Thursday, October 31, 2019

What is Strategy?

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

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


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

"Bill says you need a strategy." Obvious. But you would be surprised at how many companies I see that do not have direction. The problem? Let's call it strategy neglect. Meaningful strategy gives direction; you know you suffer from strategy neglect when people in your organization don't know how to resolve conflicting priorities. I'm not talking grand mission statements about changing the world, nor lengthy strategic plans packed with detail. I'm talking about strategy: the logic that explains why we might win.

And to be useful, your strategy’s logic must be specific enough to guide action. This means that a useful strategy includes a working definition of the company's goal, what it does, and how it does it - a logic that a rank-and-file employee can put into action. Maybe I finish my project a day late because our strategy is about completing work to perfection. Or maybe I cut some corners to be on time because we're about time-to-market. Whatever the strategy, it needs to be alive in the day-to-day actions of employees. Otherwise, as in so many companies, we are left confused.


Strategies Emerge

Of course, you not only want your strategy to be logical, but you want your logic to be right. Logics can be wrong when they are based on assumptions about the world that turn out to be wrong. For example, in the early 2000s Chris Gorog and his team launched a music subscription service long before Spotify or Apple did so. Their company, “Napster 2.0”, would fail - leading many to doubt at the time that music subscription could ever be a viable business. Of course, we now know that subscription is a winning logic in music distribution. But we also know that music subscription services assume the existence of a well-developed wifi infrastructure and ubiquitous smartphones - both assumptions that did not hold back when Gorog was starting his company. In this way, a winning strategy requires a sound logic - one that is based on correct assumptions about the world.
Image result for spotify

Since winning strategies need to be based on correct assumptions, all strategies are a work in progress - because the world keeps changing. Moreover, companies are also learning every day about what they are capable of, in much the same way that a person learns about her strengths by trial and error. Remarkably, research tracking companies over time shows that many of the world’s greatest organizations discovered their strategies, winning for reasons they did not understand initially.

For example, the fintech powerhouse Alipay today has over half a billion users, and continues to grow while remaining extremely profitable. Yet the service was created originally back in 2004 to help the then-new Taobao C-to-C ecommerce platform compete with eBay. Neither Taobao nor Alipay was initially intended to be money makers. Rather, they were meant to deter eBay from growing as a competitor to Alibaba. Yet by banking the unbanked, and enabling those without other credit options to enter the ecommerce world, Alipay discovered an entirely new and hugely profitable strategy. Today, leadership at Alipay is entirely clear on their strategy - even though the logic of that strategy emerged through experience.


So it is that strategy emerges from experience. Leaders play an important role in this process, because they help their people understand what is happening to the company. As Steve Jobs put it during his commencement address at Stanford in 2005: “You can’t connect the dots looking forward; you can only connect them looking backwards.” Because strategies emerge, one of the primary responsibilities of leadership is to make sense out of why their firm wins. That "sense-making", when formalized and explicitly stated, is strategy.


Creating and Capturing Value

In recent times, the video entertainment industry has seen tremendous changes, with viewership moving from traditional television broadcasters to online and streaming services. How do we understand the various strategies emerging in this context? Why is Netflix, a streaming service, spending so much on original content creation? Why is Disney, the storied king of content creation, now moving aggressively into direct-to-consumer streaming?

To make sense of these changes, it helps to distinguish between "value creation" and "value capture." Video production studios create value when they produce content that people really want to watch, like the comedy series Seinfeld produced by Warner Brothers. Video distribution services, such as Netflix, also create value when they enable consumers to conveniently view such content. Taken together, the content producers and distribution services create and deliver entertainment - the "value" that the consumers are willing to pay for.

But who gets to keep that value? Consumers pay Netflix billions of dollars in revenue every year, but Netflix, in turn, pays billions of dollars in license fees to the studios that create much of the content that they distribute. Netflix does get to capture some of the value, but the studios that produce content also capture a great deal of that value. To be successful, the different players in this business need to both create and capture value.

