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SYNOPSIS When a networked product launches, it faces a chicken-and-egg problem: people need to use it for it to be worth anything. Think of Facebook, Slack, or Airbnb. So how do you start the very first network without a basis to work from? Andrew Chen, General Partner at Andreessen Horowitz, calls this the Cold Start Problem.

The Cold Start Problem is Chen’s attempt to help us better understand network effects: how to solve the Cold Start Problem, how to scale network effects, how to manage growth plateaus, and so on. Chen’s Cold Start Theory is broken down into 5 stages: 1. the cold start problem; 2. the tipping point; 3. escape velocity; 4. hitting the ceiling; 5. the moat.

SUMMARY1. “The Cold Start Problem”To overcome the Cold Start Problem, businesses tend to start with a single network—what Chen calls an ‘atomic network’. This is perhaps the most crucial idea in the book. Networked products tend to start small, in a single city, college campus, or in small beta tests at individual companies—like when Facebook launched at Harvard University. “Only once they nail it in a smaller network do they build up over time to eventually conquer the world,” Chen writes. Moreover, appropriate atomic networks are often smaller than entrepreneurs think. Uber’s early atomic networks were not cities like San Francisco; ‘5pm at the Caltrain Station at 5th and King Street’ is more accurate.

Networked products should focus on the smallest network needed to sustain the product. Different products require differently sized first networks. For Slack, a small team within a company is enough for the platform to work. But, when the credit card was first launched by Bank of America in 1958, it was done so across the whole of Fresno, California.

BoA understood that for a credit card to work, a large enough pool of people must buy in—enough for merchants and consumers alike to derive value from the new system. Despite the difference in scale—Slack with 4 or 5 colleagues, BoA’s credit card with 60,000 Fresno residents—the principles of atomic networks are the same. Start as small as your product will allow. Once the first network has been nurtured, the process can be repeated (when a product reaches its “tipping point,” which will be discussed in the next section).

Attract the hard sideChen also distinguishes between the easy and hard sides of a given network. To solve the Cold Start Problem, products must, above all else, attract the hard side—sellers on a marketplace, content creators on a video platform, or in the case of Tinder, attractive women. Tinder launched on the University of Southern California campus. The founders leveraged their popular friends to promote the app at parties. Students had to download Tinder to allow party access. The next day, hundreds of hungover, like-minded students had a second chance at love via Tinder.

Network density is crucial. However small the first network, its nodes must find value in the product and one node’s engagement with the next must be high. Simplicity is also crucial to a product’s success. Zoom, now worth tens of billions, has eclipsed apps like Skype and Microsoft Teams. The product is intentionally bare. According to Chen, Zoom is the perfect storm of killer product and viral capability.

“Zoom’s simplicity is a strength when it comes to the company’s ability to grow its network,” Chen writes. “When the product concept and value is simple to describe, it makes them easier to spread from user to user.” Zoom, and dozens of other networked products, ensure those first customers are acquired without friction by making the product free. “It’s hard enough to build an atomic network; why make it even harder by erecting barriers?”

1. “Tipping Point”Tinder’s success among University of Southern California fraternities and sororities—executed using parties among popular college students—unlocked other colleges in America. Tinder had built a few different networks the right way: focus on the right audience (in this case young students looking for love). At a certain point, Tinder reached the tipping point for network effects: building networks of engaged users became easy. The company had discovered a repeatable strategy.

LinkedIn, like many others, utilized an invite-only strategy, which was successful for one key, often overlooked reason: by targeting a small group first and allowing them to invite whomever they choose, network proliferation takes place by itself. It is a solution that solves the hardest problem of all, because mid-level professionals—those most likely to use and benefit from LinkedIn—will invite other, similar people. Thus, LinkedIn reached its tipping point after roughly a week. It engaged its users, and was valuable beyond the early-adopter tech community.

Besides things like market subsidization and invite-only strategies, other methods, like bootstrapping a product, can ensure products that rely on communities don’t dry up, à la Reddit (the founders would post on the site’s front page manually with dozens of bot accounts). This was necessary for Reddit to build momentum and gain a core user base. Organic users soon began to post their own content, which rendered the founders’ bot accounts surplus to requirements. But that kickstart was crucial.

1. “Escape Velocity”After a startup solves the Cold Start Problem and reaches its tipping point (when the startup of new networks becomes replicable), the next stage, at least for successful products, is Escape Velocity. This is when products scale their growth.

Chen breaks network effects down into 3 types: Engagement, Acquisition, and Economics.

The Engagement Effect is what happens when a product gets stickier (and more engaging) as more users join. Companies like LinkedIn, Facebook and Slack have tapped into the Engagement network effect well which allows them to drive up retention over time. The best companies do this in 3 ways.

First, successful networked products create new use cases as a network develops. For example, as Slack becomes more popular within a company, new chats are created, where colleagues discuss all sorts (work-related or otherwise), which drives engagement. Second, products reinforce the core ‘loop’ of a product, where users in a network interact (for Slack this might be a manager who shares a file with a direct report, who in turn ‘closes’ the loop with the competition of the task). Third, products reactivate churned users.

The Acquisition Effect is essentially viral growth via organic use—the network effect that powers the acquisition of new customers. PayPal is a good example of this viral effect. Initially, a company that struggled to envision the ‘perfect customer’, it eventually latched onto eBay, where PayPal was already used by hundreds of sellers (unbeknownst to the PayPal team). PayPal went with this and created its own ‘pay with PayPal’ badges to place on eBay items.

When a product has a built-in feature that encourages collaboration, it can spread on its own. “This is the Product/Network Duo at work again, where the product has features to attract people to the network, while the network brings more value to the product,” Chen writes. Finally, The “Economic Effect” is where network effects improve business models over time via improved feed algorithms, increased conversion rates, premium pricing, and more.

1. “Hitting the Ceiling”After a period of viral growth (Escape Velocity), even the most formidable startups hit the ceiling. The growth chart turns from a hockey stick to a squiggly line (if the company does well), where products plateau then return to growth, over and over. To maintain growth, networked products must remain proactive. “Dealing with the ceiling is a never-ending battle,” Chen writes.

SaturationThere are a few causes of slowdown from ‘rocketship growth’. One is saturation. This happens when a product grows to dominate its market and has no more worlds to conquer. At the same time, the marketing channels a company uses become less effective over time (as with banner ads and email marketing), which Chen calls “the law of shitty clickthroughs.”

When the network revoltsThis is when the ‘hard side’ of the network—the minority of users that create disproportionate value and as a result have disproportionate power—recognize their own influence and demand better terms. This happened when the most valuable Uber drivers demanded better pay and benefits. As a company grows enormous, it becomes difficult to keep everyone happy.

Eternal SeptemberWhile the hard side evolves, the rest of the network changes too. In what Chen calls the eternal September, as a mainstream audience is reached, what made a product’s initial community special is lost. Usage becomes less appealing as the network grows larger.

OvercrowdingAnother common way to hit the ceiling is through overcrowding, where the discovery of relevant people and content becomes hard. This problem must be solved before users start to leave. Solutions often include things like search functionality, algorithmic feeds, or curation tools.

Startups that focus on bottom-up distribution(i.e. target other small customers first), such as Slack, Dropbox or Zoom, will inevitably see their growth slow. The problem is that smaller customers churn more easily because, among other reasons, they are more price-sensitive than larger customers (they are more likely to run out of money or change their business model, for example). Therefore it is common for a networked product to hit a ceiling after it builds its first atomic networks. To solve this problem, a startup should remain proactive with the addition of new features (and in the case of B2B, focus on enterprise sales).

1. The MoatThe Moat is the final stage of Chen’s Cold Start Theory and is about a successful network that defends its turf with network effects. Warren Buffett popularized the concept of the competitive moat. He argued that to make good investments, one should determine the competitive advantage of a company, and above all, the durability of that advantage. For networked products like Slack or Airbnb, their software and functionality can be replicated fairly easily. Instead it is the difficulty of cloning their network that makes these types of products defensible.

Vicious cycle, virtuous cycleAll companies in the same field have network effects—it’s how you scale and leverage them that matters. Small companies have some advantages—namely speed, and a lack of sacred cows. Bigger ones have established relationships, manpower, and product lines to lean on. Small companies usurp bigger ones frequently (Facebook blew MySpace out of the water); big companies bat small ones away often (Airbnb swatted away copycat firm Wimdu). For bosses of companies both large and small, there are ways to navigate competition with the other.

Cherry-pickingThis is when a company, usually a smaller one, focuses its resources to acquire a small network from another company. An example is how Airbnb snatched Craigslist’s shared-rooms idea and made an entire product with it. In this instance David (Airbnb) was the cherry picker; Goliath (Craigslist) couldn’t defend all of his networks. By the time Craigslist stopped Airbnb from its ability to redirect its users, Airbnb had already built its atomic network.

Big Bang launches to Big Bang failuresWhen a global brand launches a swanky new product, excitement builds. In the context of networked products, this type of launch often fails. Google+, launched in 2011, faceplanted because of its go-to-market strategy. While its user quantity (raw sign-ups and monthly active users) was predictably giant—within months, Google announced 90 million sign-ups—user quality sorely lacked.

Users heard about Google+ in the press, not from friends. Because of this, engagement was poor. Users averaged 3 minutes on Google+ per month around launch; in the same period, Facebook users averaged 6-7 hours per month. The launch of Google+ was based on hype, and it never had the strength of small networks that successful products have.

Compete over the hard sideWhen there’s a battle between networks, it is the networks themselves that are up for grabs. To compete over the hard side is when a network directs its resources towards the defense of (or attack of) the highest-value-additive part of the network. An example of this was when Uber entered a fierce competition over drivers with the likes of Lyft and Sidecar.

BundlingBundling is when a bigger network uses its resources as a launchpad into another product domain. Companies of this size can solve the Cold Start Problem and establish traction—provided the product itself is good enough. In a “stroke of product marketing genius” according to Chen, Microsoft bundledWord and Excel together to make Microsoft Office. An effort was made to enable interoperability between Office apps. The rest is history. Provided the product is outstanding and advances the industry in some important way, bundling can be a powerful tool to accelerate success.

BenefitsAndrew Chen’s The Cold Start Problem is a unique, ambitious book full of insights. For the first time, entrepreneurs of networked products, such as social media platforms or online marketplaces, have a step-by-step guide they can use to navigate product launches: how to get off the ground, traps to avoid, methods to scale, how to compete either as a minnow or market leader, mental shortcuts for complex ideas, and more. With recent case studies, some of which he experienced first-hand, Chen has created terms and frameworks for all stages of a business, for methods that have served the world’s most successful people.

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SYNOPSIS How do designers improve their products to work around flaws in human logic? If anything is to be learned from behavioral economics, it is that how people should behave is not how they do behave.

In The Design of Everyday Things, Don Norman argues that designers must accept this fact. Norman teaches the top frameworks behind this “human-centered” design system, the three most important areas of design, and why designers must consider additional principles besides logic, such as psychology, cognitive science, and art, to design excellent products that work better across any industry.

EXPLAINER

TOP 20 INSIGHTS1. Two of the most important features of good design are discoverabilityand understanding. Discoverability: Is it possible to figure out what actions are possible and how to perform them? Understanding: What does it all mean? How is the product supposed to be used? What do all the different controls and settings mean? 2. Discoverability comprises five fundamental psychological concepts: 1) Affordances (a chair affords support, so in turn it affords the ability to sit); 2) Signifiers (a flat panel on a door signifies one should push); 3) Constraints (imposed limitations on design that can come in four types: physical; cultural; semantic; and logical); 4) Mappings (ordered switches on the wall might specify which switch is for which light); 5) Feedback (the communicating of an action). 3. “Today, I realize that design presents a fascinating interplay of technology and psychology, that the designers must understand both. Engineers still tend to believe in logic. … ‘Why are people having problems?’ they wonder. ‘You are being too logical,’ I say. ‘You are designing for people the way you would like them to be, not for the way they really are.’” 4. The seven stages of action comprise one stage for goals, three stages for execution, and three stages for evaluation:1) Goal (form the goal); 2) Plan (the action); 3) Specify (an action sequence); 4) Perform (the action sequence); 5) Perceive (the state of the world); 6) Interpret (the perception); 7) Compare (the outcome with the goal). This is a simplified breakdown but offers a useful framework to guide design. 5. “When people use something, they face two gulfs: the Gulf of Execution, where they try to figure out how it operates, and the Gulf of Evaluation, where they try to figure out what happened. The role of the designer is to help people bridge the two gulfs. … The gulf [of Evaluation] is small when the device provides information about its state in a form that is easy to get, is easy to interpret, and matches the way the person thinks about the system.” 6. Norman recommends ‘root cause analysis’ to define one’s goals and subgoals, with the aim to discover the root cause of an action. If someone reads until it gets dark, their goal becomes to turn a light on. But this is really a subgoal to read; reading is a subgoal for learning; learning is a subgoal for application, and so on. Conduct this kind of root cause analysis and major innovations may follow — in design or elsewhere: constantly ask why — what is the real goal? 7. A useful framework for root cause analysis is what Norman calls the ‘Five Whys’. Originally used by Sakichi Toyoda and the Toyota Motor Company to improve quality (a company renowned for its quality-control), it simply asked ‘why’ repeatedly. It might not always consist of five questions, but it is framed as such to encourage one to ask the question repeatedly. “Why did it go wrong?” Human error. “Why was there human error?” He was tired. “Why was he tired while operating dangerous machinery?” And so on. 8. “Harvard Business School marketing professor Theodore Levitt once pointed out, ‘People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!’ Levitt’s example of a drill is only partially correct, however. … Once you realise that they don’t really want the drill, you realize that perhaps they don’t really want the hole, either: they want to install their bookshelves. Why not develop methods that don’t require holes? Or perhaps books that don’t require bookshelves.” 9. The seven stages of action—a useful framework for designers to use: 1) What do I want to accomplish? 2) What are the alternative action sequences? 3) What action can I do now? 4) How do I do it? 5) What happened? 6) What does it mean? 7) Is this okay? Have I accomplished my goal? “This puts the burden on the designer to ensure that at each stage, the product provides the information required to answer the question.” 10. There are two types of knowledge that people use on a day-to-day basis: knowledge of—referred to by psychologists as declarative knowledge (remember to stop at red traffic lights)—and knowledge how—also known as procedural knowledge (skills to be a musician). One need not recall exactly what a coin looks like to pay for things; knowledge that it is a coin is enough. 11. Why did millions of Americans confuse the Susan B. Anthony dollar coin with the pre-existing quarter, yet nobody confused the new $20 bill with the identically sized $1 bill? Because all notes in America are the same size, so Americans subconsciously determined that size was not a factor by which to differentiate notes. Coins, on the other hand, are frequently differentiated by size. “Consider this an example of design principles interact with the messy practicalities of the real world,” Norman writes. “What appears good in principle can sometimes fail when introduced to the world.” 12. There are two types of memory that have different implications for design. First, short-term or working (STM) memory is important for designers to consider because it is not reliable; it is too flimsy and leaves the mind quickly, especially if there are distractions (a good example of this in poor practice is electronic medical-records systems that automatically log nurses out, which forces them to write vital information down on their hands before it is lost). 13. The other—long-term memory (LTM)—can create natural mappings for product users; for example, if a motorcyclist forgets how to signal a left turn (whether to push or pull a switch), they might recall that when they turn right, the left handlebar moves forward. Their LTM has given them a frame of reference to remember how to use a product. Designers should consider this principle to guide natural mappings. 14. Approximations can be important tools for one to use when they design things. For example, an approximation of STM might be: “There are five memory slots in short-term memory. Each time a new item is added it takes up a slot, which knocks out whatever was there beforehand.” Is it precisely true? No. But it serves a useful function. Use such approximations to help yourself. 15. There are four kinds of constraints: physical, which use properties of the physical world to suggest action; cultural, which are based on cultural norms, because “each culture has a set of allowable actions for social situations”; semantic, which rely on the meaning of a given situation to control the set of possible actions; and logical, which use good-old logic, usually through the advantage of logical relationships between “the spatial or functional layout of components and the things that they affect or are affected by.” 16. “When a device as simple as a door has to have a sign to tell you whether to pull, push, or slide, then it is a failure, poorly designed.” 17. “If all else fails, standardize. … If all makers of faucets could agree on a standard set of motions to control amount and temperature … then we could all learn the standards once, and forever afterward use the knowledge for every new faucet we encountered. If you can’t put knowledge on the device (that is, knowledge in the world), then develop a cultural constraint: standardize what has to be kept in the head.” 18. Toyota has long been known for its manufacturing excellence. Its method to minimize error is based in part on the philosophy of jidoka—roughly translated to ‘automation with a human touch’. At the Toyota Production System, workers are expected to report any error, which often means entire assembly lines must be halted. This is in contrast to many cultures which emphasize efficiency and economic maximization; social pressures often prevent people from the report of errors. At Toyota, when an error is noticed, a special cord called an andon stops the assembly line and alerts the expert crew. Toyota also punishes non-reporting of error. This is an example of how products and systems can be designed to ensure safer, more effective work environments. 19. The temptation in business is to continually add new features to an already great product. A company will make something that works, but eventually, the market becomes saturated: everybody now owns the product. Competitors release similar products with more features. Hence what Norman calls ‘featuritis’. “Good design requires designers to step back from competitive pressure and ensure that the entire product is consistent, coherent, and understandable. This stance requires the leadership of the company to withstand the marketing forces that beg to add this feature or that, each thought to be essential for some market segment.” 20. There are two kinds of innovation, according to Norman: radical and incremental. Each has its utility, and no one is more valuable than the other. Incremental innovation is the slow, steady changes made to the automobile over the course of 100 years. This is more appropriate than radical innovation in some cases. Radical innovation on the other hand is “what many people seek, for it is the big, spectacular form of change,” Norman writes. “But most radical ideas fail, and even those that succeed can take decades.” Not every change has to be radical.

SUMMARYEver asked, “How the hell does my thermostat actually work, and why on God’s green earth must it be so confusing?” Everyday things are often designed poorly. Designers often go for style over substance—beauty over utility. Companies add needless features to products to increase sales but do nothing for a product’s design. Commuters shouldn’t have to perform tai chi to operate train station taps.

In The Design of Everyday Things, Donald A. Norman offers a desperately needed perspective on design. The book emphasizes the need for human-centered design and draws on various subjects from psychology to art and offers useful frameworks for designers to make things with the user in mind — warts and all.

The psychopathology of everyday things Ever approached a door and did not know how to use it? Should you push or pull? Slide or rotate? Wave? So has Donald A. Norman. So much so that such doors are now known as Norman Doors. Don Norman is an engineer by trade and by nature. He sees the world as many engineers do: logically.

Norman has a friend that became stuck between two sets of doors because their hinges were not visible and he could not figure out how to pass through. The building’s entrance “probably won a design prize,” Norman writes sarcastically. But because it causes confusion, it is designed poorly.

For simple designs, like those for a door or kettle, manual instructions to “push” or “pull” should not be necessary. Good design should indicate action by itself. Make a pillar visible so that it’s clear which side of a door is attached to a hinge. When simple things are overly complex, Norman writes, “the whole purpose of the design is lost.”

THE THREE KEY AREAS OF DESIGNNorman focuses on three areas that fall under the category of design:

1. Industrial design: Industrial designers tend to focus on form and material. Industrial design is the professional service to create and develop concepts and specifications that optimize the function, value, and appearance of products and systems for the mutual benefit of the user and manufacturer.
2. Interaction design: Interaction designers focus on understandability and usability. The design is based on how people interact with technology. The goal is to enhance people’s understanding of what can be done, what is happening, and what has occurred. It draws on principles of psychology, design, art, and emotion to ensure a positive user experience.
3. Experience design: Experience designers emphasize the emotional impact of a given design. Under this method, the quality and enjoyment of the total experience are considered across products, processes, services, events, and environments.

The five principles of good designDiscoverability is a crucial stage of user experience and comprises five fundamental psychological concepts:

1. AFFORDANCESThe relationship between an object’s properties and the capabilities of the agent that interacts with it—ergo, a chair affords support, so in turn, it affords the ability to sit on it. An affordance only exists if the agent can interact appropriately; for example, if a child is not strong enough to lift a stool, the stool does not afford lifting. Affordance is relative. To be effective, affordances and anti-affordances have to be discoverable.

2. SIGNIFIERSSignifiers are the components that signal affordance. A flat panel on a door signifies the need to push it open. Affordances determine what actions are possible. Signifiers communicate where the action should take place. “When external signifiers—signs—have to be added to something as simple as a door, it indicates bad design.”

3. CONSTRAINTSThere are four kinds of constraints. Physical, which use properties of the physical world to suggest action; cultural, which are based on cultural norms, because “each culture has a set of allowable actions for social situations”; semantic, which rely on the meaning of a given situation to control the set of possible actions; and logical, which use good-old logic to take advantage of the logical relationships between “the spatial or functional layout of components and the things that they affect or are affected by.”

4. MAPPINGMappings indicate the relationship between two sets of things. For example, if there are rows of spotlights in a ceiling, a series of switches on the wall might specify which switch is for which light, depending on their order. This would constitute mapping: the switches are mapped according to the lights. Another example might be a car steering wheel: when it turns right, the top of the steering wheel moves right along with the car itself. The car uses spatial correspondence to make use of the car simple and obvious.

5. FEEDBACKFeedback in design is crucial and should be immediate. It is the communication of an action. If a cyclist is at a red traffic light that stays red for longer than expected, perhaps it has not registered the cyclist’s presence, because their vehicle is smaller than a car. The system lacks feedback.

6. CONCEPTUAL MODELSThere is a sixth principle of good design: the conceptual model of the system. Simply, this is an explanation of how something works. Files and folders in one’s computer are not files or folders; they are conceptual models of those objects because humans are used to how these objects perform a similar function in real life. This is a useful conceptual model.

“We bridge the Gulf of Execution [where a user tries to figure out how a thing operates] with signifiers, constraints, mappings, and a conceptual model. We bridge the Gulf of Evaluation [where a user tries to figure out what happened] through the use of feedback and a conceptual model.”

When something goes wrong, like when information stored on the cloud goes missing, the conceptual model must offer a solution or it is limited in its quality. Files might appear accessible to users but be untouchable. “Simplified models are valuable only as long as the assumptions that support them hold true.”

The psychology of everyday actions“Emotion is highly underrated,” Norman writes. “In fact, the emotional system is a powerful information processing system that works in tandem with cognition. Cognition attempts to make sense of the world: emotion assigns value. It is the emotional system that determines whether a situation is safe or threatening, whether something that happens is good or bad, desirable or not. Cognition provides understanding: emotion provides value judgments.” Perhaps more reason for engineers to soften their hard-logic-based approach: people are emotional creatures and must be accepted as such.

Relatedly, Norman suggests designers consider three levels of processing: 1. visceral, or automatic responses, behavioral, or well-learned actions triggered by situations, and reflective, or conscious opinion in hindsight. Design must take place at all levels. Bad designs can induce frustration and anger; good designs can induce pride, enjoyment, and calm.

Find meaning in failureNorman recommends designers change their perception of failure—that they incorporate more positive psychology into their work. When one designs something new, they should do not worry about failure. What’s more:

• Do not blame others for their inability to use your design.
• Take people’s difficulties as signifiers of where the product can be improved.
• Eliminate all error messages from electronic or computer systems; instead, provide help and guidance.
• Make it possible to correct problems directly from help and guidance messages; don’t impede users’ tasks, and don’t make them start over.
• Assume what someone has done is partially correct; provide guidance that allows them to correct the problem and move on.
• Think positively for yourself and the people you interact with.

Knowledge in the head and in the world“A friend kindly let me borrow his car, an older, classic Saab. Just before I was about to leave, I found a note waiting for me: ‘I should have mentioned that to get the key out of the ignition, the car needs to be in reverse.’ The car needs to be in reverse! If I hadn’t seen the note, I never could have figured that out. There was no visible cue in the car: the knowledge needed for this trick had to reside in the head. If the driver lacks that knowledge, the key stays in the ignition forever.” Norman uses this as a warning: designers must make it obvious what must be done to use the things they design.

There are two types of knowledge that people use on a day-to-day basis: knowledge of—referred to by psychologists as declarative knowledge (remember to stop at red traffic lights)—and knowledge how—also known as procedural knowledge (knowledge of how to play a musical instrument). One need not recall exactly what a coin looks like to pay for things; knowledge that it is a coin is enough.

Use the world to remember stuffHow does a pilot remember so much? They are given myriad complex instructions before they take flight. The answer is that they don’t. They do not leave the unreliable short-term or working memory responsible for such important decisions. There is too much to remember to do. Therefore, pilots take advantage of their plane’s equipment to ‘remember’ important information. This is the design implication: for the risk of failure to be mitigated, designers must consider the limitations of human memory.

‘Prospective memory’ denotes the task to remember to do something in the future. For this, one needs a reminder of it. A reminder is made up of two main components: a signal and a message. A signal lets one know something needs to be remembered; a message informs one what the thing to be remembered actually is.

Activity-centered designGiven that spatial mapping of switches (such as light switches) is not always appropriate, activity-centered controls are sometimes a nice solution. For example, many auditoriums have activity-based switches; a switch might be labeled ‘lecture’, which when pressed activates the correct balance of light (nearer the back of the hall) and darkness (near a projector or screen, so it’s easier for the audience to see the presentation).

Sound in designNorman writes of the importance of sound used in design to offer positive or negative feedback. Think of the tinny sound heard when a car door fails to close properly. Then, compare that to the satisfying catch sound when it closes correctly.

For blind people, the lack of sound that comes from new electric vehicles is a problem. The ability to listen out for a car’s revs is often how blind people know whether it is safe to cross a road. Because of this, sounds are now added to electric vehicles to make them safer.

Skeuomorphic design can helpSkeuomorphic is the name given to something new to resemble something old, like early plastics that resembled wood. Skeuomorphic designs can be useful conceptual models that aid learning; recall the example of ‘folders’ and ‘files’ in your computer’s hard drive. This makes it easy for users to know what’s happened.

Human error? No, bad designIf a person fails to understand their home thermostat, who is at fault, the technology, or the person? Norman believes it is often the technology.

Technologies that people must use each day should not be as complex as they often are. Rather than blame ourselves, we ought to expect more of our everyday things.

Most industrial accidents—between 75% and 95%—are caused by human error. Norman thus poses the question: How is it that people are so incompetent? His answer: they aren’t. It is a design problem.

“We design equipment that requires people to be fully alert and attentive for hours or to remember archaic procedures even if they are only used infrequently, sometimes only once in a lifetime. We put people in boring environments with nothing to do for hours on end, until suddenly they must respond quickly and accurately. Or we subject them to complex, high-workload environments, where they are continually interrupted while having to do multiple tasks simultaneously. Then we wonder why there is a failure.”

Understanding why there is an errorErrors occur for many reasons: people are asked to be alert for hours on end, they must multitask, they must operate machinery that makes it difficult to resume operation after distraction (despite the very human inclination to be distracted by things), and so on. But for Norman, perhaps worst of all is people’s attitudes towards error.

“If the system lets you make an error, it is badly designed. And if the system induces you to make the error, then it is really badly designed. When I turn on the wrong stove burner, it is not due to my lack of knowledge: it is due to poor mapping between controls and burners. Teaching me the relationship will not stop the error from recurring: redesigning the stove will.”

Two types of errors: slips and mistakesThere are two types of errors: slips and mistakes. A slip occurs when someone intends to do one action but does something else. There are two kinds of slips: action-based, like when someone pours milk into coffee and then puts the coffee cup back in the refrigerator; and memory-lapse, like when someone forgets to turn the gas off after cooking.

A mistake occurs when the wrong goal is established in the first place. There are three kinds of mistakes: rule-based, like when the right diagnosis is made but the wrong course of action is planned; knowledge-based, like when a problem is misdiagnosed because of erroneous or incomplete knowledge; and memory-lapse, when stages of goals, plans, or evaluation are forgotten.

The Swiss-cheese model of how errors lead to accidentsBritish researcher James Reason first likened error to Swiss cheese. He argued that when systems go badly wrong, like when a nuclear power plant explodes, multiple things must go wrong and thus align in a grim cocktail of error. Think of holes in different pieces of Swiss cheese that line up so that a single straight line could pass through each of them. Norman says this is why most analyses of error are doomed to fail: stakeholders usually stop their investigation when they find one thing that went wrong. However, the answer is to be found further ahead, as catastrophes are usually caused by multiple things that go wrong rather than only one.

Design thinking Design thinking asks designers to solve a problem only if they are certain it is the right problem to solve. One should scrutinize an issue to the high heavens before they attempt to solve it. This is how design thinking works.

“Design thinking has become the hallmark of the modern design firm,” Norman writes. There are two key types of design thinking: the double-diamond diverge-converge model of design and human-centered design. There are two stages of this model: problem and solution, which are, for simplicity’s sake, the two phases of design. Each stage involves divergence and convergence.

To use the ‘problem’ stage as an example, one must first diverge the approach and consider various possibilities to determine what the real problem is. Then, they must converge when they feel the right problem has been identified. Divergence is to consider possibilities; convergence is to decide the next course of action. This divergence/convergence occurs at both the problem and solution phases.

Human-centered designHuman-centered design actually takes place within the double-diamond model. Human-centered design refers to how exactly problems and solutions are discovered. It is, according to Norman: “The process of ensuring that people’s needs are met, that the resulting product is understandable and usable, that it accomplishes the desired tasks, and that the experience of use is positive and enjoyable.” There are four different activities of the human-centered design process.

1. Observation —this form of design research involves simply observations of people as they use products and behave as they normally would. The goal is to understand the nature of a problem
2. Idea generation —creativity is critical at this stage. Norman recommends to generate a lot of ideas, create without regard for constraints, and question everything
3. Prototype —the only way to really know if an idea is reasonable is to test it. Build a quick prototype or mock-up of each potential solution
4. Test — gather a person or group of people as closely resemblant to the target demographic as possible to test the thing you have designed. Norman recommends to study five people individually; then, when those tests have been analyzed, study five more people individually, and so on

Activity-centered designWhen one develops products that are to be used by people all over the world, like refrigerators, cameras and computers, activity-centered design is an accent method to human-centered design. Here, it is important to “let the conceptual model of the product be built around the conceptual model of the activity.”

For example, the core components of cars are pretty much identical in every country. So, when the goal is to design more effective and efficient cars, designers should consider the principles of how to drive. A heads-up displays mean that critical instrument and navigation information are displayed in the space in front of the driver so they don’t have to take their eyes off the road to see it; automatic functionality mean that there is no need for the clutch pedal; and so on.

StandardizationWe often take standardized technology for granted. Clocks are standardized, but if you change the image of a clock from the one most people know, it becomes much more difficult to read. Even if the new clock is more logical, the further it deviates from the standardized version, the more difficult it is for humans to read.

Sometimes the goal is to deliberately make things difficultBut not everything should be made easy to use. If something ought to be inaccessible or difficult, it should be designed that way. Think of a high-security safe. If the safe is difficult to operate but was designed that way, under the principles of good design it is designed well. It all depends on the object’s purpose.

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SYNOPSIS Every New Year, millions of people make promises to themselves that they will form new habits or break bad habits in the year to come. But famously, most of these promises are soon broken. Why is it so hard to form habits? Why is it so hard to break bad ones?

Atomic Habits by James Clear posits that the reason is that most people fail to understand what really makes a habit stick. Atomic Habits explores the psychology behind habit formation and demonstrates the mechanisms in the human brain that cause us to create habits. Then, it gives practical advice for how those mechanisms can be leveraged and manipulated for a person to stick to the habits they want to keep and avoid the ones they want to abandon.

