader lens. First of all, we take a very general definition of AI. People start thinking about AI as robots or these things that will do amazing things or will look like humans and do what humans do. But for us, AI is anytime you use software for something that humans had traditionally done. There's a definition of artificial intelligence called weak AI, which really talks to that, which says, look, without necessarily doing anything super fancy. Anytime you actually do something with an algorithm that was originally done by a person, like setting the price on Amazon, for example, or searching for something, is.

A spreadsheet, ultimately the base form of.

AI, to the extent to which you put a little bit of automation in there, maybe the recalculation engine within that, so that you go out there. But yeah, because in the old days, there used to be people actually doing these things by hand, and now it's all automated. You take its classic use case, which is do a bunch of multiplications and additions, and now you can actually do something with automation. And Excel is driven by algorithms that people used to do by hand. In fact, I think one of the interesting things is that we've kind of done AI for a long time. There's a lot of different things that we use every day that are served up to us by software. I think the aha for us was that when you get a critical mass of AI inside a company, when you really start doing a bunch of different things with AI, a bunch of different operating things, like serving up what it is the customers want as a service, or enabling the supply chain in a way that's pretty automated.

Classic example, Amazon.

Exactly.

With Amazon, they use AI to do a lot of things that people would traditionally have done, whether it's in a warehouse or making a recommendation for a book or a video or something like that. The thing that's interesting about Amazon is that they do so much stuff with software that completely changes the opportunities that are available to the firm. It clearly changes what we call the operating model. So the way that the firm delivers Value. The way that the firm does stuff is different. There's no human bottleneck. Go to the Amazon website. You want to buy something. There is no human being that serves up a product recommendation. There is no human being that sets the price in real time for what you want. There's no human being that checks inventory. There's no human being that figures out the supply chain to get the products over to you. It's all done by software. There are humans in the process. There's a bunch of humans in an Amazon warehouse. But funny enough, humans are doing what the algorithms tell them to do, not the other way around. In some ways, the algorithm formed the core of the operating side of the firm. That's a big deal because all of a sudden when that happens, what we call the operating model becomes digital. Then you can scale the firm to huge proportions. All of a sudden. There are no constraints of traditional management or traditional labor that get in the way.

Let me stop you there for a second, let you go into an example with Amazon and contrast it with Walmart. The little bit that I know about Walmart, quite successful. But my gosh, if I just kind of blur my eyes for a second, how in the world could one guy with a website, that's essentially what Amazon was not too long ago, one guy with a website, get to the point where he could compete, get and beat what Walmart had set up? It just seems like such a, at the base level, a strategy decision, a digital strategy decision made by this one man, which you would have thought, my gosh, Walmart is impenetrable. All they have to do is basically go online and they're going to be set, they've got all this distribution. It's just amazing that Amazon even exists in the context of Walmart existing first.

The first part of the answer is that it didn't happen overnight. When Amazon was built. It wasn't built to do this originally. It really was a guy with a website. A guy with a website is not a digital operating model. It's not a new kind of company. It's just a traditional company with a traditional warehouse and a bunch of books in inventory that has a web based interface. But Amazon run like that was never going to be Walmart. It was never going to compete with it. Amazon went on like this for many years, through the whole first wave of the dot com boom, until about 2002, 2003, when the company had grown enough because of the variety that it was able to offer and the prices that he was charging. It had grown so Much that it literally was coming apart at the seams. And it grown in a usual haphazard fashion across a bunch of different business lines. But there was no thought through platform behind this. There was no thoughtful digital operating model behind it. Bezos and Amazon folks realized that and they came down to this fundamental moment in the history of the firm when they decided to rearchitect basically the whole thing from scratch. They rebuilt the Amazon code base from scratch starting then on completely different foundations. It turns out it wasn't actually it was better, but it wasn't great. So they rebuilt it from scratch again four or five years later to pull together what it is that Amazon does today. Amazon today will do many of the same things that traditionally Walmart would have done in terms of taking a product through its supply chain, recommending products to customers, setting the price, selling the product and so on. But the way it does each of those different things is completely different from the way that Walmart would have done it. Amazon is a software company. It is built like an integrated software company. It just happens to do retail and also a bunch of other things related to it.

