Individual vs. Group Decision Making in the Venture Capital World

Wharton doctoral candidate Andy Wu has conducted some interesting research about decision making in the venture capital world.    He explains his research to Knowledge@Wharton:

My current work focuses on the role of partners of venture capital firms who make angel investments on the side. What that allows us to do is compare organizational decision-making to individual decision-making. In this work, we find that individuals acting alone are able to process private information that they have that their organization doesn’t have, and allows them to make investments in firms with observably weaker characteristics, such as younger founding teams, less educated founding teams. Nevertheless, these individual investors are able to generate the same financial return as their employing firms.

What does Wu mean by private information?  Well, he's really referring to tacit knowledge... expertise that cannot be easily transmitted to others.  Your intuition may tell you that a certain investment is attractive or not.   The data do not justify your conclusions.  How do you persuade your partners in the firm?  Wu argues that you often do not persuade them.   You can't make a strong, rational, explicit case to them.  However, tacit knowledge leads you to conclude that it's a good investment.  Groups, Wu argues, focus on explicit information and often fail to incorporate crucial tacit knowledge.  

REI Shuts Stores on Black Friday! What Are They Doing?!

REI made a rather stunning announcement today.  The firm will be closing all of its stores on Black Friday, the biggest shopping day of the year.  Instead, it will pay its employees to explore and enjoy the outdoors on that day, and it will encourage its customers to do the same.  The company has launched a social media campaign in conjunction with their unique Black Friday strategy.  They have adopted the hashtag "OptOutside" and encouraged people to share their ideas and experiences for enjoying the outdoors on Black Friday.   Jerry Stritzke, president and CEO of REI, explained the company's reasoning: “Black Friday is the perfect time to remind ourselves of the essential truth that life is richer, more connected and complete when you choose to spend it outside. We’re closing our doors, paying our employees to get out there, and inviting America to OptOutside with us because we love great gear, but we are even more passionate about the experiences it unlocks.”  

I love the idea!  I've always felt that the Black Friday phenomenon had become a sort of Prisoner's Dilemma for firms.   Each company opened earlier to keep up with or one up the competition.  Some firms even began opening on Thanksgiving itself.  Promotions became even crazier with each passing year.  Yet, such moves often only shifted sales from other days.  They did not add to total holiday spending necessarily.  Thus, firms incurred more costs without actually improving revenues overall.  No firm wanted to opt out of this arms race though, for fear of the damage they would suffer if they didn't keep up with the competition.  Now, we have seen one firm choose to opt out of the arms race.  Great firms zig whenever everyone else zags.  They find a way to differentiate.  For REI, the move fits beautifully with their brand image and their values.  It reinforces all that we believe about REI's brand, culture, and beliefs.  It helps them stand out from the competition.   The key question: Will other firms follow?  I doubt it that many will follow.  Actually, simply copying REI's strategy does not make much sense anyway.   Being different is the key to building a great strategy.   Other firms may want to adapt their Black Friday strategy to avoid the arms race that I describe above, but they will have to find their own unique way of doing so.  

The NFL: Could Growth Obsession Become its Downfall?

The National Football League has never been more popular in the United States.  The league enjoys record ratings and lucrative television contracts.  Long ago, the league surpassed major league baseball as the national pastime.  However, many observers have noted a substantial decline in the quality of play recently.  Are such observations just the usual nostalgic "it ain't like the glory days" comments, or is there some truth to the comments?   That's hard to tell at the moment, though the league does appear to have an inequality not seen in some time (record number of 6-0 teams at this point in the season comes with an incredible amount of futility as well).  

