Wednesday, November 15, 2017

Winning as a Self-Fulfilling Prophecy

They left without the photographer.

The bride was being consoled by her best friend, who was hoping to keep the makeup from liquefying. The yacht was perfect, of course, and most of the bridesmaids were there as planned. How dreamy – except now no pictures. Well, the bride would make sure that the photographer never got another high-profile job. And, to think, all the best families had raved about what a genius he is.

Two hours later, as they lay on the yacht’s sun deck in the warm tropical air, they heard the roar of twin diesels. Looking up, there in the bow-sprit chair of a racing marlin boat was the photographer, Paul Barnett, snapping photos from a long telescopic lens. James Bond with a camera.

But of course! You don’t photograph the wedding party on the yacht itself; too close quarters. You shoot from a separate boat! What a genius.

Let me tell you, the story from my brother Paul’s perspective sounds a lot different: A desperate realization that you were told the wrong time; a frantic cab ride to the marina, only to see the yacht heading to sea; a search for a fast boat; a payoff to a nefarious bad guy; the last-second idea to shoot from the bowsprit chair strapped in like a marlin fisherman.  And then, of course, the usual self-assured act later on, as if to say “all part of the plan.”

Some people have a way of making things go right, no matter how badly they seem to be going wrong. Why do winners seem to just keep winning?

Social scientists tell us that winners keep winning for several reasons. First off, maybe they are just better. But quality aside, we know that those with a reputation for past success tend to get disproportionate credit for future wins – the so-called “Matthew effect” described by the sociologist Robert K. Merton. And of course the winners from the past tend to be in the right place to make things happen in the future, and have the connections and resources to make good on those opportunities. 

But there may be another reason that winners keep winning – a reason that is particularly useful to understand business leadership: The self-fulfilling prophecy. Some people tend to be unrealistically optimistic, a view that sometimes makes itself come true.

The downside of unrealistic optimism is that you are out of touch, but the upside is that your outlook might trigger a self-fulfilling prophecy. Steve Jobs was said to have been surrounded by a “reality distortion field,” in that he would believe in possibilities even when others saw them as unthinkable. Of course, once Steve believed, then others would too – making his vision more likely to come true.

So-called “positive illusions” of this sort have been talked about by social psychologists for years in terms of mental health outcomes (see the work by Shelley Taylor and her colleagues). But when they trigger the self-fulfilling prophecy, such illusions have the potential to increase chances of success. As Andy Rachleff argues, winning helps a leader feel confident in future contests, thereby increasing their chances of winning.

Paul Barnett could not accept that he would fail. So in a situation where others would throw up their hands and admit defeat, he kept scrambling. Not letting the facts get in the way, the unrealistic optimist expends effort as if victory was within reach – which of course makes that victory more likely. And with every victory, the optimist’s unrealistic view gets confirmed yet again.

The lesson for leadership is clear. Of course we know that a well-informed decision is one that sees reality for what it is. But leadership is so much more than correct calculation. Especially in uncertain times, what the leader believes to be true may end up so through the self-fulfilling prophecy.


The classic statement of the self-fulfilling prophecy is by Robert K. Merton.

Tuesday, October 31, 2017

On Walls, Ignorance, and Hate

A few days ago I was lecturing a group of executives on the topic of innovation. The talk went well for the audience, but it was a tough one for me.

The problem started when I glanced out the window. The venue was the top floor of the Axel Springer building in Berlin. From my place at the front of the room you could see where Chris Gueffroy was gunned down trying to cross the "death strip" of the Berlin Wall just months before it would come down in 1989. And now here I was speaking at Axel Springer, the publishing house that stood as a beacon of free speech overlooking that wall.

I could just see the tracings of where the wall had been, but I forced my attention back to the audience. The diversity of the group suddenly became salient: Women and men; different religions; different regions; different political views. In that moment, I was aware of the most remarkable thing about my lecture: I was speaking freely in that place to a diverse group without fear.

Walls divide - especially walls erected by governments. When effective, these divisions reinforce ignorance by preventing people from seeing each other, from listening to each other, and from experiencing life together. Walls may be built for many reasons, but once built, walls are monuments to ignorance.

Ignorance, meanwhile, makes it easy for people to hate. It is hard to hate someone when you know them as fully human, when you can relate with them and when you have shared life with them.

One is reminded of the Stanford Prison Experiment, a controversial experiment conducted by psychologist Philip Zimbardo in 1971. Participants were all male students at Stanford, similar in so many ways, but in the experiment they enacted the roles of "guards" and "prisoners." Even though they knew these were just roles, the resulting behavior of the guards towards the prisoners was shocking - as was the prisoners' resignation to their fate. Much has been written about this experiment, and its precise psychological lessons remain the subject of debate to this day. But one thing is clear: It demonstrated that people treat others less humanely when they are separated by a gulf of ignorance - in this case replacing names with numbers and covering individuality with the uniforms of guard and prisoner. In short: ignorance breeds hate.

