Sunday, June 30, 2019

The Signal

The opportunity was impressive.

The product would enable hospitals to go all digital, eliminating paper records and improving physician's access to high-resolution images. Lower costs, better outcomes. No wonder the company had already sold to eight hospitals. The growth projections from there were obvious.

So it was that Arnold Parnassus left a soon-to-be fortune in Oracle stock options on the table to run this hot new start up in the digital radiology space. And then reality hit. The company stopped dead in its tracks, not selling another system, and Parnassus moved on.

What happened?

First let me assure you that this is a true story, although his name I changed. The post-mortem would find that the first eight adoptions were all by hospitals where the company's founders had close relationships. Once their network was tapped out, growth stopped. Apparently this product was not nearly as compelling as the initial returns implied. The team thought the market had given "the signal," but it was a false positive. The early returns were not really a signal of product-market fit.

But at the time, this diagnosis was not so clear. Parnassus and his team racked up the miles (and the burn rate) making sales calls and attending conferences. They even got a call from GE, which they rebuffed wanting to go it alone. After all, they thought the market had given them the signal, and now it was time for execution.

I see the problem of false positives all the time when I talk to executives. I typically ask "do you have product-market fit?" when I meet with an executive and her team. Normally she will say "yes," and then I'll ask "how do you know?" Then the hand-waving begins, featuring a lot of talk about "value propositions" and such. I listen for the evidence of product-market fit. Are the dogs eating the dog food? If so, can we be sure about why? Or are we like Parnassus, misreading the signal like an embarrassed suitor misreading a wink.

There are many ways of misreading a signal. For instance, just recently an executive told me, "BigCompany is a potential customer, and they want to invest!" OK, this remark raises the obvious problem that customers and investors have very different motivations. But the real problem is the executive. He's getting excited for the wrong reason. An offer to invest is not a purchase order. It is not evidence of product market fit. It is not "the signal."

What's more, an investment like this not only gets misread as the signal, it also buys the firm more time to keep doing what they are doing - even though the dogs are not eating the dog food. Investments often kill firms by cushioning their management teams, allowing them to feel like they are doing a good job even when they should be desperately reconsidering their strategy.

Can you tell signal from noise? What does that say about your leadership?


Marc Andreessen has an interesting article on product market fit.

Friday, May 31, 2019

Predicting Unicorns

Recently I lectured three very different groups: some top executives of a large American manufacturing firm, a roomful of Russians, and several thousand Chinese entrepreneurs in Shanghai. Very different groups. Very different topics. But one question was asked in every venue: "What business is the next 'unicorn'?"

If you can read then by now you are tired of hearing about unicorns. The internet tells me that the trope refers to startups valued at $1 billion. Most pundits talk about them only after they are valuable, but anybody can look in the rear view mirror. What my audiences worldwide want to know is how to see them coming.

First let's get something straight: Statistics tells us that amazing exceptions will happen, every now and then, at random. In fact, amazing exceptions will even come in bunches every now and then at random, in the same way that my music player will randomly serve up three straight "Steely Dan" songs in a row. Call them what you want; black swans, unicorns, whatever. Unusual exceptions happen at random.

But with unicorn businesses there is a pattern we can see in advance. This pattern won't tell you who is the next unicorn. It will tell you where not to look, however.

Let me explain. Research shows that waves of exuberance about businesses tend to be biased. Since we're all looking to each other to find the next new thing, once a market space starts trending it's bound to get hyped beyond its real potential; that's what the "hype cycle" is all about.  All that buzz makes it much easier to start companies in a hyped space. Ironically, this makes it so that many of the least competitive firms are the ones that herd into the hot markets where everyone wants to invest.

Want to find the next unicorn? Listen to where the buzz is coming from and run the other way. I can't tell you who will be the next unicorn, but I can tell you it will come from where we least expect it.


This idea is systematically researched in my paper with Professor Elizabeth Pontikes.

Tuesday, April 30, 2019

Two-faced Compliance

In what you are about to read, the names have been changed.

Jonathan had just taken over as managing director for his multinational company's Thailand operations, where they were under pressure to finish constructing a new manufacturing facility. Sitting in his new office he met with his first visitor, who identified himself as one of Jonathan's "assistants" - a local who we'll call Kasem. 

"Good news!" reported Kasem. "The production equipment for the new facility has arrived from the German manufacturer. It is at the port now. I'll take a team down to pick it up."

Knowing that "facilitating payments" were often expected in such situations, Jonathan asked, "Will you be needing to make any kind of cash payment to the customs agent?"

Waving a hand to dismiss the concern, Kasem replied, "Oh, not to worry. I have a good relationship with the customs officer." And with that he turned and left.

Down at the port, Kasem approached the customs desk and inquired about the shipment. From the back, out came Pandit, his long-time "friend" at the customs office. Pandit explained that the shipment needed to be fully unpacked and checked against the manifest. "You see," he went on, "this will take a very long time. You might want to return some time next week."

Kasem countered, "Pandit, might there be some way that we could expedite the process? This shipment is very important to keeping us on schedule for opening the new facility."

Pandit feigned thinking for a moment, and then observed, "Well, that could be done, for a payment of 2000 Baht." (That would have been about $60 USD at the time.)

Kasem made the payment. It was, after all, within the guidelines of the company's policy on such payments at the time. And with that his team was allowed to leave with the shipment, still unopened.

Once back at the new facility, Kasem was surprised to see that the shipment contained an extra compressor that was not listed on the shipping manifest. That compressor was due to arrive in the next shipment. "This is excellent!" he stated to his team. "This will speed up our installation considerably!"

