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Yearly Archives: 2012
Thank you to all our readers for joining the conversation here in 2012. We wish you all a happy and prosperous 2013!
Offered for your reading pleasure, in case you missed any: a compendium of our twitter highlights from 2012.
- When it comes to green investing, political venture capital is a loser. Or as we put it back in 2009: “We’re concerned that the clean tech sector is over-invested, with too much capital chasing two few viable business models. There’s no question that big companies will be built in the clean-tech sector, but the risk-reward ratio continues to worry us, particularly in light of the government’s increasing, but often fickle, involvement in the industry. If the industry continues to grow, there should be a number of new opportunities for interested Southeastern investors.”
- Increasing taxes on investment is akin to building a pitcher-friendly park and keeping the infield grass long: better plan on low-scoring games. Our letter in the Wall Street Journal.
- Great cartoon about TX’s friendly biz climate vs. CA – who just became more hostile to entrepreneurs. Again.
- Why Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway
- History of iconic fast food & convenience stores. Some interesting stories of adaptability. McD’s started as BBQ?!
- Florida’s space, robotics, and biotech rank it 10th most entrepreneurial state
- If you can sing (and you can), can you innovate?
- Ideas for modernizing and streamlining FDA approval process.
- Atlanta, Orlando, Tampa, Dallas all rank Top 5 in Best US Cities for Biz
- North Texas: w/capital scarce outside of energy & real estate, the gap is filled by venture capital firms like BPV.
- Why Some Startups Succeed And Others Fail: 10 Fascinating Harvard Findings
- The Economist: “Where angels will tread” – where start-ups will create the next billion-dollar companies.
- HBS Working Knowledge: Are creative people more dishonest?
The latest addition to The Library in St. Pete is Three Simple Steps, authored by Trevor Blake, the highly successful entrepreneur who founded BPV portfolio company QOL Medical.
Mr. Blake says he developed his simple steps – take control of your mentality, learn to generate winning ideas, and turn ideas into real achievements – by studying the biographies of self-made men and women:
Andrew Carnegie taught me how to control my thoughts. From Henry Ford, I learned how to generate moments of insight. And J. Paul Getty helped me understand how to turn imagination into a concrete achievement.
A theme that emerges throughout the book is the importance of maintaining the optimism of a successful entrepreneur. For instance, he points out that it’s vital to encourage employees to report bad news while still keeping their criticism directed at solving a problem:
There’s a big difference between bringing your attention to something that’s awry and a complaint. Typically, people who are complaining don’t want a solution; they just want you to join in the indignity of the whole thing. You can almost hear brains clink when six people get together and start saying, ‘Isn’t it terrible?’ This will damage your brain even if you’re just passively listening. And if you try to change their behavior, you’ll become the target of the complaint.
Trevor also emphasizes the importance of maintaining a calm, clear mind – especially when trying to come up with a key insight or creative breakthrough. When he urges the reader to allow solutions to “percolate up” from subconscious thinking, he’s making an argument similar to the one we blogged on in our recent series of posts on thinking consciously, unconsciously, and semi-consciously. We referenced an HBSWK piece entitled The Unconscious Executive in which the author maintains that “deliberation without attention” supports the kind of mental organization needed for making complex decisions and improving creativity:
Here is an example of unconscious thought. Imagine you are listening to a song and can’t remember the name of the artist. You try to think hard, but are still unable to come up with it. So you tell yourself, “I’ll stop thinking about it, and it will come to me in a minute.” This is fascinating. In fact, there is an automatic process that continues to work on your question in the back of your mind. We call that process “unconscious thought.”
Unconscious thought can do more than just help you remember facts. It actually has the power to fuel the creative process. Have you ever found yourself struggling with the wording while writing a paper, but after taking time away from it, you’re able to quickly find the right words? This is your unconscious mind at work.
While our conscious mind is focused on other matters, our unconscious mind can process the relevant information we need to make important decisions.
Trevor cites a study from Temple University to make a similar case about what he terms “subconscious thinking“:
A study from the Center for Neural Decision Making at Temple University found that when people take the time to quiet down the left brain — that’s the part of our brain that’s processing to-do-lists — solutions often percolate up from the subconscious. After a period of not thinking about the problem, the answer simply appears. The more these study participants were able to let go, the more activation was seen in the part of the brain associated with enhanced vigilance and awareness — exactly what you need if you’re looking for a new idea.
