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Cognitive Bias – Getting it Wrong

Cognitive Bias

Cognitive BiasYour brain is wired to think fast. So, to do this, it needs to take shortcuts, that psychologists call heuristics. But these shortcuts don’t always give the right answer. They give rise to cognitive bias.

Cognitive bias is the result of the shortcuts. If every car door you’ve ever encountered opens outwards, it’s a good bet that the next one you encounter will too. That’s a bias in your assumptions. Usually, it serves you well. One day, it may let you down.

But the cognitive biases that we need to worry about are those that are baked into our mental operating system. We make the mistakes without realising it. They lead to bad decisions – sometimes to catastrophe.

Continue reading Cognitive Bias – Getting it Wrong

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Alfred Chandler: Business History

It’s just a few people who could claim to have invented an academic discipline, but one who could, with some justice, is Alfred D Chandler. He was a historian who studied business, and in so doing, he inferred large historical patterns that still inform our thinking.

Alfred Chandler
Alfred Chandler, 1918 – 2007

Short Biography

Alfred DuPont Chandler was born in 1918 into a Delaware family that had commerce in its blood. In one branch of his family was grandfather Henry Poor, of Standard and Poors, and in another was the duPont family. He studied for a Masters degree at Harvard College before the war, where he was a friend of John F Kennedy. After service in a non-combat role, he returned to Harvard to finish his Masters and earn his PhD with a study of Henry Poor and the coming of the American railroads..

An appointment to MIT allowed him to study more large corporations in depth. His analysis of duPont, General Motors, Standard Oil, and Sears Roebuck & Co led to the publication in 1962 of the first of his three most noteworthy books (among over 25 in total): Strategy and Structure.

He also worked for a while at Johns Hopkins University, before returning Harvard in 1970, as the Isidor Strauss Professor of Business History at the Harvard Business School. There, he wrote his second major work, 1977’s The Visible Hand: The Managerial Revolution in American Business. This exceptional work won Chandler the Pulitzer Prize for History, and was the first business book to be recognised with a Pulitzer Prize. The title is a deliberate reply to Adam Smith, whose ‘invisible hand’ is the market. We’ll see what Chandler was referring to in a moment.

In 1990, Chandler published the last of his three major books, Scale and Scope: Dynamics of Industrial Capitalism. In this he shows that it is not just scale of operations that bestows big economies and hence competitive advantage. It is also scope – capturing a diverse spread of markets early on. Uncharacteristically, Chandler looked to economics and borrowed the term ‘first mover advantage’.

Having retired from the Harvard faculty in 1989, Chandler continued to work, write and comment on changes in business, and was a visiting professor at numerous institutions. He died in May 2007.

Themes of Alfred Chandler’s Work

Chandler’s approach of wide-ranging comparative analysis to find historical patterns of evolution and change initially encountered a lot of resistance from the academic business community. These academics favoured using economic and quantitative analysis to build their theories, but Chandler was able to change many (though not all) attitudes. Today’s business school focus on case studies and the rise to prominence of academics and writers like Jim Collins.

Strategy before Structure

The primary thesis of Chandler’s ‘Strategy and Structure‘ is that strategy must come before (and therefore dictate) the structure of the corporation. His historical observations led him to conclude that market forces need to drive shifts in the way organisations evolve, and he was able to predict the increasing trend for decentralisation that continues, in the largest businesses, today.

More recently, academic and business commentators have disagreed. Tom Peters observes that it is structure that determines which strategy a corporation will select, and Richard Tanner Pascale argued that Chandler assumed that organisations act rationally. They don’t, and he also notes that organisational structures play a big role in shaping strategy.

Trust Gary Hamel to sort it out, by seeing the subtlety of the competing views. He notes that the two are intertwined: new challenges lead to new structures, and new structures present new challenges. He concludes:

‘Few historians were prescient. Chandler was.’

Arguably, Chandler is, along with Igor Ansoff, one of the founding advocates of the study of business strategy.

