December 10, 2008

What fuels it all: Grandiosity

[Excerpt from Chapter 2, Bigger Isn’t Always Better]

These [see last post] are all cognitive errors, not manifestations of greed. They drive bigness, and they are also reinforced by it.

What causes people (especially smart people, as Sternberg and Finkelstein like to point out) to fall into these traps?

We are all prone to distorted thinking from time to time, but when these become our modus operandi for dealing with the world, it is likely that we have become caught up in grandiosity.

This is an occupational hazard to which many leaders are vulnerable. Psychiatrist Roy Lubit notes that people in positions of power can become self-centered and grandiose when those around them treat them with excessive deference, fawn on them, feel reluctant to challenge their views, and fail to provide self-corrective feedback.

Observes Lubit: "If you have power you are probably not as smart, funny, or good looking as people say you are."

Many leaders have risen to senior positions because of their expressed self-confidence, ability to generate enthusiasm in others, and willingness to make tough decisions quickly. As they advance in the hierarchy, they run the risk of having fewer people nearby who are willing to intelligently challenge or add balance to their views, further inflating their sense of self-importance and fueling any tendencies toward arrogance that they have brought with them.

The tendency to provide rock-star-sized pay packages to senior executives reinforces all of this, putting additional distance between them and the others in their organization. Soon the stage is set for unrealistic optimism, egocentrism, omniscience, omnipotence, and invulnerability to take over, and the quest for bigness is primed to become the business's dominant driver.


The 5 Horsemen: Where do mistaken perceptions of reality come from?

[Excerpt from Chapter 2, Bigger Isn’t Always Better]

Mistaken perceptions come from faulty thinking processes. Robert Sternberg identified five forms of flawed thinking that can lead to counterproductive actions:

Unrealistic optimism. Optimism is a powerful enabler of growth. Too much of it, applied in situations where it is unwarranted, can backfire by leaving people feeling so capable and on such a roll that they mistakenly think that they can achieve anything they set out to do. Samsung thought its great success with consumer electronics would carry over to a completely different business, automobile manufacturing. It invested $5 billion to enter a market that was already oversaturated and nearly profit-free. Exaggerating benefits and discounting costs is a great way to set a business up for failure, as Samsung soon learned after it was forced to turn over the direction of its ailing car business to a more experienced French company, Renault.

Egocentrism. Individuals who come to think that they are the only ones who matter are likely to make many perceptual errors. They will take personal credit for the good luck of having been in a buoyant economy or a market that has just taken off. Egocentrists act in ways that benefit themselves, often without a clue to what impact these behaviors are having on others. Their illusion of personal preeminence leads them to miss a lot that is going on around them. MIT systems researchers have spent several decades examining the dynamics behind growth. They have noticed that all growth initiatives involve two distinct processes—one that generates a self-reinforcing spiral of success, and another that attempts to balance this forward momentum with feedback from the rest of the world telling the grower to slow down a bit. The first process always runs up against, and sometimes causes, the second. Egocentrism (acting as if the world revolves around you) basks in the first of these, while ignoring the early warnings of obstacles ahead provided by the second process. Even as its sales declined, legendary Levi Strauss still thought of itself as the company that defined jeans and smart casual wear, and dismissed reports that young, fashion-oriented consumers saw its clothes as stodgy and outdated.

Omniscience. People who feel that they know all they need to know and do not need to seek or heed advice are the ones who are most likely to make decisions without considering all the ramifications of their actions. The chief executive of Rubbermaid in the mid-1990s, Wolfgang Schmitt, cultivated a reputation with his managers as a lightning-fast thinker who behaved as through he knew "everything about everything."24 He ran one of the then most admired companies in the United States. Rubbermaid had a dominant position in many categories of household products and containers—at least, dominant until Schmitt missed that decade's shift of market power from makers of products to their sellers. Rubbermaid ignored Wal-Mart's demands for lower prices and deliveries at Wal-Mart's convenience, and found its place on this retailer's shelves quickly taken by cheaper items made by companies with retailer-friendly, just-in-time delivery systems. Rubbermaid's sales declined, and by the end of the decade the company was sold to a turnaround specialist.