A week later, Kasem received another call from customs, informing him that the next shipment had arrived. So he headed down with his team to pick up this shipment. Checking in at the desk, Kasem was surprised to see a different customs agent, whom Kasem did not know, come out from the back. Again this agent explained that the clearing process would be long and laborious, and again Kasem suggested that perhaps some way could be found to speed up the process. To this the customs agent replied, "Yes, such a thing is possible, for a payment of 6000 Baht."

Appalled, Kasem exclaimed, "That is quite unreasonable! 2000 Baht is the customary amount. I refuse to even consider such an increase!"

The customs agent shrugged, and then instructed the customs officers to open the shipment and begin the long process of checking its contents against the manifest. Kasem waited, impatiently, until at some point the customs agent called him over: "Sir, your shipment cannot be cleared because the manifest is incorrect. It lists a compressor, but there is no compressor in this shipment." 

"Ah, not to worry," reassured Kasem. "You see, that must have been the second compressor included in our shipment received last week."

"May I please see the manifest from that shipment?" requested the agent. Upon reviewing the manifest, he observed, "There is no second compressor listed on this manifest. You clearly smuggled that compressor into the country. But I can overlook this problem, for a payment of 15,000 Baht."

Kasem lost his temper. He refused to pay and stormed back to the office, where he reported the incident to Jonathan. Hearing all that had gone on, Jonathan surmised "I'm glad you did not pay that unreasonable demand. Obviously we are not guilty of any offense!"

Then the phone rang; it was the company's legal department. Jonathan sat stunned at the news. The customs agent had reported his company to the authorities, who were charging them with smuggling. If convicted, he would do time and the company would be fined $50,000 USD!

At this point, Jonathan reported the incident to corporate, who advised him to comply with the authorities and pay the fine immediately. Apparently, it was certain that they would be found guilty either way, and have to pay the fine, but at least this way there would be no further delay and no chance of jail time for Jonathan.

Surprised? First let me assure you that the facts here are true. This incident here is the subject of a case study written by Professor Bruce McKern. The story illustrates the slippery slope involved when the norms of the "informal economy" run up against the rules and regulations of the "formal economy."

I've noticed that when telling this story to executives, they quickly fall into one of two groups. One group, the "holier than thous," are certain that this could never happen to them. As one particularly sacrosanct compliance officer once said regarding this incident, "This could never happen at our company. We've been trained!" The other group, the "realists," roll their eyes at the holier than thous. One such realist, reacting to the compliance officer, barked "well then I guess you'll never do business in most of the world!" Whichever of these groups includes you, please let me warn you not to miss the point here. And there are two ways to miss the point:

The sacrosanct: Acting holy won't help if you have people trying to make their performance review numbers in areas where facilitating payments are the norm. You've trained them, sure, but they still need to pay the rent.

The realist: There was a time when company policies (like the one above) would build in the guidelines of the "Foreign Corrupt Practices Act." (Essentially they would OK payments of small amounts paid to lower level employees to speed up services to which the firm was entitled.) But since the passage of the UK Bribery Act in 2010, even payments such as this may end up getting you in trouble. (And outsourcing to an agent may not help!) So even though much of the world still expects such payments, you could end up the loser if you (or your agent) make them.

The leadership lesson? Most companies still expect their managers to make their numbers. So while the compliance officers are making sure you're "trained," your incentive system still expects you to perform. This is two-faced compliance, where we say we comply and tell our managers to "behave," and then give them incentives to look the other way.

Today's managers are in the middle of an intersection where two worlds are colliding. If this describes you, be warned. If this describes your firm, what does that say about your leadership?


Thomas Fox has a practical guide to dealing with some of these issues.

Sunday, March 31, 2019

The Acquisition Trap

Shortly after coming to Stanford I realized my mistake. I should have hired an actor to go to work in my place. 

My first day on the job, he would arrive and fill out the paperwork, meet the dean, and step into the classroom. He would be popular, of course; perhaps I would hire a comedian. I could teach him the material in private, and he could cartwheel into the classroom like Jackie Chan – or maybe sachet in like George Clooney. Meanwhile, I would hide in the library basement and write research articles. But, alas, I did not devise the scheme until it was too late. I had already reported for work, so my colleagues and students all know that I am no Brad Pitt – and ever since I have split my time between teaching and research.

The good news is that by doing things myself, I learned how. I’m still unlikely to be called by Angelina Jolie any time soon, but I’m a better teacher for having done this myself. That is how things go; call it the “learn or buy” decision. Need food? Go to the store. Need to finish a math assignment? Get to work. You could pay someone to do your math assignment, but then you’d not only be a liar, you would never learn your math. Paying for things is a way to avoid learning. Some people change the oil; some people pay Jiffylube.

Common sense, you say. But I work with companies all the time who don’t get this basic truth. Leadership wants their company to learn something, so they acquire another company that already knows how. But this purchase does not make their company learn; it just means they own another company that knows how to do things that they don’t. For their company to learn, they would have to do it themselves, and through that difficult process they might have learned. But paying someone else does not help you to know. In fact, since you can rely on the acquired unit, you can avoid having to learn.

For example, the American company eBay (the inventor of internet auction websites) decided to enter China a few years ago. They could have gone in themselves, and learned, and it would have been risky and difficult. So instead, they acquired China’s then-leader in that space, Eachnet. Earlier, Eachnet had learned (by doing) a lot about how internet auctions work in China – whether and for what you can charge fees, how to deal with the trust problem using escrow services, the costs and benefits of physical trading locations, how to do business with people who don’t have a credit card, and the list goes on. eBay’s leadership in Silicon Valley did not know any of this about China. After the acquisition, eBay’s leadership still did not know any of this. They just owned a company that knew. They fell into the acquisition trap.