Professional Management

Chandler also charted the rise of professional management; first in Strategy and Structure and then, more fully, in The Visible Hand. He saw managerially led corporations in the US rise with the growth of the railways and the need for complex, geographically-spread, systems. These first arose within the railway companies, and then in the corporations that grew nationally, due to the opportunities that long-distance transport offered.

It was the visible hand of an organisation’s managers that replaced Smith’s invisible hand of the market as a major driver of the structure of a modern business.

Further Reading

I rarely cite another website for further reading about our Management Thinkers, but in this case, I am compelled by the excellence of the article at the Strategy + Business site. I have deliberately avoided borrowing from it. If you are interested in Chandler, this should be your next port of call.

 

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Arie de Geus: Living Company

James Dean or Kirk Douglas? Jimi Hendrix or Vera Lynn? Why do some people die young and other live long and productive lives? Arie de Geus, who himself is living a long and productive life, asked the same question of companies. And the answer he got was, like the long-lived companies,  unexciting, cautious, yet robust.

Arie de Geus
Arie de Geus

Short Biography

Arie de Geus was born in 1930, in Rotterdam in the Netherlands. While studying for his doctorate in Business Administration at the Nederlandse Economische Hoogeschool (now, Erasmus University) in Rotterdam, he started working at Royal Dutch Shell to support himself through his studies.

His career at Shell was long and successful. Over 38 years he took a number of regional and corporate roles. They culminated with leadership of Shell’s Group Planning Department, famous for its innovations in Scenario Planning. There, he focused his attention on Portfolio Analysis and Organisational Decision-making. He concluded that organisational learning was a key to successful decisions and corporate longevity.

He developed this theme in a Harvard Business Review article in 1988, ‘Planning as Learning’. When de Geus retired from Shell in 1989, he rapidly got involved with the newly founded Center for Organizational Learning, at MIT, joining Chris Argyris, and Edgar Schein among its advisors, and Peter Senge, as its first Director. In 1997, he wrote the book that has brought him most prominence: ‘The Living Company’.

The Living Company

In his research, de Geus found that the average life expectancy of European and Japanese companies is 12.5 years. For large multi-nationals, it is between 40 and 50 years. Why then, are some able to last hundreds of years? De Geus argues that all have a potential life of 200 to 300 years, and he set out to learn the secrets of those who have achieved it.

His principal conclusion is simple. The problem is profits. Or, more accurately, it is a short-term focus on building profits, at the cost of a longer-term focus on all aspects of the business. Chief among the long-term aspect, de Geus highlights the need to nurture people. How a long life, a business needs to prioritise human capital over financial capital.

The title of his book arises from two hypotheses de Geus sets out:

  1. A company is (in some ways) a living being
  2. The decisions made by the company are a result of a learning process

Therefore, for the living being to thrive, it must continually learn, and build on what it has, rather than constantly seek to throw out the old, and with it, the organism’s accumulated wisdom.

Other factors he found, which characterise the long-lived companies he studied, are:

  • sensitivity to their environment
  • cohesive, with a strong sense of identity
  • tolerant of experimentation
  • frugal financing decisions

He uses these to carry forward his metaphor of companies being like living organisms, in suggesting that these characteristics also represent successful survival strategies for real living creatures.

Context

Without a doubt, de Geus sets out a corporate, rather than entrepreneurial growth agenda. And his approach to human capital aligns him with other proponents of the human side of the enterprise, starting with people like Follett, Owen, Mayo, and McGregor.

His analysis is also more nuanced and less of a ready-recipe, than the book that followed it a few years later and also looked at long-lived companies: ‘Built To Last’ by Jim Collins and Jerry Porras. Perhaps the biggest difference is that, while de Geus saw average companies as lasting up to fifty years, and targeted longevity on 200-300 years. Collins was interested, in Built to Last, on those that make it past the 50 year mark. Maybe de Geus would see these as merely promising adolescents.

 

 

 

 

 

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Samuel Walton: Retail Giant

Sam Walton founded Wal-Mart, growing it to over a thousand stores. He is a serial early-adopter whose commitment to innovations made them ubiquitous and his investors extremely rich.

