Sanmet Deo (3:04)

Yeah, yeah. So, you know, we were taught that the great firms fail in the face of disruption precisely because they're doing everything right. They listen to their best customers. How can listening to your best customers, you know, be an inaccurate guide? You know, when the world is going to flip around you, you know, using the example of Kodak, which you had in your book, you know, they saw digital coming, but what got them was missing the merging of cameras and mobile phones.

Scott D. Anthony (3:28)

Exactly right. And the challenge you have is that the people who love you the most give you the worst answers when you ask them about the future. So if you ask somebody who really loved the texture of how an Eastman Kodak print would look on silver halide film, they're not going to tell you, I want a reasonably crummy digital facsimile, or I'm going to go post on this thing called Instagram, which emerged in 2012. They're telling you, I love what you do. Can you do more of it? Or imagine you're Apple in 2007. You've got a team that's been working on this phone. There's a voice in the ear of Steve Jobs that says, don't do it. We've got a great personal computer line. We've got a great laptop line. And don't forget they have this MP3 line of players, the ipod that was churning off all sorts of cash. It might feel to some that the disruptive approach is cannibalistic. But the thing that's so powerful about disruption is it unlocks markets. So even if it does cause you to lose at the margins, you win in the long run. But it requires a mindset that says, I need to think and act differently when change is happening.

Sanmet Deo (4:36)

Yeah. You know, it was interesting you mentioned the book, too. Kodak was. Was on the verge of disrupting themselves. You know, they did invest in digital cameras. They kind of saw it coming, but even with seeing it coming, we don't hear about it much anymore. They weren't able to get that bright merging of the technologies or. Right. Like, you know, fit to the. To the customer and this is the.

Scott D. Anthony (4:56)

Thing that is so great about Clay Christensen's original research. One of the things that Clay taught me is ask great questions. That is the great way to get great insights. And his question was a doozy. His question was, why is it that great companies fail? That's interesting. If you ask why do stupid companies fail? Well, it's because they're stupid. But great companies doing everything that seems to be right. Eastman Kodak is invests early in digital imaging, moves early into online platforms when it buys Ofoto, one of the early photo sharing sites. It's really hard though. Kodak got over gate number one, allocate resources to the disruption. They failed at gate number two, which is reimagine your business in the face of that disruption. And that's hard because you have a long successful past of being a certain company that creates a lot of powerful things, but also creates what I call in the book ghosts that can haunt your ability to change. Kodak's identity was so tied into film that when it had that site ophoto, rather than embracing the disruptive power and essentially creating Facebook or Instagram, well, before anyone did any of that, they said, how do we get more people to print more pictures? Which in hindsight was the wrong thing to do.

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Sanmet Deo (6:45)

Technology, you know, just is enough. You know, it has to be coupled with a business model to kind of capture the value. And you know, you noted that current AI companies business models are kind of banal and pretty boring, you know, so why is the ability to kind of create, deliver and capture value kind of like Ray Kroc did with real estate in funding McDonald's so crucial for like a disruptive company?

Scott D. Anthony (7:06)

First of all, I have to really acknowledge and appreciate you just strung together something from the conclusion and a chapter in the middle of the book, which is a good sign that you got beyond people get to it. I really appreciate that.

Sanmet Deo (7:19)

Absolutely.

Scott D. Anthony (7:20)

The thing that's really important here is if you look at the patterns of disruptive innovation, one of the meta themes in the book is disruption is predictably unpredictable. The business model is the real special sauce. How you create, deliver and Capture value. Why? Well, a product is a thing, a service is a thing, a thing is relatively easy to copy. Yes, OpenAI might always have a small lead over other frontier models in terms of performance, but we can see many people are figuring out the nuts and bolts of how you make large language models work. That's not the hard part. Well, it's hard, but it's not the hardest part. What's really hard is saying, all right, how we use this to create value in unique ways, deliver it in unique ways, and then go and capture the value ourselves.

Sanmet Deo (8:07)

That's a system.

Scott D. Anthony (8:08)

The system has multiple parts that feed off each other. That's really hard to copy. You could copy an individual function on the Apple iPhone, but once the App Store kicks into gear and there's an ecosystem around it, it's really hard for anyone to credibly compete against it. And I think the same thing will happen with AI. Right now you have some amazing technologies. I'm very grateful for them. The valuations are just crazy until someone figures out something that is defensible. Right now, people have not. And because of that, I think you're going to see the big model houses get absorbed into other players. Unless they can figure something out. We'll see.

