Saturday, October 15, 2016

Differing Without Dividing

Variety is great for innovation. For instance, consider the case of Seymour Cray, the “father of the supercomputer.” In the 1970s, Cray left Control Data to start Cray Research, a company devoted to creating the world’s fastest computer. Cray approached the problem with a revolutionary architecture, so called “vector processing.” By 1976 he and his team introduced the Cray 1, and Cray Research was seen as the Mecca of high-speed computing. John Rollwagen became company President in 1977, bringing business leadership alongside Cray’s technological prowess.

In 1979, Rollwagen brought in another technology genius, Steve Chen, to lead the design of a completely different approach to supercomputing. So as Seymour Cray’s team worked on the Cray 2, Chen’s team worked on the Cray X-MP. Chen’s design built on Cray’s initial innovation, but did so using a revolutionary architecture featuring multiple processors operating in parallel. Released in 1982, the X-MP set a new standard for supercomputer performance, and significantly raised the bar for the team working on the Cray 2.

When we do not know what the future holds, variety helps our organization to discover what is possible. This truth is one reason why we often hear people saying that they want to increase the diversity of their employees. Just like the biosphere, organizations evolve better if they sustain variety.

Yet examples like Cray and Chen’s are rare. One reason is that sustaining variety is expensive. How inefficient to run multiple projects that are trying to do the same thing. But another, bigger problem is that sustaining variety threatens to divide a company. People object to having others in their company working at cross purposes. How can we encourage differences without being divisive?

One way is to live by the adage “disagree and commit.” Here in Silicon Valley people attribute the saying to Intel. The idea is that you should encourage disagreement during the decision-making process, in order to improve the quality of your decisions. But once a decision is made, everybody needs to fully commit to its implementation. Unfortunately, in practice this saying often is used to silence those who see things differently. Often managers say “disagree and commit,” but they are really saying “disagree and shut up.”

I prefer “switch and commit.” The goal is still to end up committing at the end of the process, but during the decision I want the participants to switch roles. The person disagreeing with you needs to take your position and argue it well. Similarly, you must argue the other’s view well. You can think of the approach as devil’s advocacy taken seriously by both sides.

I first tried “switch and commit” when teaching a controversial topic here at Stanford. For the first assignment, the students had to state their position on the topic. For the second, big assignment, they had to write an essay taking the opposite view. (They did not hear about the second assignment until after they handed in the first.) The end results were some fantastic essays, because the authors were legitimately skeptical.

Since then, I have tried “switch and commit” when facilitating hard-hitting business meetings among top managers. The results have been mixed. Many people cannot get their head around a different perspective. But now and then you find an exceptional leader who appreciates the value of differing without dividing.

A readable review of related academic work is Scott Page’s book The Difference.

Friday, September 30, 2016

Leading Growth: Why Strategy Matters

“I have copied Facebook entirely in Spanish,” the student said to Zuckerberg. “You are operating only in English. You should be growing Facebook in other countries and languages.”

“Well,” Zuckerberg replied. “You have a cool accent. Why don’t you do it?”

And so it was that Javier Olivan would join Facebook in 2007, not long after receiving his MBA. By 2008, his team tested a user-generated content translation-mode version of Facebook, initially in France. They released the product at the end of the day, and upon returning to work the next day it appeared that there was a bug. The program’s tracking statistics indicated that tens of thousands of lines of code had been translated, and that users were already flocking to the French version of Facebook. In fact, the translation program had gone viral, and would prove successful beyond expectations. Within a month, Facebook would launch in over 40 countries. Looking back at Facebook’s growth over time, Javier’s arrival at the company coincides with a clear kink in its growth trajectory – the point when it transitioned to become a global giant.
Javier Olivan’s story is the archetypal success path for a budding leader: To join a company and spur tremendous growth. Some people even list growth claims next to each job on their resume. But what about those who try to grow and fail? In fact, research shows that many attempts to accelerate organizational growth go awry. Often these attempts fail to produce growth at all. Worse yet, some succeed in triggering growth initially, but then send the firm into a death spiral not long thereafter.

Why are some growth initiatives a great success, while others end in failure? The difference comes down to one word: Strategy.

When Does Growth Succeed?

Growth succeeds when it builds on, and reinforces, a company’s source of advantage. For instance, MercadoLibre has grown since the late 1990s to become the leading platform in Latin America for internet commerce. While it started out looking very similar to eBay in its strategy, soon it evolved to serve as an online marketplace for business-to-consumer traffic with a variety of features that have proven to be especially attractive to customers in Brazil, Argentina, Mexico, and elsewhere in Latin America. The company’s strategy was unique to its context, including its own payment system and an order-fulfillment system both designed to deal with the special circumstances found in Latin America. These features soon paid off. For instance, the company experienced a surge of growth as customers responded very positively to the “MercadoPago” payment processing system, including many customers who previously had difficulty engaging in e-commerce.