We came across an article which reminded us of a good friend whose stock reply, when asked how he’s doing, is: “I’m not unhappy.” (“The cult of positivity” holds no charm over our stoic pal.) It was in the weekend Wall Street Journal and we think it merits a little attention during normal business hours:
“The Power of Negative Thinking – Both ancient philosophy and modern psychology suggest that darker thoughts can make us happier.”
At first blush it may sound a little far afield, but it certainly has applicability for the long term nature of, and ambiguity surrounding, venture investing and managing the inevitable emotional ups&downs associated with it. The piece’s “defensive pessimism” is an apt description for a good approach towards evaluating business plans and their authors, some of whom have been known to take a nip of their own kool-aid when pitching.
However it’s more than just a means for assessing the downside risks of a potential investment. The article cites Albert Ellis, the late New York psychotherapist, who recommends the “negative path” as a technique for coping with stress:
He rediscovered a key insight of the Stoic philosophers of ancient Greece and Rome: that sometimes the best way to address an uncertain future is to focus not on the best case scenario but on the worst… Just thinking in sober detail about worst-case scenarios—a technique the Stoics called “the premeditation of evils“—can help to sap the future of its anxiety-producing power.
One other reason we enjoyed the article: it mentions research conducted by Saras Sarasvathy, an associate professor of business administration at the University of Virginia – research on the mind of great entrepreneurs we ourselves blogged about just under two years ago.
Research by Saras Sarasvathy, an associate professor of business administration at the University of Virginia, suggests that learning to accommodate feelings of uncertainty is not just the key to a more balanced life but often leads to prosperity as well. For one project, she interviewed 45 successful entrepreneurs, all of whom had taken at least one business public. Almost none embraced the idea of writing comprehensive business plans or conducting extensive market research.
They practiced instead what Prof. Sarasvathy calls “effectuation.” Rather than choosing a goal and then making a plan to achieve it, they took stock of the means and materials at their disposal, then imagined the possible ends. Effectuation also includes what she calls the “affordable loss principle.”
Instead of focusing on the possibility of spectacular rewards from a venture, ask how great the loss would be if it failed. If the potential loss seems tolerable, take the next step.
Ballast Point Ventures is pleased to announce a successful exit from its investment in BPV II portfolio company FSV Payment Systems, a leading provider of prepaid program management and processing services. FSV is known for its expertise managing a broad range of prepaid programs for companies, government agencies, financial institutions, and incentive/marketing firms. Under the terms of the transaction, Ballast Point Ventures, North Hill Ventures, Berkley Capital, and the other non-management investors sold their ownership stakes in the Company to U.S. Bank. The acquisition combines U.S. Bank’s payments strength and prepaid expertise with FSV’s platform which will position the combined entity as one of the few financial institutions in the industry capable of providing efficient end-to-end prepaid programs and services for its clients.
Paul Johan, Partner with BPV, had praise for the management team:
The sale of our interest in FSV marks the end of a very successful three and a half year investment for BPV. We are very appreciative of the outstanding job that Rick Savard and his team did in taking FSV from a solid growth company to a very profitable firm with a high profile in the prepaid sector. They’ve done a fantastic job working with clients while leading a dramatic improvement to the service platform and technology capabilities of the company. Rick and his team have created significant value for FSV shareholders and their customers. We are delighted U.S. Bank will be working with FSV management to continue to build the business.
Additional detail can be found here.
This book landed on our desks recently and looks promising. In Judgment Calls, Thomas H. Davenport and Brook Manville share the tales of several organizations that made successful choices through collective judgment.
We’ll consider adding it to our collection in The Library in St.Pete, and based on the reviews and excerpts it sounds similar to another book already found our shelves: Why Great Leaders Don’t Take Yes for and Answer by Michael Roberto. Professor Roberto writes that the key to making successful strategic business decisions lies in how you design the decision-making process itself, and how leaders address the inherent biases of that process.