Sanmet Deo (8:47)

But like you're saying too, like the snapshot right now is the valuation of the companies, the way that the AI models kind of currently work. I think it was in one of, I was listening to some of your other podcasts, you talked about how well OpenAI and all these models just create a business model that's just another ad engine. You know, Google became the best pretty much business model in the world based off their ad engine. Is that how these AI models are going to function? Or will there be another unimaginable kind of revenue model that they might come out with?

Scott D. Anthony (9:18)

And you'd imagine, you know, if agentic AI is really able to deliver against promises. And some would argue, and I'm not a technology expert, but some would argue there are fundamental flaws in the technology that you never want to give too much over to AI because you get a small error rate on multiple tasks. It compounds and that's bad. But if you're able to figure out actually getting stuff done. So, you know, Google's business model is based on connecting people who want to get stuff done. I'm searching for something. You've got it. If you have a business model based on actually getting stuff done, that's really interesting. The other thing that I, I've become mildly obsessed with, I don't Know the answer, but I know it's the place to look. Disruption. History teaches us you always watch people who are competing against non consumption. What does that mean for AI? Well, if we see someone use it now, like I, I watch my, my kid in 9th grade use it. The question for education is will AI teach him better than his 9th grade instructor? You can debate that. If you've got someone in a country that has poor educational infrastructure, it's not are they better than the ninth grade teacher, it's are they better than nothing? And the answer is clearly better than nothing. So education and health care models that are emerging in parts of the world that don't have great school infrastructure and don't have great health care infrastructure, I think those are ones that are going to drive big disruptive growth. I don't know the names of companies doing this yet, but that's the place you got to watch.

Sanmet Deo (10:40)

A lot of the companies that we look for too is, you know, good management, sustainable competitive advantages, you know, and you know, success demands patient perseverance, willingness to be misunderstood for long periods. So you know, you emphasize looking at the edges and anomalies of a market. You know, given persistence required, like Julia Child's example, you know, 10 year effort behind her book, lots of challenges there. What kind of specific behavior should investors look for in management that kind of signals when they, that they can turn what starts small into something really massive.

Scott D. Anthony (11:11)

Yeah, great question. So of course one big thing is demonstrated proof they've done it before. So why do we believe that Amazon.com can keep churning things out? Well, they've shown us through their original model and prime and AWS and so on that they are able to take small things and make them big. And because of that we give them a lot of latitude. Jeff Bezos would say Amazon is the best place in the world to fail because he knew, and the organization knew that to have the big success you had to have a lot of failures. And investors said, okay, we have seen demonstrated proof that you can actually make this work. So that that's one big thing. The second thing is you watch where people are spending their money. If all of their investments are in what the disruptive literature would call sustaining innovations, things to make what currently exists better, even if it's a big technological breakthrough that they're working on. You're a little bit worried because you want to make sure that investment portfolio, yes, has a bunch of things that are about today better, but also has some things that are about tomorrow different. And then finally, I think you really look for the vision that the leadership team has. If the vision is one that's about solving an important problem, getting an important job done, and there's multiple paths to get there, the equivalent of John F. Kennedy landing a man on the moon and bringing them back, you say, okay, this is a company that, that I think could do something really interesting. If it's about how do I make sure that I maximize my returns from the feature set that's in a product or service. They're going to get caught when transitions come. So those would be the things that I would look for.

Sanmet Deo (12:46)

You know, I really love the discussion about just being misunderstood for long periods of time. You know, for the kinds of companies that we look at, many of the very successful ones that have succeeded over a very long period of time have been misunderstood for very long periods of time. I mean, Amazon, for example, you mentioned people just thought it was going to be a bookseller, and that's all it can do. And then Jeff Bezos had that visionary mindset of, no, we're going to be much more. He probably had a whole plan laid out in terms of what. What. What they were going to do. And even through the process, people misunderstood and probably criticized that. I remember thinking, who's going to buy things online? Like, there's no way. I don't trust buying stuff online. Like, now we buy cars and furniture and everything online without batting an eye. So have you found that that tends to be a lot of what makes these disruptors just scale so much?

