Zhang Lei:Gao Ling (Líng) Founder and CEO of Capital.
Hillhouse Capital was established in 2005. It is an investment company focusing on long-term structural value investment. After more than ten years of development, it has become an Asian One of the largest investment funds under asset management and one of the largest private equity funds in Asia.
In recent years, Hillhouse Capital has focused on the combination of technological innovation and traditional industries. Tencent, Didi, JD.com, Meituan, Qunar, and many other well-known companies in the Internet field are behind them.
The following content is an excerpt of”Value” by Zhang Lei.
What kind of business and enterprise are good businesses and enterprises? Buffett believes that the key is to find a moat. We also have some thinking in practice.
Buffett once said:”In terms of the Internet, the change is Friends of society. But generally speaking, investors’ friends are those who do not change. Although the Internet will change many things, it will not change the chewing gum brand that people like. Charlie Munger and I like stable companies like chewing gum. , And strive to leave more unforeseen things in life to others.”
Undoubtedly, this story is an investment of Buffett An important embodiment of his philosophy, he likes business with a moat. For example, in the United States in the 1950s, the brand was the moat that maximized and the fastest to be effective, because the brand had the equivalent effect of reducing consumer search costs and increasing exit costs.
Until many years later, people still have a unified cognition and preference for the brand, the brand image and its representative product quality, corporate culture and other elements Become the key to influence people’s purchasing decisions. If the time dimension can be lengthened indefinitely, and the granularity of time can be reduced infinitely, perhaps we can see something new.
There is no static moat
With the changes of Internet technology to traditional industries, from obtaining information, Initiating consumer demands, to forming purchasing decisions and completing transactions, the present is completely different from the past. Especially with the rise of e-commerce and the generational changes of consumers, many new changes and new gameplay have emerged.
On the one hand, with the continuous improvement of the industrial chain, brands are produced faster and faster, and the cost of trial and error and innovation is getting lower and lower. More and more novel brands have emerged; on the other hand, consumers have never had so many choices as they do now. Consumers no longer agree with popular brands, but through reviews or community recommendations, KOL or KOC Try it out and choose products that truly meet your own”tonality” or needs, and some are even completely out of the ordinary.
The search process of consumers no longer needs to spend a lot of time and cost, but is full of fun. At the same time, due to the impact of the Internet on brands, some people say that it is more efficient to create value through opinion leaders online, some say that the grasp of terminal channels, especially scarce channels, has become more important, and some people say that no brand can truly own consumers , These brands are just temporarily keeping the enthusiasm of consumers for the next brand… There are many changes like this.
Therefore, the brand cannot become a permanent moat, and even some old brands will become constraints and burdens.
Harvard University management professor Clayton Christensen (Clayton Christensen) in his A new systematic interpretation of innovation is made in the”Innovation Trilogy”.
Different from what many people think, the key to the innovation he emphasized lies not in technological progress, nor in scientific discovery, but in response to market changes. Proactive response. The dilemma of innovators lies in the fact that managers have made the wrong approach or stay on oneself. The changes in the market have caused their original moat to lose value.
In the era of endless innovation, people need to re-examine whether the traditional moat can still work. From a traditional perspective, the sources of the moat include intangible assets (brands, patents or franchise qualifications), cost advantages, switching costs, network effects, and effective scale. All these elements are helping companies gain monopoly status and thus obtain economic profits. Because monopoly means that the company has the right to set prices, so that the company can face the competition very well within a period of time.
People always think that less competition is better, but once there are no competitors, the competitiveness of the company will often follow disappear. Subsidies or monopolies cannot produce great companies. Great companies can only be produced in competition. It is possible to make an enterprise bigger, and it is almost impossible to make an enterprise eternal. Any enterprise will die.
Especially once a company has a monopoly, from a genetic point of view, can it still have enough motivation to continue to innovate? This is a huge challenge facing enterprises. What’s more, in the current era, whether there is a real monopoly is also a question that must be considered.
The moat as I understand it is actually dynamic and changing, and cannot be limited to the so-called patents, trademarks, brands, and licenses Business qualifications do not rely solely on cost advantages, switching costs, or network effects.
We are clearly aware that the traditional moat has a life cycle. All brands, channels, technological scale, intellectual property rights, etc. are not enough to become a real moat.
There is only one moat in the world, that is, entrepreneurs continue to innovate and create long-term value frantically.
Inspired by Buffett’s moat theory, we further understand the moat from a long-term, dynamic and open perspective. The most important of these is to use users and Consumer-centric.