Here Davenport and Manville (in a book excerpt at HBS Working Knowledge) recount how Tweezerman’s CEO Dal LaManga learned that the people around him were a big part of that process:
By his own words, LaMagna was “a risk addict and … a compulsive capitalist,” and deep down knew that he wanted to take his company to this next, bigger level. But he also wanted to avoid turning Tweezerman into one more failure in what had been a previous career of multiple entrepreneurial misfires. What if this last and greatest airplane, which had finally begun to fly—and fly high—now crashed and burned like so many other LaMagna ventures before? …For many of his earlier ventures, he had de facto operated as a solo entrepreneur, so any kind of collaborative decision making was not even an option.
In the early days of Tweezerman, things started out the same. But with the evolving success of the company, and the growth that followed, he began to see things differently. Over time, he had established a group of trusted executives around him, which formed a “steering committee.” And they all had their own points of view, which they regularly voiced. The tension of the big-growth decision was always before them. “For years, I was a like a horse champing at the bit to do this, and the steering committee held me in the corral so we could really think it through,” recalled LaMagna with a smile. “I know how reckless and impatient I can be, and these people kept me in check.” In the end, the CEO and the leadership team made the final decision together—in fact, a series of interrelated and difficult decisions leading to the all-important outcome. What follows is the story of how the collective judgment they called upon was built and embedded in the entrepreneurial soul of this company, enabling what ultimately became a multimillion-dollar enterprise—and wealth for all of them beyond their wildest dreams. Of particular note is the context for better judgment that LaMagna built around him: the cultural values and sense of mutual accountability within this company that he, as founder, encouraged and reinforced steadily.
…Like so many entrepreneurs, Dal LaMagna pursued his new idea with a vengeance, but insisted on doing it all himself. … As he recalls, looking back, “I sort of had this epiphany. I suddenly realized what my own time was worth, and I wasn’t taking advantage of what I could do when I had to do everything alone. All along I had really just been sort of a promoter, selling this or that crazy idea. And it hit me then. I had to build a company. I needed to… get good at picking people I could trust and who could do the job.
Here’s how we put it last year in Good boards need tension and mutual esteem:
A frequent theme of our writing here, and our conversations with our entrepreneur partners, is board performance: there is more to strong board performance than best practices. The critical factor is a ‘robust social system’ in which members’ informal modi operandi ensure that all the well-designed board processes function properly….
Simon C. Y. Wong, a partner at London-based investment firm Governance for Owners and adjunct professor of law at Northwestern University School of Law, hits many of the same notes in this past June’s McKinsey Quarterly:
[B]oards that operate to their potential are characterized by constant tensions, coupled with mutual esteem between management and outside directors. Rather than leading to endless bickering, this virtuous combination helps to facilitate healthy and constructive debate and improves decision making.
And here he makes an excellent point about ownership that is especially true in the venture capital industry:
Directors with an ownership mind-set—whether from the family or outside—have passion for the company, look long term, and take personal (as distinguished from legal) responsibility for the firm. They will spend time to understand things they don’t know and not pass the buck to others. They will stand their ground when it is called for. Ultimately, the success of the company over the long term matters to them at a deep, personal level.
In the venture world our long term reward depends heavily on whether or not the value of our portfolio company appreciates. Furthermore, there are far fewer investors (than in a publicly traded company) so owners are more “meaningfully engaged.” Owners of private companies get to pick both their investors and their board members. If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved “high performance” corporate governance that will contribute substantially to their eventual success.
In an op-ed this week in The New York Times, Warren Buffett writes that investors ought to assess investment ideas without regard to their personal tax rates. He opens by suggesting no reasonable person declines a good investment opportunity based on the after tax return. Quoting a hypothetical investor response, Mr. Buffett writes:
“Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.
He later closes the op-ed in similar fashion, with a tongue-in-cheek challenge:
In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.
To be clear, we are big fans of Mr. Buffett’s investment style and more than impressed with his long term returns. He is one of the greatest investors of modern times. But many of us who invest in early-stage, high-growth companies – the companies responsible for all net job growth in the economy – disagree with the idea that individual tax rates don’t matter when it comes to investment decisions. Investors will always seek the best risk-adjusted return on their money, whatever the external constraints. If taxes and other risks go up, they will expect higher returns to compensate for the greater risk; when those returns aren’t available or attractive they will sit on their money.