The struggle to both create and capture value explains the many changes going on in the video entertainment industry these days. If Netflix can produce original content, it will reduce the amount of value it pays out to the studios; that is, it will capture more value. If Disney can stream its content directly to consumers, it will reduce the amount of value it leaves with distribution services like Netflix; it will capture more value. Companies in this industry today are following a strategic logic that includes both the production and distribution of content, in the hope that they can create and capture the most value possible.

But there is a catch: Value is created only if the costs of doing so are less than the amount consumers are willing to pay. Netflix is paying a great deal to create original content. Some pundits speculate that they may not recoup their investment. Similarly, Disney is paying a great deal to create a direct-to-consumer streaming service. Each of these companies is following a strategic logic - one built on the assumption that it can create value greater than the costs involved. Whether this assumption turns out to be correct, only time will tell. No matter how this particular example works out in the end, the lesson is clear: A winning strategy lays out the logic of how a company will both create and capture value.


What About Planning?

If strategies emerge, then what about planning? After all, If you say “strategy” to most people, they will think of the annual “strategic planning” (budget-and-goal) process at their place of work. Even though strategies emerge from experience, we must of course plan because we must create budgets and goals to guide action over the year to come. But that budget-and-goal process, in and of itself, is not strategy, since such planning can and often does take place without any guiding logic.

The best example of planning without logic is historical: The Soviet Union. Business school professors miss the Soviet Union. The nemesis of old used to provide us with a stream of cautionary tales.

Take nails, for instance. Socialist economist Alec Nove wrote of this example: In an effort to increase the production of nails, the Soviet planning authorities created production incentives based on numbers of nails produced. In response, the Soviets enjoyed the following year a plentiful supply of many many very small nails. 


To correct the problem, the authorities cleverly switched to incentives based on weight, and the producers responded by manufacturing very large nails. The travesty was parodied in this cartoon from the satirical magazine Krokodil. Ah yes, better to use the market. But the real lesson of the Soviet experiment is about planning: Unless it is guided by a strategic logic, planning doesn't work.

Corporations must and do plan, of course. Their leaders often call these plans "strategic" to give them gravitas. But typically strategic plans are just budgets and goals. Budgets and goals are important, but they are not "strategy" if by strategy we mean the logic that drives action.

For planning to be strategic, it needs to be guided by a clear logic that links the actions of people throughout the organization to the success of the firm. In this way, planning is a way to go from sense-making - "connecting the dots" - to giving direction. Planning guided by strategy builds on what we have learned about our organization's successes and failures, turning those lessons into guidance for future action.

Monday, September 30, 2019

The Whole Product

Next time you are in Brazil, leave the typical tourist locations and visit the nearest Magazine Luiza, the growing retailer headed up by Chairwoman Luiza Helena Trajano. There you will see another side of Brazil - the many up-and-coming consumers just entering the lower middle class. Brazilian families looking to buy their first refrigerator, or other modern convenience, probably do not go to the retailers that are so well known globally. Rather, they probably head to Magazine Luiza or one of the other, similar home-grown retailers. Why?

Of course, this company knows its logistics, and understands distributions channels in Brazil. But what makes this company special is that it understands the “whole product” – although probably nobody in their organization uses this phrase.

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

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


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

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


For more on this idea, read the work of Regis McKenna.

Wednesday, July 31, 2019

The Price of Genius

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

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

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

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

In short, foolishness is the price of genius.

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


Sunday, June 30, 2019

The Signal

The opportunity was impressive.

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

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

What happened?

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

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

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

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

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

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


Marc Andreessen has an interesting article on product market fit.

Friday, May 31, 2019

Predicting Unicorns

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

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

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

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

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

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


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

Tuesday, April 30, 2019

Two-faced Compliance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Sunday, March 31, 2019

The Acquisition Trap

Shortly after coming to Stanford I realized my mistake. I should have hired an actor to go to work in my place. 

