Friday, September 15, 2017

The Crossroads

The corner of Telegraph Avenue and Channing Way in Berkeley was at the crossroads in 1977. An angry man in a torn shirt waved his arms helter-skelter, hollering gibberish as he kicked a newspaper stand into the intersection. The commotion drew the attention of the hippy bead-sellers and t-shirt vendors; even the scraggy-bearded students took notice. Fittingly, the name of the newspaper in the broken stand was “Appeal to Reason.” Oblivious to the racket, a blind tarot-card reader wearing a Scottish plaid stared upward as he shouted predictions to a freshman who had paid his 5 bucks: “You are about to go through great change!” went the fortune, as his wrinkled old fingers probed the braille card face up on the table. Amazed at this clairvoyance, the student nodded open-jawed, “Yes, how did you know?!” Berkeley in the 1970s was at the crossroads, where novel combinations created unforgettable oddities.

It turns out that the crossroads create more than local color. At the crossroads, novel combinations often go nowhere; but now and then you see genius: Bill Gates built BASIC software for the Altair hobby computer, thereby getting to know the folks at IBM – and then accepting as a “side project” the job of getting their PC’s operating system to work. Bell Labs scientists Arno Penzias and Robert Wilson measuring background radiation from space in an effort to improve microwave communications; then finding the evidence that would win them the Nobel Prize for the “Big Bang” theory. Gordon Moore, Robert Noyce, and the others of the “traitorous eight” meeting at Shockley Labs in Mountain View, and from there forming Fairchild and the foundation of the Silicon Valley.

Great minds? Yes, but there are many great minds. In case after case, innovation explodes when such people find themselves crossing paths in the right place at the right time.

And these meetings need not involve technology: The crossroads have spawned great films, new approaches to banking, fusion cuisine, masterpieces of literature, new musical genre – the list goes on. Often my family and I raft the Rogue River, stopping to do yoga along the way. Sounds strange, but this marvelous innovation resulted when the rafting guru Peter Fox met yoga master Susan Schneck. Strange and beautiful combinations happen at the crossroads.

Want to be at the right place at the right time?  Go to the crossroads. You may discover genius, or not. But you won’t end up doing, yet again, the predictable.

Systematic research on this idea appears in the work of Lee Fleming.

Wednesday, August 30, 2017

Pull Your Head out of the Silicon

A local practiced his English on me while we were standing at a Shanghai intersection. He was not dressed very well, but as we spoke he kept flashing his fancy phone. So I commented, “Nice phone, but not so nice your clothes.” He held up his hand and said “No problem.” He explained, “First the phone. Then a car.” And with a small smile he added, “Then a house. Then a wife.” This man had a plan. But notice that the plan had no place for a computer.


You think I'm going to talk about "native mobile" trumping technologies born on the desktop. No. My point is that native mobile is just part of a larger pattern. We may be sharing the same technologies around the world, but the way we use them is very different. Because conditions vary so much from place to place, businesses born in different places look very different too. But we won't see that if we our heads are stuck here in the valley.

Take the online gaming world. While silicon valley's Zynga, having been born on a desktop, is down to 1/3 of what it was at its peak, mobile games like Devsisters' "Cookie Run" proliferate on mobile platforms created elsewhere - South Korea's Kakao in the case of Devsisters. With globalization, we're seeing not one big "flat" world - but big differences from place to place. As a result, new innovative business models are emerging from around the world, based on logics not discovered in the silicon valley.

One of my favorite serial entrepreneurs, Croatia's Jan Jilek, laments that VCs often do not take notice of the many startups originating outside the valley. Why not? I wonder, perhaps folks here in the valley may be living in the past (when we could ignore the "rest of the world")? I told a friend of mine, who knows a lot about success in the silicon valley, that I am studying MercadoLibre. “Ah,” he said, “The eBay copycat.”


In fact, the company that once was a South American version of eBay is nothing like that now. MercadoLibre has evolved in response to the unique circumstances of Latin America. Latin American companies needing an internet channel turned to MercadoLibre. Customers without credit cards found MercadoLibre’s payment backbone, MercadoPago. (And, MercadoPago, meanwhile, looks nothing like eBay’s PayPal.) As it evolved, MercadoLibre developed innovative services perfect for the Latin American context - from escrow services to alternative money transfer systems. In short, MercadoLibre may have started out like eBay, but today it has evolved its own business model in line with its markets. Although Marcos Galperin, its founder, went to Stanford, the business evolved into something that would not have been created in the silicon valley.