EXPLAINER TOP 20 INSIGHTS1. From 1908 to 2003, the British professional cycling team performed notoriously poorly. However, beginning in 2003, when it hired Dave Brailsford, its luck changed. Brailsford made small but consistent changes to the team’s procedures. Changes like a change to the shape of bike seats, the application of alcohol to tires, or the transformation of the inside of their van white. Soon the team won Olympic gold medals and Tours de France. Like interest that compounds, major changes to results are often brought about by many small changes that work together. This story is elaborated on below. 2. When people focus on goals, they run into four problems: 1) Winners and losers often have the same goals, and so it’s not a good indicator of why some win and some lose. 2) The achievement of a goal is only a momentary change, then you begin to want something else. 3) You will inevitably not meet all your goals, so too much preoccupation with them can be mentally disastrous. 4) Goals aim for a specific accomplishment, not a sustained change. This means goals are at odds with long-term progress. Don’t become too preoccupied with goals. Instead, focus on sustained systems of change. 3. Human brains make decisions with a four-step process. 1) It receives a cue to perform a particular action. 2) It creates a craving to perform that action. 3) It responds to that craving. 4) It receives a reward or consequence for that action, either internally or externally. When it receives a reward, it is inclined to repeat the cycle, when it receives a consequence, not to. This cycle, repeated, is what forms a habit. An example would be: 1) Wake up. 2) want to feel alert. 3) Drink coffee. 4) Satisfy the craving to feel alert. 4. Human brains are hardwired to take the path of least resistance and to exert the least energy necessary. That makes the adoption of new habits hard. In order to make good habits easier: 1) Make it obvious, 2) make it attractive, 3) make it easy, and 4) make it satisfactory. This can be inverted to break a bad habit to 1) make it invisible, 2) make it unattractive, 3) make it difficult, and 4) make it unsatisfactory 5. Employees of the Tokyo Metro system are trained to “point and call.” When they see a signal or perform an action, they are trained to point to it and say it aloud. For example, “signal is green” or “apply breaks.” This system prevents employees from accidentally missed details, reduced errors by 85% and accidents by 30%. To form a new habit or break a bad one requires the unconscious to become conscious. This is necessary to overcome the current loop that runs in the brain automatically. 6. In 2001 British researchers conducted a study of 248 people to explore exercise habits. One-third, the control group, were asked only to track their exercise. One-third were asked to track their exercise and read materials about the benefits of exercise. One-third were asked to read said materials and track their exercise, but also to make a plan for when and where they would exercise in the next week. In the first two groups, 35% and 38% of people exercised at least once per week. In the third group, 91% exercised at least once per week. This method is called an “implementation intention” and triggers a cue that begins the habit cycle described in insight 3. “When X happens, I will Y.” 7. The environment is one of the most important factors that determine our habits. It provides cues that start a habit loop in the brain and subtly encourage people to pursue particular habits, whether good or bad. Anne Thorndike, a doctor at Massachusetts General Hospital, once did an experiment to encourage more people to drink water in the hospital cafeteria. Previously, water had been available, but only in two places in the cafeteria and not in the refrigerators next to the cashier. Thorndike added water to those refrigerators and six new locations in the cafeteria. Despite the fact that soda is equally available as it had been before, over the next three months, soda sales dropped by 11.4%, while water sales increased 25.8%. 8. Dr. William G Allyn says, “More than 50 percent of the cortex, the surface of the brain, is devoted to processing visual information.” This makes vision the most stimulating sense in humans and the one most likely to elicit a response. Therefore, visual cues are more likely to prompt a reaction than other forms of cues. 9. Charles Darwin says, “In the long history of humankind, those who learned to collaborate and improvise most effectively have prevailed.” Human evolution has predisposed people to act as a collective. Therefore, humans are predisposed to imitate the habits of other humans. Principally, there are three groups that are instinctively most likely to be imitated. 1) The close: those who a person makes close contact with regularly. 2) The many: those whose collective habits create a standard of “normalcy.” 3) The powerful: those who have something that is commonly desired, whose success or possession encourages others to imitate them out of hopes to achieve the same. 10. Behaviors have base-level motives that are more deeply ingrained than the behavior themselves. Motives like: “conserve energy,” “obtain food and water,” “find love and reproduce,” or “connect and bond with others.” For example, a person may scroll Facebook because of an acute desire at the moment, but more deeply, out of a desire to connect and bond with others. Attach habits to these motivations to make yourself more likely to trigger a craving to perform that habit. 11. One way to make habits attractive is to reframe them in terms of their benefits instead of drawbacks. For example, associate saving money with its future bounty instead of its present sacrifice. One easy way to do this is to speak it aloud. Like the point and call method, say the benefits that a habit provides. Another psychological trick is to refer to habits as something that a person “gets to do” instead of as something that they “have to do.” 12. Habits don’t form based on time; they form based on frequency. A behavior will become automatic when the aforementioned habit loop is completed a certain number of times (which differs across people and habits). This is when a habit is formed. It doesn’t matter if it takes a week to complete the necessary number of repetitions or a year. 13. In the 1970s, Japanese firms optimized their factories to remove as much unnecessary work as possible in order to make the accurate assembly of products as easy as possible. For example, they arranged workspaces to avoid wasted time from twists and turns for tools. As a result, Japanese products were assembled faster and more reliably than their American counterparts. Brains are hardwired to choose the option that requires the least effort. Therefore, make a habit as easy as possible helps it win out over alternatives. 14. An effective way to start a habit is to begin with a simplified, easier version — something that can be done in two minutes or less. For example, instead of a two-hour workout, try ten pushups. This is an easy-to-do entry point, which can be added onto to build bigger habits. 15. In the Summer of 1829, Victor Hugo promised his publisher a new book. He had spent the year in pursuit of other projects and failed to seriously start work on the book a year later. His publisher then set a seemingly impossible deadline to have the book finished six months later, by February 1831. To complete this, Hugo asked his assistant to lock away all his clothes except a large shawl until he finished the book. Without the ability to leave home, Hugo was forced to focus and write. This is called a commitment device and is an inversion of the trick to make a habit easy. It makes it difficult not to do a habit. Commitment devices ensure a habit will be stuck to with a decision now that determines what actions must be taken in the future. 16. In the 1990’s Karachi, Pakistan was one of the most populous cities in the world but one of the least livable. Most people lived in squatter settlements with little access to running water or hygiene supplies. In an effort to reduce the spread of disease, aid workers attempted to encourage more people to wash their hands in the city. However, they discovered that despite commonly haphazard practices, most people already knew the benefits when they wash their hands. An aid worker named Stephen Luby distributed Safeguard Soap. This soap, which smelled pleasant and foamed easily, was considered premium in Pakistan. But Luby discovered that the more pleasurable experience of Safeguard soap led to higher retention of the habit. The cardinal rule of behavior change is that behaviors that are rewarded are repeated, and behaviors that are punished are avoided. 17. One trick to develop habits is to set up systems that automatically reward desired behaviors or punish those that are not. For example, if one wants to break a habit of daily Starbucks visits, set up a savings account and set automatic deposits for the amount that would be spent on coffee each day that’s skipped. When they see the money hit the account, it will create a psychological reward that encourages the brain to repeat the behavior. 18. One way to evoke several of the factors that make habits easier to repeat is to track the habit. For example, mark every time a habit is repeated on a calendar. This makes it obvious whether a habit has been completed. If it is incomplete, it offers a reminder to complete it. This makes habits attractive through the invocation of a psychological desire to continue streaks of behavior. It makes the habit satisfactory through the creation of an accomplishment for each time a habit is completed. 19. Self-improvement should be a combination of new habit exploration and new habit exploitation, or the improvement of habits that are already developed. Aim for roughly 80% of time devoted to exploits, with 20% devoted to exploration. Google asks its employees to spend about 80% of their time on their actual job and 20% on side projects. This method has resulted in products like Google AdWords and Gmail. 20. Human brains are hardwired to appreciate challenges, but to avoid those that are too difficult. This means that people will get bored of habits that are too easy and give up on habits that are too hard. Therefore, it’s optimal to form habits based on tasks in the “Goldilocks zone” of difficulty that is just manageable. For example, most adults will not have fun in a one-on-one basketball game against a four-year-old. But most adults would also give up if they had to play against Lebron James. To make the game enjoyable and repeatable, play against an equally skilled peer.

SUMMARYEvery New Year, millions of people make promises to themselves that they will form new habits or break bad habits in the year to come. But famously, most of these promises are soon broken. Why? Why is it so hard to form habits? Why is it so hard to break bad ones? The answer is “atomic.”

When you multiply 100 times 1.01, the answer is only 101. If you multiple 100 times 1.01 ten times, the answer is only 110.5. But if you multiple it fifty times, the answer scales to 164.5. And when you multiply it 100 times, the answer grows to over 270. Now multiply 100 times 1.01 over 500 times, and the answer becomes over 14,477. Like interest that compounds, when you make a small improvement, over and over again, it adds up into a massive change. This is the idea behind “atomic” habits. Atomic habits are minor improvements to the systems of your life, on their own insignificant, which together change the course of it.

How do we form habits?In 1898, a scientist named Edward Thorndike conducted an experiment whereby he placed cats into a box designed so the cats could escape if they performed the right task. These Tasks could be to pull a lever or step on a plate. Once the cats discovered the correct action, a door would open and let them run to a bowl of food. When he first placed the cats into the box, they would experiment, and after a few minutes, they would discover how to escape the box.

In the beginning, the cats experimented randomly, but as Thorndike repeated the experiment, the cats would learn how to escape and become faster and faster each time. During the first three trials, it took an average of 1.5 minutes for the cats to escape. During the final three trials, it took them only 6.3 seconds. Thorndike describes the pattern of learning displayed by the cats as this: “behaviors followed by satisfying consequences tend to be repeated and those that produce unpleasant consequences are less likely to be repeated.” If one wants to read a book or exercise as part of their daily routine, it is often viewed as a task of willpower. Many think that it requires mental and moral fortitude to do something that we don’t actually want to do. But this is an inefficient way to form new habits which are, more often than not, destined to fall apart.

Four-step framework to habit formation The process to develop a habit can be divided into a four-step process. First, the brain receives a cue to perform a certain action, or which is associated with a particular action. Then the cue triggers the brain to generate a craving to perform that action. Third, we respond to that craving through the performance of the action. Finally, we receive either a reward or consequence. If it is a reward, our brain is prompted to repeat the loop in the future and a habit begins to form.

Four steps can make a habit more likely to trigger this reward loop in the brain and, therefore, more likely to become a habit that endures. (1) Make it obvious. (2) Make it attractive. (3) Make it easy. (4) Make it satisfy. Each of these addresses one step of the loop mentioned above. People often glorify the achievement of hard tasks, but the reality is that the harder a task is to do, the harder it is to form a habit out of it.

This is exactly what the Japanese manufacturers of cars and electronics did. They made it as easy as possible for their workers to form habits and complete each task they needed to do as efficiently and accurately as possible. As a result, by 1974 American televisions received five times as many service calls as their Japanese counterparts. And by 1979 Japanese manufacturers assembled their sets three times as quickly as American manufacturers. Conversely, a bad habit can be broken if one inverts these four steps:

1. Make a habit invisible so that no cue is ever received.
2. Make a habit unattractive to undermine any craving.
3. Make a habit difficult to make a response harder.
4. Make a habit unsatisfactory so the brain is prompted not to repeat it.

Here are some tricks that can be employed to fulfill these four steps: Design your environment to create as many cues for good habits as possible and make those cues obvious and impossible to miss. Pair a “want to do” with a “need to do.” “I’m only allowed to watch Netflix after I run on the treadmill.” Automate as many of your habits as possible. Invest in technology which makes it easier to do what would usually be difficult. Use reinforcement. Use an immediate reward after a habit is completed. “I’ll organize my computer files at the end of the day, and when I’m done, I’ll have a beer.”

A case study on atomic habits in action From 1908 to 2003, the British national cycling team was one of the worst in Europe. In nearly 100 years, they won only a single Gold Medal at the Olympics and never won the Tour de France, considered the greatest of all bicycle races, a single time. Then, in 2003, the team hired David Brailsford as performance director. The strategy Brailsford committed to was what he called “the aggregation of marginal gains” to make tiny, 1% improvements to everything the team did.

Brailsford’s team slightly redesigned the seats of their bikes to make them more comfortable. They applied alcohol to their tires to slightly improve grip with the track. They asked riders to wear heated overshorts to maintain the ideal temperature in their thighs. They tested fabrics in wind tunnels to find the ones that were slightly more aerodynamic. They switched their outfits and wore indoor race suits outdoors because they were slightly lighter and more aerodynamic. They wore biosensors and tested different massage gels. They hired a surgeon to teach them how to wash their hands better to prevent illness. They tested pillows and mattresses that gave riders a better night’s sleep. They even painted the inside of their van white to make it easier to see dust which would decrease the aerodynamics of their bikes.

Any of these changes, on their own, would not change the performance of the team in any meaningful way. But in aggregate, they made a dramatic change. By the 2008 Olympics, the British team won eight gold medals, four times more than any other team. In 2012 they repeated this feat with the added bonus of several world records and their first-ever Tour de France win. They then went on to win the Tour de France again in 2013, 2015, 2016, 2017, and 2018.

The true trick to self-improvementSelf-improvement is often framed as a function of motivation and goals. But goals and motivation are only a small part of the bigger picture. A much more significant part of self-improvement is the systems that are put in place in a person’s daily life.

When people focus on goals, they run into four problems: Winners and losers have the same goals, so it’s not a good indicator of why some win and some lose. To achieve a goal is only a momentary change, and then you begin to want something else. You will inevitably not meet all your goals, so too much preoccupation with them can be mentally disastrous. Goals aim for a specific thing, not sustained change, and are at odds with long-term progress. Don’t become preoccupied with goals — instead, focus on sustained systems of change. Think of it like this: it’s nearly impossible to go from zero to 100% improvement, but it’s much easier to go from zero to 1% to 2.1%, then 3.3%, and so on.

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By: Jonathan Brill4,200 WORDS (10 PAGES)SYNOPSIS Rogue waves that upend entire industries and break businesses, like pandemics and financial crises, occur more frequently than ever. In Rogue Waves, author Jonathan Brill shares the five-step ROGUE framework that helps turn major systemic threats into outsized opportunities.

The first step is the Reality Test, used to deeply understand your present state. The Organize Your Forces step helps you model the forces that keep your current system stable. Step three is to Generate Your Futures through simulations to identify potential opportunities and threats. Step four is Uncouple Opportunities from Threats to identify where and how to intervene. The fifth step is Experiment, where you build an experiments portfolio to maximize your odds of success.

EXPLAINER VIDEO TOP 20 INSIGHTS1. As the world moves faster and becomes more connected, Rogue Waves are no longer edge cases. External events of large magnitude like wars, financial crises and large natural disasters have severely affected large companies every seven years on average. American business leaders respond to radical external change nearly 45% of the time. 2. In an increasingly volatile world, resilience is the new growth strategy. Resilient organizations have more redundancies than what Six Sigma advocates find acceptable. But today's organizational mandate is not just about performance. It's also about surviving and recovering from unexpected systemic shocks. 3. Any business or economy is just a combination of games with different rules, different winning probabilities, and different payouts. In a casino, while individual players win or lose, the house always wins the night because it places systemic controls on the flow of information. Similarly, a business can beat randomness and win by placing systemic controls around the unknown. 4. All business risks can be slotted into the FOES framework: Financial, Operations, External and Strategic Risks. Financial, External and Strategic risks combined have accounted for significant, sustained value loss of over 20% in 92% of occurrences over 20 years. Therefore senior managers look out for Financial, External and Strategic Risks, while mid-level managers primarily focus on Operational Risks. While the above approach works in regular times, it can sink an organization when rogue waves hit. When change is rapid, junior people on the ground will see it first. Organizations must teach them what to look for, create effective mechanisms to process their warnings and give them the confidence that they will be heard. 5. Rogue waves can have four types of characteristics. First, they can be Static, with constant probability or Dynamic, with varying probabilities. Second, they are Symmetric or Asymmetric based on whether they affect all parties equally or unequally. Third, they are either Synchronous or Asynchronous, based on whether they impact all parties simultaneously or at different times. Finally, their impact can be Sustained or Temporary. Covid-19 was a dynamic, symmetrical synchronous wave as its probability changed over time, and its impact was on every business in the category within the same time frame. In contrast, the rapidly growing cyberattacks on companies are static, asymmetric and asynchronous. 6. Three things are required to spot the next rogue wave before your competitor does. First, be familiar with today's prominent economic, technological and social undercurrents. Second, pay special attention to events that cause two or more undercurrents to interact. Finally, build awareness throughout your organization so that everyone can scan the horizon for critical indicators. 7. To build systemic intuition about the threats and opportunities created by rogue waves, think through the impact of the different types of rogue waves on the four FOES of your organization. Ask how they can impact you and create new opportunities for your organization to create outsized value. 8. Demographics are one of the top 10 undercurrents that will shape the next wave. As birth rates decline in highly developed countries, the percentage of working-age people with advanced degrees will fall. California alone will have a shortage of 1 million college graduates by 2030. By 2030, the only major country with a labor surplus will be India, and the surplus will barely cover California's projected shortage alone. This means that companies must emphasize talent over tax considerations while making locational decisions. Wealth, production and power are reorganizing from Europe to Asia. In 2019, 121 companies in the Global Fortune 500 were from the United States, while 129 were from China (includes 10 Taiwanese firms). By 2035, 2.1 billion people will be earning the global equivalent of $35000 per year, and 87% of this growth will be in Asia. 9. Use the ROGUE method to prepare for rogue waves and build organizational resilience. ROGUE is a set of mental models that help you identify systemic risks and opportunities and potentially shape them in your favor. ROGUE consists of five stages Reality Test, Organize your Forces, Generate Possible Futures, Unbundle your Risks and Experiment. Step 1 of ROGUE is Reality Testing. Many organizations put great effort into collecting data about the past to forecast the future, but far less into modeling the present. But if your model of the present is wrong, your model of the future will mostly be wrong as well. Reality Testing helps you clearly understand your present state to avoid making decisions based on wrong information. 10. For Reality Testing, use the four-step REAL Framework - Reconnaissance Method, Evidence Collection, Alternative Analysis and Likely Realities. The reconnaissance Method helps you decide the bounds of your question and your approach to data collection. Evaluation helps you analyze the accuracy and usefulness of your data. At the Alternative Analysis stage, you develop multiple theories and test their robustness. At the Likely Realities stage, rank your solutions by the degree of confidence. For Reconnaissance, use the Search Tree method to reduce the range of answers as quickly and easily as possible. Think of the Search Tree method as an adult version of 20 questions. Ask questions that, when correctly answered, will define the boundaries of the search area most effectively. What one detail, when known, would narrow the search space the most? 11. When you do Reconnaissance, a lack of information about a potential customer segment might indicate an underserved market. When REI, a major US outdoor gear retailer, started researching millennials' attitudes towards wilderness creation and equipment, they were surprised by the lack of information. They rightly suspected a market gap and piloted a new-sub brand that addressed a brand new audience. 12. Use the Chess Tournament technique to avoid cognitive biases and improve group decisions in uncertain situations. Identify four competing hypotheses and collaboratively spend 15 minutes to prove each approach. Now spend 15 minutes to prove why each solution won't work while others attempt to defend it. When a solution fails, add a new one. The Chess Tournament forces teams to argue for and against double-check assumptions. 13. Step 2 of ROGUE is to Organize your Forces. Model the complex balance of forces that keep your current system in equilibrium. Every system has six elements: nodes, links, inputs, outputs, rates and frequencies. Nodes store inventory, and links make inventory flow across nodes. Inputs measure the potential added to the system, and outputs measure the potential subtracted. Rates measure the transfer speed between nodes, and frequencies measure how often transfers happen. 14. Step 3 of ROGUE is to Generate your Futures. Leverage simulations to project and prepare for a range of scenarios from 100X success to massive failure. Simulations answer three key questions: Uncertainty- the likelihood of an event occurring, Impact- How significant its influence will be, and Timeline- when these uncertainties and impact will manifest. Simulations can rapidly accelerate organizational learning, identify unlikely opportunities and prevent threats. Simulations don’t need to be complex or challenging programs run by Fortune 100 companies. You can realize 80% of the value can be realized with just 20% of the right effort. Use a simple paper and pencil exercise with some reconnaissance, discussions and a couple of spreadsheets. What's important is to structure the simulation and ask the right questions. 15. When COVID-19 hit, Amazon hired an additional 175000 employees in just 90 days to handle increased demand. Amazon's leaders could act decisively to rewire links and scale the capacity of nodes because they had a comprehensive system model and detailed scenario planning. That's because Amazon employs the highest number of economics Ph.D. in the United States to run simulations and prepare for possible futures. 16. Step 4 of ROGUE is Uncouple Your Opportunities from Threats which aims to shift the probabilities of the identified threats and opportunities in your favor. First, identify Trigger Points, the parts of the system most sensitive to change. Second, find ways to nudge the Trigger Points to shift the system to your advantage. Third, determine the best sequence and time to address your threats and opportunities. Finally, design your strategy to shift the probabilities of these events. 17. Step 5 of ROGUE is Experiment. Create a portfolio of experiments to respond strategically to the threats and opportunities identified. A well-balanced portfolio of experiments increases the probabilities of success and minimizes the downsides of failures. Your portfolio should have three categories of experiments to serve different goals. Growth experiments are those that can enable your 100x outcome. Sustaining Experiments protect the existing value and decrease the chance of an ugly outcome. Finally, Insurance Experiments increase resilience when bad futures occur. 18. A cross-sectoral study at 103 firms over 23 years shows that R&D investments had twice the impact on the market cap as investments intangible assets. However, returns vary based on what you optimize the portfolio of experiments for. Huawei averaged 10% annual return on R&D while Xiaomi averaged just 5-6%. Huawei sought to dominate the 5G ecosystem while Xiaomi just aimed to retain customer loyalty in a rapidly-changing market. 19. To encourage genuinely innovative experiments and not-safe ones to incentivize smart failure. Reward employees who deliver quality experiments instead of only those whose experiments were successful. Good experiments are those that help the organization learn more about the future. Define risk bands for your team. Any reasonable experiment which falls within the upper and lower risk limit should not be penalized. Zombie projects live on for years and lock up valuable resources because teams are reluctant to admit failure. Create incentives for your team to kill their zombie projects. Offer bonuses and appreciation for those teams that cut their losses early. 20. Companies often seek a single large solution when faced with a fundamental threat. But a big bet on a single experimental approach can lead to unintended second and third-order consequences. Instead, a well-balanced portfolio of dozens of low-impact experiments can collectively produce a high-impact outcome when probabilities add up to create decent odds of success.

SUMMARYThe world has become more volatile than ever, with once-in-a-lifetime events happening once a decade. Jonathan Brill calls them Rogue Waves. But organizations and management theories have been designed for stable operating environments. This book provides actionable frameworks to reduce risk, build resilience and best position your organization to take advantage of future rogue waves.

ASSESS YOUR THREATS AND OPPORTUNITIES1. Horizon ScanningIdentify the top ten economic, technological and social undercurrents that could create the next rogue wave and impact your business. These could include trends like changing demographics in the West, the rise of Asia and the impact of emerging technologies like 5G and IoT. For each of them, list the high impact changes in politics, markets and consumer behavior they could cause.

1. Identify Implications for your OrganizationAfter you have listed the significant undercurrents relevant to your business, identify the risks and opportunities they could create. Risk can be modeled using the FOES Framework: Financial Risk, Operational Risk, External Risk and Systemic Risk. Since your junior staff is closest to ground reality, train them to keep a lookout for the right issues and install organizational mechanisms to ensure warnings are heeded.

2. Identify Response Window and Build an Indicators DashboardYour response window is the period between the earliest time the changes become relevant to you and the latest time your organization can still course correct. Set up a dashboard to systematically track threats and opportunities. Review your Four FOES Dashboard every quarter and do an in-depth assessment every 12 months.

THE ROGUE METHODWhen a rogue wave hits, it will be the process you have installed, not your individual performance, that will drive results. To prepare your organization, you must provide your team the training they need to look out for rogue waves, the processes that will enable them to speak up and the confidence that they will be heard. The ROGUE method is a broad set of mental models to build organizational resilience to handle rogue waves.

The ROGUE framework begins with the Reality Test stage, used to deeply understand your present state. The Organize Your Forces step helps you model the forces that keep your current system stable. Step three is to Generate Your Futures through simulations to identify potential opportunities and threats. Step four is Uncouple Opportunities from Threats to identify where and how to intervene. The fifth step is Experiment, where you build an experiments portfolio to maximize your odds of success.

STEP 1: REALITY TESTOrganizations often spend significant effort collecting data on the past to forecast the future but far less to understand the present. But if your present model is wrong, your future projections are likely to go wrong as well. Use the REAL framework to investigate current reality.

1. Reconnaissance Decide what decisions have to be made and the degree of proof required to make them and estimate appropriate boundaries to the search. An excellent way to start reconnaissance is to identify the knowns and unknowns. Known Knowns are the things that we are aware of and understand. Equally clear are Known Unknowns, the things that we want to find out but don't have information on yet. Unknown Knowns is available information that you may have missed due to cognitive biases. Finally, there are Unknown Unknowns, which is information that we are neither aware of nor understand. An excellent way to brainstorm possible Unknown Unknowns is to consider counterfactuals or what-ifs. Unknown Unknowns could be new technology, unexpected competition, a shift in geopolitics etc. While you cannot research them, listing them down helps you expand the problem understanding.

2. Evidence Collection Decide on a standard of proof before you collect evidence. Many organizations rely on sources like newspapers, trade journals and industry analysts. However, high-risk decisions need a deeper dive. The best quality information usually comes from academic writing or direct source data analysis. To determine whether an information source is valuable, evaluate it across three factors:

3. Focus — Does the data have a detailed focus on the subset relevant and limited to your question? If you want to know LA traffic patterns, data for the US is useless.

4. Givenness — Does the information say something new that provides fresh insights into your problem?

5. Relevance — Will the information help you generate new insights?

6. Alternative Analysis Take the information gathered and create multiple theories of reality. When you have to deal with complex and ambiguous data, you could be easily prone to cognitive biases. To avoid them separate information collection from analysis and systematically evaluate alternatives. Use the Chess Tournament approach to evaluate multiple theories of reality generated. Identify four competing hypotheses and spend 15 minutes trying to confirm each. In the second hour, one person spends 15 minutes to demonstrate why each solution won't work while others attempt to defend it. When a solution fails, another is added. The structured brainstorming approach biases and forces teams to second-guess conclusions and double-check assumptions. Finally, for every theory that survives, establish the impact if your theory is invalidated.

7. Likely RealitiesEnsure you have explored the full range of options, given the level of proof you have. Confirm if you have subjected all possible theories to the same level of logical scrutiny. Make an honest assessment of how confident you are in your conclusions and rank them. Now you have a clear picture of your current reality.

STEP 2: OBSERVE YOUR SYSTEMStep 2 requires you to model the forces that keep your current system stable to determine what can cause the system to change or break. A system becomes unstable when there is a change in the balance of forces.

First, identify the boundaries of the system in which you are working. Every system comprises the same elements: nodes, links, inputs, outputs, rates and frequencies. Nodes are locations within a system that contain inventory. Links are pathways to move inventory from one node to another. Inputs measure how much potential is added to the system. Outputs measure how much potential is subtracted from the system. Rates are the speeds at which inventory moves from one node to another. Frequencies measure how often inventory moves between nodes.

Take the example of a distribution chain. The factory pushes new products as system inputs. Multiple warehouses are nodes that stock inventory. Vehicles are links that move products across warehouses. The mode of transport depends on both the Rate of transfer and Frequency of transfer. Finally, the seller is paid(output) when the product is delivered.

1. Map the System — System models provide clarity and help you focus on the small changes that will have the most significant impact. Identify the nodes, links, inputs and outputs that you already understand. Place black boxes around the ones you don't. Identify which links are deterministic and which are probabilistic.
2. Identify the system’s equilibrium — There are balancing and reinforcing loops that keep your system under equilibrium. Causal loops help you predict second and third-order effects of changes. Draw directed arrows to connect the nodes based on links in the system. Sometimes causal loops can be recursive. Balancing loops slow the system down while reinforcing loops that accelerate small changes. These are represented by - and + signs, respectively. Left unchecked, a reinforcing loop can rapidly produce an exponential growth situation. Causal loops help you identify which relationships are still unknown and what indicators must be tracked to receive early warnings.
3. Identify subsystems to investigate — Based on the previous steps, identify subsystems around black boxes and recursive loops that are important to understand. Perform direct investigations where possible, as described in the Reconnaissance section. For subsystems that you cannot directly investigate, infer what is going on by looking at the rates and frequencies throughout the system.
4. Imagine and list possible causes of disruption — Ask what could cause the balancing and reinforcing loops to accelerate, decelerate, reverse direction or snap. Evaluate the impact of major economic, social and technological undercurrents on your system.
5. Identify most important uncertainties — Which uncertainties are most important to understand and manage? From the above list, select disruptions that are feasible within the timeline of your concern. Then identify the system elements where you can intervene to handle the disruptions.

STEP 3: GENERATE YOUR FUTURESSimulations are a risk-free way to analyze how actions affect possible scenarios and generate a range of possible futures. Simulations help us understand three key things:

1. Uncertainty — The likelihood of an event
2. Impact — The influence on your organization
3. Timeline — If the uncertainties and impact are relevant within the timeline considered.

While organizations like Blackrock and Amazon use sophisticated mathematical models, simulation follows the 80/20 rule. A simple pen and paper approach supplemented by spreadsheets can get you surprisingly far if you know how to structure the simulation and ask the right questions. Here is a simple sequence to simulate futures.

1. Build your Tree of PossibilityThe Tree of Possibility helps you expand your universe of possibilities and present a range of plausible outcomes from optimal success to disaster. Start with a clear future outcome for each iteration and work your way backward to the present. Systematically think through what possible sequence of events and actions can lead your organization to that outcome. Make sure you model three types of outcomes:

The Good — Envision a transformational goal that leads to a 100X future. 10x goals are often not ambitious enough. It takes seven years to get a category product to scale in many fields. When we factor in the cost of capital and existing competition, a 10x improvement is barely sufficient.

The Bad —Reframe your current goal as the minimum acceptable outcome.

The Ugly —Imagine failure to the fullest extreme. Ask "what is the worst that could happen" and assess likelihood and impact. Prepare for these outcomes by determining what steps you can take now to minimize their likelihood, recover from their impact or leverage them to your advantage.

If a threat or opportunity comes up repeatedly across multiple scenarios, it is worth focussing on.

1. List your MiraclesMany futures depend on one or more "miracles" to occur. Determine what extraordinary things must fall in place for each modeled scenario across the Four FOES - the Financial, Operational, External and Strategic drivers. Find out what actions you can do to shift the odds in your favor and make them more likely to occur. Identify what indicators to track to know if these "miracles" have occurred. Finally, prepare contingency plans to respond if these don't occur.

2. Maintain a chart with a range of possible futuresFor each future, estimate the likelihood of occurrence and potential opportunities or threats for your organization. Qualify each of your threats and opportunities by the degree of uncertainty, impact and the time you have to prepare. Create a ranked list of opportunities and threats. Identify the key events that can cause each future and what indicators you can track to see them coming. Finally, rank the actions you can take to shift the future to your advantage.

Share the future scenarios with your organization inevitably generates robust discussion and feedback. It results in better planning and the ability to respond well when unplanned scenarios occur. Run scenario planning and simulation programs regularly.

STEP 4: UNCOUPLE YOUR OPPORTUNITIES FROM THREATSNow it's time to identify points in the system to intervene in and shift probabilities in your favor. There are four steps to shift probabilities in your favor:

1. Identify trigger pointsTrigger points are interactions where a small amount of effort can release a large amount of pent-up energy. Creating mechanisms to nudge systems at trigger points is a powerful way to shape change in your favor. The most successful businesses see these pent-up forces and prepare themselves to ride the wave when it unleashes. Use the VEGAS framework to systematically identify trigger points:

2. Visibility — Is it easy to identify problems in the system?

3. Effect — What mundane events can cause second-order effects that lead to failure?
4. Gestation — What is the time gap between the action and its result?
5. Accessibility — Do you have access to the vulnerable points to fix them?

6. Security — How likely are critical components to fail? What self-correction or recovery mechanisms exist?

7. Evaluate your optionsMake a list of interventions to mitigate threats and create opportunities. Cluster them into low, medium and high impact interventions.

8. Build Separate Threat and Opportunity DashboardsFor both dashboards, the first column lists FOES, Financial, Operational, External and Strategic events that could impact your organization. The second column identifies undercurrents that would drive these FOES risks. The remaining columns assess the impact of these issues over 3,6,12, and 24 months. The bottom of the dashboard has triggers to watch out for.

9. Decide what actions to take. There are four actions that you can take to shift the impact of uncertainties:

10. Accept

11. Avoid
12. Mitigate
13. Experiment to fuel innovation

For each critical threat and opportunity, analyze which approach is suitable.

STEP 5: EXPERIMENTWhen you can't avoid, accept or mitigate risk, you need to experiment to innovate your way around the challenge. Make failure cheap so that your team carries out more small-scale experiments.

1. Plan your experiments like an investment portfolioExperiments are investments, and organizations must adopt a portfolio approach as a strategic response to FOES of growth. Experiments fall into three categories:

2. Growth Experiments — They enable your 100X outcome. They have a high risk of failure but promise disproportionate payoffs.

3. Sustaining Experiments — These experiments protect your existing interests and reduce poor outcomes.
4. Insurance Experiments — These improve organizational resilience to negative scenarios.

Balance the efforts you spend pursuing, growing, sustaining and insurance innovations. The rapid pace of change requires us to run experiments in parallel. For each experiment, consider the timing and sequencing that will make it effective.

1. Structure your portfolio to maximize payoffs. Shortlist experiments that you can take advantage of if they are successful. Do the experiments that will provide the most important information first, even if they are highly risky. Finally, maintain a repertoire of experiments that you can perform if external conditions change or your experiment portfolio behaves differently than expected.

2. Create clear rules to finance experimentsWhen you set a budget, consider each experiment's impact on the overall portfolio's long-term optionality, near-term impact, resilience and performance. Your financial goal must be to manage overall project risk instead of individual experiment risks. Create a spread of experiments with high and low impact and high and low success rates. Have clear rules for when to initiate experiments and when to stop them.

3. Institutionalize the use of experiment portfoliosIncentivize smart failure to encourage genuinely innovative experiments and not safe ones. Reward employees who deliver quality experiments instead of only those whose experiments were successful. Good experiments are those that help the organization learn more about the future. Protect team members who perform experiments within a defined risk band.

Bigger and more frequent rogue waves are not only threats. They also contain within themselves immense opportunities. With the proper frameworks and organizational processes, you can be prepared to take advantage of the next rogue wave as Amazon did.

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By: Richard Rumelt4,500 WORDS (13 PAGES)SYNOPSIS Why do so many organizations get strategy wrong? Even some of the world’s biggest organizations do strategy poorly, and incorrectly credit their success to their personal decision-making skill. Leaders often do what makes them feel good, whether it helps their company or not.

