Friday, August 31, 2018

Why You Don't Understand "Disruption"

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

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

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

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

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


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

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

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

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

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

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

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

Not true.

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

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

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

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

Tuesday, July 31, 2018

How to Recognize an Authentic Entrepreneur

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

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

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

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

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

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

Saturday, June 30, 2018

When the Means Become the Ends

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

So I asked, "Is this meter working?"

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

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

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

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

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

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

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

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

Robert Michels' book is still worth reading.

Friday, June 15, 2018

How to Create Self-Silenced Fools

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

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

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

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

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

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

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

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

Rule 1: Admit ignorance.

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

Rule 2: Permit ignorance.

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

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

Thursday, May 31, 2018

Why Entrepreneurs Outperform Intrapreneurs

Mid-20th century economists, most notably John Kenneth Galbraith, predicted that large companies would be responsible for most of the groundbreaking innovations in our future. History has proved them dead wrong.

In fact, the opposite has turned out to be true. Startups – entrepreneurial companies – are the engine of innovation in the modern economy, and as a result they grow disproportionately faster than large, established firms. And this is true both in terms of their average growth rates and in terms of which companies are more likely to be super-high-growth outliers.

Big firm fans: Before you argue by naming your favorite big-firm innovator, review the quality research on this subject. A large academic literature has thoroughly looked at “Gibrat’s Law of Proportionate Effect” in firm growth rates. That's a baseline model where small, new companies and large, established ones innovate and grow proportionate to their size. If that were true, then entrepreneurship and intrapreneurship would be equally effective. But this literature consistently finds disproportionate growth rates (and more dispersed growth rates) among smaller, newer organizations. We can debate nuances, such as whether large organizations help by investing in R&D that later appears in the innovations of startups, or that there are some exceptional big-company innovators, but there is no doubt of the main finding: Entrepreneurs outperform intrapreneurs.

But what about the studies showing that innovation helps big firms improve? Two problems here. First, when innovation does help large firms, the improvements typically don't kick in until after a difficult and painful period of adjustment. In fact, often large companies fail outright while trying to adjust to innovation. Second, this is a false comparison anyway. Sure, compared to its tired, old self, an innovative big firm is improving. But the correct comparison is to the entrepreneur.

Now you may be wondering, don’t new companies also fail at a higher rate? Yes, they do, but the growth created by the high-growth survivors more than compensates for the economic losses due to failure. Plus, failures fuel future entrepreneurship; the “creative destruction” described by Schumpeter. In any case, if you’re looking for big success, look to entrepreneurs – not to the intrapreneurs funded by large, established companies.

But why?

To understand why entrepreneurs outperform intrapreneurs, you first have to understand how great new innovations take hold. The process happens in two steps:

Step 1: Variation.

Groundbreaking new innovations are typically "nonconsensus" ideas when they start out. That is, some think they are a good idea, but many disagree because (by definition) groundbreaking innovations defy conventional wisdom. I recall when the consensus said that internet search was not a good business. After all, we had seen the failure of Lycos, Excite, Alta Vista, and a bunch of other search firms. So when Google came along few people wanted to fund them. Now, my marketing colleagues tell me that search is the greatest business in the history of humankind. In this way, we're often very bad at predicting which innovations will succeed. But we're so good at retrospectively rationalizing, we forget how bad we are at predicting.

Of course, not all nonconsensus ideas are brilliant. In fact, often they are really bad ideas. We won't know for sure until an entrepreneur proves their genius (or folly) by experimentation. Nonconsensus ideas are not necessarily better, they are just higher variance.

To see what I mean, Consider these two distributions:

Let's say these are plots of the number of innovations produced, ranging from really foolish (far left) to really genius (far right). The top distribution is a high-variance distribution, while the bottom distribution is low variance. Both have the same average, but the top distribution has much more genius (and folly) than the one on the bottom. Nonconsensus ideas are high variance ideas, like the top distribution. If what we want are some really great innovations, we want to generate high-variance distributions like the one on the top.

Entrepreneurs are unpredictable, and uncontrollable. So they are very high variance, looked at as a group. Many are complete fools, and some of the fools will turn out to have been geniuses once we see how history develops. By contrast, intrapreneurs operate within a corporation. They need to justify their expenses. And, even if they are given a great deal of latitude, they must at some point explain themselves. The need to answer to a big, established firm renders intrapreneurship low variance.