Sam Walton

Short Biography

Samuel Walton was born in Oklahoma, in 1918, and grew up on the move in Missouri, during the great Depression, as his father worked at a series of sales jobs. Walton worked too, during his education, pausing to take a degree in Business at the University of Missouri at Columbia.

On leaving, he started working as a management trainee at JC Penney, where he also started learning the management skills that would help him grow his own business in the future. As for many young men of his age, the Second World War put the brakes on his career, when he served in the US Military Police. Returning to civilian life in 1945, he decided not to return to JC Penney, but to open a franchise Ben Franklin store in Arkansas, funded by a loan from his father-in-law.

This thrived, but he was unable to renew his lease, so opened a new one in a nearby town in 1950. Gradually, he bought more and grew his empire, using a light aircraft to get from one store to another and to scout possible new locations.

In 1962, he opened his first Wal-Mart store, on a new model he’d seen in Chicago – a Kmart, owned by competitor Sebastian Kresge. He had started his experiment with bulk retailing. Over the coming years, he experimented further in stock lines and layouts, and opened a second Wal-Mart in 1964. Then, in 1970, he raised $5 million in equity through a stock issue (at $16.50 per share), and opened six new stores and a distribution warehouse. By the time of his death, one of the original Wal-Mart shares had grown in value to $26,000 and the Wal-Mart empire was the biggest retailer in the US, with over a thousand stores.

Sam Walton stood down as CEO of Wal-Mart in 1988, to fight both leukaemia and bone marrow cancer; and finally died of it in 1992.

Five Retail Lessons from Sam Walton

1. The Personal Touch

Walton would get to know his employees (or Associates, as they are known) personally in the early days. He maintained this as long as he could, having gained a pilot’s licence so he could fly from store to store. The use of the term ‘Associate’ was a deliberate choice to create a sense of inclusion and what we would now call engagement. Indeed, he encouraged managers of new stores to take shares in the business to create a sense of their ownership. Walton practised, from his earliest days at JC Penney, a management style that can be called MBWA: Management by Walking About.

2. Rigorous Standards

In visiting stores, Walton set and expected strict quality standards. If he did not find them, he was sanguine about just shutting the store and not re-opening it until the management and staff could get it right.

3. Control your Supply Chain

There is a story about Walton that reminds me of one I recounted about Ingvar Kamprad (founder of Ikea). In the early days (his second Ben Franklin store), when a local competitor sold out of a product – women’s rayon underwear – instead of ordering himself a stock, he bought the distributor. In one move, he deprived his competitor of stock and assured his own supply chain. The money he raised in 1970 from a stock issue was used in part, not to expand his retail base as much as possible, but to fund a distribution centre. Like a good military general, Walton understood the criticality of his supply chain. He invested heavily in warehousing, logistics and, early on, in networking his stores and warehouses to one another.

4. Embrace the New

Less of an innovator and more of an early adopter, Walton frequently saw and rapidly embraced new ideas that would help him grow his business (Jim Collins’ Flywheel principle). I mentioned satellite networking of his stores, above, but other examples abound:  self-service retailing, discounting, and hypermarkets. Each step made him more successful.

5. Experimentation

Walton believed in achieving the best results he could, so he was constantly experimenting to test the effects of different layouts, promotions, and stock lines. Once again, the flywheel principle at work, but the salient lesson for me is test-evaluate-improve – then test something new.

If all this sounds a little familiar, take a look back at the blog on Ingvar Kamprad, which I posted just over a year ago. I cannot help feeling that these two retailers, born only eight years apart, are kindred spirits.

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Jim Collins: Corporate Comparisons

Jim Collins has built an astonishingly successful career as an author, speaker and corporate commentator, on a simple methodology. Pick the best, compare them with the rest, and find differences in behaviours that appear to explain the causes. It is a methodology that has created simple, coherent lessons and led to vast book sales, in the millions.

