Our Obsession with Scale

Nilofer Merchant has a terrific blog post on HBR today.   She describes "our obsession with scale."   She explains:

Giants have a view of the world that often makes new markets "too small" to pursue. When we see scale as the thing they must do all by ourselves, then only "big" opportunities are worth investing in. Scale, in the traditional view, means that what they produce and how they function has to be about efficiency, productivity and being bigger than the other guy — because that is, above all, the source of profits. And for sure, it means they skip right past $50M or $100M or even $500M opportunities because they are not "big enough" to work on. And it is this thinking — this mindset — that is the central reason so many industries (automotive, financial, health care, and even education) and their companies are failing all around us today. It's not that our economy is stalled, but that our thinking has stalled. It means that industries are stagnating because nothing new ever shows up as a $1B market right away — market opportunities show up first as the $50M or $100M opportunities. And markets that need to be served should not be killed off because the giants can squash it. 

I agree wholeheartedly.  I have argued on this blog that executives often convince themselves that:

a.  economies of scale exist in every industry
b.  further economies of scale can be exploited in their industry
c.  no such thing as diseconomies of scale exist (or they are far from reaching that point

 We know that these three beliefs are often proven incorrect... yet, companies and their leaders continue to adhere to these notions.   Why?  In some cases, executives like to lead large organizations.  Slimming down, divesting units, and reducing scale doesn't prove very popular.  In other cases, we see leaders whose firms are struggling... and they see a merger to capitalize on supposed scale economies as a "easy" way to juice profits when organic growth opportunities don't seem apparent.   At the same time, leaders often are looking for new organic growth opportunities that will "move the needle" - i.e. impact the top line in a significant way.  Of course, knowing which new ventures will become very large businesses is hard to predict in advance!   Thus, we see too many large firms rejecting new opportunities because they think they will be small revenue generators... only to be proven incorrect years later.

Are People More Cooperative When They Make Speedy, Intuitive Choices?

David Rand, Joshua Greene, and Martin Nowak have conducted a series of interesting new experiments that show a correlation between decision speed and selfless behavior.   The experiments involved "the sort of games that economists have used for years. They have to decide how to divvy, steal, invest or monopolize a pot of money, sometimes with the option to reward or punish other players."   The scholars found that individuals behaved more cooperatively/selflessly when they made their choices faster.   The individuals who took to deliberate tended to be a bit more self-interested.   This article in Discover magazine explains a bit more about the studies:

From these results, it’s tempting to conclude that cooperation is somehow “innate” or “hardwired” and that selfishness is somehow imposed upon these predispositions. But Rand points out that our intuitions are also shaped by our daily lives. In so many of our choices, cooperation is the sensible call; if we cheat, we may be punished, lose our reputation, or deny ourselves the future goodwill of those we wrong.  So, when volunteers take part in the experiments, “their automatic first response is to be cooperative,” Rand writes. “It then requires reflection to overcome this cooperative impulse and instead adapt to the unusual situation created in these experiments, in which cooperation is not advantageous.” He found two lines of support for this idea when he surveyed his volunteers: The link between fast-thinking and charity only held for people who said that their daily lives were mostly filled with cooperative interactions; and it only held for those who hadn’t taken part in similar experimental games before.   “This shows how it’s difficult to consider experimental play in isolation from things outside the lab or as completely determined by the game’s monetary payoffs, as a lot of economists do,” says Ann Dreber Almenberg from the Stockholm School of Economics, and one of Rand’s former colleagues. 

I wonder how these findings translate to the realm of organizational life.   Do managers in different business units have a natural tendency to be cooperative if they choose quickly, but perhaps behave a bit more selfishly when they ponder the incentives and payoffs embedded in the firm's compensation and promotion system?  How might we encourage people to focus a bit less on detailed deliberations regarding the direct compensation effects of their actions, so as to hopefully elicit higher levels of cooperation across silos?