MercadoLibre’s steady, organic growth stands in stark contrast to DeRemate, an early rival. Initially, DeRemate grew much faster by acquiring other startups in an attempt to build a large user base. But lacking any clear source of advantage, DeRemate soon saw its growth rate stall. Ultimately the company would fall by the wayside as MercadoLibre steadily maintained its growth trajectory.

The difference here is more than just the pattern of success vs. failure. The difference is that MercadoLibre’s growth has been guided by a clear understanding of its source of advantage. Each move made by the company’s leadership was designed to build on and reinforce that advantage. By contrast, DeRemate pursued growth, but did so without identifying and building on a clearly defined source of advantage. The lesson: Growth without strategy cannot be sustained.

Growing a Cost Advantage

For companies pursuing a low-cost advantage in their markets, growth is especially attractive. With growth, a company’s fixed costs are covered by a larger and larger revenue base, driving down average costs. Examples of such growth abound, but Walmart is particularly instructive. That company invested in sizeable assets, including information technology to control inventory and its own fleet of trucks linking an elaborate warehouse and logistics network. As the number of Walmart stores grew, these investments were then shared by many more establishments, driving down costs. These lower costs, in turn, made Walmart more competitive, further expanding the organization in a classic virtuous circle.

If you are seeking to grow a cost advantage, pay attention to organization. Your deployment of people, organizational structures, and work routines all must reinforce the low-cost strategy. Your organizational culture, too, should also reflect a primary concern with cost minimization. In short, your strategy should guide how you organize growth.

Growing a Quality Advantage

In contrast, some firms grow by building on a high-perceived-quality competitive advantage. For instance, high-end hotel chains such as the Four Seasons or Ritz Carleton charge a much higher price than budget hotels and deliver a luxury experience, and they do so at very large scale. Attention to detail, spacious and opulent facilities, and extremely responsive service set these hotels apart. Growing such a high-quality strategy is a tricky proposition, because increasing scale does not automatically reinforce the strategy as it does in the low-cost case. If anything, increasing scale threatens to dilute quality, replacing distinctiveness with the “cookie cutter” output typical of mass production.

For this reason, growing a high-quality firm requires constant attention to replicating quality. In the luxury hotel example, leadership paces growth so that each new property maintains quality. New structures are given unique designs, or in some cases are acquisitions of classic hotels. New employees are trained first in existing, high-performance properties before being deployed into new locations. And system-wide, standard operating procedures make sure that service at every hotel is at the highest level. To scale high-quality successfully, your strategy must be your guide.

When Growth Fails

It may seem obvious that growth should build on your competitive advantage, but very often companies fail to abide by this rule. The reason is that growth often changes a company’s circumstances in ways that leadership does not understand. Worse yet, increased scale and complexity make it harder for leadership to diagnose their situation. So it helps to review a few of the common ways that companies fail as they try to grow.

Unclear Advantage

Sometimes leadership does not know whether it has a clear source of advantage, and perhaps has not even thought about the matter. Nonetheless, armed with the desire to grow they set out to scale up. When this happens, growth occurs without guidance and so a company ends up scaling without a strategy to sustain success. At DeRemate, leadership thought that growth was their strategy, and so they went on an acquisition spree without understanding why or how they would create value – an invitation to failure. The lesson: Growth is only a strategy if it is based on a clear source of advantage.

Premature growth. In some cases, a company does develop a source of advantage, but too late to shape their growth. The pioneering online retailer Webvan failed for precisely this reason. A darling of the dot-com boom, Webvan and its founder Louis Borders (of Border’s Books fame) attracted premier venture capitalists and went public at record valuations. Using this capital, they built out an elaborate delivery system and infrastructure, and immediately scaled to various regions around the United States. As they grew, each of their regions then started down the learning curve, coming to understand the economics of online grocery delivery. Finally, their first distribution center, in the San Francisco Bay Area, went cash flow positive – the very day the company filed for bankruptcy. By growing before it understood how it created value, the company ended up a failure. (Note: Many of the trucks driven by Amazon’s delivery system today are repurposed Webvan trucks!) The lesson: Before you grow, understand your source of advantage.

Rapid Growth. Oftentimes leadership in a company understands well its source of advantage, but by growing rapidly they may lose that advantage. Such was the case for the Mendocino Brewing Company. Founded in the small town of Hopland in Northern California, Mendocino was a ramshackle facility attached to a brewpub. The brewery, one of the original craft brewers of the modern era, was known for producing some distinctive beers, such as “Red Tail Ale.” But when they tried to expand operations, they did so very rapidly after an investment by a major international firm. Rapid growth meant relying on production from shiny new “turnkey” plants operated using standard industry practice. These plants turned out a beer that was much like the original Red Tail, but it had lost much of its distinctiveness. Today Red Tail sits on more retail shelves than ever, but it is very little different from the many beers around it. The lesson: Beware of rapid growth, lest you standardize and lose what made you unique.

