David Matheson - SmartOrg, Inc.

Managing Change and Uncertainty: The Second Way - Jim Matheson

On a recent drive, I listened to a CD on Chinese history, which discussed an interesting period of intense Buddhism in China.  In brief, the Buddha concluded that people suffer because of their emotional attachment to their expectations about their situation, their relationships, their things, etc.  When their situation changes in a manner that does not meet their expectations people suffer.  In the Buddha’s view, all suffering is caused by unmet expectations—the cycle called Maya.

Is there a parallel in corporate culture?  Companies and their investors have high expectations for continued growth and profitability.  When there is a hiccup, heads roll, scapegoats are found, and new executives are forced to make promises – to set expectations – that they hope they will be able to keep.  And “the cycle of suffering” continues. 

The Path of Withdrawl

The Buddha said that to be free of suffering we must liberate ourselves from our attachments.  In Chinese Buddhism this liberation took the form of renunciation and meditation.  By the fourth century, large numbers of people had moved into monasteries and nunneries as a way of avoiding attachments.  These institutions took so much land off the tax rolls, that later emperors banned them and confiscated their holdings. Unfortunately in the corporate world withdrawal is not an option.  Individuals maybe able to withdraw to less stressful careers, but the corporate world continues.  Even companies that have made spectacular crashes, such as AT&T, have a way of turning up again. 

The Path of Engagement

For those of us who choose to live in and experience the world, particularly the business world, there is a second way I call the Path of Engagement.  The key to this alternate path is avoiding the Buddhist trap of unmet expectations by not forming them in the first place.  Along this path, we must embrace uncertainty and change.  We must admit that we cannot predict the future and that change is inevitable. 

Expectancy

Unexpected change provides us with exciting learning opportunities.  If we come to expect change we need not suffer because of it.  View unexpected change as a wonderful learning opportunity.  Do not become attached to your expectations; rather, have high expectancy that interesting things will happen. Accept what you get and move on.  Learn to love the surprises the world gives us.

Action Level

At the action level, do not expect that your predictions or desires will always come true.  In the face of uncertainty, logic demands that we distinguish decisions – the actions we take – from the outcomes – what actually happens.  For example, most people would agree that paying $1 for a 50% chance of winning $100 is a worthwhile investment, and of course the person making this investment desires the $100 prize.  However, the investor knows in advance, at the time of the decision, that there is an equal chance of losing.  If the investor (or the organization) gets emotionally attached to “winning” he has a 50% chance of suffering loss.  If the investor understands that this is just one result of many, over a lifetime of investments, he just moves on to look for more good opportunities.  He is confident that he made a good decision and does not worry because he cannot guarantee the outcome he likes.  In more complex situations, the investor has an opportunity to learn from whatever happens and can take advantage of his new knowledge in making a future investment.

Managing Change and Uncertainty the Second Way

• Expect change and uncertainty. 
• Separate decisions from their outcomes in your thinking and planning.
• Do not focus on single forecasts, but vet sources of uncertainty and prepare for them.  Do not ask for optimistic forecasts: ask for deep insight into the possible and the probable.
• Investigate the sources of uncertainty and prepare for a range of outcomes.  Do not regard preparation for events that do not happen as wasted: value the preparation for the events that do happen.
• Avoid attachment to particular results.  Be flexible and take advantage of what you get.  Adapt to change: do not stay the course in the face of new circumstances.
• Celebrate whatever happens and go on: do not wallow in the endless cycle of suffering.

References

• Kenneth J. Hammond, From Yao to Mao: 5000 years of Chinese History, The Teaching Company, 2004 (CD)
• David and Jim Matheson, The Smart Organization: Creating Value through Strategic R&D, Harvard Business School Press, 1998.

About SmartOrg

SmartOrg helps organizations pursue “the second way” by providing solutions for value-based decision making that embrace uncertainty and change.  SmartOrg embodies these principles in advanced software and provides associated consulting to help organizations build new capabilities.  See www.smartorg.com.

Open Innovation and the Hype Cycle - David Matheson

At a recent major convention on innovation, I got into a discussion with Henry Chesbrough, author of "Open Innovation" (http://www.amazon.com/Open-Innovation-Imperative-Profiting-Technology/dp/1578518377) and general innovation rock star (http://www.haas.berkeley.edu/faculty/chesbrough.html). We discussed management fads and recognizing how the idea of Open Innovation echoes an older fad on Benchmarking...both involve getting ideas from other companies. Open Innovation is hot now; Benchmarking is a mature technique with well understood strengths and limitations. While requests for Henry to speak are clearly rising rapidly now, where is Open Innovation as a management fad?