Agile Companies

Faisal Hogue has a good post at Fast Company about how companies can remain agile.  He starts by citing a statistic from former McKinsey partner Richard Foster:  the average lifespan of a company on the S&P 500 has shrunk by decades over the past 100 years.  Companies die or get acquired in many more instances than in the past.

Hogue offers four characteristics of agile firms:

1.  They are not insular.  They are always looking at their environment and evaluating trends, threats, and new developments in technology and consumer tastes.

2. They experiment often.

3.  They can shift assets and resources quickly across geographies, lines of business, and functional areas.

4.  They build new competences to match emerging needs.  Those competences may be technological, human, or process-oriented.

I would add one other attribute of agile firms.  They are willing to disrupt themselves.  In other words, they are willing to launch new businesses that may cannibalize their existing businesses.  

Moneyball and the Resurgence of the Stolen Base

Many people read Michael Lewis' terrific book, Moneyball, and they concluded that it was all about on base percentage and Billy Beane's use of new statistical methods to evaluate performance.  However, the big idea is really about capitalizing on market inefficiencies (which are driven by various biases).

Recently, Sports Illustrated writers described the resurgence of the stolen base in baseball.  Even Billy Beane's Oakland A's are stealing bases! What's happening?  After all, Beane and other statistically-minded general managers tended to despise the stolen base a decade ago.  They argued that stolen base attempts often decreased a team's chances of scoring runs, unless the success rate was exceptionally high.

The difference is that conditions have changed.  With steroid testing decreasing batting averages and home runs, teams have to find other ways to score runs.  Speed became an undervalued asset that low budget teams such as Oakland could acquire.  The lesson here is that markets are dynamic.  As people become aware of inefficiencies, the opportunity to take advantage of them dissipates.  Thus, you have to stay one step ahead of others who are acquiring assets.  You have to recognize what is no longer undervalued, and identify what is currently undervalued.

Tailored Practices, not Best Practices

Executives become enamored with identifying and studying industry best practices at times.  I think some of those efforts are misguided at times.  Managers forget that competitive advantage comes from alignment among strategy, structure, processes, and culture.   Copying someone else's processes only works if they fit your company's strategy and culture.  In many cases, there is no one best way to do things.  Instead, there is a best way GIVEN the other choices you have made.

How Amazon Works Backwards

Ian McAllister of Amazon posted this interesting note on Quora about innovation at Amazon:

There is an approach called "working backwards" that is widely used at Amazon. We try to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it. While working backwards can be applied to any specific product decision, using this approach is especially important when developing new products or features.

For new initiatives a product manager typically starts by writing an internal press release announcing the finished product. The target audience for the press release is the new/updated product's customers, which can be retail customers or internal users of a tool or technology. Internal press releases are centered around the customer problem, how current solutions (internal or external) fail, and how the new product will blow away existing solutions.

If the benefits listed don't sound very interesting or exciting to customers, then perhaps they're not (and shouldn't be built). Instead, the product manager should keep iterating on the press release until they've come up with benefits that actually sound like benefits. Iterating on a press release is a lot less expensive than iterating on the product itself (and quicker!).

I love this approach.  The idea of working backwards has many benefits.  First, it really causes you to sharpen your idea.  You have to be able to communicate it crisply and concisely.  If you can't, then you probably don't have a clear strategy yet.  Second, it puts you in the shoes of the customer reading that press release.  It makes you think about how they will perceive your innovation.  Third, it helps you sharpen your understanding of the target market.  Who precisely is the target?  What do they care about?  Finally, it provides a clear, compelling direction for your team - they will have a strong shared understanding of the vision they are trying to achieve. 

The Problem with Reference Checks

Hiring outside talent always proves challenging.  Does this person have the right capabilities given our needs?  Will they be a cultural fit?  How fast can they hit the ground running?  Can they lead a team effectively?   The interview process sheds some light on these questions, but we still see many hiring mistakes.  Can a good reference check process improve the success rate?   Perhaps, but... Reference checks pose their own set of challenges, as this article by Vicki Elmer at Fortune indicates. 

