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, February 28, 2019

Why Strategic Planning is Not

Business school professors miss the Soviet Union. The nemesis of old used to provide us with a stream of wonderful examples that we could contrast to the market.

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 satiric magazine Krokodil. Ah yes, better to use the market.

But the real lesson of the Soviet experiment has been lost on us, and the corporations of the world should take note: Planning doesn't work.

Corporations must and do plan, of course. Their leaders 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.

The problem is that we don't have all the information we need when we make the plan. If we did, we might be able to make planning strategic, and then leadership would just be planning + execution. But we live in a world of great uncertainty, and so stuff comes up that soon renders our plans obsolete. You do this enough times, and you laugh at planning approaches like the one pictured here.


The better option to "strategic planning," in my view, is strategic thinking

Let me illustrate. I recall during the late 1990s when Dan Warmenhoven, then the CEO of NetApp, challenged his leadership team to move the company beyond its customer base - which at the time was mostly high-tech companies needing NetApp file servers. Warmenhoven had a compelling logic - that information technology (IT) was spreading to all sectors of the world economy and NetApp needed to be selling into the IT buyers within large companies of all sectors.

Today we know that this vision would turn out to be spot on, but at the time the strategy was controversial. After all, the company was doing just fine selling into high-tech. But Warmenhoven changed the company's direction nonetheless, setting a brave course that was clear in its logic, even if it was debatable. There was no lengthy "plan" to do this. Warmenhoven established a way of thinking about the company's strategy, and they commenced action (tracked at weekly business updates). So commenced a process of learning and updating, giving shape and substance to Warmenhoven's initial strategic logic. Such is the power of strategic thinking.

The lesson: Of course we must plan, but don't let the budget-and-goal cycle substitute for strategy. Build your strategy into your planning process, so your people share a common logic that guides their actions.


For more on strategic thinking, see my notes on change and growth.

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