In industry after industry, worldwide, new business models are taking shape that would not have been invented in the valley. The ecotourism lodges run by Rainforest Expeditions in Peru balance the interests of the local population, the environment, and the need to do business in ways unknown in developed countries. The internet-based mass education and training systems run by Educomp are successful worldwide.  Notably, the company started in India where it initially developed the capability to create and deliver online curriculum in that context. Those capabilities allowed it to outcompete its rivals from the developed world. Large scale production and export of ceramic products by RAK Ceramics of Ras-al-Khaimah takes advantage of the resource endowments and location of this company in the UAE. The innovative mobile payments company M-Pesa in Kenya allows customers to transfer money, pay bills, and even access microfinance without involving a traditional bank – an attractive business logic where banks are suspect. The list goes on. Such companies are not playing “catch up” with the valley. Rather, they are evolving their own business logics, in response to the unique characteristics of their own environments.

It is true that we are a small world geographically, but globalization is increasing variety when it comes to business models. These varied approaches to business reflect the various logics of the world’s very different markets, technologies, cultures, and institutions. The countries of the world are logic laboratories, giving rise to new kinds of businesses that never could have been invented in the Silicon Valley, New York, or London. Business leaders would do well to ditch the illusion of convergence. Pull your head out of the silicon, and you'll see business innovations blossoming worldwide, reflecting the logics of other places - successful precisely because they were not invented here.

The importance of differences across the world economy is studied many, including Pankaj Ghemewat.

Tuesday, August 15, 2017

The Marketplace of Beliefs

In January 1981, James Watt became the Secretary of the Interior of the United States.  President Ronald Reagan’s choice of the controversial, pro-development Watt sent tremors through the environmental movement. The press was abuzz with the possibilities: stationing MX missiles in the Great Basin, opening up the California coast to oil and gas exploration, limiting the reach of the Endangered Species Act, and the like. For environmentalists, 1981 was their darkest hour.

Or was it? In the wake of Watt’s appointment, enraged environmentalists signed up to social movement organizations in numbers. The Sacramento Bee (4/23/2001) quoted a Sierra Club official remembering that time: “You couldn’t process the memberships fast enough. We basically added 100,000 members.” That organization’s roster surged past 200,000 members in 1981, reaching 325,000 members the following year. Clearly nobody in the environmental movement was happy about James Watt, but his appointment triggered a rally of support for their cause.

A strange exception? No. It turns out that when beliefs compete, opposition is vital.  A powerful opponent makes clear your own reason for being. There is little need for the Women’s Christian Temperance Union in Salt Lake City – the Mecca of America’s Mormon population. But in places where breweries and distilleries abound, temperance organizations have prospered. (See work by Professors Wade and Swaminathan on this.) When beliefs compete, opposition strengthens identity.

In the marketplace of beliefs, the real competition is between the purists and pragmatists in the same camp. Once speaking to group of environmentalists, I asked who would be willing to work with Wal-Mart if this would help the environment. Half the room raised their hands, much to the surprise of the other half. A low buzz of consternation could be heard.  “We need to get something done,” said a pragmatist.  “Greenwashing,” replied a purist. When beliefs compete, the purists put a premium on their legitimate identity. The pragmatists opt for effectiveness, and in so doing call their own legitimacy into question.

The competition between pragmatism and purity is more than personal; it shapes how organizations develop. For years, in many places small food cooperatives were the place to go for organic produce – often locally grown. Powered by pragmatists, this movement became so successful that now even mass retailers sell organic products. Good news? Not to the purists, who have seen the small cooperatives close down in the shadow of the superstores. How much simpler were the days of pure opposites – of local food cooperatives standing in opposition to “industrial” food stores. In the marketplace of beliefs, compromise triggers a competition between purists and pragmatists.

Competition over beliefs is a leadership challenge: should you be pure or pragmatic? If you compromise, you get things done. But by compromising you also blur the lines, calling into question your legitimacy. The effective environmentalist is accused of selling out. The pragmatic conservative is sanctioned for being inauthentic. Yet it is those who compromise who get things done. Here is your tough choice as a leader in the marketplace of beliefs: Are you pure or pragmatic?

Academic research on "oppositional identity" can be found in the work of Glenn Carroll and his colleagues.

Sunday, July 30, 2017

Why Did We Come to Work?

Do you work for a big company? If so, try this: The next time you attend a meeting, ask yourself whether you can tell what business you are in by the content of the meeting. Is there any connection between what is being talked about in the meeting and the actual customers of the business? If not – and often there is no connection – look around the table. Does anyone in the room, you included, know a customer? If not, do you at least know someone who knows a customer? It may come as a shock, but most people in big companies do not interact with customers. After all, as a company grows, the number of relationships inside the company increases much faster than the number of customer-contact positions. This mathematical fact is akin to the "square-cube" law first observed by Galileo (albeit not talking about companies). And this fact leads to a problem: Most of us do not know why we go to work.