What's the problem with reference checks?  First, the candidate naturally provides names of folks who are likely to offer positive recommendations.  Second, references often are hesitant to say bad things about former colleagues or employees.  In some cases, they even worry about possible litigation that might result from their comments.  Third, hiring companies may be limited in terms of the people they can contact because of confidentiality concerns. If the candidate's current employer does not know they are searching for a position, a reference check can create a sticky situation. 

How does one overcome these challenges?  Elmer suggests asking better questions when conducting a reference check.  In the end, though, even great questions won't overcome these limitations cited above.  Companies need to examine the entire hiring process and try to find better ways to assess capabilities, evaluate cultural fit, and examine one's ability to collaborate effectively with others.  Firms can begin to improve the search process if they find ways to see the candidate in action.  Asking them to make a presentation on a key topic, work together with other candidates on a team exercise, conducting team interviews, and other such tactics can prove enlightening.  More companies need to embrace these types of interview tactics if they want to improve their batting averages. 

Margaret Heffernan: Dare to Disagree

Acqui-Hires: Buying Teams of Engineers from Start-ups

The Wall Street Journal reports on the growth of an interesting phenomenon that has existed for some time in Silicon Valley. 

Established technology companies increasingly are buying—and then shutting down—early stage start-ups, mostly to acquire their software-engineering talent.  Investors, attorneys and others involved have dubbed these transactions acqui-hires.  The deals, which typically range in price from about $3 million to $6 million, started to become commonplace in Silicon Valley last year as demand for software engineers soared.

The paper reports that the deals come with some strings attached (naturally).   The employees may have to sign agreements to stay on board at the acquiring company for a few years.   They also may have to sign noncompete agreements that kick in if/when they leave for another firm. 

Even with these types of "strings" attached to a deal, I think these types of acquisitions come with some risk.  On the plus side, you are acquiring a team of engineers that is comfortable and experienced working together.  You are getting more than talent... you are getting a potentially terrific team.  On the downside, you are not much buying much other than the people.  Yes, you can stop them from walking away, or from going to a direct rival (although non-competes can be tough to enforce).  However, just keeping them there contractually does not insure that they will be productive.  You have to keep them happy.  If they have walked away from an entrepreneurial dream, then the task of keeping them engaged and fulfilled may not be easy.  

What do you have to provide for these folks?  It's more than good compensation.  You have to provide them interesting projects on which to work - fulfilling, meaningful work.  You have to make them feel like they are contributing to something bigger than themselves.  You want them to feel ownership of the product or service on which they are working.  It's a tough task, but it's critical if firms wish to make these types of acquisitions successful. 

Resolving Team Conflict

In Warren Bennis' terrific book, Organizing Genius, he suggests a simple method for intervening productively when conflict emerges within a team.  He learned the method from Robert Taylor at Xerox PARC.  Taylor used to refer to Class 1 and Class 2 disagreements.  In a Class 1 disagreement, the "combatants" cannot even fully explain the other sides' position.  In a Class 2 disagreement, the parties can clearly articulate the other side's views.  When a conflict emerged, Taylor would urge group members to shift toward Class 2.  In other words, he would ask them to articulate clearly and concisely the other side's point of view.  That method seemed to take the temperature down a bit, and it often helped pave the way toward a resolution.  Bennis argues that it helped the members find common ground.  Moreover, he explains that it may have used the principle of cognitive dissonance to Taylor's advantage.  In other words, the simple act of understanding and then stating the other side's position and rationale may have made opposing members more likely to embrace key elements of it. 

Leader Selection Bias: Do We Choose Braggarts?

Paola Sapienza, Ernesto Reuben, Pedro Rey-Biel, and Luigi Zingales have performed a fascinating experiment with insights regarding how we select leaders. In their experiment, they asked MBA teams to select a leader to represent the group in a competition that involved quantitative analysis.  Everyone involved had performed these calculations two years earlier.  They asked each person to recall how they performed on these calculations in the past, and to predict how they thought they would do now.  Their results show that, "Women were selected as group leaders 33.3 percent less frequently than they should have been based solely on how well they did in the earlier competition."