What could be driving a decline in the quality of play?  I would hypothesize that the obsession with revenue growth has diluted quality... something we see in many industries.  The NFL is not immune to that phenomenon.   How has revenue growth obsession damaged quality?   One reason may be that the desire for growth has led to a huge shift in emphasis toward offense.   Fantasy sports have contributed greatly to that emphasis on offense.   As the emphasis has shifted toward increasing scoring, the league has become very pass happy.  The running game has diminished in importance.  How does that lead to decreased quality?  Well, for one thing, the incredible emphasis on passing offense means that one player, the quarterback, is more important than ever.   The quarterback has always been the most important position on the field, but now the critical need for superb play at that one position is elevated substantially.   In the past, you could win in multiple ways.   You could run the ball in a dominant fashion.  You could have a monster defense.  Today, the old adage "run the ball and stop the run" just does not apply.   If you do not have a superb quarterback, you are going to struggle to win consistently.   Recall that quarterbacks such as Mark Rypien, Brad Johnson, Trent Dilfer won Super Bowls in the past.  That seems increasingly difficult in this new era.  The problem, then, is that the league does not have enough quarterbacks who can play at a very high level.  This year, Peyton Manning has suffered a decline in skills due to age and injury, and other top QBs (Luck, Roethlisberger, Brees) have been injured or have played poorly.  So, in a rush to drive revenue growth, the league made itself more dependent on one position, the quarterback.  However, it does not have enough excellent quarterbacks to maintain a high level of play.  

That's my hypothesis.  The NFL is not immune to the basic tradeoff that many firms face... top line obsession can lead to brand and quality dilution.  The ratings continue to soar, but will this problem eventually lead to a loss of viewers?    I don't know... I still watch, but then again, I have the privilege of watching the greatest quarterback of all time each week.

Do Firms Really Value Curiosity?

George Mason University Professor Todd  Kashdan has conducted a study about curiosity in the workplace.  He found that companies talk a good talk about curiosity and new ideas, but they don't walk the walk.   Kashdan reports, "Surveying workers in 16 industries, we found that while 65% said that curiosity was essential to discover new ideas, virtually the same percentage felt unable to ask questions on the job. The contradictions continued: while 84% reported that their employers encouraged curiosity, 60% said they had also encountered barriers to it at work."  

What types of barriers do workers cite?  According to Kashdan, "Common stumbling blocks cited (across industries) were a top-down approach to decision-making, limited time for creative thinking, a preference for safe ideas over new ones, and fear of standing out from the pack. How can these and other organizations do better?"  

We have seen the many reports about low employee engagement across a variety of industries and firms.  Why is engagement so low in the American workforce?  One reason may be that employees have become disenchanted by too many instances of leaders talking a good game, but not acting in ways that are consistent with those verbal messages.  Not backing up your words with actions can be a very easy way to lose the trust of your employees.  The research here on curiosity offers one example of a situation in which firms and their leaders appear to be dropping the ball. 

How Not to Deliver an Elevator Pitch!

Lessons from the Cuban Missile Crisis

Source:  Boston Globe (from JFK Library)

On this day in 1962, President John F. Kennedy addressed the nation to discuss the Cuban Missile Crisis.  In his speech, Kennedy informed the public that the U.S. would be establishing a naval quarantine around the island of Cuba until the missiles were removed.  I have written extensively about Kennedy's decision-making process during the crisis.   Ten years ago, I had the opportunity to talk to Kennedy's Secretary of Defense, Robert McNamara, about the crisis.  He came to Harvard to address my students at that time.  For more on what we can learn from how Kennedy led his team through that ordeal, you might wish to read an article that I published in the Ivey Business Journal.  

When You Are Overly Dependent on One Product: Apple's "Problem"

The Wall Street Journal has a great chart today (shown here) that highlights how increasingly dependent Apple has become on the iPhone as the one product driving a substantial portion of revenue and profit.   Many analysts have expressed concern about this dependency.  I find it an interesting discussion.  On the one hand, it does appear worrisome to have so much of the company's fate reliant on one particular blockbuster product. On the other hand, a firm has to be careful how it responds to this type of "problem" that emerges with success.  Diversifying recklessly simply to reduce dependency on a single product can be a recipe for disaster...yet many firms have made that mistake when faced with this situation.  Moreover, we know that focus can be a powerful dimension of any strategy.  Jobs preached focus relentlessly during his time at Apple (and at Pixar).   Will a company lose focus if it tries "too hard" to reduce reliance on one hit product?  It's a delicate balancing act, and it will be interesting to see how Apple navigates this situation in the years to come. 

Amazon Hits Back at The New York Times: Why Now?

