Tuesday, April 15, 2014

Strategy Neglect

"I may be wrong, but at least I am not confused."

Jeff Miller, former CEO of Documentum, repeats this point whenever he has a chance. He strikes a chord. A leader, above all, must point the way. Better to be pointed the wrong way than to be left aimless. After all, going the wrong way, your error will eventually become evident. Aimlessness is probably wrong too, but is harder to correct. If leadership is anything, it is about pointing the way.

But pointing the way is difficult. Organizations face conflicting demands: marketing reports on a new competitor with a dramatically different product; R&D has created a breakthrough technology, but it is behind schedule and needs more funding; legal compliance is at odds with the company's China country head, whose "entrepreneurial" actions are ramping up sales there. Leadership can seem so simple when portrayed as pointing to the top of a hill. In practice, leadership is about deciding amid sharply conflicting priorities. For that you need a strategy.

"Bill says you need a strategy." Obvious. But you would be surprised at how many companies I see that do not have direction. The problem? Let's call it strategy neglect. Meaningful strategy gives direction; you know you suffer from strategy neglect when people in your organization don't know how to resolve conflicting priorities. I'm not talking grand mission statements about changing the world, nor lengthy strategic plans packed with detail. I'm talking about a working definition of the company's goal, what it does, and how it does it - a logic that a rank-and-file employee can put into action. Maybe I finish my project a day late because our strategy depends on completing work to perfection. Or maybe I cut some corners to be on time because we're about time-to-market. Whatever the strategy, it needs to be alive in the day-to-day actions of employees. Otherwise, as in so many companies, we are left confused.

Worse yet, leaders often think they are providing direction even when they are not. Instead, they provide formal structure. Social scientists have documented that when faced with confusion, people will often turn to "formal" or "procedural" rationality - making sure we do things in a structured, appropriate way. This often means putting an organizational structure in place. We've been doing this for millennia. Historian Josh Ober documents a formal structure created under Cleisthenes in ancient Greece (see figure) - rationalizing the various tribes of Anthens into an elaborate hierarchical structure.

Of course, modern business leaders do this routinely. Confused? Let's have some structure. Here is the rub. Structure alone does not clear up confusion. Structure makes plain the contradictions we face. You still need strategy to help you resolve those contradictions. When we put in place structure without strategy, we can end up increasing confusion.

Take this example, kept anonymous to protect my sources. A global technology firm recently acquired another, smaller technology firm here in silicon valley. The parent company is based on another continent and has operations worldwide, often tailored to particular countries; they have complicated products, and they offer valuable services. They pay smart consultants who help them with their (voluminous) strategic plans. They have a very clear organizational structure. Yet their people are confused.

Why? Ask them and they will tell you that they operate in a 3-dimensional matrix structure. Each middle manager reports equally to a country head, a product head, and a service head - in a business where these three imperatives rarely line up. The result? Making it into management in this firm means being stuck between 3 bosses who can't agree. Like a child caught up in a polygamous divorce, make any one boss happy and you have a serious problem with the other two. I asked one particularly talented manager what he was going to do. The reply: "I'm counting the days for my options to vest."

Should we blame the matrix? Not so fast. Remember, this firm faces imperatives from location and product and services. Somehow decisions have to consider all three. That's why they created their matrix. But the structure is only half the solution. Leadership still needs to point the way, to give middle managers a guide to resolve the contradictions revealed by the matrix.

The problem here is not the matrix structure, it is the lack of strategic direction. Having three bosses confronts you with many choices, but it does not give you direction. Right, left, or middle? To make that choice well, you need a strategy: Not just a planning document on the shelf, but a strategy that lives in the priorities you rank every day.

Don't blame the structure. Set a course to follow. You may be wrong, but at least you will not be confused.


A good overview of strategy as a guide to action, and misuses of strategy, is by Richard Rumelt.

Monday, March 31, 2014

The Nonconsensus Strategy

Have you ever found yourself boasting about a time when you persevered against all odds, even when others said you were wrong? Of course, we all have. There is something irresistible about the rugged individualist, going it alone against the consensus. Teary-eyed renderings of "my way" sung in high-end bars, chants against the dominant paradigm heard at occupy Harvard, the wealthy alumnus of an elite business school claiming to be a self-made man. For most of us, attempts to make this claim are the stuff of comedy; yet they are evidence that we would love to be the lone innovator courageously bucking the trend.

