By aligning yourself in a certain domain with favorable characteristics, you are more likely to have greater flexibility and reap more rewards.
Explanation of the Concept
- Practically, what does this mean though? The example that Shane Parrish gives on his mental models blog, Farnam Street, is that of a chess board. In chess, if you can control the middle of the board, you tend to create more options for yourself later in the game. This is because you are in a central position and have more options than if you had pieces stuck along the edges of the board.
- Seizing the middle is all about options. Where can we put ourselves in life and business such that, in the future, we’re more likely to have a lot of options?
- Let’s think about education in America. In the 20th century, if you were able to somehow obtain a college degree of some kind, in a way that was seizing the middle of the socioeconomic ladder.
- By getting a degree, Americans all but guaranteed themselves and their families a spot in the middle class, because college degrees were more rare, the economy was just beginning to shift to a knowledge based economy, there was less foreign competition, lower tuition at schools, etcetera, etcetera.
- Sure you wouldn’t guarantee yourself a ticket to affluence and being in the 1%, but you wouldn’t be poor either.
- Another example is the old strategy of the large firm Proctor and Gamble. They’ll get their own episode on the show eventually, but for now consider this one fact – 298 out of 300 American households contain a product from P&G in them. That’s virtually all American households!
- Traditionally, P&G has been excellent at producing consumer products for the middle class, and not just creating any products, but products that are more or less indispensable for modern life. Think about Tide laundry detergent, or Crest toothpaste. These are brands that have been around for a long time, and because people grew up with them they are more likely to use them themselves (mental model: intergenerational transmission). Not only that, but because P&G has a lot of insight into middle America’s buying patterns, they can create complimentary products that are adjacent to their main brands.
- For an example, let’s look at Tide again. The primary product of the Tide brand is the laundry detergent. You might buy and use this yourself (doesn’t laundry detergent smell so good by the way?…)
- Tide started out with a single laundry detergent product in 1946, and now it’s the most dominant laundry detergent brand in the world, with over 14% global market share.
- Over time, P&G has expanded the Tide product line immensely. There are several types of Tide liquid detergent, and there are several types of Tide powder detergent. There are variations with different scents. There are Tide to-go wipes, Tide stain removal pens, Tide Washing Machine Cleaner, Tide Antibacterial Fabric Spray, and the list goes on.
- By thoroughly dominating the middle class demand globally for laundry detergent, P&G was able to create adjacent products with the same brand name and have easier success.
- I do want to point out now that seizing the middle is not always the right strategy. Sometimes attempting to dominate at the margins is more profitable and offers a better risk/reward relationship. Even now in America, the middle class that once was large is now shrinking, with more people being split between the lower and upper classes. This shift is informing product development for a lot of consumer-facing companies.
The Mental Model in an Investing Context
- The most obvious application is looking at the company level, like we just saw with P&G. Companies that are able to apply this principle effectively can have great results to their bottom line.
- Another example we can look at is the example of large telecoms, like Verizon, Comcast and AT&T. To get internet access in your home, you basically have to go through them. There are no other providers and no other options. They have the infrastructure and that is pretty much it. This “toll road” competitive advantage gives these companies the ability to then market other products and services with ease. Would you like a cable package and phone bundle with your internet? It’s just $19.99 more per month…
- When my wife and I moved into our home, we set up our internet with Comcast. When they sent us the modem to install it, the packaging also came with a small TV streaming device (like a Roku streaming stick, Google Chromecast, or Amazon Fire Stick). Did we ask for this little gadget? Nope. Did we want it? Nope, we were good with our current devices. But that didn’t stop Comcast from sending it anyway. After all, they knew that we were becoming internet customers and so, why not try to sell adjacent services right away? Comcast seized an advantageous position to market to us by positioning themselves as one of only a few providers of a service that we would absolutely hate to live without (the internet).
- So, take a look at your watchlist of companies. Are there any that stick out to you as one that is “seizing the middle” in their respective marketplace? Are they able to do it successfully?
- Thinking about this mental model can help you and eye become better investors by allowing us to think a few moves ahead – what opportunities open up in one area by succeeding in another?