We borrowed Gartner's Hype Cycle model to make some comparisons (http://gsb.haifa.ac.il/~sheizaf/ecommerce/GartnerHypeCycle.html). This model is used to describe IT approaches, like business intelligence and customer relationship management. It says that each technology goes through several distinct phases, here in abbreviated form:

1. Early Adoption, who try out the technology and prove that it can really do something. These early adopters them become the poster children and get lots of publicity. This leads to...

2. Maximum Hype, in which the fad seems to be everywhere and can solve virtually all problems. Press coverage is intense, consultants pop out of nowhere, and everyone is talking about it. This leads to...

3. Unmet Expectations, in which people trying out the technology find it fails to meet all the claims during the period of maximum hype. Disillusionment and bad press crush the technology into the background. This leads to...

4. Maturation, in which people quietly find the strengths and limitations of the technology and use it to solve real business problems. It works its way into the way things are done.

Henry and I both agreed that Open Innovation was in the earlier phases. He leaned more towards early adoption, "Open Innovation is just at its beginning phase." I thought it was approaching the period of maximum hype, "It is hard to imagine more press coverage and accolades." P&G is definitely an early adopter, and has been on the speaking circuit for a while now. It seems to me that their success is going to limit the success of later consumer products companies that try the techique. P&G is already prospecting the world for great consumer products ideas using Open Innovation, and has undoubtedly found many of the good ideas. Perhaps the vein has been mined.

Henry was less sure. But he pointed out that P&G's version of Open Innovation is only one of three parts: they focus on getting ideas from other companies. Nobody has really mastered taking one's own ideas and putting them out to others, nor have true markets really emerged for the exchange of ideas. Both of these aspects of Open Innovation remain in the Early Adoption phase.

Mapping the Future - David Matheson

We sat in the meadow looking up at the dark granite pyramid of a mountain, trying to identify the trail criss-crossing up its right shoulder – Forrester Pass. The sky had been blue all day, but now in late afternoon, clouds were gathering, as they do in the Summer in the high Sierra Nevada mountains of California. We were concerned about the weather.

Looking at our detailed 7.5 minute USGS topographic map, we could see that we had about two miles to go and about 500 feet to climb to get the saddle of the 13,180' pass. Oxygen was already thin and we were feeling the accompanying light-headed blur. The clouds slowly grew as we watched, forming on and around the big mountain.

Some old-timers arrived at the meadow from the same direction we had just come. They surveyed the mountain, the pass, the clouds. Then they pitched their tent. "We're in no hurry," they said, "looks to be a short nasty storm comin’ in the next few hours. We’ll just camp here and cross on over in the morning."

            My group conferred. "It is only two miles – we can do that in an hour," someone remarked. My friends and I – all teenagers – scrutinized the topographic map more closely, paying particular attention to the contour intervals. "Look here," said another, "just after the pass, the terrain drops steeply. Once we cross the pass, we will get to lower elevations quickly." We knew that the intensity of afternoon storms was strongly dependent on altitude, and figured we could find shelter on the other side of the pass as soon as we descended. "In a couple of hours, we will be over the pass, and at a lower elevation than we’re at now," my friend summed up.

            We had a shared vision, confidence, and a plan. Given a sense of security from our detailed topographical map, we heaved on our 50-pound packs and began our nearly fatal mistake as we climbed up out of the meadow towards the pass.

            What went wrong? We had a detailed map: the USGS 7.5 minute quadrangles are legendary. We had a clear and reasonable set of assumptions: a couple of hours until the storm, knowledge that we were fast hikers, knowledge about how weather varies with altitude. We had an executable plan: hike over the pass and drop to lower elevation. We had vision and passion: our group was ready to go, we weren’t old-timers, we were teenagers and so of course in a hurry.