And no wonder, because history has been written by such people.

Consider the story of Qualcomm. Years ago when Irwin Jacobs was just getting Qualcomm off the ground, the world was pretty skeptical about his attempt to turn CDMA technology into a working wireless standard. The technology was complicated, yet Jacobs’ team claimed to have made it work. Doubts about this claim mounted, even among experts; some esteemed faculty at Stanford University concluded that Jacobs’ work “violated the laws of physics.” If you ever feel surrounded by doubters, imagine how that must have felt for Irwin Jacobs and his fledgling firm.

Today we know that Qualcomm was successful in bringing CDMA technology into the market, and Jacobs is often described as a genius. This success is all the greater because of those early doubts. With so much controversy surrounding CDMA, most of the good early research was done by Irwin and his team. The benefit from being right, in a sea of doubters, is that you end up with most of the intellectual property. So it has been for Qualcomm. To this day they enjoy a handsome stream of payments: The reward for being right about a non-consensus strategy.

As the renown venture capitalist Andy Rachleff likes to say, the sweet spot for an innovator is to be right about a new opportunity before the rest of the world has reached a consensus. After all, if you are right and everyone else agrees, then you are unlikely to see much of an upside. This fact is at work when we say that we would happily go it alone. We know we have an edge when we’re right and others are in doubt.

But what if you are wrong?

If you are wrong, would you rather be consensus or non-consensus?  No doubt: If I am wrong, I just don’t want to be alone. Because if we are all wrong, who can blame me? Whereas if I’m wrong and alone, now I am a fool.  Everyone said I was wrong, but I stayed with my idea anyway, and sure enough I am wrong. What a fool! Like Don Quixote, I did it my way.


In many organizations, the fear of being a fool is stronger than the hope of being a genius. We are human, after all, and vulnerable. We know that pursuing a non-consensus idea puts us at risk of being seen as a fool. So it is that people so often stay with the consensus, remaining silent about their ideas that buck the trend. After all, as long as we remain with the consensus, failure is tolerable; it is failure as the lone fool that we fear.

Is your organization a safe place to be non-consensus? Do those who work for you feel safe when they innovate, even if they are alone? You should frankly ask yourself these questions. Great leaders make it safe for others to innovate. And history then is written about those who were correct about new opportunities, even though there was no consensus.


The academic work behind these ideas can be traced to James March’s paper on exploration and exploitation. Research showing the returns to the nonconsensus strategy appears in my paper with Elizabeth Pontikes.

Saturday, March 15, 2014

The Price of Genius

You have to admire Singapore. The world's most efficient city-state has planned itself into modernity. Whenever I'm stuck in a confusing airport, I wish they would outsource their operations to Singapore. But Singapore has also shown us the limits of planning. In the 1990s, I was in the mall attached to Singapore's Westin hotel when I saw a clean-looking street musician playing a Peter, Paul, and Mary song about "Puff the Magic Dragon." That night I saw a similar musician strumming away on another milktoast tune in the lobby of the Singapore Shangri-La hotel. No way this happened by chance. Sure enough, a colleague later explained to me that the musicians were part of a government campaign to increase creativity.

You just smirked at the idea of planned spontaneity. But having spent a lot of time in Berkeley, I can understand Singapore's dilemma. On average, street musicians sound bad, smell bad, and generally are worth avoiding. So I can see why Singapore would want to manage their street musicians; let's have some of this spontaneous creativity, but without the riff-raff.

Here is the problem: Creativity is not about eliminating error. Creativity's payoff is the occasional burst of genius - and you don't get that by eliminating error. To the contrary, once you start telling the musicians how to look, sound, and act, you'll never get the next Bob Dylan. Systems that sometimes give us the rare genius also give us a lot of foolishness along the way.