Growing Beyond Your Market. Professors Dan Levinthal and James March coined a term worth knowing: the “competency trap.”[1] We all know about the problem of fighting today’s war with yesterday’s army. This error happens not because an organization is incompetent; rather, it is competent at the wrong things. So it goes with companies. Having succeeded, leadership is sure that they can now scale. But by scaling, they encounter different customers, new geographies, unfamiliar rivals, and various challenges for which they are not prepared. The archetypal case is the expansion of a retail business beyond its first location, as when a restaurant becomes a chain. This initial move is fraught with danger, and ends the life of many businesses as they discover that what made them succeed in one location no longer serves as a source of advantage in other locations. The lesson: know why you win in your current market – and what it will take to win as you grow.

The Two Roads to Growth

Research reveals two distinct paths to scaling up: marketing-led growth and “viral” growth.[2] Marketing-led growth comes from actions taken by your organization to influence the purchasing behavior of customers, such as advertising and merchandising. Viral growth occurs when your existing customers influence others to become customers. Most growing companies experience both forms of growth, depending on their industry. Each path has its distinct challenges, but for both the key to success remains the same: Strategy.

Marketing-led Growth

These days many Silicon Valley firms have no “VP of Marketing;” instead, they have a “VP of Growth.” And the change is more than just a name. Marketing can drive growth, illustrated nicely if you browse the internet for “growth hacks” dreamt up by clever marketeers. But take caution: Quick wins are short lived when it comes to growth marketing.

Easy-come, easy-go has long been understood in the advertising business. Research shows that brand building takes a long time and consistent messaging. Jack Welch, former CEO of GE, used to say that a good market message needs to be “relentless and boring.” By that he meant that long after you are tired of your own message, it still needs to stay on theme because shaping brand identity takes time. To see for yourself, search up some cool Super Bowl ads of the past. Now look at the companies represented. Some are household names, of course, but some will be companies you’ve never heard from since.

Drop into a “marketing strategy” meeting in many companies today and you’ll hear a lot of talk about LTV/CAC: comparing the “lifetime value of customers” to “customer acquisition costs.” Companies are focused on these measures because internet advertising allows them to make reasonably precise calculations of each. If you turn up the “spend” on acquiring customers, you’ll get growth, but are those new customers worth the price? A good deal of time is being spent these days calculating LTV/CAC in order to answer that question. Unfortunately, this question misses the point.

Good brand marketing reinforces the company’s source of competitive advantage. That, in turn, translates into high “lifetime value of customers.” Shimano means quality to the bicycle enthusiast. Walmart means low prices to their shoppers. Ritz Carlton means luxury and service to high-end travelers. Marketing strategy is about aligning your message to your source of advantage, and that gives you high LTV. The tactical question of how much to spend acquiring customers is secondary, since it takes LTV – and thus strategy – as a given. Whatever the “spend,” marketing-led growth works to your advantage when it is guided by your strategy.

Viral growth

Unless you have been lost in a cave for the past decade, you have heard about viral growth. Viral growth occurs when existing customers influence others to become new customers. The subject is an old one, based on the statistics of epidemiology, but it became all the rage in business with the rise of the App economy of iOS and Android. Whether you’re a developer or just a consumer, you know about the importance of viral growth.

Experts on viral growth in business typically focus on what has become known as “growth accounting,” by which they mean the arithmetic of viral growth. It is worth thinking through the basics of growth accounting in order to see why strategy is essential to viral growth. Here I break down the discussion into three elements: contagiousness, susceptibility, and retention.[3]

Contagiousness. A customer who is introducing many other people to your product rates high on contagiousness. Contagious customers are the dream of every business, which is why so many companies calculate the “net promoter scores” of their customers. High NPS customers are out there doing your marketing for you.

Susceptibility. A potential customer who is especially likely to become an actual customer is highly susceptible. A primary job of marketing is to identify susceptible parts of the market; hence all the attention paid to books like Geoff Moore’s Crossing the Chasm. These frameworks help you to identify which people (or companies) are more likely to become customers.

The virality you experience depends on both contagiousness and susceptibility. If you measure contagiousness by N, the number of potential customers introduced to your product by your average existing customer, and if you measure susceptibility by p, the probability that any one of those potential customers becomes an actual customer, then your “virality coefficient” v is just the product v = N×p.

Viral growth depends on the size of v. If it is greater than 1, then your company will grow explosively. But most companies have a virality coefficient well below 1. Nonetheless, since you are probably also generating new customers directly through other marketing, any virality will amplify the effectiveness of your other marketing activities.

Many leaders think that their main job is to increase v, ideally until it is greater than 1. The “growth hacks” you may read about online typically aim to do just that. Some techniques focus on increasing contagiousness; others focus on increasing susceptibility. Of course, since v is the product of these two factors, you’ll need to make sure neither is too low if you want to increase v. Yet most efforts meant to increase v miss the point entirely.