Yesterday, Amazon's Jay Carney (former White House Press Secretary) published a post on Medium that criticized the New York Times scathing article published two months ago about Amazon's culture and workplace environment.    The newspaper offered a quick rebuttal.   My question: Why now?  Why offer this rebuttal two months after the article ran?  The controversy had died down, after receiving a great deal of attention two months ago.  Why bring the issues back to the forefront now?  It only serves to remind people about the negative statements and observations made about Amazon's organization.  Moreover, as The New York Times stated, the Carney post did not refute the claims made in the article directly, but instead only pointed out that some of the quotes came from highly disgruntled employees (at least one of whom may have been fired for wrongdoing).   In a situation such as this one, offering a clear rebuttal may be good policy, but timing is important.  You have to move quickly.  In many ways, you only rekindle the controversy by responding now.

Confirmation Bias

I discovered this terrific comic about confirmation bias today.  

Normalization of Deviance at Volkswagen?

Paul Kedrosky, a venture investor, wrote a very interesting column for The New Yorker about the Volkswagen scandal.  He does not introduce new facts, but instead speculates as to how the ethical and legal transgressions may have taken place.  He draws upon Diane Vaughan's great work on the Challenger space shuttle accident.  In her research, Vaughan describes a phenomenon that she calls the "normalization of deviance."  It's a process whereby we gradually engage in riskier behavior.  We don't jump over the line from legal/ethical to illegal/unethical.  Instead, we inch our way there over time.  As Vaughan puts it, "the unexpected becomes the expected becomes the accepted" over time.  In short, what may look very risky or irresponsible in hindsight actually came to be viewed as acceptable  by decision makers in a gradual process that unfolded over a lengthy period of time.  With each incremental step down the slippery slope, people established a "new normal."  The next deviation didn't seem so large, because it wasn't being compared against the original standard of behavior.  Instead, it was being compared against the new normal established in the recent past.  Kedrosky explains how the normalization of deviance may have played out at Volkswagen.  Investigators should definitely examine this aspect of organizational behavior.  In no way does this explanation excuse the behavior, but it does help us understand how such things happen in large organizations.  Here's Kedrosky's hypothesis:

If the same pattern proves to have played out at Volkswagen, then the scandal may well have begun with a few lines of engine-tuning software. Perhaps it started with tweaks that optimized some aspect of diesel performance and then evolved over time: detect this, change that, optimize something else. At every step, the software changes might have seemed to be a slight “improvement” on what came before, but at no one step would it necessarily have felt like a vast, emissions-fixing conspiracy by Volkswagen engineers, or been identified by Volkswagen executives. Instead, it would have slowly and insidiously led to the development of the defeat device and its inclusion in cars that were sold to consumers... Faced with an expensively engineered diesel engine that couldn’t meet strict emissions standards, Volkswagen engineers “tuned” their engine software. And they kept on tuning it, normalizing deviance along the way, until they were far from where they started, to the point of gaming the emissions tests by detecting test conditions and re-calibrating the engine accordingly on the fly.

The Inbev Acquisition of SAB Miller

Major consolidation in the beer industry continued this week, as Inbev agreed to acquire SAB Miller for over $100 billion.  The deal continues a long track record of acquisition by Inbev.  Several years ago, they took over Anheuser Busch, for instance.   Here are a few thoughts about this deal, with lessons that apply to many mergers and acquisitions:

1.  Divestitures of certain brands are highly likely due to antitrust concerns.  Therefore, other major brewers could be able to acquire some important brands during this process. 

Broader lesson:  Will rivals be strengthened at all as a result of an acquisition that we do? 

2.  Economies of scale and scope are a major driver of beer industry consolidation.  However, one has to ask:  How big is big enough?  At what point do diseconomies kick in?  Moreover, some research suggests that economies of scale in the beer business are largely about achieving scale within a particular country as opposed to achieving global scale. 

Broader lesson:  How confident are we that diseconomies of scale will not hamper us?

3.   Acquisition integration will be challenging, as with many complex cross-border deals.  The firms will have to account for "anti-synergies" i.e. the costs associated with trying to put the two firms together and achieve synergies.  Put another way,  many deals include detailed valuations of potential synergies without examining the true cost of putting in place processes and systems to achieve those economies of scope.