I think the insight is that both Walmart's view as a store owner and a retailer is very different from Amazon's view of them as a software company that is expanding into a whole range of other software analytics, data driven company that's expanding to a whole range of activities. It's really rethinking what customers want. You think about Alexa? Alexa says I'm going to bring shopping to voice. I'm going to be the place where all shopping can take place. Well, that's a radically different view of retail than the world of running warehouses and running retail stores. Now Amazon does that as well. It runs warehouses, it's now going to be FedEx's biggest competitor, and so on and so forth. But it's how you start and you start from a digital foundation and you start from a digital operating model and oh, by the way, you rewrite your code base three times along the way and you're not reluctant to do that.

Can you imagine at Walmart a traditional CEO says this is just not going to cut it, we're just going to rebuild it from scratch.

No, it's crazy. So not even saying agree to do that, but then actually doing it and doing it successfully because we've all heard about prior installations of SAP going disastrously in the last decade in many companies because they didn't know how to do it. So it's both having the vision, but then the ability to be agile and to change and adapt to the demands of being a digital operating model than what we're used to thinking.

And interestingly enough, from that point on, they brought on board a super experienced software executive, Brian Valentine, that used to ship Windows at Microsoft to actually do the rebuilding of the website. This is no traditional IT organization. This is a real experience. Software product development, business and software savvy person, very different from a traditional cm.

It must have been daunting for Walmart when they realized, oh my gosh, our competitor isn't, as you guys lay out, isn't just another retailer selling products. They're a digital company who happens to sell retail products like we do. But the entire company has been set up from the scratch to be different. That must be very daunting for even a massive company like Walmart where you all of a sudden watch across your eyes go, oh my gosh, is this potentially the end of us?

No, that's exactly right. That's exactly the phenomenon that we call a collision in the book. A collision is an interesting thing, like you're basically Walmart coming along and you're running your business in a traditional way, or you're Marriott.

You think you've got the biggest moat built around you possible, right?

Everything is fine and you're scaling up, you're growing the organization, you're running along at a good clip and your business is actually getting better. And then all of a sudden you start to see this other organization that's coming along that's sort of doing the same things that you're doing, but in a profoundly different way. As you said, you're Walmart and you're finding Amazon gunning for you and they don't look like you, they're fundamentally a different kind of firm or your Marriott. And you're looking at, and you're seeing Airbnb and again, they're going for the same customers, similar use cases, similar customer needs, but fundamentally different kind of company colliding with you and really redefining the industry in the process.

A similar transformation we talk about in the book is actually what happened with Microsoft. Chapter five of our book really talks about a similar level of change that Satya Nadella put into play to go from a products company to a platform company and to take on these super tough decisions and super tough organizational change and business model change to make this happen. So it's doable, but it requires a ton of conviction, it requires a ton of patience, and it requires sort of this view that if you don't do this, the logic that we set up for ourselves is not going to survive.

I think the reality is that software companies transform themselves all the time in very fundamental ways. If you look at what Microsoft is going through, or if you look at what Oracle is going through, or if you look at what SAP even is going through, it's fundamentally changing the way it does business in a drastic way. In some ways, as the software industry starts to swallow up a bunch of neighboring industries, and maybe not even so neighboring fairly distant as well, then this kind of transformation need takes over very different parts of the economy. And so you have a bunch of different organizations that are starting to understand the extent of transformation that is required of them. And you can see Walmart doing this. I mean they're out there investing like crazy and they're buying up companies that can help them redo their infrastructure and redo their business model and their operating model. They're rebuilding themselves essentially in different found. The other interesting thing about this is that it really has nothing to do with being an online company. It has to do with how you do things from an operating perspective. Do you have a comprehensive software based operating model that is highly scalable, can drive a lot of variety and personalization, can drive learning and innovation as it evolves. It doesn't matter whether your front end is a website or a mobile app is a retail store or a combination of those things. As we see, for example back to Amazon, they have now multiple channels. Each of those channels is evolving in a similar way. It's not about being a website, it's not about being online, it's about having a digitized way of running the company.