The important point is that if you increase v, you do so in a way that builds on your company’s competitive advantage. Otherwise, your “growth hack” will generate nothing more than a temporary flood of interest, followed by a downturn. For instance, you could give current users an extra incentive to spread the word, and they will become more contagious. Or, you could steeply discount your product so that more potential customers become actual customers, and they will become more susceptible. But perhaps neither of these techniques are based on your company’s competitive advantage. Consequently, you’ll get a short-run boost to size but not for the right reasons. None of your (now more numerous) users will be excited by your product, and so they will soon leave. In short, you should not force virality. Rather, you should design measures that increase virality by building on your company’s source of advantage.

Looking again at Facebook’s internationalization, the user-generated-content translation platform allowed users to tailor Facebook to subtleties of language and culture in each country, which in turn increased the company’s virality in many countries despite the fundamental differences across these contexts.

Retention. Perhaps the most neglected aspect of viral growth is the problem of retention, the rate at which customers remain engaged after they become customers. Think of your favorite flash-in-the-pan success: the short-lived cellphone game or the over-hyped software startup. Such products attract a great deal of attention and experience extremely rapid viral growth. But in no time they vanish because their customers move on.

In the virality model, the retention rate is akin to the plug in a bathtub. Fill the tub as fast as you want, but if the drain is open you’ll soon be empty. When leaders focus exclusively on increasing virality, they enjoy the short-run gains of rapid growth, but without continued engagement they fail to retain customers and soon are history.

Companies trying to increase retention do so by focusing on engagement. Specifically how you engage your customers depends on your source of advantage. So, in the end, the secret to viral growth – like all forms of growth – is for leadership to stay focused on its source of advantage. The lesson: Growth hacking may feel good in the short run, but in the long run there is no substitute for strategy.

[1] Levinthal, Daniel, A. and James G. March. 1993. “The Myopia of Learning,” Strategic Management Journal, 14: 95-112.
[2] More fundamentally, models of “diffusion” distinguish between broadcast and contact-dependent processes. See Bartholomew, 1982, Stochastic Models for Social Processes. NY: Wiley.
[3] The fundamental work distinguishing contagiousness and susceptibility in a diffusion model is found in Strang, David and Nancy Brandon Tuma, 1993. “Spatial and Temporal Heterogeneity in Diffusion,” American Journal of Sociology, 99: 614-639.

Thursday, September 15, 2016

Dynamic Platforms: How to Discover What's Next

Many of the services we use in day to day life depend on a “platform” – the organizing technology that allows applications to work. Of course your smartphone has an operating system, such as iOS or Android, which serves as the platform for your mobile apps. But many other platforms are important to the modern economy, too, although you may not realize it. The network through which you are reading this has many working parts: involving Apache servers, the Linux operating system, MySQL relational database management, and PHP as a scripting language. If all these words seem strange, forget about it. The important point is that these technologies work together as a platform, and on that platform information flows. All around you, when information technologies work well, you can bet that platforms are in the background making everything possible.

Not surprisingly, many companies would like to be in charge of a successful technology platform. Think Microsoft. Winners and losers came and went in the computer industry for decades, but Microsoft kept winning. (That is changing, of course, as the action moves to other platforms.) In this way, a technology platform is like a playing fieldA company running a platform may not care much about which team wins, just so long as the game is played on its turf. So when Zynga took off as a popular social gaming company (Farmville, etc.), Facebook – Zynga’s platform – prospered. And, as times have changed, Zynga has given way to other raging fashions. But Facebook’s shareholders are still happy, just so long as there is plenty of action played on their field. No wonder so many companies say that their goal is to become a platform.

What is the key to becoming a successful platform? I know of two answers to this question, and the answer you go with says a lot about how you see the world. One answer is seen by looking through the lens of coordination. The other comes into focus through the lens of evolution. Both of these lenses make sense of platforms, but they do so in very different ways.

First let’s look through the coordination lens. From this perspective, we see that the best platforms are well organized; they are control platforms. This view did a good job explaining the platforms of the mid-20th century. Back then, the world’s most important information technology platforms were the landline telephone networks. Those systems were organized to be fail-safe, and to permit every person on a system to communicate with any other person on the system at any time. To do this, a few very large organizations were formed to plan and coordinate each network, such as the Direction Générale des Télécommunications in France, the Bell System in the United States, and the Post Office in Great Britain. (Check out that map – from my late father’s phone company office back in the 1960s. The lines on the oceans were undersea cables linking those landline networks.) These organizations were a feat of planning and implementation; rules and procedures assured standardization. So effective were these control platforms that, for much of the 20th century, many felt that network technologies required coordination by large monopolies. Some academics even claimed that they were “natural” monopolies.