Broader lesson:  Value synergies and anti-synergies in every deal you make.

4.  Cost synergies are easier to achieve than revenue synergies.  They are much more concrete and predictable.  Inbev has a great history of achieving cost synergies.  To really make this deal worthwhile, they will have to drive revenue synergies as well.

Broader lesson:  Is your deal based on the somewhat hard-to-quantify hope and promise of revenue synergies or the more concrete and predictable cost synergies of bringing two firms together?

Was Steve Jobs' Daily Question to Jony Ive a Good One?

Inc. magazine reports this week on the one question that Steve Jobs asked Apple design guru Jony Ive every day.  Here's the query:  "How many times did you say no today?"   Jobs preached "extreme, laser-like focus" at all times. Ives explained:   "The discipline to turn your back on something you believe in passionately, so you can apply yourself to what's at hand, is really remarkable," Ive said. "It's a deeply uncomfortable but really effective thing to do."  

Do I agree with Jobs' question?  All things in moderation, I suppose.   I do agree that focus is crucial if you want to excel.  That's as true of companies as it is of individuals.  Great firms clearly make tradeoffs; they say no when the typical firm in their industry says yes.  Trader Joe's, for instance, rejects many of the standard ways of doing business in the grocery industry.  That makes them incredibly distinctive and difficult to imitate. 

When it comes to individual behavior, though, I am a little leery of taking the Jobs question too far. To have a successful organization, we have to have people who are willing to sacrifice at times to help others. We need collaborators.  That means sometimes saying yes for the good of the greater whole, even if it may distract you from the task at hand.  

Quick Tip for New Hires

You have landed a new job, perhaps just out of college or maybe after a successful stint at another organization.  You have lofty ambitions for your career.   People have advised you to find a mentor to help you think about your long term goals and objectives.  Hold it!  Before you go any further, here's an important tip offered to me by a mentor many years ago.  He reminded me before I started work, "Do the job that you have been assigned.  Do it well.  The best thing you can do for your long term career goals is to excel at your current assignment.  Don't put tomorrow before today."   It was tremendous advice.  I encourage everyone to follow it. 

More on Making Good Predictions: An Interview with Philip Tetlock

Delivering Bad News: The Message, the Messenger, and the Masses

Mark Cotteleer of Deloitte Research and his colleague Timothy Murphy have written a great piece about the delivery of bad  news in organizations.   As Colin Powell once said, "Bad news isn't wine.  It doesn't improve with age."  However, in many organizations, bad news fails to surface in a timely manner.   Cotteleer and Murphy examine this issue and offer a simple framework for thinking about it. They focus on the message, the messenger, and the masses.   With regard to the message, Cotteleer and Murphy argue that, "To protect one’s self from the stress of delivering bad news, one may communicate in ways that help the recipient to avoid, distort, or ignore the bad news."  With regard to the messenger, they argue that bad news is more likely to be heard and attended to if the messenger has a specific role/responsibility for project oversight.  If they don't have that type of designated role, they are less likely to be heard.  Finally, with regard to the masses, they argue that a small bit of "sugarcoating" can actually be beneficial.  Unfortunately, many organizations take that too far, downplaying serious risks at times.  

In my own work (Know What You Don't Know, 2009), I've examined the issue of surfacing bad news proactively.  In this excerpt, I explain why problems often remain hidden in organizations:

First, people fear being marginalized or punished for speaking up in many firms, particularly for admitting that they might have made a mistake or contributed to a failure. Second, structural complexity in organizations may serve like dense “tree cover” in a forest, which makes it difficult for sunlight to reach the ground. Multiple layers, confusing reporting relationships, convoluted matrix structures, and the like all make it hard for messages to make their way to key leaders. Even if the messages do make their way through the dense forest, they may become watered down, misinterpreted, or mutated along the way. Third, the existence and power of key gatekeepers may insulate leaders from hearing bad news, even if the filtering of information takes place with the best of intentions. Fourth, an over-emphasis on formal analysis and an under-appreciation of intuitive reasoning may cause problems to remain hidden for far too long. Finally, many organizations do not train employees in how to spot problems. Issues surface more quickly if people have been taught how to hunt for potential problems, what cues they should attend to as they do their jobs, and how to communicate their concerns to others.