For instance, I remember when Hewlett Packard was the model of big-firm intrapreneurship back in the 1990s. I was studying their venture into video networking, a very entrepreneurial move. Jim Olson ran their video division just like a startup, even imitating the physical surroundings and culture of a start-up company. But every year he would have to attend the budget meetings, where the meager returns of the video division were dwarfed by the billions being earned in other parts of the company. So it was that the division began to market a printer that would sit atop your TV, since corporate understood printers. This move helped them in the budgetary negotiations, but in so doing it moved them from high-variance entrepreneurship to the safely low-variance world of intrapreneurship.

Step 2: Selection.

Once an idea is surfaced, the innovation process has just begun. The process of "selection" involves testing the idea in the market. You've probably heard a lot about this process: The innovative firm quickly gets its idea into the market in an effort to improve by failing fast and cheap. This process improves the idea by iterating through trial and error. What you may not realize is that the real beauty of the selection process is when the market test leads to unexpected outcomes - discovery. The most innovative applications of ideas are not the anticipated applications, but rather those that materialize along they way. There is a long list of innovative companies that became raging successes after discovering their unexpected brilliance, including Airbnb, NetApp, and Apple (to name just a few).

Image result for apple lemmingsWhen it comes to discovery, entrepreneurship again has an advantage over intrapreneurship. The intrapreneur's iterative tests are seen through the lens of the parent organization. Imagine when Airbnb was first discovering itself. Had its model been tested by the folks at Hilton or Sheraton, odds are they would not have recognized the very different logic at work. Similarly, NetApp's innovative file servers would have made no sense to IBM - nor would have Apple's odd experiment with iTunes. All these experiments were based on logics that made no sense to the establishment.

Now you may be thinking: Intrapreneurs also engage in discovery. Yes, but they do so through the lens of the status quo. When it comes to discovery, the lens of the status quo creates blinders. By contrast, the entrepreneur can see things in ways that the intrapreneur cannot.

Implications for startups: If you're getting push-back because your idea is nonconsensus, that's a good thing. If the big-company people like your idea, it is time to worry. And if your plans are not working out as planned, that's a good thing; you're discovering.

Implications for big, established companies: Don't reward good innovation. Reward high-variance innovation, good or bad. Evaluate your innovation processes in terms of how they affect variation and selection. Stamping out foolishness? Well, there's your problem.

Implications for budding entrepreneurs: Tempted to take a big-company job to gain the experience you need to start your own business? Don't fool yourself. Take a look at my research on this topic: Joining a large, established organization dramatically reduces your chances of ever becoming an entrepreneur. Taking that job cuts your likelihood of starting a company by up to 75%, depending on how large and well-established the company is. Go ahead and join a big company, but be honest with yourself about the decision you are making.

For a study looking at the importance of nonconsensus to entrepreneurship, see my paper with Elizabeth Pontikes. A good example of the academic work on growth rates of firms can be found in this article by Costas Askolakis. For evidence of how working for a big company affects your chances of ever becoming an entrepreneur, see my paper with Stanislav Dobrev.

Tuesday, May 15, 2018

The Escalation of Bias

“I don’t care who does the electing, so long as I get to do the nominating.” This gem often is attributed to Boss Tweed, the notorious American political manipulator. In any competition, the surest way to win is to narrow down the list of those in the running. If you are the only viable candidate, you’re in. Competitions often are unfair, but restricting who can race to the top is especially important because it escalates bias to the highest levels.

The escalation of bias goes on every day the world over. What you may not realize is that it happens especially when people think they are being fair. Let me explain.

Slogans like “We are an equal opportunity employer” are seen in many companies, especially in the United States. Although such slogans are not always lived up to, in many places things have improved compared to the past. Although racism, sexism, and other forms of discrimination endure, in many industries we are seeing efforts to hire more fairly. But what about promotion?

The executive suite remains difficult to penetrate for women and minorities in the US, despite the greater fairness in hiring at lower levels. In what feels like a “bait and switch,” we hire for diversity, only to stay with the same old bias when it comes to promotion. This no doubt feels pretty unfair to those who might have merited a promotion, but were passed over because of a superficial characteristic like race or sex. Yet the hidden effect is on the privileged, who then enjoy the escalation of bias.