Let me put you on the spot. Are there some companies right now, to the top of your mind that you can think of, ones that we all know that have not yet made the decision to start the adjustment? The traditional players that have been around, welcome to throw some examples out. I'd like to hear some examples, but ones that are not adjusting or has everyone said, my gosh, Bezos is now the richest guy in the world, he got there for a reason. We better start, worst case, emulating him. Even if we don't know why we're emulating him, we better start emulating him in some way. Are there companies out there that are flat footed still?

Oh for sure. I mean you find them everywhere. We find it here at home, one very close to our heart. So you think of one of the leaders in the education sector here, universities, that kind of thing. And I look at our own organization, I Think we have a lot of things to learn, a lot of commitments to make, to transformation. I mean, education is being transformed and universities are being transformed as much as anyone else.

Now, hold on, hold on. You're talking Harvard.

I. I mean, take an example completely.

Was that. Hold on. Was that. That was a pause. Was that a stutter? What was.

You know, we, we will swallow.

You guys have got the endowment to do anything.

Yeah, no, exactly.

That doesn't mean. No, the endowment is all bunched up into small pieces or something.

Yeah, I know, but it doesn't just take money. In fact, the amount of money that it takes, I don't think.

It's not about the money. It's not about the money.

It's about people and commitments and understanding that all of a sudden this IT stuff that you've been doing for many years and potentially spending a lot of money on, as Harvard and others do, has to be done in a fundamentally different way. All of a sudden, that is your model. That is the way you go to market. And you think about. You would think about teaching in a different way. You would think about communicating with the students, connecting with communities of students and executives in a different way. It's a different mindset and a different culture and a different way to actually drive the business that is our core.

You guys are there. You guys have this voice, you have this knowledge, you have this experience when you bring these subjects up, which I know you do, with assorted people that need to hear your message. What's the pushback?

Look, the thing is, the system works well. We're doing amazing as a business school, one of the top business schools in the world. We keep growing, you know, we're constrained for supply for really great faculty. When people look at this, they go, huh, Tell me, where's my burning platform? Where's the burning platform? Everything looks awesome. Record enrollments, everything. So this is what happens. The traditional leaders look down at the digital businesses and they go, huh. At the moment, we're generating much more value than what these digital businesses require. And these guys require a lot of investment and a fundamentally different view of the way you operate. Why should I change? It's like, tell me the ROI on this. I can tell you, Jeff Bezos, ROI at the beginning of 1999, 2000, 2005, was nowhere near what Walmart was at. People at Walmart will look at this and say, why would we do this? And it's the same thing that most.

Incumbents find themselves under when you're talking to those at Harvard that need to hear your message, it's kind of like they have to imagine somehow or another, a meteor comes along that could possibly damage the Harvard brand. And you both are sitting here saying, we can't tell you exactly how that might happen, but it could happen if we don't go digital.

Yeah. And we have a lot to lose. I mean, anybody that has had a leadership position has a lot to lose. If you look at Marriott right now, they have a ton to lose, and they have a growth strategy in mind. They've done things in a certain way for a long time, just on Marriott.

I mean, I love that example. You love the brands that they have, the hotels that they have. And certainly Airbnb is showing up as a different competitor. But what's interesting is recently, a month ago or six weeks ago, I saw that they announced that they were buying the hotel in Manhattan for $200 million, the flagship place to reimagine the W brand. I was like, wow, that's $200 million. That's not going into their data strategy, their infrastructure, and their digital operating model to acquire real estate. To then figure out the W experience. It would seem to me to be crazy. In this world where they're under attack by booking.com, they're under attack by Airbnb. Simultaneously, yes, they have a strength position, their soft values are amazing. But I'd be scared. I'd be scared.

