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Our Intuitive Knowledge Isn’t Always Right!
I was recently listening to a lecturer discuss how risk-taking is an integral part of “the entrepreneurial mindset.” He was very inspirational. Unfortunately, he was also flat-out wrong. There has been a lot of research into the psychological qualities of entrepreneurs. What has it concluded? There is no “entrepreneurial mindset”–entrepreneurs are a very diverse group. But especially among lifelong entrepreneurs who have experienced multiple successes, there is no evidence that they are any more risk-taking than anyone else. In fact, they do everything they can to mitigate risk.
My point, however, has nothing to do with entrepreneurs. It has to do with conventional wisdom. We intuitively (or culturally) want to believe that entrepreneurs are a special breed of person. That way, we have an excuse to be an entrepreneur if we deem ourselves “that breed.” Or we have an excuse *not* to be an entrepreneur if we aren’t “that breed.” Either way, we get to shift the responsibility for the decision to our personality type, rather than our decisions and efforts. That makes the very notion of an “entrepreneurial mindset” attractive, as a flexible rationale we can use for all kinds of stuff.
A lot of conventional wisdom is similar. The American myth that CEOs are somehow to credit for the entire performance of their companies, for example, is unsupported by any data whatsoever. W. Edwards Deming, the statistician who created the Total Quality movement, said that no more than 10% of a company’s performance could be attributed statistically to the CEO, and then only in highly unusual cases.
The problem is that our minds aren’t very good at understanding complex things. For 100,000 years, our minds weren’t able to do much beyond farm. Then we invented the scientific method, which was the first time we had a rigorous way to separate our intuitive-but-wrong ideas from the nonintuitive-but-accurate ways the world really works.
There is a lot of poorly-done science in the works. There is also a lot of excellent science, which is why we live 2x as long as our ancestors, in comfort, with electric lights and polar fleece.
Especially in the human potential fields–self-help, business leadership, etc.–there is a substantial body of research about how people and human systems actually work. Much of that research has even been popularized and published in books accessible to everyday people.
Before jumping on the pleasant, inspirational stories propagated in our cultural myths, take the time to read some of the research-based books on the topics. You can even go further and read the studies the books are based on. Some of the science (or the way it is being interpreted) may be ‘iffy,’ but some may be solid. And you may learn how the world *really* works, which will only make it easier for you to create the life you want.
(*) this is what I did for the Get-It-Done Guy episodes on visualizing for results. “The Secret” doesn’t work. They’ve done controlled experiments to find out. But some slight tweaks in the visualization technique *has* been shown to boost results. Not because of a deep spiritual principle, but because the right visualization gets people motivated and moving to make their dreams come true.
Meritocracy: A Fine, But Mythological, Idea
I love the idea of a meritocracy! It’s a glorious myth that makes a wonderful story. But if you look at how resources, wealth, prestige, etc. get distributed, it’s very hard to make a case for meritocracy.
It’s no surprise we believe in meritocracy. We spend our entire first 18-25 conscious years in school. School is a true meritocracy. The more you work at mastering the material, the more you earn good grades. I don’t know about you, but school was the last meritocracy I had the privilege to enjoy.
At my very first job out of college, I was told, “You do the best job of anyone here, but you’re too young to be making any more money.” Sadly, I persisted in thinking that doing a good job was the way to get what I wanted out of life. I still think that way in my gut, even though I continue to see little evidence of it.
Many very successful people talk a lot about meritocracy and how they just worked hard to succeed. That’s all fine and good, but they’re looking at only their own story. They’re not looking at the vast majority of people in the world who work very, very hard, and don’t get rewarded nearly as well. I’ve also noticed that the people who are highly successful/rewarded/prestigious have a tremendously powerful psychological vested interest in believing in and trumpeting the idea of meritocracy. Otherwise they would have to confront the idea that maybe they don’t deserve all that money/power/fame, and it simply came to them because they were born to the right parents, or were in the right place at the right time.