To see why, consider what happens to someone in the traditionally favored group – white men in the case of the US. For them, hiring equally and then promoting unequally escalates bias. After all, when it comes to choosing the next boss, blessed are those who are surrounded by "unpromotables." If race and sex matter for promotion, then the sure bet is to be the only white man in the running. So it is that hiring policies meant to improve fairness, ironically, may be triggering the escalation of bias.

The escalation of bias operates in many walks of life: The law firm that hires for diversity, but then promotes to partner those who get on with the old boys. The technology firm that boasts of a sex-blind and color-blind hiring process, run by a traditional-looking C-suite and board. We even see it in global competitions among companies. Firms are often allowed to enter another country to compete, only to find out once there that they have restricted access to government permits and the like.

In each of these situations, you get in through a fair process - but you move up through a biased one. When we trigger the escalation of bias, the privileged dominate the race to the top.

Evidence of this kind of effect triggered by hiring temporary workers is reported in my paper with Anne Miner.

Monday, April 30, 2018

Persistence Enables Innovation

Changes keep coming. Yesterday’s new thing is likely to be eclipsed by another new thing tomorrow. Many companies try to catch these waves, but only a few last. What separates the innovators from those who flame out?

Some say it comes down to being able to "pivot" into new areas fast. But in fact, the opposite is true; it comes down to persistence.

Here is the problem. You can redesign your company to become something completely different overnight, but companies that pivot overnight lack depth. After all, how deep is your ability in an area that you just discovered yesterday? You may be able to offer a product, but you’ll lose the first time you run up against a firm that has a deep background of knowledge. And to have depth of knowledge, you need to maintain a consistent focus over time.

For example, a few years ago the data storage company NetApp was approached by the Swiss stock exchange for technology to deal with connecting networks in a novel way to improve data availability and disaster recovery. NetApp’s head of Europe back then was Andreas Koenig, a scrappy “can-do” executive with a good understanding of NetApp’s technologies. Koenig knew that NetApp had been doing research for some time on continuous data availability and disaster recovery for networks spanning different locations. So he went back to corporate R&D to find a solution for this customer. There he found “Metrocluster,” a project that had been researched extensively and then shelved by the company’s corporate engineering group. Koenig resurrected the project, to the surprise of some insiders. But the product was a hit in Europe and quickly became an important part of NetApp’s product offering.

Note the key fact in this story: NetApp engineers had been working persistently on the problem for some time – even before it was clear that there was product demand. So when the market took off for this product, NetApp was able to respond well; they had deep knowledge in this area. A number of companies claim to have this kind of product, but how well-developed is their technology? The firm that persists builds its capabilities, and will win against the Johnny-come-lately.

The key to successful innovation is persistence. Keeping your focus over time builds deep knowledge. In a world of fads and fashions, have the courage to stake out a domain where you are the expert. You won’t be all things to all people, but when you do compete, you’ll win.

Systematic evidence of this idea is in my paper with Elizabeth Pontikes.

Sunday, April 15, 2018

Wrong-headed Leadership

The idea is common sense. Giraffes repeatedly stretch out their necks to get at leaves, and so over generations this action has made their necks very long. So reasoned Jean-Baptiste Lamarck in 1801, offering an early (though now discredited) version of evolutionary theory featuring heritable traits acquired by use. Over the centuries, the idea seems to keep reappearing, perhaps because we wish adaptation were so controllable. Notoriously, Joseph Stalin favored the idea as being consistent with revolutionary thinking - and profoundly harmed Soviet-era scientific progress by enforcing his belief. Wrong-headed leadership can do a lot of damage.

I see wrong-headed leadership in business all the time. Like Stalin, business leaders routinely believe that ideas are true because they want the ideas to be true. For instance: "Our organization can be both extremely efficient and extremely innovative at the same time." We know from research that this claim typically is not true; there is a trade-off between the high-variance behaviors that spawn innovation and the low-variance behaviors that make for efficiency. Yet the idea keeps reappearing, perhaps because we wish adaptation were so controllable. And so for decades management gurus have claimed to have discovered the way to make this wishful thinking true.

And when it comes to knowing the truth, our emotions seem to make things worse. Often teachers appeal to their students by being funny, or exciting, or nice, or passionate. At least since Aristotle we've known that emotional persuasion often trumps logic. After I teach a class, students tell me they "enjoyed" their experience. Hmm. Did they learn? If enjoyment is the point, perhaps class should feature a real comedian.

