The Culture of Learning as The Ultimate Competitive Advantage

‘The end of work’ has been quite of a debated theme, including by Brynjolfsson, McAfee, Drucker, Keynes, Andreessen, among others. As Nobel Prize winner Wassily Leontief has put it,

The role of humans as the most important factor of production is bound to diminish in the same way that the role of horses in agricultural production was first diminished and then eliminated by the end of introduction of tractors.

Fast forward, (robotic) engineering and automation in general have played quite a role in the last decade. As Mr. Gave put it in his book titled “Too Different for Comfort”,

Thanks to functionality, and lower prices, the global ‘labor-cost arbitrage’ trend, which was the predominant macroeconomic feature of the past decade, may now be coming to an end.

Automobile manufacturers were the main beneficiaries of robotization wave #1, followed by electronic devices industry. More recently, we have seen other industries also benefit from the same trend.

The most staggering fact though is that we may be entering into a new revolution within this decade – a Robolution – as lower robots costs and inflationary labor costs converge, favoring robots adoption by industry participants.

But what types of jobs are at risk? Again recurring to Gave’s book “Too different for comfort”, he categorizes 4 kinds of jobs, being:

That said, categories 3 and 4 certainly fall at risk, while we (equity investors & research analysts) certainly follow under category 2 – non repetitive and complex tasks – and are likely shielded from robots. Thus, if we are indeed safe from robots, how could we lever our skills to better perform our jobs at the individual level, but more importantly, at the company level? Here kicks in Edward Hess and his recently published book “Learn or die: Using science to build a leading-edge learning organization”.

Hess’ motivation to write the book likely emanated from the conclusion that continually learning better and faster than the competition may be the only sustainable competitive advantage individually and organizationally. Take McGrath’s thought-provoking book “The end of competitive advantage: how to keep your strategy moving as fast as your business” as the basis of this. If this assertion is correct, then to perform at a high level on job category 2 we must lever critical thinking, innovative thinking, emotional and social high engagement and other humans. As Hess put it,

the way to unify operational excellence and innovation in an organization is to have a learning culture, because learning underlies operational excellence and it underlies innovation.

In a recent interview with Hess conducted by Shane Parrish from Farnam Street blog, Hess lied a couple tenets of a learning culture, such as de-emphasized hierarchy, intellectual and leadership humility, curiosity, questioning, the right to debate freely, clarity, preparation, a praise for vulnerability, strong processes, accountability, empathy, compassion, humane relationships, no complacency, and so on.

At the end of the day, what we are talking about here is a CULTURE OF LEARNING. At Bridgewater, for instance, the culture is so strong we might call it a doctrine or a religion – if haven’t read Ray Dalio’s principles yet, please do! As companies with such a peculiar culture say it, “we are not for everyone!”

As I don’t to spoil Hess’ amazing book, I will finish this post with a couple quotes I got from his previous mentioned interview.

Number one, underlying innovation and operational excellence, go back to root cause analysis, or the five why’s. Unpacking assumptions, good digging, the why, why, why, is underlying both processes.

Hierarchy as an elitism is de-emphasized, and there is a real push for highly engaging employees and leadership humility, and intellectual humility. (…) Does the CEO own the learning culture and walk the talk? (…) Has the organization put in place culture, structured leadership behaviors, HR policies, measurement and rewards to enable and promote learning behaviors? (…) You’ve got to start small and figure out and prioritize what you are really going to start working on.

Arrogance is a huge inhibitor to learning. Arrogance comes also from success in positional authority.

Where can I improve? What happened today? What would I do differently in how I think? What would I do differently in that conversation as to how I relate?

A leadership model that is very, very humanistic and people-oriented.

 The purpose of the whole system at Bridgewater is to overcome our humanness in a humane way. (…) The first thing they want to talk about is their vulnerability.

You don’t put things off. You deal with them directly, honestly, openly. (…) everything about everybody is public record. 

Indeed, we are all work-in-progress until the last day of our lives. Thinking about how we are thinking is a never ending loop. We can’t ever truly get comfortable. As this topic may look too ‘soft’ for for-profit companies, actually, it’s not according to Hess:

There’s this whole concept in the business world that if you’re humanistic and engaging with people, you’ll come across as soft. People will take advantage of you. (…) It’s not the case. You can be humanistic and have high standards and high accountability. The companies I write about, every one of them are outstanding performers because they have the highest of standards that they hold themselves to. There is no softness in standards. There’s a human element.

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Mauboussin on Complex Adaptive Systems

Mauboussin was recently invited to seat at the Santa Fe Institute board, a research and education center which praises diversity to solve complex problems (by the way, there are tons of top notch materials and events to be checked out there). I found this interview with Mauboussin via compoundingmyinterests. Below, I highlighted and commented on some quotes:

#1. “The problem is that modeling complex adaptive systems is a lot messier than those other approaches.” 

Although, financial analysts focus on modelling EPS and finding out if it’s going to be . I’d argue the best research practice is understand capital allocators incentives & agenda.

#2. “This work showed that under some conditions returns actually move sharply away from the mean. This is counter to classic microeconomic thinking that assumes returns are mean-reverting.”

This reinforces the previous post on quality investing. 54% of companies tend to remain in the 1st quartile after a long period of time, assuring their moat is wide and deep enough to bear multiple attacks.

#3. “Diversity is essential, both in nature and in markets, and the system has to be able to take advantage of that diversity. On the flip side, when you lose diversity the system can become very inefficient. And that’s also what we see in markets—diversity loss leads to booms and crashes.”

Now let’s frame the diversity in investment teams. Or even in Santa Fe Institute, which is exactly how it’s done by the way. Different backgrounds working on the same problem is the knowledge leap.

#4. “Many businesses are being defined less by their specific market segment and more by the ecosystem they create. And it is often the case that in a battle of ecosystems, one will come out on top. So this set of steps provides a mental model to understand the process of increasing returns and, as important, how to identify them in real time.”

The concept is beautiful, but applying it is tough. When it comes to the environment/value chain businesses are in, the spectrum is too wide for a quick research project. Actually, it can be the work of a lifetime. The “knowable” facts are scattered in open field and the “unknown unknowns” are also out there. For those interested, critical thinking might be an useful vertical for you to dive in.

#5. “First, it’s essential to provide your mind with good raw material. That means exposing yourself to a lot of disciplines and learning the key tenets. It also means spending time with people who think differently than you do. Second, you have to be willing and able to make connections.”

I liked this quote because it uses plain language. Nothing better than that.