When you work directly with customers, you know why you go to work. That is the case for people in small companies, or for salespeople in big companies. But for the rest of us – those who do not deal directly with customers – why do we work? You can probably answer the small “why?” question. Maybe you help run the information technology system that the company uses to keep track of its people. That’s important. We can’t get paid without your work on the IT system. That is the small “why” question and it is usually easy to answer.  But try answering the big “why?” question. If you quit today, would the mission of the company be harmed? Why does your work matter, really matter, for the company? This question is very hard to answer for most people in big organizations, since they are so removed from the customer. They know why they come to work, but they don’t know why that work matters.

Unable to answer the big “why?” we end up instead measuring things that we do, in an attempt to show that our work matters. This leads to various maladies, such as calling a lot of meetings. We want to make progress, so we call a meeting. Because meetings are measurable, and attendance at meetings also is measurable, calling meetings is a way to feel like something is getting done. Did you go to the meeting? You can’t make the meeting!? Were you invited to the meeting? Even our calendar software is designed to enable meetings, allowing us to see when others do not yet have a meeting. Maybe we’ll set up a regular weekly meeting, or even a daily meeting. But why? Odds are, you have sometimes missed a meeting, or wished you could miss a meeting, because you wanted to actually get work done. Yet your absence would be measured, so you go. Of course, meetings can be useful; but in big organizations far too many meetings are called, since they are a measurable substitute for knowing the big “why?”

Enter strategy. A good strategy lays out the logic behind why a company exists, and so is a tool for leaders to help their people understand why they come to work. A useful strategy makes clear the link between what people do at work and what the organization is trying to get done. Do you tell a technician that they need to come in this weekend, and leave it at that? It would be better to add a small explanation. Explain why. How is that person’s work connected to the organization’s reason for existence? Perhaps the technician needs to come in because their support will enable an engineer to serve a customer. Although the customer will never know the technician, the technician should at least know how her work was important. Strategy is how leaders help their people know why they come to work.

For more on strategy as sensemaking, see the work of Professor Sarah Kaplan.

Saturday, July 15, 2017

Honorable Leadership

The water was on fire. A Japanese "zero" had just struck the ship, water was flowing over the railings, and above the roar of the explosion he could hear the screams of men in the water. He did not hesitate. Later he would recall figuring that the burning fuel was probably only on the surface of the water. So he dove into the flaming South Pacific. One-by-one he hauled the injured men back onto the boat. He would not remember how many he saved.

When we think of honor, often what comes to mind are great leaders like this man, my father Burton Barnett, who would later be decorated with the Bronze Star and the Purple Heart for his service as a radio operator with the Amphibious Corps - a unit within the US Army that was deployed alongside the Marines as they landed on islands during World War II.

But this image neglects a more common, if mundane, form of honor. I refer to those who show leadership every day by living up to the duty implied by their office: the school principal helping one of his teachers with a difficult student; the general manager of a cement plant fulfilling a promise made years before to residents near the factory; the scientist supporting one of her postdocs whose experiments just failed. Honorable leadership includes these seemingly small moments too. By living up to our duty during such moments, we make real our promises and show that a person's word has meaning.

Seen this way, my father's greatest leadership challenge may have come years after the war, and involved honorable actions that would never be acknowledged with a medal. As a supervisor with what we then called "the phone company," he was ordered to lay off dozens of workers during the computerization of the American phone system. The cuts hit hard and fast, with thousands laid off systemwide - most with little warning, just a pink slip appearing one day at work. But not for my father's workers. He met with them individually, looked each one in the eye, and explained as best he could why the layoff was happening and how he and the company would try to help them through the job loss. Returning home each day he was quiet and subdued - not his normal upbeat self. Living up to one's duty can be difficult.

It seems we cringe every day when reading the news, learning of yet another example of juvenile behavior by so-called leaders who do not deserve the title of their office. These pretenders disrespect their workers, commit crimes, and act in self-interest in violation of their duty. They wrongly think that leadership bestows entitlement. To the contrary, leadership implies duty, and honorable leadership occurs only when we live up to that duty. Thankfully, we still have the many quiet heroes of everyday life - those who understand the calling of honorable leadership, quietly living up to their duty each day.

Sociologist Philip Selznick developed the idea of "institutional leadership" connected to creating and exemplifying the values of an organization in his seminal book Leadership in Administration.