So to those in my government wanting to erect a wall, consider this: Walls increase ignorance, and ignorance breeds hate. My vote: I prefer to be immersed in the rich diversity that we humans have to offer.


A large academic literature investigates this phenomenon using the term "intergroup bias."

Sunday, October 15, 2017

Metacompetition: Competing Over the Game to be Played

I fell for the shoe-shine huckster on Bourbon Street. I was young, and my wife and I were all dressed up. I could not resist the challenge, called out loudly to me amidst a large audience: “I bet I can tell you where you got your shoes!” I hesitated and replied, “Okay, where?”  Game over. He shouted “On your feet!”, fell to his knees, spat on my shoes (with disrespect), and began to shine them furiously. How did I end up standing with my pretty young wife in the middle of a laughing, half-drunk mob – as a wiry man gave me an unwanted, overpriced shoe shine? He seemed to know I was asking myself that question. Now with some pity in his eyes, he looked up at me and said “Never play another man’s game.”


Since then I remind myself of his message often: make sure you play the right game. Common sense, I know. Big men throw shotput; tall women shoot hoops; smart folks solve equations; tight bodies go to the beach. Of course we each try to play the right game – and the same goes for companies. That is what “business strategy” is all about. But sometimes the game being played is unclear, and then we risk losing by playing the wrong game.

People and companies often lose by playing the wrong game. This happens, for instance, when people fail to get a job. Several rounds of interviews end up in disappointment, and then you find out they were looking for someone with a sales background, or experience in C++, or geographic flexibility, or fluent Mandarin, or whatever. At that point, you probably wondered why they did not make their criteria clear in the first place. The problem is that in real life competitions, unlike board games or sports, the criteria for winning are often decided while the game is being played. Inside the company, different people may favor hiring different kinds of people for a given job, and that debate is often taking place even as you are interviewing. Once the dust settles, you find out you lost based on a criterion on which you never would have even tried to compete. You lost the “metacompetition” – the competition over the game being played. When you lose a metacompetition, you lose without ever really competing – like the fool on Bourbon Street playing another man’s game.

Metacompetitions decide the fates of people and companies all the time:

If Facebook succeeds in a country, companies that produce Facebook apps suddenly “win” access to that market; metacompetitions between platforms determine the fates of applications.

If teaching comes to be valued more than research in a university, then professors skilled at teaching rise in prominence; metacompetitions between performance criteria determine professional status.

When CDMA-based technologies took off in the US, companies like QualComm that work on that standard prospered; metacompetitions between standards decide the fates of the firms that adopt (or reject) those standards.

When an oil spill raises concerns about the environment, consumers favor businesses with good environmental records; metacompetitions between beliefs determine the criteria we use to evaluate whether a firm is “good.”

If a particular organic foods certification becomes important to consumers, companies with that certification are favored; metacompetitions between certifications determines how the quality of firms is measured.

In all these examples, you could be the very best at what you do, but lose in the metacompetition over what criteria will matter. On the other hand, you may win due to a metacompetition that protects you from fierce rivals who play a different game.

Great leaders pay attention to metacompetition. They advocate the game they play well, promoting criteria on which they measure up. By contrast, many failed leaders work hard at being the best at what they do, only to throw up their hands in dismay when they are not even allowed to compete. These losers cannot understand why they lost, but they have neglected a fundamental responsibility of leadership. It is not enough to play your game well. In every market in every country, alternative “logics” vie for prominence. Before you can win in competition, you must first win the metacompetition over the game being played.


Research on metacompetition appears in my book on the Red Queen.

Sunday, October 1, 2017

Don't Just Pivot!

No doubt you've heard insanity defined as "doing the same thing over and over and expecting different results." And yet we know from science that advances often come when experiments fail to replicate a result. Einstein himself, said to be the aphorism's author, often repeated experiments. After all, experiments sometimes produce false results. You don't have to be Einstein to know it is a good idea to run the test again.

Yet if you are in business, you probably live by the insanity aphorism - insisting that no test be repeated. How often have you said "But we already tried that, and look how it turned out!" Calling others insane is an effective way to shut down further experimentation (and thinking).

Fortunately for us all, the world re-runs experiments all the time, and often gets different results. Webvan failed. Now Amazon, Google, and others are delivering to your door. EachNet (and its acquirer, eBay) failed to make cash-on-delivery work in Chinese C-to-C e-commerce. Now Taobao's cash-on-delivery system is thriving. The failures of Alta Vista, Excite, Lycos, and others led many to conclude that internet search could not be a business. Now, well, you know.

You're probably already trying to explain the differences in all these examples. Slow down; the broader issue here is the problem of false results.

Sometimes experiments generate false negatives - they tell you "no" when the real answer is "yes." And sometimes experiments generate false positives, telling you "yes" when the real answer is "no." You of course know about false positives and false negatives in medicine. We worry about them a lot, which is why we often go back for a re-test when things get medically serious. But for whatever reason, we don't think about false results nearly enough in business.