Reasonable people will disagree on what tax rates should be. But can we at least agree that there are some forms of investment activity which promote economic growth, and that those forms ought to be encouraged, perhaps with favorable tax treatment? Our investors’ capital is tied up for years, resulting in reward only if our portfolio companies grow (and hire). That is not the same activity as trading securities or Treasury bonds, which Mr. Buffett has done with amazing success, and for which he practices his own tax-avoidance strategies. Mr. Buffett’s minimum tax on “millionaires” is essentially a tax on capital gains, which is a tax on economic growth and job creation.
We’d like to take issue with something else Mr. Buffet seems to suggest. In his op-ed he seems to treat investments as being either “worth doing” or “not worth doing.” However one of his well-known nostrums is that obviously “terrific” investment opportunities are rare, and that value is more likely to be found or created via attention to the more mundane operating or competitive considerations at the margins. And at the margins, changing the tax rate clearly affects the viability of additional projects. As a friend of ours recently said, this is true for established companies as well as start-ups: for Costco (one example) to build a new store, a 40% tax rate on the income will require much higher sales expectations for the store than if taxes were 30%, or 20%, or 0%. It’s the same analysis regardless of who is making the investment decision: rich angel investor, venture capitalist, Fortune 500 CFO. When taxes are higher, fewer stores get built and fewer companies get started.
There’s a heroic assumption embedded in the op-ed’s analysis: that there will always be a nicely growing economy, with plenty of opportunity, and no shortage of entrepreneurs. We believe it is not safe to assume that entrepreneurs will continue to risk their wealth and careers, expend the energy, and make the enormous sacrifices required to build a business no matter how big a bite the taxman takes out of their eventual reward. It’s fine to say investors will look for the best opportunity regardless, but if there are fewer entrepreneurs there will be fewer opportunities, and the economic pie will start to shrink.
Mr. Buffett is no doubt correct that “terrific” ideas will still find willing investors, but what about all the not-obviously-terrific-but-still-really-good ideas? For every Facebook there are hundreds of other early-stage companies who receive financial backing and grow nicely and thousands of new stores opened by established companies; those investments are approved only if the after-tax returns are sufficient. The economy is not built on a series of towering home runs that clear the fence no matter how strong the wind is blowing into the park. Winning takes singles, doubles, walks, anything that advances runners and scores runs. Raising taxes on investment is like building a pitcher-friendly park and keeping the infield grass long: you better plan on low-scoring games.
BPV was honored to have Mike Quilty, founder of Matrix Medical, give the keynote speech at our Annual Meeting last Wednesday. Matrix Medical – a former portfolio company of ours – provides physician services and prospective assessments for patients in long-term care facilities on behalf of managed care plans and skilled nursing facility operators. (The Company was a very successful investment for BPV I and was sold to Welsh, Carson, Anderson & Stowe in October 2011.)
Mike discussed the inevitable ups and downs on the path to entrepreneurial success, dispensing several bits of advice along the way.
Get the right team members into the right roles.
U.S. Grant enjoyed great success as a general, but not so much as president; and Babe Ruth, while a good pitcher, was too good not to play every day. We’ve covered this topic ourselves, within the context of the roles venture capitalist and entrepreneur must play to make the team work well. The long-term partnership is best served when (switching sports…) each learns when to take the shot and when to pass the ball.
Getting this piece right isn’t so much about control as it is about chemistry. If VC-CEO partnerships are like marriages (as is often said), then the issue of control needs to mirror that of a healthy marriage. It’s not about 100% control, or even 51% control – it’s about playing to each others’ strengths and making the concessions and adjustments that a given situation demands.
Of course before you can get people into the right roles, you have to get the right people. As Mike put it, “We had to turn over a few B and C players to get to the A’s.”
Once we found our lightening in a bottle, we had to act.