I think Marriott in many ways is a huge example of the kind of thing that many, many different people are experiencing, including the Harvard Business School, including any kind of traditional company, especially those that have led in the past, that is that actually becoming digital in a serious way in involves what we call an architectural transformation. The way the company is structured, the way it's built, the relationships between all the pieces needs to change. Can I give you a little tiny bit of history here?

Absolutely. Dig in.

Basically, if you look at companies, they have been designed in a certain way for a long period of time. It's been hundreds of years since literally the 1600s. Sometimes you have examples of companies that are older than that, that are designed in what we call the multi divisional structure. They're built up of a bunch of different subunits, a bunch of pieces that are focused on individual tasks or individual strategies, and they connect in a relatively simple way. As companies grow and get bigger and bigger and bigger, you essentially divide them into smaller and smaller pieces to make them more and more manageable. That is driven by the nature of people and the nature of managers. The nature of organizations is that in Order to scale, in order to grow, you divide the company up into a bunch of little pieces. Now, as you start to put it into those companies, as we have done now for probably around 50 years, you put it into those little components. If you look at Marriott, Marriott has grown into this incredibly complex thing that has a huge variety of different subunits, different pieces, different divisions, business units, different hotels, different hotel chains. Each has a different character and different approach to information technology, different separate teams running IT and so on. So you have these conglomerations of stuff that significant companies are made up of. Digital companies, if you look at Airbnb and how it is structured, or if you look at Facebook and how it is structured, are fundamentally different. Essentially, it's the core of the company is a unified sort of integrated data platform that stores the information that is needed to actually run what the company does. The silos are the shallow things, if anything, where the teams are working on top of this. But integrated stuff that drives the firm is all together. If you look at Marriott, when Marriott looks at Airbnb, they say, okay, that's cool. They have a 360 degree view of the customer. They can do amazing things in following what you've done in the past and providing suggestions for what you might do in the future and matching up with the right kind of hosts and so forth. What if we were to try to do the same thing in Marriott and then they look at their own IT systems and their own organization and say, oh, no, well, damn, we've got this thing which is literally dozens of different organizations, dozens, if not hundreds of different separate databases that would have to be integrated and an IT system and an organizational structure that is totally fragmented into bits and pieces, which is why the transformation is so hard. Howard Business School, by the way, is sort of the same way. We have a bunch of different units, different organizations that are designed to work as much as possible independently. And so when it comes down to integrating the data and providing a consistent experience for a user, it's really, really hard.

Yeah. And it's not because we're not investing in digital. I mean, we've got a Harvard Business School online platform which has served 50,000 users. We're both part of the Harvard Business analytics program, which does online training and analytics with our engineering school in a very unique way. Harvard has invested in HarvardX. We have more than 200 courses online. That doesn't mean we're not investing and working away at this. But those are many ways. Sideshows. Those are sideshows that are not Part of the core. And how we figure out this, becoming part of the core, part of your operating model is the core question.

It just struck me as you were speaking about Harvard, and everyone knows that the Harvard label is exclusive. This is what people think of when they think of Harvard. It struck me that the old Facebook movie, the Social Network movie. Well, just the whole notion of how Facebook came along being Harvard only, and then, you know, oh, hey, it's exclusive. It's exclusive Facebook. It's only at universities. When it went wide and everybody could get on Facebook, it really didn't lose any value in the brand. And it makes me think, instead of Harvard being, quote, exclusive, if everyone had access to Harvard, would that make Harvard any less valuable as a brand?

It might make us even more valuable. I mean, we as caterers, we as scholars, want to change the world, want to have impact with our research. There's one model of exclusivity, but there's another model of let's make sure that everybody learns from the insights that we're lucky enough and have the license from society to be able to generate.

If guys like you could turn your thoughts about digital strategy loose with an operation like Harvard, talk about getting to a point where you could really build a moat, an unusual period of time that could perhaps protect Harvard for a long ways into the future.

Yeah, but again, it flips some basic assumptions of what you are as an organization, what your mission is, and how you orient yourself. And it's really the architectural change that Marco has been talking about. This change in architecture is what is required to build a digital operating system.

So what you're really saying is, hey, guys, our most important thing is that brand. Now, underneath that brand, we're going to keep all the old buildings and everything, but everything else might get blown up in a way to come up with something even better.