Jim Collins

Short Biography

Jim Collins was born in Colorado in the USA, in 1958, and lives there today. He studied at Stanford University, where he earned a BSc in Mathematics and an MBA. He then went to work at management consulting firm McKinsey, before moving into industry as a product manager for Hewlett Packard. He returned to Stanford as a lecturer in the Graduate School for Business, and then, in 1995, returned to Boulder Colorado to found his own ‘Management Laboratory’.

This move followed the success of his second* book – and the one that made his name – ‘Built To Last: Successful Habits of Visionary Companies‘, which he co-authored with Jerry Porras. It has sold over 4 million copies. In his management laboratory, he works with a research team, gathering and analysing the data that form the basis of his books:

Jim Collins’ Ideas

In Built to Last, Collins and Porras established a simple methodology: hypothesise a reason why some companies endure and thrive, identify a set of thriving, enduring companies and compare them with others that are not, and look for evidence to confirm your hypothesis. Their hypothesis, for which they found ample evidence, was that corporations with a strong vision, purpose and value set that would guide all of their choices would endure and thrive over a long period. Each of their prime examples were industry leaders and had been since  the 1950s. Each was compared to a similar competitor that had not fared so well and was far less admired. Each was shown to have stronger, more immutable core values, a central raison d’etre, and a clear sight towards its future, guided by them.

In Good to Great, Collins went on to look at why some companies perform and achieve results that are markedly superior to direct competitors and others in their sector. Again, Collins’ research, with a team of 20 researchers, identified their best performers, paired each one to a similar but lesser performing comparator, and also compared them to other players in their sector. His research data found seven characteristics that distinguished the great from the good:

  1. A distinctive style of leadership, which they described as Level 5 Leadership: with a drive for the company to succeed paired to a personal humility
  2. Starting with selecting the right people and then deciding on their roles; ‘First Who, Then What’.
  3. A climate of tough conversations that face realities and move forward with deliberate optimism: ‘Confront the Brutal Facts’.
  4. A real sense of focus on one thing, rather than dissipating efforts across many: ‘The Hedgehog Concept’. Collins illustrated this with three overlapping circles of passion (‘What creates real passion?’), excellence (What can you be best in the world at?), and infrastructure (What drives your economic engine?)
  5. A ‘Culture of Discipline’ that means people follow the rules yet paradoxically are freed up to innovate.
  6. Careful adoption of technology that deepens their success in the three circles: ‘Technology Accelerators’.
  7. Continual innovation and change that constantly improves the business (within the constraints of the Hedgehog concept): ‘The Flywheel’.

A Critique of Collins’ Methodology

Collins’ books are readable and their logic is compelling. However, he misses one key point: correlation does not imply causation. Because there is a pattern, we cannot be confident that any one element of that pattern has caused the differences. Both Built to Last and Good to Great contain exemplars of excellence that have since declined and even failed. Collins and his supporters assert that this is because they deviated from what made them great. Critics would say that the examples were little more than the tail of a distribution of poor, good and great data points.

Indeed, as a scientist, it seems clear to me that, no matter how compelling Collins’ evidence is, it conflicts with the scientific method. Data analysis alone does not make good science. In science, we form a hypothesis and then try to disprove it. We shake it, test it, challenge it and try to break it. The more resilient our hypothesis is to these insults, the greater confidence we can have in its predictive capacity. Collins, on the other hand, forms his hypotheses and then builds ever more evidence to support them. He does not try to break them, and so falls into the trap that cognitive psychologists refer to as ‘confirmation bias’. Indeed, one of his strongest critics is Nobel Prize-winning psychologist, Daniel Kahneman.

It seems to me that it is events and time that will shake Collins’ hypotheses and test what stands or falls. I don’t feel confident enough to critique his findings, but I do worry that I find his answers compellingly plausible. This is far from proof and we must accept that there may be an equally large role for contingency in the levels of success of some businesses. However, I will make my last words in support of Collins’ analysis. Luck or design: it is hard to see how adopting his ideas can possibly harm a business; it seems to me that all of Collins’ seven Good to Great characteristics are self evidently ‘good things’. You makes your choices and you takes your chances!