            Wasn’t all this sufficient for good decision making? It’s a common standard:

1.  Good information backed by an authority;

2.  Defendable assumptions leading to a reasonable scenario how things will unfold;

3.  A clear plan that works given the assumptions;

4.  A strong champion who can mobilize the organization.

            As a business example, consider launching a new product. Typically a company will:

1.  Get market and customer data from analysts with a good reputation and customer-needs research;

2.  Develop defendable assumptions for price, market share, cost, timeline, etc. and put them in a business case to show how the business will make loads of money;

3.  Create a business plan and milestones for executing to win;

4.  Rally people around the vision and excite them about making it work.

            Yet 70% of product launches fail. Often this is blamed on a failure to execute. But this is rarely the reason. We were nearly killed on Forrester pass and product launches often fail for the same reason: not understanding the future. On Forrester pass, we focused on the topographic map. But this was a map of what we knew. This focus on what we knew was the mistake. The map of the future is a map of what one does not know, of uncertainty. We needed a map of the potential weather and the consequences. The crucial factor -- the weather, was the most unknown, the most important, and the factor most hidden by our very reasonable assumption of "a couple of hours."  The fact is there are no facts about the future and we are foolish to act as if our assumptions are true.

            Daniel Kahneman won the 2002 Nobel Prize for his work in the psychology of judgment and decision making in uncertain situations. While it is an act of great hubris to summarize the life's work of a genius and an entire research industry in a single word, I'll take a stab: overconfidence.

            People are very systematic in how they make these kinds of judgements, but also biased.  The biggest bias is overconfidence:

1.  Too often people believe their own assumptions.

2.  Too often people fail to find evidence that would disconfirm their preconceived notions.

3.  Too often people focus narrowly and fail to account for broader factors.

4.  Too often people anchor on their first estimate and fail to adjust sufficiently to account for uncertainty.

            These biases of overconfidence occur in everyday situations, in dramatic ones like my teenage experience on Forrester Pass, and in business situations. In fact, these problems of overconfidence are prevalent and part of human nature. It is as if we are all a little light-headed from lack of Oxygen when contemplating the future.

            Yet these biases can be corrected for by having the right tools. What is needed is a map of the future to guide our actions and remind us that we are all explorers in this fundamentally uncharted land: a map of uncertainty.

Value-Based Management Defined - Jim Matheson

When you get ready to make decisions in your organization, do some of these management scenarios sound familiar? 

• "Let’s get together and reach consensus about what to do: perhaps I can get my way this time as you got your way last time."
• "The boss should just decide: he has earned that right." 
• "Let’s make up some kind of point scoring system and make the choice with the highest score; of course, we will tinker with the scoring system until we like the results."

In contrast, Value-Based Management says “Let’s figure out what creates the most value and do that!  And while we are focused on value, let’s be innovative and figure out new ways to create even more value.”

 

Value-Based Management pulls together the people who can contribute most to understanding value creation, from the boss to internal managers and experts to outside consultants. While the boss usually has the formal authority to take a decision, the process seeks understanding how to generate bottom-line value and creativity in obtaining more of it.

Value-Based Management is about figuring out how your business works to create more value. We sometimes call this direction “True North.” Why would your ever want to use a different system — go in a different direction? Sometimes True North will direct you to cost cutting, other times to market expansion, other times to product development. The kind of terrain you must traverse to go True North changes depending on your particular circumstances — where you are along your path. Sometimes you must temporarily divert from True North to get around an obstacle, but ultimately you need to get back on the main path to value.

One reason people do not focus on value is that it is not easy to understand. The process of creating value is fraught with complications: such as facing uncertainty, complexity, markets, competitors and long time horizons. But these complication are real, and facing them directly leads to learning and better decision making — a higher rate of value creation. For example, performing the unnatural act of vetting all of the uncertainties surrounding a particular situation allows you to develop strategies to hedge and adapt to those uncertainties as they evolve, as well as to focus your attention on getting more information in key areas. While this task may seem overwhelming, the secret of success is to focus on the particular situation at hand and the particular decision that need to be made. This focus limits the questioning and modeling process to the elements that have the strongest impact on these decisions.

Value-Based Management is the only process that focuses directly on getting more of what we want. It requires clear thinking about what we can do and the opportunities and threats to our success. Moreover, the methods of Value-Based Management are readily accessible because they have been developed and honed over the last 50 years. More recently, software tools such as the ones SmartOrg is developing and offering, have greatly increase the speed and efficiency of high quality processes.

Future notes will discuss the elements and issues around Value-Based Management, such as dealing directly with uncertainty, building value models and the humans side of Value Based Management.

Reference: David and Jim Matheson, The Smart Organization, Harvard Business School Press, 1998.

Jim Matheson — January 2007