Yeah.

The reality is there really is tremendous opportunity out there for organizations like Harvard or Marriott or anyone. Yeah, anyone that is out there has been leading the way in the traditional sense because they built assets that can be really valuable in a variety of different ways, like brands, for example. And so, from their perspective, it's not about Harvard going online. It's really about Harvard thinking of itself differently and figuring out new ways to scale the impact of its traditional assets. And so, okay, so we have this great Harvard brand. What else can we do with it? And how can we use a more digital operating model to scale to billions of people? Why not?

Let's break the hotel room example down because we talked about airbnb Everybody knows why Airbnb has become successful, but I'm in a hotel room right now. I'm in Shinjuku and Tokyo. There's nothing here digital. They haven't thought it through to me. As I listen to you guys, I'm thinking to myself, okay, if I'm Marriott, I've got rooms, I've got captive audiences, they're in those rooms. And when they're in those rooms, I can do anything, I can collect data, I can sell. I think this is where you're going at it here, is that it's the fundamental reimagination of what we are, what do we have and how can we shape shift it to use data and reach out and create different product opportunities that we're otherwise not doing right now.

Right, exactly. It has to start with the consumer first and what they want. And our expectations have changed.

The consumer might not know what he or she wants.

Let's just talk about catch up. I'm not used to having a taxi, Uber, pick me up within three minutes and if it's seven minutes, I get upset in a world where in Boston and you would need to book your cab 10 days in advance and maybe they would show up. And so now people's expectations of what the digital experience needs to be has changed fundamentally. If Marriott just did an ethnography of its most powerful users and their expectations. And by the way, Marriott executives probably when it comes to getting taxis, have a very different view about the world than when they think about hotels. But if they just did that, that would get them a much longer way above and beyond sort of reimagining what we're saying. What I'm saying is that executives are sort of living these split lives. One life of theirs is digital, it's online, it's instantaneous, it's high value creating for themselves. Then they go back to their old coal factories and saying, okay, we still must mine coal in the old way and have child labor. It's this bifurcation of, I want lots of things that are digital in my real life, but in my business life, I just want to keep operating the coal factory. And I think that's the first wake up call that we need to be making to these guys.

I think what you can do with the digital operating model is really fundamentally rethink the experience that you can offer to a user, to a customer. What you actually do is you can personalize in real time, which is a stunning thing. Your Marriott example in Tokyo is interesting. The challenge is with traditional hotel companies that Their data is very fragmented, so it's very hard for them to know what you did before, what you may have ordered from room service, what your preferences might have been, what you might have liked to do as additional experiences, what kind of cars you might have liked to hire to get you places, or whether you're interested in subway information in Tokyo or whatever. That data is splintered across literally dozens of different databases and impossible for them to bring to bear. In defining an experience for you that would really make you go like, wow, these people really sort of understand what it is that I want.

Impossible. With their current model as structured today.

It'S impossible because there is no way to integrate all the data. There's no way to make it all work for you.

Integrating data. They're not even collecting all the data they could possibly collect.

Yes, that's right. And whatever they collect is fragmented, so you can't really pull it together. And so you can't compete a modern data platform. I mean, data knows no boundaries. You have data that talks about Kareem's preference sets and what he likes to do when he goes on vacation that could be gathered and could be merged with data that says, what is Kareem doing right now that we could improve or help with? It could be merged with data on your own financial systems and says, what are the more profitable ways for us to actually make suggestions to go about what he might do next? He might be merged with data from Availability. Oh, well, we could recommend these kinds of experiences, but we don't have them available right now because somebody else has got full capacity and so on. You can see how when you start to migrate the data from different places, put it all together into one single model of what it is that career might want to do, you can offer all kinds of really interesting things and really change the game. Traditionally, we spent a lot of time designing products or a lot of time designing services, then reintroduced those products and services, hopefully to be used by a bunch of customers in a repeated way. What this model does is fundamentally different. There is an additional cycle that says there's innovation happening real time as you are experiencing the product or as you're experiencing the service that is personalizing that experience to what you need at that moment where data is coming together to inform what it is that Marriott or whoever might offer you at that particular point in time. At 8:37 on Monday morning, when what you really want to do is you love to have the special scrambled eggs with a side of avocado and you've had that before and this time, exactly what you might want to do. It fundamentally reshapes the way that consumers manage and deal with the kind of services and products that they're providing.