Same goes for the other Aristotelian appeal - credibility. Often successful business leaders become lecturers at business schools. Listen to them describe why they think something is true, and you will often hear "In my class, I teach...". Because they teach it, it must be true?

Of course, our belief in the truth of an idea should depend on whether the idea is supported by research. Such an appeal to logic lacks the emotion of pathos or the bluster of ethos, but it helps us to avoid wrong-headed thinking. Next time you accept an idea as true, ask yourself why. Wishful thinking? Good feeling? Bluster? You may be headed toward your own episode of wrong-headed leadership.

Brad Jackson has written an interesting book on this issue.

Saturday, March 31, 2018

Corruption's Mark

The fix was in. As the horses entered the turn, a large wall made them briefly invisible to the stands. Moments later the horses came back into sight - with the long-shot now in the lead. A collective moan. Angry shouting. Torn tickets flying, the cynical crowd realizing that it had been the "mark" - the victim of a con.

Of course, horse racing is notoriously corrupt - hence the crowd's immediate, cynical reaction to the fix. But corruption abounds in the world today, and affects our well being more deeply than you might realize.

You are probably thinking of corruption's direct consequences: The better horse loses; the lesser firm gets the deal; the meritorious job candidate is passed over. Such injustice often leaves the mark helpless. They played by the rules, but someone else was playing a different game - one where a corrupt payoff trumps merit. And so everyone loses: fans, shareholders, and consumers alike. Only the thief prospers in such a system.

Yet corruption has an even more insidious effect: collective nihilism. I first saw this effect in my old step-grandfather when I was but a boy. I was telling grandpa about the coming world series matchup. Grandpa waggled the cigar in his mouth, took it out, and said "the whole thing's fixed." I replied, "What do you mean, 'fixed'?" A deep, cigar laugh, and then "Well, they pay everybody off to make sure it goes the way they want. Then they collect their bets. They think we're stupid."

So went my first exposure to nihilism, the view that our institutions are so hollow as to render all action pointless. I said nothing; I knew better. Taking after my own father, I have always believed in the possibility of effective action, and to this day I resist the cynical urge to see everything as one big "fix."

But for many, widespread corruption has sown the seeds of nihilistic cynicism, distorting their perceptions. I recall a conversation in Moscow with a frustrated entrepreneur that illustrates the problem. As we shared a drink, he pointed to a passing luxury car and reflected, "When you see a nice car blow by, you know that guy stole from someone." How odd, I thought. Of course thieves are everywhere, but the shining Teslas in Palo Alto look to me like the fruit of hard work and innovation. Yet he sees corruption, and so throws up his hands as if to say "all is pointless."

Effective leadership roots out corruption, not just to do "what's right", but to create institutions that reward meaningful action. If we fail this leadership challenge, we fail the innovators of the future.

A sample of the research in this area is by Marcolo Veracierto.

Thursday, March 15, 2018

Discovery Beats Planning, so Plan to Discover

Heard at an outdoor café along University Avenue in Palo Alto: “The strategy was clear. You can’t start as a platform. You start as an application and then, when the user base is large enough to get a network effect, you can pivot into a platform.” Knowing nods around the table; wisdom understood by the cognoscenti.

I was hunkered down with a Super Tuscan at the last sidewalk table, eavesdropping on the ideas circulating among the start-up crowd. This one is a lesson from my elective course at Stanford. Not to imply that I’m the headwaters. To the contrary, I’ve waded into a stream of ideas cascading around the valley, ideas that change with each new, unexpected development. Even the subject of the debate I overheard, Facebook’s platform strategy, was discovered along the way. Originally, Facebook’s leaders saw it as a social network application. Only once Facebook grew large did the idea materialize to become a platform. So in 2007 the website’s APIs were opened to a world of developers who could independently create Facebook applications. Since then, a litany of reversals and changes have fueled debate among developers and users, as Facebook has tried to exert control over the platform. Some have criticized Facebook for this haphazard evolution. Turns out, that is how most strategies emerge: Discovery beats planning.