We read the book Good Strategy, Bad Strategy by Richard Rumelt and will break down the key insights between good and bad strategy. The “kernel” of good strategy contains three main components: diagnosis of a problem; an appropriate guiding policy; and a set of coherent actions. If each stage isn’t treated carefully, bad strategy is inevitable.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. In its simplest form, good strategy answers three very simple questions: ‘why’ (diagnosis of the problem), ‘what’ (guiding policy for action), and ‘how’ (the actionable objectives themselves). Rumelt calls this the kernel of good strategy. 2. A good guiding policy tackles the obstacles identified in the diagnosis of a problem through the creation of advantage or the collection from sources of advantage. Importantly, not all advantage is competitive (in the case of nonprofits or public-policy strategy). 3. Action points are vital to any good strategy. Companies often lack action points. With Bush in Iraq, the goal was to invade and conquer. The goals were freedom, democracy, and reconstruction; but the strategy was not implemented until General David Petraeus laid out what must be done to counter an insurgence (something that had not been considered before). General Petraeus’ impact was great. This example demonstrates why coherent action must be central to any strategy. “A good strategy does more than urge us forward toward a goal or vision,” Rumelt writes. “A good strategy honestly acknowledges the challenges being faced and provides an approach to overcoming them.” 4. There are two main types of bad strategic objectives: 1) dog’s-dinner objectives, which often constitute a “scrambled mess of things to accomplish” and tend to come from large meetings; and 2) blue-sky objectives. “A blue-sky objective is usually a simple restatement of the desired state of affairs or of the challenge,” Rumelt writes. “It skips over the annoying fact that no one has a clue as to how to get there.” 5. The example of when a doctor treats a patient can be used to guide good strategy. It consists of three stages: diagnosis of the problem, e.g. name the disease or pathology; the therapeutic approach taken then becomes the doctor’s guiding policy; and finally, the doctor’s prescriptions for diet, therapy and medication are the coherent actions to be taken. 6. “The simplest business strategy is to use knowledge gleaned by sales and marketing specialists to affect capacity expansion or product design decisions—coordination across functions and knowledge bases” – Richard Rumelt 7. Operation Desert Storm in 1991 was the US’s counter-attack to Iraq’s invasion of Kuwait. General Schwarzkopf received adulation for his strategy to misdirect Saddam Hussein’s attention while he flanked his forces with a so-called ‘left hook’. However, Rumelt points out that the strategy is foreshadowed in the US Army’s own field manual titled ‘Operations’. What was seen as a brilliant strategy by many in the US media and general population was sound, simple action based on the US’s own field manuals. Often this is the essence of good strategy: simple in concept, focused on execution. 8. There are two essential, frequently overlooked sources of advantage for organizations: 1) A coherent strategy—objectives that don’t conflict with and do relate closely to one another. “A good strategy doesn’t just draw on existing strength; it creates strength through the coherence of its design,” which creates advantage; and 2) The creation of new strengths through subtle shifts in viewpoint: “An insightful reframing of a competitive situation can create whole new patterns of advantage and weakness.” 9. The tale of David versus Goliath can reveal that what often appears a weakness at first may in fact be a strength in certain situations. Through the list of David’s strengths and weaknesses, one might presume his diminutive size is a weakness against the much stronger, much bigger Goliath, yet it was David’s quick movement and skill with a slingshot, aimed at an uncovered part of Goliath’s body, that secured his victory. Good strategy often lies in a leader’s ability to see what others cannot. When such insight is realized, a reframe of a situation can enable fresh ways to think that can lead to unique approaches. 10. Proximate objectives are central to any strategy. John F. Kennedy’s goal to put a man on the moon by the end of the 1960s, while often touted as a lofty, audacious goal, was in fact a carefully chosen proximate objective—that is, one that the administration felt was within reach. The more dynamic and complex a situation, the more proximate objectives should be, because despite what many strategy writers espouse, your foresight grows worse as the complexity of a situation increases. 11. There are four major hallmarks of bad strategy: 1) fluff, aka “a form of gibberish masquerading as strategic concepts or arguments”; 2) a failure to face the challenge; 3) mistaking goals for strategy, and 4) bad strategic objectives. 12. Chain-link systems, beware: performance is limited by its weakest chain link. When there is a weak link, a chain is not made stronger by strengthening the other links. General Motors suffered from chain-link problems between 1980-2008. If knobs still fall off automobile dashboards and door panels continue to rattle, improving transmission will do little good. Improving fit and finish will do little good as long as the designers make sub-par designs. These are examples of chain-link systems: in many business situations, the whole is only as good as its weakest link. It is important for leaders to identify and address the worst problems afflicting a company. 13. Chain-link systems, rejoice: Conversely, “the excellence achieved by a well-managed chain-link system is difficult to replicate,” as can be seen with IKEA. The source of IKEA’s dominance is in the integrated coordination of its policies, including giant retail stores in suburban neighborhoods (with free parking), catalogs that effectively replace a sales force, flat-pack furniture designs that reduce shipping and storage costs, and so on. To compete with IKEA, a company must implement each stage of the process, because each link complements the next. 14. “Doing strategy is more like designing a high-performance aircraft than deciding which forklift truck to buy or how large to build a new factory. When someone says, ‘Managers are decision-makers,’ they are not talking about master strategists, for a master strategist is a designer.” Rumelt emphasizes the importance of creative design when putting together a strategy. 15. Focused strategy: Crown Cork & Seal was a metal-can maker that despite its smaller size and higher costs compared to competitors, made far more money than any of them. This was because all of Crown’s policies were coherent, focused on the goal of retaining the company’s bargaining power. While its competitors supplied all customers (thus intensifying competition between said suppliers), Crown’s policies were focused on short runs and remained adaptable to the sporadic customer. Because to shift production is expensive, most suppliers don’t do it. But this is how Crown managed to succeed: it retained its leverage where others did not. 16. The fetishization of growth: When Crown Cork & Seal’s new CEO took over, he had ambitious plans to grow the business. During the ten years before Avery became CEO (1980-1989), revenues only grew at 3.1% each year. Crucially, however, it yielded an average return for shareholders of 18.5%. After Avery took over, Crown’s rise in sales revenue was accompanied by a dramatic fall in return on capital (the ratio of profit to investments)—below 5%. Before he took over that figure was 15.3%. Performance had deteriorated because the new CEO chased growth for its own sake. 17. Inertia and entropy: The inertia of Blockbuster’s failure to give up on its retail stores meant that Netflix surpassed it and is now an industry leader. “Understanding the inertia of rivals may be just as vital as understanding your own strengths. … An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.” Organizational inertia usually falls into one of three categories: 1) the inertia of routine; 2) cultural inertia, and 3) inertia by proxy. 18. Don’t accept the first convenient solution to a problem: 1) consider the kernel of good strategy, as discussed above: diagnosis, guiding policy, and coherent action; 2) approach a problem with a ‘problem-solution’ view, simplify the process with the identification of a problem the organization hopes to solve; and 3) use the ‘create-destroy’ approach, which includes the attempt to destroy one’s own ideas and solutions to test their robustness. (Rumelt recommends execs to imagine a panel of experts that scrutinizes your proposed solution.) 19. Since Jen-Hsun Huang became the CEO of Nvidia in 1999, the company’s shares increased 21-fold, which outperformed Apple over the next decade-plus. Nvidia’s explosion is an example of great strategy, based on Rumelt’s ‘kernel’ approach: the company diagnosed the problem, namely that 3D-graphics cards were the future; its guiding policy was the shift from a multi-media approach to a focus on improved graphics for PCs by the development of superior GPUs, and its action points were coherent and focused. More detail on this example can be found below. 20. Execs should utilize leverage. Rumelt says leverage is the focus of attention and resources at the right moment towards a pivotal objective. There are three main considerations in the process of strategic leverage: 1) anticipation of challenges and opportunities, which often comes from the analysis of competitor behavior and market forces; 2) pivot points from which to base strategic focus, as in sources of strength for an organization relative to alternative approaches; and 3) the concentration of resources toward said points.

SUMMARYUseless ‘strategy’ has pervaded the psyche of organizations worldwide. Why? Because good strategy is hard work. From redundant vision-building to lazy law-of-attraction thinking, people do what makes them feel good, whether it helps their company or not. It’s easy to declare wishfully; it’s much harder to put together a plan to ensure execs’ wishes are granted.

Good strategy cannot be stumbled upon by chance. Even some of the world’s biggest organizations do strategy poorly, and incorrectly owe their success to their decision-making skill. Conversely, many organizations do strategy expertly, from which much can be learned. The ‘kernel’ of good strategy contains three main components: diagnosis of a problem; an appropriate guiding policy; and a set of coherent actions. If each stage isn’t treated carefully, bad strategy is inevitable.

A paragon of organizational strategy, Richard Rumelt walks readers around the many landmines lying in wait should leaders misstep in their strategy. At its core, strategy is the identification of critical factors in a situation, then the skillful design of coordinated actions to deal with said factors. It requires awareness of one’s resources and capabilities and a sharp understanding of one’s industry and its surrounding space. Though there is much to learn, fundamentally strategy is very difficult leg work, not easily replaced with template-style vision building or any other form of pseudo-strategy.

Some ground rulesRumelt first dispels what some believe constitutes strategy. It has little to do with ambition, leadership, vision or the economic logic of competition. The core of strategy work is “discovering the critical factors of a situation and designing a way of coordinating and focusing actions to deal with those factors.”

Bad strategy is not only the absence of good strategy; bad strategy is itself a hodgepodge of misunderstood or misapplied concepts. Leaders often “mistakenly [treat] strategy work as an exercise into set goals rather than solve problems.”

Steve Jobs and AppleWhen Steve Jobs first returned to Apple, he didn’t do much that was remarkable. Given Apple’s shrinking market share (about 4% of the PC market when he rejoined), he did what any right-thinking strategist would do, according to Rumelt: he made a series of shrewd, necessary business choices that made sense.

Jobs made (necessary) cuts across the board, simplifying and focusing the company’s processes. Jobs took ‘focused action’—something that is all too rare in business, writes Rumelt. He first steadied the ship and then stood poised and waited for the perfect opportunity to explode the company into life again.

There were many technologies on the brink of launch, and Jobs knew that. Despite Windows-Intel’s seemingly insurmountable market lead, Jobs knew that if he made the right decision at the right time, he had a chance to skyrocket Apple to the top. So he steadied the ship, simplified product selection, made tough but necessary decisions, and waited.

Jobs’ strategy was focused, self-aware, and action-oriented throughout. “Good strategy itself is unexpected,” Rumelt writes.

The Jobs formulaJobs has an amusing, and incredibly simple, approach to business, which Rumelt, a foremost academic of organizational strategy, loves. It has four stages:

1) imagine a product that is “insanely great”

2) assemble a small team of the very best engineers and designers in the world

3) make the product visually stunning and easy to use, pouring innovation into the user interface

4) tell the world how cool and trendy the product is with innovative advertising.

Often the greatest business leaders, like Jobs, or Elon Musk, have simple approaches to strategy, even if technically they are complex. “Good strategies are usually ‘corner solutions,’” Rumelt writes. “That is, they emphasize focus over compromise.”

The curious case of Wal-Mart“Half of what alert [MBA students] learn in a strategy exercise is to consider the competition even when no one tells you to do it in advance,” Rumelt writes as he details the case of Wal-Mart in 1986. Rumelt’s students would theorize why Wal-Mart did so well (computerised warehousing and trucking system, non-union, low admin expenses and so on), but no one considered why, if this was so simple, competitors didn’t copy the formula. “Looking just at the actions of a winning firm, you see only part of the picture.”

Kmart was the most notable failure. Eventually filing for bankruptcy in 2002, they focused on international expansion throughout the ‘70s and ‘80s, “ignoring Wal-Mart’s innovations in logistics and its growing dominance of small-town discounting.”

Overall, it is the coherence of structure, policy, and actions that made Wal-Mart so difficult to compete with. Isolated examples, such as the introduction of barcode scanners at checkout, are not enough; Kmart also had barcode scanners in the early ‘80s. The difference between it and Wal-Mart is coherence, a total strategy as opposed to “some imagined ‘best practice’ form. … The network, not the store, became Wal-Mart’s basic unit of management.”

Competitors must integrate the entire design of Wal-Mart’s strategy to emulate its success. It is the coherence of its strategy that buttresses its advantage.

Bad strategyThere is a difference between what Rumelt in 2007 coined ‘bad strategy’ and no strategy at all. There are four major hallmarks of bad strategy:

Fluff is “a form of gibberish masquerading as strategic concepts or arguments. It uses … words that are inflated and unnecessarily abstruse and apparently esoteric concepts to create the illusion of high-level thinking.”

A humorous example of fluff in business, the likes of which are to be avoided at all costs: “Our fundamental strategy is one of customer-centric intermediation” – a major retail bank that Rumelt worked with as a consultant. In other words, its fundamental strategy was to be a bank.

Failure to face the challengeBad strategy fails to recognize or define the challenge, which makes overcoming it near impossible. DARPA, a US military research organization, explicitly outlines what governs its actions (a good example):

• “DARPA focuses its investments on this ‘DARPA-hard’ niche—a set of technical challenges that, if solved, will be of enormous benefit to US national security even if the risk of technical failure is high”
• DARPA changes its program managers every four to six years to limit ‘empire building’ and so that workers challenge previously held modes of operation

On this, Rumelt writes: “DARPA’s strategy is more than a general direction. It includes specific policies that guide its everyday actions.” DARPA has led to advancements in various fields, including stealth technology, GPS, nanotechnology, and much more.

Don’t mistake goals for strategyStatement of goals is not a strategy; a bad strategy often contains no action points.

Cookie-cutter annual ‘strategic planning’ accounts for most of corporate ‘strategy’: “Importantly, opportunities, challenges, and changes don’t come along in nice annual packages. The need for true strategy work is episodic, not necessarily annual.”

Bad strategic objectives: Strategic objectives must help an organization reach its desired end. Bad strategic objectives often fail to address critical issues or are impracticable. Rumelt suggests using the following definitions:

Goal: a word used to express overall values and desire. For example: The United States’ foreign-policy goals of freedom, justice, and democracy

Objective: used to denote specific operational targets. For example: defeat the Taliban, rebuild infrastructure

Chen Brothers: Good goals plus good objectivesChen Brothers, a distributor of specialty foods, was under threat by the growth of Whole Foods. Whole Foods was applying pressure on the smaller stores that Chen Brothers supplied.

Chen Brothers’ stated goals were to 1) Grow profit; 2) be a good place to work; 3) be seen as the go-to distributor of organic foods.

Chen Brothers’ stated objectives were to first categorize customers into three tiers; then, the most important objectives for each tier were as follows: the Top tier was to achieve shelf-space dominance, the middle tier was promotional parity or better, and the lowest tier was to grow market penetration.

But Chen Brothers spotted the threat of Whole Foods and adapted. The company kept its goals the same but adjusted its strategic objectives. Its strategy became the linking together of the various smaller stores that Chen Brothers supplied to, formulating a common brand that would be sold through Whole Foods. It formulated a dedicated Whole Foods team, combining production, marketing, advertising, financial expertise, and distribution under one roof.

Chen Brothers were successful in their attempts and were right about Whole Foods eventually dominating the specialty food market.

Two key takeaways from this example:

• Sharp focus on one or two crucial objectives is vital. In this case, the objective was adapted; the original strategy of distributing directly to merchants was no longer tenable given Whole Foods’ ascendance. “Management had skilfully designed a ‘way forward’ that concentrated corporate attention on one or two important objectives,” Rumelt writes.
• Industry-level awareness is essential. Chen Brothers identified Whole Foods as a force worthy of altering its own course. Whole Foods has stayed; Chen Brothers was right to adapt. Knowledge of your industry is a must for identifying opportunities and threats and adapting your strategy accordingly.

Common pathways to bad strategyThe three most common pathways to bad strategy begin with the unwillingness or inability to choose. In short, strategy decisions are difficult to make. Having the conviction and the foresight to make big, tough decisions is a necessary step when putting together a strategy.

Second, a template style strategy that includes fill-in-the-blanks template ideas like “The Vision”, “The Mission”, “The Values” and “The Strategies.” This alone is not an actual “strategy.”

Third, there is now a fetishization of quasi-religious, law-of-attraction thought in the US that has its roots in 19th-century Protestant Christian individualism. This “new thought” has had a knock-on impact on business strategy, which often leads to a shallow motivational mantra rather than a strategy for success.

The kernel of good strategyRumelt defines the ‘kernel’ of good strategy as “an effective mixture of thought and action with a basic underlying structure.” It contains three elements: 1) A diagnosis, 2) a guiding policy, and 3) coherent actions.

A good “guiding policy” sets the stage for focused action. For example, George Kennan was the American diplomat in the USSR for more than a decade. He witnessed first-hand much of the terror for which the USSR was responsible. In 1946, he wrote the so-called ‘long telegram’, which explored the nature of Soviet ideology and power. He surmised that the Soviets positioned themselves explicitly against capitalism, and as such, Kennan’s proposal was to treat the Soviet ideology as a virus that must be contained until it dies out.

This was a sliding-doors moment in foreign policy. If the challenge was diagnosed another way —for example, if the Soviet Union were enticed into the world community through a policy of engagement as opposed to containment— the Vietnam War, Berlin Airlift, Korean War, and many other horrific events might not have happened. Kennan’s framing of the problem was absent of actionable objectives, and because of that, future American leaders struggled to turn the guiding policy into action.

A guiding policy can be an advantage in and of itself if it anticipates actions and reactions of others, reduces the complexity and ambiguity of a situation, by exploiting leverage, and by creating policies and actions that are coherent.

Nvidia: A+ strategyNvidia, a designer of 3D-graphics chips, had a rapid rise to the top, passing apparently stronger firms, including Intel, along the way in the 3D-graphics market. Since Jen-Hsun Huang became CEO in 1999 the company’s shares increased 21-fold, even beating Apple during that same period.

Diagnosis: recognizing that 3D-graphics chips were the future of computing (given the almost infinite demand for graphics improvement that came from PC gaming).

Guiding policy: the shift from a holistic multi-media approach to a sharp focus on improved graphics for PCs through the development of superior graphics processing units (GPUs).

Action points: 1) The establishment of three separate development teams; 2) reducing the chance of delays in production/design by investing heavily in specific design simulation processes; 3) reducing process delays involving the lack of control over driver production, by developing a unified driver architecture (UDA). All Nvidia chips would use the same downloadable driver software, making everything run more smoothly at all stages (for both Nvidia and its customers).

Nvidia grew at a rate of about 67% per year from 2001 to 2007 and circumnavigated the design and production bottlenecks faced by companies like Intel. Despite similar growth to Nvidia during that period, Intel had the effects of its performance increases dulled by process issues. Nvidia, meanwhile, won consumers over with more frequent top-tier GPUs.

Where competitors like Silicon Graphics spread themselves too thin, Nvidia’s strategy during that time was intuitive, focused, and executed well.

Proximate objectivesThe Kennedy administration was careful not to claim the US would beat the Soviet Union to put up a manned orbiting lab, or an unmanned vehicle on the moon; these feats, the US concluded, would not be achieved before the Soviets did so because of the latter’s superiority in heavy-lift rockets. Kennedy chose his goal of putting a crew on the moon very carefully, because he knew that it was not only possible but probable that they would beat the Soviet Union: “…the moon landing would require much larger rockets than either nation possessed, giving the United States an advantage because of its larger base of resources.”

It is vital for execs to choose proximate objectives.

Design novel strategyWhen you design a strategy, business leaders should consider three key stages:

1) Premeditation

2) The anticipation of others’ behavior

3) The purposeful design of coordinated actions.

Many great strategies are more like bespoke designs than decisions. Seeing strategy as a ‘choice’ or a ‘decision’ may in fact be a poor reflection of its true nature; often leaders are faced with unique challenges, to which they are forced to formulate a novel response.

Sometimes an early advantage, such as Xerox’s plain-paper-copying patent, can lead to inertia. Such a big market lead can lead to complacency when management doesn’t believe it needs to stay abreast of new developments.

Focus Applied to strategy, ‘focus’ has two meanings: first, it denotes the coordination of policies that produces extra power through interactions and overlapping effects. Second, as introduced by Michael Porter in Competitive Strategy, it denotes the application of that power to the right target.

Use advantageBusinesses should strive to have a competitive advantage, which can come in two ways. It can either be a cost advantage, or it can deliver more perceived value than that of competitors. For an advantage to be sustainable, it must be difficult or out of reach to duplicate it.

Apple incentivizes users to remain in its ecosystem: iMessage for Apple devices, unique charger ports which only work on Apple devices, and so on. These ‘network effects’ increase the customers’ willingness to pay, and thus create an advantage for Apple. If an IT company pitches to hundreds of businesses that its new product will offer the recipient a ‘competitive advantage’, they are misunderstanding what competitive advantage means; this is a contradiction in terms, because if that many companies had said product it would not be a competitive advantage.

Interesting advantageThe relationship between advantage and profitability is often dynamic; an advantage does not always necessarily result in greater profitability. To increase value requires a strategy for progress on at least one of four different fronts:

• Deepen advantages, which widens the gap between buyer value and cost through the increase of value to buyers, reduction of costs, or both.
• Broaden the extent of advantages, which brings an advantage into new fields and new competitions, though this needs to be done skillfully. Develop knowledge over time and it may open up new opportunities for a business, but some extensions, for example, those based on customer beliefs, like brand names or reputation, might be diluted by careless extension.
• Create higher demand for advantaged products or services.
• Strengthen the isolating mechanisms that block easy replication and imitation by competitors.

Use dynamicsThe dynamics of change are important to consider when formulating strategy. Sensing waves of change in society, or in a given industry, is crucial.

As computer technology progressed in the 20th century, the focus shifted from interconnected individual computer systems—that were made and maintained by companies like IBM and DEC who specialized in integrated systems—to a series of component parts driven by the microprocessor. Now each part was ‘smarter’, and didn’t require expertise of holistic integration. The industry had shifted, and IBM had to readjust.

Here are five ‘guideposts’ to read the shifting dynamics of an industry:

• Raise fixed costs: the simplest form of transition is triggered by a substantial increase in fixed costs, such as when traditional pistons were replaced by more advanced jet engines, which leaves but a few competitors left able to pay for the added cost
• Deregulation: this can enable previously stretched competitors to become more involved with profit-making
• Predictable biases: biases include an inability to predict a dip in sales after continuously rising all-time highs; an overprediction of current companies and business models; and the advice from consultants and analysts that businesses should copy whatever the current largest player does
• Incumbent responses: expect resistance from incumbent companies when dynamics start to shift
• Attractor states: this provides a sense of direction for the future evolution of an industry, but such attractor states might not come to be.

Inertia and entropyInertia and entropy, defined by Rumelt as resistance to change, are responsible for much bad strategy. The inertia of Blockbuster as it failed to abandon its retail stores meant that Netflix surpassed it and is now an industry leader. Understand the inertia of rivals, as it is vital as understanding your own strengths. As Rumelt wrote, “An organization’s greatest challenge may not be external threats or opportunities, but instead the effects of entropy and inertia.”

Organizational inertia usually falls into one of three categories: 1) the inertia of routine; 2) cultural inertia, and 3) inertia by proxy.

Keep your headIf you can maintain composure and ‘keep your head’, even while those around you lose theirs, you are at a great advantage, Rumelt writes, who warns not to put blind faith in the stock market. He uses the example of the telecommunications industry and details a time around the beginning of the 21st century when everybody else had blind faith in the company Global Crossing, whose stock was grossly overvalued given the dynamics of its industry. This included the ease of entry for competitors, as it was not as hard as it seemed for others to do what Global Crossing was doing. In 2001, the company filed for bankruptcy amid an inability to keep up with bandwidth capacity — something that was clear to anyone that had looked close enough. Despite what everyone else thinks, conduct your own analyses, and do not be swayed by social herding. Keep your head.

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By: Clayton Christenson4,327 WORDS (15 PAGES)SYNOPSIS Management theories can help us find the right balance between our careers, families and personal priorities. Think of your career and personal life as a resource allocation problem. You have limited time, energy, wealth and talent to grow several "businesses", like your work, relationships with your family and your community. Unless you manage your priorities mindfully, your time and energy will be consumed in firefighting the most urgent priorities.

We read the book How Will You Measure Your Life by Clayton Christenson and will break down Christensen’s top strategies for how to navigate all these competing priorities and come out ahead with a more fulfilling, balanced, and purpose-driven life.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. Employees are not motivated by financial incentives. Frederick Herzberg's Two Factor theory says that compensation, status, job security and work conditions are Hygiene Factors necessary to not hate your job. But job fulfillment comes from Motivators like challenging work, recognition, responsibility and personal growth. Find a career that has true motivators and satisfies key hygiene factors. 2. Careers that are rich in motivators are highly correlated with financial rewards. The reverse does not hold. People who find a job that is meaningful to them have a distinct career advantage. They can put their best effort every day and soon become very good at what they do. Therefore they naturally gain access to hygiene factors like good compensation, status, job security and good work conditions. 3. Professor Henry Mintzberg says that there are two ways in which strategy is formed. Deliberate Strategy arises from conscious, planned action based on anticipated opportunities. Emergent Strategy emerges from day-to-day decisions to pursue anticipated opportunities and resolve unforeseen problems. If company leaders make an explicit commitment to follow the Emergent Strategy, it becomes their new Deliberate Strategy. 4. Many high achievers believe that they must have a deliberate strategy for their career and make detailed five-year plans. But this makes sense only when your current career trajectory provides a good mix of hygiene and motivation factors. If you have not found this balance so far, adopt an Emergent Strategy. Experiment and iterate fast until you find a trajectory that works. Then flip to a deliberate strategy. 5. New ventures mostly fail because of initial faulty assumptions that were left unexamined. Ian Macmillan and Rita McGrath's Discovery Driven Planning approach avoids this trap. Project teams compile a list of assumptions made and rank them by importance and degree of uncertainty. The team then finds ways to quickly test and validate the most critical and least uncertain assumptions. Only then are investments made. 6. Unvalidated assumptions made Disney's Paris theme-park a billion-dollar failure. Disney built infrastructure for 33 million guest days per year because they projected 11 million visitors, and other park data showed that visitors stayed for three days. Disney Paris did have 11 million visitors, but they stayed for just one day. The unvalidated number of days assumption was based on other parks with nearly 45 rides. Paris had only 15 rides. 7. Discovery Driven Planning is an effective way to avoid career missteps and validate your most important assumptions. Systematically list the assumptions that must hold for you to succeed professionally and find job satisfaction in the role. Rank assumptions in order of importance and find inexpensive ways to quickly validate if they hold before you commit. One of Christenson's students, who wanted to contribute to developing countries, joined a VC firm that promised to invest 20% in emerging markets. But she worked solely on American investments for years until she quit in frustration. A simple discovery-driven approach to validate if the company had allocated capital to and had dedicated partners for developing markets could have avoided this career misstep. 8. Your strategy for your career and personal life can be framed as a resource allocation problem. You have limited time, energy, wealth and talent to grow several "businesses" like work, relationship with your spouse, children and community. People ask for your time and energy every day. Unless you manage priorities mindfully, your time and energy will be consumed in firefighting the most urgent priorities. 9. Your actual strategy is not what you think it is. Your strategy is created through hundreds of everyday decisions about how you spend your time, energy, money and attention. To make sure if you are headed in the direction you want, watch where your resources flow. If they don't support your strategy, it means you are not implementing your strategy at all. Professor Amar Bhide's work shows that 93 percent of all successful companies had to abandon their original strategy and pivot. When the right strategy is not evident in the initial stages of a new business, investors must be impatient for profit and patient with growth. Once iteration reveals a viable strategy, investors must then be impatient for growth and patient for profit. 10. Businesses that fail to understand that the best time to invest in future growth engines is when their core business grows find themselves without a new revenue source when their core business slows down. A new business takes years of patient nurturing. Similarly, high potential professionals mistakenly believe that they invest in their careers first and spend time with family in later years. But the only way to have those relationships bear fruit later is to invest long before you need them. Steve always wanted to build his own business. He worked long hours every day, but family and friends were initially supportive. But soon, Steve's meager investments of time in his family ultimately took its toll. His marriage fell apart just as his business picked up, and when he needed the support of friends and siblings, he found himself alone. They no longer felt close to him. 11. Your availability during your child's format years matters. Researchers Todd Risley and Betty Hart found a strong correlation between the number of words children heard in the first 30 months and their later performance on grammar and comprehension tests. Children whose parents speak to them regularly have an incalculable cognitive advantage. They enter school with solid language and cognitive abilities, advantages that continue throughout education. 12. The Jobs to be Done framework helps companies identify what features customers truly want from their product. Job to be Done is the task a customer wants to accomplish. The customer "hires" a product only when it can do that job. A product that does not accomplish that will not be purchased irrespective of many other attractive features. Use the Jobs To Be Done framework to understand what's most important for your partner. Just like companies try to understand what jobs they perform for a customer, figure out what Jobs to be Done your partner wants you to fulfill in their life. The jobs your partner wants to get done through you are often very different from the jobs you think they want from you. 13. Organizational capabilities, which determine what a company can or cannot do, fall into three buckets: resources, processes and priorities. Resources are people, equipment, product designs, brands, cash and relationships with suppliers, distributors and customers. Processes are the ways in which employees interact, coordinate, communicate and make decisions to transform resources into valuable products. Priorities define how a company makes decisions. 14. Use the Capabilities framework to plan what resources, processes and priorities your children must develop to face future challenges. A child's resources include time, energy, knowledge, talents and relationships. Processes include the way he thinks, questions collaborates with others and solves problems. Priorities will determine how the child makes choices. Resources are what he uses to do it, processes are how he does it, and priorities are why he does it. 15. Priorities are the single most important capability we can give our children as it impacts what children put first in their lives. When parents outsource their role to classes of different kinds where they are not involved, they lose valuable opportunities to help nurture them into the kind of adults you respect. Children will learn priorities and values from other adults whom the parents do not know or respect. 16. The way companies hire candidates is broken. When Christensen surveyed over 1000 senior leaders on recruitment choices, 25% of hires were mistakes. Professor Morgan McCall offers a radically different approach. People succeed in specific roles not because they have credentials but because they have gone through the required courses in the school of experience to develop the right processes. 17. Nolan Archibald took a process-based unconventional path to become the youngest ever CEO of a Fortune 500 company. Instead of highly prestigious roles, Archibald deliberately chose jobs that would give him the required courses in the school of experience to become a successful CEO. After business school, he turned down consulting offers to operate an Asbestos Mine in Northern Quebec as he wanted to learn how to lead a team under challenging conditions. At the age of 42, he became the CEO of Black and Decker and stayed in that position for 24 years. 18. Identify what courses of experience your children will have to undergo to develop processes necessary to succeed and engineer opportunities to develop those capabilities. Children learn processes when there are challenged to solve novel complex problems by themselves. Encourage them to stretch for out-of-reach goals and help them pick themselves up and try again when they fail. Culture is the unique combination of priorities and processes within an organization. Culture in any organization is formed through repetition. Every time employees tackle a problem, they also learn what the organization's true priorities are and the processes to execute them. 19. Build a robust family culture to shape your child's priorities and ensure they make the right choices in life. Actively choose which priorities matter to your family and engineer the culture that supports these values. Design and repeat activities that reinforce family priorities. Repeated activities lead to a clear sense of what the family prioritizes, how they do things and what really matters. Constant vigilance is required to shape a healthy family culture. For every action a family member takes, imagine it will happen all the time and ask if it is consistent with your collective priorities. A few repetitions left unchecked quickly become the de-facto family culture which is difficult to change. Remember, culture emerges from repeated behavior. 20. A company's purpose has three critical parts - likeness, commitment and metrics. A likeness is what leaders want an enterprise to become. Executives and employees must have a deep commitment, almost a conversion, to the likeness to avoid compromises when difficult situations arise. Finally, metrics allow executives to measure progress, calibrate work and move in a coherent direction. Take time out to think and define your purpose through the likeness, commitment and metrics framework. In the long run, its benefits will outstrip any domain knowledge or expertise you may build because you will apply it multiple times every day for the rest of your life. Use the likeness, commitment and metric framework to define your purpose and live it every day.

SUMMARYChristensen offers concrete theories from the world of management that can help you find direction and purpose in your professional and personal life. They have been successfully used both in organizations and in the personal lives of many of Christensen's students. Career fulfillment comes not from salary and status but from True Motivators like challenging work, personal growth and responsibility. A five-year plan only makes sense if you have a career with True Motivators. Otherwise, adopt an Emergent Strategy of quick experiments and pivots. For a healthy relationship, identify your partner's core "Job to be Done" from you and do it well consistently. To ensure that your child makes good life decisions, create a family culture that prioritizes core values and reinforces them through shared activities.

CAREER Find your True Motivators

Frederick Herzberg's Two Factor theory says that incentives are not the same as motivation. Hygiene factors include status, compensation, job security and work conditions. While poor hygiene factors cause dissatisfaction, an abundance of them does not result in employee satisfaction. Motivators are factors like personal growth, challenging work, responsibility and recognition that cause employees to honestly care about their work.

Many professionals make the mistake of choosing careers based solely on hygiene factors like salary and position. But over time, professionals find themselves uninspired by their work. But as lifestyles have soared with rising incomes, they find it difficult to cut down and move into more fulfilling careers.

It's essential to address the hygiene factors in your career, but they won't make you love your job. Look for meaningful opportunities that allow you to learn new things, succeed, and shoulder more responsibility. Further, when you love what you do, you will put in your best effort every day, and that will make you good at what you do, which means you will get paid well. Interestingly, motivators are stable across professions and over time.

Balance Structure and SerendipityProfessor Henry Minzberg's work shows that strategy emerges from two different sources. When organizations make plans based on anticipated opportunities, they are pursuing a Deliberate Strategy. But often, an Emergent Strategy emerges from myriad day-to-day decisions to pursue unanticipated opportunities or resolve unexpected challenges. If the company makes a clear decision to pursue the Emergent Strategy, it becomes the new Deliberate Strategy.