In capitalism, we give the bulk of the value created by an enterprise to the owners. It’s far better to own 50% of the equity in a successful company that you left 6 months after founding it than to work your ass off for 12 years making that same company a success, but working on salary. What matters as far as material reward isn’t the work/merit, but the capital and ownership structure. (That’s a true story, by the way. The company founder never worked again. The employees, while doing reasonably well, are still working at the same or other companies to earn their daily bread.)
If you want to do a good job, by all means, do it. Personally, I like to be proud of my work, and I strive to do the very best. But don’t confuse that with getting what you want. When you’re designing your life, remember that producing good work may be something you do for the psychic and self-esteem rewards. When you’re going after other rewards, say, money, be as clear-headed as you can about what will help you reach that result. Hard work and skill may not have anything to do with living the kind of life you want.
Should we take personal responsibility for business’s impact?
Many businesses do things that are legal, are in fact good business practice, but which are shown later to have bad effects for society. In some cases, these effects are huge. For example, the contribution of fast food cooking and recipe practices to obesity and heart disease only came to light 40 years after the founding of the fast food industry. And tobacco was only shown to cause cancer hundreds of years into its trade.
If these had caused immediate obesity or cancer, they probably wouldn’t have succeeded in the market. But human beings have an odd quirk: if the effects of something don’t happen quickly, we discount them in favor of immediate gratification. Our compulsion to eat that extra cookie (like I did last night) is immediate, and we act on it much more than we act on the hypothetical, imaginary future world in which we have added a few inches to our waistline.
Then we came up with science and started uncovering these longer-term cause and effects. If a new product were to be introduced that was known to have such negative health effects by triggering short-term gratification impulses, I’d like to think we wouldn’t rush to embrace it.
But even if we’ve gotten smarter (debatable), there’s an even trickier question: some things are fine when done individually, but disastrous when everyone does them. Skipping college is a great example. We’re living in a moment in history where our college costs, educational outcomes, and job prospects are such that it makes very little economic sense for most people to go to college. There’s just no way they can get a job that can pay back their tuition, and we don’t provide enough national educational assistance or reimbursement to encourage people to go unless it has a direct effect on their future income. (Let’s leave out for a moment the recent studies that show that many 4-year colleges are nothing but an extended party and don’t seem to teach very much.) For any one person this makes sense. When an entire generation does it, 20 years later we’ll have a workforce unsuited for anything but manual labor and jobs as check-out clerks. Bad check-out clerks, I might add.
Outsourcing is another place where the individual benefit leads to bad things societally. Any one company can be more profitable through outsourcing. When all companies start doing this, however, it leads to higher domestic unemployment and the gradual deskilling of our workforce. Why would anyone put in the time and effort to develop a skill when they can’t compete with $3/day people of similar skill overseas?
Our economic system is clearly set up to reward the individual, short-term decisions. Sometimes that produces the larger good outcomes, and sometimes it doesn’t. If we as businesspeople are concerned about our larger societal outcomes, how can/should/could we change the system to deal with (a) profitable short-term gratification businesses that have long-term negative effects, and (b) individual incentives that lead to rational individual behavior, but when everyone does them, larger Very Bad Problems?
Do we have any responsibility to address those two flaws in the system? If so, how? If not, then how should we handle the very real societal problems that result?
Success Starts When You Stop Using Your Own Product
Have you checked out your competitors recently? I was just reading a review that says the new Blackberry smartphone is by far the best, speediest, most elegant Blackberry ever. But the reviewer would not recommend anyone buy it. Why? Because it’s still missing a lot of the key functionality that other smartphones have. The hardware is leading edge, but they haven’t truly made the device do anything better.
What I want to know is what kind of smartphone the co-CEOs of RIM use? Do they use Blackberrys? I can’t imagine a worse choice. They should be using iPhone and Android devices for 95% of their calls and computing. We’ll let them use Blackberrys, but only on Sunday. And they’re not allowed to have their IT people set them up; they need to do that themselves. Then they’ll start to understand fundamentally what it’s like to use these devices, and why Blackberry is increasingly falling behind.