For more evidence, go back and look at the strategic plan from years ago at your favorite successful company. There is a good chance that the company’s winning strategy won’t appear in that old plan. Examples abound: Trader Joe’s, a boutique specialty retailer in the U.S., once made its money selling cigarettes and ammunition – a far cry from the microwavable organic meals and fancy cheeses one can get there today. Honda Motors, famously, planned to sell big motorcycles – “choppers” – in the U.S., and ended up discovering the market for small “minibikes.” The list of examples goes on, including many entrepreneurial firms that discover a strategy better than the plan their founders once pitched.

So how do we deal with the fact that discovery beats planning?

One common reaction is to pretend that the success was planned. Of course, after a discovery we naturally try to make sense of what we see working so well. And there is nothing wrong with retrospective rationalization; we do it all the time in business school “case studies” in an effort to learn. The problem is allowing retrospective rationalization to masquerade as a well-planned strategy, as in the young folks talking about Facebook (“The strategy was clear…”) Such a misunderstanding leads observers to think (wrongly) that great businesses result from a great plan.

Another bad reaction is to wax cynical, surmising that success really just comes down to luck. This conclusion denies the fact that some people are better than others at spotting the opportunities that (luckily) come along. There is much more to discovery than the flip of a coin. When plans produce unanticipated consequences, these look like failures.  If you think that leadership means waiting to get lucky, you’ll conclude from such failure that your luck has run out – a self-fulfilling prophecy.

But there is information in those unanticipated consequences for those who know to seek it out. Scott Cook, Intuit’s founder, coaches his people to “savor surprises” – to see deviations from plan as the fountainhead of opportunity. Seen this way, the strategic plan is just step one in the discovery process. Leaders that understand this truth do not pretend to know the solution in advance. Instead, they plan to discover.

A more academic treatment of this idea is in my book on the Red Queen.

Wednesday, February 28, 2018

The Authenticity Advantage

I recall sitting in the Café Mediterranean in Berkeley, struggling to make sense of Das Kapital. The upstairs seating area was good for such study, and for the occasional erudite discussion. A quirky intellectual commented on my choice of reading, and the conversation was easy. He was interesting – a physician who had majored in philosophy. I did not know that was possible; pre-meds stay focused on grades, and you don’t do that writing essays on epistemology. And then he muffed, mispronouncing Wittgenstein. Why do you major in philosophy, if not to learn how to pronounce Wittgenstein? Clearly he was not a philosophy major. Probably he was not a doctor. Maybe he was not even a guy. The conversation was over; he was a poser.

Posers work hard to conform, because they know that people are well-tuned to detect fakes. Think Frank Abagnale, the notorious serial impostor who successfully carried on in a number of false careers - including as an airline pilot, lawyer, and doctor. Criminal though he was, we are in awe of Abagnale in no small part because most of us suffer from the opposite problem: impostor syndrome. Psychologists note that many people have trouble fully embracing their own accomplishments. So the posers of the world, repulsive though they are, have to be admired for their ability to embrace playing a part in the play of life.

Growing up in San Diego, you knew the tourists because they were too perfect: Heishi beads, surfboard wax, hair just so. We locals spent a lot of time on the beach, but had not thought enough about the outfit. In my case: cutoffs that I actually cut off, no board, bad hair. Idiosyncrasy implies authenticity, since posers pay so much attention to form.

In competition, posing can be effective. We concentrate on how we dress when we apply for a job, because we’re posing and want to be seen as an appropriate choice. Those who compete in mating contests work hard at how they present themselves on Facebook. (Does he really prefer romantic comedies?) Of course companies do this too – and sometimes to great effect. You may remember when you found out that Sam Adams beer was not even brewed by the company that posed as its “brewer,” or when you realized that Häagen-Dazs ice cream was not from Europe. But it must be admitted that these brands, posers though they may be, fool enough people to be strong competitors.

The downside of posing is that most anybody can do it. In 2004 eBay declared it would dominate China, and entered by acquiring the then-leading Chinese firm EachNet. By 2008 they had failed utterly – overtaken by authentic rival TaoBao.  What happened? eBay “became Chinese” overnight through an acquisition, while TaoBao built something idiosyncratic from the ground up. I was developing case studies in China back then, and recall that there was nothing distinctive about eBay’s China operation. In fact, it was run out of Seoul! The problem with posing is that you may end up competing with the real thing.