But by talking history, I don’t mean to imply that control platforms are no longer relevant. Fans of Apple and its products enjoy the benefits of seamless coordination every day. Apple detractors complain about how that company controls so much centrally. But these detractors also are likely to have problems getting music onto small devices. At work for Apple’s platform is the benefit of control. In technology platforms, all the different parts of the technology affect each other. Any change in one part runs a risk of hurting the workings of many other parts. (In fact, the number of possible problems created by changing something in a platform increase as a square of the number of parts!) For this reason, changes in a platform need to be well-controlled if you want the system to work perfectly. Of course, this could be done by groups of companies agreeing on standards and the like – as happens all the time. The point remains the same: However structured, coordination and control are needed for a platform to run smoothly.

But a very different view is seen through the evolutionary lens. With an eye for change, the evolutionary lens shows us that some platforms act as dynamic systems – allowing the creation and death of innovations through a process that looks a lot like natural selection. Systems that encourage such loosely controlled evolution are dynamic platforms. Back in 2007, when Facebook changed to a platform strategy, they started by opening up the protocols that software developers would need to develop applications. The population of Facebook applications took off, growing fantastically. Many of these applications were ridiculous, and Facebook users at the time complained at the clutter that these apps caused. But some of these apps became extremely successful. Like any evolving system, a dynamic platform does best when it encourages variation and selection. Foolishness is the price of genius in these systems.

And, for the platform company itself, the job is to make sure that innovations keep coming (and going) so that the platform keeps evolving. That requires that both the rate of birth – and the rate of death – for innovations (such as new apps) stay high. Linux, Wikipedia, and the Worldwide Web are all examples of such dynamic platforms. These platforms are not tightly controlled or well coordinated, but they grow and innovate. Compare Wikipedia to Encarta, a now defunct attempt to create a control platform for knowledge access. Wikipedia is poorly controlled, and is filled with contradictions. Encarta did not suffer these problems. But Wikipedia is a dynamic platform, and so it continues to grow and self-correct. In short, dynamic platforms harness “creative destruction”, and improve in ways that not even the designers of the platform might have expected.

In practice, all platforms blend some control with some evolutionary dynamics. Linux does not just evolve willy nilly. For the central “kernel” of Linux to be changed, a complicated approval process is involved. And, at Facebook, a steady stream of changes to its platform have increased Facebook's control so much that many developers have moved away from that platform; some even have declared it "dead" -- by which they mean "too controlled." Looking again at Apple, while the company is known for being in control, it has triggered dynamics by encouraging independent application developers to flourish. Yet while most platforms blend some control with some evolutionary dynamics, the distinction remains important: To understand why platforms win, keep an eye on dynamics. The more dynamic the platform, the more coordination problems will arise. But over time the benefits of innovation will more than make up for these errors. Dynamic platforms trump control platforms. And those who lead these systems choose not to control. The leader's job is not to know the future, but to design the platform that will discover it.

A review of the academic work on platforms can be found in this paper by Annabelle Gawer.

Wednesday, August 31, 2016

Any Old Map Will Do

Byron Farwell wrote about the Gurkhas, a people from Nepal who famously served with the British army during the 19th and 20th centuries. One account by Farwell, in his book The Gurkhas, is particularly instructive:

"Havildar Manbahadur Rai of the 1st Battalion, 7th Gurkha Regiment escaped from a Japanese prison camp and walked 600 miles in five months to return to British lines, navigating with a map he had purchased from a British soldier before his capture. (The British officers he showed it to upon his arrival were dumbfounded: it was a street map of London.)"

London? I don't have a copy of the map, but here is a typical map of central London:

Now to one who does not read English, the intricacies of the City might be imagined to be pathways, gullies, roads, hills, or any other form of terrain. So it is perhaps understandable that Rai mistakenly saw the map as a useful tool thousands of miles from London. What leaves us dumbfounded is that the map proved to be useful, despite being absolutely wrong. The lesson seems to be that, as the social psychologist Karl Weick often said, "Any old map will do."

The story Weick typically used to support his claim - a different story - was factually incorrect. It turned out that Weick's story was drawn from fiction mistaken as fact, and this error was not revealed until others did some research. Yet people love repeating the idea, regardless of its factual basis. (It was on my porch, telling Weick's unfounded story to Don Green - a well-read guy I know - that I learned of the apparently correct Gurkha story.)

In any case, people are often intrigued by the idea that any guidance - even incorrect guidance - is better than no guidance at all; at least if the lost person thinks the guidance is correct.

Among academics, we've had a lot of fun with this idea. Sociologists like to point to it as an example of what Robert K. Merton called the "self fulfilling prophecy." To social psychologists, especially Shelley Taylor and and her followers, the wrong map story would be seen as a the upside of a "positive illusion."

But the real punch from the map story is felt by business leaders.

One of the major concerns among business leaders is that they must resolutely declare their strategy, even though they know that they may be wrong. In fact, in rapidly changing industries one's strategy is almost sure to be incorrect, since circumstances will change so fast. Yet the leader must point forward and declare with certainty that they know the way. If you can do this, your people will follow with vigor - hopefully self-fulfilling vigor.

