“Do not seek to follow in the footsteps of the wise; seek what they sought.” 

“The journey itself is my home.” 

― Matsuo Basho (The Narrow Road to Deep North)

As some of you may have guessed, the title of this post refers to some of the industries in which we have worked during the last year. That list could also include: capital planning and e-commerce software, injection molding, reclaimed refrigerants, aggregate, organic acids and radio signal processing. Yes, it has been a diverse and exciting year to say the least!

Sometimes people ask how is it that we work across all these different industries, “Don’t you have to be an ‘expert’ to consult?” We usually respond by saying that we bring a proven process that works across industries and expect the client to bring the industry-specific knowledge that we need to get to the right outcome. But the truth is that there are really two additional things we bring: a commitment to understanding problems and industries based on first principles and an ability to think (and help our clients think) by analogy.

First principles ensure we’re on the right track – if something doesn’t make economic sense, it is usually a sign that we haven’t asked ‘Why?’ enough times.  Analogies help us to uncover that track when it may be overgrown or not yet trodden. 

As an example of the power of thinking by first principles, several years ago we worked with a chemical company who wondered why they were having difficulty raising prices in some very high value (relative to alternative chemicals) applications. It turned out that prices weren’t higher because the product is fungible across applications and so prices are driven by supply and demand. Selling to higher value applications will not yield higher prices (why would a customer want to pay more than the market price?). So, selling to existing high value applications will have little impact on prices, but developing additional higher value applications will shift the demand curve and drive higher prices across all applications. This insight led to a fundamental re-thinking of the client’s commercial focus.

Upon reflection, there are several reasons behind the power of applying first principles:

• Using first principles forces you to ask ‘why’ questions and think about root causes – e.g., why is this industry so fragmented? Why are all our competitors vertically integrated?
• Second, it allows you to ask stupid questions and in the process surface unspoken assumptions – does everyone segment based on FICO score because it is the best way to segment, or is it required for regulatory reporting and therefore the easiest way to segment, since doing anything different would require additional work?
• Third, it shifts the discussion from the qualitative to the quantitative. The business world is motivated by money. While qualitative rationales may be expressed, eventually decisions are driven by economics. – Customers say the like our product, why don’t they pay more for it?

Our second superpower is thinking by analogy. As an example, about fifteen years ago we worked with an auto lending company. The business unit leader really liked our segmentation approach and challenged his team to find their “dog as grandchild” segment. His team initially fought the suggestion, asserting that they already had a segmentation scheme based on credit scores. But our client persisted, understanding that if you segment the way the rest of the industry does it can’t help you to differentiate.

After several awkward meetings, an idea finally emerged. What if they segmented based on change in credit score? – might there be a group of people stuck in car loans at interest rates that are ‘too high’ based on their current, improved credit ratings? It turns out that there was – and the auto loan refinancing business was born. After some initial fine-tuning, it became the most rapidly growing product in the industry (and then was quickly killed in the financial downturn in 2009, but that is a story for another time).

Especially when combined with first principles, there are several factors behind the power of thinking by analogy:

• Thinking by analogy allows us to imagine what might be possible especially in industries stuck in their own conventional wisdom. Thinking by analogy allowed the team in the story above to ask themselves, “what if there were a segment like the “dog as grandchild” segment in our own industry”?
• Second, done well, it allows you to foresee how an industry might evolve because you can spot patterns… “It seems to me that as transactions shift on-line, the value of local relationships will decline and this industry will likely begin to consolidate. Could that happen here?”
• Third, thinking by analogy allows us to learn by other people’s mistakes. We can often observe when others tried something similar in their industry what they did wrong and so what we can avoid in our own initiatives.
• Fourth, as seen above, it can provide a distinctive shorthand or even a rallying cry for the strategic problems your organization must face. Another one of our clients adopted the saying “we don’t want to be ‘Nested’” – meaning if there is a disruptive solution to the end-user’s problem, we want to find it, not allow a start-up to do so.

When these two skills are developed and practiced, it leads to perhaps the most important benefit in the long term, periodically tracking back to first principles and thinking by analogy keeps your brain fresh and agile. It prevents you from falling into the ‘we’ve always done it this way’ trap and mistaking knowledge or experience for insight.

For example, one of our chemical clients assembled a team with hundreds of years of technical experience and decades of customer relationships, but no one could articulate why they were losing market share in one large segment of their business to alternative compounds. They could explain away each sales loss and tell you about the personality of the buyer, but they could not generalize the pattern into something actionable. By using first principles and thinking by analogy they were able to see patterns from similar situations and to identify things they had previously missed. As this example illustrates, for our clients who are willing, we can help them to think by analogy as well.

In the end, we love what we do, and the incredible variety of industries in which we work is a large part of that. Of course, working across all these businesses means that we are always learning, and for that we are grateful as well. When our clients really engage, it forces us to re-think our perspectives and keeps us on our toes. And when our clients succeed, it gives us stories that we can turn into analogies for others to learn from.

This year, serving those clients also meant that we were on the road quite often – on four continents, in fact. And while travel has its downsides, we couldn’t do what we do if we hadn’t adapted to life on the road. So as we wrap up this varied, turbulent and sometimes crazy year, allow us one last analogy: life is a journey, so to travel is to live. We are humbled by how much we have experienced in our journeys. We are thankful for the clients who have done the hard work with us to think differently and find new ways to succeed.

Yes, life is a journey, and in the end we don’t know where the journey will take us… but we’re at home taking the journey, and what we seek along the way is what the wise have sought through the ages…  economic truth and a compelling way to communicate it.

As Amphora’s 20^th year draws to a close, we wish all of you a happy and peaceful holiday season and may your own journey continue to take you to fantastic insights and wonderful places in 2024.