In the last two weeks, I've had the chance to be in. I guess I'm in Tokyo right now. I was in Singapore, I was in Manila, I was in Hanoi. I was in Ho Chi Minh City. Where else was. I was somewhere else, too. I forget. But the reason I bring this up is because I was spurred by being in multiple taxis to notice something in these taxis in these different Asian cities. And what I noticed were Chinese pay systems being heavily advertised in the taxis. Something I've not seen in the last. I mean, it's like literally within one or two years, maybe even less that it's now in all the taxis, which just speaks to something which is tough for us Americans to understand. Look, every time I go to China, it's a really interesting experience. I really hate the fact that I can't use any of my American apps or this or that, but that doesn't mean I should turn my brain off to China, clearly. So why don't we open up a little bit of a Pandora's box to what we have is kind of a closed system as a country, but inside that closed system, they are using digital operating systems to spread out from China and as I just mentioned, to infect the Tokyo taxi system, to infect the Singapore taxi system in a way that no one would have imagined a couple years ago.

Yeah, absolutely. I want to use a quote from one of my favorite authors, William Gibson. He says the future is already here. It's just not evenly distributed. China to us looks like already living in the world of an AI future with both all the great things and also the bad things as well. My experience with this was actually in Kuala Lumpur three years ago. I went to KL to do some executive teaching for us. Was in Petronas Towers, staying nearby there. Petronas Star wars is the luxury mall and office space right in the heart of the Kuala Lumpur. Went to the 711 to get some junk food and snacks in the basement of the Petronas Towers. I go there, give them my credit card and they go, well, no, don't take a credit card. You got to go down to the ATM to get some money. But then they go, oh, well, we take Elipay so Euro. And in a luxury mall, in a 7 11. Now maybe you're saying, like, why is there a 711 in a luxury mall? That's a different conversation. But an American brand trying to use a visa, Amex, MasterCard, Discover. No, no, no. But they'll take Alipay. It gets better. We go to Jalan Alor, a street in kl, which is a big tourist street, amazing restaurant. If you want a great sort of authentic Malaysian restaurant experience, you go to Jalan Alor and there lots of tourists flying in the street. And there I met a street performer, she's from Huangzhou, she sings for the Chinese tourists. But the way she makes money is through the QR codes for Alipay and wepay. It doesn't take cash, takes the QR codes only. That was like oh my goodness. And then you go to a luxury hotel in Malaysia and at the desk they say we take Alipay and Wepay from 711 to street performer to luxury hotel, the same QR codes are being used. Tells you that the world is changing in Southeast Asia, in Malaysia.

Let's speak to that though why that happened. It happened because Chinese tourists are in massive numbers going to cities like KL and Singapore, etc.

Exactly. And they with them brought this demand for the fact they don't carry cash, they don't carry conventional credit cards, they shouldn't carry conventional credit cards because the transaction fee on a conventional credit card is 2.5 to 3 to 5% versus Alipay's transaction fee is 0.6%. So why the hell would you even want a credit card when Alipay is way better? It's a better user experience with Alipay and wepay than what the credit cards offer. That world has dramatically changed. The book we talk about the rise of Ant Financial as an example of an AI first company that has fundamentally rethought what a financial services institution does. In many ways I would say us here in the US are backwards and are in a closed system and China is the one that's leading the way. Better value for consumers, more value for merchants. Everybody benefits from it. And we're here paying the transactions cost for the antiquated IT systems that are the bank of America or Chase or JP Morgan.