I’ve been in Blackberry’s marketing research list for years. I want so badly to tell them why my next phone will be an iPhone, and exactly how and why their platform falls short. But they never ask that. They ask too-specific questions about their guesses as to why I might prefer an iPhone. And their guesses are wrong, because they’re so steeped in their own product.
If you’re in a competitive market, you owe it to yourself to adopt your competitor’s product. Don’t just use it for an hour or a couple of days; really integrate it into your life. Understand its strengths and its shortcomings. Do this a couple of times a year. Only then will you have a hope of being able to take the next step and leapfrog what they’re doing with your own next product. Otherwise, you’re playing guessing games. You might get lucky once or twice, but at the end of the day, you can’t create a vision of a next generation product when you don’t even know what this generation holds.
Use An Editor!
If you want to produce extremely high-quality work, it may be wise to find someone to help. It’s hard to be objective about our own work. Almost by definition, we believe if we did it, it must be good. But yet, sometimes an objective eye can help us take our good work to the realm of greatness. The objective eyes I’m talking about belong to editors.
Editors ROCK! When I’m writing a Get-it-Done Guy episode, my natural sense of humor comes out. My natural sense of humor was developed doing comedy improvisation with college audiences. “Decorum” is not high on the list of words you would use to describe my first draft material.
Fortunately, there’s a very dedicated editor at Macmillan publishing who reads my drafts. She sends them back with paragraphs circled in red pen. In the margin, she writes notes like, “If you say that, the FBI will open a file on you, start wire-tapping your phones, and put you under 24-hour surveillance. Again.” While most people would enjoy free protection services, I find it cramps my style when I go out clubbing. So I rewrite the paragraphs she highlights, this time using Goldilocks and the Three Bears as the central metaphor of my piece. My editors approve, and another Get-it-Done Guy episode is born.
Editors come in many varieties. Some editors can make sure your humor is appropriate. They can make sure your text flows, that you don’t repeat yourself, and that your points build on one another. Copy-editors handle editing the details. They double-check your spelling, your grammar, and your punctuation. I was a copyeditor for the school newspaper when I was a student at Harvard Business School; I need to give my marketing staff a special therapy budget, so they can deal with me.
If you have to write reports, pamphlets, or anything where quality matters, get yourself an editor. It doesn’t have to be a professional, a colleague who writes well may be all that’s required. If you’re worried about letting your coworkers see your work before it’s polished, find a friend who has the write skill set, but works at another company. You can be an outside helper for each other, without worrying about work-in-progress-quality work getting out to the people in your company.
If you’ve never worked with an editor, give it a shot. You’ll discover that having an extra pair of eyes double-check your work can often produce something better than either of you could have written on your own.
Know the Lifetime Value of Your Customers
When that lone customer arrives at your restaurant on a busy night, it’s tempting to make him or her wait, in favor of the party of 12 that’s sure to rack up a huge bill. But it just might not be wise.
When you’re deciding how to structure your business, who to give service to, and when to go the extra mile for a customer, don’t just consider the transaction you’re in the middle of dealing with. Consider the total lifetime of interaction with your customer. The “lifetime value” of a customer is how much you expect that customer to spend over the course of their association with you. That lifetime value is what you want to take into account when deciding how far out of your way to go. I’ve recently had a few run-ins with companies that have taken a short view, much to their detriment.
I eat lunch 5 times a week at the same deli. They discontinued my favorite kind of hot pepper, leaving no condiments that I enjoyed. I asked them to please bring them back, and they refused. I offered to buy my own jar for them to use. They refused. And I stopped eating there. Five days a week, times 50 weeks a year, times $7 per lunch is $1,750 of income a year they were happy to forgo to avoid dealing with the hassle of keeping a jar of peppers around. My new deli is part of a franchise. They are only supposed to serve their approved condiments. I spoke to the owner and he happily kept a special jar of peppers just for me. In the 3 years I’ve been eating there, they’ve made $5,000 and my previous deli has gone out of business.