Or, as James Dyson, British Inventor, puts it: innovation often grows in unexpected directions. When BPV looked inside the mind of great entrepreneurs we found that the successful ones thrive on contingency:
Professor Saras Sarasvathy of the Darden School of Business likened great entrepreneurs to Iron Chefs: “at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest.” Professor Sarasvathy had several keen insights on the difference between this mindset, which she termed effectual reasoning, and the causal reasoning of successful corporate executives.
Corporate managers believe that to the extent they can predict the future, they can control it. Entrepreneurs believe that to the extent they can control the future, they don’t need to predict it. Entrepreneurs thrive on contingency. The best ones improvise their way to an outcome that in retrospect feels ordained…
Thriving on contingency, outcomes that feel ordained… some could argue this conflates luck and skill. Napoleon famously (and apocryphally) was said to prefer lucky generals over clever ones. He was reliably quoted on the subject thusly: “A bold general may be lucky but no general can be lucky unless he is bold.”
“I have not yet begun to fight.”
Mike – a graduate of the Naval Academy in Annapolis and a former nuclear submarine officer – cited John Paul Jones’ immortal words to recount the persistence required to build his business. “We had so many of these moments, really hard times.” He also quoted the creator of the P90X workout, referring to how many times they redesigned their infomercial: “The 22nd time is the charm.” We ourselves wrote on persistence as part of 10 rules of entrepreneurship:
Develop flexible persistence – the sense for when to stay committed to your vision and when to pivot in the face of new realities. You are at least partially wrong about your product. Launch early enough that you are embarrassed by your first product release, and find out how people are using it. Aspire, but don’t drink your own Kool-Aid. …[A]lways look for good perspective on how you are doing. It is very easy for creative innovators to get caught up in their own story rather than learning where they should be headed.
This is Part III of a short series on the topic of decision making; specifically the not-quite-conscious decision making that can be influenced by external cues. In Part I we discussed “deliberation without attention” and how cues can affect the unconscious mind. In Part II we moved to the semi-conscious mind and how habits are triggered by cues – and then followed by the next two steps of the “habit loop,” routine and reward. Below we delve into author Charles Duhigg’s (“The Power of Habit”) recommendations on how to change habits on either the personal or organizational level.
In a separate interview in Wired , Duhigg says he finally identified the secret to changing was the “keystone habit.”
I felt like I had willpower in some areas of my life, and that I had created successful habits — I could get myself to work really easily, I could get myself to think creatively when I needed to — so it didn’t make any sense to me that there were other parts of my life where I seemed to be powerless. I wanted to understand why…
The way you identify keystone habits is that you look for things that have emotional resonance. When I talk to companies about how they changed, what people often say is, “The way I discovered the keystone habit is, I tried to figure out what kind of change scared me the most. Not ‘worried me the most,’ not ‘concerned that the numbers weren’t going to line up’; scared me the most.” That’s how you know.
Even so, it remains harder to change habits “because making a conscious decision occurs in the prefrontal cortex. And to influence the basal ganglia, you have to target these cues and these rewards, these almost kind of animalistic reactions.” Duhigg illustrates this with a fantastic example drawn from marketing history:
Claude C. Hopkins, who is totally forgotten today, but about 100 years ago was like the most famous adman in America. And back at that point, nobody brushed their teeth. It was actually something that just sort of the upper classes did, almost to show off that they had money every so often.
And Hopkins had a friend who had found this new toothpaste named Pepsodent. So Hopkins said, look, if you give me a stake in the company, I’ll help sell Pepsodent. And so he had intuited that you need this cue and this reward.
And so the cue was that film that you feel on your teeth if you haven’t brushed in about a day. People for eons had had that film. And no one had ever minded it. But Hopkins put up all these ads that say, if you feel that film, then that’s a bad thing. You need to get rid of the film. And he thought the reward was a beautiful smile, giving people whiter teeth. Turns out that he was right about the cue, and wrong about the reward. It takes so long for toothpaste to make your teeth whiter that that’s a terrible reward, because it would take months for anyone to see it. But the guy who had invented Pepsodent had actually added into it these chemicals and these oils to make it taste like mint. And a secondary impact of that was that they were irritants that would make people’s gums and tongue tingle… They started to equate that tingling with cleanliness. And it happens so quickly– when you brush, it happens right away– that that became a reward in and of itself. And so when people would walk out the door to work or they would lay down in bed at night and they didn’t feel that tingling, they would feel like their mouth was unclean… (W)ithin five years of Hopkins starting to advertise Pepsodent, like half of America was brushing its teeth every day. And historians say it’s because of Pepsodent.
