Saturday, March 31, 2018

Corruption's Mark

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

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

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

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

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

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

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


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

Thursday, March 15, 2018

Discovery Beats Planning, so Plan to Discover

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

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

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

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

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

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

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



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