Adhere to this center, understand the changing consumer and market needs, and use the most efficient way and the lowest cost to continuously innovate and create value is the real moat. If you cannot create value efficiently in the long term, this moat is actually very fragile.
Create a dynamic and open ecological moat
So how can we have such a dynamic moat?
1. Understand the background and ecological environment of the enterprise.
The first and most important point of understanding the dynamic moat is to understand the background and ecological environment of the enterprise.
For example, with the impact of the Internet on brands, relying on the moat source of brands may not be the most efficient way. Some people say that expressing opinions through opinion leaders on the Internet is more efficient. Therefore, when you understand that”the only thing that is constant is change”, you also understand that the moat cannot be constant.
“The father of management philosophy” Charles Handy (Charles Handy) once proposed the second curve theory, that is, companies should find the first curve before the growth of the first curve (main business) The second curve replaces the first curve as the growth engine.
For an enterprise, if it can continuously innovate in the changing times and market environment, and has the ability to jump from one curve to another, we can think that it has The ability to dig deep into the moat.
Enterprises such as bamboo, a company’s lasting growth path is self-revolution and internal innovation, forget the successful past, and constantly”grow” new”bamboo”. Every day is brand new, and the environment and ecology of the company is brand new every day. Therefore, embrace the spirit of”Day 1″ as when the company was first founded.
When the Internet boom hits, excellent companies actively embrace the changes brought about by the Internet, which is to dig deep into their own moat.
From this perspective, government-protected moats are very fragile, and such moats may collapse at any time. The moat that I value most is the moat that entrepreneurs with a great view of the layout gradually create and dig in practice. These are perfect responses to changes in the ecological environment.
Take the top three global technology companies by market capitalization as an example. When Amazon was an online bookstore and even became an online department store, we could not yet call it a technology company. Although it enjoys a money-making model that is almost a”money printing machine”, Amazon has been subverting itself, dabbling in cloud computing, developing smart devices, opening and closing, without boundaries.
When Apple made the first personal computer, no one thought that this expensive device would enter millions of households. When Apple successively uses iPod, iPhone, iPad to disrupt the music market, communications market and home entertainment equipment market, people have become accustomed to imagine what kind of innovation Apple will bring.
When Google as a search engine company launched Gmail on April 1, 2004, many people thought it was just a joke on April Fools’ Day. Now, Google has become a subsidiary of Alphabet, and Alphabet also covers a series of innovative companies or platforms such as Google Ventures, Google Capital, Google Labs and Next, and has extensive involvement in artificial intelligence, life sciences and other fields.
Look at domestic Internet companies. Through continuous understanding of C-end users and self-improvement of their own business models, these companies have refined their own business innovation capabilities.
Alibaba started as an e-commerce website. In this process, it has continuously used creative thinking to solve problems, turned solutions into different products, and became a comprehensive technology company.
Tencent started with instant messaging software, first connecting users, and then continuously enriching users’ online life scenes. QQ show, QQ space, QQ music…have developed well in QQ At that time, Tencent supported the internal research and development of new mobile Internet social products, including WeChat developed by Zhang Xiaolong’s team. Now WeChat has grown from a mobile social software to a super platform.
Baidu started as a search engine company and has continuously developed new business forms, such as Baidu Know, Baidu Tieba, Baidu Baike… Now it continues to increase its weight in the field of artificial intelligence and explore new business areas.
Meituan is no longer just a group-buying website, but has stepped into the catering industry to become an”ecological provider in the service field”, building the underlying service infrastructure of the catering business, and improving every physical catering The operating efficiency of the store also spans”food, lodging, travel, shopping and entertainment” to realize the value enhancement of the entire industry chain.
Of course, these and more Chinese Internet companies have not stopped there. Cloud computing, new retail, financial technology…These may all become new moats.
For example, Bytedance, this technology company founded in 2012, with a recommendation algorithm engine and strong product development capabilities, has launched Weiwei in the fields of information distribution, short video, content social networking, and Q&A. Considerable product matrix.
ByteDance started from a personalized information recommendation software based on data mining technology——Today’s headlines In a short period of time, many applications such as Douyin, Watermelon Video, Volcano Video, Feishu, Wukong Q&A, Tuchong, Weitoutiao, Tiktok, Flipagram, etc. have been hatched.
The core of Bytedance is a powerful product iteration capability, and what drives this capability is a powerful organization and talent management mechanism, which encourages innovation, does not set boundaries, and promotes distributed decision-making Communicate frankly and reduce the transaction cost of the organization to an extremely low level, so that the company’s core values and innovation capabilities are well integrated.