In your career, you are constantly navigating a path between deliberate strategy and unanticipated alternatives. Many young professionals believe that they must have a deliberate strategy approach and plan their career trajectories for the next five years. But this makes sense only if you have found a career trajectory that provides motivators and hygiene factors. But if you haven't found a way to maximize your motivators and satisfy the hygiene factors, adopt an Emergent Strategy through constant experimentation and modifications until you find the right trajectory.

Discovery Driven Planning for CareersCompanies invest massive amounts of capital based on initial projections but often don't test whether the initial projections are accurate. Only when the investments are made and the rubber hits the road does the organization realize which assumptions are valid and which ones are mistaken. To avoid this situation, Ian MacMillan and Rita McGrath propose a Discovery Driven Planning approach. Project teams compile a list of assumptions and rank them in order of highest importance and least certainty. Then the team is asked to find cheap ways to quickly validate critical assumptions.

Like investments, it is often too easy to go too far down a career path before you realize that the choice isn't working out for you. The Discovery Driven Planning approach is a great way to evaluate job opportunities. Ask what assumptions have to hold true for you to succeed and be happy in this role, sort them by importance and uncertainty. Find inexpensive ways to test if they are valid through research about the company, conversations with employees and mentors or even short assignments.

FAMILY AND RELATIONSHIPSTrack your Resource AllocationResource allocation determines which deliberate and emergent initiatives get funded and implemented and which are denied resources. Many companies' decision-making systems are designed to steer resources to initiatives that offer the most tangible and immediate returns. Unfortunately, this shortchanges critical investments in long-term strategies.

Our limited resources like time, energy and wealth are used to grow several "businesses" in our personal lives, including your relationship with your partner, raising children, building careers and contributing to the community. People ask for your time and energy every day. Unless you manage your resources mindfully, your allocation will happen by default and accident. High achievers tend to prioritize activities that yield the most immediate and tangible accomplishments. Many who say that family is essential actually allocate fewer and fewer resources to them. This may initially be tactical, but as it continues, people implement a strategy vastly different from what they intended. Make sure that you are implementing the strategy you care about by tracking the flow of your resources like time, energy and money.

Invest in your Relationships EarlyProfessor Amar Bhide's work shows that 93% of all successful companies had to abandon their original strategy. Therefore, when the winning strategy is unclear, investors need to be patient with growth and impatient for profit. The reverse inevitably results in failure and losses.

The best time to build an alternative growth engine is when the core business is growing. Unfortunately, large companies allocate almost all capital and executive resources to the growing business. When the core business begins to slow, there is no new growth engine ready. It rapidly invests in new ventures and expects them to become huge very fast. Inevitably, as the theory predicts, this ends in a disaster. If a company has ignored investing in new businesses until the time it needs new sources of revenue and profits, it's already too late. It takes years of patient nurturing for a new venture to become a growth engine.

It's easy to revert to a similar bad investment approach in our lives. Many working professionals thrive on the intensity of a demanding job with challenging projects. While family and friends are initially supportive, starving them of resources like attention and energy will soon begin to take its toll. When you need family or friends, they may not be available because you did not invest in these relationships earlier.

When you are getting your career off the ground, you may be tempted to assume you can defer investments in personal relationships. Research by Todd Risley and Betty Hart shows that the number of words parents speak to the child in the first two-and-a-half years has a massive impact on their reading and comprehension skills much later in school. Children of "talkative" parents heard about 48 million words in the first 30 months compared to disadvantaged children who heard only 13 million. Children who have been exposed to early talk have an incalculable cognitive advantage and continue to do well throughout school.

Identify your Job to be DoneCustomers "hire" products because they have jobs to be done. When companies understand the jobs that their customers are attempting to get done and develop products and supportive experiences required, customers will instinctively seek the same product every time the same job occurs in their lives.

There are enormous benefits when you take the time to understand what job you are hired to get done in your relationships. The job you think your partner expects you to do can be fundamentally different from what you think they expect you to do. It's easy to mean well and get it wrong. Couples who are loyal to each other have figured out the jobs their partner needs to get done and do it reliably well.

PARENTINGNever Outsource Core CapabilitiesThere are three components to an organization's capabilities -resources, processes and priorities. Resources include people, cash, equipment, technology, brand and relationships with customers or suppliers. Processes are the ways in which employees work together, interact, communicate and make decisions. Finally, priorities define how a company makes decisions, what it will and will not do. Capabilities are dynamic and built over time.

Companies that end up outsourcing critical capabilities end up outsourcing their future. The American semiconductor industry is a classic example. What began as outsourcing components because they were cheaper to manufacture has ended in outsourcing out of necessity because American companies just don't have the manufacturing capabilities anymore. Critical processes must be kept in-house.

The Capabilities framework is an excellent way to identify what capacities your children need to succeed in the future and find ways to develop them. A child's resources include time, energy, what they know, relationships and talents. Processes are what a child does with the resources they have to accomplish new things. Processes include the way they think, how they question, problem-solving, collaborating with others etc. Finally, a child's priorities will determine how they make decisions in their life. Resources are what a child uses to do things, processes are how they do it, and priorities are why they do it.

A child's self-esteem emerges not from abundant resources but from achieving something when it was difficult to accomplish. Classes provide children with resources like knowledge and skills. However, because they are highly structured, they often don't adequately challenge them to do hard things by themselves and get the opportunity to develop processes that they need to succeed in the future. Self-esteem does not come from abundant resources, it comes from achieving something important when it's hard to do. For the first time in modern economic history, unemployment among young males is higher than almost any other group in America and most developed countries. An entire generation has possibly reached adulthood without any of the critical processes that translate into employment.

Further, when children spend most of their time in activities where their parents are not involved, they learn their values from other adults who are present. As parents outsource more and more of their roles, they lose precious opportunities to develop their child's values.

Plan Courses in the School of ExperienceRecruiters search for candidates whose CVs show consistent success to identify the right fit for a position. However, Christensen's survey of over 1000 executives showed that 25% of hiring choices turned out to be mistakes. Professor Morgan McCall's School of Experience theory explains why. The candidates' skills do not come from stellar credentials but because they have undergone the necessary experiences to succeed in that role. Candidates succeeded when they had previous opportunities to develop the processes necessary for that role. McCall's work prioritizes a candidate's processes over their credentials.

The same principles apply to raising children. We might be tempted to judge parenting success by a stellar resume of accomplishments, but what courses of experience children have gone through matters far more in the long run. Parents can consciously think of what experiences children must undergo to develop critical processes and engineer situations. Putting a child through challenging situations also means that they may fail occasionally. Parents must be comfortable with watching them fail and try again. If children don't get the opportunity to face complex challenges and sometimes fail along the way, they will not get the chance to develop the resilience and processes necessary to succeed in life.

Consciously Design Your Family CultureCulture is the only way to ensure that employees in an organization make decisions consistent with organizational priorities without constant management oversight. Such culture is formed through repetition. Every Time employees solve a problem, they are also learning how that problem should be addressed and the key organizational priorities that make them decide a particular course of action. If a company doesn't explicitly articulate a culture, a culture will still evolve based on ad hoc priorities and decisions. Therefore many companies repeatedly articulate their organizational values and processes and consistently enforce them across all critical decisions.

Every family must choose a set of priorities and values that are important to them and engineer a culture that reinforces those elements. Family culture is formed by doing things together, over and over again, which leads to an implicit understanding of what matters to the family and how they solve problems. Enforcement is a necessary part of the culture. While it might be tempting to let an omission, every excuse shows the child that this is how the world actually works. For every action a family member takes, imagine it will happen all the time and then act appropriately. Culture, after all, is formed by repeated actions, and every action communicates what is permitted and what is a value.

PERSONAL PRIORITIES100% of the timeWhen new entrants develop disruptive technology, the incumbent company thinks that the total upfront cost of matching the new technology is too high. It instead opts for the marginal cost of slightly improving its outdated technology to gain the same outputs. However, as companies continue with existing technology, they pay more than the total costs as they lose competitiveness and face disruption.

Similarly, the marginal cost of violating a principle just once is alluringly low. But multiple small decisions compound into much more significant consequences, eventually ending at a destination you never imagined for yourself. The lure of taking a performance-enhancing drug just this once or insider-trading just this once has led to the ruin of many careers. Nick Leeson, the 26-year-old banker who brought down the 233-year-old British bank Barrings in 1995, began with a small error which he hid in a relatively unscrutinized trading account. To make up for the losses, he made further risky bets which failed. The trap of marginal thinking about just this once exceptions ultimately led him to forge documents and make false statements. The story ended with $1.3 billion in trading losses and Leeson's arrest. Leeson did not imagine that his small initial mistake would lead him down a path that cost him his freedom, marriage and career at 26.

Define and Measure your Life The company's purpose, as determined by its priorities, shapes the rules by which executives make decisions in every situation. The company's purpose focuses the employee attention on what really matters. A company's purpose is a combination of likeness, commitment and metrics. Likeness is what the company aims to be at the end of the road. Executives must have a deep, almost fanatical commitment to the organization's likeness to make decisions consistent with it even under challenging circumstances. Finally, metrics aligned with the likeness enable managers to measure their progress consistent with organizational purpose.

The purpose of your life is too important to leave to chance. The likeness, commitment and metrics framework is a great tool to define your purpose. First, begin with the likeness and sketch out the kind of person you want to be. Second, you must devote your life to becoming that kind of person. This comes naturally if you intensely care about the likeness and have a deep desire to become that person. Finally, think about the metrics to measure your life.

The process of finding and articulating your purpose in life is not an easy one. It takes time, repeated iterations and sustained effort. But it is worth spending that time as your purpose is likely the single most valuable piece of knowledge in your life. In the long run, clarity about your purpose will trump any domain knowledge or skills, as it is likely to be applied multiple times every day for the rest of your life. The right time to begin is now.

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By: Morgan Housel3,600 WORDS (10 PAGES)SYNOPSIS How should investors manage the inevitabilities of risk? What are the most powerful wealth-building tools that require little technical skill? How do our brains hold us back from a more prosperous future?

In The Psychology of Money, investor and finance journalist Morgan Housel answers these questions and shares how human thought, habits, and emotions are intertwined with investment. He shares insights and strategies for how investors can leverage these connections for personal gain — not only financial but personal and emotional as well.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. Someone’s personal experiences make up only a small portion of what happens, but it makes up most of how that person thinks the world works. In theory, financial decisions should be driven by an investor's goals and the characteristics of investment options available to them. Economists from the National Bureau of Economic Research found that instead, investment decisions are anchored by early adulthood experiences. They found that investors tend to weigh more heavily the experience of the economy when they were young than what the economy is like now. 2. Both luck and risk are often the factors that determine success and failure. Because they are hard to measure, they are often discounted. Some of Bill Gate's success can be attributed to hard work and good decisions. Some of it can also be attributed to his going to a high school with a computer. This was a roughly 1 in 1 million chance in the '60s. To account for risk and luck in decisions, an investor should: 1) Avoid idolization of specific investors when it cannot be known how much luck or risk influenced their success. 2) Focus less on specific individuals and case studies and more on broad patterns. 3. There is never a reason to risk what you have and need for what you don't have and don't need. Social comparison often causes investors to look up to whoever has more than them and become so convinced that they need to have what they have that they take unnecessary risks that cause them to lose. If someone has enough to cover everything they need, they can avoid unnecessary risks by keeping four things in mind: 1) The hardest financial skill is to get the goalpost to stop moving. 2) Social comparison is the problem that causes unnecessary risk. 3) "Enough" is not too little. 4) Decide what is never worth risking. 4. The key to good investing is not to earn the highest returns; it is to earn pretty good returns consistently. The powerful nature of compounding interest is counterintuitive but is the backbone of investment. Warren Buffett has managed to achieve an average annual return of 22% throughout his career. On the other hand, James Simons of Renaissance Technologies has achieved an incredible 66% per year. Yet, Buffett is 75% wealthier than Simons because he has invested for forty years younger than Simons. More than 97% of Warren Buffett's wealth has been accumulated after the age of 65. 5. Getting wealthy and staying wealthy are two different skills. Getting wealthy requires risks and being optimistic. Staying wealthy requires caution and paranoia. 40% of companies successful enough to become publicly traded lose all of their value over time. The Forbes 400 list has, on average, a 20% turnover rate per decade. To avoid these fates, investors should: 1) Prioritize being financially unbreakable over bigger returns. 2) Build the possible (and likely) failure of any plan into your plans. 3) Develop a personality that is optimistic yet paranoid. 6. Most investments either fail or break even. The vast majority of your success is determined by a small number of big winners – "tail events." In the Russell 3000 Index, 40% of companies lost at least 75% of their value. Effectively all of the Index's returns were driven by only 7% of companies that outperformed the average by at least two standard deviations. In VC investing, approximately 65% of companies lose money, 2.5% return 10-20x their investment, 1% return >20x their investment, 0.5% return 50x their investment. The majority of VC returns come from the last category. To allow enough time to take advantage of tail events: 1) Don't panic in a crisis and sell prematurely. 2) Be a consistent investor. 3) Take advantage of a wide range of investments. 7. If the goal is happiness, then a person should structure their wealth to maximize their control over their own time. In 1981 psychologist Angus Campbell studied what made people happy. He found that most people were happier than most psychologists assumed but could not be grouped by income, geography, or education. He found that the most influential factor was whether people felt they had control of their own time. Money can contribute to giving people control of their own time, but it is not a guarantee. 8. Wealth is the money that is not spent. But to accumulate wealth, people must accept that being wealthy and looking wealthy are different things. In 2009 Rihanna nearly went bankrupt after she lost 82% of her wealth in a year. She sued her financial advisor for gross mismanagement, who responded, "was it really necessary to tell her that if you spend money on things you'll end up with the things and not the money?" People tend to imagine wealth as what you can buy with wealth. That is the opposite of wealth. 9. Building wealth is less about income or investment return and more about savings rate. In the 1970's it appeared that the world was going to run out of oil. The rate of oil consumption was increasing faster than the rate of oil production. But those predictions did not account for the new efficiency technology would create. The US now uses 65% less energy per dollar of GDP than in 1950. Saving is like that oil. It is easier and more effective to use the already available wealth more efficiently than to find new sources of wealth. 10. It’s more important to have flexibility. One hundred years ago, 75% of people had neither a telephone nor regular mail. The only real competition that most people had were the people in their immediate surroundings. Now, the entire world is competition, and it is increasingly hard to compete. Each year almost 600 people get a perfect score on the SAT, and 7,000 come within a few points. In the past, each of these people would be unrivaled in their immediate area. Now they are competing against each other. As it becomes harder and harder to compete, it becomes more and more important to save because savings provide flexibility and time to wait for good opportunities both in a career and in investments. 11. If being reasonable is easier to maintain than being coldly rational, that should be done because anything that helps keep an investor in the game long enough to benefit from tail events will have a quantifiable advantage. In 2008 a pair of researchers at Yale created a retirement strategy whereby investing using a two-to-one margin when buying stocks investors could increase their retirement savings by 90%. However, this strategy also makes it easy to lose everything when you're young and expects you to pick up from that and keep going so that it works. It's entirely rational, but no reasonable person would behave like that. It's hard to be rational. It's easier to be reasonable. 12. One good way to stay in the game long enough to benefit from tail events is for investors to have an emotional connection to their investments. Many investors pride themselves on a lack of emotion, but with no love of the investments, they've made it easy to panic in a downturn and sell too early. If investors invest in something they love, they will be more willing to ride out turbulence and stay in the game longer. 13. History is a poor guide to investing because it tricks investors to think that the future will be like the past. Things that have never happened before happen all the time. The future is rarely like the past, and if investors forget, they will miss the unprecedented events that have the most significant effect on the future. To avoid this, when looking at history, look for patterns and generalities instead of discrete events. The further back history goes, the more general conclusions should become. 14. No one can know everything that is going to happen, so they have to invest safely enough to experience tail events. When people are asked about other people's home renovation projects, they predict that they will run, on average, between 25% and 50% over budget. But when they're asked about their own, they usually predict they will come in at budget. Over time, the stock market returns an average of 6.8% per year, but it does go down, and what if that happens at a critical time? Investors need to build a margin of error into all of their plans to be prepared for these eventualities and ensure they are not wiped out. 15. Therefore, long-term financial plans should have the potential for change built into them. Only 27% of college graduates work in a field related to their degree. 29% of stay-at-home parents have a college degree. Research shows that from age 18 to 68, people underestimate how much they and their goals will change and that makes long-term financial planning hard. To plan for this change: 1) Avoid the extreme ends of planning. 2) Reject the sunk cost fallacy. 16. Most investors who try to game the system see it come back to bite them. Morningstar studied 112 tactical mutual funds from 2010-2011, which tried to beat market returns and compared them to simple 60/40 stock-bond mutual funds. They found that "with few exceptions, [tactical funds] gained less, were more volatile and were subject to just as much downside risk." Volatility, loss, uncertainty, and doubt are natural parts of investing. Investors have to accept that sometimes they will make a loss and not get out because of that. 17. Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long-term to primarily short-term. From 2000 to 2004, the number of homes sold more than once in twelve months – that were flipped – rose from 20,000 to 100,000 per quarter. This, in turn, drove up the price of homes. Similarly, in the late '90s, day traders, to whom the cost of a stock was largely irrelevant as long as it went up in a day, drove up the price of most stocks. Cisco rose 300% in 1999 and Yahoo! rose to $500 in the same year. 18. Bubbles, however, do their damage when long-term investors start taking their cues from short-term investors. In 1999, the average mutual fund had a 120% annual turnover, meaning that long-term investors were not investing for the long term. Different investors have different goals, and one of the biggest financial mistakes that can be made is to take advice or cues from investors who have different goals from you. 19. Bad news will get more coverage but identification of the places with potential can be massive. In 1889 the Detroit Free Press wrote that flying machines "appear impossible." Four years later, the Wright Brothers flew the first airplane. Even then, most wrote it off. It wasn't until World War I, which began in 1914, that airplanes began to get regular use. The first major coverage of an airplane in the media, however, was a crash in 1908. Progress tends to happen too slowly to notice, but setbacks happen too quickly to ignore. 20. Predictors of the future tend to extrapolate current trends into the future, but they rarely do, or can, account for how markets will adapt. In 2008 it was written that by 2030 China would need 98 million barrels of oil per day, but that only 85 million barrels were produced worldwide and not much more was likely ever to be produced. However, growing demand drove up the price of oil, which made it profitable for the first time to tap harder-to-get-to oil reserves, driving up production well above what was needed. In 1985 the journal "nature" predicted that by 2000 women would consistently run faster marathons than men. They figured this because the average marathon times of professional female runners were increasing faster than that of males. However, if you extrapolated those numbers at that rate indefinitely into the future, women would quickly run faster than 1,000 miles per hour.

SUMMARYMorgan Housel is a partner at the Collaborative Fund and a former columnist at The Wall Street Journal and The Motley Fool. His work has been focused on the exploration of how investors deal with risk and how to handle it in more productive ways.

Confounding compoundingDuring the 1800s, scientists came to the consensus that the Earth had experienced a number of ice ages in which large parts of the planet had been covered in ice sheets. During the last glacial maximum, the location of what is now Boston had more than a full kilometer of ice above it. Toronto had two kilometers. Montréal had more than three. The southernmost edges of the North American ice sheet were in northern Kentucky and West Virginia.

It was unknown, however, what caused these ice sheets to form. Each theory could explain one or two instances, but not all of them. That is, until Russian meteorologist Wladimir Köppen made an unexpected discovery. The cause, Köppen discovered, was not especially cold winters but slightly colder summers.

Each winter, snow would be left behind, but the slightly colder summer meant that a small amount of it would survive to the next. Over time, more and more snow piled on top of what had survived in years before and covered more and more of the ground in permanent snow. Each summer, the leftover snow would increase the chances of more remaining, and the new snow cover would reflect more sunlight, cooling the ground and causing more to remain the following year. Eventually, this became ice sheets thousands of meters thick.

It feels counterintuitive that such small change can have such massive results, but it is the same operating principle behind compounding returns. If something, like ice or money, compounds and a little bit of progress builds more progress, that small progress can have tremendous results. The number one rule of investing is that you don't need massive returns. You need on average ok returns that can compound for long periods.

Tails, you winIn 1936 Heinz Berggruen fled Nazi Germany. In his new life in America, he would become an art dealer until, in 2000, he sold the core of his massive collection to the German government. This sale, which would go on to make up the core of the Berggruen Museum in Berlin, included 85 works by Picasso and 80 other pieces of art by artists like Klee, Braque, Matisse, and Giacometti. The 165 pieces were valued at over $1 billion.

How did Berggruen acquire such an impressive collection of famous masterpieces? Luck? Skill? Horizon Research wrote that the secret was that Berggruen bought and sold thousands of pieces of art throughout his career. Most of them were probably of little value, but if a tiny percentage of those thousands turn out to be Picassos and Matisses, they can make up for all the ones that weren't. Most of Berggruen's investments could be bad, but he made enough of them that it didn't matter.

The reality is most companies and most investments lose money or break even, but a few are big winners. Those big winners are the ones that create value. In 2018 Amazon single-handedly drove 6% of the S&P 500's returns, and Apple drove another 7%. If you owned an S&P 500 index fund in that year, almost 1/7th of your returns came from just two companies. If the number one rule of investing is compounding returns, then the number two rule has to be those tail events create the returns that get compounded.

Good investors will cast a sufficiently large net that they are sure to have some tails in it. They won't panic at one bad year, one bad earnings report, or one lousy product and sell before they have a chance to find those magic returns. They'll accept that most of their decisions will not be big winners but that if they make enough, they'll find ones that are.

Room for errorThere has never been a battle larger than that for the city of Stalingrad during World War II. Having lasted almost half a year, that single battle saw more casualties than the total military dead of the United States, Great Britain, Italy, France, and Yugoslavia combined. In 1942 a unit of 104 German tanks was outside of the city in reserve. But when it was needed most, its officers were shocked to discover that only twenty of their tanks were operational.

Engineers investigated and soon discovered that during the weeks the tanks spent unused, outside the city to be called upon, field mice had nested inside of them and eaten the wires and insulation of the electrical systems the tanks needed to run their engines.

These tanks were not poorly designed. Many have made the argument that German armored units were so well engineered that they were impractically expensive. But no engineer would think to plan for a 20-gram field mouse to disable a 25-ton steel machine. It wasn't the engineer's responsibility to plan for freak events like field mice. It was the commander's responsibility to plan that they may not be able to use those tanks for some reason.

Freak events happen all the time. Things that have never happened before happen all the time. Even when someone thinks that they have planned for every possibility, they haven't. That's why it's so essential that margin for error is built into every plan and strategy. Investors always need to account for the ever-present reality of risk in their investments. They should never bet everything on a single strategy. They should always maintain a reserve in case their investments go wrong. They should always be aware that the returns they expect may never materialize. Loss will always come eventually, risk will always appear. The job of a competent investor is to make sure that when that happens, it is not catastrophic.

Save moneyMargin for error is pretty hard to achieve without savings. Savings are a margin of error in a way, and building margin of error into a strategy – at least in investing – usually requires extra money (read: savings). Past a certain level of income, people fall into three groups.

Past a certain income level, people tend to fall into three groups: 1) Those who save. 2) Those who don't think they can save. 3) Those who don't think they need to save. Group one can stop. This isn't for them. But what should groups two and three understand?

First, wealth has more to do with your savings rate than your income and investments. Wealth is accumulated money. You need to save to get that. Secondly, the value of wealth is relative to what you need. It's a lot easier to use money more efficiently than find new sources of money. Thirdly, past a certain level of income, what you need is just what sits below your ego. Once comfortable basics are covered, everything after that is a want, and often those wants treat the display of money as more important than having money.

Fourth, people's ability to save is more in their control than they might think. You can spend less if you desire less, and you can desire less if you don’t care what others think. Fifth, there's no need to have a specific reason to save. Something that's going to need money is seldom going to be anticipated. Sixth, flexibility and control over your time is an unseen return on wealth. Savings give the ability to control your own time. Lastly, that return is more and more important. Being able to be flexible and control time makes it easier to compete in an increasingly competitive market.

Nothing's FreeIf someone wants a $30,000 car, they have three options. They can pay for it, they can find a different car, or they can steal it. Most people would not opt for the third option. They know that if they steal that car, it's not really free. It’s just a different price. Investment returns are not free either. They all come with some kind of price.

From 2002 to 2018 Netflix returned 35,000%. But the price of success for someone invested in Netflix through that time was high. Netflix traded below its previous all-time high on 94% of days during that period. Monster Beverage, similarly, returned 319,000% from 1995 to 2018, but traded below its previous all-time high on 95% of all days.

Like the car, investors have three options. They can either A) accept this volatility as the price of those returns, B) accept lower returns with less volatility, or C) try to game the system and get those returns without the volatility. Like with the car, some car thieves will get away, many of them will not.

In 2008 GE, one of the biggest companies in the world, almost collapsed. Their stock price went from $40 in 2007 to only $7 by 2018. One of the problems was that under their CEO, Jack Welch, their extremely lucrative financing division would always beat Wall Street estimates. They'd always return higher, no matter what. They gamed the system, massaged numbers, pulled returns from future quarters to current quarters.

But that caught up with them, and when the stock market collapsed, so did their game. Volatility, risk, and uncertainty are a part of investing. They have to be accepted because they will always appear, and to think they can be avoided, often just exacerbates their effects.

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By: Dan Gardner and Philip E. Tetlock3,195 WORDS (10 PAGES)SYNOPSIS Did you know it's possible to make accurate predictions about the future without psychic powers? Given the right practice and strategies to explore, you can become what’s known as a super forecaster.

In Super Forecasting by Wharton professor Philip E. Tetlock and co-author Dan Gardner, readers learn about the qualities and skills that make a super forecaster and how you can apply the knowledge to any situation. You will also learn about real-life super forecasters from all walks of life and how to break down even the most difficult questions to achieve the best results.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. Super forecasting is not about the ability to crunch numbers, but what you do with it that matters most. A brilliant puzzle solver will be at a disadvantage relative to a less intelligent person who possesses a great capacity for self-critical thinking. 2. For super forecasters, beliefs are hypotheses to be tested, not treasures to be guarded. Do not be open-minded, be super open-minded. However, when you make a prediction, be as precise as possible. If the prediction is too vague, you can run into the “Forer Effect,” where people assume its meaning and apply it to themselves. 3. Unpack the question into components, then distinguish which parts you know and which ones you don’t. Then, put the problem into a comparative perspective that downplays the situation’s uniqueness. Look at factors that play up a situation’s uniqueness and synchronize your findings to make as precise a judgement as you can. 4. Super forecasters adjust their views in light of new information as often as necessary to draw the most accurate conclusion. Carefully balance the old with the new and incorporate them into your latest prediction. Update often, but in small increments. This concept is perfectly illustrated by using the Bayesian belief-updating equation. 5. There are two dangers a forecaster faces after making an initial determination. One is underreaction to new information (bias or “belief perseverance”), and the second is to overreact. Both can diminish accuracy and in extreme cases, destroy a perfectly good forecast. Disregard irrelevant information to avoid the dilution effect on your information, then commit. 6. Bring out the best in others and let others bring out the best in you. The balance you learn in forecasting will translate to team management, especially when you hear different perspectives. Former LA Dodgers coach Tommy Lasorda said that management is “like holding a dove.” Hold too tight, kill it. Hold too loose, lose it. 7. Tweak the wording of a question to get another perspective. For example: “Will the South African government grant the Dalai Lama a visa within six months?” In addition to reasons they would grant him a visa, look at reasons they wouldn’t. Change the word “grant” to “deny” and you have a new criterion for research. 8. Forecasters run into several barriers that impact accuracy. Vague language such as “significant market share” can be interpreted based on the reader’s biases and not facts. Time lag is another issue. When forecasts span months or years, beware of “hindsight bias” that changes your current perspective to match the results. 9. To be a super forecaster, a growth mindset is essential. Not all practice improves skill, however. You need to know which mistakes to look out for, and pair your practice with clear and timely feedback. Be careful not to let your confidence grow faster than your accuracy. 10. Intractable problem? Break it into tractable sub-problems that you can identify as knowable and unknowable. The big question of, “Will there be another Korean war?” is much harder to quantify than “What is the frequency of North Korean nuclear tests?” and “Will North Korea launch a cyber-attack on South Korea?” 11. Strike the right balance between inside and outside views. Inside views are specific to the situation, such as recent events. Outside views are more generic, i.e. how often the situation at hand occurs, on average. History tends to repeat itself. Even seemingly unique events can relate to trends, which are then weighted against inside views. 12. Don’t overreact to evidence, but don’t underreact, either. Forecasting is all about observation and balance. Super forecasters are agile, but don’t jump needlessly. When you update your prediction, it can be boring or even uncomfortable, but worth it in the long run. The best forecasters tend to update probabilities incrementally, such as from 0.4 to 0.35. 13. “Dragonfly eye forecasting” is the pursuit of point-counterpoint discussions, i.e. “on the other hand…” This method is common among the forecasting world because the best forecasters are precise, but willing to weigh all sides. Super forecasters often score high on an active open-mindedness tests, such as one by Psychologist Jonathan Baron at the University of Pennsylvania. 14. Make yourself aware of causal forces at work in your problem. Information that clashes is just as important, if not more so, than evidence that supports your hypothesis. Just as a dragon fly sees multiple images and synthesizes them all together into a single picture, so must forecasters do with opposing views. 15. As you dissect a question, you will be able to determine various probabilities that range from “remote” to “almost certainly.” The more degrees of uncertainty you can distinguish, the better a forecaster you will become. It feels unnatural at first, but with patience and practice you will be able to translate vague-verbiage hunches into numeric probabilities. 16. Strike a healthy balance between overconfidence and under confidence. Super forecasters do not rush to judgement, nor do they linger too long near “maybe.” Long-term accuracy requires calibration and resolution, prudence and decisiveness. Do post-mortems on your experiments to learn what worked and find creative solutions to the errors you find. 17. Hindsight is greater than 20/20, especially if you made a prediction. A common pitfall to avoid is “rearview mirror hindsight bias.” Own your failures. Don’t overlook flaws in your basic assumptions. You might have been on the right track but were thrown off course by a minor technical error. 18. Complex algorithms fed into super computers may soon complement forecast endeavors. Human judgement can stand to benefit from a second perspective devoid of emotion, but as of right now, only humans can understand human meaning. “There’s a difference between mimicking and reflecting meaning and originating meaning,” said Watson’s Chief Engineer, David Ferrucci. 19. There are obstacles to consider if you plan to put a team of forecasters together with a single objective. Forecasters can adopt “group think” and become too agreeable. Likewise, they can slip into “cognitive loafing,” which is the attitude that others should do the heavy lifting. Maintain independent judgement in the group. 20. Learning requires doing, with good feedback that leaves no ambiguity on whether you are on the right track. Practice is not helpful if you simply go through the forecasting motions. Super forecasting is the product of deep, deliberative practice. Super forecasting requires constant mindfulness even when you try to follow the rules.

SUMMARYWhat does it take to be a good superforecaster?Celebrity forecasters like Tom Friedman are called upon in times of crisis to help make long term decisions based on current events. You don’t have to be a celebrity to make accurate predictions, however, and many “super forecasters” with high accuracy rates are unsung. Forecasting is a skill to be learned and continually mastered.

To be a reliable and confident forecaster, you’ll need to be open to new experiences. It’s not enough to be open-minded; you must be super open-minded to sacrifice your own preconceived ideas and opinions for the sake of the most accurate prediction.

Unfortunately, no magic formula exists that forecasters can turn to – just broad principles with a lot of caveats. However, there are a number of tried-and-true methods of forecasting that can help you on your journey.

GOLDILOCKS WAS RIGHTWhen posed with a big question, triage the situation. That is, focus on questions where your hard work is likely to pay off, as opposed to the hardest or the easiest questions. Go for the “Goldilocks” approach, i.e. somewhere in the middle and work your way outward.

If you were to sum up forecasting in one word, it might be “balance.” This doesn’t mean that your predictions should always be somewhere in the middle but take everything into consideration even if it contrasts with your current view. A closer inspection might introduce a factor you hadn’t thought of that alters the course of your probabilities.

FERMI-IZE ITItalian American physicist Enrico Fermi, a central figure in the invention of the atomic bomb, posed a brainteaser for forecasting that asks how many piano tuners are in Chicago.

Without looking at the internet or Yellow Pages, a forecaster can come up with an educated answer if they know four things:

• The number of pianos in Chicago
• How often pianos are tuned each year
• How long it takes to tune a piano
• How many hours a year the average piano tuner works

Fermi taught that breaking down the question can separate the knowable and unknowable from this list. Despite the seemingly random nature of the answers, the result tends to be more accurate than a random guess. Many have attempted this puzzle, but one presentation by psychologist Daniel Levitin shows how to come up with a solution.

• For the first answer, set a confident interval – a range you are 90% sure contains the right answer. Levitin guessed that Chicago has around 2.5 million people because it is smaller than Los Angeles but large enough to house over 1.5 million residents.
• Next, Levitin supposed that a piano might need tuning once per year.
• Since pianos are too expensive for most families, Levitin guessed that 1/100 homes in Chicago own a piano. That number is doubled when you factor in schools, concert halls, etc. that possess more than one. 2.5 million residents x 2/100 (2%) = 50,000 pianos in Chicago.
• Then, Levitin guessed that it takes around two hours to tune a piano.
• Assuming that a piano tuner works 40 hours a week plus two weeks’ vacation and spends about 20% of their time driving from job to job, the average piano tuner might work 1,600 hours per year.