Friday, June 30, 2017

The Senators' Sons' Problem

Imagine you have to take a test in a room along with 50 other people. I will administer the test, and it will be objective – perhaps just straightforward math problems – and I will grade it anonymously. A very valuable prize goes to each test taker who makes it into the top 5% among the people taking the exam, silently and independently, in the same room with you. You do have a choice, however. You can take the exam in either of two identical rooms, each of which contains the same number of test takers. The only difference between the rooms is the criterion used to select the other test takers. Individuals chosen based on academic merit are in one room. The other room is filled with senators’ sons. Against which group would you prefer to compete?

I have noticed that people prefer to compete against the senators’ sons. Presumably, privileged though they may be, the senators' sons are easier rivals than a group chosen according to their ability. People seem to feel uncomfortable giving this answer in a public setting, perhaps because someone there might be a senator’s son and could take offense (although he may not understand the insult). But keep in mind that we prefer to compete against the senators’ sons not because we think that they all are weak performers. Any one senator's son might be quite sharp. Rather, our intuition is that the privileged group is weaker on average than the average of the merit-based group. This is the senators' sons' problem: Privilege and merit sometimes are negatively correlated. But why?

Behind the senators' sons' problem is a process known as “selection”. In most contests, you have to qualify in order to play – as when people try to get into a school or a company, or when firms vie to get into markets or to do business in different countries. Criteria have to be set up to select who gets into these contests and who does not. When merit is the criterion, those who play must be capable. When some other criterion is used, such as privilege (as in the case of senators’ sons), then for them being capable is optional. And when merit is optional, average levels of merit will be lower.

In life, both merit and privilege together decide who gets to play. If you lack privilege, you better be good. If you lack merit, but are well connected, then you may be able to play too. In situations like this, merit and privilege are negatively correlated: The senators' sons' problem. So if you see someone succeed despite lacking connections, club memberships, and fancy titles, they must be good at what they do. Similarly, if a foreign company excels despite government policies favoring domestic firms, then the foreign firm must be impressive. The same process happens in entrepreneurship, too. Big, established firms rely on their reputation to get business, while start-ups have to prove that they are capable. Consequently, most start-ups fail; those that survive are then especially competitive. In each of these examples, those who make it without privilege had to be good.

I think we all realize that the senators' sons' problem is at work in many areas of life, which is why so many people try to deny their own privileged backgrounds. How we all wish we were a “self-made man." People who claim this are really wanting to say “I’m no senator’s son.” After all, if we got ahead without privilege, then we must be really capable.

So here is the question for you and your organization. How much do you rely on privilege to win in your markets? How much of your performance is based on merit? And, inside your organization, do you reward privilege or merit? In my view, great leaders build companies that win on merit - and inside their firms create systems that reward merit.

For an academic study showing how this idea plays a role in competition, see my paper on compensatory fitness.

Thursday, June 15, 2017

The Red Queen

Do you send your children to the least demanding school you can find? Of course not. What kind of parent are you? You know that they need to measure up to a high standard in school if they are to do well in life.

Yet every day I hear business leaders claim that they want to avoid competition. Are you one of these leaders? What kind of leader are you?

Of course, when organizations compete, they make it difficult for each other to perform well. But this fact has led to a great misunderstanding. Many business leaders, especially those trained in business schools, infer from this fact that they should avoid competition. That conclusion is wrong.

Pressure from competition causes people to search for ways to improve their company's performance. These improvements, in turn, make companies stronger competitors. So now these improved firms put more pressure on their rivals, who must also find a way to improve. Once those rivals improve, they now are stronger competitors, starting the whole cycle over again. So it is that competition causes organizations to learn, which in turn intensifies competition in a self-accelerating process known as the “Red Queen” effect. This term was coined by the evolutionary theorist Van Valen in reference to Lewis Carroll’s Alice who remarks to the Red Queen: “Well, in our country, you’d generally get to somewhere else – if you ran very fast for a long time as we’ve been doing.” To this the Red Queen responds: “A slow sort of country! Now, here, you see, it takes all the running you can do, to keep in the same place.” Van Valen noted that biological evolution features such change. In my book, I demonstrate that in an ecology of learning organizations, relatively stable performance masks absolute development.

The Red Queen is at work around us all the time, triggering progress on many fronts. When the Korean steel firm Posco came up with the "finex" process, this innovation raised the bar for any firms wanting to compete in the global steel business. Those steel firms that kept pace are still competing today. Similarly, when Qualcomm revolutionized digital wireless transmission by making CDMA technology workable, this put pressure on every other firm in that space to respond. Apple, Samsung, Nokia, Ericsson, LG, and many other firms engaged in that competition for years. Some still are competing, but only by remaining innovative.