My first day on the job, he would arrive and fill out the paperwork, meet the dean, and step into the classroom. He would be popular, of course; perhaps I would hire a comedian. I could teach him the material in private, and he could cartwheel into the classroom like Jackie Chan – or maybe sachet in like George Clooney. Meanwhile, I would hide in the library basement and write research articles. But, alas, I did not devise the scheme until it was too late. I had already reported for work, so my colleagues and students all know that I am no Brad Pitt – and ever since I have split my time between teaching and research.

The good news is that by doing things myself, I learned how. I’m still unlikely to be called by Angelina Jolie any time soon, but I’m a better teacher for having done this myself. That is how things go; call it the “learn or buy” decision. Need food? Go to the store. Need to finish a math assignment? Get to work. You could pay someone to do your math assignment, but then you’d not only be a liar, you would never learn your math. Paying for things is a way to avoid learning. Some people change the oil; some people pay Jiffylube.

Common sense, you say. But I work with companies all the time who don’t get this basic truth. Leadership wants their company to learn something, so they acquire another company that already knows how. But this purchase does not make their company learn; it just means they own another company that knows how to do things that they don’t. For their company to learn, they would have to do it themselves, and through that difficult process they might have learned. But paying someone else does not help you to know. In fact, since you can rely on the acquired unit, you can avoid having to learn.

For example, the American company eBay (the inventor of internet auction websites) decided to enter China a few years ago. They could have gone in themselves, and learned, and it would have been risky and difficult. So instead, they acquired China’s then-leader in that space, Eachnet. Earlier, Eachnet had learned (by doing) a lot about how internet auctions work in China – whether and for what you can charge fees, how to deal with the trust problem using escrow services, the costs and benefits of physical trading locations, how to do business with people who don’t have a credit card, and the list goes on. eBay’s leadership in Silicon Valley did not know any of this about China. After the acquisition, eBay’s leadership still did not know any of this. They just owned a company that knew. They fell into the acquisition trap.

You may think that “good execution” can get you out of the acquisition trap. You’re wrong. After the acquisition, you have a choice. You may choose to absorb the acquired company into your company, or you may choose to let it stand alone. If you absorb, business consultants will likely be involved; they call it “post-acquisition integration.” You can pay these consultants to tell you about “synergy.” But the research suggests these promises are often not fulfilled. (The results are mixed. It appears that acquisition increases the variance in performance. That means acquisition makes some firms much better off but others much worse off – and it is hard to know in advance which will be which.) In practice, “integration” is where the two companies are put together, some people lose their jobs, and many others end up in new jobs (that might not be right for them but they are glad to have the job at all). Typically the purchasing company dominates in this process, which means that the knowledge of the acquired company usually gets watered down or vanishes entirely.

Your other choice is to leave the acquired firm alone. One of my favorite CEOs, Matt Harris, once had to leave alone an acquired software development group in Israel because, to paraphrase that group’s leader, they “would kill for each other, but they did not care” about the acquiring company. Harris’ company needed their work, so he let them be and designed the development process to take advantage of the situation. This worked out fine because Harris was not interested in having the company learn from the acquisition. But if your goal is to learn, you won't get there by leaving the acquisition alone.

What about the successful acquisitions you've heard about? You may be thinking of an example or two now. Caution! We can always cherry-pick success stories afterwards. There are also many failed acquisitions, and that is why we need to learn from research that does not sample on success. (Sampling on success, we should play slot machines, too.) That said, we can all name companies that have a good track records on acquisition. Maybe you’re thinking of Google, or 3M, or Cisco, or Blackstone, or name your favorite successful acquirer. Perhaps some firms know how to acquire better than others?

True enough, some companies seem able to acquire better than others, but think about why. Google absorbs innovative technology companies all the time; that is where many of their “innovations” come from. Facebook spread through acquisition so that it now has four distinct entities in the social network space. Private equity companies routinely make money through acquisition and restructuring. But these various examples do not imply that acquisition for learning works. In fact, we know that the less the acquirer needs to learn, the better the acquisitions typically go. Good acquirers already know what they are doing; they may be getting many things from the company they buy, but they are probably not treating that company as their teacher.

There is no substitute for learning by doing. Perhaps you don’t really want to know how to change the oil, but if you do, get to work. And if you’re acquiring a company to learn what it knows, you are stepping into a trap.