Therefore, if 50,000 pianos need tuning once per year, and it takes two hours to tune one piano, that comes out to 100,000 total piano-tuning hours. If you divide that by the annual hours worked by one piano tuner, it comes out to 62.5 piano tuners in Chicago. Levitin found 83 listings for piano tuners in Chicago, but many of them were duplicates, such as businesses with more than one phone number. So, an accurate number is not known, but Levitin’s calculation shows how close you can get.

Forecasting step-by-step: let’s solve a murderPose a question. For example, let’s say you’re a homicide detective and you need to find out who did it. Unlike on TV, the clues will not fall in your lap before the next commercial break.

• First, check the outside view: Refer to statistics as a base rate. The FBI says that 28.3% of homicide victims are killed by someone they know, so there is a 28.3% chance the victim knew their killer. Likewise, there is a 9% chance it was a stranger.
• Next, check the inside view: Examine facts specific to this case. Who had the ability, means, and motive for killing this person? Adjust your chance percentile up and down based on each suspect. Start with the most obvious and move your way outward. (That’s why they always look at the spouse or significant other first.) If the victim had a recent fight with their significant other, the likelihood that this person killed them goes up. If that significant other had a verifiable alibi, the likelihood goes down. Note: Don’t get stuck on your initial gut feelings, but don’t ignore them, either. It’s easy to latch on to a prediction and find information to support it, rather than weigh all options.
• Now, merge the two views to create a synthesized prediction. Let’s say the victim was seen getting into a car the night they were killed. You’ve identified a person that worked with the victim who drives the same kind of car. Co-workers say that person was obsessed with the victim. Their alibi is weak. They look like the strongest suspect. Let’s say you come up with a 75% chance that this person is your culprit.
• Have your colleagues assume your judgement is wrong and make their own estimates. Researchers have found that combining your first judgement with a second one made by others is often more accurate. Another way to approach this is to step back from your first estimate for several weeks (if you have the luxury of time outside of a murder case) before asking peers to make one of their own. Likewise, you can make your own second judgement after a break, as billionaire investor George Soros does. Soros has often cited this method as a key part of his success.

Psychologists who test police officers find a large gap between their confidence and their skill. As officers become more experienced, that gap grows. Beware of growing confident faster than you grow accurate.

Update often, but bit by bit Statisticians will be familiar with a thought experiment proposed in the 1700s by Presbyterian minister, Thomas Bayes. He wrote “An Essay Towards Solving a Problem in the Doctrine of Chances,” which was refined and published posthumously in 1761 by his friend, Richard Price.

Essentially, the theorem says that your new belief should depend on your prior belief, multiplied by the diagnostic value of the new information.

While super forecasters should be numerate, they don’t have to turn to algebra every time they want to make a prediction. What matters more is Bayes’ core insight of getting closer to the truth gradually by updating in proportion to the weight of the evidence.

Going back to the homicide example, you might increase the likelihood of one subject being your killer once you find out they lied about their whereabouts. If you overreact and think, “Ah ha! I’m 99% sure now” you can overlook unknowns, such as the reasons why they lied (to save their job, to save their spouse’s feelings, etc.).

Predicting the UnpredictableDon’t forget to factor in situations that could change everything overnight. It’s better to give yourself a bit of wriggle room “just in case” than assume everything will go as planned.

In 2010, a poor Tunisian fruit vendor was robbed by corrupt police officers ̶ sadly, a common occurrence at the time. Later that day, he set himself on fire outside the town office. Protests erupted. The dictator of Tunisia, President Zine el-Abidine Ben Ali fled the country. Still, the civil unrest continued throughout the Arab world and resulted in a number of rebellions and civil wars. Who could have predicted that one man’s self-emollition would cause the “Arab Spring?”

A situation might be identified as a “powder keg ready to explode,” but it’s nearly impossible to tell what will light the fuse.

American meteorologist Edward Lorenz discovered that tiny data entry variations in computer simulated weather patterns could produce dramatically different long-term forecasts. His insight, published in an article called, “Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set Off a Tornado in Texas?” became the inspiration for chaos theory.

Predictions are everywhereHow predictable something is will depend on what we want to predict, how far into the future, and under what circumstances. Tomorrow’s weather forecast is going to be much more accurate than one five days from now because as Lorenz discovered, a lot can change between now and then.

The internet is full of forecasts. A quick visit to Amazon illustrates the algorithm’s prediction of other items you might like to buy. When you provide feedback on recommendations, the algorithm updates its predictions ever so slightly.

Life is full of mundane predictions, too. You see clouds on the horizon and grab an umbrella. Scientific laws like phases of the moon can predict the weather with enough accuracy to plan agriculture. But, it’s much harder to forecast when you should fill up your gas tank this week because the pipeline might get attacked by hackers and drives the prices up.

To err (and assume) is humanA now famous “Cognitive Reflection Test” was introduced by Shane Frederick, a management science professor at the Massachusetts Institute of Technology. It poses this seemingly easy question:

“A bat and ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost?”

Most people immediately think, $0.10. If you think about it more carefully, you find that this answer is incorrect. Our brains automatically latch on to the “dollar” and not the “more.” If the ball costs $0.10 and the bat costs a dollar more ($1.10), then the total cost will be $1.20. Therefore, the correct answer is $0.05.

Modern psychologists attribute this phenomenon to a division of human brain function into two systems. System One is the subconscious. It makes automatic cognitive and perceptual decisions, and very quickly at that. System Two is our conscious mind, or whatever we choose to focus on at the moment. System One makes split second decisions based on historical experience, existing knowledge, predispositions, and other factors that “feel” right but are not necessarily correct.

To be a super forecaster, you will need to be aware of System One and how its vital operations can sometimes hinder the judgement of intelligent people.

The importance of human predictionsAs imperfect and bias as humans can be, they will still be a necessary component of forecasting in the future. The advent of super computers and artificial intelligence makes it tempting to assume we can leave all the predictions up to machines. Polymath Herbert Simon predicted in 1965 that we were only 20 years away from a world in which machines could do “any work a man can do.”

While this is certainly the case in many automated industries, there is a reason that computers and robots are still overseen by humans. The authors spoke to Watson’s chief engineer, David Ferrucci, who has worked in artificial intelligence for over 30 years. Computers are better able to spot patterns these days, he noted, but machine learning requires the presence of humans to feed the learning process. As of right now, a computer can look up a fact, but a forecast requires an informed guess based on a myriad of information.

The human brain is wonderous because the task of compiling data and making a prediction is extremely difficult, and yet we do it all the time. The biggest hurdle for computers if they are to ever replace a super forecaster is understanding. Humans may get better at mimicking human meaning and therefore better at predicting human behavior, noted Ferrucci, but “there is a difference between mimicking and reflecting meaning and originating meaning.”

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By: Elad GilSYNOPSIS You’ve found a good product with strong market fit, so how do you scale from an early stage startup to list on the S&P? Author Elad Gil, cofounder of Color Genomics and VP at Twitter, lays out the key frameworks that CEOs of high-growth companies need to understand in High Growth Handbook.

He provides a comprehensive guide to hiring best practices, the three phases of CEO change management from LinkedIn Co-Founder Reid Hoffman, a roadmap for M&A success from major investor Marc Andreessen, and an eight-step framework to evaluate the pros and cons of IPOs. With specific and actionable advice for every stage of the hyper-growth, this guide is meant to launch founders and their companies to the moon.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. Marc Andreessen's high growth framework is the following: Step 1. hyper-focus on product-market fit. Step 2. Great products will attract copycats. Step 3. Innovate your products so you don't get undercut by competitors or you'll run yourself out of business by innovators who do, like Blockbuster and Netflix. 2. M&A is a powerful and underrated tool, even for smaller-scale start-ups in the hyper-growth phase. For example, Google Maps, Android, and Gmail were all acquisitions that Google made relatively early on. M&A brings new talent and capabilities into your organization, eliminate competition, and save you heaps of time and money. Use M&As and buy other companies liberally. Andreessen discusses the pattern of companies like IBM, Microsoft, and Cisco that grew off the back of M&A. Between 1995 and 2000 Cisco bought seventy-nine companies and that largely made them the $230 billion market cap company they are today. 3. A great way to eliminate bias in hiring is candidate scoring. Instead of subjectives scores, let the interviewer score based on a concrete rubric. Instead of asking interviewers to recommend “hire” or “don’t hire,” ask them to assess whether someone meets the company’s standards. 4. You can’t be good at everything, but you don’t have to if you hire well. CEOs shouldn’t put all the pressure on themselves to do everything, instead they should find people who are better than them and delegate. Aaron Levie, CEO of Box, had no experience building out these kinds of high growth companies, so he hired Dan Levin from Intuit as COO to help him build an organization that can manage a large number of employees. When a CEO delegates, they should take their hands off the wheel. If they “delegate” but find themselves still constantly involved with worry over what employees do, they either haven’t relinquished control or their team is not able to execute the delegated task. 5. During the hiring process, think of candidate conversion in terms of time spent measured against the likelihood for candidates to accept the job. The longer it takes to interview, follow up and hire them, the less likely they are to accept the position. 6. Don’t skimp on onboarding. Far too many CEOs put lots of time and resources into hiring (as they should) but forget to build a good onboarding program. That just wastes. Send out a welcome letter and an onboarding package with what they will need and need to know. Pair them up with a buddy, set goals, and make sure that they have real ownership over their role. 7. During a company reorganization, follow this seven-step framework for change management: 1) Decide why to reorganize. 2) Determine what structure is most practical. 3) Get buy-in from leaders. 4) Move quickly. 5) Make sure leadership understands and can explain it before you announce it. 6) Remove ambiguity. 7) Communicate directly, clearly, and compassionately. 8. Once a company finds product/market fit, the network, skills, and advice needed from the board will change. As a company approaches an IPO it will need more independent directors, operators, and specialized board members. If an independent board member needs to be changed this can be done with either A) a board vote, B) a stock vote, or C) mutual agreement. VC board members are harder to be removed and require either A) a change in the overall composition of the board, B) a buy-out, or C) the consent of the VC firm. 9. Per LinkedIn CEO Reid Hoffman, even if you need to replace your CEO, you still need someone with a founder’s mindset. A CEO is hired for a skillset, but at the end of the day, if they don’t have the right perspective, they’re just an asset manager. 10. Write a guide for yourself. Claire Hughes Johnson - COO of Stripe – wrote a guide to herself when she began at that company and that can be a great way to let people know what to expect from their executives as well as what executives expect from them. It can also jumpstart practices a CEO wants employees to know about when they work with them so that they lose no efficiency. 11. A valuation of $500 million to $1 billion tends to be the point when founders and employees sell or consider the sale of some stock. This is for three reasons: 1) It likely took several years to get to this point and life events may mean people need more liquidity. 2) At this point, most of their net worth may be tied up in company stock and diversification becomes attractive. 3) Employees may be less confident that the company will continue to grow at the rate it did before. 12. Bandwidth often matters more than perfect fit. Sometimes it’s better that an executive can do a lot of things well instead of some things perfectly. Put people into positions where they can do that. Alex Macgillivray was general counsel for Twitter. Normally a GC would not have user support, trust and safety, and corporate development/M&A all reporting to them, but Alex’s ability to juggle these tasks made him one of Twitter’s most valuable executives. 13. Plan for the medium term. Plan too short term and it can backfire. In a hyper-growth phase, a company can change rapidly in six to twelve months and become a whole new company. But don’t plan too far ahead either. If a company has a 10-person engineering team that grows to 30 people in a year, it doesn’t need to hire an SVP from Salesforce whose job is to manage a 1,500-person team. No one knows what the company will need three years from now, so plan for what you know now. 14. Patrick Collison, the CEO of Stripe says it’s easy to learn the wrong lessons from early success. If a company’s gotten to the hyper-growth point it did a lot of things right in the early stages. But it made a lot of mistakes too. Just because something worked or didn’t backfire in the past doesn’t mean that it was what should have been done or that it should be repeated. 15. Watch out for how the board interacts with you as CEO. Reid Hoffman created the following three-step framework to measure a CEO’s status with its board: At a “Green Light”, the CEO makes all the decisions and the board is only advisory. At “Yellow light”, there are questions that can be fixed, but a good board will not stay for long. At “Red light” there will soon be a new CEO. 16. There are four types of product managers and the type you choose will depend on the needs of your company. Business product managers are great for turning customer feedback into product changes. Technical product managers can deal with the engineering team and excel at inward-facing tasks. Design product managers can revolutionize user experience. And growth product managers can identify and manipulate the critical levers to product adoption. 17. Paradigm CEO Joelle Emerson says it’s important not only that organizations be fair, but that the people involved in them perceive them to be fair. Make sure that promotion, demotion, and hiring processes are structured and standardized so that people feel like these decisions are not arbitrary. 18. Do not think a good press cycle can make up for a bad business decision, or that a bad press cycle can ruin a good one. Press is not nothing, but for most companies it’s not what they should focus on. Theranos once enamored the press and is now defunct; Facebook has had no shortage of bad press and is valued over $1 trillion. 19. Be careful of Wall Street investors when you get late-stage funding. Unlike the Silicon Valley investors most startups are used to, Wall Street is not hyper-focused on startups and won’t be as patient or accommodating as Sand Hill Road. 20. Go public as soon as you can. In the past, companies waited too long. During the period from 2007-2012, most companies waited as long as they could to go public and that really limited them. Going public will give a company new capital, a better currency for M&A, let it grow faster, and have new opportunities for expansion. Tesla, for example, would not be able to fund massive ventures the way it does today without it’s highly valued stock. The benefits often outweigh the risks.

SUMMARYHiringIf your company is at the hyper-growth phase, new hires will take up a lot of your time as CEO. During his time at Twitter, Gil saw the company grow from just 90 employees to 1,500 in two and a half years.

When hiring, it’s important to make sure that every candidate goes through the same process. A CEO may believe because they’ve given the same instructions to all of their managers and interviewers that this is the case, but each of those people will bring with them their own perspectives, interpretations, and biases that will change the way they execute instructions. That’s why CEOs should standardize their hiring to a greater level of detail than they may with other instances of delegation.

Make sure that every candidate is asked the same questions, make sure that references are asked the same questions, and make sure that interviewers are given focus areas to pay attention to before they go into interviews.

One great way to eliminate bias and interpretation is to institute a system for candidate scoring. Don’t allow the interviewer to interpret how well a candidate answered a question differently than another interviewer. Instead, create a points system or a satisfactory/unsatisfactory scoring system for each question based on a concrete, measurable rubric. Instead of asking interviewers to recommend “hire” or “don’t hire,” ask them to assess whether a candidate meets the company’s standards. These will help to eliminate the disparities between different interviewers and give the team a more accurate picture of each candidate.

After new candidates are hired, don’t think that you’re done.

“Many companies make the mistake of spending months building a pipeline for recruiting the very best people, but then spend little time actually onboarding them to make sure they are successful.”

Onboarding best practices

• Send out a welcome letter: Send a letter to new employees with their relevant teams cc’d. In it explain their role, who they report to and their goals. Ask for an interesting fact about them that they’re willing to share.
• Create a welcome package: This can include practical items like a laptop and email address but should also include things like a book that expresses the management style you hope to emulate or company merch. Personal touches are nice. For instance, a signed or handwritten note or a company onesie if they have a newborn.
• Use a buddy system: There are going to be processes, jargon, tools, and structures that are unique to the company. Pair new employees up with someone who has more experience so that they can learn all of these and become maximally efficient faster.
• Make sure they have real ownership over their work: Try to give them their own projects or transition projects over to them that they can make their own. They’ll feel more connected and prouder of their work that way.
• Set goals: Setting30-, 60-, and 90-day goals gives new employees a sense of direction. But make sure to check in on these goals and update them or else they’ll become useless pretty quickly.

ChangeAt this phase in a company’s growth, you’ll have essentially a new company every 6-12 months. Like Google, which grew from 1,500 employees to 15,000 in three and a half years.

If a CEO is not able to adapt to this change, the board of directors may soon begin to realize that they’re no longer the best person to lead the company. What can a CEO look out for? How can one know when that’s starting to happen?

Reid Hoffman talks about how the board of directors should interact with a CEO and lays out a three-leveled scale for how boards should interact with CEOs.

Green light: “You’re the CEO, make the call, we’re advisory.” This is where you want to be as CEO. The board is not there to run the company and if a CEO’s doing well, they won’t be. If the CEO handles the management of the company with only advisory input from the board and the board trusts them to do so, everyone’s at green light.

Yellow light: “I have a question about the CEO. Should we be at green light?” If you’re at yellow light, there’s some kind of problem or the board has some kind of questions. This is ok, but the trick is that this should be temporary. Never let yellow light be the standard state of affairs for long. Either fix the problem to move to green light, or the yellow light should become red.

Red light: “The CEO will not be the CEO much longer.” If the board is handling management of the company, it usually means the CEO is doing a poor job. If the board has people who are experienced and know what the job of a board is supposed to be, they’ll be looking for a new CEO, whether the CEO knows it or not.

“The hard part is that most people want to just do the first part, which is figure out what the company should do. In practice, time-wise, I think the job is 5% that and 95% making sure that it happens. And the annoying thing to many CEOs is that the way you make it happen is incredibly repetitive. It’s a lot of the same conversation again and again with employees or press or customers. You just have to relentlessly say, “This is what we’re doing, this is why, and this is how we’re going to do it.” And that part—the communication and the evangelizing of the company vision and goals—is time-wise by far the biggest part of the job.” — Sam Altman, Y Combinator

Eventually, you’ll have hired so many people that you have nearly a whole new staff. The company will have new procedures and operating principles. It’ll have new products and new markets. There will be whole new departments in the company. Leaders have to remember that they can’t predict where the company will be in three or five or ten years, so they can’t plan for that. At this phase, plan everything for the medium term. Hire people who will meet the company’s needs for the next 12-18 months, build an organizational structure for the next 12-18 months, build a board for the next 12-18 months.

Inevitably, this means that you will have to reorganize your company. Probably more than once. Gil walks us through how to do this:

1. Decide why the company needs the new org structure
2. Determine what org structure is most pragmatic
3. Get buy-in from the right people before implementation
4. Announce and completely implement the reorganization within 24 hours. Everyone has to move quickly or else they give people time to resist the reorg and time for rumors and panic to spread. If there is much time between announcing a reorg and implementing it, that will be unproductive time.
5. Brief everyone on leadership and make sure that they’re ready to answer questions about it before announcing.
6. Remove ambiguity, make sure leadership knows 100% where everyone is going and that everyone else knows 100% where they are going.
7. Communicate directly, clearly, and compassionately. Listen to people’s concerns, but keep backtracking to a minimum, this is being done for a reason and backtracking could just start to undermine that.

The best way to retain good employees is to give them someone that they can learn from. This will help them to adapt from the company they were hired into to the company that it will be 8 months later. Make sure to communicate these changes though. People cannot grow with something if they don’t see the growth, so a CEO needs to make sure that everyone under them understands how and why the company is changing and help them find the way that they will best fit into the new company.

“When it comes to culture, I think that the main mistakes that companies make are being too precious about it, being too apologetic about it, and not treating it as dynamic and subject to change.” — Patrick Collison, Stripe

ESTIMATION QUESTIONSInterviewers care more about your problem-solution approach than a numerically accurate answer. Use this 8 step process to answer estimation questions.

1. Clarify the question — Repeat the question back to the interviewer and ask about any detail which seems ambiguous.
2. Identify knowledge required to solve the question — Find out what data you have and what needs to be computed. You can ask interviewers for critical facts in some cases.
3. Make an equation — Form an equation to solve the problem. Before you choose one approach, brainstorm multiple possible equations and choose the best plan of attack. Communicate your approach to demonstrate your thought process to the interviewer.
4. Think about edge cases — Think about possible edge cases and problems in the approach. Be open about challenges to show the interviewer that you are detail-oriented and unafraid to discuss shortcomings of your approach.
5. Break it down — Compute each component of the equation through the construction of sub-equations.
6. State your assumptions — Rely on experience and intuition to make reasonable estimates for key variables. State your assumptions clearly. Pick round numbers.
7. Compute — Do the math. Remember that estimation questions only require a ballpark answer.
8. Sanity Check — Before you share the answer with the interviewer, double-check if your answer is reasonable in accordance with commonly known facts.

CASE QUESTIONSPM interview case questions can lead you astray because they are dangerously similar to consultant case questions. Unlike case interviews where consultants will be asked to solve organization-scale problems based on data, interviewers expect PM candidates to solve product questions through reliance on their product instincts. PM candidates must make sound business decisions in the absence of detailed data. Use management frameworks like the 4P's, SWOT analysis and Porter's five forces to structure your response.

"The best way to learn Product Management is through observation and interaction with seasoned PMs. Look out for products users love and find ways to get in touch with the PMs behind them. Talk to them to understand their process and the frameworks they use to make decisions. Besides the ability to learn more about Product Management, a robust network can open many PM opportunities."

Mergers and AcquisitionsM&A, in Gil’s approximation, is a criminally underrated tool for businesses in the hyper-growth phase. Usually thought of as a tool for giants, most hyper-growth stage companies are in fact in a strong position to be acquiring other companies. This tool can give a company access to talent it wouldn’t otherwise be able to get, can knock out competitors or prevent competitors from entering the market, can improve its own products, and can advance development by months or years. Many of the products we think of today as integral to a company’s strategy were in fact gotten through M&A. Google, for instance, acquired Android, Google Maps (from ZipDash) and Gmail (from Reqwireless) this way.

There are three main ways that your company can use this tool: Hiring M&As – These M&As, also called team M&As or acqui-hires, are done to get the personnel that another company has. If a company wants to build a machine learning product and a failing startup has outstanding machine learning and AI engineers, that company can buy the startup just to add those engineers to the team. Their product can be kept, but it’s not the main point. * Product M&As – These are done for the sake of a piece of IP. The three M&As from Google above are a great example. If a company wants to build out an email application, sure, it can do it itself, but many times it will be far easier, faster, and cheaper to just use the work someone else already did. * Strategic M&As* – These are usually about competition. They can either be to eliminate a competitor, such as Facebook’s acquisition of Instagram, or to prevent Big Scary Company X from entering the market by acquiring the same company being acquired now.

While your team may push back against these rollups in favor of internal development, it will usually be the case that you will save yourself a lot of time, energy, money, and hassle with strategic M&A.

As you consider an M&A, make an M&A roadmap. Ask yourself:

What do you need? Do you need people, new engineers, or coders? Facebook’s acquisition of drop.io was largely to get Sam Lessin. Do you need a tool that can be adapted into a product you already have, like Twitter’s acquisition of Summarize and subsequent transformation of it into Twitter Search. Or do you need a new product all together, like Google’s acquisition of Android? It may also be that you need to keep a competitor out of the game — although this practice is currently under scrutiny as anti-competitive.

Who has what you need? Figure out which company has something similar to what you need. There may be more than one. If so, figure out whose product is best, who has something you can’t make yourself, and who seems most open to a sale.

What type of M&A am I pursuing? Product? Hiring? Strategic?

Is this company a good fit for mine? Run these general considerations through your head:

• Can we absorb a company of this size without screwing up our culture?
• What will our org chart and reporting structure be?
• Will the leadership of the team have an impact more broadly on our company?
• Are there areas we are struggling with that they can own?

IPOsGil believes that for much of this century companies waited too long to go public. A lot of companies through the 2000’s and early 2010’s waited as long as they could. Gil thinks that this is a mistake and that CEOs should try to go public as soon as possible. In his opinion, the pros heavily outweigh the cons — But how does one know when it is right for their company?

Pros1. Employee retention, hiring, and conversion: After an IPO conversion and new employee retention will often go up. New employees will value the new, more liquid stock higher and believe that they have more of a future in the company. Old-timers may leave now that they can sell their stock more easily, but many would have left anyway. 2. Mergers & Acquisitions:When buying a company now, there’s no longer any need to discuss and debate how much stock is actually worth as a currency. 3. New capital sources for a company: Public markets give a company access to a lot more funding. Tesla for instance would not have the cash it has now were its stock not so valued on the public market. Especially in a tight capital marker, this can provide funding when none other is available. 4. Ability to partner or sell at scale: A public company tends to be taken more seriously for partnerships, sales, and other business activities. 5. Fiscal and business discipline: Public market pressure can force companies to take more seriously their financial position. For Facebook, monetization was not a major concern until after their first big dip in sale prices when Zuckerberg directed his team to more seriously develop it.

Cons1. Larger, more complex board of directors: Once a company goes public, it has to staff committees at the board level. This makes the board larger and more complex, which also means it will be harder to manage. 2. Financial and other controls: Companies will have to abide by more regulations and financial controls. Some of this will be good for the business overall, but more will just slow it down. 3. Employee mix shifts: As the company develops, new employees will be more risk averse than early ones. If they were more open to risk, they would have joined earlier.

The Icarus ConundrumLast, Gil shares the top 3 scenarios to avoid when it seems like everything is on an upward trajectory with no end to the good times in sight.

1. Waste not – At the height of its fundraise, Dropbox bought its office a giant chrome panda. But as time went on, the panda became a symbol for wasteful spending. If your company wants to spend VC money on a Juicero machine, you’ve probably flown too close to the sun.
2. Expand too far – While Uber was able to capture 20% of the Chinese market with its investment in its Chinese counterpart DiDi, nearly every other tech giant that has tried to launch in China has had its operations blocked and shut out for its failure to abide by China’s rules. Don’t try to expand too fast without weighing the rules of the countries you want to enter or you’ve flown too close to the sun.
3. False casual – Gil once worked for a 120-person team at a startup backed by the VC firm Sequoia. Three months after he joined, the company expanded to 150 team members. After a round of layoffs, the company thought a pool table would help employee morale. But in the nine months that followed, the company held four more rounds of layoffs until the team shrunk down to 12. The pool table became a symbol for “company waste” and anyone Gil saw play pool ended up losing their job in the following round of layoffs.

While it seems like a good idea to try to build morale with workplace perks (especially at the height of your growth) — it's better to spend money where it counts so you don’t fly headfirst into the sun.

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By: Felix Oberholzer-GeeSYNOPSIS Ever wondered what strategies make Apple, Amazon, and other juggernauts so successful? We read the book Better, Simpler Strategy by Felix Oberholzer-Gee and will share the top insights he uncovered that explain how top companies succeed.

You'll learn the value stick framework to raise a customer's willingness to pay and lower an employee's willingness to sell, how customers and employees contribute to value incentives, how to build value maps to compare against your competitors, and how companies like Amazon, Apple, Ford and Nike prioritize the right value drivers to grow their business.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. A higher willingness to pay (WTP) is not a guarantee for success. What matters is customer delight, the difference between WTP and price. JetBlue may have better customer WTP than American Airlines. But still, customers will prefer American Airlines if the difference between American's WTP and ticket cost is more than the difference between JetBlue's WTP and ticket cost. This is because they prefer American's brand. 2. A focus on WTP throughout the customer journey beyond the purchase decision gives you new ways to increase customer delight. Sony dominated the e-reader market with a great product and first-mover advantage. But Amazon won because it offered free 3G access to buy books instantly, which Sony could not match. Amazon's insight came from its focus on value creation across the customer journey. 3. Prioritize value creation over your current business model. When Larry Page and Sergey Brin tried to sell their search algorithm for just $1.6 million to search engine company Excite, their CEO refused because a better algorithm would reduce the time spent on the home page and lower revenue from advertising. Excite is dead, and Google is now valued at over $1 trillion. 4. Focus on your near-customers, those whose WTP is just below your price. Upstart Taobao took 84% market share from eBay in China within four years because it focussed on near-customers who wanted to shop online but were scared. Taobao's Alipay ensured that payments were only made after sellers shipped, allowed customers to bargain with sellers and deployed a brick-and-mortar look to create familiarity. 5. Complementary services are a powerful way to increase WTP and create customer delight, and are particularly powerful if they raise the WTP for only your specific product. FaceTime raises the WTP for iPhones but not Android devices. Tesla's Superchargers charge only Tesla cars — at least initially. If your organization gains more from overall category growth, non-proprietary, industry-level complements are ideal. 6. Treat your partners as a frenemy, not a friend. Partners collaborate to create value but quarrel on how to split that value. Compliments always seek to gain more value from their partner. Intel wants Windows to be inexpensive while Windows seeks to lower Intel's hardware costs. 7. Negotiations between partners have more significant stakes than negotiations between companies and suppliers. As complement prices fall, your product becomes more valuable. When you negotiate a 10% discount with a supplier, your benefit is 10%. However, if you manage to lower the price of a complement, you not only receive a discount but also see an additional increase in your product's WTP, which provides price flexibility. 8. When the competition heats up, companies that make their own complements can drop prices in competitive areas and raise WTP in better-protected areas to shelter overall profits. When Apple faced increased competition from Android phones, it shifted its profits from hardware to software. Between 2009 and 2018, Apple's iPhone margins fell from 62% to 38%, while its average profit from apps rose nearly four times. 9. Winner-takes-all outcomes of Network Effects like Facebook are rare. Network effects are usually limited by geography and culture. Uber has 3 million drivers globally, but it has to start from scratch every time it enters a new market. Once DiDi pulled ahead in China, the market tipped, and Uber had no chance. But Uber's defeat in China had little impact on its dominance in other markets. 10. There are three strategies by which smaller companies can successfully compete with the network effects of large platforms. First, develop features to boost willingness to pay that are independent of scale. Second, dominant platforms are either buyer-oriented or seller-focussed. Create meaningful differentiation with a focus on the WTP of the group neglected by your competitor. Third, focus on a niche group of customers and create deeper connections between them. 11. To lower employee willingness to sell (WTS), choose ways to improve employee satisfaction over a simple pay raise. A pay raise reduces margins and merely redistributes current value without new value creation. But measures to improve work conditions create new value, and companies can capture part of this value in many ways. Companies can offer below-market compensation, enjoy greater loyalty and engagement and get larger applicant pools. 12. Gap improved WTS for part-time employees because it offered predictable shifts in an industry where 80% of part-timers report huge schedule variations. Gap standardized shift timings, scheduled employees for the same shift, provided a minimum of 20 work hours per week for core staff and created an app for workers to trade work hours. Productivity increased by 6.8%, and job satisfaction rose without a pay hike. 13. The measures you choose to reduce WTS can be powerful ways to attract the right employees to your organization. BayCare, an organization that runs hospitals in Florida, is nationally recognized for its training programs. The programs made BayCare particularly attractive for healthcare professionals who value continued training and education. Choose your measures to reduce WTS based on the type of talent you wish to apply. 14. Companies pay suppliers less to improve margins while suppliers push to enlarge their surplus. These zero-sum games create no value. Think of ways to lower the WTS for your suppliers and create more value so that both parties can be better off. Nike enabled its suppliers to adopt lean manufacturing, and the resultant productivity advances both lowered Nike's WTS and increased supplier productivity simultaneously. 15. Do not underestimate the productivity gains that come from established management techniques. Conventional management wisdom says that best practices are easily replicable. However, research shows that, across industries and countries, companies fail to adopt essential tools such as goal setting, performance tracking and frequent feedback. Good management practices are hard to achieve, diffuse slowly and can serve as the basis of long-term competitive advantage. 16. Organizational learning can lead to robust productivity gains. Indian hospital group Narayana Health exploits organizational learning to offer complex surgeries at remarkably low prices. A surgeon at Narayana health performs 200 open-heart surgeries annually, twice as many as a doctor at Cleveland Clinic. High volumes improve productivity (and lower WTS), reduce cost and improve quality, which raises WTP. Narayana Health's success rates rival the very best hospitals in the West. 17. However, excessive emphasis on organizational learning can stifle innovation. When an organization runs a process multiple times to create process improvements, product and process become closely intertwined. Innovation becomes difficult as significant product changes require an extensive process overhaul. Ford's obsession with process improvements for Model T made it costly to introduce new models. 18. A focus on WTP does not mean you build every possible feature. Excellence always requires resources that are in short supply: time, capital and managerial attention. To be great at a few critical features, companies have to be comfortable with deemphasizing others. Slack succeeded because it focussed on just three critical features - search, synchronization across devices and file sharing and neglected others. 19. Value maps help you translate strategic ideas into specific activities and initiatives. List value drivers, the criteria your customers care about most and rank them from most to least significant. For each value driver, rank your company's competence on a scale of 1 to 10. A poor score next to a highly-ranked value driver is a clear opportunity for progress. You can also use value Maps to manage talent. 20. It is possible to raise WTP and lower WTS at the same time. To build this dual advantage, focus on the natural connections between WTP and WTS value drivers. Apple gets a steep discount from malls (lower WTS) as the company brings 15% more foot traffic (higher WTP) for the mall. Zara's fast fashion model reduces inventory (lower WTS) and provides customers with the latest trends in clothing (higher WTP).

SUMMARYOver the past few decades, strategy has become increasingly sophisticated. However, only a few companies manage to translate strategy into enduring financial success. Too often, strategic planning becomes an annual ritual. The Value-Based Strategy approach cuts through complexity and clarifies where to focus and how to deepen competitive advantage.

THE VALUE STICKA Value Stick visually represents the Value-Based Strategy approach with four components: Willingness to pay (WTP), Willingness to sell (WTS), Price and Cost.

The value stick is a simple and powerful tool to understand value creation and value capture. The stick provides the customer's maximum willingness to pay on top, followed by product price, cost and finally, the employee's willingness to sell at the bottom.

Willingness to payWTP represents the most a customer would pay for your product or service. If companies improve their product, the WTP will increase.

Willingness to sellWTS is based on employee and supplier perceptions. For employees, WTS is the minimum compensation they require to accept a job offer. If companies make work more attractive, WTS reduces. If a job is dangerous or exceptionally demanding, WTS increases.