You may think that “good execution” can get you out of the acquisition trap. You’re wrong. After the acquisition, you have a choice. You may choose to absorb the acquired company into your company, or you may choose to let it stand alone. If you absorb, business consultants will likely be involved; they call it “post-acquisition integration.” You can pay these consultants to tell you about “synergy.” But the research suggests these promises are often not fulfilled. (The results are mixed. It appears that acquisition increases the variance in performance. That means acquisition makes some firms much better off but others much worse off – and it is hard to know in advance which will be which.) In practice, “integration” is where the two companies are put together, some people lose their jobs, and many others end up in new jobs (that might not be right for them but they are glad to have the job at all). Typically the purchasing company dominates in this process, which means that the knowledge of the acquired company usually gets watered down or vanishes entirely.

Your other choice is to leave the acquired firm alone. One of my favorite CEOs, Matt Harris, once had to leave alone an acquired software development group in Israel because, to paraphrase that group’s leader, they “would kill for each other, but they did not care” about the acquiring company. Harris’ company needed their work, so he let them be and designed the development process to take advantage of the situation. This worked out fine because Harris was not interested in having the company learn from the acquisition. But if your goal is to learn, you won't get there by leaving the acquisition alone.

What about the successful acquisitions you've heard about? You may be thinking of an example or two now. Caution! We can always cherry-pick success stories afterwards. There are also many failed acquisitions, and that is why we need to learn from research that does not sample on success. (Sampling on success, we should play slot machines, too.) That said, we can all name companies that have a good track records on acquisition. Maybe you’re thinking of Google, or 3M, or Cisco, or Blackstone, or name your favorite successful acquirer. Perhaps some firms know how to acquire better than others?

True enough, some companies seem able to acquire better than others, but think about why. Google absorbs innovative technology companies all the time; that is where many of their “innovations” come from. Facebook spread through acquisition so that it now has four distinct entities in the social network space. Private equity companies routinely make money through acquisition and restructuring. But these various examples do not imply that acquisition for learning works. In fact, we know that the less the acquirer needs to learn, the better the acquisitions typically go. Good acquirers already know what they are doing; they may be getting many things from the company they buy, but they are probably not treating that company as their teacher.

There is no substitute for learning by doing. Perhaps you don’t really want to know how to change the oil, but if you do, get to work. And if you’re acquiring a company to learn what it knows, you are stepping into a trap.


For a sobering academic literature review, see this paper by King and his colleagues.

Thursday, February 28, 2019

Why Strategic Planning is Not

Business school professors miss the Soviet Union. The nemesis of old used to provide us with a stream of wonderful examples that we could contrast to the market.

Take nails, for instance. Socialist economist Alec Nove wrote of this example: In an effort to increase the production of nails, the Soviet planning authorities created production incentives based on numbers of nails produced. In response, the Soviets enjoyed the following year a plentiful supply of many many very small nails. To correct the problem, the authorities cleverly switched to incentives based on weight, and the producers responded by manufacturing very large nails. The travesty was parodied in this cartoon from the satiric magazine Krokodil. Ah yes, better to use the market.

But the real lesson of the Soviet experiment has been lost on us, and the corporations of the world should take note: Planning doesn't work.

Corporations must and do plan, of course. Their leaders call these plans "strategic" to give them gravitas. But typically strategic plans are just budgets and goals. Budgets and goals are important, but they are not "strategy" if by strategy we mean the logic that drives action.

The problem is that we don't have all the information we need when we make the plan. If we did, we might be able to make planning strategic, and then leadership would just be planning + execution. But we live in a world of great uncertainty, and so stuff comes up that soon renders our plans obsolete. You do this enough times, and you laugh at planning approaches like the one pictured here.


The better option to "strategic planning," in my view, is strategic thinking

Let me illustrate. I recall during the late 1990s when Dan Warmenhoven, then the CEO of NetApp, challenged his leadership team to move the company beyond its customer base - which at the time was mostly high-tech companies needing NetApp file servers. Warmenhoven had a compelling logic - that information technology (IT) was spreading to all sectors of the world economy and NetApp needed to be selling into the IT buyers within large companies of all sectors.

Today we know that this vision would turn out to be spot on, but at the time the strategy was controversial. After all, the company was doing just fine selling into high-tech. But Warmenhoven changed the company's direction nonetheless, setting a brave course that was clear in its logic, even if it was debatable. There was no lengthy "plan" to do this. Warmenhoven established a way of thinking about the company's strategy, and they commenced action (tracked at weekly business updates). So commenced a process of learning and updating, giving shape and substance to Warmenhoven's initial strategic logic. Such is the power of strategic thinking.

The lesson: Of course we must plan, but don't let the budget-and-goal cycle substitute for strategy. Build your strategy into your planning process, so your people share a common logic that guides their actions.


For more on strategic thinking, see my notes on change and growth.

Thursday, January 31, 2019

How to Change for Good

Sometimes I get the pleasure of teaching Stanford undergraduates. How very bright they are. And the best part: Give me an hour to lecture the undergraduates, and I can send them away completely changed. The problem is, then they go to the next professor, and she changes them right back again!

The lesson: Easy changes are easy to undo, so easy change is temporary. And the easiest changes are the snap decisions, made in a moment, since they can be unmade just as fast.

Sound familiar? If you are an experienced executive, you no doubt have tried to change your approach to leadership. Perhaps you've tried often. Did the changes stick? If so, good for you. But very often our attempts to change ourselves are foiled by the forces of inertia: routines at work; calendars so full of meetings they leave no time for thinking; colleagues who look skeptically when you behave unexpectedly - especially if you've been to a leadership training. The forces of inertia are strong.

Yet every summer, for six weeks, I see a couple hundred talented executives change their lives forever.

Wait. Bear with me.