For instance, I recall one of the early movers in digital medical diagnostic imaging. Their system was rapidly adopted by several hospitals, leading to a lot of excitement, including executives quitting their jobs and joining the company. Then growth abruptly ended. It turns out the early wins were a false positive. (Many more examples of false positives can be found in Geoffrey Moore's "Crossing the Chasm" books, enough to have created a consulting juggernaut.)

False negatives in business are common too, as in the examples of search, delivery, and Chinese COD - but they are often harder to spot. The problem is that false positives are self-correcting, but false negatives are not. When you get a positive result from a business experiment, typically you'll keep at it. If it turns out to have been a false result, the world will make that clear enough. But if you get a false negative, you'll be inclined to "pivot." And you'll never know that you were on to something good - unless somebody else tries it again.

Perhaps you are thinking: "Hey, in all your examples, there were some variables that changed. A good test would take into account all the variables that matter." Sure, Amazon and Google now know about some things that Webvan did not, and they have adjusted those variables accordingly and that's why their experiments are working when Webvan's did not.

Here's the problem: Often we don't know all the variables that matter. This problem is well understood in science. Good scientists know that two seemingly identical experiments can produce different results, since often there are variables operating that are unknown to the scientist at the time. In fact, even random chance can produce odd results. That's why a good scientist knows that there is a lot she does not know; so she runs the test again.

The lesson: Insane though it may seem, don't just pivot. Run the test again.


A rigorous treatment of this problem, sometimes called the "hot stove effect" is by Jerker Denrell and James March.

Friday, September 15, 2017

The Crossroads

The corner of Telegraph Avenue and Channing Way in Berkeley was at the crossroads in 1977. An angry man in a torn shirt waved his arms helter-skelter, hollering gibberish as he kicked a newspaper stand into the intersection. The commotion drew the attention of the hippy bead-sellers and t-shirt vendors; even the scraggy-bearded students took notice. Fittingly, the name of the newspaper in the broken stand was “Appeal to Reason.” Oblivious to the racket, a blind tarot-card reader wearing a Scottish plaid stared upward as he shouted predictions to a freshman who had paid his 5 bucks: “You are about to go through great change!” went the fortune, as his wrinkled old fingers probed the braille card face up on the table. Amazed at this clairvoyance, the student nodded open-jawed, “Yes, how did you know?!” Berkeley in the 1970s was at the crossroads, where novel combinations created unforgettable oddities.

It turns out that the crossroads create more than local color. At the crossroads, novel combinations often go nowhere; but now and then you see genius: Bill Gates built BASIC software for the Altair hobby computer, thereby getting to know the folks at IBM – and then accepting as a “side project” the job of getting their PC’s operating system to work. Bell Labs scientists Arno Penzias and Robert Wilson measuring background radiation from space in an effort to improve microwave communications; then finding the evidence that would win them the Nobel Prize for the “Big Bang” theory. Gordon Moore, Robert Noyce, and the others of the “traitorous eight” meeting at Shockley Labs in Mountain View, and from there forming Fairchild and the foundation of the Silicon Valley.

Great minds? Yes, but there are many great minds. In case after case, innovation explodes when such people find themselves crossing paths in the right place at the right time.

And these meetings need not involve technology: The crossroads have spawned great films, new approaches to banking, fusion cuisine, masterpieces of literature, new musical genre – the list goes on. Often my family and I raft the Rogue River, stopping to do yoga along the way. Sounds strange, but this marvelous innovation resulted when the rafting guru Peter Fox met yoga master Susan Schneck. Strange and beautiful combinations happen at the crossroads.

Want to be at the right place at the right time?  Go to the crossroads. You may discover genius, or not. But you won’t end up doing, yet again, the predictable.


Systematic research on this idea appears in the work of Lee Fleming.

Wednesday, August 30, 2017

Pull Your Head out of the Silicon

A local practiced his English on me while we were standing at a Shanghai intersection. He was not dressed very well, but as we spoke he kept flashing his fancy phone. So I commented, “Nice phone, but not so nice your clothes.” He held up his hand and said “No problem.” He explained, “First the phone. Then a car.” And with a small smile he added, “Then a house. Then a wife.” This man had a plan. But notice that the plan had no place for a computer.



Wait. 

You think I'm going to talk about "native mobile" trumping technologies born on the desktop. No. My point is that native mobile is just part of a larger pattern. We may be sharing the same technologies around the world, but the way we use them is very different. Because conditions vary so much from place to place, businesses born in different places look very different too. But we won't see that if we our heads are stuck here in the valley.

Take the online gaming world. While silicon valley's Zynga, having been born on a desktop, is down to 1/3 of what it was at its peak, mobile games like Devsisters' "Cookie Run" proliferate on mobile platforms created elsewhere - South Korea's Kakao in the case of Devsisters. With globalization, we're seeing not one big "flat" world - but big differences from place to place. As a result, new innovative business models are emerging from around the world, based on logics not discovered in the silicon valley.