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

Thursday, January 31, 2019

How to Change for Good

Sometimes I get the pleasure of teaching Stanford undergraduates. How very bright they are. And the best part: Give me an hour to lecture the undergraduates, and I can send them away completely changed. The problem is, then they go to the next professor, and she changes them right back again!

The lesson: Easy changes are easy to undo, so easy change is temporary. And the easiest changes are the snap decisions, made in a moment, since they can be unmade just as fast.

Sound familiar? If you are an experienced executive, you no doubt have tried to change your approach to leadership. Perhaps you've tried often. Did the changes stick? If so, good for you. But very often our attempts to change ourselves are foiled by the forces of inertia: routines at work; calendars so full of meetings they leave no time for thinking; colleagues who look skeptically when you behave unexpectedly - especially if you've been to a leadership training. The forces of inertia are strong.

Yet every summer, for six weeks, I see a couple hundred talented executives change their lives forever.

Wait. Bear with me.

Yes, I'm plugging the Stanford Executive Program (SEP), which I direct. But I'm talking about how to change as a leader - how to change for good - and you can use the ideas here even without coming to SEP.

To see what makes change stick, it helps to see the difference between one-time change and trajectory change. One-time change happens in a moment, like when I lecture the undergraduates. Such change often happens in a big announcement: "turning over a new leaf"; "from now on..." But well intended though they may be, loudly proclaimed changes made in a moment can be reversed just as loudly in the next moment. Like young love, no need to worry. Just wait a day.

Image may contain: one or more people, sunglasses, ocean, sky, outdoor, nature and waterTrajectory change, on the other hand, is hardly noticeable at first but over time leads to a big difference. Those who navigate the sea, like Paul Barnett, shown here, know the problem. Leave something metal next to your magnetic compass, and the trip from San Diego to Hawaii could end up in Panama. The slight initial change in trajectory would hardly be noticeable at first, but held long enough the new trajectory leads us to a very different place.

Image may contain: sky, ocean, outdoor, nature and waterSo how do you change your leadership trajectory? (First, get past the trajectory metaphor; countless self-help books tell you to change trajectory, but you are not a boat.) To apply this idea to leadership, replace "trajectory" with "understanding." The way you understand the facts gives direction to your leadership. When you change understanding, you change the direction of your leadership.

For instance: Is the controversial new employee a deviant or an innovator? Your answer depends on how you understand your people and their role in creating new ideas. Is the recent failed project evidence of incompetence or of learning? Your answer depends on how you understand your organization's approach to experimentation. Is the new competitor a reason to withdraw or a call to action? Your answer depends on how you understand your strategy and the opportunities in your environment.

When you come to understand in a new way, you change your trajectory as a leader. And better yet, you now have the forces of inertia working in your favor. As your new understanding becomes a habit, it also becomes the status-quo - very hard to undo. Guided by a new understanding, and given time, you and your organization will be in a very different place.

Want to change your leadership trajectory? Come change your understanding at the Stanford Executive Program

Sunday, December 30, 2018

Want Success? Invite Failure

Across from the Black Bull Inn, just off the Canterbury Road in Folkestone England, I used to get Maryland fried chicken from a Chinese take-out at a post office run by an Indian family. The chicken was notable mostly for the battered, deep fried bananas that were thrown in – looking like giant fried worms when first bitten by the uninitiated. The chicken was passable – mediocre by my taste but then I eat a lot of fried chicken. If that family is still running the post office, then their chicken is probably still being served to this day. After all, the chicken was not so bad that they would fail outright, and in any case they could survive as a post office or by selling Chinese food; yet neither did they delight their customers. Like so many businesses, they survived somewhere in the middle.

Many firms survive being mediocre. No wonder there are so many management theories about excellence. Think of all the guru books that feature “excellence” in their titles. We want high performance, yet so many organizations give us mediocrity.

Why?

The problem is simple: We don’t get excellence because we don’t invite failure.

Let me explain.