Yes, I'm plugging the Stanford Executive Program (SEP), which I direct. But I'm talking about how to change as a leader - how to change for good - and you can use the ideas here even without coming to SEP.

To see what makes change stick, it helps to see the difference between one-time change and trajectory change. One-time change happens in a moment, like when I lecture the undergraduates. Such change often happens in a big announcement: "turning over a new leaf"; "from now on..." But well intended though they may be, loudly proclaimed changes made in a moment can be reversed just as loudly in the next moment. Like young love, no need to worry. Just wait a day.

Image may contain: one or more people, sunglasses, ocean, sky, outdoor, nature and waterTrajectory change, on the other hand, is hardly noticeable at first but over time leads to a big difference. Those who navigate the sea, like Paul Barnett, shown here, know the problem. Leave something metal next to your magnetic compass, and the trip from San Diego to Hawaii could end up in Panama. The slight initial change in trajectory would hardly be noticeable at first, but held long enough the new trajectory leads us to a very different place.

Image may contain: sky, ocean, outdoor, nature and waterSo how do you change your leadership trajectory? (First, get past the trajectory metaphor; countless self-help books tell you to change trajectory, but you are not a boat.) To apply this idea to leadership, replace "trajectory" with "understanding." The way you understand the facts gives direction to your leadership. When you change understanding, you change the direction of your leadership.

For instance: Is the controversial new employee a deviant or an innovator? Your answer depends on how you understand your people and their role in creating new ideas. Is the recent failed project evidence of incompetence or of learning? Your answer depends on how you understand your organization's approach to experimentation. Is the new competitor a reason to withdraw or a call to action? Your answer depends on how you understand your strategy and the opportunities in your environment.

When you come to understand in a new way, you change your trajectory as a leader. And better yet, you now have the forces of inertia working in your favor. As your new understanding becomes a habit, it also becomes the status-quo - very hard to undo. Guided by a new understanding, and given time, you and your organization will be in a very different place.

Want to change your leadership trajectory? Come change your understanding at the Stanford Executive Program

Sunday, December 30, 2018

Want Success? Invite Failure

Across from the Black Bull Inn, just off the Canterbury Road in Folkestone England, I used to get Maryland fried chicken from a Chinese take-out at a post office run by an Indian family. The chicken was notable mostly for the battered, deep fried bananas that were thrown in – looking like giant fried worms when first bitten by the uninitiated. The chicken was passable – mediocre by my taste but then I eat a lot of fried chicken. If that family is still running the post office, then their chicken is probably still being served to this day. After all, the chicken was not so bad that they would fail outright, and in any case they could survive as a post office or by selling Chinese food; yet neither did they delight their customers. Like so many businesses, they survived somewhere in the middle.

Many firms survive being mediocre. No wonder there are so many management theories about excellence. Think of all the guru books that feature “excellence” in their titles. We want high performance, yet so many organizations give us mediocrity.

Why?

The problem is simple: We don’t get excellence because we don’t invite failure.

Let me explain.

If we seek out and eliminate failing projects, then we are left with only the clearly successful ones. And if we are then left with nothing, we have learned the valuable lesson that it is time to change direction. The more stringent our definition of success, the more failures we eliminate – and the better are those few projects that survive.

Thriving markets sometimes kill off failures for us. Highly competitive markets have high failure rates and therefore stronger survivors. It is no accident that Silicon Valley has good software companies; look at the high failure rates there! Back to fried chicken, you’ll find some amazing choices in Atlanta (and Seoul). A mediocre fried chicken shack in Georgia has the life expectancy of a balloon in the pokeweed. Thriving markets kill mediocrity.

Some companies harness the power of the market. They design stand-alone, specialized products and services, and so their failures are evident. For instance, consider the evolution of the file server - computers specialized to move data. When they came along in the early 1990s, some of the first innovators in this space were worried about competing with big, general-purpose computer servers made back then by Sun, DEC, IBM, and the like. In fact, some specialized file servers failed in that competition, and the companies that made them, like Auspex, are gone. This is the great strength of specializing: Specialists know when they are not competitive

On the upside, the successful specialist is clearly best-of-breed. In the case of file servers, we saw this result for firms like NetApp and EMC. By making specialized file servers, these companies could easily judge where they did and did not have product-market fit. They then easily out-competed the general-purpose servers of the big players. Those big servers had their place, of course, at the heart of large distributed-computing systems and later as the backbones of the internet. But when it came simply to moving data, the big servers were outcompeted by the specialized servers.

Unfortunately, wrong-headed business strategy can prevent the market from eliminating mediocrity. This happens when leaders try to improve a product by adding more features. Think late-night advertisements for gadgets: “wait, and there is more!” sings the announcer, as the contraption is revealed to have yet another benefit. We end up with an “integrated” product that provides many different benefits to many different customers. Such products allow the losing parts of the overall product to stay alive when they should be allowed to fail. Integrated products allow features to subsidize each other. You are hoping that somehow the full set of integrated features will make up for the lack of individually-excellent features. Hermes’ cartoon of the one-man-band comes to mind. Amazing in some ways, the one-man-band never really caught on. One prefers a full band of individually best-of-breed performers. Best of breed beats integrated.

So what about cherry picking from the world of innovators, and building a “suite” of best-of-breed features? This road to the integrated product is traveled by big firms acquiring up-and-coming specialists that have survived the market test. This strategy can work – as long as the business acquires best-of-breed products, and as long as the value of these products is improved by being in the big firm. We’ve seen this outcome at big technology firms like Cisco, Microsoft, Google, and Facebook. These companies acquire rising stars in the technology world, and then point to their growing portfolio as evidence that they are innovative. (Somebody was innovative, and their reward was to be acquired by somebody who then claims to be innovative.) Integrated products built this way can be effective, if you are well-funded and can spot the best-of-breed early on.