My friend passes through Reno every year on the way back from the Burning Man festival. He stayed in Harrah’s because they gave him a free upgrade if they had rooms available. He then spent the money he saved in the Harrah’s restaurant and spent even more in the casino. They stopped giving free upgrades, and he changed hotels. It would cost them nothing to give him the upgrade, and instead, they’ve lost year-after-year of restaurant and casino business. Let’s not even consider how much Harrah’s would make on all the referral business my friend would bring. Smooth move, Harrah’s.
To return to the original example, while it may make sense on any given night to forgo seating one person in favor of the party of 12, if that one person dines at your restaurant three times a week, in the course of a year, they’ll outspend the entire party of 12. As unintuitive as it may seem, treating the solo customer well may be a better business decision than handling the occasional bachelorette party. And believe me—the cleanup’s a lot easier, too.
When you make decisions about your customers, do you consider their requests as separate events, or do you consider the lifetime value of each customer before deciding how much to commit to their happiness?
“Strategic Thinking” – The Meaning Behind the Buzzword
It sounds easy: my client wanted to think more strategically. isn’t that the hot buzzword? “Strategic thinking.” Oooh! Sexy. There’s only one problem: what, exactly, does it mean?
You’d think we would know. But I’ve seen executive teams discuss in all seriousness what the lever does on a piece of machinery. That’s about as non-strategic as it gets. In fact, a general rule is that if you read it in a manual, it’s quite likely not strategic.
What is strategic is when you’re doing something that changes the structure of the business in some basic way. Paint a machine lever red? Not strategic. Decide to outsource manufacturing to China? Strategic, because it changes who you hire, how you manage them, and what they’re capable of achieving. You punt your machines and take on eager young managers who speak Mandarin.
This is the first kind of strategic impact: changing organization structure. This includes outsourcing, selecting vendors (since what you can do now becomes expanded and limited by what they can do), mergers and acquisitions, changing the org chart, going public, and hiring and firing people who will in turn make strategic decisions.
Or consider an entrepreneurial client who insists on answering the phones himself. He’s done it since founding the business 20 years ago and prides himself on knowing everything that’s going on. But now that the company gets a hundred phone calls a day, he decides to install an automated attendant, freeing himself to do other things. This is an example of “business process reengineering,” which is a fancy way of saying “doing things differently.” Changing how a business does something is strategic because different hows give the business different capabilities. If your product is produced on a machine that turns out 100 widgets a day, then you simply can’t bid on a job that wants 500 units by tomorrow. If you can rearrange your factory processes and produce 5,000 units a day, whole new markets open up.
Speaking of markets, choosing the markets to compete in, what to sell, and how to price are all strategic decisions. After all, those decisions determine who you’ll hire, how you set up your org structure, and how you’ll deliver your product or service.
The American Express web site lists 20+ cards. I called a friend in Amex’s strategy group to help me understand the difference between the “Platinum Business” and the “Business Platinum” cards. He said, “I work in strategy. I don’t really know our product lines.” A strategy group that doesn’t know the products? I don’t know what they do, but it seems awfully dangerous to be making organization structure and process decisions without even knowing what your customers are buying.
Everything we’ve discussed so far is cross-functional; they can involve changes that affect many parts of a business. Though it’s possible to make strategic decisions in one area of a company without involving other areas, that’s a dangerous game. If our marketing department starts competing in a new market that cares about delivery time, but doesn’t tell our shipping folks, they can set the company up for failure.
Don’t make the same mistake. Learn when your decisions are strategic.
That means decisions about org structure, process–the HOW–, cross-functional decisions, and the marketing decisions of what to sell and who to sell them to.
If you want to learn more about strategy, my very favorite book is Co-opetition by Adam Brandenburger and Barry Nalebuff. I also liked Geoff Moore’s “Crossing the Chasm.” Both books are circa mid-90s. There are 83,416 other business books that will teach you some kind of strategic thinking. I’m not sure the specific strategic approach is very important (though consulting firms will make big bucks telling you otherwise); to me, the value comes from learning to think at a strategic level consistently and integrate strategic thinking into your daily running of the business.
When neighborhood institutions die
I live in a very special city in America. Boston is one of the few cities in the country where chain stores have been relatively slow to take hold. For much of my time living here, most of the stores I have frequented have been locally owned and operated.