For instance, it is instructive to compare the intended strategies of Apple under Steve Jobs to what really happened during the company's spectacular rise after the year 2000:

January 2001,  iTunes: No music store; just a "jukebox" alongside iMovie and other software meant to make the Apple desktop computer more competitive vs. the PC.

October 2001, iPod: Still no music store; meant to help the iTunes/iMac strategy.

April 2003, iTunes store: Triggers success as a music company.

October 2003, iTunes for Windows: Hell freezes over. Strategic change away from reinforcing the Apple computer to being the world's music company (regardless of what computer you use).

2003-2007, explosive growth as a music company, culminating in the company dropping "Computer" from its name.

January 2007, iPhone announced: No app store; just a phone+iPod+browser as a response to music-playing cellphones.

July 2008, iPhone app store: Triggers explosion of app generation and revenue, redefines strategy again.

Reviewing these events, note that at each point in time, an event guided by a strategy triggers changes that render the strategy outdated. Leadership at Apple did not "plan and execute" a stable strategy. Rather, leadership allowed the strategy to evolve as it recognized the emerging possibilities enabled by their actions, regardless of what they had intended. As Jobs put it in an address at Stanford in 2005:

"You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well-worn path; and that will make all the difference.”

The lesson: The more that you find yourself in changing circumstances, the more that your strategy serves not to guide you down a known route, but to trigger your discovery of routes unknown.

For academic research on the discovery process, see my book on Red Queen Competition

Monday, August 15, 2016

Picking Up Broken Glass

Woody Allen's "Sleeper" was playing in downtown Berkeley. Being 1981, going to see a movie was a big deal, and my future wife and I were making it a date. Settled into our seats and several minutes into the show, the guy on my left taps on my arm: "Hey, man. What just happened?"

To my dismay, I turn to see Craig, the plaid-wearing blind tarot-card reader who circulated Telegraph Avenue in those days. "Well," I whisper, "Woody Allen wrecked his VW bug and--"

"Shhhhhh!" hiss the people behind us.

I gesture at Craig, and whisper "But he's blind!"

Another tap on the arm. Craig asks, "and then what?"

Whispering more softly this time, right in his ear: "now he's looking around at the world, which appears to be in the future - except that McDonald's still--"

"Shhhhh!" from behind. "Quiet down, man!"

Now a tap on my right arm. My date: "Bill, what's going on? Let's just watch the movie."

"But it's Craig, the blind tarot-card guy!" I explain, "He wants to know what's going on."

"Shhhhh!" Now very loud from behind. "Dude, can't you be quiet?!"

Left arm tap again. Craig: "Sorry man, but what is he doing now?"

And so the night went. The people behind me moved and I settled in real close to Craig, whispering into his ear for the next two hours. Not the snuggling I had envisioned for the evening.

I often wonder why I did not move us away to watch the movie in peace. If I'm honest, I'm sure that if I had been alone, I would have done just that. But I was there with my dream date and, although I did not consciously think it through, I'm sure I wanted to be a good guy in front of her.

More generally, this issue is studied by academics under the label "prosocial behavior," doing things for the good of others for reasons other than self-interest.

Most business leaders will tell you they would love to see more prosocial behavior among their workers. Victor Kislyi, CEO of the gaming company likes to call this "picking up broken glass," referring to someone taking the time to solve a problem even if they did not create it - and even if nobody knows they are doing it. He wants more people within his company to do just that.

So how does a leader encourage prosocial behavior in her organization? You may say that the key is "culture," the unspoken norms and values that define what behaviors are appropriate at work. But culture is most powerful when others know what we are doing. Truly prosocial behavior happens even when nobody knows, when there is no payoff to us personally.

Such actions only happen when a person wants to do them intrinsically. For prosocial behavior to happen in your organization, your people have to want your organization to be a better place. Is that the kind of organization you have created? If not, what does that say about your leadership?

Academic research on this topic is reviewed by Adam Grant and Justin Berg.

Saturday, July 30, 2016

The Problem with the "Pivot"

Hang out some time at the cafeteria of the Stanford Business School and listen for the number of times you hear the word “pivot.” The word is said too offhandedly, and with great effect – evidenced by the ripple of nods among listeners: “this person knows the way.”

In case you have been locked up for the past decade, “pivot” means to change direction as you discover your market, often following some instructive missteps. The term has become standard jargon in the startup world since the explosive success of Eric Ries’ “lean startup” approach to creating a company. Many say that the pivot is how you get to success.

The iconic example of an effective pivot is Intel’s move into microprocessors. You may be surprised to find that this company was not always a microprocessor producer. Intel made other things, like dynamic random access memory, but the accounting numbers were showing that their small microprocessor business was taking off. Since Intel’s budgets were set up to follow trends in accounting returns, the company pivoted toward this new market opportunity; explosive growth followed and soon Intel re-defined itself as a microprocessor firm. Like so many firms, Intel became great not by planning, but through a process of discovery.