A cautionary note: You may think you and your firm can make an integrated product with many features, and all of them can be best-of-breed. You may hope for that outcome, but here’s your problem: The way you get best-of-breed is by discovering product-market fit, and such discovery requires a market test. But the market test is prevented when there are too many benefits to your product. You'll end up mediocre, because you failed to invite failure.


For some of the research behind these ideas, take a look at my book on the "Red Queen".

Friday, November 30, 2018

National Culture: Constraint or Catalyst?

When you speak in public in different countries, you soon learn of a trick used by translators the world over. At the humorous parts of your talk, the translator will say: "The professor is telling a joke. He is still telling the joke. He is still telling the joke. Now the joke is done!" at which point, on cue, everyone laughs hysterically. The problem is not that a joke cannot be translated; it is that humor is often culture specific, and so even a well-translated joke is likely to cause more confusion than enjoyment. Better to just play along with the professor and keep things comfortable.

The translator trick illustrates the power of culture. We'd like to share subtleties of language, but the lens of culture changes meanings, preventing our message from getting through. To see culture's lens in action, look at this picture of some fish:


Using this picture in a series of experiments, social psychologist Michael Morris and his colleagues have found some interesting patterns. When asked about this picture, American subjects typically see the standout fish as a "leader." By contrast, Chinese subjects typically refer to the standout fish as an "outcast." Why? Well, American culture is more individualistic, while Chinese culture is more collectivistic. These cultural differences shape the lenses through which subjects see this picture, and so give very different meanings to the same image.

You're thinking "Barnett is telling me what every college sophomore knows: different cultures are different." Well, yes, that is part of the story. Cultures do differ and those differences matter. But those who stop at this (obvious) fact miss the true power of culture. They see cultural differences as an unchangeable given as in "when in Rome, do as the Romans do." The Internet tells me that this proverbial saying dates back to various saints. Be that as it may, it is a view that treats culture as an unchangeable constraint.

But culture is not unchangeable. In fact, a quick glance at the data shows just the opposite: The cultures of the world are changing dramatically. Take a look at this cultural map showing World Values Survey data from 1981-2015, illustrating shifts on both the "traditional vs. secular/rational" dimension and the "survival vs. self-expression" dimension.



Two facts are worth noting in this map. First, cultures are changing dramatically over time. Second, and most importantly, cultures are not just moving in one direction: there is no simple "convergence" going on. Rather, cultural changes are moving back and forth, often cross-cutting one another.

These cross-cutting changes reflect the struggle that is cultural change: The woman starting her own firm in the Middle East; the bureaucrat resisting pressures for corruption in Africa; the gay couple starting a family in the US. Cultural changes are occurring all around us.

With this in mind, how you look at culture matters a lot. Do you think of culture as a constraint? If so, then when in Rome you do as the Romans do - but that leaves the world unchanged. Instead, do you think of culture as emerging from our own attempts to change the world? In that case, national culture is a catalyst, turning the world in directions that our parents could not have imagined.


An interesting body of work on national culture is by Professor Michael Morris.

Wednesday, October 31, 2018

The Secret

When you don’t know how to do something, you suspect that those who do know how share a special secret. If someone would just whisper to you the special secret, then you could do it too: whistle a tune, or maybe ride a bike. Of course, there is no special secret – no single piece of information that makes all the difference. Instead, you learn most interesting things by doing. You engage the challenge in your own way, fail a lot, and possibly make it work for you. You learn.

The philosopher Alfred North Whitehead long ago made the point that valuable learning comes not from being told a fact. Recited facts are “inert” ideas disconnected from the fullness of our understanding. Valuable learning, says Whitehead, means discovering “living” knowledge: ideas “utilised, tested, or thrown into fresh combinations.” Yet we persist in believing the myth of the special secret.

I run into the myth of the special secret often because I am a teacher and parent. Children and executives often come to me in their search for one or another special secret, wanting to skip a rope, design a product, write an essay, throw a ball, run a company, or what have you. I remember when my son Willie wanted to be able to ride a bike. I removed his “training wheels” and there he was standing out in the street, superhero flames on his helmet, two-wheeled bike in hand, waiting for me to tell him the special secret that all bike riders know.

About now, what if we dropped a business school professor into this situation? What would he say? “Willie should not be doing this. Bike riding is not his ‘core competence.’ Willie should outsource bike riding to Bobby down the road, for whom bike-riding is a core competence. They can form a partnership.”

Fortunately for Willie, his patient mother stepped in. Every day for a week she ran next to him up and down the street, catching him as he fell, so he could learn. The process of discovering living knowledge is not easy, but it pays off. Now Willie knows how to ride. And he knows the secret: that there is no secret.

The same problem comes up in business all the time. How often have you been in a meeting when someone at the table proclaims “That is not our core competence!” All go quiet, the core competence trump card having been played. We are taught that companies should only do what they already know how to do.

So where do organizational capabilities come from?

Wrong answer: Organizational capabilities come from researching “best business practice.” I often have executives come to Stanford thinking they will write down inert ideas told to them by professors. There can be some value in this exercise, but frankly you could parrot inert ideas more efficiently using information technology. Besides, everybody else can easily find out these inert ideas too. A list of best practices will not make you a great company, any more than finding a recipe will make you a great cook.

Right answer: Design your organization so that it develops new capabilities. We know that some companies learn much better than others. Make it your job, as a leader, to help your organization be better at learning. Structure your organization so that your people must engage with important, unsolved problems. Establish routines that allow for failure and reward those who try to discover – regardless of the ultimate outcome. Build a culture that values discovering over knowing, becoming over being. Lead by design, and don’t forget the secret: There is no secret.