 The scholars did not stop there though. They went further to understand why this result took place.  They examined three potential explanations:

"The first was a difference in the way men and women judge their own abilities. The second was a difference in how men and women describe their own abilities. And the third was a difference in how men and women deal with what the researchers call 'agency problems,' or how they 'respond to conflicts of interest between their own interest and the group’s.'”

What did they find?  Sapienza and her colleagues discovered that the second explanation proved most powerful.   Women tended to represent themselves differently than men.  While everyone tended to overstate their performance on the task two years earlier, men clearly exaggerated much more than women.  They were braggarts.  Shocker!   Sapienza takes it one step further though. She says that it might not be surprising that men are braggarts, but it is surprising that women don't account for that when casting their vote for who should lead the team.  She says, "The fact that men tend to overstate, that's not a surprise.  But if everyone knows that, why don't they just say, 'If men say 5, it must be 3.' There is some discounting, but it's very minimal." 

Did Decentralizing R&D Hurt P&G?

Coleman Lochner at Bloomberg Business Week writes today about the struggles at P&G.  Specifically, Lochner examines the slowdown in product innovation at a firm famous for its breakthroughs in the past.  Lochner displays a chart, posted below, which shows the slowdown in the company's R&D spending over the past few years.














Why the decrease at a firm so well known for innovation?  After all, Lafley made a major push to increase the rate of innovation.  He invested heavily in ethnographic marketing research and the introduction of design thinking methods.   He also embraced open innovation and collaboration with external partners.  Many observers credited these moves with accelerating the pace of innovation at P&G during his tenure.

Lochner offers an interesting explanation for the decrease in R&D spending, given that Lafley did emphasize new product development so much.  He writes,

 "Lafley also decentralized R&D, making business-unit heads responsible for developing new items. R&D chief Brown says that inadvertently slowed innovation by more closely tying research spending to immediate profit concerns. Between 2003 and 2008, the sales of new launches shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, says Brown."

 I found this observation very powerful.  Often, we advocate decentralization in organizations, because we want to empower those closer to the customer.   However, this example demonstrates a key downside of decentralization.   If you couple decentralization with an incentive scheme that may put a bit too much focus on short term profits, then you could get decisions that are harmful in the long run.   The business units may simply feel too much pressure to "make the numbers" and not invest enough for the long run.   Leadership development programs that rotate executives often into new roles also can result in excessive focus on short term results.

One caveat though... Much research shows that R&D spending is not strongly correlated with successful new product development.  It's not just how much you spend; it's how you spend it.  Therefore, before we can jump to conclusions about the chart above, we would need to know more about how P&G is engaging in R&D.  Perhaps the challenges lie in the methods and processes, not just the spending levels. 

Diversified Firms in Emerging Markets

Harvard Professor Tarun Khanna has conducted extensive research on large business groups (conglomerates) in emerging markets.  He has found that the so-called conglomerate discount doesn't exist in many emerging markets.  Why?  Khanna argues that institutional voids exist in these countries.   Capital, labor, and product markets are not very efficient.  Therefore, large organizations and their management teams fill these "voids" in those countries.  In other words, the conglomerate serves a useful function, because it does what the efficient labor, product, and capital markets do in more developed countries. 

On the other hand, in more advanced economies like the United States, unrelated diversification makes much less sense.  Investors, for instance, can diversify risk quite inexpensively on their own; they don't need a CEO to diversify into many unrelated units to reduce risk.   That type of strategic move proves far more expensive than simply having the investor buy an index fund to achieve risk diversification.  

A new paper by Venkat Kuppuswamy, George Serafeim, and Belén Villalonga examines this concept in more detail.  They look at capital, product, and labor market efficiency in 38 countries over a 15 year period.   They find that the value of corporate diversification does indeed fall as capital and labor markets get more efficient.   However, they did not find a significant effect for product market factors.   In sum, corporate strategy should look different as we move across the globe, and not just because of cultural differences.  Fundamental differences in the institutional environment call for different approaches to corporate strategy as we move from more advanced economies to emerging markets. 