One of my favorite serial entrepreneurs, Croatia's Jan Jilek, laments that VCs often do not take notice of the many startups originating outside the valley. Why not? I wonder, perhaps folks here in the valley may be living in the past (when we could ignore the "rest of the world")? I told a friend of mine, who knows a lot about success in the silicon valley, that I am studying MercadoLibre. “Ah,” he said, “The eBay copycat.”

Wrong.

In fact, the company that once was a South American version of eBay is nothing like that now. MercadoLibre has evolved in response to the unique circumstances of Latin America. Latin American companies needing an internet channel turned to MercadoLibre. Customers without credit cards found MercadoLibre’s payment backbone, MercadoPago. (And, MercadoPago, meanwhile, looks nothing like eBay’s PayPal.) As it evolved, MercadoLibre developed innovative services perfect for the Latin American context - from escrow services to alternative money transfer systems. In short, MercadoLibre may have started out like eBay, but today it has evolved its own business model in line with its markets. Although Marcos Galperin, its founder, went to Stanford, the business evolved into something that would not have been created in the silicon valley.

In industry after industry, worldwide, new business models are taking shape that would not have been invented in the valley. The ecotourism lodges run by Rainforest Expeditions in Peru balance the interests of the local population, the environment, and the need to do business in ways unknown in developed countries. The internet-based mass education and training systems run by Educomp are successful worldwide.  Notably, the company started in India where it initially developed the capability to create and deliver online curriculum in that context. Those capabilities allowed it to outcompete its rivals from the developed world. Large scale production and export of ceramic products by RAK Ceramics of Ras-al-Khaimah takes advantage of the resource endowments and location of this company in the UAE. The innovative mobile payments company M-Pesa in Kenya allows customers to transfer money, pay bills, and even access microfinance without involving a traditional bank – an attractive business logic where banks are suspect. The list goes on. Such companies are not playing “catch up” with the valley. Rather, they are evolving their own business logics, in response to the unique characteristics of their own environments.

It is true that we are a small world geographically, but globalization is increasing variety when it comes to business models. These varied approaches to business reflect the various logics of the world’s very different markets, technologies, cultures, and institutions. The countries of the world are logic laboratories, giving rise to new kinds of businesses that never could have been invented in the Silicon Valley, New York, or London. Business leaders would do well to ditch the illusion of convergence. Pull your head out of the silicon, and you'll see business innovations blossoming worldwide, reflecting the logics of other places - successful precisely because they were not invented here.



The importance of differences across the world economy is studied many, including Pankaj Ghemewat.

Tuesday, August 15, 2017

The Marketplace of Beliefs

In January 1981, James Watt became the Secretary of the Interior of the United States.  President Ronald Reagan’s choice of the controversial, pro-development Watt sent tremors through the environmental movement. The press was abuzz with the possibilities: stationing MX missiles in the Great Basin, opening up the California coast to oil and gas exploration, limiting the reach of the Endangered Species Act, and the like. For environmentalists, 1981 was their darkest hour.


Or was it? In the wake of Watt’s appointment, enraged environmentalists signed up to social movement organizations in numbers. The Sacramento Bee (4/23/2001) quoted a Sierra Club official remembering that time: “You couldn’t process the memberships fast enough. We basically added 100,000 members.” That organization’s roster surged past 200,000 members in 1981, reaching 325,000 members the following year. Clearly nobody in the environmental movement was happy about James Watt, but his appointment triggered a rally of support for their cause.

A strange exception? No. It turns out that when beliefs compete, opposition is vital.  A powerful opponent makes clear your own reason for being. There is little need for the Women’s Christian Temperance Union in Salt Lake City – the Mecca of America’s Mormon population. But in places where breweries and distilleries abound, temperance organizations have prospered. (See work by Professors Wade and Swaminathan on this.) When beliefs compete, opposition strengthens identity.


In the marketplace of beliefs, the real competition is between the purists and pragmatists in the same camp. Once speaking to group of environmentalists, I asked who would be willing to work with Wal-Mart if this would help the environment. Half the room raised their hands, much to the surprise of the other half. A low buzz of consternation could be heard.  “We need to get something done,” said a pragmatist.  “Greenwashing,” replied a purist. When beliefs compete, the purists put a premium on their legitimate identity. The pragmatists opt for effectiveness, and in so doing call their own legitimacy into question.

The competition between pragmatism and purity is more than personal; it shapes how organizations develop. For years, in many places small food cooperatives were the place to go for organic produce – often locally grown. Powered by pragmatists, this movement became so successful that now even mass retailers sell organic products. Good news? Not to the purists, who have seen the small cooperatives close down in the shadow of the superstores. How much simpler were the days of pure opposites – of local food cooperatives standing in opposition to “industrial” food stores. In the marketplace of beliefs, compromise triggers a competition between purists and pragmatists.

Competition over beliefs is a leadership challenge: should you be pure or pragmatic? If you compromise, you get things done. But by compromising you also blur the lines, calling into question your legitimacy. The effective environmentalist is accused of selling out. The pragmatic conservative is sanctioned for being inauthentic. Yet it is those who compromise who get things done. Here is your tough choice as a leader in the marketplace of beliefs: Are you pure or pragmatic?