Omnipotence. Feeling like an all-powerful master of the universe leads one to push harder in the same direction when obstacles arise, rather than heeding the potentially useful feedback the world is trying to provide. Assumptions about reality get confused with reality itself. After Nokia became the world's leading cell phone maker, it came to think that it could shape the industry because its market position was so strong. It resisted following its smaller competitors, forgetting how motivated these companies were to keep up with changes in customer needs that could offer a way to topple Nokia's dominance. As a result, when preferences shifted away from candy bar–style handsets and toward sleeker, clamshell phones, Nokia stayed with the older models too long and lost market share. Ironically, one of the companies it lost customers to was Motorola, the former wireless phone leader whose business had been devastated by Nokia's digital phones a few years earlier when Motorola clung too long to analog technology. Executives caught up in omnipotence overestimate how much control they have over events and completely discount the role that chance and one-time occurrences have played in their past successes. Their response to obstacles becomes stereotyped—they just push harder.

Invulnerability. Once thought to be only an affliction of teenage boys, the idea of being able to do whatever one wants to without fear of harm or exposure has crept into some boardrooms. Sometimes expressed by ignoring the law and social norms, and other times by failing to protect a strong position in the marketplace by adapting to evolving circumstances, this thinking fallacy leads to underestimating how aware and clever ones' opponents (and regulators) really are.


Why otherwise smart executives do stupid things

[Here is Bigger Isn’t Always Better’s take on what’s behind what Steve Pearlstein wrote about in the last post.]

Why do otherwise smart, alert, and forward-thinking businesspeople repeatedly engage in activities that usually prove counterproductive?

This is a subject that has received a lot of recent attention.

Robert Sternberg, a Yale psychologist, wrote a book to answer just that question. Why Smart People Can Be So Stupid pulls together the research of several leading behavioral scientists to identify factors beyond avarice that have driven the kinds of dumb business decisions discussed in this chapter.

A Dartmouth management professor, Sydney Finkelstein, also studied this phenomenon. His book, Why Smart Executives Fail, examines what was behind 197 instances of dramatic drops in market share and value.

Nobel Prize in Economics winner Daniel Kahneman and behavioral economist Richard Thaler have also weighed in on these issues.

The findings of all these scholars share a similar theme: Mistaken perceptions of reality can cause much more damage than willful misconduct. Self-serving behaviors have certainly played a part in many unwise business expansions, but they are far from the whole story.


A perfect storm - or lack of clear vision?

Washington Post’s Steve Pearlstein has written another of his classic on-target columns about what’s behind the recent sinking performance of so many companies. He takes strong issue with the “perfect storm” defense being used recently by so many business leaders.

As always, he’s very direct:

“A bit of unsolicited advice to business executives trying to explain why their company or their industry is suddenly in the soup:

Please spare us the "perfect storm" metaphor.

It's hackneyed, for starters. It doesn't square with the facts. And for people who fancy themselves leaders, it's downright unbecoming.

The reason the perfect storm is such an appealing metaphor for these shipwrecked captains of industry is that it appears to let them off the hook. … It's an act of nature that nobody could have predicted -- or so the story goes.”

Pearlstein also notices that:

“…these guys actually buy into this nonsense.

The rest of us want desperately to believe that what brought us this economic crisis was some combination of greed, fraud and negligence -- and, no doubt, there was quite a bit of that. What the populist critique ignores, however, is that at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers.

It's not that they don't see the excesses and dangers in front of them -- how could they not? But somehow they convince themselves that the world has changed, that the old rules no longer apply or that, because of competitive pressure, they had no choice but to run with the herd.”

He then goes on to observe how widespread victimology-thinking has become in executive suites:

“In recent months, I've had a chance to talk with half a dozen top business leaders whose companies have fallen into the soup and read published interviews with many more. And almost to a person, they say that they've been replaying the tape over and over in their minds and, even now, they still can't figure out what they might have done differently, given what they knew at the time and the various pressures they were under. Or put another way, they continue to think of themselves as victims of a perfect storm.”

The rest of Steve’s article shows how these executives are totally off-base in their analyses of what went wrong.

Being a journalist, he saves his greatest wrath for Sam Zell, head of the now-bankrupt Tribune:

“The only perfect storm to hit the Tribune was the one that resulted from the collision of Zell's ego, his arrogance and his utter ineptitude in running a media empire, along with a total disregard for the financial well-being of thousands of employees whose retirement assets he commandeered for a financing scheme that gave him control of the company while putting in very little of his own money.”

Pearlstein sees self-delusion and the herd mentality behind many of Wall Street’s and Detroit’s current woes. He sums things up saying:

“What capsized the economy was not a perfect storm but a widespread failure of business leadership -- a failure that is only compounded when executives refuse to take responsibility for their misjudgments and apologize.”


December 09, 2008

Booms and busts

Richard Foster was a McKinsey director from 1982 to 2004, and is a coauthor of Creative Destruction. Here’s his take on the cyclical nature of growth cycles:

"During the boom times, when the equity premium goes way too high, everybody hocks everything to get in on the game, and this creates the conditions for a crash.