For more on the “process philosophy” of Alfred North Whitehead, read his essay Aims of Education. 

Sunday, September 30, 2018

Oblivious Leadership

The old priest prepared his sermon all week for family mass. He would target the children, draw out of them some gems and that way make his point to the adults. The message would be thankfulness, since Christmas was approaching and the Advent gospel was on appreciating God’s gifts.

Sunday. The sermon started as planned: Up came the children, sitting around the old priest in the timeless pose of prophet and disciples. The priest was direct, “What are you thankful for?”

Without hesitation, a blonde boy in the back of the group shot up a hand. The priest encouraged: “Yes, young man; what are you thankful for?”

“Life!” came the reply.

The old priest’s delight could hardly be contained, as he looked up and proclaimed to the adults, “People, did you hear that!? The boy is thankful for life!”

Seeing the misunderstanding, the boy piped up “Life is a game!” for he had been given the board game “Life” as a gift, and for that he was thankful.

The face of the old priest transformed into shock. He beseeched: “No, child, life is NOT a game!”

The perplexed child could not decode the sudden turn in the priest. Dismayed, he responded matter-of-factly, “Life is a game.”  

Tell-tale gasps and barely-suppressed laughs from the congregation spoke not of humor but of surprise, yet to the old priest the tittering sounds told a cynical story. He scanned the adults, now doubly shocked by their complicity in the child’s warped view. Down went all heads, striking a praying pose, but the shaking shoulders suggested otherwise.

Derailed, the sermon meandered through the priest’s messages on thankfulness, gratefully without any more audience participation. Calm returned. All sat in silence, sharing the quiet shame of having played a part in the derailment – made worse by the fact that only the old priest himself was oblivious.

Lest I be throwing the first stone, I admit that the story of the old priest is my story too, and yours. All of us suffer at times from not understanding the other’s understanding. Research shows that humans have a lot of trouble bridging this gap in understanding: We naturally tend to assume that others see what we see the way we see it. So if you think that this is not a problem for you, your self-assurance, itself, is a symptom of the problem.

The problem of understanding the other’s understanding is even worse for leaders. Our life experiences shape our points of view. For most leaders, their life experiences are very different from those they lead. So it is that leaders and followers rarely see things from the same vantage point. Yet leaders are expected to persuade their followers – despite the fact that they do not understand their followers' understanding.

No wonder that a vast industry tries to help leaders communicate. These efforts have mixed results, since communication failures often are just a symptom of the deeper understanding problem. It won’t help if I improve my communication techniques, but remain clueless about how my followers see things. This fact explains many a notorious gaff: The politician who knows not the price of bread; the executive flying a private jet to ask for government support; the CEO’s video explanation of layoffs, filmed in his paneled office. Such miscues result from not understanding the other's understanding.

So what should you do to bridge the understanding gap? Step one is to get beyond the suggestion to "be empathetic" that one often reads about. Remember, the problem is that you don't have a clue. You cannot empathize with someone whose life is a complete mystery to you. Some say you can bridge the gap by "walking around" at work - except that everybody knows you're the boss.

If you are serious about bridging the understanding gap, you could take a page from the tradition of academic ethnographers: Put yourself (literally) in the other’s shoes. What is it really like to be them? Try actually working in your organization – obey their rules, try to get along with others who don't know you're a boss, and work within the guidelines and systems that you have set for your people. This approach will not be easy, but you may end up coming to the most important understanding: that life is not a game.


Many academic literatures address this issue in different ways. One of my favorite approaches is the work of Professor Thomas Gilovich. Examples of using ethnography in the workplace can be found in the work of Professor John Van Maanen

Friday, August 31, 2018

Why You Don't Understand "Disruption"

Going to the upcoming "Disrupt" conference? The Broadway of innovation theater will be in full feather, as self-proclaimed "disruptors" gather to reach consensus about what are the non-consensus ideas out there. 

Big wigs having a conference on disruption is like the Czar creating a bureau on revolutionary thinking. Really want to see disruption? Don't go to a conference. Go to where people are breaking the rules.

If you just smiled, then you are probably from a small startup (or wish you were), and you know that disruptions come from startups who break the rules of the game.

For example, consider this idea from a small team of rule breakers: Provide a way to instantly share digital photographs with others anywhere on earth - but only with those who you want to see the photo.

You are thinking Instagram, the tiny company acquired in 2012 by Facebook for $1 billion.

Wrong.

I'm describing a project launched in 1996 - that's right, 1996 - by a group at Kodak's Brazil headquarters in Sao Paulo. (Yes, Kodak - everybody's favorite example of a company that failed by being too slow to innovate.) Kodak's country head for Brazil, Jarbas Mendes, and his team were trying to find innovative ways to help customers share their digital photographs. The team understood that the internet - brand new at the time - could enable such sharing. So they designed a system where one could upload photographs to a server in the cloud (though nobody yet used the term "cloud"), and send a code to another person who could then view the photographs. "The technological possibility of having an online way to view pictures was the idea. There was a lot of work by the team on this approach to sharing." recalls Joao Ciaco, who was in a marketing role on the team at the time.

What we now call Instagram was invented by Kodak in 1996 - 16 years before Instagram would be acquired for a billion.

How can this be? After all, we often hear that big, established firms are slow to innovate, and so they get disrupted by new technologies. As the story goes, success at a well-honed strategy leaves companies blind to the value of new technologies until it is too late. If this is how you understand disruption, you believe in the slow-incumbent myth.

It turns out, Kodak is not a strange exception. Often big, established firms do a great job of rapidly adopting new technologies. With success, leaders are often more willing to innovate – even when such innovations are out-of-step with their traditional organizations. And therein lies the problem: “success bias”. We misread our success at one game, and so readily launch into another – whether our organization is suited for that business or not.