Academic research on "oppositional identity" can be found in the work of Glenn Carroll and his colleagues.

Sunday, July 30, 2017

Why Did We Come to Work?

Do you work for a big company? If so, try this: The next time you attend a meeting, ask yourself whether you can tell what business you are in by the content of the meeting. Is there any connection between what is being talked about in the meeting and the actual customers of the business? If not – and often there is no connection – look around the table. Does anyone in the room, you included, know a customer? If not, do you at least know someone who knows a customer? It may come as a shock, but most people in big companies do not interact with customers. After all, as a company grows, the number of relationships inside the company increases much faster than the number of customer-contact positions. This mathematical fact is akin to the "square-cube" law first observed by Galileo (albeit not talking about companies). And this fact leads to a problem: Most of us do not know why we go to work.

When you work directly with customers, you know why you go to work. That is the case for people in small companies, or for salespeople in big companies. But for the rest of us – those who do not deal directly with customers – why do we work? You can probably answer the small “why?” question. Maybe you help run the information technology system that the company uses to keep track of its people. That’s important. We can’t get paid without your work on the IT system. That is the small “why” question and it is usually easy to answer.  But try answering the big “why?” question. If you quit today, would the mission of the company be harmed? Why does your work matter, really matter, for the company? This question is very hard to answer for most people in big organizations, since they are so removed from the customer. They know why they come to work, but they don’t know why that work matters.

Unable to answer the big “why?” we end up instead measuring things that we do, in an attempt to show that our work matters. This leads to various maladies, such as calling a lot of meetings. We want to make progress, so we call a meeting. Because meetings are measurable, and attendance at meetings also is measurable, calling meetings is a way to feel like something is getting done. Did you go to the meeting? You can’t make the meeting!? Were you invited to the meeting? Even our calendar software is designed to enable meetings, allowing us to see when others do not yet have a meeting. Maybe we’ll set up a regular weekly meeting, or even a daily meeting. But why? Odds are, you have sometimes missed a meeting, or wished you could miss a meeting, because you wanted to actually get work done. Yet your absence would be measured, so you go. Of course, meetings can be useful; but in big organizations far too many meetings are called, since they are a measurable substitute for knowing the big “why?”


Enter strategy. A good strategy lays out the logic behind why a company exists, and so is a tool for leaders to help their people understand why they come to work. A useful strategy makes clear the link between what people do at work and what the organization is trying to get done. Do you tell a technician that they need to come in this weekend, and leave it at that? It would be better to add a small explanation. Explain why. How is that person’s work connected to the organization’s reason for existence? Perhaps the technician needs to come in because their support will enable an engineer to serve a customer. Although the customer will never know the technician, the technician should at least know how her work was important. Strategy is how leaders help their people know why they come to work.


For more on strategy as sensemaking, see the work of Professor Sarah Kaplan.

Saturday, July 15, 2017

Honorable Leadership

The water was on fire. A Japanese "zero" had just struck the ship, water was flowing over the railings, and above the roar of the explosion he could hear the screams of men in the water. He did not hesitate. Later he would recall figuring that the burning fuel was probably only on the surface of the water. So he dove into the flaming South Pacific. One-by-one he hauled the injured men back onto the boat. He would not remember how many he saved.

When we think of honor, often what comes to mind are great leaders like this man, my father Burton Barnett, who would later be decorated with the Bronze Star and the Purple Heart for his service as a radio operator with the Amphibious Corps - a unit within the US Army that was deployed alongside the Marines as they landed on islands during World War II.

But this image neglects a more common, if mundane, form of honor. I refer to those who show leadership every day by living up to the duty implied by their office: the school principal helping one of his teachers with a difficult student; the general manager of a cement plant fulfilling a promise made years before to residents near the factory; the scientist supporting one of her postdocs whose experiments just failed. Honorable leadership includes these seemingly small moments too. By living up to our duty during such moments, we make real our promises and show that a person's word has meaning.

Seen this way, my father's greatest leadership challenge may have come years after the war, and involved honorable actions that would never be acknowledged with a medal. As a supervisor with what we then called "the phone company," he was ordered to lay off dozens of workers during the computerization of the American phone system. The cuts hit hard and fast, with thousands laid off systemwide - most with little warning, just a pink slip appearing one day at work. But not for my father's workers. He met with them individually, looked each one in the eye, and explained as best he could why the layoff was happening and how he and the company would try to help them through the job loss. Returning home each day he was quiet and subdued - not his normal upbeat self. Living up to one's duty can be difficult.

It seems we cringe every day when reading the news, learning of yet another example of juvenile behavior by so-called leaders who do not deserve the title of their office. These pretenders disrespect their workers, commit crimes, and act in self-interest in violation of their duty. They wrongly think that leadership bestows entitlement. To the contrary, leadership implies duty, and honorable leadership occurs only when we live up to that duty. Thankfully, we still have the many quiet heroes of everyday life - those who understand the calling of honorable leadership, quietly living up to their duty each day.


