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.

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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?

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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.  

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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.

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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.

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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. 

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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. 

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