Scott D. Anthony (13:42)

Yeah, I think it's really important. So, you know, the ingredients are not that complicated. You find a problem that's not well solved, you find a disruptive way to solve that problem in a different way. You go and get a business model that reinforces it. Actually doing that is really, really difficult. And this idea that we are going to really focus, Jeff Bezos obsessively on the customer, the problem they're trying to solve, the job they're trying to get done, and then be willing to be misunderstood for long periods of time. Chris Dixon from Andreessen Horowitz had a definition of disruption once that I really like is a disruptive idea, is a brilliant idea that sounds like a stupid idea the first time you hear it. So the first time you hear about something like Airbnb, you're like, that's crazy. No way is some rando going to sleep on a couch in people's house until it actually does. If it was obvious, it would have already been done. So it's got to be something that breaks from that in some way. And I think the other thing that's just important to remember is even the visionaries don't have perfect ability to spot and articulate sometimes their vision. I had forgotten this. You go back to Steve Jobs and the launch of the iPhone in 2007. What he said was the killer app was not the slick Internet browser. It was not the app store because there was no app store. It was the ability to make phone calls. He said the killer app was the ability to make phone calls. And you listen to that, you're like, wow. He was completely wrong. And it required him being convinced to open up the infrastructure and create the app store for the iPhone, really, to become the blockbuster success it was. So, again, snapshot movie. And in that snapshot, even the smartest of us can sometimes miss things.

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Sanmet Deo (15:53)

We'Re kind of in the messy middle of a massive AI disruption. You kind of warned in your book too, that, and you mentioned it a little earlier, that disruption casts a shadow. You know, like, so what kind of conflict and messiness the societal battle resulted from the branding of jaywalkers during the Model T era. And, you know, must kind of leaders kind of prepare for as. As. As AI accelerates.

Scott D. Anthony (16:13)

Now you've given me the. The nod to tell my favorite story from the book, or at least one of my favorite stories, you know, the jaywalker hint that you heard there. So let me tell you the brief story and then bring it to present day 1920s. Henry Ford had achieved his vision. The car for the multitudes. The Model T, which started at about $30,000 in today's terms, was down to $5,000. Sales were through the roof. Good for many people, but bad if you lived in a city. Because cities were designed not for cars, but for people and horses. And you sadly had accidents, injuries, and fatalities. All sorts of things had to happen to get through this messy middle period. We needed to have technologies like traffic lights. We needed to have norms like, this is what you do for right of way. We needed to have laws like driver's license. And we needed to have the PR battle between the jaywalkers and the flipper boobs. What's that? Well, you had two sides. You had the motorists, the pedestrians. The motorists said, it is the pedestrians problem. They're wandering aimlessly into the street. Let's brand them jaywalkers. Jay is a country bumpkin walker. Kind of obvious. They got the boy scouts to give out little cards saying, don't be a Jay walker. Crossing these designated areas, the pedestrians fought back. They tried to brand the motorist Fliver boobs. F L I V V E R B O O B. Fliver is old time slang for a car. And boob, well, that's kind of obvious. You know who won this battle. You type in Fliver boob, you get a red squiggle underneath the word. The word does no, no longer is in the lexicon. 1924, a New York magistrate said we now know 80% of the traffic incidents are caused by pedestrians. So onwards we go. What does this matter about today? Well, we are in the messy middle of AI and the thing I really worry about is there's a big push to say hands off. Let's just let the market work through everything. Let's let the technology work through everything. Let's remember to get through the messy middle of automobiles, we needed norms, we needed laws, we needed technologies that provided boundaries, that provided barriers, that said you can't do and you can do. I think history says we might need the same thing for AI. If we don't, there's going to potentially be some really bad things that happen. So I think an interesting thing to.

Sanmet Deo (18:28)

Reflect on, you know, one thing too, with disruption in innovation, there's a fine line between it being that recognize if it's a disruption innovation or if it's a fad. You know, one, one thing talked about additive manufacturing, the 3D printing stuff for period of time, that was like the next thing. Everyone was really, really excited about it. And now some people call it a fad. Maybe it's one of where it will come back and maybe the time wasn't right. How can consumers, investors really kind of pinpoint what is a staying innovation or disruption versus more of like just a fad?