Sociologist Philip Selznick developed the idea of "institutional leadership" connected to creating and exemplifying the values of an organization in his seminal book Leadership in Administration.

Friday, June 30, 2017

The Senators' Sons' Problem

Imagine you have to take a test in a room along with 50 other people. I will administer the test, and it will be objective – perhaps just straightforward math problems – and I will grade it anonymously. A very valuable prize goes to each test taker who makes it into the top 5% among the people taking the exam, silently and independently, in the same room with you. You do have a choice, however. You can take the exam in either of two identical rooms, each of which contains the same number of test takers. The only difference between the rooms is the criterion used to select the other test takers. Individuals chosen based on academic merit are in one room. The other room is filled with senators’ sons. Against which group would you prefer to compete?


I have noticed that people prefer to compete against the senators’ sons. Presumably, privileged though they may be, the senators' sons are easier rivals than a group chosen according to their ability. People seem to feel uncomfortable giving this answer in a public setting, perhaps because someone there might be a senator’s son and could take offense (although he may not understand the insult). But keep in mind that we prefer to compete against the senators’ sons not because we think that they all are weak performers. Any one senator's son might be quite sharp. Rather, our intuition is that the privileged group is weaker on average than the average of the merit-based group. This is the senators' sons' problem: Privilege and merit sometimes are negatively correlated. But why?

Behind the senators' sons' problem is a process known as “selection”. In most contests, you have to qualify in order to play – as when people try to get into a school or a company, or when firms vie to get into markets or to do business in different countries. Criteria have to be set up to select who gets into these contests and who does not. When merit is the criterion, those who play must be capable. When some other criterion is used, such as privilege (as in the case of senators’ sons), then for them being capable is optional. And when merit is optional, average levels of merit will be lower.

In life, both merit and privilege together decide who gets to play. If you lack privilege, you better be good. If you lack merit, but are well connected, then you may be able to play too. In situations like this, merit and privilege are negatively correlated: The senators' sons' problem. So if you see someone succeed despite lacking connections, club memberships, and fancy titles, they must be good at what they do. Similarly, if a foreign company excels despite government policies favoring domestic firms, then the foreign firm must be impressive. The same process happens in entrepreneurship, too. Big, established firms rely on their reputation to get business, while start-ups have to prove that they are capable. Consequently, most start-ups fail; those that survive are then especially competitive. In each of these examples, those who make it without privilege had to be good.

I think we all realize that the senators' sons' problem is at work in many areas of life, which is why so many people try to deny their own privileged backgrounds. How we all wish we were a “self-made man." People who claim this are really wanting to say “I’m no senator’s son.” After all, if we got ahead without privilege, then we must be really capable.

So here is the question for you and your organization. How much do you rely on privilege to win in your markets? How much of your performance is based on merit? And, inside your organization, do you reward privilege or merit? In my view, great leaders build companies that win on merit - and inside their firms create systems that reward merit.


For an academic study showing how this idea plays a role in competition, see my paper on compensatory fitness.

Thursday, June 15, 2017

The Red Queen

Do you send your children to the least demanding school you can find? Of course not. What kind of parent are you? You know that they need to measure up to a high standard in school if they are to do well in life.

Yet every day I hear business leaders claim that they want to avoid competition. Are you one of these leaders? What kind of leader are you?

Of course, when organizations compete, they make it difficult for each other to perform well. But this fact has led to a great misunderstanding. Many business leaders, especially those trained in business schools, infer from this fact that they should avoid competition. That conclusion is wrong.

Pressure from competition causes people to search for ways to improve their company's performance. These improvements, in turn, make companies stronger competitors. So now these improved firms put more pressure on their rivals, who must also find a way to improve. Once those rivals improve, they now are stronger competitors, starting the whole cycle over again. So it is that competition causes organizations to learn, which in turn intensifies competition in a self-accelerating process known as the “Red Queen” effect. This term was coined by the evolutionary theorist Van Valen in reference to Lewis Carroll’s Alice who remarks to the Red Queen: “Well, in our country, you’d generally get to somewhere else – if you ran very fast for a long time as we’ve been doing.” To this the Red Queen responds: “A slow sort of country! Now, here, you see, it takes all the running you can do, to keep in the same place.” Van Valen noted that biological evolution features such change. In my book, I demonstrate that in an ecology of learning organizations, relatively stable performance masks absolute development.

The Red Queen is at work around us all the time, triggering progress on many fronts. When the Korean steel firm Posco came up with the "finex" process, this innovation raised the bar for any firms wanting to compete in the global steel business. Those steel firms that kept pace are still competing today. Similarly, when Qualcomm revolutionized digital wireless transmission by making CDMA technology workable, this put pressure on every other firm in that space to respond. Apple, Samsung, Nokia, Ericsson, LG, and many other firms engaged in that competition for years. Some still are competing, but only by remaining innovative.