More about Jim Collins’ Work on Pocketblog


 

* Collins’ first book was 1992’s Beyond Entrepreneurship: Turning Your Business into an Enduring Great Company, co-authored with William Lazirer

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Nancy Duarte: Story Telling

Almost anyone who calls themselves a manager, a leader or a professional has to create and deliver presentations. Whilst oratory and rhetoric have their origins in classical times, it would not be unreasonable to argue that the modern presentation is the most recently invented new literary form. Yet, as a way of communicating, its newness means many of us use it very badly; throwing data, diagrams and bullet points onto a screen with little thought about who we are speaking to and what their needs are.

But presentations offer us a powerful medium to communicate ideas and to persuade. No one has done more to understand how to do this well, and to offer her insights to the world than Nancy Duarte.

Nancy Duarte

Short Biography

Nancy Duarte studied maths at college, which I think is important: she clearly has an analytical brain and can understand data deeply. So part of her success comes, I suspect, from fusing that with an understanding of design. Her husband, Mark Duarte, started a design company in Silicon Valley in 1988, about which Nancy Duarte was sceptical. However, after making some sales calls for the business, she landed three large accounts (including Apple, for whom the company still works) and she became persuaded. She joined the business in 1990 and is now the CEO, while Mark is CIO and CFO.

As a general design agency, Duarte had little to differentiate itself from its many competitors. Nancy Duarte’s big insight (from reading Jim Collins’ Good to Great) was the need to specialise deeply, so they picked something other agencies shunned: helping their clients to create great presentations.

Some of the key points in Nancy Duarte’s career are:

  • Helping to create AL Gore’s slide deck, which he used in his presentation (and subsequently movie) An Inconvenient Truth
  • Attending UCLA’s Management Development for Entrepreneurs (MDE) MBA-level programme
  • Linking up with the other great presentation guru, Garr Reynolds, and subsequently writing her first book, Slide:ology
  • Discovering the pattern of contrasts in many great speeches and presentations
  • Turning these insights into a TED speech (below) and her second book, Resonate

Nancy Duarte’s Ideas

Nancy Duarte’s first book, Slide:ology, shows how to create great presentation graphics to show information in a clear and compelling way. But it is her second, Resonate, that contains her big idea. She describes it as a prequel to the first, and in it she sets out how you can craft a narrative flow that will make your ideas resonate with your audience; making them persuasive. Of the relationship between the two books, she says:

‘Gussying up slides that have meaningless content is like putting lipstick on a pig’.

Let’s forgive her both the cliche and the insult to porcine-kind: her point is well made. Great slides do not make a great talk, they can merely enhance it.

If you present and want to make an impact, then put Resonate at the top of your reading list. It is filled with ideas and illustrations. Let’s summarise the two big ones.

The Hero’s Journey

Duarte emphasises the importance of your presentation telling a story, and she uses several models to help explain how to do it, including The Syd Field Paradigm for screenplays. This has a three act structure, where act 1 sets up the story, with a key plot point towards the end. Act 2 creates a confrontation, with a major event around the middle. It ends with a vital plot development. And act 3 resolves the story.

Her primary model, however, is the idea of a Hero’s Journey, first developed by Joseph Campbell. Star Wars is, famously, modelled on this archetype. The distinctive point of Duarte’s analysis is this. When you build your presentation, cast your audience as the hero. You need to be their mentor and guide: showing them a possible new world, helping them to overcome their resistance to entering it, and then building their loyalty to the new idea., so they feel they can re-enter their familiar world having achieved a triumph and feeling enriched.

The Contour of Communication: The Sparkline

What I think lifts Duarte’s thinking to a new level and introduces insights that were certainly new to me, is her way of illustrating the form of a presentation and her insight into where a presentation’s power comes from.

Contour of Communication

 

Duarte suggests that all great talks, speeches and presentations alternate between what is and what could be. They start with what is, develop a sense of imbalance and then suddenly reveal what could be. Through the middle part, the second act, they alternate between the two, creating a greater and greater sense of contrast, before moving to the end section with a final transition that ends with the reward, triggered by a call to action. The dotted line represents the audiences future.