How to Start Your Day

Source: Business Insider

Superforecasters: Foxes vs. Hedgehogs

You can't go anywhere, watch anything, or read any article these days without hearing from an expert or pundit predicting the future.  Should we pay much attention to those forecasters?  Well, according to research by Philip Tetlock and his fellow scholars at the Good Judgment Project, we might want to remain skeptical of such predictions.   They have found that many experts are not very accurate in their predictions.  On other hand, they discovered some folks who they term "superforecasters."  Who are these folks?  Here's an excerpt from a BBC story on Tetlock's research:

Roberts cites the Isaiah Berlin essay “The Fox and the Hedgehog” – a comparison often used by Tetlock himself – which divides thinkers into those “hedgehogs'” narrowly invested in a single topic and “foxes” with a wider, if shallower, range of experience. “Foxes” like him, Robert says, tend to be better forecasters. “They don't get attached to one particular narrative” and are able to adapt their viewpoints to incorporate any new information, unlike “hedgehog” thinkers, who often force new information into a pre-existing mental framework, or discard it if it seems to contradict their initial view.

In short, the problem with many experts is that they are hedgehogs.  They have deep expertise in a narrow domain, but as a result, they also have a lot of biases.   They have a strong attachment to certain pre-existing beliefs.  The foxes are more open-minded.  What else characterizes the superforecasters?

1.  An ability to ask good questions

2.  An ability to assimilate new information, even if it contradicts their initial view

3.  An ability to use the scientific method to pose and test hypotheses

4.  A reliance on data and not just intuition

5.  A willingness to acknowledge their own lack of knowledge in certain areas 

Rebranding Yourself Mid-Career

In this terrific brief video, Duke Professor Dorie Clark describes how one should tackle a mid-career transition, with a focus on re-positioning your personal brand.

Why Do Successful People Celebrate Their Failures?

Harvey Deutschendorf asks an interesting question in a new Fast Company article:  Why do successful people enjoy celebrating their failures?  He argues that our culture has created a mystique around failure.   Success comes from hard work, from perseverance, from not giving up even when  you stumble.  Of course, success can, in part, also be attributed to good fortune, a combination of the right circumstances at the right time.  Success can derive from having the right team coming together to collaborate with and support you.  However, we don't want others to underestimate the effort required to succeed.   We don't want them to attribute our successes to luck.  Thus, we enjoy telling the tales of our struggles, of the failures that we had to overcome in order to achieve the ultimate positive result.    

There's nothing wrong with this attitude actually.  In fact, reminding others of the importance of learning from failure is beneficial.  Moreover, it's useful to encourage others to experiment, and to accept that failure is part of the innovation process.  The only downside of such stories emerges if we underestimate the role of others in our success, as well as the role of circumstances and other environmental factors.  If we begin to believe that success is all about us, then we may be setting ourselves up for future failures. 

Sbarro: In Strategy, You Have to Choose

The Wall Street Journal reports today on yet another reorganization at Sbarro, the operator of Italian eateries in malls throughout the US.  Sbarro has already experienced two bankruptcies in its history.  What's the new plan for turning around the company?  They will open neighborhood pizza shops with dine-in, take-out, and delivery options for consumers.  They will focus on pizza.  The firm argues it has suffered in recent years due to substantial declines in mall traffic.  Ok, the strategy sounds readonable so far.  However, then you read that the CEO believes that there is still an opportunity to add mall food court locations.  Huh?  He says, "There are 900 malls in the US with food courts, and we're in a third of them.  But instead of them representing 90% of our sites, I'd like them to represent less than half."

The question, though, is whether a company with limited resources and a history of financial troubles can do multiple things at once. Are the two business models (malls vs stand-alone) fundamentally different? Can you optimize both?  Many companies fail because they simply cannot make tough choices about what to do and what not to do. Sbarro may succeed, but it might increasing its odds by making a choice about what it really wants to be.  Instead, it appears to be falling into the trap of seeing a large market (malls) and not being willing to walk away.  However, it shouldn't fixate simply on the size of that market.  It should consider whether it can run mall and stand-alone businesses efficiently together.