Those who stick to their authentic identity are difficult to imitate. If you go into any part of NetApp, a leading data storage company with operations worldwide, you will see the same organizational culture in action anywhere on earth: little regard for formal titles, open exchange of information, a shared sense of concern for the customer, and respect for well-intended action. These norms are widespread at NetApp because the company hires and promotes with that culture in mind – a habit formed by its founders in its early days, and reinforced to this day by its CEO George Kurian and his leadership team. (Check out Tom Mendoza’s talks on this subject.) Of course, that means the company’s growth needed to be mostly organic, rather than by acquisition. Such growth can be painful at times, and certainly slower than the sudden growth that comes with acquisition. But most of us would prefer to grow steadily than to acquire and then fail.

Authentic companies fail too, of course. A firm’s idiosyncratic approach to doing business may be dead wrong, in which case they will fail. But to paraphrase Jeff Miller, they may be wrong, but at least they are not confused. So a difficult choice needs to be made if you are growing a business. Do you conform to the established recipes you see around you, or do you build on what makes your company authentic? Posing is likely to be less risky – at least until you encounter the real thing.

For the research on authenticity and competition is the book by Hannan, Pólos, and Carroll.

Wednesday, January 31, 2018

What Makes You Unique?

I recall a few years ago one of the kids came home from elementary school with a paper "award" that looked like this:

That afternoon, the school playground was littered with these things. Apparently the school had copied hundreds of the identical awards. Just fill in your child's name, and you have mass customization.

I got to thinking about the problem of uniqueness yesterday. I had breakfast at Baji's, but forgot my earbuds. So I was forced to listen to the guru bellowing wisdom at the next table, mansplaining to his "client" how to succeed as an entrepreneur: " need to have barriers to entry...bla bla bla...all about execution...bla bla bla...focus on your capabilities...bla bla bla...just like at Google...bla bla bla..."

Putting aside the superficial content, the most remarkable thing about the "conversation" is that I never once heard the entrepreneur speak. Not one single word - from when I ordered coffee to when I paid the check. So the guru thinks that his wisdom is right, regardless of what business he is talking about. Just follow his recipe, and success is yours - no matter who you are, what you do, what you're good at, or what challenges you face.

But we know from research (and experience) that there are many roads to success, each unique in some way. Research identifies this as the problem of "competitive heterogeneity," where companies differ in unique ways that lead to very different outcomes. In practice, if you listen (really listen) to people at work, you may come to see possibilities for success that apply to them because of their unique circumstances, their unique abilities, and their unique shortcomings. Of course, this means actions that might help one company to succeed may well fail for another. A sobering fact if you're a guru peddling a recipe.

Caution: Don't now conclude that generalizations cannot be true or useful. Research has taught us many useful generalizations about business success. For instance, we know that delegation and empowerment increases employee involvement and creativity. But like all generalizations, putting such an idea into practice brings in many other variables that can change what happens. Delegation that works for a creative video game studio in Chicago may not work well in a Mexican brewery or in a German automobile factory. In short, whether a generalization holds true in practice depends on the unique circumstances of the company in question.

Knowing generalizations about business is not enough. To succeed, you must also know when to apply your general knowledge in the right, specific circumstances. Know what makes your company unique. Only then can you begin to find your own, unique, path to success.

The problem of "competitive heterogeneity" is the subject of considerable research, including my book on The Red Queen.

Monday, January 15, 2018

Think You're Well Connected? Stop Fooling Yourself

You read a lot. You’re informed daily through Twitter, various blogs, and a few subscriptions. Your network is very large, and is made up of people who also have large networks. With technology at your fingertips, you are extremely well informed.

You’re fooling yourself.

Humans want to know what others think, and we’re especially persuaded when information is verified by different sources. The problem is that our “different” sources often tap the same information. You hear something from a Twitter feed that you like, that is confirmed on a blog, that is confirmed yet again by a video of a Ted talk. But what if each of these got their information from the same source? You are all recycling one single datum! It is bad to be poorly informed, but it is much worse to be poorly informed and not realize it.

For example:

“As CEO, I make sure I am in the thick of it. I stay right in the middle of things: product development, engineering, marketing, sales – they all keep me in the know.” So said the CEO of a software startup where I was conducting interviews. I met with him four times over four months, as he shaped the strategy of his budding company. He was surprised when they failed. All his information sources agreed that his strategy would win.