The result?  Well, to the firms involved it can feel like they are running in the same place since each is evaluated relative to the others. But for the rest of us, we've seen this:



evolve into this:



As a consumer, you probably think of this amazing record of innovation as something that was inevitable. But this development did not have to happen. Each innovation along the way was carried out by a firm as it attempted to do a better job, in turn raising the bar for others. So perhaps for a while your your device could not map correctly, but by now the problem has been fixed. Competition still thrives in the wireless industry, so each manufacturer keeps pressuring its rivals to do a better job.

Yet according to many, firms are supposed to find a way to avoid competition - to gain "positional advantage" or locate in "blue oceans" where rivalry is weak. Had Qualcomm, Apple, LG, Samsung, and the others taken this advice, how different the wireless industry would be. (Indeed, many experts on the telecommunications industry argued just a few years ago that it was a "natural monopoly", where competition would be "ruinous"!) Avoiding competition would be more comfortable, for sure. But avoiding competition is just a way to shut down the engine that generates innovation.

But, you might say, surely competition is bad for an organization's performance. Don't monopolists outperform other firms? Isn't that why so many companies are trying to dominate their markets? Well, yes, in the short run a monopolist performs better than a firm facing rivalry (other things equal). But over time, that monopolist gets lazy. Meanwhile, over time firms facing competition continue improving. If fact, I estimated the statistical effects of Red Queen competition on hundreds of firms over many, many years, and found the following pattern:



On the left, comparing two inexperienced firms, the monopolist performs better. But over time experience makes the firms facing rivalry improve, eventually becoming better performers than had they found a way to be a monopolist. That is the Red Queen effect. As a firm competes, it becomes more capable, and so performs better. Even though its rivals also perform better, the net effect turns out to be beneficial in time. Highly competitive markets, over time, feature some of the world's most capable and innovative companies.

Reflect on your role as a business leader. Is your job to shield your company from competition? Not if you want it to learn and improve. Short-sighted business leaders hide their companies from competition. Great leaders do just the opposite: They understand that competition teaches. So what kind of leader are you?


Wednesday, May 31, 2017

Deep Knowledge

In the 1968 Olympics, Dick Fosbury would forever change the sport of high-jump. There he won the gold medal using an unheard-of approach: falling backward over the bar. Prior to Fosbury, virtually all athletes jumped face-first, rolling forward over the bar in the air. But Fosbury, age 21 at the time of the Olympics, had since his high-school days been experimenting with a back-first approach. Those years of experimentation finally paid off with the gold medal, after which his "Fosbury Flop" would become the standard approach to the sport.

Fosbury's innovation was the result of "deep knowledge," an understanding of a domain so complete that it can only be gained through a significant investment of time and focused effort.

Many times innovations come from those who have deep knowledge in a particular domain.

Consider Martin McVicar. He invented the swiveling forklift, a product that his Irish company ships today to companies all over the world. McVicar's innovation was possible because he spent decades working with forklifts in tight spaces, experience that helped him come to know the use of the forklift inside out.

Or take Orlando Vargas, who developed an industrial soap made from cactus, which today is sold to businesses all over Mexico. In his case, a degree in chemical engineering gave Vargas the perspective needed to see the possibilities for using cactus when he moved to cactus-rich Baja California Sur from his native Colombia in 2005.

And examples abound if you consider innovations in science and technology. Philosophers of science, particularly Lakatos, argue that scientific progress proceeds through research programs - with knowledge building cumulatively over time.

You're thinking "Barnett says know your stuff." Common Sense. But not so. These days the popular view is just the opposite. Broad knowledge is all the rage, the idea being that by combining knowledge from unrelated worlds we come up with great innovations. The case for broad knowledge is compelling, and the evidence supports the value of broad knowledge (see the work of Lee Fleming). But broad knowledge comes at a price, and its popularity has caused many to underestimate the value of deep knowledge.

When we fully absorb ourselves in a particular domain, investing the years of focus needed to gain deep knowledge, we forgo breadth. But in return we come to know the nuances and background ideas that can help us recognize patterns when they appear - to see opportunities that the dilettante would overlook.

So, yes, know your stuff. But by that, I mean immerse yourself in your area of specialization. Be authentic to your context. See the possibilities that the fair-weather innovators will miss.


For evidence on the importance of deep knowledge among innovating firms, see my paper on the subject.

Monday, May 15, 2017

On Behalf of Sprezzatura

It was in June back in 1991 - my first day of work at Stanford. My wife dropped me off, since I did not have a car and had my golf clubs, wanting to try out the Stanford Golf Course after work. As I walked up the parking lot toward the Business School, it hit me how bad this looked. The new guy shows up carrying his golf clubs. What kind of work ethic is that?

What to do? Looking about, I noticed some handy bushes where I could stash the clubs. They'd be ok until I got out of work. But it was too late. Up ahead the dean was approaching! Mike Spence, the famous economist and our dean at the time (who, in a few years, would win the Nobel prize), was walking straight at me coming out of the school.

I put my head down and kept walking, figuring that I looked young; maybe he'd just think I was a student. But it was not to be. "Bill!" he said, looking straight at me. "This must be your first day at work! Welcome!"