Scott D. Anthony (19:02)

Yeah, you know, the metaverse would be another one that would go in the same category. People will be like, you know, three years ago Facebook changed its name and people are appointing chief Metaverse officers and that's all gotten quiet. But you know, in both cases additive manufacturing and things that would be Metaverse related Technology, technology advances. There are problems out there that those technologies solve in unique ways and they will both have changes in many industries throughout our lifetime, I think. How do you, how do you know? I mean, the thing that you look for really is, number one, to what degree is there a important problem that is not well solved by existing solutions? So it's complicated, expensive, inaccessible to solve it? Number two, to what degree do you have a technology that disrupts that, that makes it simple, affordable and effective to solve the problem? Number three then, and this is really important for things like additive manufacturing. What is the improvement trajectory from today's technology as we watch that movie? Is it something where, hey, it's free riding on the doubling of Moore's Law and there's hundreds of billions of dollars being invested so we know we're going to see big improvements? Or are there fundamental physical limitations that mean, yes, things will get better, it's just going to take a lot longer. This is in one of the footnotes in the book too related to that. There was an analyst who used to work at the Clayton Christensen Institute for Disruptive Change, Horace Dedu, who did the most comprehensive review, I think, of adoption curves for disruptive innovations. And you know, everyone thinks everything's going faster. And Horace's answer was yes, but. So yes, if it is something that is modular, so it plugs right into existing systems, ChatGPT, it goes on your laptop, on your cell phone, whatever, those things have dramat accelerated if it requires the creation of a new value network or ecosystem like additive manufacturing needs to do or autonomous vehicles. You know, it's one thing to get the technology right, but then you have to deal with all the other stuff around it. Yeah, those things just always take longer and that at least in Horace's view, those things had not sped up. So where I. One piece of advice I give my students is go and look at what are some of the rate determining factors for something you're investing in. If it's a bet on demographics, like there will be more people in Africa in 10 years than there are now, good, go make that bet. If it's a bet on a system changing, be cautious about it. System change just takes a long time. Smart health for as much as I love it, healthcare has shown itself to be impervious to almost everything. So a true system level change there is going to be incredibly hard. So again, lots of opportunities still, but you want to go in with that kind of caveat in mind too.

Sanmet Deo (21:45)

Yeah, I agree. I'm always fascinated by health and wellness and the adoption of technology in that space is just mind numbingly slow. And it seems so obvious, but it just doesn't happen. But because like you said, it's a system change. It's a whole nother way of approaching and doing things, which.

Scott D. Anthony (22:03)

And the other thing too is you have to ask yourself, is it something where we're just doing something new or is it something where we have to unlearn something first? I mean, AI. I watch the way that my kids use AI. They just pick it up and use it for where it's helpful. I have to first teach myself this is not a search engine. This is not a search engine. So I have to go through that. You know, the great example of this is we type on keyboards that were purposefully designed to be inefficient and ineffective. So the QWERTY design for keyboards was meant to slow us down because in old fashioned typewriters, you type too fast, the keys get stuck. I don't know about you, but I have not used an old fashioned typewriter since I was doing my College applications in 1991. Yet this inefficient design has persisted because too many of us would have to unlearn the old and learn the new. And we say, you know what? Good enough. So, you know, you have to ask that question too.

Sanmet Deo (22:58)

Yeah, absolutely. Absolutely. Well, Scott, this has been fantastic. Kind of reminds us, you know, whether you're building a company or managing a portfolio, you know, success requires a growth mindset, you know, welcoming anomalies, realizing kind of like the next great growth. Businesses often start with looking out, looking small, insignificant, even laughable. But they can become something huge and massive disruptors in our life and world. So for our Motley fool members, where can they find your book and how can they connect with you?

Scott D. Anthony (23:27)

The book is available on all major retail channels. You can learn more about it@epicdisruptions.com and LinkedIn is the social network that I like to hang out on.

Sanmet Deo (23:37)

Great. Well, thank you for joining us today, Scott, and much success for your book.

Scott D. Anthony (23:41)

Thank you very much. It's been my pleasure. I really enjoyed the conversation.

Matt Grier (23:48)

As always. People on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for the Motley Fool Money Team. I'm Matt Greer. Thanks for listening and we will see you tomorrow.