For suppliers, WTS is the lowest price at which they will offer products and services. If companies make it easier for suppliers to produce and ship products, WTS will decline. Think of WTP and WTS as walk-away points.

The difference between WTP and WTS is "Value" for the customer. The difference between compensation and WTS is "employee satisfaction." Finally, the difference between prices and cost is the value captured by the firm. Draw value sticks for specific products and specific customer and employee groups.

Value Creation and CaptureThe total value created by a company is the difference between its WTP and WTS. Strategies that lead to exceptional performance use three levers to produce differentiated value:

• Create customer delight to increase willingness to pay.
• Create improved work conditions to decrease employee Willingness to sell.
• Improve organizational productivity in ways that are difficult to imitate.

There are only two ways to create additional value: increase WTP or lower WTS. Every significant initiative must either enhance customer experience (raise WTP) or make it more attractive for vendors or employees to work with you (lower WTS).

Strategists think in Differences.A company's ability to capture created value depends on its ability to create differentiated value. The higher the similarity between your firm and your competitors, the more customers will focus on price, which will create pressure on the firm's margins.

Many passengers choose which budget airline to fly solely based on ticket prices. Price competition puts pressure on margins and reduces a firm's ability to capture value.

Companies with a sustained competitive advantage raise WTP or lower WTS in ways that competitors find hard to replicate. Apple significantly raises WTP with unique products which are radically different from their competitors.

CREATE CUSTOMER DELIGHT WTP is influenced by the product, its associations, the status they confer, the joy they bring and the social considerations they cause. While a product-centric manager focuses on purchasing decisions and ways to sway the customer, WTP attempts to increase customer delight throughout the customer journey. Develop practices to periodically remind the entire team of the firm's focus on WTP.

Improve WTP Across the Consumer JourneyAmazon entered the billion-dollar e-reader market dominated by Sony's Librie. Sony had a great product, a first-mover advantage, dominant market share and a big marketing budget. Despite these advantages, Amazon won a 62% market share within just five years. Amazon won because it offered free 3G internet access, which enabled users to instantly download e-books, while Sony users had to rely on computers. The product-centric Sony focussed only on a great reading experience which it knew would influence the customer's purchase decision. Amazon, in contrast, focussed on WTP and improved convenience across the customer journey.

FOCUS ON NEAR CUSTOMERSCompanies are familiar with their customers and know about consumers of rival firms. But often, they ignore potential customers who are not currently active in the market but may be interested. Near-customers are the segment whose WTP is slightly below the level required to make a purchase. Understanding this group's value drivers can unlock significant business opportunities. Ask yourself why near customers don't buy your product and how you can tweak your product to boost their WTP and make them buyers.

TaoBao Beats eBayTaobao, a small Chinese startup launched by Jack Ma, took on a dominant eBay, which had an 85% market share with a focus on near-customers who wanted to shop online but were cautious to make a purchase. Taobao provided an escrow service, Alipay, to ensure customers paid only after sellers shipped a product. A second key feature was WangWang, an instant message service that allowed buyers to bargain with sellers. Finally, Taobao's website visually resembled a brick-and-mortar store to create familiarity. Taobao's group of near-customers grew far faster than eBay's customers. Taobao had an 84% market share within four years.

WIN WITH COMPLEMENTSWithout complements, the WTP of many products would be zero. Think of smartphones without any apps. Complements can be particularly powerful if they raise your WTP and not those of your competitors. Tesla Superchargers initially supplied power only to Tesla cars.

Exclusivity is a tricky choice. Ask yourself if you seek to gain the most if you grow your market share or grow the category overall. To grow market share, keep complements exclusive. To benefit from category growth, go for non-proprietary industry-standard complements. To discover complements, ask yourself what customers do before they interact with your business and how you can reduce friction there.

Cooperation and ConflictWhenever the price of a complement declines, the WTP for the other product increases. Because apps are cheap, customers are happy to spend more on smartphones. While partners jointly create complimentary value, they often compete on how to share that value. Spotify works hard to promote new songwriters but simultaneously pushes hard to reduce their royalties. There is more at stake in negotiations than a simple supplier negotiation. When you lower the price of a complement, not only do you get a discount, you also see an increase in the WTP of a product.

Create Profit PoolsCompanies that make their own complimentary services can shift profits from one product to another. Gillette gives away its "core product," the razor, in return for substantial margins on the complementary product blades. Microsoft barely makes money from consoles. When the competition heats up, they can drop product prices and raise WTP of complements to protect overall margins.

Apple kept the price of music and apps low to generate exceptional margins on the sale of iPods, iPads and iPhones. Over time, Apple's gross margins on the iPhone fell from an estimated 62% to 38% between 2009 and 2018 due to intense competition from Android Phones. However, Apple grew its gross profit from an average app by four times in the same period. In a dramatic strategic move, Apple shifted its profit pool away from hardware to software.

NETWORK EFFECTS AND TIPPING POINTSIn markets with strong network effects, customer WTP rises as the adoption of the product increases. Network effects can lead to tipping points, from low adoption to universal acceptance in a short period. In 2010, mobile payments had not taken off in China. Within a decade, three-quarters of the Chinese population prefers mobile payments to cash, and many retailers have stopped cash entirely.

Types of Network EffectsThere are three types of network effects:

1. Direct Network Effects — WTP rises with each additional customer who uses the product. Think of mobile phones or fax machines.
2. Indirect Network Effects — Companies raise customer WTP through complements. As more customers purchase smartphones, developers will create more apps. Indirect network effects create chicken-and-egg scenarios. More charging stations are needed for more people to buy electric cars. But more cars are needed to make charging stations viable. To break this, companies will have to invest in complements like charging stations to spur network effects.
3. Platform Network Effects — WTP increases for one group as the other group grows more prominent. On Amazon, WTP increases for customers as the number of sellers rises and vice-versa.

Network Effects can provide formidable advantages, and markets often tip in favor of a few companies. However, many network effects are bound by geography. Uber has 3 million drivers globally but still has to compete in every new market it enters. Regional network effects create powerful first-mover advantages. Once DiDi grew in China, Uber stood no chance even though it was a global behemoth.

How Smaller Firms Can CompeteSmall firms can compete effectively in three ways:

1. Create customer delight that does not depend on scale.
2. Create meaningful differentiation with a focus on the WTP of a group of customers neglected by the dominant platform.
3. Serve a small niche of customers.

VALUE FOR EMPLOYEESEmployee satisfaction is the difference between their compensation and their willingness to sell. Firms can improve satisfaction with increased compensation or lowered WTS to make work more attractive. However, there are essential differences between both approaches.

Increased compensation lowers margins and merely redistributes value. But more attractive work conditions create more value as they reduce WTS, the minimum compensation for which an employee will work. The firm can share a part of this value with employees and use the rest to increase margins.

Making work more attractive goes beyond process optimization to include everything from food choices to tone of feedback to even commute. Companies that lower WTS can capture a part of the value they create through below-market compensation, greater loyalty and engagement and an increased pool of applicants. To be competitive in the talent market, companies don't necessarily have to match market compensation levels. They have to create as much value for employees, which is the difference between compensation and WTS as their competitors. If the drop in WTS is more significant than the cut in salaries, both company and employees are better off.

SUPPLY CHAINSCompanies want to increase margins and pay suppliers less, and suppliers seek to enlarge their surplus. These bargaining efforts are zero-sum games that create no value. All gain comes at the expense of the other party.

However, if you manage to decrease the WTS of suppliers, more value is created, and both your company and suppliers can be better off. The relationship between the company and supplier determines WTS. If a supplier gains prestige by working with a company, WTS is lower. To lower WTS and create more value, teach your suppliers to be more productive is an effective way to lower WTS and create more. Nike enabled its suppliers to adopt lean manufacturing, and the resultant productivity advances lowered WTS and increased margins simultaneously.

The World's Cheapest CarSometimes changes in WTS occur from changes in the company's approach to suppliers. Many buyers are overly prescriptive in their demands of suppliers. But over-specification robs suppliers of the opportunity to adopt novel processes and introduce innovative products and services. When Tata Motors set out to design the world's least expensive car, it asked Bosch Automotive to design the engine. However, they gave no rulebooks or specifications. They merely mentioned the design constraints and cost goals and allowed Bosch to find innovative ways to achieve them. Bosch's technical breakthroughs found their way into multiple Tata engines.

PRODUCTIVITYAdvances in productivity lower cost and willingness to sell at the same time. Companies have considerable opportunities to improve productivity, which lowers both costs and WTS. The productivity gap between the top 10% of companies and the bottom 10% of companies is stunning. A US company in the 90th percentile is twice as productive as a company in the 10th percentile. In China and India, top performers produce five times as many products as the least efficient companies.

There are three ways to improve productivity:

1. ScaleIn some industries with fixed costs, companies benefit from economies of scale. In such an industry, you must know your Minimum Efficient Scale (MES), the volume required to be cost-competitive. Below MES, you will not be able to compete with larger rivals. Once you achieve MES, continued growth no longer results in a more significant cost advantage.

2. LearningAs companies increase production volumes, costs decline because employees gain familiarity with products and processes and find new ways to improve productivity. By 1926, the cost of manufacturing a Ford Model T had dropped to $840 — from $1300 in 1909. This price drop was despite a threefold rise in wages for workers. Learning alone had dropped costs by nearly one-third. Learning not only improves productivity but can also improve WTP in some contexts.

A surgeon at Indian hospital group Narayana Health performs nearly 200 open-heart surgeries annually, nearly twice as much as a doctor in Cleveland Clinic. The high volumes reduce cost and improve quality. Narayana Health's success rates rival the very best hospitals in the West. AI and machine learning have renewed interest in learning as a source of competitive advantage.

However, there is a dark side to learning. An excessive focus on process optimization can lead to a deep intertwining of product and process. Innovation gets stifled as it becomes too costly to make significant changes. Ford's learning effects meant that it had to wait nearly two decades before it could implement important product innovation.

1. Operational EffectivenessHigh-quality management practices and operational effectiveness help create meaningful differentiation between companies. Contrary to conventional management wisdom, management best practices are difficult for competitors to imitate and serve as a basis for long-term competitive advantage. Operational effectiveness and strategy are intertwined, and companies must not pay importance to this distinction. Instead, they should consider if they have the potential to raise WTP or lower WTS.

VALUE MAPSA value map is an excellent tool to visualize critical strategic opportunities and tradeoffs. To build a value map, select your target customer group and use data-driven surveys to rank value drivers, the core list of criteria that customers value in the order of importance. Finally, on a scale of one to ten, indicate how good your company is in meeting each value driver. Create this map for your organization and see which value drivers you could use to improve WTP.

A company's ability to capture value depends entirely on differences in WTP or WTS compared to competitors. Compare your company's value map to your competitors' value propositions to identify critical differences and devise ways to heighten them. Choose a coherent group of value drivers that help customers achieve similar objectives also differentiate your product from the competition.

Remember, to improve performance on any value driver, organizations must deprioritize another value driver. Resources are scarce and must be allocated to ensure excellence in a few core areas. It's far harder to determine where not to invest and where to underperform. At every strategy meeting, teams must ask themselves, what will we stop doing to ensure that we execute on our key priorities. Once you decide which value drivers to strengthen and which ones to deprioritize, strategic implementation follows naturally.

Create Competitive DifferentiationCompare your company's value curve with your competitors' value propositions to identify relevant differences and find ways to heighten them. Organizations should choose a set of related value drivers as a theme that help their customers achieve similar objectives. Your theme must help differentiate your product from competitors.

You can also use value maps to understand lower employee WTS. If your company depends on critical suppliers, you can create value maps for those relationships as well.

Improve Both WTP and WTSOrganizations can improve WTP and lower WTS simultaneously if both sets of value drivers are naturally connected. Malls give Apple a discount (lower WTS) because it attracts many shoppers (higher WTP). Doctors at Narayana Health perform more surgeries, which improves quality (higher WTP) and raises productivity (lower WTS). In services, employee satisfaction and customer experience are deeply interlinked. To create dual advantages, focus on connections that lead from one set of value drivers to others.

To get the strategy conversation started in your team, take a piece of paper, draw a value stick and ask three simple questions: What do we do to change WTP? How do we change WTS? What are the connections between our value drivers, prices and costs? The key to organizational growth is a relentless focus on value creation. The value-based approach enables your company's core purpose: create more value for customers, employees, suppliers and shareholders.

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BY: DONELLA H.MEADOWSSYNOPSIS How do you avoid wasted time, money, and resources from short-sighted decisions? When you think in systems, you can learn to recognize the relationship between structure and behavior to create better business decisions. This approach can help you understand any system to adjust and improve it.

Author Donella H. Meadows introduces simple explanations of what makes a system alongside the elements that drive its behavior. In addition to basic and complex system fundamentals, Meadows shares insights into a number of common traps to avoid when thinking in systems and how to escape them.

EXPLAINER VIDEO

TOP 20 INSIGHTS1. A “system” is a set of independent things that are interconnected in a way that causes them to produce their own patterns over time. Outside factors may unleash that behavior, but the system patterns are largely internal. For example, the market economy has natural ups and downs that can be impacted by politics, but is not driven exclusively by them. 2. A system must consist of three kinds of things: elements, interconnections, and a function or purpose. Each part must be vital to the system’s function. Football players, coaches, and the field are elements connected by rules. Take away or change any one of those and you alter or break down the system’s function. 3. Many systems contain both human and non-human elements. “Function” is generally used for non-human systems, while “purpose” refers to human ones. This function or purpose is often the least obvious, but the most crucial determinant of a system’s behavior. Change a team’s purpose from win to lose, and the entire game strategy changes. 4. A “stock” is the foundation of any system. Stocks are the elements of the system that you can see, feel, count, or measure but do not have to be physical. Customer satisfaction levels can be a stock, for example. Stocks change over time through the actions of flows, i.e. sales, growth, shortages, failures, etc. 5. You can understand the behavior of complex systems if you observe the dynamics of stocks and flows. A bathtub is a system that consists of inflow (faucet), outflow (drain), and stock (water in the tub). If you plug the drain or turn down the water, the stock is impacted accordingly. 6. When you look through a system-thinking lens, it will allow you to reclaim your intuitions about whole systems and how they work. You will be able to hone your ability to understand parts, see interconnections, ask “what-if” questions, and be creative and courageous about system redesign. 7. System thinkers see the world as a collection of feedback processes ̶ a collection of stocks along with the mechanisms that regulate flows, and therefore the entire system. “Everything we do as individuals, as an industry, or as a society is done in the context of an information-feedback system,” said Jay W. Forrester. 8. A “feedback loop” is formed when changes in stock affect the flows into or out of that same stock. If stock is the food in your pantry and it looks bare, you can balance the level by the purchase of more food (inflow) or a self-imposed ration on your portions until payday (outflow). 9. “Balancing feedback loops” seek goals or stability while resistant to change. If you push a stock level too far up, a balancing loop will try to pull it back down. A cup of coffee begins hot then cools. If temperature is your stock, a cup warmer will resist the change. Introduce balances as needed. 10. A “reinforcing feedback loop” enhances whatever direction of change is imposed on it. High inflation leads to higher prices, increases wages, and leads to price hikes. If you tell a teenager “no,” it makes them want to do it more. If you support positive feedback loops like reinvestment of profits, this behavior can be harnessed. 11. It is possible to calculate the amount of time it would take to double a stock within a reinforcing feedback loop. The “doubling time” equals approximately 70 divided by the growth rate (in percentage). If you deposit $100 at 7% interest, it will take you 10 years to double your initial investment. 12. Systems rarely have only one feedback loop. A single stock likely has several reinforcing and balancing loops of various strengths that pull it multiple directions. Complex systems, like the human body, do more than remain steady. Every part of our bodies has its own loop that impacts overall health. When a system’s health declines, diagnose each loop. 13. “One stock systems” have one purpose, such as to regulate the temperature in your home. The stock is the desired temperature, linked by a thermostat that balances the feedback loop that uses a furnace and air conditioner. Identify weakened loops like a faulty furnace or drafty windows that make the system ineffective. 14. Any physical system that grows must have at least one reinforcing loop that drives growth and a balancing loop that constrains it. “Two stock systems” have a renewable stock constrained by a nonrenewable stock, such as a fishery. No physical system can grow forever and will eventually run into constraints, temporary or permanent. 15. To understand a system, look at other systems with a similar feedback structure. Systems with similar feedback structures produce similar behaviors. A production system with shipments and economic flows works a lot like a population system with birth and mortality. Both have stock governed by a reinforcing growth loop and a balancing death loop with a natural aging process. 16. Make partial adjustments as needed based on recent trends to avoid overcompensation and system imbalance. A “regulatory feedback system” accommodates for variables that can be expected, but not predicted. Car dealerships, for example, consider a buffer in stock when they reorder more cars in case fulfillment is delayed or sales increase. However, this “just-in-time” operational strategy has recently caused major problems for automakers and forced them to rethink their strategy. 17. Delays are pervasive in systems and strongly impact behavior. If you change a delay, it can greatly impact the behavior of your system, for better or worse. Speed up an information delay, and a part of your system might work faster. But if you overcompensate a change, it can cause a reinforcing feedback loop. For example, Toyota was able to largely avoid the same pandemic-related supply chain issues that hurt most automakers through the stockpile of specific parts and its mastery of its network. Other car companies will now need to do the same. 18. Systems need to be managed not only for productivity or stability but also for resilience. Awareness of a system’s resilience enables one to see many ways to preserve or enhance this quality. Build up your system’s “immune system” through the maintenance of each element so that it can better maintain itself. 19. Rules that govern your system can lead to the exploitation of loopholes that distort the system. Despite the obstacle, this behavior can be used as helpful feedback. Design or redesign rules to release creativity away from exploitation and towards the rules’ intended purpose. 20. Beware of policies or practices that relieve systems or deny signals but fail to address the underlying problem. Strengthen elements of your system in a way that allows them to better support themselves, then remove yourself from the equation. Shift focus away from short-term solutions and instead think long-term sustainability.

SUMMARYA system is defined as a set of independent things that are interconnected in a way that causes them to produce their own patterns over time. Nearly everything is a system, from our bodies to the universe and the computer you use to read this.

Systems are influenced by outside factors, but any system’s patterns are largely internal. When a Slinky is extended, it bounces not because of the hand that holds it, but because of its system of coils.

A system consists of elements, interconnections, and functions. In the case of human-built systems, function could also be a purpose.

Stocks are the “foundation” of a system and are the element that you can see, feel, count, or measure. A feedback loop is formed when changes in stock affect the flows into or out of that same stock. A prime example of this concept is interest as it relates to the amount of money in a bank account. Likewise, if you see less money in your account, you might react and take more work and thus the cycle continues.

Hitch a Ride on Runaway loopsReinforcing feedback loops are found whenever a stock has the capacity to reproduce itself or grow as a constant fraction of itself. The more customers leave positive feedback about your company, the more people will try it and leave more feedback. Over time, your stock – in this case, customer satisfaction – will reproduce on its own.

Negative reinforcing feedback loops are better known as “vicious cycles.” If you’re stressed, you might eat a tub of ice cream, which makes you feel guilty, which stresses you out, so you reach for more food.

Systems thinking would have you reflect on this cause and effect. If A causes B, is it possible that B also causes A?

A systems analyst can test several scenarios and observe what happens when the driving factors do different things. These dynamic systems studies are not typically designed to predict the future, however. Rather, they are designed to explore what would happen if a number of driving factors unfold in a range of different ways.

When you test the value of a model, ask yourself:

1. Are the driving factors likely to unfold this way?
2. If they did, would the system react this way?
3. What is the force behind the driving factors?

Model utility depends not on whether the model’s driving scenarios are realistic but on whether it responds with a realistic pattern of behavior.

Types of SystemsOne stock systemsA one-stock system is what it sounds like – a system with one stock that is constantly influenced by goal-seeking feedback loops. For the sake of simplicity, let’s look at a room’s thermostat and assume that power is unlimited.

In this case, our stock is the room’s temperature, regulated by feedback loops – a furnace and an air conditioner. Other loops can be leaks to the outside through drafty windows or poor insulation. The temperature outside is another loop that influences our stock. If all loops operate at the same time (AC and heating included), the temperature will not be balanced.

People have learned to accommodate their thermostat usage for feedback loops such as heat leakage through windows and doors, a small furnace, or a super-powerful AC unit that cools quickly.

TWO Stock systemsA two-stock system will have a renewable stock constrained by a nonrenewable stock, such as any industry that works with the environment – forestry, energy, cattle, etc. Any physical system of this type is bound to naturally occurring rules. Specifically, they must have at least one reinforcing loop that drives growth and a balancing loop that constrains it. No physical system can grow forever and will eventually run into constraints, temporary or permanent.

The Bigger they Are, the Harder they FallA quantity that grows exponentially toward a constraint/limit reaches that limit in a surprisingly short amount of time. If you are an oil company that has identified a new drilling site, and the resource turns out to be much larger than geologists anticipated, you have a few options. You can increase extraction and see profits quickly but exhaust the resource faster. Alternatively, you can make less money but keep a steadier extraction for a longer period of time. With variables such as fuel demand and oil prices in constant flux, either choice is a gamble.

Fisheries run into a similar problem. Overcrowding lowers reproduction rates, and rare fish that fetch a higher price reproduce less often. The balancing feedback of smaller harvests that reduce profits brings down the investment rate quickly enough to prevent the fleet of ships from growing so large that overfishing occurs.

If a resource is depleted within a renewable resource system, three things can happen:

1. Adjustments are made to reduce the overshoot and return to a sustainable equilibrium
2. Adjustments are made in excess which results in oscillation around an equilibrium, or
3. The resource collapses, along with the industry dependent on that resource.

The constraints imposed on a renewable vs. non-renewable system differ based on stocks and flows. For example, non-renewable resources are stock-limited whereas renewable resources are flow-limited. If you extract a resource faster than it can regenerate, it will essentially create a non-renewable system. Whaling was one of the most prominent businesses in America before scientists understood the animals’ long reproductive cycles. At the time, whales appeared to be an infinite resource but proved to be quite the opposite.

The input that is most important to a system is the one that is most limited, such as oil or fish in the previous examples. These limits can easily be misidentified (“We’ll harvest more each year if we double our fleet of ships”). Any physical entity with multiple inputs and outputs will be surrounded by layers of limits. These limits can be self-imposed such as a pace of harvest. If they aren’t, they will be system-imposed, such as a finite resource that runs out completely.

How to encourage resilienceResilience arises from the dynamic structure of several feedback loops that have the ability to work in different ways to restore a system, even after a large setback. The key to this ability is redundancy – multiple feedback loops that operate through different mechanisms and time scales to accomplish the same goal. Make sure that no one feedback loop goes unsupported.

System Traps and EscapesAny system will have its own traps to avoid. Here are some common examples, as well as how to avoid them ̶ or if you find yourself trapped, how to escape.

Trap: Policy resistance“Too many cooks in the kitchen”

Any new effective policy pulls the stock further from the goals of other actors. When various actors try to pull a system stock toward various goals, the result can be policy resistance.

Escape: The best way to combat policy resistance is to establish a sense of unity. Bring in all actors and seek out mutually satisfactory ways for all goals to be realized or shift everyone’s focus toward larger and more important goals that everyone can get behind.

Trap: Tragedy of the commons“A failed honor system”

The phrase “tragedy of the commons” is credited to ecologist Garret Hardin, who in a 1968 paper described how shared resources (“commons”) are inevitably destroyed. This trap occurs when all users benefit from commonly shared resources, but also suffer from the abuses of anyone else. This leads to overuse of the resource and erosion until it is unusable. If you have ever tried to leave Halloween candy on the porch with a sign that encourages a one piece limit, you are familiar with how other children miss out because one was greedy.

Escape: Educate and exhort the users so they understand the consequences of abuse. Restore or strengthen the missing feedback link through the privatization of the resource so accountability is felt by individuals or regulate the access of problem users.

Trap: Escalation“I know you are, but what am I?”

Since exponential growth cannot go on forever, a reinforcing feedback loop will eventually collapse. Like two children that try to one-up a punch from the other, both will end up in tears.

Escape:The best defense for escalation is to prevent yourself from getting trapped in the first place. If caught in an escalating system, refuse to compete or negotiate a new system with balancing loops to control the escalation.

Trap: Success to the Successful“The rich keep getting richer”

Another reinforcing feedback loop occurs when winners are systematically awarded with the means to win again. If allowed to continue, winners take all and losers are eliminated.

Escape:Combat this loop through diversification (i.e. antitrust laws) or devise rewards for success that do not bias the next round of competition in favor of previous winners.

Trap: Shift the Burden to the Intervenor“Putting a Band-Aid on a bullet wound”

When a solution to a systematic problem merely disguises or reduces symptoms but does nothing to solve the underlying problem, the capacity of the original system to self-maintain begins to atrophy or erode, and a destructive feedback loop is set in motion. The system becomes more dependent on the intervention and less able to maintain its own desired state.

Escape:Intervene in a way as to strengthen the ability of the system to shoulder its own burdens, then remove yourself. Ask:

• Why have the natural correction mechanisms failed?
• How can obstacles to their success be removed?
• How can mechanisms for their success be made more effective?

Take the focus off short-term relief and put it on a long-term restructure.

Trap: Beat the System“Rules are made to be broken”

If an attitude to “beat-the-system” is pervasive with users throughout your system, it’s time to rethink your approach. From exploits in video games to government agencies that spend useless dollars to prevent a lower budget next year, “rule beating” is a common problem among various types of systems.

Escape:Treat these rule exploits as helpful feedback. Design or redesign rules to encourage creativity in how the purpose of the rules is achieved. Focus on the “spirit of the law” rather than the “letter of the law.” Ask yourself if there is a better way to achieve your goal.

Trap: Seek the Wrong Goal“There is no A for effort”

If the goals are defined inaccurately or incompletely, the system may obediently work to produce a result contrary to what its operators actually intended in the first place.

Escape:Specify indicators and goals that reflect the real welfare of the system. Do not confuse effort with result. Otherwise, you will be left with a system that produces effort, not outcomes.

Trap: Drift to Low Performance“If you’re not growing, you’re shrinking”

If you allow performance standards to be influenced by past performance, it sets up a reinforcing feedback loop that erodes goals and sends your system towards low performance.

Escape:Set standards according to the best actual performances instead of being discouraged by the worst. This pattern will reverse the flow of your feedback loop toward growth.

Find Leverage Points“If a revolution destroys a government, but the systematic patterns of thought that produced that government are left intact, then those patterns will repeat themselves… There’s so much talk about the system. And so little understanding.” - Robert Pirsig, Zen and the Art of Motorcycle Maintenance

Those who are deeply involved in a system often intuitively know where to find leverage points, but frequently push change in the wrong direction. MIT’s Jay Forester published a study of urban dynamics in 1969 that identified low-income housing as a leverage point in an economy.

What he found was that the less low-income housing there was in a city, the better off it was. The idea is counter-intuitive, and Forester was derided for his findings during a time when national policy dictated a slew of such projects across the country. Since then, many such projects have been torn down.

As systems become more complex, their behavior can become surprising.

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By: Larry Bossidy and Ram CharanSYNOPSIS How do you translate strategy into results? Execution is both an organizational culture and a specific set of behaviors. Leaders must be hands-on and intensively involved with three core interlinked processes -the people process, the strategy process and the operations process.

Authors Ram Charan and former Honeywell CEO Larry Bossidy share leadership strategies about how to hire doers that energize others, make decisions quickly, get things done through delegation and follow through. Business leaders who understand the reality of markets, customers and resources must own the strategy process and use the operations process to design new programs and tie performance to incentives. These three core processes are the foundation of competitive advantage.

explainer video

TOP 20 INSIGHTS1. The process to create an execution culture is similar to the six sigma process for continual improvement. Leaders constantly look for deviations from desired tolerance levels in execution across areas like profit margins to promotions. They swiftly close the gap and raise the bar for the entire organization. Like Six Sigma, execution works only when people practice it continuously. 2. Leaders who execute do not preside. They actively lead. The leader who presides takes pride in a hands-off style and does not deal with core issues or confront people responsible for poor performance. In contrast, those who actively lead are personally involved in the critical details of execution. They ensure people understand organizational priorities, assign tasks, follow up, and promote and reward people who execute. 3. Lack of execution can cost CEOs their jobs. In 2000 alone, over 40 CEOs from the top 200 companies on the Fortune 500 list were removed by their board because they could not execute what they had committed to do. 20% of the top business leaders in America lost their jobs only because they failed to master the art of execution. 4. The three core processes of execution are deeply interlinked. Strategy Plans must account for personnel and operational realities. People are chosen and promoted in light of strategic and operational plans, so operations must be linked to strategic goals and human capacities. 5. Employees need a small number of clear priorities to execute well. When you speak to employees, emphasize only three or four key priorities that will influence the overall company performance. They have to make daily trade-offs because there is competition for resources and ambiguity over decision rights. Without carefully thought-out priorities, people can get caught up in endless conflicts. 6. Companies don't execute because they don't measure, reward or promote people who know how to get things done. Ensure that there is a clear percentage differentiation in salaries, bonuses and stock options between top performers and other employees across the organization. This differentiation creates clarity in the organization that execution is rewarded and respected. 7. Emotional fortitude gives you the courage to be open to unpleasant information. It also allows you to accept opposite points of view, be firm with underperformers and handle ambiguity in a complex organization. Few leaders are good at everything their role demands. Emotional fortitude makes you comfortable with your strengths and, most importantly, puts mechanisms in place to address your shortcomings. Authenticity is key to emotional fortitude. 8. People watch a leader's behavior for ethical clues. If a leader behaves differently than what he preaches, the best will lose faith, and the worst will follow in his footsteps. Meanwhile, the rest will do what they can to survive in a muddy ethical environment. This toxic landscape becomes a barrier to get things done. 9. Candid conversations are central to execution. Honesty helps the organization effectively gather accurate information, process it and reshape it to produce decisions. Informality is the key to truth-based dialogues, as it invites questions, encourages employees to air brutal truths instead of consensus and fosters critical thought. 10. Executive development is a core competency. Leaders need to spend as much as 40% of their time and emotional energy in the selection, appraisal and development of people. As CEO of AlliedSignal, Larry Bossidy devoted 30-40% every day to guide future leaders. His effort created an extraordinary leadership pipeline that propelled organizational success. These candidates went on to become CEOs of American Standard, Raytheon, PerkinElmer and W.R Grace. 11. Most companies look for leadership candidates who are thinkers and visionaries. However, there is little correlation between the ability to think and the ability to execute well. To build an execution culture, you must select the doer with a proven track record of execution over the thinker with elite academic credentials and a high IQ. Check if the candidate displays energy and enthusiasm for execution instead of just abstract ideation. 12. To execute, you must learn how to get things done through others. People who cannot work through others reduce the organization's capacity and don't leverage the full capabilities of their team. If you work an 80-hour schedule and push others to do the same, it's a clear signal that you should learn to get things done through others. 13. A robust people's process does three things. First, it evaluates individuals accurately and in-depth. Second, it provides a framework to identify and develop the leadership talent required to execute its strategy. Finally, it creates a strong leadership pipeline to enable succession. 14. The people's process must be linked to strategic milestones in the near (0-2 years), mid (2-5 years) and long terms (5+ years). Leaders create this linkage to ensure that they have the correct number and types of people to execute their strategy. The ability to meet medium and long-term milestones depends significantly on a solid pipeline of promotable leaders. 15. Organizations must have robust processes to analyze succession depth and retention risk. Succession depth analysis determines whether a company has enough high-potential candidates to fill positions. Retention risk analysis evaluates a person's potential for mobility and the risk faced if they leave. If the person is a business-critical high-risk candidate, the organization will take more vigorous efforts to retain them with rewards and career progression. 16. Identify critical jobs and create talent pipelines for them. Critical jobs are those that are essential to execute the organization's strategic vision successfully. These jobs are not necessarily high-level ones. For a biotech company, someone who heads a clinical trial for a critical product is vital to the organization's three-year strategy. In the mid-'90s, when GE was recognized as the best pipeline of leadership talent, the division presidents became retention risks. GE's people process ensured that the company retained most candidates through financial rewards like stock grants which they could not cash until retirement. When a key person left, the process provided replacement within just 24 hours. When Larry Johnson, president of GE's appliance division, announced his departure, GE named a successor the same day. 17. Talent reviews are best conducted in a group setting. Get five people who know the candidate to share their observations, argue differences and reach a conclusion. The diverse views converge to bring out an accurate, objective and composite picture of the candidate's capability, far better than the perspective of any single person. 18. The strategy process must be designed and owned by those who will execute it. Staff can help through data collection and analysis. Still, the substance and detail of the strategy must come from the leaders because they best understand which ideas will work in the marketplace and what strategies will need new organizational capabilities. The people process and operating plan must be strongly linked to the strategic plan to be realistic. A link to the people process helps you evaluate if you have the right people to execute the strategy. A link to the strategic plan specifics to the operating plan aligns the different parts of the organization towards the strategic goals. 19. Great strategists can detect patterns of change and relate them to their landscape, industries, competition and business far earlier than others. When the Asian Financial Crisis hit in 1997, most companies failed to detect the change till March 1998. But GE and AlliedSignal recognized the crisis before 1997 and changed their 1998 operating plans to deliver the promised results despite the new circumstances. 20. Ensure your strategy does not lead to fragmentation or entry into too many markets. A fragmented strategy plan will result in more goods and services than the organization can handle. After two decades of unfocussed growth, Unilever ended up with over 1600 brands. In 2001, it confronted the problem and reduced the number of brands to 400. The consolidation resulted in higher margins and revenue growth.