That example deals with changing consumer behavior, which is simply an aggregate of individual habit changes. For a look at how an organization changed it’s habits, Duhigg picked a more recent example: Alcoa in the late 80s/early 90s.
(B)asically the same framework seems to apply within a company. There seems to be this cue that triggers a kind of automatic behavior. And then people just do things automatically. And then there’s a reward, which is usually financial or promotions or something like that.
One of my favorite examples of this is Paul O’Neill of Alcoa, the largest aluminum company in the world when he took over. He focused on creating a new habit around worker safety within the company. And it was very deliberately designed around this habit loop.
He would choose a cue, which is that any time anyone got injured, the unit vice president had to write a report within 24 hours explaining why it happened and how they were going to prevent it. So the cue was an injury. And the routine was writing this report. And the reward was that the only people who got promoted were the people who took worker safety seriously…. (T)his is what O’Neill knew… if you could start one keystone habit shifting, it would set off this chain reaction. And that’s what happened inside Alcoa, is that when habits around worker safety started to become more malleable, all of a sudden the culture of the company started to change.
For years, Alcoa had been riven with internal strife… And then O’Neill comes in and he says, OK, our number one priority is changing worker safety habits. And what he’s really saying to the company is, we are going to start valuing every single employee. Every single person who works here matters to us. And it completely changed the dynamic of the relationship between employees and management.
(T)he other thing that’s interesting is it’s not just the company culture. It’s also that when you’d ask him, so how do you actually make a factory safer? What he says is, well, the way you make it safer is you have to analyze how work gets done. You look at people’s work habits and you analyze, where do accidents occur? When is it going off the rails?
And it turns out that the way to make a work safer is to do it right every single time. And of course, if you do it right every single time, if you create the right procedures, then not only is it safer, it’s also more efficient. It’s better quality aluminum that you’re producing.
So O’Neill actually said, I want to make workers more safe. I want to change worker safety habits. And everyone could sign on to that. What he was actually saying was, I want to make every single factory more efficient and more productive and producing a higher quality product, because that’s how we make things safer. But if he had come in and he had ordered greater efficiency, everyone would have rebelled, all the workers at least. But you come in and you say, I want to make everything safer, that’s something everyone can sign onto.
In Part I Wednesday we ended with the thought that cues (sounds or smells), delivered while subjects were unconscious (asleep), may affect memory and creativity the following day. Here we continue on the subject of cues, but as they relate to changing habits that are performed semi-consciously; and on how that has applications to organizational performance.
In The Power of Habit: Why We Do What We Do in Life and Business, author Charles Duhigg describes the three parts of the habit loop – cue, routine and reward:
Every habit has three components. There’s a cue, which is like a trigger for the behavior to start unfolding; a routine, which is the habit itself, the behavior, the automatic sort of doing what you do when you do a habit; and then at the end, a reward, (which is) how our neurology learns to encode this pattern for the future. Most people, when they think about habits focus on the behavior or the routine. But what we’ve learned is that it’s the cue and the reward that determine why a habit unfolds.
Duhigg goes on to explain that the reason for this is found in the neurological difference between conscious and semi-conscious thought:
(A)bout 40% to 45% of what we do every day sort of feels like a decision, but it’s actually habit… What happens in our neurology is that most behavior originates in the prefrontal cortex, the area right behind our forehead. What we think of as thought, that’s where it occurs. It’s one of the most new, from an evolutionary perspective, parts of our brain. But as a behavior becomes a habit, as it becomes automatic, it moves into the basal ganglia, which is one of the oldest structures in our brain and it’s near the center of our skull. And when things happen in the basal ganglia, it doesn’t feel like thought. That’s why a habit feels automatic – because it’s happening in this part of your brain that for all intents and purposes, from what we think of as thinking, is completely exempt from that process.
