Saturday, July 30, 2016

The Problem with the "Pivot"

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

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

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

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

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

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

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

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

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

Friday, July 15, 2016

The Change Paradox

It was time for a change.

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

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

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

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

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

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

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