The result?  Well, to the firms involved it can feel like they are running in the same place since each is evaluated relative to the others. But for the rest of us, we've seen this:

evolve into this:

As a consumer, you probably think of this amazing record of innovation as something that was inevitable. But this development did not have to happen. Each innovation along the way was carried out by a firm as it attempted to do a better job, in turn raising the bar for others. So perhaps for a while your your device could not map correctly, but by now the problem has been fixed. Competition still thrives in the wireless industry, so each manufacturer keeps pressuring its rivals to do a better job.

Yet according to many, firms are supposed to find a way to avoid competition - to gain "positional advantage" or locate in "blue oceans" where rivalry is weak. Had Qualcomm, Apple, LG, Samsung, and the others taken this advice, how different the wireless industry would be. (Indeed, many experts on the telecommunications industry argued just a few years ago that it was a "natural monopoly", where competition would be "ruinous"!) Avoiding competition would be more comfortable, for sure. But avoiding competition is just a way to shut down the engine that generates innovation.

But, you might say, surely competition is bad for an organization's performance. Don't monopolists outperform other firms? Isn't that why so many companies are trying to dominate their markets? Well, yes, in the short run a monopolist performs better than a firm facing rivalry (other things equal). But over time, that monopolist gets lazy. Meanwhile, over time firms facing competition continue improving. If fact, I estimated the statistical effects of Red Queen competition on hundreds of firms over many, many years, and found the following pattern:

On the left, comparing two inexperienced firms, the monopolist performs better. But over time experience makes the firms facing rivalry improve, eventually becoming better performers than had they found a way to be a monopolist. That is the Red Queen effect. As a firm competes, it becomes more capable, and so performs better. Even though its rivals also perform better, the net effect turns out to be beneficial in time. Highly competitive markets, over time, feature some of the world's most capable and innovative companies.

Reflect on your role as a business leader. Is your job to shield your company from competition? Not if you want it to learn and improve. Short-sighted business leaders hide their companies from competition. Great leaders do just the opposite: They understand that competition teaches. So what kind of leader are you?

Wednesday, May 31, 2017

Deep Knowledge

In the 1968 Olympics, Dick Fosbury would forever change the sport of high-jump. There he won the gold medal using an unheard-of approach: falling backward over the bar. Prior to Fosbury, virtually all athletes jumped face-first, rolling forward over the bar in the air. But Fosbury, age 21 at the time of the Olympics, had since his high-school days been experimenting with a back-first approach. Those years of experimentation finally paid off with the gold medal, after which his "Fosbury Flop" would become the standard approach to the sport.

Fosbury's innovation was the result of "deep knowledge," an understanding of a domain so complete that it can only be gained through a significant investment of time and focused effort.

Many times innovations come from those who have deep knowledge in a particular domain.

Consider Martin McVicar. He invented the swiveling forklift, a product that his Irish company ships today to companies all over the world. McVicar's innovation was possible because he spent decades working with forklifts in tight spaces, experience that helped him come to know the use of the forklift inside out.

Or take Orlando Vargas, who developed an industrial soap made from cactus, which today is sold to businesses all over Mexico. In his case, a degree in chemical engineering gave Vargas the perspective needed to see the possibilities for using cactus when he moved to cactus-rich Baja California Sur from his native Colombia in 2005.

And examples abound if you consider innovations in science and technology. Philosophers of science, particularly Lakatos, argue that scientific progress proceeds through research programs - with knowledge building cumulatively over time.

You're thinking "Barnett says know your stuff." Common Sense. But not so. These days the popular view is just the opposite. Broad knowledge is all the rage, the idea being that by combining knowledge from unrelated worlds we come up with great innovations. The case for broad knowledge is compelling, and the evidence supports the value of broad knowledge (see the work of Lee Fleming). But broad knowledge comes at a price, and its popularity has caused many to underestimate the value of deep knowledge.

When we fully absorb ourselves in a particular domain, investing the years of focus needed to gain deep knowledge, we forgo breadth. But in return we come to know the nuances and background ideas that can help us recognize patterns when they appear - to see opportunities that the dilettante would overlook.

So, yes, know your stuff. But by that, I mean immerse yourself in your area of specialization. Be authentic to your context. See the possibilities that the fair-weather innovators will miss.

For evidence on the importance of deep knowledge among innovating firms, see my paper on the subject.

Monday, May 15, 2017

On Behalf of Sprezzatura

It was in June back in 1991 - my first day of work at Stanford. My wife dropped me off, since I did not have a car and had my golf clubs, wanting to try out the Stanford Golf Course after work. As I walked up the parking lot toward the Business School, it hit me how bad this looked. The new guy shows up carrying his golf clubs. What kind of work ethic is that?