Contrast, Duarte says, creates contour, and you can contrast present and future, pain and gain, resistance and action, emotion and reason, information and insight… anything. And she offers three modes for doing this: your content, emotional register, and delivery style.

The Secret Structure of Great Talks

Nancy Duarte’s TED video is one of my favourites. For some reason, TED does not allow embedding of this particular video, so click the image and watch it on TED.

Nancy Duarte: The Secret Structure of Great Talks

Management Pocketbooks you might like

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The Apprentice and Five Levels of Leadership


One of the most compelling critiques of contemporary business leadership is Jim Collins’ ‘Good to Great in which he defines five levels of business leadership.

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Level 1 Leaders

… are Highly Capable people who make ‘productive contributions through talent, knowledge, skills and good work habits.’

Level 2 Leaders

… are Contributing Team Members who contribute ‘individual capabilities to the achievement of group objectives and works effectively with others in a group setting.’

Level 3 Leaders

… are Competent Managers who ‘organize people and resources toward the effective and efficient pursuit of predetermined objectives.’

Level 4 Leaders

… are Effective Leaders who ‘catalyse commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards.’

Level 5 Leaders

… are Executives who ‘build enduring greatness through a paradoxical blend of personal humility and professional will.’

Personal Humility and Professional Will

Collins’ ‘paradoxical blend’ is not something we see in many Apprentice candidates. In fact most are at pains to describe themselves as charismatic, ruthless and ambitious.

Curiously, Level 5 Leaders are charismatic – but in a very different way. Their calm humility exudes a sense of wisdom and self control. They are ruthlessly determined, it is true, but with a commitment to integrity that means they take great trouble to be fair. And their ambition is not for themselves, but for their business.

Diligence and Details

Level 5 leaders are able to wrestle at length with the details, see through the gloss to the truth and work hard – relentlessly even – to build a business of lasting value. Their outward modesty – few were well known outside their industry – belied a ruthless advocacy for their business.

Built to Last’ was Collins’ earlier book (with Jerry Porras) about what made some companies great.

Collins concludes that each of the ‘good-to-great’ companies he studied was led by a Level 5 leader, but none of the less-successful companies he compared them with were.

The Apprentice: what level of leadership?

Until the Apprentice, one might have characterised Lord Sugar as a Level 5 Leader, but now he courts limelight in a way that Level 5 Leaders never would. Arguably though, he has built his business empire and created a property portfolio that meets all of his material needs and more, so it’s time to have fun.

But what message is he, through the needs of a prime-time TV reality show, sending to young business people? What levels of leadership do we see week after week?

I Leap to the Show’s Defence

Who knows how this series will end? But let’s step back a year and look at how the last series ended.

imageLast season’s winner (I hope this isn’t a spoiler for anyone still working through their over-full video collection) was Stella English. Far from the fluffy charisma bunny, Stella was accused by some peers as dull. But she knew how to focus on the business issues and – uncharacteristically for Apprentice candidates – could manage a team.

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Stella left school with no qualifications, but flourished in a Japanese bank that cannot possibly favour gobby managers with no substance and, interestingly, described herself as ‘like a dog with a bone. I can’t let go.’

Maybe Lord Sugar recognises the value of Level 5 Leadership after all.

That said…

Ellie Reed - The Apprentice Series 7As the voice-over and Lord S keep reminding viewers, this series is different. He is looking for an entrepreneur: not a manager. So he let calm and steady Ellie Reed (‘I’m just a nice person really, but I have got a dark side if somebody treats me badly’) go, alongside Level 0 Poseur Vincent.

Let’s keep watching.

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Management Pocketbooks the Candidates might Enjoy
… or just benefit from!

… hey! Maybe the people who get signed up for Series 8 should buy the whole DVD of 50 top Pocketbooks!

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More Apprentice?

We know that The Apprentice is not watched by everyone interested in management, so we won’t let the series take over your Pocketblog. If you are a fan, please do check out my own blog, where I aim to draw a management lesson from each episode, on the morning after.

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