What's interesting about this point though with the Chinese tourists in a place like kl, I can think the first time I was in KL and I remember having a conversation with a nice executive at the hotel and she was trying to figure out where I was from and we went through 10 countries before she finally guessed us and she had perfect English. I think that it speaks to the notion that one of the reasons that China is being successful in A place like Southeast Asia is that contact, American contact. We're kind of isolated, and in a way, that's something, Gosh, I don't know, we might look back in time and say, gosh, it was Chinese tourists that were leading the way on the integration of Asia, whereas we were staying in the States, not traveling as much. And that isolation perhaps could be one of the reasons that where you would think that the isolation is not really there because we have all this digital technology. But in some ways, it's the feet on the ground that are pushing it.

It's isolation. There's also a fair amount of arrogance up and down Silicon Valley. There's a bunch of different companies that think essentially they're the only game in town, especially with regards to digital networks, platform AI and things like that. The reality is China has become a huge powerhouse of AI companies that are in many ways leading the ways in fields as different as financial services, healthcare, traditional design firms, all kinds of different things that are really changing the industrial landscape in a very fundamental way. Some of the more interesting AI concepts really are coming out of there right now. That's a pretty good surprise to a lot of different organizations in Silicon Valley. And it's perhaps even bigger surprise to a bunch of different people scattered around the US Thinking that we're just the latest and greatest in everything.

When you say that, many Americans, they listen to me occasionally. They know I've spent the last seven years basically outside of the States. But many Americans hear you say some nice things about China. The only narrative they know is to scream, literally, red Communists next. I mean, okay, you can say that, but that doesn't get at what we're talking about.

They're more capitalist than we are in many ways. They have a different political institution, and we can debate about their political institutions, but in terms of capitalism, there are more American capitalists than we are.

I love talking about capitalism and entrepreneurism with Asian guys in Asia. Any country. Any country in Asia. There's that merchant thinking.

Yes, again, Alipay and financial. The payments architecture that China has unleashed in China and the rest of Asia now and rest of the world coming soon shows you the power of building a digital operating model and how you actually set yourself up in a way that you deliver tremendous value to your users and your consumers, but at the same time, you just grow enormously because of the way you're organized.

And financial is really an amazing firm. As you start with Alipay, that was spun out of Alibaba just a few years ago. Then the company Goes off and introduces a whole bunch of different financial services, insurance services, health care services, all kinds of consumer driven applications and really sets really a new standard in how fast you can scale an organization and drive a broad variety of different businesses to maturity. It's just an unbelievable thing. This is an organization that has in the order of 10,000 people. So it's still a pretty tiny company where the user base right now I think has gone to 1.4, actually 1.4 billion users of Alipay. It's just incredible if you think about it. If you think of any financial. As a financial institution, we raised money last year at $150 billion, which is considerably more than Goldman Sachs. And it's about half as much as the largest bank in the world in terms of valuation market cap in just four or five years.

Yeah.

Why as an American, if I'm in that KL 711 and I want to buy whatever snack they've got in there that particular moment, and I love buying snacks in 711 in Asia, who is messing up of the American companies that equally I can make an Alipay purchase or I can make a purchase using something beyond an American credit card. Who in the States is not reimagining their opportunity, who is not seeing it?

It's the usual suspect. I've had close to a 22 year relationship with bank of America and all the different forms. Bank of Boston here, then it was Fleet and then now bank of America. I tried to open up a bank account for my daughter, teenage daughter, in their nice marble lobby here in Cambridge. It took us 45 minutes and two trips back home to get more identification with a 22 year old bloody relationship. Then when I said, okay, can I now get her a credit card? Oh no, you can't do that. At our branch you have to call the 800 number because we only do banking, we don't do credit card. That tells you there's something fundamentally wrong with the ways in which the architecture of the US banks are set up which aren't going to allow for this kind of stuff. It's unbelievable.

What's really cool with your work here is I'm looking at the front cover. Competing in the age of AI strategy and leadership when algorithms and networks run the world. As I think about our conversation, sometimes maybe as entrepreneurs, as business people, we think, ah, the opportunities are limited. When you start to think about it this way, it's like we're just getting started. I don't care how successful Alipay or Amazon is right now there are so many opportunities when you look at it this way, because it's just an entirely different way of imagining the world.

