The New AI Decade - The Value Pyramid with Barbara Gray: Part I

We are very pleased to have leading equity analyst and author Barbara Gray share her research, frameworks and predictions on looming structural disruptions in financial services and other industries. In the coming articles we will discuss:

1. Barbara Gray and her intellectual journey
2. The Value Pyramid
3. How to apply the three categories in assessing strategic positioning
4. The future of financial services and how change will evolve
a. Specific predictions about the challenges for insurers
b. The impact of Apple, Amazon and Google on banking c. How and where impact will be felt by banks
5. How other industries will evolve – retail, travel, energy
6. How our individual lives will change

Our most recent guest in this series on the Digital Economy is Barbara Gray, the founder of Brady Capital Research and author of four books on structural disruption in business (with a fifth coming out soon). Prior to founding Brady Capital, she was a leading corporate sell-side equity analyst. In this first part of our interview, Barbara explains the Value Pyramid model that she uses to evaluate investment opportunities. She also shows the predictive power of the model using examples of well-known companies who succeeded and failed over the past decade.

Developing the Value Pyramid

We began by asking Barbara about her career journey and why she founded Brady Capital Research: “I’ve worked in sell side equity research for over two decades now. It was actually a decade ago that I left the comforts of a nice high paying job and went out on my own. I had quit my job, travelled with my husband for a bit and I went to the SXSW Conference for the first time which really opened my eyes to what I call the new disruptive exposing force of social media. I had come from a world where I was used to wearing Armani suits and heels and carrying a Blackberry, and here at this conference, I saw everybody was in jeans and T-shirts and carrying iPhones. It was a different world. And what I kept hearing at the conference was about Twitter, LinkedIn and Facebook and I was really struck by what a huge disruptive force I could see these companies were going to be. I also realized the customer would become so much more important because these tools would give them a voice they didn’t have before.”

“I came home and found I was pregnant with my son Brady, who is now nine. I decided rather than go back to the same corporate work, I would do my own thing. After reading tons of business strategy books, I put together a report which was published in January 2011. My thesis was that you want to invest in companies with ‘heart and soul’, and this laid the foundation for the first side of my value pyramid which became the strategic framework that I’ve built over the last decade (see the image below). It’s the way I look at the world and the way I identify opportunities for investment. The idea is that companies need to move up the value pyramid on all three sides. For my investment clients, I identify the value traps — companies that are still operating at the base of the pyramid. For example, on the structural capital side, they might be at just the physical level but not have a digital component or an AI component, and on the customer capital side, they may offer just a functional value proposition while not building an emotional connection with their customers.”

The Value Pyramid

Key Take-Aways

1. 2010 – 2020 was the digital transformation decade
2. 2020 – 2030 will be the AI decade
3. The Value Pyramid is a framework for evaluating the strategic positioning of companies
4. The Value Pyramid has three sides (Customer, Structural & Economic Capital) and each side has three layers.
5. To correctly assess any company, you must consider all three Capital categories.
6. The Value Pyramid framework allowed Barbara Gray to correctly predict the demise of Yellow Pages and the rise of lululemon, in spite of its 100X multiple at the time.

Barbara explained how she began developing the Value Pyramid model: “A decade ago, I began forming my social capital thesis that you want to invest in companies like lululemon, Chipotle, Starbucks and Whole Foods because these companies had something special, what I call ‘heart and soul’. That is, they have a purpose beyond just making money. For example, with lululemon, the original thesis of Chip Wilson was to build products to help people live happier, healthier lives, and they built a whole community focused on this. In the report, I argued that lululemon was a good buy even though I think it was trading at around 100 times earnings at the time. In contrast, even though at the time Yellow Pages had a low-price earnings multiple and high dividend yield, I identified it as an empty shell. It was my thesis that you want to avoid the shells and go for the lululemon-type companies. My thesis was proven right because a few years later Yellow Pages restructured and lululemon had gone up multiple folds.

In Part 2 of our interview with Barbara, she explains each of the sides of the Value Pyramid in detail using examples of well-known companies that have succeeded and failed over the past decade.