Creative systems should be judged, but not by their "average output." Instead, you should judge creative systems by their variance - their ability to produce extreme outcomes whether good or bad. As Professor James March explains, high-variance systems are the most creative. They produce lots of foolishness and, every now and then, a moment of brilliance. If you plan away the foolishness you might improve the "average" result. But planning away foolishness will also reduce variance - which means you eliminate any chance of genius. 

In short, foolishness is the price of genius.

You probably accept this idea when it comes to artistic creativity. But what about in business? Well-meaning business leaders plan away variance all the time. Sometimes that makes sense, of course. I don't want a lot of creative experimentation when we're operating an airport. But when leaders want innovation, they typically put systems in place that reduce variance and raise the average. They ask for "intelligent" innovation, for creativity without foolishness. Don't look to leaders like this for the next breakthrough innovation. They are unwilling to pay the price of genius.


Friday, February 28, 2014

The Performance Paradox

Kim Dong-Joo ripped a double, and I was stunned. It took me a while to figure out why I was so impressed by his hit. After all, I am a fan of American baseball – a season ticket holder of the San Francisco Giants. I see great players routinely, and frankly some of the players there in Seoul would not have made the big leagues in the US. Yet I was transfixed by Kim Dong-Joo’s performance. Why?

At first I thought it was the strange and wonderful surroundings. When Kim Dong-Joo cranked his hit, only half the crowd reacted. Orchestrated by the dancing cheerleaders on top of the dugout, the Doosan Bears’ fans chanted their praise in unison. Politely, the fans of the “visiting” team sat quietly on the other half of the stadium, waiting for their turn to cheer. (How odd, you might say, but most professional baseball games in Korea are played in Seoul, so “home” vs “away” depends on date rather than location. So the fans have resorted to the Korean solution, splitting the stadium down the middle.) Or perhaps my judgment was impaired by the endless stream of beer provided by K-pop style vendors refilling my cup from kegs on their backs?


But it was not the surroundings. I was impressed by Kim Dong-Joo because of his quality, period. At work was the performance paradox: The more performance matters, the less it seems to matter.

Let me explain.

Watching a ballgame in Korea, I saw a mix of players, some very good and some who were just OK, including a few unknown Americans. I saw some acceptable fielding. And I saw some decent pitching, but nothing to compare with the aces I see every game in America. So the contrast was vivid when Kim Dong-Joo came to bat. He stood out, there in Seoul, precisely because the variability of performance there was so high – good and not-so-good players were on the field at the same time. 

By comparison, American baseball has the luxury of attracting the very best players from all over the world (including some of the best of the Korean greats). A so-so player does not make the American Big Leagues, and if he does it will not take long to correct the mistake. Consequently, in the US, you don’t see much of a contrast in performance. Greatness is less apparent there precisely because it is so important to getting in. To get a big contrast effect, go to Seoul. Then you’ll understand how great Kim Dong-Joo really is.

The performance paradox operates in business all the time, and it makes it hard for us to understand why some companies are more competitive than others. You don’t find it remarkable that the jet you fly this weekend stays in the air. Performance on safety is so important to an airplane manufacturer that you won’t see any variability on that dimension. Similarly, low-yield semiconductor manufacturing is nearly impossible to find. Competition has driven all the low-yield fabs out of that industry. Precisely because efficiency is so important in semiconductors, we don’t see any noticeable efficiency differences in that industry. Want a great tomato? Go to the farmers’ market in Zagreb, but don’t expect the locals to realize how good their produce is. Quality is so important to them that not a bad tomato can be found – so quality is therefore less noticeable.

The lesson for business leaders: To understand performance differences in your business, don’t sample on the surviving products and firms. Pay attention to failures and why they fail. In comparing those who did not measure up to the greats that survive, you’ll come to recognize the reason for greatness - and you'll overcome the performance paradox.


In academic work, Professor Marshall Meyer came up with this idea. Since then, the best work on performance-based sampling is by Professor Jerker Denrell.


Sunday, February 16, 2014

The Whole Product

With Brazil’s economic success, we see millions of Brazilians entering the lower middle class.  Brazilian families looking to buy their first refrigerator, or other modern convenience, probably do not go to the retailers that are so well known globally.  Rather, they probably go down to the nearest Magazine Luiza, the growing Brazilian retailer headed up by Chairwoman Luiza Helena Trajano.  Of course, this company knows its logistics, and understands distributions channels in Brazil.  But what makes this company special is that it understands the “whole product” – although probably nobody in their organization uses this phrase.