What to do? Looking about, I noticed some handy bushes where I could stash the clubs. They'd be ok until I got out of work. But it was too late. Up ahead the dean was approaching! Mike Spence, the famous economist and our dean at the time (who, in a few years, would win the Nobel prize), was walking straight at me coming out of the school.

I put my head down and kept walking, figuring that I looked young; maybe he'd just think I was a student. But it was not to be. "Bill!" he said, looking straight at me. "This must be your first day at work! Welcome!"

I tried to look as professional as possible, but I was carrying a set of golf clubs. Mr. Busy? Not! "Yes, Mike. Great to be here."

"And you brought your clubs!" he observed. "What a great day. I'm heading out myself!" He gestured to the windsurfing board clipped to his car's roof rack.

Ah, sprezzatura. The internet says the term was coined by Baldesar Castiglione in Il Cortegiano, where it refers to an air of measured nonchalance among accomplished courtiers. Become dean. Win the Nobel prize. Do a little windsurfing. No problem. In the Stanford parking lot that day, I had my first lesson in the culture that then characterized Stanford: Sprezzatura. You may be paddling furiously under the water line, but above the surface you're a calm and graceful swan.

But that was 1991. Decades later, I can report that the days of sprezzatura appear to be behind us here in the silicon valley. Today, a day in the life seems to be all of a rush, running from one thing to the next, face aimed unwaveringly at the phone. But I wonder about all this busyness. Are these hyper-busy people really all that productive? Or are they just looking busy to seem important?

Being busy to look important is nothing new. Chaucer wrote in The Canterbury Tales (circa 1387) of the important lawyer: "Nowhere a man so busy of his class, and yet he seemed much busier than he was." Spend some time people watching on University Avenue, here in Palo Alto (perhaps over a glass of wine), and you'll count dozens of head-down hurriers - but no sprezzatura to be seen anywhere. Even the others at their tables will be busy staring at you-know-what. Perhaps they are trying to fool others, since important people are thought to be busy. (In some contexts, busyness even serves to signal high status.) What's worse, perhaps they are fooling themselves. A full calendar, appointment pings, deadline checklists, "screens up" at meetings, all the trappings of a productive life may convince us that we really are productive.

But what about stopping to think? One advantage of sprezzatura is that it includes having long conversations with others - conversations without an agenda. Sprezzatura means we breathe between sentences, allow silence in the conversation, and listen long enough to hear. Do that enough, and you think - not just of what you must consider, but also of what you may have never considered. We could use more of that in the valley these days.

Remedy? Well, you could spend some time in Croatia. No, seriously. Croatians have a wonderful habit of spending hours on end relaxing and talking at coffee houses. I love the fact that in the Croatian language, they use the phrase ajmo na kavu, that is "let's go for coffee," to mean taking time to talk and think with others. Talking and thinking can lead to many creative things - maybe even some productive things. So what looks on the surface as sprezzatura may be more important than you realize, and it cannot be had if you're driving through Starbucks.

In your spare time, read the book in which Sprezzatura was first coined.

Sunday, April 30, 2017

The Partnership Fallacy

Remember doing group projects in school? Typically your teacher would partner you up with students who had different skills. Maybe a good writer would be matched with someone who knew math, for instance. In theory, you would each teach the other; the group project would get done, and everyone would learn. But what really happened? Perhaps pushed for time, at some point everyone in the group realized that the job needed to get done. And if you wanted to do well, this meant dividing labor. You broke down the project into parts, as in the well-known "divide and conquer" algorithm pictured here, and each of you took on the part that you understood best. In the end, the project was a success – but the math person did even less writing, and the writer again avoided math. So goes the partnership fallacy:  We partner up hoping to improve our weaknesses, only to divide labor and so make our weaknesses even worse.

Business leaders often fall victim to the partnership fallacy. For example, it may be hard to believe today, but in the early 1990s Apple Computer (as it was then called) was widely known to be bad at making small devices. The company’s earliest attempts to make small computers had flopped. Meanwhile, Sony stood out as the worldwide leader in making cool, miniaturized electronics. So Apple’s leaders decided to form a partnership with Sony. The idea was for Apple to learn about miniaturization while producing a laptop computer. History says that the alliance succeeded, because it created the first “Powerbook” computers. But in terms of learning, the alliance was a failure. Case studies at the time reported that deadlines kicked in, and pushed the two companies to each stay focused on what they did best. In particular, Sony took care of miniaturization, with very little day-to-day contact between Sony and Apple engineers. In the end, they got the job done – but Apple emerged without learning Sony’s miniaturization magic.