If we seek out and eliminate failing projects, then we are left with only the clearly successful ones. And if we are then left with nothing, we have learned the valuable lesson that it is time to change direction. The more stringent our definition of success, the more failures we eliminate – and the better are those few projects that survive.

Thriving markets sometimes kill off failures for us. Highly competitive markets have high failure rates and therefore stronger survivors. It is no accident that Silicon Valley has good software companies; look at the high failure rates there! Back to fried chicken, you’ll find some amazing choices in Atlanta (and Seoul). A mediocre fried chicken shack in Georgia has the life expectancy of a balloon in the pokeweed. Thriving markets kill mediocrity.

Some companies harness the power of the market. They design stand-alone, specialized products and services, and so their failures are evident. For instance, consider the evolution of the file server - computers specialized to move data. When they came along in the early 1990s, some of the first innovators in this space were worried about competing with big, general-purpose computer servers made back then by Sun, DEC, IBM, and the like. In fact, some specialized file servers failed in that competition, and the companies that made them, like Auspex, are gone. This is the great strength of specializing: Specialists know when they are not competitive

On the upside, the successful specialist is clearly best-of-breed. In the case of file servers, we saw this result for firms like NetApp and EMC. By making specialized file servers, these companies could easily judge where they did and did not have product-market fit. They then easily out-competed the general-purpose servers of the big players. Those big servers had their place, of course, at the heart of large distributed-computing systems and later as the backbones of the internet. But when it came simply to moving data, the big servers were outcompeted by the specialized servers.

Unfortunately, wrong-headed business strategy can prevent the market from eliminating mediocrity. This happens when leaders try to improve a product by adding more features. Think late-night advertisements for gadgets: “wait, and there is more!” sings the announcer, as the contraption is revealed to have yet another benefit. We end up with an “integrated” product that provides many different benefits to many different customers. Such products allow the losing parts of the overall product to stay alive when they should be allowed to fail. Integrated products allow features to subsidize each other. You are hoping that somehow the full set of integrated features will make up for the lack of individually-excellent features. Hermes’ cartoon of the one-man-band comes to mind. Amazing in some ways, the one-man-band never really caught on. One prefers a full band of individually best-of-breed performers. Best of breed beats integrated.

So what about cherry picking from the world of innovators, and building a “suite” of best-of-breed features? This road to the integrated product is traveled by big firms acquiring up-and-coming specialists that have survived the market test. This strategy can work – as long as the business acquires best-of-breed products, and as long as the value of these products is improved by being in the big firm. We’ve seen this outcome at big technology firms like Cisco, Microsoft, Google, and Facebook. These companies acquire rising stars in the technology world, and then point to their growing portfolio as evidence that they are innovative. (Somebody was innovative, and their reward was to be acquired by somebody who then claims to be innovative.) Integrated products built this way can be effective, if you are well-funded and can spot the best-of-breed early on.

A cautionary note: You may think you and your firm can make an integrated product with many features, and all of them can be best-of-breed. You may hope for that outcome, but here’s your problem: The way you get best-of-breed is by discovering product-market fit, and such discovery requires a market test. But the market test is prevented when there are too many benefits to your product. You'll end up mediocre, because you failed to invite failure.


For some of the research behind these ideas, take a look at my book on the "Red Queen".

Friday, November 30, 2018

National Culture: Constraint or Catalyst?

When you speak in public in different countries, you soon learn of a trick used by translators the world over. At the humorous parts of your talk, the translator will say: "The professor is telling a joke. He is still telling the joke. He is still telling the joke. Now the joke is done!" at which point, on cue, everyone laughs hysterically. The problem is not that a joke cannot be translated; it is that humor is often culture specific, and so even a well-translated joke is likely to cause more confusion than enjoyment. Better to just play along with the professor and keep things comfortable.