Today, I visited my awesome and amazing stationery store, Bob Slates. They’ve been in business for 83 years, and they are closing their doors next month. Are they the cheapest? Absolutely not. “Big box” stores like Staples are cheaper. But Bob Slate has merchandisers always looking for cool new niche products and a product selection you can’t get anywhere else. The staff tends to be stationery geeks, so we can waste tons of time every visit gabbing about how much more we like one fountain pen nib than the other.
Small stores like this can never compete against a Staples on price. Staples can win every time, just because they’re bigger. Maybe there are “economies of scale” to a big store. Maybe. It may be that a big store simply limits their selection to very mainstream products, and they are big enough to have negotiating leverage to force suppliers to provide low prices or be shut out of he market. “Economies of scale” may simply be the reallocation of profit to Staples, thanks to their bargaining power. Sadly, lower prices do result in more sales, because at the moment of purchase, price is often all we consider.
Personally, I think this is a bad thing. I value variety, community, and connection for their own sake. When I visit certain American cities, I’m astonished at the incredible lack of choice and variety people have in their restaurants and stores. People proudly proclaim, “We have our very own insert-name-of-huge-chain-store here!” without realizing that there could be plenty of alternatives, many of which might actually be much nicer to shop in for a variety of reasons.
It also makes our cities far less interesting and relevant. Why should I visit insert-your-city-here when all I’m going to find is three historic sites and the rest of a city that’s a carbon copy of the city I visited last week? To the extent that large companies do reap economies of scale, they do it by eliminating individuality and turning their customer experience into a consistent—but limited—cookie-cutter approach.
Once upon a time, you could find drinks other than the Standard Coke or Pepsi Panoply (cola, lemon lime, orange, lemonade and diet versions of same) if you wanted to get a drink at a restaurant. But Coke and Pepsi have pretty much taken the entire fountain market. What’s been great for the companies has resulted in me as a consumer having far less choice and variety.
I’ll miss Bob Slate’s, as I’ve missed the succession of wonderful, local stores that have been replaced over the years by nationwide brands. Maybe we’ll be lucky and get a new Staples.
Negotiating equity with a co-founder.
A student entrepreneur wrote and asked how he should negotiate with his company co-founder, a Professor, for equity. The Professor has proposed the the student get almost nothing, and the Professor get the bulk of the equity. Here’s my response to the student.
Negotiating around equity is tricky. There are conventions, but at the end of the day, it really comes down to nothing more than the ability to conversationally create huge perceived value and then use that as a negotiating leverage.
Check out this article I wrote on the topic: https://www.steverrobbins.com/articles/equitydistrib.htm
The book Co-opetition defines your “value-added” in a negotiation as the value-of-the-deal-with-you-in-it minus the value-of-the-deal-without-you. Once you know your value added, it can help with negotiation. Let’s say you and a friend are starting a business and neither of you can be replaced. With both of you present, the business is worth $100. If either of you leaves, the business is worth $0, so you each have a value added of $100, which gives you symmetric bargaining power.
Let’s change the situation a bit. Let’s say that you have special technology without which the startup won’t work. He’s bringing valuable sales skills, but if he were to drop out, you could find someone else who could do sales, but let’s say it would take enough time and money that you’d have to spend $5 replacing him. (Thus, the value of the business without him would be $100-$5, since you spent $5 on a Craigslist ad to replace him.) Your value added is $100 – $0 = $100. His value added is $100 – ($100- $5) = $5.
In this scenario, you have considerably more bargaining power than he does. Note that having the bargaining power doesn’t mean you can or should get that proportion of the total pie, just that you have that relative strength of bargaining power.
I wouldn’t actually try to do specific numeric calculations. But do think about what you bring to the table that would be hard to replace, and use those as your disucssion points. There may be many things you bring to the table that justify a request for equity:
- If you helped originate the idea.
- If you plan to take lower wages or work longer hours that would be expected solely from your salary.
- If you’re the only one who can do the work.
- If you bring any unique resources or connections to the table.
- If you put in initial cash to get it off the ground.