Stories like this one circulate in our business schools like tales of clutch hits around a sports bar. To hear them, you would think we were all batting .500. After all, we forget the pivots gone awry. And since our collective memory selectively retains the success stories, the pivot seems like a sure bet. To aspiring business school students, how seductive to think that there is a sure road to success – if only we keep our eyes open and remember to pivot.

It turns out that if you look at all the evidence, failures and successes alike, the picture is very different. The bottom line of the research is that pivots work smoothly only when incremental change brings positive returns. Then we see gradual shifts, with each small step along the way yielding some slightly encouraging results. But only some journeys entail a smooth upward path. For many changes, especially the disruptive ones, pivoting makes things worse before they get better. Bad news in the wake of a change makes it seem that you can’t get there from here.  Hence the “J curve” often talked about by pundits searching for disruptive change.

Take, for example, Hewlett Packard’s move into digital communications systems in the 1990s. With network technologies taking off globally, the world’s big tech companies were vying to be the center of the new “platforms” for digital transmission. HP made its move in this space by transforming its old microwave division to be its digital communications business. The company assembled a team under Jim Olson, who ran the division like a startup. Informal hall-talk pushed aside scheduled meetings and formal reports, and HP’s flat, engineering culture accelerated the division’s innovativeness. The technical results were encouraging: a new broadband server, a broadcast server, and other technologies that would allow for such futuristic functions as video on demand – just as soon as the networks of the world would allow. And therein was the problem. Technology advances alone are not a business, and the company’s visionary pivot into the digital communications age far outpaced the ability of the world’s networks to use these technologies. Now, with 20/20 hindsight, we of course know that these developments would turn out to be worthwhile. But Jim Olson had to go to annual budget planning meetings without the benefit of hindsight, where his anemic returns were literally invisible when graphed next to those of, say, the company’s exploding printer division. Year after year, Olson evangelized his vision of a digital future, but the numbers told a different story.

The lesson: Big changes, the breakthroughs that transform industries, make things worse before they make things better. In hindsight, we dismiss those troubles as “short run”. But when you are living through them, when you are leading a team charged with getting to success, you face what seems to be an unsolvable problem. Quality research shows that firms commonly fail to make these transitions. These are not fast, cheap failures, but disastrous ones that render cynical those who put their faith in the promise of a smooth pivot.

So it is that To lead others through change requires a steadfast vision, one that holds even after the cynics have moved on in search of an easy pivot.

For academic research on  the problem of getting from here to there, read my paper with Elizabeth Pontikes.

Friday, July 15, 2016

The Change Paradox

It was time for a change.

ATM machines had just been invented, but many of the customers were suspicious. I was a bank teller in need of more hours, and volunteered for the job. It was hot - summer in Davis California. So I wore just some cutoff shorts and the "Versateller" sandwich sign as I walked around the bank. The point was to draw people's attention and then explain how the machine worked. The old people crossed the street to stay away from me, wondering why I was wearing so little. The young people were amused, but did not need a lesson. Had I not been so ineffective, you could have said I was working myself out of a job.

It is striking how hard it is to make change happen. And then, once a change takes hold we cannot imagine life any other way - like the ATM machine. But some things are more changeable than others, and this causes problems if you're a leader.

For instance, change was on the agenda when Tracy O’Rourke took over as CEO at Varian Associates back in the 1990s. Varian was one of the original iconic firms of the Silicon Valley, featuring a college-like culture that attracted some of the world’s greatest technical talent.  The Varian patent portfolio was unparalleled, and they gave the world some impressive innovations like radar and the x-ray machine. But by the time O’Rourke took over, the company was out of step with its markets. Tracy acted fast, laying off thousands within a few weeks, restructuring the organization, and establishing new product development and quality systems. None of these changes was trivial, but O’Rourke succeeded by targeting only those things he could change rapidly: staffing, structure, routines, and the like. Given how much we value change, one way to be effective is to target those things that can be changed most easily.

By contrast, some changes are difficult and slow. Consider, for example, how difficult it is to establish a company’s reputation in Japan. A company’s status matters in all cultures, and it matters even more in Japan. But in Japan especially it takes ages to be seen as high-status. This fact is frustrating for many firms who want to enter Japan, since they need to be seen as top-notch if they want to hire the best talent and attract good customers. Many firms take a look at this obstacle and avoid entering Japan at all. But there are exceptions. Many decades ago, IBM made the decision to enter Japan, even if it took time to build up a top reputation there. They stuck to it; ultimately it took over 30 years before IBM was seen as an “A” player among Japanese engineers. 30 years! That means that some IBM managers spent their entire careers trying to break into the Japanese elite, and retired with the job still not done. No wonder you and I avoid such difficult obstacles, preferring instead to change that which can more easily be changed.

So here is the rub. When the next leader comes along after you, what will she try to change?  Odds are, like you, the next leader will also look to change those things that can be changed. But those will be precisely the things that you changed yesterday. So it was that, within a few years of his departure, most of Tracy O’Rourke’s changes at Varian were changed again – and in fact the company was split up and many of its parts sold off. This is the change paradox:  We and our successors change what can be changed, each undoing the work of the one before him. We feel accomplished at the moment of change, but so does the person who comes along tomorrow and undoes all of our work. Ironically, though we all feel we have made a difference, if we go back in a year or two we may see no sign of our efforts.