The translator trick illustrates the power of culture. We'd like to share subtleties of language, but the lens of culture changes meanings, preventing our message from getting through. To see culture's lens in action, look at this picture of some fish:


Using this picture in a series of experiments, social psychologist Michael Morris and his colleagues have found some interesting patterns. When asked about this picture, American subjects typically see the standout fish as a "leader." By contrast, Chinese subjects typically refer to the standout fish as an "outcast." Why? Well, American culture is more individualistic, while Chinese culture is more collectivistic. These cultural differences shape the lenses through which subjects see this picture, and so give very different meanings to the same image.

You're thinking "Barnett is telling me what every college sophomore knows: different cultures are different." Well, yes, that is part of the story. Cultures do differ and those differences matter. But those who stop at this (obvious) fact miss the true power of culture. They see cultural differences as an unchangeable given as in "when in Rome, do as the Romans do." The Internet tells me that this proverbial saying dates back to various saints. Be that as it may, it is a view that treats culture as an unchangeable constraint.

But culture is not unchangeable. In fact, a quick glance at the data shows just the opposite: The cultures of the world are changing dramatically. Take a look at this cultural map showing World Values Survey data from 1981-2015, illustrating shifts on both the "traditional vs. secular/rational" dimension and the "survival vs. self-expression" dimension.



Two facts are worth noting in this map. First, cultures are changing dramatically over time. Second, and most importantly, cultures are not just moving in one direction: there is no simple "convergence" going on. Rather, cultural changes are moving back and forth, often cross-cutting one another.

These cross-cutting changes reflect the struggle that is cultural change: The woman starting her own firm in the Middle East; the bureaucrat resisting pressures for corruption in Africa; the gay couple starting a family in the US. Cultural changes are occurring all around us.

With this in mind, how you look at culture matters a lot. Do you think of culture as a constraint? If so, then when in Rome you do as the Romans do - but that leaves the world unchanged. Instead, do you think of culture as emerging from our own attempts to change the world? In that case, national culture is a catalyst, turning the world in directions that our parents could not have imagined.


An interesting body of work on national culture is by Professor Michael Morris.

Wednesday, October 31, 2018

The Secret

When you don’t know how to do something, you suspect that those who do know how share a special secret. If someone would just whisper to you the special secret, then you could do it too: whistle a tune, or maybe ride a bike. Of course, there is no special secret – no single piece of information that makes all the difference. Instead, you learn most interesting things by doing. You engage the challenge in your own way, fail a lot, and possibly make it work for you. You learn.

The philosopher Alfred North Whitehead long ago made the point that valuable learning comes not from being told a fact. Recited facts are “inert” ideas disconnected from the fullness of our understanding. Valuable learning, says Whitehead, means discovering “living” knowledge: ideas “utilised, tested, or thrown into fresh combinations.” Yet we persist in believing the myth of the special secret.

I run into the myth of the special secret often because I am a teacher and parent. Children and executives often come to me in their search for one or another special secret, wanting to skip a rope, design a product, write an essay, throw a ball, run a company, or what have you. I remember when my son Willie wanted to be able to ride a bike. I removed his “training wheels” and there he was standing out in the street, superhero flames on his helmet, two-wheeled bike in hand, waiting for me to tell him the special secret that all bike riders know.

About now, what if we dropped a business school professor into this situation? What would he say? “Willie should not be doing this. Bike riding is not his ‘core competence.’ Willie should outsource bike riding to Bobby down the road, for whom bike-riding is a core competence. They can form a partnership.”

Fortunately for Willie, his patient mother stepped in. Every day for a week she ran next to him up and down the street, catching him as he fell, so he could learn. The process of discovering living knowledge is not easy, but it pays off. Now Willie knows how to ride. And he knows the secret: that there is no secret.

The same problem comes up in business all the time. How often have you been in a meeting when someone at the table proclaims “That is not our core competence!” All go quiet, the core competence trump card having been played. We are taught that companies should only do what they already know how to do.

So where do organizational capabilities come from?

Wrong answer: Organizational capabilities come from researching “best business practice.” I often have executives come to Stanford thinking they will write down inert ideas told to them by professors. There can be some value in this exercise, but frankly you could parrot inert ideas more efficiently using information technology. Besides, everybody else can easily find out these inert ideas too. A list of best practices will not make you a great company, any more than finding a recipe will make you a great cook.