What’s more, often partnerships fail even to accomplish their stated goal, never mind learning. If you have much experience, you can probably name an example or two of failed partnerships. Business leaders typically allow these arrangements to fizzle out without much fanfare. Combining firms through merger and acquisition suffers this problem, too. We talk a good story about “synergy” and “learning” and “1+1>2”, but the evidence shows that combining firms typically increases only the variance in performance (not the level of performance as promised by “synergies”).  

The lesson: Partnerships are not a substitute for learning by doing. Partnerships sound great during a planning session. After all, who can argue with the idea of bringing in somebody who already knows what you need to learn? But ask yourself, how did they come to know?  Odds are, they learned the old-fashioned way: by doing. Effective leaders understand how organizations learn, so they avoid the partnership fallacy. Partner if you must, but don’t fool yourself that this is a great way for your organization to learn.

For a thorough academic study highlighting the value of organic learning and growth, read my book on competition.

Saturday, April 15, 2017

Differing without Dividing

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

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

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

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

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

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

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

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

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

Thursday, March 30, 2017

On VCs, Clairvoyants, and Magicians

The guy at the next table looks out at the amber sunset, puffs up with gravitas, and announces to his wide-eyed friend “soon all things will be connected seamlessly to the ubiquitous network." Time to change tables. I grab my drink and set off to find an area outside of Houdini’s vocal range. The bar at the Rosewood is cursed by its reputation as the place where VCs from Sand Hill Road meet, so it attracts posers playing the prophet like LA attracts actors.

Coincidentally, on my way over to the Rosewood, I saw along El Camino Real a hand-painted sign saying “clairvoyant conference” with an arrow pointing to a hotel. Imagine a conference for clairvoyants! You would not need to have sessions on “future trends,” since they would already know. But wait: Why the sign giving directions, for that matter?

Since time began, it seems people want to believe that some of us have a special knowledge of what is to come. So we’re vulnerable to those who claim such knowledge - albeit that different people fall for different images of the prophet. You might mock the trappings of the village shaman, the tarot reader, and the astrologist – but I bet you’d clear your calendar to hear the latest word from the valley’s richest VCs.

I’m not just waxing cynical. It turns out that venture capitalists typically are bad at telling the future. As an industry, VCs don’t perform that well financially. To find VCs who outperform the market, you have to selectively sample only the most successful ones - but that is true for slot machines, too. OK, a minority of VCs do tend to appear repeatedly on the winning side, so perhaps they are the real Houdinis. Maybe. Or maybe having been successful they end up getting preferential access to things that continue to make them successful. (I appreciate that advantage, working at Stanford.)

Whatever the reason, the fact that at least some VCs are repeatedly successful has created the mystique that there does exist, somewhere along Sand Hill Road, somebody who does know what’s next. Hence all the puffery at the Rosewood. How are we to know that he’s not really a visionary?

Professor Elizabeth Pontikes and I took a careful look at this question. We collected data on thousands of firms in the software business and looked at their fates over time – including both successes and failures in the data. We found that these firms herd into “hot” markets that have been blessed by the VCs. But we also found that the VCs herd into markets too, following each other in financing frenzies. The resulting hype cycles lead to bad outcomes for companies; firms getting funded in these waves are the least likely to ultimately succeed by going public. So much for Houdini.

Perhaps even more interesting, the VCs themselves seem to be aware of this problem. While VCs herd into hot markets, at the same time they try to avoid investing in firms that do so. The VCs prefer instead to invest in those who pioneered what is now a hot market (and survived). As a kid I had a precocious classmate who would jump to the front when he saw a trend, pointing resolutely forward in Napoleonic fashion, proclaiming “follow me!” I’ll have to check; perhaps he grew up to be a VC.

Remember, the most disruptive changes are not predicted by our experts. They are pioneered by those foolish enough to ignore the consensus. Be skeptical of those who claim to know what's next.

For the research behind this article, see my paper with Elizabeth Pontikes.

Wednesday, March 15, 2017

Define the Game

"Change the game" you'll hear people say. In fact, we often define the game we play when we choose how to play it. But only some of us realize this fact. I was reminded of this lesson in Moscow by the French chess master, Joel Lautier.

Joel and the rest of the team had to solve the problem before morning. Vladimir Kramnik would sleep, of course. He would need to be rested fully, and even then it would be a long shot to beat Garry Kasparov. The dominant world chess champion was unlikely to lose. But the team had an idea. Even if it worked just once - there were many games in the match - it might open up the smallest of chances.