The lesson? Change those things that are most difficult to change. This will take time, and may fail entirely. But if you succeed – like IBM taking a lifetime to break into Japan – you will have created something permanent; something that the next generation of leaders cannot undo. Better to work at setting one thing right forever, than to easily set many things right temporarily.

The academic work on this topic was triggered by Michael Hannan and John Freeman's seminal 1984 paper.

Thursday, June 30, 2016

Dead Revolutionaries: A Call for Nominations

Russian revolutionary Leon Trotsky survived for decades, sometimes imprisoned, often in exile. Ultimately, in 1940, he was assassinated while in exile in Mexico - not by an agent of the former Czar, but by another revolutionary likely connected to Stalin.

So it often goes: The fiercest rivalry takes place not between the old guard and the new, but among those who vie to be called the "real" revolutionaries.

Revolutionaries assassinate each other in business, too.

Think Overture, the long-gone innovator of the space Google owns today.

Got a favorite dead, revolutionary firm? Click here to vote, or to nominate your own candidate.

Wednesday, June 15, 2016

The Power of Product-Market Fit


The word brings to mind the Godfather, or perhaps a political leader, or maybe a great CEO like Jack Welch in his General Electric days. Such power stems from the reach of large organizations. They can get things done even when they face great opposition. But the purest power comes from another source. It is beautifully simple, but has to be discovered.

Take Jerry Fiddler and David Wilner. In the 1980s, the pair left Lawrence Berkeley Laboratories to create one of the first “embedded operating systems” – the software that makes microprocessors do things we value. One of the world’s greatest firms, General Electric, came to Fiddler wanting his small team to ramp up big time in order to make GE’s medical imaging machines go digital. Fiddler wanted the deal, but unbelievably he said no. Fiddler knew that GE developed on a SUN platform. But Fiddler’s team had just invested in another development platform made by ISI (a company that would later disappear). Straight out of central casting for the role of an engineer, Fiddler (pictured below) could not accept the costs of changing from that platform and having to come down another learning curve.

Back at GE, Fiddler’s shocking rejection triggered a crisis. Only Fiddler’s team could make GE’s new innovations in digital radiology work well enough to impress their customers. Fiddler’s fledgling firm, Wind River, was tiny and powerless by most measures – but it was essential to a massive potential market for one of the world’s great firms. The crisis escalated, and the decision was made at GE to change their development platform to ISI! At that point, SUN’s leadership met in emergency meeting and called Fiddler, offering Wind River whatever it would take to move them over to a SUN platform. 

Jerry Fiddler is brilliant and imaginative, but he does not play the game of power like Machiavelli’s Prince. Yet in that moment he wielded the purest power: the power of product-market fit. Firms with this kind of power do not muscle others to get their way. They need not call in political favors, nor sabotage their rivals. They are powerful because they provide a product or service that others feel they absolutely must have. The power of product-market fit comes from the will of others. Others want you to succeed, and will do anything they can to make that happen. Such power has a momentum of its own, as those who need you try to make you win. Holding back the power of product-market fit is like holding back the tide.

What is the path to the power of product-market fit? The answer is simple but elusive: Tight product-market fit is discovered. In Wind River’s case, over a series of projects the team worked closely with a variety of clients to discover how embedded operating systems can make microprocessors do amazing things. With Francis Ford Coppola, they enabled digital film editing. The American space agency NASA worked with them to enable microprocessors to run in the Mars Rover “Curiosity”. Even the American National Football League worked with Fiddler, figuring out how to use microprocessors in video-graphic equipment so that teams could quickly review game films during practice. Over time, working closely with a variety of customers, Fiddler and his team honed their product so that it was essential to manufacturers. Even Motorola, which made its own embedded operating system, insisted on using Wind River’s instead! This is the power of product-market fit.

I have used a technology example to illustrate my point, but the power of product-market fit appears everywhere. In the construction business, some companies understand “design-build” contracting so well that their customers will use no other firm. Such is the case for Linbeck Construction operating out of Houston. Linbeck’s customers return, knowing that this company has developed a great process for minimizing costs and staying on schedule. In manufacturing, Newell-Rubbermaid has developed over years of experience the ability to manufacture staple consumer products at low cost, and the logistics necessary to keep these products on the shelves of mass retailers. So it is that Newell makes much better margins than most who sell through the mass retailers. No doubt you can come up with your own examples: What company is essential to making you succeed? Odds are, that company took the time and effort necessary to discover product-market fit – and is powerful now as a result.

For research showing the importance of fit between organizations and their environments, see the book by Glenn Carroll and Mike Hannan.

Monday, May 30, 2016

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 Athens 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.

Sunday, May 15, 2016

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.