Let It Rip (Part II)

In a previous article, I touched on the idea that economic value is generated only after you take action that costs something and make things until people feel compelled to buy.

I’m fascinated by how companies build cultures where people feel empowered to repeatedly take action, even if it’s risky and high-profile.

So, I returned to Mr. Beinhocker’s book to explore how some companies can maintain competitive advantages across decades.

The odds of pulling this off are not in your favor. In the early 2000s, researchers analyzed ~6,700 companies across 40 industries and determined that very few were able to sustain “superior performance” (measured by Return on Assets relative to their industries):

• ~300 (4%) for 10+ years

• 32 (.5%) for 20+ years

• 3 (.04%!!) for 50 years

The reason it’s so hard for companies to repeatedly carve out a moat, Beinhocker explains, is because their “hierarchies with all their human foibles and distortions” prevent them from quickly finding (and doubling down on) the best emerging business plans (“experiments”).

In other words, at the company-level, we shoot ourselves in the foot over inaction, fear, poor data, and much more.

The broader economy, on the other hand, consists of:

• millions of experiments constantly in motion

• trillions of dollars willing to be spent in pursuit of moonshots, and

• a machine-like ability to aggressively select & amplify the most promising experiments

Interestingly, Beinhocker suggests that by following the steps below, your company can actually perform more like the broader economy:

First, prior to any planning, build “prepared minds” so that everyone shares the same aspiration and agrees on the facts & issues at hand.

Everyone’s gotta be aligned on what winning means and the headwinds ahead.

Second, create a portfolio of diverse plans.

Many companies only have one plan for a business unit, resulting in:

• a push to optimize the initiatives that are already up and running (even if they’re becoming obscure), and

• less tolerance for employees who are eager to test out risky ideas (it can be hard to measure progress for a potentially transformational initiative that’s struggling to find market fit)

Strategy must emphasize creating choices, Beinhocker states; and for the best business plans to serendipitously bubble to the surface in an evolutionary system, the pool of choices must vary in terms of risk, relatedness to the existing business, and expected time until payoff.

For example, Microsoft was once the smallest and most resource-strapped of its competitor group.

Nonetheless, Bill Gates simultaneously pursued six unique business plans related to a new operating system (Windows was their preference and thus received the most investment).

Maintaining optionality was hard for Microsoft:

• stress ensued, as coworkers focusing on different business plans competed with one another,

• as did doubt: despite becoming wildly successful, Windows sold poorly for years after version 1.0 launched in 1985 and was beleaguered with tons of issues

People criticized Gates for this portfolio approach (“confused and adrift”), but he was smart to diversify his bets because one can never anticipate which plan will become the winner.

Alternatively, IBM – an industry behemoth at the time with tons of resources - placed its bets on one operating system … a decision that contributed to its later struggles.

Third, create an internal selection environment that mirrors the market environment.

Humans are prone to incorrectly interpreting (whether through biases, internal politics, etc.) signals from the market about how business plans are performing.

Beinhocker’s remedy is to develop strong signals that tightly bind together market realities, company priorities, and employee rewards.

General Electric, for example, effectively used company aspirations to let employees know exactly what they were dealing with in the market, and how successful business plan selection and execution would be rewarded.

GE’s aspiration, which was written into compensation plans and talked about obsessively, was “to be Number 1 or 2 in every market that they served … and revolutionize the company to have speed and agility of a small enterprise.”

• An effective company aspiration “reaches out and grabs [you] by the gut” -- it’s tangible, highly focused, and people get it right away. “GE’s aspiration wasn’t just an objective … it was a requirement”

And, without trying to predict the future, “aspiration should capture important insight about selection pressures that the outside world is subjecting the organization to.”

• GE was under fire from corporate raiders who wanted to break up the company … so, striving to become Number 1 or 2 meant they took an external selection pressure and “beamed” it back into their organization so everyone felt the hostility and acted on it

Aspirations “should motivate you to always be in motion, try new tings, and support the ethic of experimentation.”

They’re also temporary: you either achieve them, or their relevance changes.

GE never met its aspiration for all business lines … but who does? It experienced tons of success, sold the underperformers, and then developed new aspirations.

Finally, figure out a way to scale up the successful business plans (and clip the unsuccessful plans).

To combat the fact that legacy businesses often receive the “A” team, push resources down into business units so leaders with their ear to the streets have the authority to create, fund, and double down on winning experiments that may not be apparent to the top bosses.

And, create unique scorecards (rather than just one overarching system) to judge each plan well and ensure good feedback is garnered in real time.

[That’s all I got! Apologies to the author if I didn’t provide quotes where they were needed … all ideas should be attributed to him]