Two, create connections between different fields, look at problems from different perspectives, and form a new perspective of thinking.
The second perspective of understanding the dynamic moat is also a very important methodology, which is to create connections between different fields, look at problems from different perspectives, and form a new perspective of thinking.
Christensen defined innovation as two types in”The Innovator’s Dilemma”:sustainable innovation and destructive innovation.
Maintenance innovation is the continuous improvement and improvement of existing products, through intensive cultivation to meet more demanding needs, just like many large companies have turned innovation into a”routine , Predictable procedures”, but some accidental and unconventional ideas cannot be integrated into the enterprise’s innovation process.
Disruptive innovation is the pursuit of the most fundamental change, starting from the bottom, changing the existing technology development path and way of thinking, and creating brand new products or services that are different from the existing mainstream market. Innovation may have a dimensionality reduction blow to the original moat.
Therefore, creative reconstruction has become the most important productivity driver, and no business can predict competition from other fields and dimensions.
When Reed Hastings, the founder of Netflix (20), subverted the traditional disc store with a monthly rental model, Blockbuster The group may still be thinking about how to open more stores to consolidate its monopoly position.
When McDonald’s and KFC were fighting, they discovered that the biggest competitor was actually a convenience store. People can eat breakfast at a convenience store for a few dollars. When the take-out format emerges, it is very likely that the convenience store business will also face huge challenges.
This is competition on a higher level. When you finally defeat competitors in this field, you will find competitors in other fields appear again. This is very interesting.
Commercial competition essentially depends on the pattern, value, and upgrade thinking, and see what value is created for consumers from a larger framework and a broader perspective.
The third perspective to understand the dynamic moat is openness.
Openness is the opposite of closedness. Really great companies dare to break their monopoly position, break boundaries from within, and build an ecosystem with open resources and mutual benefit.
If an enterprise is wrapped in the inertia of historical success, the enterprise will stay in the past and cannot grow. In my own words, it means”dead early and super live” and subvert myself from within.
Take Tencent and JD as examples.
Tencent was praised by investors in its early days for using Internet tools to build a social ecosystem and creating rich virtual products on this system.
For a period of time, a closed ecosystem can increase user stickiness or increase conversion costs, thereby helping companies create barriers to competition.
However, the fundamental attributes of the Internet are sharing, openness and tolerance. Only when companies respect this Internet spirit can they achieve higher levels of innovation. Therefore, Tencent has continuously adjusted its development strategy and formed an alliance with JD.com under our cooperation.
The important finding here is that JD and Tencent have completely different genes.
Each company has its own dreams and ambitions, but as the company grows, you can know what you can do well, what you can’t do well, and how the company’s genes will eventually appear Traits.
On the surface, both companies can do each other’s things, but due to genetic differences, many things become constraints.
In an exchange with Tencent’s management team, we mentioned this “constraint factor”:Tencent has been essentially doing virtual goods, and does not involve inventory or inventory. But when faced with inventory of goods, Tencent needs to have a series of production, manufacturing and supply chain management capabilities.
If Tencent does not want to be an e-commerce company, but does not have inventory management capabilities in its genes, then it will be difficult for it to break through.
JD’s outstanding advantage lies in its ability to create and manage a complete ecosystem of order production, warehouse management, and sales and distribution. However, JD’s genes lack the “mobile terminal”, and the entrance of e-commerce lies largely on the “mobile terminal”.
It just so happens that Tencent has a mobile terminal, and Tencent’s social networking and games have been better developed on the mobile terminal. In the end, under the concept of openness and win-win, these two outstanding enterprises will jointly create a moat of new enterprises through openness, sharing and integration.
Therefore, in the future business logic, companies will change from seeking to win to continuously pursuing new growth space, from linear thinking to three-dimensional thinking, and from static game to dynamic symbiosis.
The corporate moat is no longer described in terms of width or depth, but is evaluated from the perspective of trends from a dynamic perspective. The dynamic moat of an enterprise must always be laid out around the search for new development directions and new evolution trends.
An open and dynamic moat may be the most important way to understand value investment. When realizing that a company has a dynamic moat, investment talents can truly understand the nature of the value created by the company.
To some extent, the entrepreneurial spirit that continues to create value crazily is the moat that will never disappear.
“Value”, Zhang Lei, Chapter 4-The Method and Philosophy of Value Investment , Zhejiang Education Publishing House