SUMMARYExecution requires leaders to be hands-on and intensively involved with their people and organizations. They must put vital leadership behaviors in place and create a culture of execution to run the core processes effectively. In this way, execution is a systematic way to expose reality and act on it.

SEVEN ESSENTIAL LEADERSHIP BEHAVIORSHere are seven things you must do to execute:

1. Know your people and your business — Leaders must make an effort to engage with their staff actively and have candid discussions on operational realities. A leader who asks superficial questions at significant and casual interactions leaves the team with a sense that said leader is clueless. In contrast, a leader who actively discusses operational realities shares the organizational vision and opens a space for candid conversation, which earns the team's respect.
2. Insist on Realism — Leaders have to be realistic and ensure that realism is the goal of all dialogues in the organization. An excellent way to start is to ask employees frequently, "What are we doing right, and what are we doing wrong as a business?"
3. Set Clear Goals and Priorities — Focus on a few clear priorities that can produce the best results from the resources at hand. Well-thought-out priorities can help people make better trade-offs between priorities daily and avoid organizational politics.
4. Follow Through — Ensure accountability and create follow-through mechanisms to ensure that everyone does what they are supposed to do. Regular follow-through meetings send the signal throughout the company that others can expect follow-through on tasks from each other.
5. Reward the Doers — Performers must get a better bonus, stock options or even stock grants. A leader needs to ensure that distinctions based on performance become a way of life through the organization.
6. Coach to Expand Capabilities — Leaders must regard every encounter as an opportunity to coach their people. Provide specific feedback and point out behavior and performance that require changes. Do not preach. Ask incisive questions that bring out the reality of a situation and give stakeholders the help they need to correct problems.
7. Know Yourself — Emotional blockages result in conflict evasion, procrastination on decisions and failure to deal with underperformers. Build emotional fortitude to be honest with yourself, accept opposite points of view and give people honest assessments. Leaders earn confidence when followers can see their inner strength, confidence, ability to help others deliver results, and efforts to expand their capabilities. Four core qualities make up emotional fortitude: authenticity, self-awareness, self-mastery and humility.

FRAMEWORKS FOR CULTURAL CHANGEEfforts at cultural change fail because they are not linked to business outcomes. Usually, values don't need to be changed. Instead, work to change the limiting beliefs that affect behavior. Behaviors are beliefs turned into actions. Behaviors deliver results.

Beliefs are conditioned by experience, what people hear inside and outside the organization, and perceptions about their leaders. If employees believe that those who perform less will gain the same rewards, they will be unmotivated and work poorly.

FOUR STEPS TO A CULTURE OF EXECUTIONThere are four steps to create a culture of execution.

1. Be transparent with your team about what results are needed.
2. Coach and support them to achieve the results.
3. Reward people for positive results.
4. If people come up short, coach them, withdraw rewards, offer other jobs or let them go.

LINK REWARDS TO PERFORMANCEA business culture ultimately tells the people in the organization what kinds of behaviors are valued and rewarded. The compensation system must reward not just substantial achievement on numbers but also desirable behaviors that people adopt.

SOCIAL OPERATING MECHANISMSA vital part of the organizational software is "Social Operating Mechanisms," which include any place where dialogue occurs in an organization. Social Operating Mechanisms could be formal or informal meetings, emails, presentations etc.

Social Operating Mechanisms cut across functions, disciplines, work processes and hierarchies. They create new information flows, working relationships and improve transparency and collective action. Social Operating Mechanisms are critical to share the leader's behaviors, beliefs and mode of dialogue throughout the organization. Other leaders who are present adopt these as their mode of operation

ROBUST DIALOGUEThese candid and open dialogues improve the organization's ability to gather information, process it and make decisions. Informality encourages questions, helps colleagues take risks and surfaces out-of-the-box ideas.

BLOCK 3: THE RIGHT PEOPLE IN THE RIGHT PLACEThe best long-term competitive differentiator is the quality of an organization's talent pool. Leaders need to spend up to 40% of their time and emotional energy in the selection, appraisal and development of people. While a CEO may not interview every leadership candidate, employees will follow the standard set by the CEO for hires across the organization.

What Kind of People to Hire: You can spot the doers by their work habits. Here are qualities to look for in candidates:

Energize People: Some leaders drain energy from people while others create it. Hire candidates who energize their fellow employees.

Be Decisive on Tough Issues: Some candidates waver, procrastinate and avoid reality. Choose candidates with the emotional fortitude to decide on complex issues swiftly and act on them.

Get Things Done Through Others: Without this ability, leaders cannot get the full benefit of the team's capabilities. Leaders who cannot get work done through others put in 80-hour weeks and push their team to do the same. If a candidate cannot get things done through others, they are sure to burn out.

Follow Through: Every leader who is good at executing follows through religiously. Follow through ensures that people do the thing they have committed to do on time. Never finish a meeting without follow-throughs.

THE PEOPLE PROCESSThe people process is more important than the strategy or operations process. People make market judgments, create strategies and translate them into operational realities. A people process accurately evaluates individuals, provides a framework to identify and develop leadership talent and creates a leadership pipeline that builds a strong succession plan. There are four building blocks to a robust people's process.

LINK PEOPLE TO STRATEGY AND OPERATIONSLeaders must have the correct numbers and kinds of people to execute their strategy. The people's process must be linked to strategic milestones in the near (0-2 years), mid (2-5 years), and long-term. These milestones must also be linked to operational targets to understand what new talent to hire and what capabilities to develop.

DEVELOP LEADERSHIP PRINCIPLESA pipeline of promotable leaders is essential to meet mid and long-term targets. The people's process must assess candidates and decide what they need to do to become ready for leadership responsibilities.

THE LEADERSHIP ASSESSMENT SUMMARYThe Leadership Assessment Summary is a matrix with performance and behavior as axes, both with a scale of low, medium and high. The Leadership Assessment Summary gives an overview of candidates who are high-potential and promotable. Similarly, it shows those who exceed performance standards but need coaching on behavior and vice-versa.

Retention risk analysis evaluates a person's potential for mobility and the organization's risk if they leave. If a candidate is both high mobility and critical to the future of the business, the organization will take actions like recognitions and rewards to retain them.

Succession depth analysis evaluates if the company has the talent pipeline to fill critical positions. It also evaluates if high-potential people are stuck in the wrong jobs.

RETENTION AND SUCCESS AT GE In the mid-1990s, when GE was widely seen as the best producer of leadership talent, every senior leader was a retention risk. GE's people process swiftly moved to retain critical candidates. GE offered them long-term financial rewards like stock grants that they could not cash in until retirement. However, if a critical person left, GE's succession depth approach could replace them within 24 hours.

DEAL WITH NONPERFORMERSA robust people's process must distinguish between candidates who need to be moved to a lesser job and those who need to be fired. When you have to let people go, it's best to do it with as much dignity as possible. It reinforces the positive nature of the performance culture.

Lastly, link HR to business results. Apart from people skills, the HR representative in charge must be a business leader with a point of view on how the people process can help achieve a business objective or a strategic plan.

THE STRATEGY PROCESSA good strategy emerges from people closest to the action who understand the market, customers, and resources. While staff can help with numbers and analysis, ultimately, business leaders must develop a strategic plan.

To be realistic, leaders must link their strategy to the people process. The organization must have the right people in the right place to execute the strategy. The operational plan must link the strategic plan specifics to align the different parts of the organization towards its target goals. A business unit strategy must be less than 50 pages and easy to read. You should present its essential components within one page and describe your strategy in 20 minutes in simple language. If you find this difficult, it means that you will have to clarify your thought process.

THE ASSESSMENT OF THE EXTERNAL ENVIRONMENTThe strategic plan must explicitly state assumptions it makes about the social, political and macroeconomic context. Successful strategists can perceive patterns of change and relate them to their landscape and business far before everyone else.

UNDERSTANDING CUSTOMERS AND MARKETS Sometimes organizations can lose awareness of consumers' needs and purchase patterns due to excessive focus on the production and sales of their products.

PATHS TO PROFITABILITY AND OBSTACLES TO GROWTHMarket segment maps are helpful to define growth opportunities. A.T.Cross, the pen manufacturer, has three primary consumer segments: individual buyers, gifters and corporate purchases for institutional gifts. Each product segment will have different competitors, channels, economics and price.

A robust strategic plan must address these questions:

1. Who is the competition? Sometimes unlikely competitors can have more attractive value propositions for customers. While Staples and Office Depot competed for the discounted office supplies market, they missed the emergence of Walmart as a competitor.
2. Can the business execute the strategy? Many strategies fail because businesses don't accurately assess whether their organization can execute the plan. If the leader has been actively involved in all three core processes and runs robust dialogues, they would have a decent sense of the organization's capabilities.
3. What are important milestones to execute the plan? Milestones make a strategic plan realistic. Periodic interim reviews can help the organization understand the current state and what changes might be required to get back on track.
4. Are short-term and long-term needs balanced? Most plans don't address what a company must do, from when the plan is made to when peak results are expected. When the CEO is clear that long-term projects don't mean an earnings holiday, stakeholders can develop remarkable ways to meet earnings requirements without damage to the long-term project.
5. What are critical issues for the business now? Every business has some critical issues that can prevent the achievement of strategic goals. These have to be explicitly mentioned in the strategic plan. In strategy review meetings, these issues are discussed and handled periodically. The strategic plan provides a foundation for candid dialogue, the strategy review that links strategy to operations and people process.

OPERATIONS PROCESSThe operations process breaks long-term strategic outputs into short-term targets. It looks at the programs like product launches, sales plans and manufacturing plans that the business must complete to achieve desired objectives. The leader has to set goals actively, link details of the operations process to the people and strategy processes and lead operating reviews to align the organization to the plan. The operating plan is fundamentally different from a budget, which usually uses the previous year's numbers to set targets. In contrast, an excellent operating plan begins with the strategy document and breaks down long-term strategic goals into short-term targets. Many companies prepare an operating plan based on the budget. In reality, the budget should be a financial expression of the operating plan.

DEBATE EVERY ASSUMPTIONThere is usually an inherent conflict of interest as people see the review through their respective lenses. In a formal budget review, they negotiate to achieve compromise. Instead, the operating review aims to surface all assumptions, debate them out and validate them with customers and suppliers. An operating review must thoroughly debate every assumption, not only big-picture assumptions but little assumptions and their effect on business, item by item. You cannot set realistic goals unless you have examined the assumptions behind them.

STRATEGY REVIEWAs it offers the last chance to test and validate the strategy before it faces the real world, the strategy review must feature a robust debate with all key players present. People must leave with closure on the discussion and clear accountability for their parts of the plan. Leaders should ensure everyone is clear about outcomes.

The Strategy Review is a good place for leaders to learn about and coach other team members. At the end of the review, the leader gets a good perspective of the strategic thinking capabilities of the people involved and their potential for promotion. At the strategic review, the same questions raised when the team formed the strategic plan will be raised again with a broader group with more diverse views.

Here are some additional questions to consider:

IS THE PLAN SCATTERED OR SHARPLY FOCUSED? In a quest for expansion, sometimes businesses can end up with far more goods and services than they can manage. Check if your strategy avoids fragmentation of effort and if the company plans to enter too many market segments simultaneously.

ARE THESE THE RIGHT IDEAS? Companies can strategize themselves into markets and business ideas they cannot succeed in. Irrespective of how well you execute, the odds are highly stacked against the company's success when ideas don't fit into current capabilities or require costly acquisitions.

THREE STEPS TO BUILD AN OPERATIONS PLANFirst, set targets like revenues, productivity, market share and operating margin from the outside-in and top-down. Outside-in means that the numbers must reflect economic and competitive realities. Top-down means leaders set goals from the organization level to the business unit level.

Second, develop action plans and make necessary trade-offs. These include significant programs for the year across sales, marketing, production and capital spends. The plans originate from business units as a response to the targets set. Leaders look at the assumptions that might be the most vulnerable and create and ask people to develop contingency plans for those scenarios.

Finally, the leader gets agreement and closure from all participants and establishes follow-through measures. An excellent way to ensure follow-through is to send a memo that outlines the details of the agreements. Quarterly reviews keep the plan up to date and reinforce synchronization.

Apart from clarity on achievable targets, the operations process is an excellent opportunity to coach for leadership. Leaders who participate see the company as a whole, think about every facet of the business and understand how they fit in. They learn to allocate and reassign resources when the environment changes. People get to practice trade-offs to balance the short and long-term.

Finally, the operations process builds confidence. The team knows they can meet the targets because leadership based them on realistic assumptions. Additionally, the company has simulated the moves necessary to achieve those targets in all but the most uncertain circumstances.

These three processes complement each other to create a virtuous spiral of excellence in execution. These three core processes, when done right, are the differentiation between you and your competitors.

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By: Gayle Laakmann McDowell, Jackie Bavaro3,500 WORDS (11 PAGES)SYNOPSIS How do you ace one of the toughest job interviews there is? When you apply to be a Product Manager, you will be asked to make sound business decisions with incomplete data. Interviewers expect you to know their products, product strategy and user goals inside and out. Your product instincts will be put to the test. And you may be asked to design algorithms or write code right on the spot.

In Cracking the PM Interview, author Gayle Laakmann McDowell provides the strategies and frameworks you need to land a PM job at any company — and even shares unique strategies to land a PM job at one of the top five biggest tech companies in the world.

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TOP 20 INSIGHTS1. There is no one right background for PM candidates. The expected background varies from company to company. Amazon prefers MBAs while Apple hires more engineer graduates. Some Google PMs have MBAs, but the company prefers candidates with engineering masters. Facebook looks for a programmer background and startup experience. 2. Companies use technical experience as a proxy to check for three qualities: ability to form a relationship with engineers, good intuition on how long engineer work should take and ability to be self-sufficient about minor technical tasks like data collection. If you don't have a technical background, find ways to develop and demonstrate these three skills. 3. Side projects are the second most important criteria after actual PM experience. Great side projects fill gaps in your experience, demonstrate your PM skills and give you something concrete to speak about in interviews. Choose projects where you can demonstrate customer focus, product design skills, and experience with a shipped product. 4. If you don't have a technical background, build a design and usability project to demonstrate PM skills. Pick a real-world problem from your local community, talk to people and come up with ideas. Build paper prototypes and iterate the design based on feedback. Use the Human Centered Design Toolkit from ideo.com to understand the steps involved. 5. Interviewers see your resume as a product that demonstrates your PM skills like communication, design and your ability to put yourself in the user's shoes. Optimize your resume to highlight key professional skills and accomplishments within a 15-second skim. No bullet point should be longer than three sentences, and no more than 50% of bullets should expand into two lines. 6. To get a sense of a company's PM role, check their ratio of PMs to engineers. In companies with few PMs and many engineers, you will get the opportunity to own the vision for a larger product and work primarily on high-level specifications. In companies with a higher PM-to-engineer ratio, you design technical specs and work closely with engineers. 7. Interviewers expect candidates to know their company's products well and judge you harshly if you are unaware of "obvious" details. Study the company's products, their strategy and what the PM role entails in that team. Go prepared with concrete suggestions for product improvements based on common user complaints. 8. Do not answer product questions based on what you want to see in the product. You may end up with a solution radically different from what users want. Approach them the way a PM would, with a structured approach that starts with the user. 9. While you answer product design questions, keep in mind the organization's style. Some companies want bold, ambitious feature ideas, while others favor more practical, incremental features. Choose features that best align with the company's style. 10. Interviewers will ask you to talk about your favorite product. Select a few products you care about that have exciting features. For each product, understand key metrics, user goals, strengths, challenges and competitors. Have ideas on how you can improve the project. 11. When it comes to design questions, be opinionated. Interviewers expect PMs to have a clear perspective on the product's design and how it can be improved. However, don't try to pass off your approach as the best approach. Be transparent about the tradeoffs involved, particularly between business and customer goals. 12. Interviewers ask brainstorming questions to test your ability to produce bold, audacious ideas instead of incremental linear thinking. Suspend disbelief, and don't be afraid to share ideas that you think seem stupid or impractical. 13. The best way to prepare for behavioral questions is to create a Preparation Grid. For each behavioral question category like leadership, teamwork, successes and failures, map suitable instances from your previous jobs and projects. Select and master five stories that best represent why you are a great PM candidate and use them whenever you get a chance. 14. Use a Situation Action Result(SAR) framework to structure your response to behavioral questions. First, explain the situation and provide background information to the problem and why it was necessary. Second, describe the concrete action you took. Finally, quantify the results of your actions in concrete numbers and explain the impact on the company. 15. Be prepared with a good failure story. Interviewers will ask you how you failed, how you handled the incident and what you learned. The best way to answer this question is to talk about a failure that made you learn something relevant to the PM role. 16. If you are from a consulting background, don't be fooled by how similar PM case questions look to consulting case questions. The roles are very different, and appropriate interview behavior differs. Unlike consulting interviews where candidates rely heavily on data to solve problems, interviewers use case questions to test the product instincts of PM candidates. You will be expected to make opinionated business decisions in the absence of data. 17. While you can certainly ask questions to understand the case better, be careful not to probe too much. When the interviewer responds with a "what do you think?", it's a clear signal that you went too far with your questions. If you find it difficult to choose between two equally good approaches to solve an interview problem, choose the solution that aligns best with the company’s business goals. These goals will not only vary from company to company. They will also vary from product to product. 18. Some companies will ask PM candidates coding and algorithm questions that range from simple pseudocode to more complex programming questions. However, the good news is that expectations are lower than they would be for developers. You won't be evaluated on solution accuracy but on your willingness to solve the problem and the effectiveness of your approach. Amazon's PM interview revolves around their 14 leadership principles. Interviewers will repeatedly verify if the candidate's answers align with Amazon's leadership principles. If you know the leadership principles well, you can identify which one the interviewer has in mind during a particular question and address it directly. 19. You don't need a lot of work experience to apply for a Product Manager role. Many tech companies like Google, Facebook, and Microsoft recruit PMs directly out of college. If you are in business school, take project-based classes to work on your ideas and launch a product to gain relevant experience. You can make double use of class time and pick the brains of a team of MBAs. Engineers who wish to transition to PM roles can demonstrate product leadership through leadership and cross-team coordination work. Stephen, a tech lead at Microsoft, volunteered to take on project management for a cross-team collaboration project. The project's success convinced his team of Stephen's leadership and PM skills. When a role opened up in his current team, Stephen got the job. 20. The best way to learn Product Management is through observation and interaction with seasoned PMs. Look out for products users love and find ways to get in touch with the PMs behind them. Talk to them to understand their process the frameworks they use to make decisions. Besides the opportunity to learn more about Product Management, a robust network can open many PM opportunities.

SUMMARYProduct Managers (PMs) work at the intersection of technology, business and design. Good PM candidates come from diverse backgrounds. The PM role and the interview process vary widely from company to company. Given the interdisciplinary nature of the role, candidates with backgrounds that range from freshers to engineers to consultants have cracked the PM interview. Here's how you can prepare.

CORE RESPONSIBILITIES OF A PMProduct Managers have three core responsibilities:

1. Product StrategyThe PM is responsible to define two simple things:

2. What game the company will play: including the product vision, customer value, product differentiation and most importantly, the strategy to win in the market.

3. The metrics to define success

If they achieve both, it will allow a diverse team to run in the same direction. A clear product strategy allows the team to make the right decisions even in the absence of the PM.

1. PrioritizationThe PM has to consistently choose from a surplus of great ideas for the next three things the team will execute.

2. ExecutionPMs must define product specifications to bring clarity on what to build. To do this, they run analytics to understand customer requirements, how current features work and what features to prioritize in the product roadmap. PMs make time/benefit tradeoffs on features to ensure that the product hits the market on time with the right features. When product development hits a snag, they take a call on tricky edge cases.

Ultimately, Product Managers do whatever is required to ship their products. They cover gaps in design, write content and even do PR. PMs have to lead without authority. While the PM sets the product vision, strategy and defines success, they don't have direct authority over their team members. PMs have to lead without authority.

Build the right profile Interviewers look for five key competencies in PM candidates:

1. Analysis and Insight: Companies seek data-driven PMs who can analyze metrics and draw insights from usage patterns. Find ways to build and demonstrate data analysis skills.
2. Customer Focus: Companies want candidates who can understand customer requirements and translate customer feedback into product specs.
3. Business Cases: Companies love candidates who have built business cases, sized markets and made business decisions.
4. Marketing: A background in marketing can help PMs effectively communicate the value of a product and design products that will do well in the marketplace.
5. Industry Expertise: A deep working knowledge of a specific industry can be a good boost when you apply for PM roles in the same industry.

Is a CS Background Necessary? Companies use technical expertise as a proxy for specific skills. If you don't have a CS background, find ways to develop and demonstrate three skills:

1. Ability to form a working relationship with engineers. PMs have to work closely with engineers, understand their mindset and appreciate the complexity of their work.
2. A good understanding of how long engineering work takes. PMs need to make informed tradeoffs between time spent and the value of the work to the customer.
3. Hands-on and self-sufficient. PMs must be able to make minor product changes and gather data independently.

Side Projects MatterSide projects are the second most important criteria after actual PM experience when interviewers evaluate a PM candidate. Side projects offer proof of experience in product design, technical work and an actual shipped product. A good side project will:

• Cover gaps in experience: You can make up for a lack of technical degrees or experience with a website or a simple mobile app that you build based on online tutorials.
• Demonstrate skills: A good side project can compensate for a lack of experience in project management, design or programming.
• Give something concrete to talk about in interviews. A good project gives you the chance to explain why you have the necessary background and skills to be a PM.

If you don't have technical experience, you can do design and usability projects. Find a problem in your local neighborhood, talk to potential users and prototype ideas on paper. Test with potential users and iterate.

Optimize your resumeInterviewers see PM resumes as a product that showcases the candidate's design skills, communication skills and the ability to put themselves in the user's shoes. Resumes are not read. The screener skims them for about 15 seconds to decide whether or not to interview the candidate. In particular, interviewers look out for:

• Passion for technology: If you don't have technical work experience, demonstrate a passion for technology through the highlight of side projects, online courses or your website.
• Leadership: If you have managed people in some capacity, highlight it.
• Projects: List your side projects, their goals and metrics of success.

COMPANY RESEARCHInterviewers expect candidates to know the company's products nearly as well as they do and may judge them harshly if they don't. Make sure to extensively research the product, strategy and role description before an interview.

Study the company's products, features, key competitors, target market, revenue model and critical product metrics. Use the product extensively and formulate a clear opinion on it.

Understand how the company's products fit into its mission statement and the company's overall strategy. Study the product's strengths, how the company should address its weaknesses, key challenges and ways to overcome them and opportunities on the horizon. Form a researched opinion on the product's strategy and how it can succeed.

Understand the PM role in the company and find good answers for why you would be a good fit. Finally, be prepared with some ideas for what you would like to change about the company's product.

PRODUCT DESIGN QUESTIONSProduct design questions are the most critical part of the interview as they deal with the PM's core work: the design, architecture and improvement of products. Companies use product questions to test an interviewee’s core product, user understanding and design skills. To get these questions right, understand deeply what the user and business product goals are. Approach these problems in a structured way.

Here is a framework to approach these problems in a structured way, that begins with the target user requirements.

1. Clarify the problem. Ask questions to understand the organizational and user goals behind the problem. Products may have primary and secondary goals. Candidates who jump into a solution for a problem without clarity on the goal will design a radically different product from what users want.
2. Provide a structure. Provide a clear structure upfront on how you will approach the problem. At every step, you can explicitly mention which part of the structure you are at so that the interviewer can follow your approach.
3. Identify users and customers. Customers are those who pay for products, and users are those who use the product. Their needs may diverge. An excellent way to identify users is to think of different ways a product is used and who interacts with it.
4. Report customer needs. List goals and use cases for each type of user.
5. Prioritize significant user issues. For each use case, evaluate to what extent the current product meets user goals. Identify key user issues with the current product will provide a clear idea of areas to focus on in product design.
6. Design features and evaluate tradeoffs. Brainstorm a few feature ideas for key user issues. A good feature idea will solve multiple customer issues at once. Select ideas that align with the company's risk appetite. Some organizations love big, bold ideas, while others are more interested in minor, iterative improvements. Explicitly tie each feature idea to a customer use case so that the interviewer knows that your ideas are customer focussed. Discuss the tradeoffs involved for each feature. Use the whiteboard for this step.
7. Summarize your recommendation. Provide a summary of your final solution so that the interviewer clearly understands your final proposal. Discuss how the solution can be implemented and what resources would be required. Finally, explain the metrics you will measure to validate your solution.

Favorite Product QuestionPrepare for this inevitable interview question with the selection of a few products that you love. Make sure they have features you can discuss at the interview. Use the framework below to structure your answer:

1. What user problems does it solve? Focus on one or two key user goals.
2. How does the product accomplish its goals? Explain what makes the product uniquely good at what it accomplishes.
3. How does it compare to alternatives? Focus on the reason why users don't prefer the alternatives.
4. How would you improve it? Take a critical approach to product shortcomings and explain how you can make it better as a PM.

Practice repeatedly and make sure you understand key metrics like users, conversions, referral rates and engagement for your product. Interviewers want PM candidates who have a well-thought-out opinion about products. Be opinionated.

BEHAVIOURAL QUESTIONSFor Behavioural Questions, prepare five great stories from your work experience that correlate with important question categories like leadership, teamwork, successes and failures. Interviewers use behavioral questions to test if a candidate's experience matches what the resume says and test if the candidate's communication is structured.

Master 5 Great StoriesYou can easily ace behavioral questions with some preparation. Create a grid with common behavioral questions as columns. These can include leadership, teamwork, successes, challenges and failures. Add significant work experience and projects as rows. Finally, fill each cell with one or more stories.

Select five great stories that best represent why you are an excellent PM candidate. Each story must have a substantial Situation, Action and Result. You must have at least one story for each behavioral question type. Practice these stories with friends to polish the narration.

Use The Nugget-Situation-Action FrameworkUse this framework to structure your response to behavioral questions.

1. Nugget. Begin with a clear thesis about your story. An opener statement helps the interviewer focus on the core idea and organize information around that context.
2. Situation. Provide adequate background information for the interviewer to understand what you did and why it mattered in that context.
3. Action. Describe the actions that you took. Make sure to focus on your actions and not what the team did.
4. Result. Explain how your action helped your team or company. Quantify the impact.

ESTIMATION QUESTIONSInterviewers care more about your problem-solution approach than a numerically accurate answer. Use this 8 step process to answer estimation questions.

1. Clarify the questionRepeat the question back to the interviewer and ask about any detail which seems ambiguous.

2. Identify knowledge required to solve the questionFind out what data you have and what needs to be computed. You can ask interviewers for critical facts in some cases.

3. Make an equationForm an equation to solve the problem. Before you choose one approach, brainstorm multiple possible equations and choose the best plan of attack. Communicate your approach to demonstrate your thought process to the interviewer.

4. Think about Edge CasesThink about possible edge cases and problems in the approach. Be open about challenges to show the interviewer that you are detail-oriented and unafraid to discuss shortcomings of your approach.

5. Break it DownCompute each component of the equation through the construction of sub-equations.

6. State your Assumptions Rely on experience and intuition to make reasonable estimates for key variables. State your assumptions clearly. Pick round numbers.

7. ComputeDo the math. Remember that estimation questions only require a ballpark answer.

8. Sanity CheckBefore you share the answer with the interviewer, double-check if your answer is reasonable in accordance with commonly known facts.

CASE QUESTIONSPM interview case questions can lead you astray because they are dangerously similar to consultant case questions. Unlike case interviews where consultants will be asked to solve organization-scale problems based on data, interviewers expect PM candidates to solve product questions through reliance on their product instincts. PM candidates must make sound business decisions in the absence of detailed data. Use management frameworks like the 4P's, SWOT analysis and Porter's five forces to structure your response.

"The best way to learn Product Management is through observation and interaction with seasoned PMs. Look out for products users love and find ways to get in touch with the PMs behind them. Talk to them to understand their process and the frameworks they use to make decisions. Besides the ability to learn more about Product Management, a robust network can open many PM opportunities."

HOW HIRING WORKSThe following is a breakdown of the PM hiring process for the “Big 5” tech companies.

1. AmazonAmazon prefers management candidates for its PM roles and often hires right out of business school. Amazon is highly data-driven and expects PMs to have strong data analysis skills.

Make sure you know Amazon's 14 leadership principles well. Interviewers will validate your responses against the principles to see if you are a good fit. Weave the leadership principles into your responses and screen your resume to spotlight details that demonstrate these principles.

Amazon has a bar raiser interview that is a high challenge to ensure that the candidate is better than 50% of current Amazon PMs. The bar raiser interviewer and the hiring manager have veto powers.

1. MicrosoftMicrosoft's PM role must have a strong business focus. Microsoft hires candidates with a management background.

Microsoft's PM interview focuses more on behavioral questions and product design questions. Most Microsoft teams hire independently, and therefore some teams may want excellent technical skills while others focus more on design skills.

1. AppleApple has both software and hardware Engineering Program Manager (EPM) roles and prefers candidates with engineer backgrounds over management backgrounds. EPMs can range from freshers to those with 15 years of work experience.

Depending on the team, the candidate may have four to five interviews that last an hour or as many as 12 interviews that last 30 minutes. Apple only hires people who are passionate about its products. Know Apple's products well and expect questions on why you want to work for Apple.

1. GoogleGoogle prefers to hire candidates with four years of experience or an MBA for PM roles. The company prefers an engineer background over an MBA.

Google puts a strong emphasis on estimation questions and technical questions, which will include the need to write code on a whiteboard. There are separate interviews to assess your technical, product and analytical skills. To qualify, a candidate needs an average interview score of 3.0 or 4.0 and at least one interviewer who strongly supports your candidature.

Many Google interviewers may not read your resume thoroughly beforehand. If you want to highlight a key aspect, mention it across interviews to improve the odds that this fact will reach the hiring committee.

1. FacebookFacebook has fewer PMs and prefers highly technical or entrepreneurial candidates. Facebook expects PMs to code and often build initial prototypes on their own.

There are separate interviews for quantitative questions, program questions, design questions and a round dedicated to futuristic thoughts about technological trends. Candidates will be asked to code, so make sure to brush up on your programming.

1. StartupsMost startups expect their PMs to be hands-on and work closely with engineers. Sometimes PMs may have to write code to fill gaps.

Most startups prefer to hire seasoned candidates who have previous product management experience. Expect rigorous technical interviews and questions about relevant experience.

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BY: ali tamasebSYNOPSIS The billion-dollar startup founder is shrouded in mystery and mythology, but don’t believe everything you hear. If you’re not an Ivy League drop-out that launched a company from your dorm room, you are just as likely, if not more so, to be the next Super Founder.

Venture capitalist Ali Tamaseb shares over 300,000 data points that reveal the truth about billion-dollar startups and their founders, such as their age, education, industry experience, market size, competition, investors, and more.

Interviews with actual Super Founders offer an even closer look into the struggles, triumphs, and truth behind startups like Zoom, PayPal, Nest, and Instacart.

VIDEO (8:38)

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TOP 20 INSIGHTS1. Billion-dollar startups, or “unicorns,” make up for less than 0.1% of startups. Despite the “eccentric Ivy League drop-out” stereotype, many successful startups and their founders defy assumptions about competition, education, financing, and more. Don’t assume that you can’t be one of them. 2. A founder's age does not correlate strongly with success. The median age of unicorn founders in this study was 34. Some founders were as young as 18, and others as old as 68 when they got started. On average, founders who were 34 or older had a more extended history of entrepreneurship than their younger counterparts. 3. Age has no appreciable advantage when you start a company. Marc Lore was 42 years old when he founded the e-commerce site Jet.com. David Duffield was 64 when he founded human capital management software giant, Workday. 4. Data reveals that only one person founds one out of every five billion-dollar companies. However, it also shows that a duo founded nearly a third (28%). It is less common, although not unheard of, to start a billion-dollar company with three or more co-founders. 5. Industry background matters but does not necessarily define the outcome of a startup. The data reveals that 50.5% of billion-dollar company founders had a business background, while 49.5% had technical backgrounds. 6. Experience is not always a requirement for billion-dollar startups. Over 50% of CEOs and over 70% of CxOs (other chief executives) had less than a year of industry or relevant work experience before they launched their companies. Science-related startups are a different story. On average, 75% of founders had directly relevant experience. 7. Industry experience can vary between founder duos, with great success. One of Brazil’s few unicorn startups, Nubank, was founded by two completely different professionals. David Vélez, with his investment background, joined forces with Cristina Junqueira, who had accumulated years of experience with local banks. 8. If your first attempt at billion-dollar unicorns doesn’t work out, don’t be discouraged. It is more likely that “second or third time’s a charm,” as was the case with many founders observed in the study. Treat the process as a journey, invest in a portfolio of people, and try again. 9. When one startup attempt fails to go as planned, be open to new ideas that are right under your nose. When Stewart Butterfield's online game, "Glitch," failed to catch on, his team realized that the communication tool they built would help others too. And Slack was born. 10. The trends that created billion-dollar companies in the past won't necessarily be the same for those in the future. Over half of the startups reviewed by the author were software companies when the technology experienced a boom. Today's trends lean toward biology, space, agriculture, or AI. 11. Founders often hear the advice to create a painkiller and not a vitamin pill, which is a company that solves a problem versus one that maintains a joyful experience. Most billion-dollar startups indeed fall under the painkiller category, but vitamins like TikTok and BuzzFeed do just fine, so don’t second-guess your idea. 12. Startups that save time and money are the most common needs addressed by billion-dollar companies. Productivity startups accounted for close to 40% of those observed. 13. It pays to be different. Over two-thirds of billion-dollar companies were highly differentiated, i.e., they offered consumer experiences that varied greatly from others in their industries. Customers are more likely to try something new if it is radically different. Nest became a success when it updated the thermostat for the first time in decades. 14. Contrary to popular belief, billion-dollar startups are more likely to be created in large existing markets than small, nascent ones. Only 32% of these companies created a new market, and the rest competed for market share. 15. Timing plays an integral part in whether a startup will reach a billion-dollar valuation. The cell phone boom made batteries more affordable, which allowed electric car manufacturers like Tesla a possibility. Better smartphone cameras gave rise to Instagram, and PayPal grew alongside eBay. 16. Competition against powerful incumbents is possible – and expected – but a startup must be defensible against copycats. Peter Thiel, the co-founder of PayPal and Palantir, said that startups should strive to create monopolies. Engineering is a common defense against copies, as 56% of billion-dollar startups have utilized this method. 17. There is a misconception that only low capital expenditure (CapEx) software-as-a-service companies can be capital efficient. High expenditures didn’t always lead to low efficiency, and CapEx is impacted by shifting dynamics in business and technology, such as cloud computing. 18. Founders should think about unit economics early on regardless of their ability to raise a lot of money. According to a 2019 study by Tomasz Tunguz, capital efficiency for software companies has been in decline since 2006. How and if your ideas can become profitable with their current costs are vital to their success. 19. A great idea is only as great as the people who bring it to life. A survey of 900 venture capitalists by Stanford Graduate School of Business found that the most important factor for investment was “the team” at 53% compared to “the product or technology” at 12%. 20. If you want to found a billion-dollar company, it's not about being first with the idea but rather closest to the turning point. The Affordable Care Act allowed Oscar Health to grow as it offered virtual care services and transparency around billing.