But let’s take a closer look. I asked everyone in his company to tell me whom they turned to for work-related advice and information. Using the matrix of these information flows among everyone in the firm, I mapped the company’s information network here - where the squares are people and the lines are their communications:

As you can see, this company's communication network is dense and saturated, with plenty of paths for information to get around. But that is precisely the problem. Throw one single datum into this company and it rapidly cycles throughout the whole system over and over and over. The central people in the middle – including the CEO – are no better informed than anybody else in this network; they just think they are. But they are simply hearing the same information as it gets recycled over and over apparently from different sources. No wonder they convinced themselves that their strategy made sense. They got the illusion of a second opinion without ever really getting a second opinion.

The solution?

Gather information from those who do not communicate with one another. In fact, you want to gather information from entire networks that do not communicate with one another. Truly rich and diverse information comes only when you hear, separately and independently, from “worlds” that do not overlap: From different parts of the earth, different economic sectors, different social demographics, different religions, languages, ideologies and cultures.

But gathering such varied data is difficult, and it is getting more difficult because of the IT revolution. Twitter will suggest that you listen to people who listen to each other. Amazon will suggest that you read something very much like what you just read. Even your search engine will try to make sure that you get results that are similar to the ones you clicked on last time. If you go with the flow, you’ll end up hearing the same narrow view recycled repeatedly – yet you’ll think you did your due diligence.

Don’t fool yourself.

One of the best academic approaches to information networks is by Duncan Watts.

Sunday, December 31, 2017

The Leader's Lens

It was time to run an online survey of the employees at a large technology company. My work with their leadership team had raised some interesting research questions, so one of the vice presidents asked her assistant to help me make it happen. She said to her assistant, who I will refer to here as Amelia, "Please help Bill to get access to everything he needs. We want to get everything arranged pretty quickly."

Amelia is a remarkable assistant - very thorough. But often she is asked to organized social events. So that was the lens through which she understood her boss' request. I was thinking "survey;" she was thinking "social event." 

As we began working on the project, Amelia asked, "when will it take place?"

"As soon as we can set everything up," I responded, adding, "I would like to host it here at Stanford." Although I did not explain this to Amelia, my concern was that if we hosted the survey on the company's servers, I might not be able to analyze the data on my own computer for security reasons.

"Host it at Stanford!" she responded. 

"Sure," I said. "We do this all the time."

She asked, "How many employees will be involved?"

"All of them," I replied.

"ALL OF THEM?" Amelia was dumbfounded.

"Of course!" I said. "We can use our server and--"

"But, Bill," she interrupted, "it makes no sense to host it at Stanford. We host these all the time here at our company. And we can get servers, of course!"

"Servers?" I questioned, "really, Amelia, one server should be more than enough."

"ONE SERVER, for the ENTIRE company?" Exclaimed a flabbergasted Amelia.

"No problem." I said. "These days servers are extremely efficient. And the tasks should not be too intensive."

As the discussion went on, we ultimately realized the misunderstanding and had a good laugh. But this story nicely illustrates the importance of one's "interpretive lens," the assumptions that shape how we understand information. Amelia and I were hearing all the same words, but they meant very different things to each of us because we were looking through different interpretive lenses.

Effective leaders understand the importance of the interpretive lens. I remember at one company, their sales head in Europe went around the approved product and price list, creating a solution for a customer that was not approved by the corporate marketing organization. He won the customer, and in fact was responsible for growing the business considerably through such tactics. The CEO called him back to the firm's silicon valley headquarters; some thought it would be a reprimand. But the CEO brought him into a top leadership meeting to applaud him for being entrepreneurial and customer focused. The manager received a promotion and a raise. This story spread through the company's employees quickly. The CEO's interpretive lens saw the manager as an innovator. Others saw him as a rule breaker. Both interpretations were correct, but the CEO wanted the "innovator" lens to win the day. By making his interpretation clear to everyone, he helped to shape their interpretive lenses. 

Every day at work, alternative lenses compete. Is a failed project shameful, or a healthy sign of experimentation? Is an outspoken employee insubordinate, or is she showing leadership? A great leader shapes the lenses through which her employees interpret what happens.

Look around you at work. Do you like the lens being used to interpret what happens? If not, what does this say about your leadership? 

The sociological research on this topic is reviewed by Robert Benford and David Snow.