Couldn't agree with you more. I mean, I think we're at the beginning stages. There's tons of opportunity here, us side for us to reimagine rethinking, but globally as well. I think we're just scratching the surface in many ways. I think the established companies again need conviction, need patience and need courage to go forward.

One really important way to think about this is that nobody has this right yet. It's not like Facebook and Amazon have built the perfect company for the digital age. There's all kinds of challenges, all kinds of problems, all kinds of opportunities to do things better. Anything from managing privacy better to managing algorithmic bias better. There's a whole slew of downsides and challenges as you deploy an increasingly digital operating model. Things that really go back to the leadership questions that we talk about in the book. And what are the ethics that you have to worry about when you pull together an AI based company? What are the things you really think about hard and managers need to learn how to deal with? Nobody has this completely right yet. We're still kind of figuring it out that we are seeing an inflection point in the adoption of the technologies. They're reshaping how we do many, many, many things. From buying access to a movie, to elections, everything in between news and all kinds of stuff. Everything is changing around us. There is an enormous challenge associated with all of that as you start thinking about the implications of doing these things wrong. Also an enormous opportunity for organizations to do it well. This is where I think that if you're a traditional firm, if you've been around longer, it's so clear right now that this is becoming the dominant model in which organizations need to work. There's an opportunity because all of the experience that these organizations have had, all of the regulatory challenges that they might have thought through, all of the ethical and leadership issues that they've encountered over the years can really be used. And all that experience is valuable as you rebuild the first on a new foundation. Mastercard knows how to do a lot of these things really well from that perspective, what's holding them back is some more traditional technology than you might see it in financial. But geez, here's a lot of opportunity in terms of what you might do and might do it differently. And based on your experience, you might actually be able to do it better if you get the technology and organizational side right.

Exactly. And also the business model MasterCard is used to making profitability at 2.5% transaction cost, 2.5% transaction charges. Now you have a competitor that can make money at 0.6%. How do you organize yourself to be able to take a cut on your revenue and still be profitable and scale in the right way? So those are fundamental questions that these guys face. Our view is, though, that they are reluctant to go all in. They're reluctant to go, okay, we're going to figure this out and make it happen. Similar to hbs, we don't have a burning platform. We're still making a ton of money. We're still having a lot of impact. We're getting the best students in the world, the best executives in the world coming to us. We're having great. We're publishing lots. All the metrics are pointing in the right direction.

So enough complaining, enough screwing around. Let's go and transform and rebuild this organization.

This is why we think that the entrepreneurial opportunities are immense. Because incumbent companies will still take a long time. We can just figure out how to unleash the entrepreneurs on this space. I think we may be better off.

Here's a great final example. As I mentioned, I'm in Tokyo, so I've got a Visa card here and it looks like the back stripe got scratched in some way by one of the readers. So the card won't work. Even though it's got a chip embedded in it, you can't wave the card. My chip doesn't wave in front of one of these readers, et cetera. So I've got to call in the States and have them FedEx me a new card. Doesn't that say it all right there? How entirely ridiculous.

Yes.

And you have to call them. You couldn't do it through their app. Yeah, yeah.

No way to reach them. I won't mention the bank, but there was no way to reach them via email. Quickly. Just a black hole of. Well, this question might help you if you haven't. If you know this answer might help you if you have a question. Guys, I appreciate you coming on the book Competing in the Age of AI Strategy and Leadership, when algorithms and networks run the world, which I assume is right now.

Yes, the win is now.

Is there a website we can send people to?

Where would you like to direct people to ageof AI.

Easy enough. Guys, I appreciate you coming on. Thanks very much.

Thank you so much. Real pleasure talking to you.

A lot of fun. Fantastic. Thank you.

I see a time when those awake will understand how to make make money in up down and surprise markets. Whether new trader or experienced college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately send me an email michaelovell.com I will send you the right trend following steps to take along with my free video.

But if you want to buy and.

Hold, trust the government and trust Wall street, this is absolutely not for you.