Right answer: Design your organization so that it develops new capabilities. We know that some companies learn much better than others. Make it your job, as a leader, to help your organization be better at learning. Structure your organization so that your people must engage with important, unsolved problems. Establish routines that allow for failure and reward those who try to discover – regardless of the ultimate outcome. Build a culture that values discovering over knowing, becoming over being. Lead by design, and don’t forget the secret: There is no secret.


For more on the “process philosophy” of Alfred North Whitehead, read his essay Aims of Education. 

Sunday, September 30, 2018

Oblivious Leadership

The old priest prepared his sermon all week for family mass. He would target the children, draw out of them some gems and that way make his point to the adults. The message would be thankfulness, since Christmas was approaching and the Advent gospel was on appreciating God’s gifts.

Sunday. The sermon started as planned: Up came the children, sitting around the old priest in the timeless pose of prophet and disciples. The priest was direct, “What are you thankful for?”

Without hesitation, a blonde boy in the back of the group shot up a hand. The priest encouraged: “Yes, young man; what are you thankful for?”

“Life!” came the reply.

The old priest’s delight could hardly be contained, as he looked up and proclaimed to the adults, “People, did you hear that!? The boy is thankful for life!”

Seeing the misunderstanding, the boy piped up “Life is a game!” for he had been given the board game “Life” as a gift, and for that he was thankful.

The face of the old priest transformed into shock. He beseeched: “No, child, life is NOT a game!”

The perplexed child could not decode the sudden turn in the priest. Dismayed, he responded matter-of-factly, “Life is a game.”  

Tell-tale gasps and barely-suppressed laughs from the congregation spoke not of humor but of surprise, yet to the old priest the tittering sounds told a cynical story. He scanned the adults, now doubly shocked by their complicity in the child’s warped view. Down went all heads, striking a praying pose, but the shaking shoulders suggested otherwise.

Derailed, the sermon meandered through the priest’s messages on thankfulness, gratefully without any more audience participation. Calm returned. All sat in silence, sharing the quiet shame of having played a part in the derailment – made worse by the fact that only the old priest himself was oblivious.

Lest I be throwing the first stone, I admit that the story of the old priest is my story too, and yours. All of us suffer at times from not understanding the other’s understanding. Research shows that humans have a lot of trouble bridging this gap in understanding: We naturally tend to assume that others see what we see the way we see it. So if you think that this is not a problem for you, your self-assurance, itself, is a symptom of the problem.

The problem of understanding the other’s understanding is even worse for leaders. Our life experiences shape our points of view. For most leaders, their life experiences are very different from those they lead. So it is that leaders and followers rarely see things from the same vantage point. Yet leaders are expected to persuade their followers – despite the fact that they do not understand their followers' understanding.

No wonder that a vast industry tries to help leaders communicate. These efforts have mixed results, since communication failures often are just a symptom of the deeper understanding problem. It won’t help if I improve my communication techniques, but remain clueless about how my followers see things. This fact explains many a notorious gaff: The politician who knows not the price of bread; the executive flying a private jet to ask for government support; the CEO’s video explanation of layoffs, filmed in his paneled office. Such miscues result from not understanding the other's understanding.

So what should you do to bridge the understanding gap? Step one is to get beyond the suggestion to "be empathetic" that one often reads about. Remember, the problem is that you don't have a clue. You cannot empathize with someone whose life is a complete mystery to you. Some say you can bridge the gap by "walking around" at work - except that everybody knows you're the boss.

If you are serious about bridging the understanding gap, you could take a page from the tradition of academic ethnographers: Put yourself (literally) in the other’s shoes. What is it really like to be them? Try actually working in your organization – obey their rules, try to get along with others who don't know you're a boss, and work within the guidelines and systems that you have set for your people. This approach will not be easy, but you may end up coming to the most important understanding: that life is not a game.


Many academic literatures address this issue in different ways. One of my favorite approaches is the work of Professor Thomas Gilovich. Examples of using ethnography in the workplace can be found in the work of Professor John Van Maanen