When the crash occurs, the politicians come in and say it was this or that person’s fault. Then they create regulatory institutions, and virtually every one of those institutions—starting with the Federal Reserve, in 1913, as a result of the crash of 1907—has been quite productive for the nation in the longer term. This includes the formation of the Securities and Exchange Commission, in 1934; the Investment Company Act, in 1940; the beginning of the end of fixed commission rates in 1970; and the Sarbanes–Oxley Act, in the early 2000s."

But happens in the aftermath of all the new regulations? Why don’t they seem to provide lasting relief?

“What do self-respecting entrepreneurs do when subjected to new regulations? They learn the regulations backward and forward and then vow never to start another business that falls within the scope of those regulations.

And so off the entrepreneur goes to find a new way. That’s one reason credit default swaps eventually took the form they did—the other options were regulated.

The new entrepreneur often seeks ways to innovate outside the scope of the newly established regulations. In the beginning, all that works out fine. We have innovations, we love the people who created them, they’re great heroes, the returns are strong, everybody says, ‘I’m going to be one of those guys.’

Eventually, all the truly good guys who are going to get into that business have done so. The opportunity starts drawing less savory figures—charlatans who overmarket, cut corners, establish usurious contracts, and do other clever things to generate profit for themselves. They end up bringing the system down.

Then guess what happens? At the end of that period, after the equity premium has soared and collapsed again, the government steps in and regulates the systems, this time focusing on the last wave of abuse.

And then we start over.”

Foster also thinks that our economy was “getting somewhat better at handling these cycles until 2000, but since then we’ve gotten worse.”

The key issue, of course, is: does it have to be this way? How can we move from a system that only fixes itself after another round of great pain to one that pulls us back way before we reach the brink? How can we cultivate the “good innovation” and minimize “the bad.”


December 06, 2008

Fighting over the steering wheel

Micheline Maynard, in The New York Times, offers a perceptive account of the growth management failures that brought General Motors to where it is today. It’s a recap well worth reading because the tensions it describes are present in every organization.

Her bottom line:

"G.M.’s biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about returns on investment.

The two views were rarely in sync — in effect, fighting over the steering wheel that controlled G.M.’s direction — and the internal battles distracted G.M. from spotting shifts in the marketplace.

Time and again over the last 30 years, G.M. has spent billions of dollars on innovative ideas like its Saturn small-car company in the 1980s and the EV1 electric vehicle in the 1990s, only to then deprive those projects of further financing because money was needed elsewhere or because they were not delivering enough profit."

Her article cites the pivotal decade of the 1960s as the time when GM’s DNA began to lose its innovation chromosomes.


December 03, 2008

When Microsoft got it right

Parallel paths are often the best way to avoid the paralysis that frequently accompanies single, bet-your-business strategies. Improvisers acting along these lines have many balls in the air at once. Rather than rushing to implement any single solution, they mimic the experimenter and launch multiple attacks on each problem.

This is what Microsoft did at a critical stage of its development when it had to be open to the leadings and promptings of a market that itself didn’t know where it was going.

In 1988 Microsoft was not the certain winner in the desk top operating system wars. Smaller then than most of its competitors, its flagship product DOS had been the industry standard for six years in the PC market, but it was clunky and showing its age. It’s replacement product, Windows, was already in its second release and a near still-birth attracting more pundit criticism than loyal users.

Facing-off with Microsoft in the marketplace was a much loved, more elegant alternative - the Apple Macintosh operating system. AT&T, Hewlett-Packard and Sun Microsystems were touting a new graphical version of their robust Unix software. And IBM had just released OS/2, a product compatible with DOS, as strong as Unix and as easy to use as a Macintosh.

How did Microsoft respond? With a little of everything. A new, improved DOS was put on the market along with the latest version of Windows. Microsoft actually co-developed OS/2, so it would share its market success along with IBM. In case Apple’s Macintosh triumphed, Microsoft invested heavily in updated versions of Excell, PowerPoint and Word that would run only on it. And, to keep its flanks protected, Microsoft even partnered with a small software maker to create a version of Unix that was PC-compatible.

The business press had a field day criticizing the company from Seattle. “Microsoft was adrift, Gates has no strategy” shouted the articles. Rumors abounded of infighting among rival teams of his programmers. Gates, of course, was far from strategy-less. He had a clear plan of action in the face of massive uncertainty. He, as McKinsey consultant Eric Beinhocker noted, bet on every horse. Gates wanted Windows to pull ahead in the race, but he knew that past trends were not predictors of future results in the then still-amorphous PC market (otherwise we’d all be using Macintoshes today). So he flanked his favored product with an array of side bets. Even if Windows lost, Microsoft wouldn’t.