Looking again at Kodak, it was the first mover in digital cameras, and it held an early lead in that market. Kodak even made the digital cameras sold by other firms trying to be in that market. The problem was not Kodak’s ability to innovate. At work was the poor fit of its organization to the logic of the digital business. If anything, Kodak was too willing to innovate given its organization.

Same with the minicomputer firms like DEC. They are often criticized for resisting a disruption. We know that the personal computer cut the legs off of the market for minicomputers (powerful mid-range computers and servers) starting in the 1980s. At that time, the cutting edge of the computer industry – the real “hackers” – were the minicomputer manufacturers like Data General and DEC that flourished from the 1960s through the 1980s. They were scrappy, imaginative rebels compared to the monoliths of the mainframe computer business. The secret to their success was imaginative design, since they relied on the architecture of the entire system for performance. And, as Tracy Kidder romanticized in his book Soul of a New Machine, they were passionate about getting products out into the market. That book documented the tale of the cult-like Data General, and its creation of the Eclipse MV/8000 minicomputer that launched in 1980.

Technology writers, decades later, would describe these innovative firms as unable to change.  The slow-incumbent myth: These successful, established firms did not see the microcomputer coming, since they were wed to the technologies and designs of the old market that they knew well.

Not true.

The real story is that the most successful minicomputer companies made the transition to the personal computer very quickly – but once there they were ill-suited organizationally. Success bias was at work yet again. For instance, Data General released its first microcomputer in 1981 – the same year as IBM. And DEC – another legendary champion of the minicomputer era – entered with the “Rainbow” in 1982. These fast-moving firms had no problem innovating. They could and did. Their problem was that everything else about their organizations was well tuned to their traditional market. They innovated in the PC market very quickly, and then they failed there at a very high rate.

We want to believe in the slow-incumbent myth, so we dismiss the early moves by incumbents as half-hearted. But look again at the evidence. Successful incumbents are often very innovative – too innovative for their own good. What is going on in these cases is success bias. When business leaders win, they infer from victory an exaggerated sense of their own ability to win.  So they are overly eager to enter into new competitions – even ones where they are not well suited to play. Their very success in the earlier business is evidence that they are well-honed to an earlier strategy - yet it is that earlier success that makes them especially willing to move into the new competition.

The lesson for leaders? Disruption is not just about technology changing; it is about changing the logic of a business. Success with a new technology requires organizing for a new logic, and organizing in new ways requires that you forget the successes of your past.


The theory behind success bias among managers is in this paper by Jerker Denrell, and evidence linking success bias with failure is in my paper with Elizabeth Pontikes.

Tuesday, July 31, 2018

How to Recognize an Authentic Entrepreneur

I still remember when Steve Jobs was featured in business school case studies as an example of bad leadership style. At the time, Apple was a less-than-successful computer company, and Steve – ever the loner - had moved on to create another less-than-successful one (Next). When things go poorly for a nonconformist, how easy it is to call them the fool. But on those rare occasions when the loner gets it right, he does so in a big way. As Andy Rachleff likes to say, nothing pays off so well as a nonconsensus strategy that wins.

But where do we find these nonconsensus entrepreneurs? Many people come to the Silicon Valley in search of them. But here’s the problem: The way to conform in the Silicon Valley is to act like an entrepreneur. Often I have been told by spectacularly intelligent Stanford students, sheepishly, that they have accepted a well-paying job at a big established company. That such great news is delivered with embarrassment says something about the culture of the Silicon Valley: The way to conform is by acting the entrepreneur. So here is the rub. In places where entrepreneurship is all the rage, you can’t tell the authentic entrepreneurs from the posers.

So to find a nonconsensus entrepreneur, we should look to places, markets, and times where entrepreneurship is unpopular. Naturally that brings to mind Tokyo. Your company’s status matters a lot in most countries, but this is especially so in Japan. So it was shocking when the “Purinto Kurabu” – Print Club in English – appeared all over Tokyo back in the 1990s.

Japanese teens lined up for blocks to get into one of these booths for a picture with their friends, which would then come out on a sticker. Ultimately, this little device proliferated worldwide, and made a lot of money along the way. But unlike most Japanese innovations, it did not come from a big established firm. Instead, it came from a start-up company, “Atlus,” formed when Naoya Harano struck out on his own. His little company was creating some of the earliest fantasy-based video games, such as “Megami Tensei” (“Transformation of the Goddess” in English) - and had a cult following in Japan. But these games did not pay the bills. Harano, desperate and intelligent (a great combination), made money any way he could – distributing billiard tables to gaming rooms, setting up karaoke machines in empty container vehicles around Tokyo, and the like. The consummate loner, Harano would likely have stayed off our radar screen, except that one day his unpredictable behavior led to a fantastically successful product. In fact, the idea for the product itself came from a female secretary at his small company. At one of the huge, established Japanese conglomerates, a new idea from a low-status female worker would have no chance. But in the hands of a nonconsensus entrepreneur, the idea saw the light of day.

More generally, it turns out that at times or in places where entrepreneurship is least likely, those few entrepreneurs who do appear may win big. So to find the nonconsensus entrepreneurs, look to where entrepreneurship is least likely. Examples abound once you look for them. In the UAE, you might be surprised to see twofour54, an entrepreneurial media hub in Abu Dhabi run by Ms. Noura Al Kaabi. Coming out of Peru, you’ll see Kola Real, formed during a coup d’├ętat in 1988 – not exactly an ideal environment for business incubation. Or, in Kamchatka, you’ll see ecotourism ventures by Wild Salmon River Expeditions – initiated by an alliance between a former American military officer and his Russian associates. Name your own unusual circumstance. Where entrepreneurship is least expected, only the authentic entrepreneurs show up.