The team were all wiz kids, each a chess master in his own right. No one person could fully prepare alone for the many possibilities of a match at this level. So each of the grand masters had his team of trainers assigned to work out the best solution to a particular situation that might arise. By morning, each team member needed to have solved his problem and prepared the result of his analysis for presentation to Kramnik himself, who would scan the analysis and commit it to his marvelous mind. Few words were needed.

Joel Lautier was on the team because he is one of the few to ever beat Kasparov. Lautier’s job was key: Formulate Kramnik’s best “black” opening. Many readers will know about the most well-known chess openings. But, in fact, there are many more possible openings than the common ones, and by its nature chess allows for the invention of new openings to this day. But in such an old and storied game, the chances of inventing an effective new opening are not great. That was Lautier’s task.

What made Lautier’s job especially important was that Kasparov was especially good at the attack. Key for Kramnik would be to find a way to improve his chances in the games where he started as “black”- second - since those games would favor Kasparov’s attacking ability. And he would need to be able to repeat the opening over several games as black, a tough job once the opening was revealed.

Working into the night, Lautier formulated a risky approach for Kramnik. The opening was not ideal, but it might work given Kasparov’s strengths relative to Kramnik. It involved an odd series of moves, quickly leading to the trading of queens. When complete, the strategy - which has come to be known as the "Berlin" opening - left Kasparov, as white, with a slight positional advantage (with his players in slightly better places on the board). But the opening hurt Kasparov too, by skipping the complicated “mid game” where Kasparov famously had an advantage. The strategy worked. The opening shifted the edge enough for Kramnik to draw games that he would have otherwise lost.

Several years later, when I was lecturing in Moscow, Joel Lautier was in the audience and he asked me this question: “There may be many possible winning business strategies. How do we know which is best?” The answer comes from Mr. Lautier's example. The best strategy plays to your strengths, and away from the other’s. Don't just play the game as defined; define the game you play.

Research on "metacompetition," defining the game you play, appears in my book on Red Queen competition.

Tuesday, February 28, 2017

Why You Should Turn Down That Well-Paying Job

I remember being young and broke, going to an interview for an internal auditor job at a bank. The bankers who interviewed me were enthusiastic; they were authentic bankers. I did my best to pose as a banker, but as often happens to posers I was found out. The bankers asked me for a “writing sample.” I showed them my poetry. It was not to be.

Some people become accountants because they want a secure job. There is much to be said for pragmatism; better to be an employed accountant than a wanna-be actor. But is that the right comparison? Here is the issue: Somewhere tonight, maybe around 3 AM, some guy will be laying awake thinking about accounting. He lives and breathes accounting; it occupies his thinking even in his spare time. If things get competitive for accountants, he is going to dominate. His rivals are acting like accountants; he is the real thing.

Competitive advantage goes to the authentic. Their job is their avocation. They would do it, if need be, without pay. The authentic persist at getting through the tough parts of their vocation. They ponder it during the quiet times, so the magic of insight makes their work more creative. The gardener out on a cold morning; the writer typing away when she should be sleeping. Such people will take their vocation as far as it can be taken. By contrast, those who merely pose will not. As in the old adage “you cannot coach passion,” no amount of posturing can outdo authentic dedication.

The practical reader is objecting at this point, noting that there is a big economic difference between being an authentic accountant and an authentic writer. This contrast brings to mind a corollary adage: “Every person has a special gift.” As each of us grew up, we searched for that gift – the activity that seemed authentic to us. Our parents hoped that it might also be an activity that pays. How fortunate is the authentic accountant! His passion lines up well with economic gain. Meanwhile there goes the authentic musician, waiting on the accountant as he dines. Don’t get me wrong; I love the arts and admire the authentic artists. But though all of us may have a gift, some gifts pay better than others.

Does this mean that only some of us can follow our calling? That depends on how long we search. My failed attempt to be a banker left me broke still, but the upside was that I kept searching. Life is a “sequential search” process. We search, one by one, trying to match our gifts with the opportunities of the world. When we settle on an occupation, we also stop our search. If we stop the search at the first pragmatic job, then we are posing - and will surely be out-competed by the authentic. But if we keep searching, we increase the chances of matching our gifts with opportunity. Of course not all jobs pay the same. But better to keep searching for a way to remain authentic, than to settle early for mediocrity. Search enables authenticity.

The lesson: Ask “what do you do well?” and then search to see how that ability fits the opportunities of the world. You will have failures along the way if your search is thorough. But the upside of each failure is that you'll be required to keep searching, again increasing your chances of finding a match between your passion and the opportunities of the world.

More dangerous than failure is that you might, early on, score a well-paying job for which you are not authentic. Turn it down. Search enables authenticity.

For an academic treatment of the sequential search strategy, see Levinthal and March’s paper.