I tried to look as professional as possible, but I was carrying a set of golf clubs. Mr. Busy? Not! "Yes, Mike. Great to be here."

"And you brought your clubs!" he observed. "What a great day. I'm heading out myself!" He gestured to the windsurfing board clipped to his car's roof rack.

Ah, sprezzatura. The internet says the term was coined by Baldesar Castiglione in Il Cortegiano, where it refers to an air of measured nonchalance among accomplished courtiers. Become dean. Win the Nobel prize. Do a little windsurfing. No problem. In the Stanford parking lot that day, I had my first lesson in the culture that then characterized Stanford: Sprezzatura. You may be paddling furiously under the water line, but above the surface you're a calm and graceful swan.

But that was 1991. Decades later, I can report that the days of sprezzatura appear to be behind us here in the silicon valley. Today, a day in the life seems to be all of a rush, running from one thing to the next, face aimed unwaveringly at the phone. But I wonder about all this busyness. Are these hyper-busy people really all that productive? Or are they just looking busy to seem important?

Being busy to look important is nothing new. Chaucer wrote in The Canterbury Tales (circa 1387) of the important lawyer: "Nowhere a man so busy of his class, and yet he seemed much busier than he was." Spend some time people watching on University Avenue, here in Palo Alto (perhaps over a glass of wine), and you'll count dozens of head-down hurriers - but no sprezzatura to be seen anywhere. Even the others at their tables will be busy staring at you-know-what. Perhaps they are trying to fool others, since important people are thought to be busy. (In some contexts, busyness even serves to signal high status.) What's worse, perhaps they are fooling themselves. A full calendar, appointment pings, deadline checklists, "screens up" at meetings, all the trappings of a productive life may convince us that we really are productive.

But what about stopping to think? One advantage of sprezzatura is that it includes having long conversations with others - conversations without an agenda. Sprezzatura means we breathe between sentences, allow silence in the conversation, and listen long enough to hear. Do that enough, and you think - not just of what you must consider, but also of what you may have never considered. We could use more of that in the valley these days.

Remedy? Well, you could spend some time in Croatia. No, seriously. Croatians have a wonderful habit of spending hours on end relaxing and talking at coffee houses. I love the fact that in the Croatian language, they use the phrase ajmo na kavu, that is "let's go for coffee," to mean taking time to talk and think with others. Talking and thinking can lead to many creative things - maybe even some productive things. So what looks on the surface as sprezzatura may be more important than you realize, and it cannot be had if you're driving through Starbucks.


In your spare time, read the book in which Sprezzatura was first coined.

Sunday, April 30, 2017

The Partnership Fallacy

Remember doing group projects in school? Typically your teacher would partner you up with students who had different skills. Maybe a good writer would be matched with someone who knew math, for instance. In theory, you would each teach the other; the group project would get done, and everyone would learn. But what really happened? Perhaps pushed for time, at some point everyone in the group realized that the job needed to get done. And if you wanted to do well, this meant dividing labor. You broke down the project into parts, as in the well-known "divide and conquer" algorithm pictured here, and each of you took on the part that you understood best. In the end, the project was a success – but the math person did even less writing, and the writer again avoided math. So goes the partnership fallacy:  We partner up hoping to improve our weaknesses, only to divide labor and so make our weaknesses even worse.


Business leaders often fall victim to the partnership fallacy. For example, it may be hard to believe today, but in the early 1990s Apple Computer (as it was then called) was widely known to be bad at making small devices. The company’s earliest attempts to make small computers had flopped. Meanwhile, Sony stood out as the worldwide leader in making cool, miniaturized electronics. So Apple’s leaders decided to form a partnership with Sony. The idea was for Apple to learn about miniaturization while producing a laptop computer. History says that the alliance succeeded, because it created the first “Powerbook” computers. But in terms of learning, the alliance was a failure. Case studies at the time reported that deadlines kicked in, and pushed the two companies to each stay focused on what they did best. In particular, Sony took care of miniaturization, with very little day-to-day contact between Sony and Apple engineers. In the end, they got the job done – but Apple emerged without learning Sony’s miniaturization magic.



What’s more, often partnerships fail even to accomplish their stated goal, never mind learning. If you have much experience, you can probably name an example or two of failed partnerships. Business leaders typically allow these arrangements to fizzle out without much fanfare. Combining firms through merger and acquisition suffers this problem, too. We talk a good story about “synergy” and “learning” and “1+1>2”, but the evidence shows that combining firms typically increases only the variance in performance (not the level of performance as promised by “synergies”).  

The lesson: Partnerships are not a substitute for learning by doing. Partnerships sound great during a planning session. After all, who can argue with the idea of bringing in somebody who already knows what you need to learn? But ask yourself, how did they come to know?  Odds are, they learned the old-fashioned way: by doing. Effective leaders understand how organizations learn, so they avoid the partnership fallacy. Partner if you must, but don’t fool yourself that this is a great way for your organization to learn.


For a thorough academic study highlighting the value of organic learning and growth, read my book on competition.