To see what I mean by whole product, consider what it is like for a family now able to afford their first refrigerator.  A job is bringing in some income, but the family cannot afford a large cash payment.  Neither do they have credit.  But when they go to the local Magazine Luiza store, they are approached by a worker who talks to them about their needs.  The conversation is friendly, and the store is abuzz with neighbors and friends.  If things work out, Magazine Luiza will extend them credit, and the purchase may even take place using the internet – but on a terminal right there in the store.

The “product” sold in this case is not just a refrigerator, but the credit to make the sale, access to the technology needed to identify the right refrigerator, and even the physical location of the store and the atmosphere that makes the experience comfortable to the novice customer.  Had you tried doing market research in advance of this purchase, the customer would not have known what they needed to make all this work out.  But in action, all these elements combined so that the purchase could take place.  Taken together, these elements are the whole product.


Sometimes a product can be too focused.  You need to identify the whole product – the full set of features (including services) that are required to delight the customer.  The tough part is that those features are typically discovered through experience.  (See my blog on the discovery process.)  For instance, over time Cemex became a force in the global Cement business by acquiring and making efficient many of the world’s inefficient cement operations.  But Cemex’s value to the customer was due as well to their ability to deliver cement to the right place at the right time, which required excellent logistics, and other service benefits that made them a good partner in the construction business.  That full set of features – the whole product of efficiently manufactured cement, logistics, and service – was discovered by Cemex in the early years of its global expansion.  Similarly, in the disk drive market, firms like Seagate evolved the product we now know as the disk drive.  They brought together a set of individually-important components such as substrates, heads, motors, software, ASICs, and other such parts.  While each of these components is important, much greater value is experienced by Seagate’s customer from being delivered a complete disk drive than would be the case if it were to buy only some of the disk drive’s components.

Is your product the “whole product”?  This is a tough question, because in trying to build out a whole product you may be losing focus.  (See my blog on the problem of the integrated product.)  Some firms add features in order to please different kinds of customers, and end up being just so-so for each customer.  In other cases, companies bring many different benefits to the same customer – the troubled one-man-band of the integrated product.  The whole product delights your customer by satisfying completely a single need.


For more on this idea, read Regis McKenna's original book published back in the 1980s. 

Friday, January 31, 2014

The Acquisition Trap

Shortly after coming to Stanford I realized my mistake. I should have hired an actor to go to work for me. 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 General Electric, or EON, or Cisco, or Cemex, or Newell-Rubbermaid, 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. Cemex had a long run of successful acquisitions in the worldwide Cement business, as did Newell in branded consumer products. But these wins 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 an academic study that models the long-term variance consequences of mergers and acquisitions, see my paper with Robin Luo.

Wednesday, January 15, 2014

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; and this is no fad – check out the persistent interest in “excellence” among Google searches of book titles over time. 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 trumps 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 the work of Olav Sorenson.

Tuesday, December 31, 2013

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. 

Monday, December 16, 2013

Where Are The Authentic Entrepreneurs?

It is common knowledge that “nonconformist” thinking has the best potential for genius.  Those who follow the herd may or may not be right, but for sure they are predictable. The loners, those willing to go against the consensus, are anything but predictable.  They may well be wrong, in which case they look the fool.  But when the loners are right, we think of them – later, with hindsight – as geniuses.  No wonder we resonate to Robert Frost: "I took the one less traveled by, and that has made all the difference."


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.  Nothing pays off so well as a nonconformist strategy that wins. (See my blog on this.)

So where do we find these nonconformist 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 loners from the posers.

So to find a nonconformist entrepreneur, we should look to places 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 nonconformist 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 are most likely to win big.  So to find the nonconformist 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:


Saturday, November 30, 2013

Understanding the Other's Understanding

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

Tuesday, November 19, 2013

Competition Teaches

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.” 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 keep 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?


For more on these ideas, read:

Monday, October 28, 2013

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 Professor Arrow's questions. I said "Why did you not ask them?" He replied, “They 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.