For academic research on this idea, check out my paper with Professor Elizabeth Pontikes on the nonconsensus entrepreneur.

Saturday, June 30, 2018

When the Means Become the Ends

The Linda Vista central office still had a Western Electric person. I was working the frame, which meant I worked for "the phone company" and had to ask the Western person should I need a volt meter. He brought me the meter and stood by while I tested the circuit. It was dead; too dead. There is always a slight bit of a background reading even on a line with no signal. Zero movement meant the volt meter was broken.

So I asked, "Is this meter working?"

"No" came his matter-of-fact reply.

"Why didn't you send it to be repaired," I asked.

"Because then we would not have a volt meter." Apparently, the rules required that we always have a volt meter. And the rules - the means by which we try to accomplish our ends - had become the ends.

OK, that was a while ago. Since then, many things have changed. We broke up the phone company and renamed Western Electric. I got fired. The iron curtain fell. We deregulated the telephone industry. My beard went grey. We invented smart phones. Yes, a lot has changed. But one thing remains the same: People allow the means to become the ends.

The iconic study of such "goal displacement" was by the political sociologist Robert Michels, whose 1911 book Political Parties documented the German Social Democratic Party's use of non-democratic means to pursue democratic ends. From this example he coined the term "iron law of oligarchy."

A century later goal displacement is still going strong. You see it every day all around you: I know an enterprise software company that developed a product a customer really wanted, but refused to sell it because it had not gone through the right approval procedure. In another case, one company's "key performance indicators" encouraged employees to push a service that harmed the company's performance. In such cases, the means have become the ends.

There is a simple solution to the problem, albeit one that is hard to put into practice: Make sure everyone knows the real "ends". That's why you have strategy; so people will know why they are working to begin with. If you're at a university, make sure the housing policies get you the right students - not the students who fit the housing policies. If you're a software company, make sure your development procedures create the best products - not just the products that conform to policy. If you're in accounting, make sure your procedures encourage employees to work toward your company's real goals.

And when you see the means displacing the ends, fix the problem. If the means have become the ends, what does that say about your leadership?


Robert Michels' book is still worth reading.

Friday, June 15, 2018

How to Create Self-Silenced Fools

Do you try hard to look like the smartest person in the room? Do you fantasize of that moment when you fire off the perfect “gotcha” remark, disarming the speaker and coming off as really smart? Nods around the room; a raised eyebrow; a sideways glance. “Who is that guy?”  

If this describes you, you're not alone; we all want to be seen as smart.

But if zinger questioning describes life in your organization, you have a leadership problem.

To see why, first note that there are two kinds of questions, those meant to show off and those meant to learn. Questioning to show off involves hurling zingers at one another, as each of us acts out what we already know. Questioning to learn requires that we admit our ignorance, and often involves asking basic questions – the ones that appear almost too basic. Such questions do not make the questioner appear smart, but they help us all to learn.

In organizations where questions are meant to show off, it is not safe to ask questions in order to learn. After all, by trying to learn, you reveal your lack of knowledge and admit to not being the smartest person in the room. As the zingers fly, who would risk raising a hand to admit ignorance? Instead we clam up and pretend. Like the illiterate who fakes it undetected through school, we expend more effort trying to conceal our ignorance than we do trying to learn. We become a self-silenced fool.

I have seen this problem in many companies, but I have seen it at universities too. I recall presenting a research paper here at Stanford at an interdisciplinary seminar – a context where many attendees don’t know each other. Back in the corner a hand went up, an old guy with a pretty simple question. Several more times over the hour he again asked basic questions, but in doing so he was helping everyone understand my research. He was questioning to learn, not to show off. After his fourth question, I said, “Sir, may I ask, who are you?” He replied, “Ken Arrow.” As people around room craned their necks to get a look at the Nobel Laureate, I continued to answer his questions. After the seminar, a junior professor introduced himself and noted that he had thought of one of Professor Arrow's questions. I said "Why did you not ask it?" He replied, “It seemed so basic, almost silly.” Worried about revealing ignorance, this smart young scholar remained silent.

The young professor is not alone; we all want to look smart. Often we claim to know how smart other people are based on their comments or questions in group settings. I have lectured for decades, and I can tell you that appearing smart and being smart are two different things. Some people are very clever at the well-timed zinger, while they remain silent when a basic question should be asked. Others, thankfully, are willing to ask the basic question – much to the relief of everybody else in the room who was too afraid to ask it.

We would all be a lot smarter if we followed these two rules:

Rule 1: Admit ignorance.

Too often, you’ll hear sayings (often attributed to Lincoln or Twain) that draw on the Biblical verse Proverbs (17:28), “Even a fool, if he keeps silent, is considered wise; if he closes his lips, intelligent.”  Normally, people use this quote to keep others silent. But if you read on, it turns out that the meaning of this verse is just the opposite: Proverbs (18:1) explains, “The fool takes no delight in understanding.” Not only does the fool stay silent, but he prefers to do so even though his silence keeps him ignorant. By looking the fool and speaking our question, we gain in knowledge precisely because we reveal our ignorance.

Rule 2: Permit ignorance.

As a leader, have you made it safe for your people to reveal ignorance? Ignorance is taboo when you treat “zingers” as evidence of intelligence. Ignorance is taboo when promotions and rewards go to those who are good at self-presentation – the “smartest person in the room.” Instead, you should create an environment where it is safe to admit ignorance. Perhaps you have not even thought about this distinction. But if your organization is filled with self-silenced fools, what does this say about your leadership?


The classic study of self-presentation is by Erving Goffman.