That was a good strategy for Microsoft in 1988. But less so now as it tries to find its place in the internet in 2008.

A common problem of successful companies is they keep repeating the strategies that led to their success.


December 02, 2008

Creating new products: Ford vs. Microsoft

When Ford committed itself to building a gas-electric hybrid SUV, it faced the challenge of creating the most technically advanced product it had ever mass-produced.6 Even though the company has been making cars for over 100 years, these have all run with one motor. Hybrids have two, and they require a host of new-to-Ford technologies to make the two motors work together.

To develop this car, Ford pulled researchers out of its lab and sat them next to the design engineers who were building the car prototype. These and other members of the hybrid team stayed in close physical proximity throughout the project, and the entire team stayed together until the project was completed.

Just like the SUV they were creating, this group had two engines. One member of the team, Prabhaker Patil, was a Ph.D. scientist. His job was to inspire creativity and invention. Another group leader, Mary Ann Wright, a veteran of many successful Ford car launches, was is the feet-on-the-ground person. Her job was to keep things on schedule. She was the disciplinarian who forced the scientists, who naturally like to keep refining (and refining) their work, to wrap things up.

Ford's head of product development also ran interference for the group with the company's top management. He freed the team from the normal time-consuming management reviews and progress report requirements, allowing it to focus on the must-win technical battles of the project, not the needs of the bureaucracy.

Contrast the hothouse process Ford used to play a critical game of catch-up with its rival hybrid maker, Toyota, with the product creation system that Bill Gates designed for Microsoft.

There, responsibility for each new product passes from the "incubator" of an idea, usually a researcher in one of Microsoft's divisions, to the product "definer" (someone in marketing or a division manager), and then finally to the "owner," which is a development team, which supervises the programmers who do the real work.

Notice that the originator of the idea is not considered its owner and is not kept with the project through its completion.

A host of other Microsoft managers play varying roles throughout the development cycle. Some are participants; others have reviewer or approver/coach roles.

Microsoft calls this integrated innovation, although its emphasis seems to be more on fostering the integration than on fostering the innovation.

Complex matrix systems like this are almost guaranteed to destroy momentum and result in long-delayed product introductions — which, when you think about it, might make sense for a company like Microsoft, whose new products primarily compete with its established products.

[Excerpt from Bigger Isn’t Always Better, Chapter 10 “Master Momentum and Bounce.”]

December 01, 2008

Why can't Microsoft make money online?

... asks Fortune magazine.


"It's quite possible that Microsoft is going after the Internet with too much energy - or at least attacking in too many directions. Rather than carve out some element of the web where it can shine, Microsoft pursues everything.

Its Live Search competes head-on with Google. MSN and Hotmail do battle, unimpressively, with Yahoo's e-mail service and Google's smaller but innovative Gmail. With recent tweaks to its Windows Live product, Microsoft is mimicking Facebook, in which Microsoft itself invested."

Sounds like a problem of bigness vs. strategic focus:

"For a company that has long been known for the clarity of its message - the old mission statement, 'A computer on every desk and in every home, running Microsoft software' - Microsoft isn't all that clear about what it wants online.

'You've had Ballmer and [chairman Bill] Gates telling the world for years that online success is critical for Microsoft,' says Benjamin Schachter, an online-ad analyst with UBS. 'But they don't say what success is.' "

Real growth is driven by clear, precise goals.

Fortune goes on with the "fear" issue. Fear, fueled by a big bank account, seldom leads to good things:

"In part, that's because Microsoft is so busy playing defense against Google. Yet Microsoft hasn't done a great job with that either. Even as it has spent money on data centers and marketing gimmicks like giving cash back to users of its search engine - the online equivalent of banks handing out toasters for opening accounts - Microsoft continues to lose share to Google.

Microsoft's portion of U.S. search queries was 8.5% in September, according to comScore, down from 10.4% in January 2007. During the same period, Google's share rose from 53% to 63%. And Facebook, MySpace, Google's YouTube, and other, newer sites have reduced MSN to also-ran status in terms of web popularity."

... and there's also the issue of organizational clarity:

"That at least five high-ranking Microsoft executives have a piece of the online portfolio illustrates another part of the company's predicament. Microsoft doesn't speak with one voice when it talks about the Internet."


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