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.

Saturday, April 30, 2016

The Elite's Curse

What university has the best geography department in the world?

If you answered "Harvard," you are not alone. Consistently, Harvard ranks well when people are asked this question. Search up the Guardian's poll on University rankings, and Harvard's Geography Department ranks right up there just below Oxford's and Berkeley's and right above Cambridge's.

But Harvard does not have a geography department.

In fact, the field of geography is still reeling from Harvard's decision, decades ago, to disband its geography department, since it led to similar abandonments at Yale and elsewhere. To find classes in geography at Harvard today, you have to find courses that sneak into the curriculum masquerading as Earth Sciences, Environmental Studies, Anthropology, and the like.

The success of Harvard's nonexistent geography department is the elite's curse. With enough social status, you are likely to be called the best - even at things you don't do!

Elites through time have always had to worry about this curse. After all, it is hard to know how well you are really doing when everything you do is above scrutiny. Like the emperor in Andersen's often told tale, the elite may be parading naked.

You are probably amused at a Stanford professor making fun of Harvard as elitist. Let me admit: I've benefited greatly from my own University's reputation, so much so that I too suffer from this curse. People routinely assume I know what I am talking about. But in the dark of the night I know I am often quoted not for the merit of my argument, but because of the logo on my letterhead.

In this way, the elite's curse harms the very elites that it insulates. If we are not careful, we can come to believe the myth to the point where we are parading naked.

Case in point: Five days ago here on the Stanford campus, the rapper Common spoke at an event that was "open to the public." But when it was time for questions from the audience, the Stanford staff reserved the scarce questioning time for Stanford students, effectively silencing those not from Stanford.  When asked why, the staff person explained, "we find that Stanford students ask better questions than outsiders."

So let me get this straight. If, next week, Common decides to come to an event here at Stanford, he will not be allowed to ask any questions?

Common would object if he knew what came down that night. The man who has spoken the poetry in "Respect for Life" would have wanted all to participate. Maybe he'd rap about it later. We failed; the elite's curse striking again. We open our campus to the public to increase the diversity and richness of the dialogue, and then silence anyone not in the club.

The lesson: Favor merit over privilege, and speak truth to the emperor.

For more on merit vs. privilege, see my article on "The Senator's Son Problem."

Friday, April 15, 2016

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.

Thursday, March 31, 2016

Predicting Unicorns

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

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

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

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

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

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

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

Tuesday, March 15, 2016

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.

Monday, February 29, 2016

The Signal

The opportunity was vast.

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

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

What happened?

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

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

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

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

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

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

Marc Andreessen has an interesting article on product market fit.

Monday, February 15, 2016

The Whole Product

Next time you are in Brazil, leave the typical tourist locations and visit the nearest Magazine Luiza, the growing retailer headed up by Chairwoman Luiza Helena Trajano. There you will see another side of Brazil - the many up-and-coming consumers just 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 head to Magazine Luiza or one of the other, similar home-grown retailers. Why?

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. 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. 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. 

Sunday, January 31, 2016

Two-Faced Compliance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, January 15, 2016

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