He then applies the theory “down in the basal ganglia of the organization,” where company habits form but aren’t really noticed:
(I)n the last 10 or 15 years there’s been this real wealth of an explosion in research in looking at organizational routines or organizational habits and trying to understand how those influence how work gets done. And what we’ve learned is that a huge amount of whether a company succeeds or fails is based not on sort of the big strategy decisions that people make, but on the habits that emerge within the organization… (I)t’s a little different… what we know about organizational routines or habits that occur among hundreds or thousands of people is that very often the habit loop differs a little bit from person to person. And yet the entire organization seems to move in the same direction.
And so what researchers have done is they’ve said, basically the same framework seems to apply within a company. There seems to be this cue that triggers a kind of automatic behavior. And then people just do things automatically. And then there’s a reward, which is usually financial or promotions or something like that.
When you talk to good CEOs, great CEOs, what they talk about are habits. Lou Gerstner at IBM, Jack Welch at GE, sometimes they talk about these big strategy decisions. But 5% of your job as a CEO is making the big strategy choice. 95% is managing small choices, managing what your culture is going to be like, managing how you structure the rewards and the incentives that determine how people kind of automatically behave. Good managers understand the importance of habits and they think about it. Bad managers pretend like organizational habits don’t exist. And so when habits emerge, they end up being distortive or toxic.
What recommendation does Duhigg offer to help snap out of habits? We’ll cover that in Part III on Monday.
Decision making theory is a favorite subject of ours. We have a few outstanding books in our library, and have written on topics such as confirmation bias (the Yes-Man in your head) and how great entrepreneurs think.
One of those outstanding books is Malcolm Gladwell’s Blink: The Power of Thinking Without Thinking, which argues that rapid cognition (the thinking that happens in first two seconds’ worth of instant conclusions) is powerful and important and occasionally really good. This is unlike “gut-level” decisions because what happens in those first seconds is perfectly rational. It’s “thinking that moves a little faster and operates a little more mysteriously than the kind of deliberate, conscious decision-making that is typically associated with ‘thinking’.” In some cases less input – provided it’s the right input – can be better.
We thought we heard faint echoes of this idea at HBS Working Knowledge in a piece on “deliberation without attention” only to learn the author of that similar-sounding formulation was actually positing something approaching the opposite of Gladwell: a rational theory of gut-level decision making.
In The Unconscious Executive Maarten Bos summarizes research which shows that thinking and deciding can often be left successfully to the unconscious mind. We may not even require a (conscious) blink. “Scores” of processes operate unconsciously: e.g., getting dressed in the morning, driving to work. Many people accomplish these tasks without entirely remembering how. Bos continues:
Here is an example of unconscious thought. Imagine you are listening to a song and can’t remember the name of the artist. You try to think hard, but are still unable to come up with it. So you tell yourself, “I’ll stop thinking about it, and it will come to me in a minute.” This is fascinating. In fact, there is an automatic process that continues to work on your question in the back of your mind. We call that process “unconscious thought.” Unconscious thought can do more than just help you remember facts. It actually has the power to fuel the creative process. Have you ever found yourself struggling with the wording while writing a paper, but after taking time away from it, you’re able to quickly find the right words? This is your unconscious mind at work. While our conscious mind is focused on other matters, our unconscious mind can process the relevant information we need to make important decisions.
Research by Bos and his colleagues suggests that unconscious thought supports the kind of mental organization needed for making complex decisions in which a large amount of information must be integrated, and might even be more dependable than conscious thought when we are low on energy. On the other hand decisions which require the application of strict mathematical rules benefit from conscious thought, which is very good at selecting options that conform to decision rules.
In our experience the best results often come from a combination of deliberation and intuition. Too much deliberation can become analysis paralysis; and studies show that those who rely on intuition alone tend to overestimate its effectiveness. They recall the times it served them well and forget the times it didn’t. (The Sycophant in your head?)
Bos and his colleagues have experimented with the use of cues (sounds or smells), delivered while subjects are asleep, to enhance unconscious decision making. So far they’ve seen encouraging results in the areas of memory retention and creative performance. Those experiments – the use of cues on the unconscious mind – overlap with other recent research on the use of cues to alter the semi-conscious mind (habits). More on that in Part II – Friday.