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Chain of Five Premises Framework

By | May 11, 2018

Chain of Five Premises Framework

I introduce to you, the Chain of Five Premises framework which can guide strategic evaluations, investments, synergies and innovation efficiency.

Humans are unique… at the surface. But look at the makeup of Homo Sapiens and the consistent foundational elements will become clear. Each Homo Sapien has skin, blood, internal organs, bones and muscles. Drill in a step deeper and we will see that each of these consistent life-dependent elements are based on each human’s unique DNA structures. If 7.6 Billion people on planet earth can have these foundational elements in common, then would it not be reasonable to assess that all business industries share linking factors as well? Yes, it is! And that is where the framework comes in.

This Chain of Five Premises framework is especially relevant in the innovation-heavy environment of the 21st century since dozens of companies could describe what they do in very similar terms, thereby making it difficult for people to assess long-term viability of the new entrants or incumbents. It is for this reason that, before we let ourselves get swept up in “disruptive,” “innovative,” “unicorn,” “trend-driving,” companies, we must strip industries down to the very premises upon which they are built. This will enable us to understand what the industry requires to continue operation, thereby highlighting components that are either stable or ripe for innovation. Fortunately, this evaluation does not need to be complex. Just like with the Homo Sapien, all industries are built off Five core Premises, and differentiated by their sub-premises.

The framework has been developed with the following understanding:

  • Each industry has foundational elements in common, as  represented by the Chain of Five Premises
  • Within each industry, the Premises hold varying levels of importance and as such will be organized in unique orders depending on the industry 
  • Over time, each Premise’s importance and order within an industry will evolve
  • The strength of each Premise is determined based on its sub-premises (aka, its DNA)
  • The sub-premises may or may not be interrelated, but together they dictate whether the Chain of Five Premises is strong (sustainable) or weak (ripe for innovation)

INDUSTRY LEVEL

At the industry level, it is important to understand how the sub-premises are being addressed by incumbents or new entrants. One business may address more than one Premise and more than one sub-premise, but it is entirely unreasonable to expect one business to address all Five Premises or all sub-premises within a Premise. It is impossible to be a jack-of-all-trades, lest the business is actually a master of none.

Still, at the industry level, the Chain of Five Premises serves the practical purpose of enabling innovators, established companies, consultants, investors, bankers and consumers with the:

  1. Awareness of which chain Premises and sub-premises are being adequately addressed versus which represent untapped opportunity
  2. Tools to evaluate if a proposed path is based on stable or weak links, and as a result value a business for its unique contribution or discount a business for its inconsequential role
  3. Ability to extract “why” a company may be sustainable or ripe for innovation, and know “how” to facilitate synergistic growth when applicable
  4. Ability to achieve efficiency in evaluating industry innovation
  5. Forward-looking mindset that can recognize which Premises will naturally give rise to future innovations and challenges

BUSINESS LEVEL

There is an analogous application for the Chain of Five Premises at the business level as well. When entering a new industry, or trying to pivot an established player, the mutual understanding of what an industry needs to keep operating can help executives evaluate their business in terms of why it is influential to the strength of the chain. It can also help businesses avoid the “copycat” trend that plagues both new and established companies. Rather than launching products or services based on what has made competitors money, executives should innovate based on the Premises which are needed to keep the industry functioning. The step of knowing how to address the Premises and sub-premises naturally still requires innovative minds and an entrepreneurial spirit, and doing so will help the business position itself as an integral component of the chain. Executives should also be mindful of how the sub-premises they are solving for relate to other components of the chain, and the associated companies. The relationship between Premises and distinct companies can influence the value of each company, and may give rise to both future synergistic opportunities and new Premises/sub-premises.
It is important to note again that a company should not try to address all Premises, nor all sub-premises. Trying to do so would call into question the company’s ability to address any of the Premises well enough. While one company may do everything well, there are only a select few sub-premises that it should be fantastic at, so it can survive and be differentiated.

CHAIN OF FIVE PREMISES

The Five Premises that comprise the chain, and their simple descriptions, are:

  • Behavioral
    • Expectations about how the consumers or businesses will act, what they will expect and how they perceive the interactions among parties
  • Environmental
    • Assumptions about events that cannot be controlled by man or are systemic to a population
  • Financial
    • Expectations about performance metrics used to evaluate a sustainable or desirable company, and financial capabilities of consumers
  • Regulatory
    • Assumptions about the man-made regulations which will enable or fail to prevent the (continued) operation of business
  • Technological
    • Expectations about progress and growth-enabling or growth-impeding technologies

The sub-premises are:

  • Determined based on industry knowledge, consistency across industry articles, and business websites
  • Unique to the industry
  • Variable over time
  • Able to determine the importance and the strength or weakness of a Factor
  • Able to signal innovation opportunities based on how businesses are addressing sub-assumptions in the present day, thereby providing a starting point for tracking future changes

Applicable example: What does the evolution of the Chain of Five Premises look like for the insurance industry? In the 17th century, many shipping captains would lose their goods at sea due to the environment, so they sought financial guarantees and diversification of risk. Thus, underwriting was born from the Environmental Premise, first, and Financial Premise, second. Fast forward to the 21st century, and insurance is still operating with a similar model of risk underwriting even though the Chain of Five Premises is organized very differently. In decreasing order of importance, the five Premises that drive innovation in insurance in 2017 are Behavioral, Technological, Financial, Regulatory and Environmental. The Chain of Five Premises and unique sub-premises, as of December 2017, are also identified below:

  • Behavioral
    • Sub-premises: Trust, Loyalty, Information, Flexibility, Connectivity
  • Technological
    • Sub-premises: Connected Devices, Big and Little Data, Artificial Intelligence, Blockchain, Drones
  • Financial
    • Sub-premises: Cost of Fraud, Combined Ratio, Capital Markets, Financial Model, Consumer Debt
  • Regulatory
    • Sub-premises: Registration Requirement, Capital Requirement, Drone Flying, Political Risk, Deal Activity
  • Environmental
    • Sub-premises: Urbanization, Crime Rates, Catastrophes, Human Error, Indirect Claims

As the new entrants gain traction and incumbents change their models, these sub-premises will change as well. Fortunately, progress does not happen randomly but rather follows a clear trajectory, and the sub-premises represent the starting point for tracking future changes. For example, in the above insurance example, I stated that trust is a core sub-premise for the Behavioral Premise. Currently, that primarily has to do with insurers paying claims. But, with Connected Devices and Big/Little Data serving as sub-premises for the Technological Premise, trust in the future may have to do with data privacy. Will a company be able to promise consumers that personal data will not be stolen? Some may say that Blockchain encryption will be the answer. If they are correct, then a sub-premise called Blockchain may be the driving force of the Technological Premise in the future. Additionally, cost of fraud may change to cost of cybersecurity.

This cause and effect remind us that every action we take will influence or awaken other Premises. If we can identify the core Premises, then we can be better prepared for the present and for the future. The Chain of Five Premises enables us to be proactive, confident and resourceful in the way we apply our knowledge of the industry.

In the next post, I will describe the methodology used to identify how to categorize new entrants and incumbents as addressing certain Premises and sub-premises.

2018-06-12T02:23:45+00:00 May 11th, 2018|

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