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What Drives Intrinsic Motivation
In his book, Drive1, Daniel Pink delves into what intrinsically motivates us to complete and master a task for no visible reward. Intrinsic motivation appears to emanate from a number of fundamental drivers which are important both individually and within a team. Financial rewards aside, we naturally seek work where we have autonomy over how we complete tasks, the possibility to master a skill and for the output to have meaning or purpose. In a knowledge-based investment role and hybrid working-from-home environment it is intrinsic internal motivation which keeps us reading the next annual report or trying to improve on our process. Knowledge accumulation is one goal but the possibility to better master our craft through practice and deliver meaningful results is an ongoing inspiration. On the flip-side, nothing is so demotivating as to spend considerable time and effort into understanding and modelling a company or deeply contemplating a checklist only to end up thinking the effort was just spinning one’s wheels for no gain. This is where a danger of process without understanding or value can creep in; it undermines autonomy and deprives the output of meaning. We love our robust, measurable investment and capital allocation processes but without our team’s connection and deeper meaning it is just process for process sake and it demoralises intrinsic motivation. With this at the back of our minds we recently had our 5th annual offsite which has become a focal point for reflection, improvement and motivation for the team, not to mention a great opportunity to socialise. “We can always get better” is a team catchphrase and our offsite is a great opportunity to define and refine our process and bring our minds back to why we live it.
One topic which we delve into every year is our thinking on business advantages, more colloquially known as moats. The canonical starting point is Michael Porter’s five forces framework which transformed the business strategy world 40 years ago when first published in the Harvard Business Review in 19792. We explored this when reading Competitive Strategy3 as one of the first books covered in our book club. The five forces framework which was developed in physical asset heavy days still has much relevance today in our more digital world and is part of our investment checklist.
Our first checklist step is our moats framework. As we have developed our thinking over time we have expanded this to differentiate between absolute competitive advantages to prevent capital coming into an industry versus relative comparative advantages between participants already within an industry. After one offsite a couple of years ago we reduced the number of potential moats from six broad categories including economies of scale, intangibles, network effects etc. down to five as we felt that investment into research and development (R&D) or capital was only a temporary advantage based on size. In addition, we use our sustainable business advantage driver framework to uncover where we believe ESG factors are compounding one of these advantages.
One of our pre-reading books this year was 7 Powers4 by Hamilton Helmer which lead to some spirited debate as we delved into barriers to scale, moat formation, counter-positioning and different combinations of relative versus absolute advantages. Unravelling corporate motivation from being unable-to-enter versus unwilling-tocompete was another nuance deliberated. We seek competitively advantaged companies as long-term protection of our businesses’ economics given our desire for longevity of return on capital. Where there is money being made it naturally attracts rivals hence we are cautious not to underestimate human ingenuity and the forces of competition. Yet, there have been hundreds of online retailers but only one Amazon. Nothing tests the theory of a moat harder than an all-out attack from rivals.
Often when researching companies, we struggle to neatly disentangle a business into our framework as we err on the side of caution rather than “double count” as two moats. In our last letter (link) we touched on how hard it is to beat scale and network effects when they are self-reinforcing. It is these “moat combinations” that can give a fortress business model and is one area we are deepening our understanding of both absolute barriers to entry and/or relative competitive advantages. For example, we don’t need to separate brand and switching cost if they combine to keep rivals out. An outcome of having a lot of small advantages is that you can end up with ecosystem control (i.e., the value chain relies on you); for a stable long-term ecosystem value needs to be shared amongst the participants. Ultimately, the most important thing is that the moats protect the key economic drivers of our investment thesis.
1 Drive: The Surprising Truth About What Motivates Us by Daniel H. Pink
2 https://hbr.org/1979/03/how-competitive-forces-shape-strategy
3 Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter
4 7 Powers: The Foundations of Business Strategy by Hamilton W. Helmer
The Global Leaders Strategy invests in a concentrated portfolio of market-leading companies from across the globe. We believe that companies that combine exceptional outcomes for their customers with strong leadership can generate high and sustainable returns on invested capital (ROIC) which can lead to outstanding shareholder returns.
Past performance is not a guarantee of future performance and you may not get back the amount invested.
The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client.