Retaining Talented New Hires

Jim Newman has written an excellent article for Fast Company regarding retention of talented new hires.  He focuses on the on-boarding process, arguing that an ineffective approach can do irreparable harm.   New hires may be gone in a very short period of time if firms mishandle those crucial days and weeks.  He argues that firms should focus on three things:

1.  Initiate Dialogue Before Orientation

In a number of instances, a significant period of time exists between the date when an individual accepts an offer of employment and the date when they actually start work.  Companies need to keep the lines of communication open with that individual during that time.  They must provide a steady stream of communication, in different forms and from different people. 

2.  Create Executive Leadership Interactions

Giving new hires, even young people joining the company, an opportunity to hear directly from senior leaders can be a powerful retention tool.   People want to know the big picture, and they would like to know that senior leaders are interested in providing development opportunities for them.  Everyone, from the front lines to senior executives, wants to understand how they can contribute to the accomplishment of the organization's broad vision and goals. 

3.  Prioritize team-based on-boarding opportunities

Newman argues that it is crucial to make "employees feel productive as quickly as possible."  Therefore, he recommends quick action to provide "team-specific opportunities that engage recruits in their areas of specialization while testing and expanding their knowledge about the company."   Companies don't want to focus only on the HR nuts and bolts (benefits, policies, etc.).  They also don't want to only focus on generic skills applicable to all employees.  They need to get specific early, so that people understand the skills htey need to be successful in their particular job, and so that they begin to form relationships with key experienced employees who can serve as mentors.  Newman provides a good example:  "For example, sales recruits might spend a week or more cultivating their sales pitches and testing them in simulated client meetings. Over the course of the week, recruits can present to sales managers or learn how to improve their performance based on actual case studies."  

I would add one other thought here.   Firms need to provide a series of early "check-ins" to insure that a new hire's on-boarding process is on track.  Some check-ins should be with the person's direct supervisor.  However, other check-ins might be useful with an HR representative, a peer in their work group, and perhaps a mentor at some higher level in the organization.  These check-ins should be vehicles for two-way communication.  The individual should receive some early constructive feedback and advice, while also being provided an opportunity to offer input on how to make their on-boarding process proceed more smoothly.  

What the Professor is Really Saying: The First Day of Class

Since today marks the first day of classes here on campus, I thought I would share this humorous video. 

Delicate Leadership Balance: Creative Tension vs. Crushing People

Fortune recently interviewed Nobel-prize winning chemist Roald Hoffmann. They asked him how his experiences translate at all to leadership in the business world.  Hoffmann talked about his work leading groups of researchers, managing large grants, and maintaining a high level of productivity.  I found this particular excerpt quite interesting:

In science, almost all the papers we publish are written together with several people in research groups. But within that research group, somehow, we have mastered the ethics of collaboration.  There's something about the way that the group leader tells people that an idea made by one of the other people in the group is not good or not right. The criticism is made in a way which allows the person, first of all, to come up with further evidence, but more importantly, doesn't shake them so that they're afraid of making another idea.
 Hoffman has hit the nail on the head when it comes to describing that delicate balance.  We all can recall bosses who crushed someone during a meeting, leaving that person reluctant to express their ideas at future team meetings.   We also know that some teams are simply too polite.  People avoid conflict, and therefore, the teams don't generate and discuss enough creative alternatives.

How does a leader strike that delicate balance?   No magic formula exists.  Leaders need to constantly keep their fingers on the pulse of a team.  They need to read body language, ask for feedback, and meet one-on-one with team members to see if they might have additional input to add.  Leaders also need to conduct periodic "after-action reviews" with their teams - not about the task only, but also about the group process.  How is it going? How can we perform better as a team?  How can our dialogue and collaboration improve?  Leaders will never get the balance perfect... but they can monitor the team aggressively so as to determine when they may have tipped the scales too far in one direction or another.