SUMMARYWhat Makes a Super Founder? Myths and FactsMyth: You have to start your company out of Silicon Valley.

Fact: While it’s true that over half of the companies in this study are in the San Francisco Bay area, many of them moved there later. Dropbox’s founders moved from Boston to San Francisco after Y Combinator. The area created a self-sustaining hub for talent, and many venture capitalists limited their investments to local places where they could attend board meetings. The pandemic changed this significantly, with remote work adopted by many companies. The other half of unicorns hailed from New York, Massachusetts, and other locations. Chewy started in Florida. Epic Games is in North Carolina. Carvana was founded and remains in Tempe, Arizona.

Myth: You must be young.

Fact: The median age of billion-dollar Super Founders observed was 34. On average, they also had 11 years of work experience before founding.

Myth: You must be first.

Fact: Many billion-dollar companies are famously built on previously tried ideas that failed to take off. General Magic developed the first smartphone in 1995, but the company was long gone before Apple's first iPhone was introduced 12 years later. At least eight other search engines were created before Google.

The largest segment of billion-dollar companies – 55% -- faced multiple incumbents, compared to 17% that faced no competition when they started.

Myth: You can only create a billion-dollar company if you raise venture capital.

Fact: About 10% of unicorns were self-financed or bootstrapped. GitHub, Atlassian, UiPath, and Qualtrics all bootstrapped for at least four years.

Myth: You can’t launch a unicorn during a recession.

Fact: Startups have been funded, and billion-dollar companies have been created during times of economic recession. The sharing economy was born from a need for travelers to access accommodations (Airbnb) and transportation (Lyft, Uber) without the commitment to purchase. Likewise, the movement created new avenues to earn money which gave rise to the gig economy. As the old saying goes, “necessity is the mother of all invention.”

The Almighty PivotSometimes a billion-dollar idea rises from the ashes of a failed one or evolves from the founder’s original intentions. Super Founders possess the ability to realize this and pivot to maximize success.

Stewart Butterfield has a history of turning failures into unicorns. His work as a game developer inspired him to find other uses for an in-game photo share feature. The game never took off, but Butterfield and his team turned the tool into its website for Flickr.

The Super Founder left Yahoo in 2008 to start an online game called Glitch. The multiplayer game had a small fan base but didn't catch on. Finally, in 2012, Butterfield threw in the towel. He had 35 employees that he wanted to keep together because they were efficient, and that's when he realized why. They had developed their own communication tool that replaced email.

Butterfield and his team decided the tool itself was a product that could increase productivity in other companies. That tool became Slack.

YouTube is known for its endless hours of video content, but when it launched in 2005, its intended purpose was for dates.

“We always thought there was something with video there, but what would be the actual practical application,” said YouTube co-founder Steve Chen. “We thought dating would be the obvious choice.”

The slogan was “Tune In, Hook Up.” The idea was sound, but no one uploaded videos until the founders offered $20 for women to sign up. Rather than upload dating profiles, however, the women shared footage from vacations and their funny pets. It was at that moment that YouTube’s true purpose was revealed.

Shopify started as a company to sell snowboard equipment. Originally called Snowdevil, the e-commerce site served as a proof of concept, and its founders Tobias Lütke, Daniel Weinand, and Scott Lake pivoted to sell other goods under the name Shopify.

Another unicorn that started its life as something different is Instagram. Originally called Burbn, the company was a feed to share social plans that worked similarly to Foursquare. Users would "check-in" at various locations then add text and photos. At the time, social media had taken off, but it was the evolution of smartphone cameras that helped launch the startup into billion-dollar history.

A simplified version of the app, called Instagram, gained tens of millions of users and was acquired for $1 billion by Facebook. At the time, Instagram had zero income.

Successful investor and former PayPal employee Keith Rabois witnessed one such pivot that made all the difference. PayPal was initially designed to exchange money on Palm PDAs but shifted to email-based transactions and targeted the growing eBay market.

Pivots can be dangerous and worry investors, so use this strategy with caution. It's often easier to pivot when the company is still tiny, and it helps to have a common denominator between the original idea and the new.

Company pivots that happen later in the life cycle aren't necessarily bad, as history has shown. Intel started as a company that produced computer memory, but the tech giant pivoted to the creation of processors when profitability dropped.

Timing isn’t Everything, But it HelpsFounders need to foresee and understand the external factors that affect a company’s timing – inflection points, enabling technologies, changes in regulations, new market segments, and other fundamental behavior shifts.

Apps that used GPS were not financially feasible until Apple and Android lowered costs through competition. These market factors allowed apps like Uber to enter the scene. On the other side of the coin, inflated prices within a market can open the door for innovation. It's no coincidence that as cable subscriptions rose in price, streaming services rose in popularity. The recession gave rise to low-cost housing and transportation, such as Airbnb and Lyft. Likewise, Warby Parker replaced the traditionally long and expensive process to replace eyeglasses.

In 2011, Cisco and Polycom owned the majority of the video conference market. Zoom became the market leader in 2018 and has continued to grow. The company's revenue doubled in 2020 as the pandemic closed businesses and forced teams to work from home.

Billion-dollar startups can emerge from a recession, too, as did web security and infrastructure company Cloudflare. The website service company raised its first round of funding in 2009 when many venture capitalists stopped investing. However, her company went public a decade later for close to $5 billion

The many faces of fundingOver 90% of billion-dollar startups were backed by venture capital. There are, of course, exceptions to the rule and those who bootstrap or self-finance end up in a better financial situation to raise capital later.

Brothers Roy and Ryan Seiders founded Yeti in 2006 out of their father’s garage and had already reached $30 million in sales before they raised money from a mall private-equity firm in 2012.

Spanx super founder Sara Blakely started the company with $5,000 of her own savings, wrote her own patent based on a textbook, and kept her 9-5 job until Spanx grew too large to manage on her own. (Oprah’s endorsement didn’t hurt.)

As a result of her avoidance of venture capital, Blakely owns 100% of the company and keeps more of her billion-dollar value than founders of much larger companies.

GitHub bootstrapped for the first five years and raised $350 million in Series A and B funding rounds before Microsoft acquired the company for $7.5 billion in 2018.

When you start a company from scratch, it can offer valuable insights that might not otherwise have come to light.

Stitch Fix founder Katrina Lake reflected on the company's early days when she didn't know how to code and made every decision based on efficiency.

“The worst piece of advice for entrepreneurs is to raise as much money as possible," she said. "There are companies out there that may have failed because they had too much money and have had to think about the economics of their business."

Attract VCsAs venture capitalists look for their next profitable investment, a great idea isn't enough. According to a survey of 900 venture capitalists conducted at Stanford Graduate School of Business, "the team" was named the most important factor when they consider an investment. When researchers asked the same VCs to look at their most successful portfolio companies, 64% attributed each success to its team. Other factors were timing and luck, at 11% and 7%, respectively.

Alfred Lin of Sequoia Capital offers this advice to structure a pitch deck:

1. Company purpose
2. Problem
3. Solution
4. Why now?
5. Market size
6. Competition
7. Product
8. Business model
9. Team
10. Financials

These sections don't necessarily have to be in that order, but all of them are important to know and talk at length about.

The creation of a deck is an excellent way to make sure you know your business inside and out. However, the author observed that they aren't always necessary. Unfortunately, there isn’t a magic formula to become a Super Founder.

“I have seen $5 million seed funding rounds come together from brand-name VC firms without a single slide – let alone a deck – on the strength of the team,” wrote Tamaseb. "I have also seen founders struggle to raise a much smaller amount, despite beautifully crafted decks and comprehensive materials, perfect timing and signaling, and superb narrative and story."

Trust mattersYou may be tempted to keep your best data at the forefront of a pitch and keep the less-than-ideal information to yourself. While it might paint a more favorable picture upfront, it can cause trust issues down the line, advises Lin.

“You want to have a relationship with your investor where you can talk about bad news,” he said. “If I don’t know the bad news, I can’t help you. I’ve never passed just because the founders showed me that something is wrong. I’ve passed because I am not the right partner to help you.”

Looks can be deceivingThere are plenty of instances where some billion-dollar ideas were not immediately apparent to VCs. One example is Honey, the web browser extension that finds coupons. The company's founder, Ryan Hudson, came up with the idea after several back-to-back startup failures. He was in the middle of a pizza order and wished he had a coupon.

So he launched Honey in 2012. Together with his co-founder George Ruan, Hudson bootstrapped the project for two and a half years but could not convince investors to back it. By the next year, Hudson was once again out of money, and it looked like the company was another bust. However, the browser's users had other plans.

A leaked Reddit post from one of Honey’s beta testers and recommendations from one user to another caused a surge in engagement. And yet, investors still weren’t interested. Browser extensions seemed like an antiquated idea when compared to the shift in consumer interest to mobile devices.

Yet, Honey's momentum continued to grow until the company raised a seed round, a Series A round, and a Series B round years later. In January 2020, PayPal acquired Honey for $4 billion.

Peloton and Airbnb faced similar rejections before their unique value propositions, and the stubbornness of their founders became too big to ignore.

Unicorns come in all agesSome startups only take a few years from their first funding round to reach unicorn status, while others take a decade or more.

One example is Medallia, a customer experience management company founded by Amy Pressman in 2001. Investors passed on the opportunity, and the aftermath of 9/11 hit the travel industry hard. Yet, the company was profitable by 2003, and Pressman decided not to pursue outside funding after all. Fourteen years later, Medallia underwent an IPO that valued the company at over $2.6 billion.

ConclusionThe path to a billion-dollar startup begins with a bug for creation. If you've never started a company before, the best way to prepare yourself is to start something—anything. It could be a side hustle, a club, or a non-profit.

Many Super Founders had already started businesses before they hit it big, and many of those businesses had failed. That's okay. The next generation of founders and investors will focus on companies that solve real problems and leave a lasting impact.

Data shows that anyone with any background can become a Super Founder. So, keep on creating.

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By: Mike Isaac4,111 WORDS (13 PAGES)SYNOPSIS Uber's growth was fuelled by obsessive product focus, broken rules, growth at all costs and minimal bureaucracy. However, the same traits eventually proved to be bottlenecks in Uber's transition from a scrappy startup into one of the world's largest and most influential companies.

Within a year, Uber lost nearly 20 billion dollars in valuation and faced half a dozen federal investigations. Learn how Uber broke the law, developed a product that has not been banned and dominated the transportation industry.

VIDEO (3:10) TOP 20 INSIGHTS1. Kickstart demand for both sides of your marketplace to create rapid growth. Uber perfected a playbook to launch the service in any city worldwide at a rapid pace. An Uber City Launcher from headquarters would parachute into the city, flood craigslist with driver ads that offer hundreds of dollars in bonuses, and free rides to customers. This strategy to kickstart demand on the two-sided marketplace was expensive, but it turbocharged growth. Once demand picked up, Uber hired a local City Manager to manage operations in the city. 2. While it's not a good idea for everyone, if you don’t fear regulation, you can often beat it — at least for a little while. Uber's DNA was designed to evade the law and fight regulators who wanted to shut the service down. In every city, Uber's employees and drivers faced threats from law enforcement and local taxi unions. Uber urged drivers to stay on the road even if they got ticketed. The company would bear all costs. To Kalanick, fines and tickets were just the cost of business. 3. Out-grow your critics. Uber's strategy to blindside transportation regulators was to outpace them. When Uber entered a new city, it moved so fast that, before regulators could respond, it would be too late with thousands of Ubers already active in the city. 4. Companies that inspire loyalty can rally users to fight for their cause. When New York's mayor Bill de Blasio threatened to cap the number of cars on the road, the app showed its users a screen titled "De Blasio's Uber" with few cabs and wait times of 30 minutes. Users could send an email to the mayor and city council with a single click. By 2015, over half a million drivers and users in America had signed petitions to support Uber. 5. Empower every employee to be a mini-founder. Kalanick demanded ownership from his employees, offered significant autonomy and complete support. City Managers could spend millions in driver and rider incentives without permission from headquarters as long as they met growth targets. Uber's approach worked because City Manager's understood local people and institutions better than anyone at headquarters. 6. Uber's product and user experience were so good that it had a negative churn rate. The total revenue from current customers was more than the revenue lost from cancellations. Uber's data showed that by the time a customer used Uber an average of just 2.7 times, they became a long-term user. 7. Uber invested heavily to rewrite laws in its favor. Uber regularly topped the list of lobbying spenders in multiple US states. Uber invested tens of millions of dollars to sway legislation. At one time, Uber employed over 400 paid lobbyists across 44 states, more than the combined lobbying staff of Amazon, Microsoft and Walmart. 8. A great startup can make VCs compete to invest in it. Kalanick took advantage of Uber's massive popularity to invert the fundraising model. Startups usually go on a roadshow to pitch their company to investors to raise funds. Uber instead staged a HomeShow where investors came to Uber's headquarters to compete for a chance to invest in Uber. Kalanick did not trust investors and ensured that they had no say in Uber's operations. Even Google Ventures, which cut a $250 million check at a valuation of $3.5 billion, got only limited access to financial and operational information, ordinary shares instead of Kalanick's supervoting shares and an observer seat on Uber's board. 9. Uber hired only hyper-competitive candidates, and this resulted in toxic work culture. Kalanick would pit employees against each other. The high-pressure work environment made employees worldwide work late into the night, barely take weekends off and frequently join calls at midnight. The pressure caused burnout at all levels. Worse, managers could get away with employee abuse as long as they hit targets. 10. Companies without effective corporate oversight are a ticking-time bomb. By 2015, investors began to worry about Uber's massive burn rate and poor corporate governance. Uber had no Chief Financial Officer, and the company spent $2 billion a year globally on driver and rider incentives, a staggering burn rate. The company burnt $40 million to $50 million every week in China alone. Worse, Uber had an ineffective legal department and a nearly nonexistent Compliance Division that lead to high regulatory risk. 11. Uber's growth-at-all-costs mindset led to massive inefficiencies. Uber created the ride-hail equivalent of a subprime mortgage through the lease of cars to high-risk individuals with poor credit history. There was an immediate spike in a range of safety incidents, from speeding tickets to sexual assault. The drivers also returned the cars in poor condition, which resulted in losses of over $9000 per vehicle. 12. Kalanick ruthlessly prioritized Uber's UX over the demands of drivers. For years, drivers pushed Uber to implement a tip function. Kalanick refused because it could increase friction for customers. A core part of the Uber UX was the frictionless payment experience where a passenger could exit the cab and not worry about money. A tip would require them to open the app again needlessly. 13. Uber's exploitation of drivers improved efficiency but resulted in massive churn. Drivers were frustrated with Uber's indifference, and by 2016, 25% of drivers churned out every three months. 14. Uber's mistreatment of drivers eventually resulted in a more inferior customer experience. Drivers hated to drive for Uber so much that the company was forced to hire minimum wage workers who had never driven professionally. Poor quality service led to increased customer complaints. 15. Uber was more than happy to make profits under the pretense of driver safety. Uber introduced a $1 "safe rides fee" for each ride. It promised to use the money to improve ride safety through improved background checks, regular vehicle checks, driver safety education and insurance. But Uber did nothing for driver safety and treated the hundreds of millions of dollars raised as yet another line of income. 16. Uber built an extensive spy network to steal ideas from Lyft and out-execute it's rival. When Kalanick picked up early rumors of Lyft's disruptive carpool service, he forced Uber's product team to drop everything and immediately build a rival carpool feature. Uber announced Uberpool hours before Lyft and made them look like also-rans. 17. DiDi Chuxing outplayed Uber in the Chinese market. DiDi would send fake texts to Uber's drivers, which said that the Chinese government had shut down Uber. Its spies who worked for Uber stole proprietary information and sabotaged Uber's internal systems. DiDi's even persuaded its investor Tencent to frequently block Uber from WeChat, China's most popular social network and payment wallet. 18. Uber's incentive model failed in China and resulted in massive losses due to sophisticated fraud. Uber spent $40 to $50 million a week in incentives. But nearly 50% of the rides were fraudulent. Scammers bought caseloads of cheap cell phones and created multiple driver and rider accounts for each phone. The scammer booked hundreds of rides and then drove once across the city. 19. Uber's consistent evasion of regulators tanked its reputation and resulted in a Department of Justice investigation. Uber used sophisticated software systems to evade local regulators who tried to ban the service. The company used ex-CIA and NSA employees to spy on government officials. Uber served these officials fake versions of the Uber app (populated with ghost cars) to prevent Uber drivers from unavailability. 20. Kalanick had authorized tens of millions of dollars in secret budgets to spy on competitors. 'Hell' was a system created to monitor the real-time locations of Uber drivers who also drove for its competitor, Lyft. Hell even analyzed Lyft's prices and used all this information to undercut Lyft and lure drivers to Uber.

SUMMARYIn 2008, it was a perfect time to launch Uber. 75% of American households had computers with internet access, and Amazon Web Services had dramatically reduced the infrastructural costs involved to launch a company. Finally, the iPhone and the App store made software distribution to millions of users nearly effortless. Fuelled by the success of Facebook, Google, Instagram and Snapchat, venture capital flooded Silicon Valley and shifted the balance of power from Venture Capitalists to founders.

THE UBER PLAYBOOKEveryone's Personal DriverGarret Camp came up with the idea for UberCab, a premium black-cab service with luxury vehicles for working professionals. When Kalanick took over as CEO, he negotiated himself a majority stake to have absolute operational controls. Initially, Uber focussed on luxury branding with a fleet of high-end black cars and the tagline "Everyone's Personal Driver." Uber got its first drivers by convinced a few black car services in San Francisco to use Uber during their lull times. The app grew as it received glowing reviews from the press. A customer who hired a traditional cab would not know when the cab would arrive, what condition it would be in and finally struggle to find the correct change. In contrast, Uber had live tracking, offered premium cars and seamless payments charged to a credit card. The use of Uber became a status symbol in San Francisco.

City LaunchesUber needed to replicate its success outside San Francisco. Austin Geidt, a 24-year-old intern, became Uber's first City Launcher. A City Launcher would parachute into markets, set up offices and launch the Uber service. To kickstart demand, Uber would offer incentives to drivers for hundreds of dollars in bonuses for completing a minimum number of rides. This strategy was expensive, but it turbocharged business. Uber replicated this across cities like Paris, Los Angeles and Melbourne. Every time Uber entered a city, the company would hire a local City Manager- a person with local knowledge, ambition, a capacity to work 15-hour days and a willingness to evade the law. The City Manager would flood craigslist with ads for drivers, lure them in with sign-up bonuses and thousands of dollars in cash when they hit milestones. City Managers would have to confront established interests, including legislators, police officers and local transportation unions.

Designed for battleKalanick had designed Uber for battle with the taxi unions and local governments. He considered local transportation hopelessly compromised with cronyism and regulatory capture. When Uber entered a new city, it moved so fast that, before the officials arrived, Uber would hit critical mass, which made it difficult for officials to shut down a large fleet that was popular with citizens. Uber urged drivers to stay on the road even if ticketed. The company would bear all costs. To Kalanick, fines and tickets were just the cost of business.

Rally Users to its CauseWhen New York mayor Bill de Blasio threatened to cap the number of cars on the road, Uber mobilized its users and nudged them to email the mayor and city council from inside the app. Thousands of emails forced the city to abandon its plans. Inspired by this success, Uber built automated tools to spam lawmakers and rally users in every city. By 2015, more than half a million drivers and riders had signed petitions in support of the company across a dozen states in the US.

Vast LobbyingUber spent tens of millions of dollars in local lobbying and regularly topped the list of spenders across states like New York and Texas. At one point, Uber employed 400 paid lobbyists across 44 states. Uber had more lobbying staff than Microsoft, Walmart and Amazon combined. Yet, legislators conveniently ignored Uber’s classification of its drivers as contract workers instead of employees, which tremendously lowered its employee benefits costs and decreased its liabilities.

Let Builders BuildKalanick imagined Uber to be the next Amazon and moved from the logistics of the transportation of people to the logistics of everything. The company reshaped how people and goods moved in urban cities.

Uber was designed to "let builders build" with minimal bureaucracy to get in the way. He wanted Uber filled with entrepreneurs who embodied the startup ethos and would own their jobs. The City Manager had the autonomy to spend millions of dollars in driver and rider incentives to spur demand. No matter what the issue was, Kalanick would have his employees' backs.

The HomeShowInvestors were desperate to invest in Uber, and Kalanick took advantage. Unlike other companies which went on a roadshow to meet investors and raise money, Uber created the HomeShow, which forced investors to come to Uber's headquarters and compete to invest in the company. Due to his inherent mistrust of VCs, Kalanick presented poor terms, which stripped investors of the right to see Uber's financials and offered them ordinary voting shares instead of supervoting shares. When Google Ventures invested$250 million at a valuation of $3.5 billion, it got only limited information rights and an observer's seat on Uber's board. In 2016, Uber raised a massive $3.5 billion from the Saudi's Public Investment Fund, which valued the company at an unprecedented $62.5 billion. The deal gave Kalanick power to appoint three additional Board members and cemented his hold on Uber.

TOXIC WORK CULTUREEven as Uber experienced breakout growth across markets, the rampant workplace infractions began to catch up with the company.

Hyper Competition and BurnoutUber only hired candidates with a cutthroat-competitive mindset, which resulted in an intense, high-pressure environment. Employees constantly pushed themselves harder to work nights and weekends. Their bosses would call at all hours. A manager in Rio would throw coffee mugs at his employees to threaten them. The pace caused burnouts across the company, but Kalanick didn't care.

Every department and city began to fight for a more significant share of incentives. Uber rewarded growth with bonuses and promotions, and incentives offered the fastest way to kickstart demand in a city. Kalanick encouraged this in-fighting and rewarded the winners. By 2015, Uber spent $2 billion a year globally on driver and rider incentives, a staggering burn rate.

Corporate MisgovernanceBy 2014, investors began to worry that Uber spent too much money on market expansion. In addition, Kalanick had fired his Chief Financial Officer to ensure minimal financial oversight. Worse, Uber had a weak legal department and a nearly nonexistent Compliance Division as the company consistently sought to exploit legal grey areas.

Drugs and AlcoholAs Uber grew, Kalanick threw himself into the party lifestyle. He hopped into limousines, dated models, attended the hottest parties in Beverly Hills and jet-setted around the world. He flaunted his lavish lifestyle and publicly made misogynistic statements. The company culture reflected Kalanick's behavior. Parties at strip clubs became regular occurrences, expensed on the company's corporate account. In the company's Southeast Asia offices, parties with drugs were commonplace. The Thailand office frequently saw drug use and visits by sex workers. These events went unchecked and rarely led to any consequences.

RIDING ROUGHSHOD OVER DRIVERSUber had a massive driver problem, and churn was very high — nearly 25% of drivers left every three months. Drivers were frustrated with rates that rapidly fluctuated and terrible communication from the headquarters. Drivers felt disposable, and to Uber, they were. Kalanick would not allow a simple tip feature to enable riders to make extra money because it would spoil the "user experience." Kalanick did not care how drivers had to do twice the work to make the same amount of money or sleep in their cars overnight, or worst of all had no proper places to urinate. Uber took none of the drivers' bills - vehicle wear and tear, medical insurance- the entire business model revolved on Uber, and minimized its responsibility to drivers.

Uber was not above playing dirty. For example, in 2014, Uber introduced a "safe rides fee," $1 for each ride to improve safety through background checks, regular vehicle checks, driver safety education and insurance. But Uber used these hundreds of millions of additional dollars for no such thing, exploited user trust and treated it as another income line.

CHINA, INDIA AND SOUTHEAST ASIAKalanick dreamt of being the first Silicon Valley founder to dominate the Chinese market. But, while he was confident about how to ignite demand, he feared the protectionist Chinese government and DiDi Chuxing, a ride-hailing app with billions in venture capital funding and deep state support.

By 2015, Uber burned between $40 million to $50 million a week in China to convince riders to use Uber over DiDi. The worst thing was, nearly 50% of the rides were fraudulent. In addition, Uber's competitor DiDi engaged in corporate espionage to sabotage Uber. After two years and billions in losses, investors forced Kalanick to abandon China. DiDi would take over Uber's business, and Uber received a 17.7% equity stake in the company. In Southeast Asia, a similar story played out as Uber burned $1 billion to fight Grab. After four years, Uber held just 25% of the market and was forced to sell its Southeast Asia business to Grab.

A $70 Billion Time BombBy 2014, as Uber experienced breakthrough growth, the company's behavioral issues began to catch up, which threatened to blow up nearly $70 billion in valuation.

Misogyny ExposedUber was caught red-handed in an effort to defame Sara Lacey, a tech journalist who frequently wrote scathing pieces on Uber's toxic culture. Uber's plans to hire an oppositional research squad to bring out lurid details about Sarah Lacey's personal life were leaked to the media. This lead to harsh headlines in the New York Times, Wall Street Journal and other publications (apart from NBC and CBS) who panned Uber for its toxic culture, misogyny and attack of reporters.

DeleteUberWhen Trump announced his new immigration policy in 2017, Muslim taxi drivers of New York organized a strike at the airport, which lead to a surge in demand. As a result, Uber turned off its surge pricing to enable commuters to reach the airport. Activists interpreted Uber's action as an attempt to break the strike to profit off refugees. Suddenly, #deleteuber was trending. Celebrities shared pictures as they began to delete their Uber app. Over 500,000 people deleted their Uber accounts within the week, which gave a new lease of life to Uber’s competitor, Lyft.

Repeated Sexual MisconductSusan Fowler, a former employee, wrote a blog post about the rampant sexual abuse inside Uber. The post caused an uproar as employees shared more incidents and demanded action. Some of them began to air their grievances on Twitter. For a company of 6000 people, Uber had a barebones HR department of around a dozen employees. There were no managerial coaches, behavior codes, sexual harassment policies or formal reviews. Whenever a sexual assault victim decided not to pursue charges, you could hear a round of cheers at Uber HQ. Finally, Kalanick was forced to order an independent review into diversity, inclusion and workplace issues. Eric Holder, former attorney general to Barack Obama, was appointed to lead the investigation

The CEO is a BullyWithin months of the Fowler revelations, Bloomberg released a damning video, shot inside of an Uber, which showed Kalanick drunkenly yell back at the driver with a raised finger over Uber's prices. The video went viral and cemented Kalanick's reputation as an arrogant bully who didn't care about his drivers.

Obstruction of JusticeWithin a month of the Bloomberg video, NYT released explosive allegations about project Greyball, Uber's sophisticated system to evade regulators. The company employed a corporate espionage force of ex-CIA, NSA and FBI employees to spy on government officials and serve them an identical fake version of Uber populated with ghost cars. Greyball ensured that Uber's drivers would not be booked. As a result, Uber's image went from an aggressive bully to actual obstruction of justice. Employee attrition rates grew, employee attendance at work shrank and protests in front of the Uber Headquarters became a weekly occurrence.

Heaven and HellWithin weeks, the media broke the story of 'Heaven' and 'Hell,' Uber's user and competitor surveillance systems, respectively. Heaven gave Uber a live bird's-eye view of every single ride in a city. Uber's Competitive Intelligence team had created hell to monitor real-time locations of Uber drivers who also drove for Lyft. Uber even had a tool to steal price information from Lyft and used it to undercut Lyft and lure drivers.

Uber's Strategic Services Group, made up of ex-CIA and secret service executives, tracked the competitors at DiDi and Lyft and monitored high-profile political figures and lawmakers. They even recorded private conversations. Kalanick approved personal budgets that ran into tens of millions of dollars for these activities. Uber executives used company cash to pay bribes to local officials in Asian markets.

THE CEO MUST STEP DOWNIn just three months, Uber had gone from one of the most significant startup investments to a $70 billion time bomb. Many top-line executives had quit in disgust, and over six of them wrote a letter to the board to ask for an independent chairman to counter Kalanick's power and force Kalanick to take a leave of absence.

The Holder ReportOn June 11, Uber's board of directors read the Holder report, which detailed hundreds of pages of infractions across Uber's offices worldwide. The report recommended that Travis Kalanick step down as CEO, take a leave of absence from Uber, and recruit an independent CEO and a stronger board. By the end of the day, all seven board members, including Kalanick, unanimously voted to accept all recommendations.

Bring Down KalanickKalanick continued to be active. Benchmark's partners and investors were terrified that the firm's investment, now worth billions, would go up in flames. However, Kalanick’s removal was difficult. He and his allies held an enormous amount of supervoting shares. Most of the board was aligned with Kalanick. Further, Kalanick had the right to appoint three additional members whenever he wanted.

A syndicate of Uber's largest shareholders, Benchmark, Lowercase, First Round and Menlo, who held nearly 25% of Uber's stock, gave an ultimatum to Kalanick to step down by 6 PM the same day. If he agreed, he would get a graceful exit. If Kalanick refused, the investors would go public, and their letter would land on the front page of the New York Times. Kalanick was initially furious, but when he realized the number of investors behind the plan, he agreed to step down as CEO and continue on the board.

The Search for LeadershipThe board wanted a strong CEO candidate who could keep Kalanick out of Uber. On August 25, three CEO candidates, Jeff Immelt, Meg Whitman and Dara Khosrowshahi, the CEO of travel and logistics company expedia.com, presented in front of the board. When Dara spoke, it was immediately apparent to the board that he understood the intricacies and economics of the ride-hailing market. He made it clear that "there cannot be two CEOs." Benchmark and others pitched for Whitman while Kalanick and team rooted for Khosrowshahi, which lead to deadlocked votes. After multiple rounds, the board chose Dara Khosrowshahi as Uber's new CEO.

We Do the Right Thing, PeriodIn December, Softbank reached a deal to buy 17.5% of Uber from multiple shareholders at $48 billion, a steep discount from Uber's $68.5 billion valuation earlier the same year. The infighting had cost Uber a nearly $20 billion loss in valuation.

Over the next 18 months, Khosrowshahi systematically undid nearly everything Kalanick stood for. Khsrowshahi's first task was to repair Uber's relationship with its drivers. Next, he implemented the tip feature, which earned the company some goodwill. Khosrowshahi established strong corporate governance through the identification of an independent chairperson and the hire of strong CFO and legal compliance candidates. The core operating philosophy for Khosrowshahi was not Kalanick's "always be hustling." It was "We do the right thing. Period".

After a year on the wrong side of headlines, Uber tried to stay as low-key as possible. As a result, Uber was no longer a bold startup with a visionary founder. Instead, it was a professionally run organization with a seasoned CEO.

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By: Clayton M. Christensen, Tadd Hall, Karen Dillon, and David S. Duncan3,117 WORDS (8 PAGES)SYNOPSIS Is innovation inherently a question of luck? While good luck is never a bad thing, it turns out that innovation is more science than magic.

Jobs Theory is a tool to innovate in a meaningful (and profitable) way. If you take the time to understand the real "job" that your customers hire your product to perform, then competition, innovation, and strategies become clear.

Learn how to emulate the methodology behind everything from baking soda toothpaste to Airbnb into your own business.

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TOP 20 INSIGHTS1. The Theory of Jobs to Be Done, or Jobs Theory explores why customers choose certain products over others. People "hire" products to fill a particular "job" in their lives. For example, the job of a milkshake can be a reward for your child or to make a morning commute more enjoyable. 2. In Jobs Theory, a "job" is defined as the progress of a person in a particular circumstance. In the author’s milkshake case study, morning commuters chose the thick dessert because it staved off mid-morning hunger, provided energy, and was easier to consume on the drive than traditional breakfast foods like bagels. 3. If you understand your product’s “resume,” it can help you understand what job your customers want to fill and what your competitors are. If you know a product's resume, you can change your approach and market your product as the best candidate. V8 doesn’t just compete against sugary drinks and other juices but also raw vegetables. 4. Circumstances help dictate the job for a product to fill and, by extension, predict customer behavior. Innovation should not focus solely on functional needs but consider other aspects such as social and emotional ones. A daycare might be conveniently located and affordable, but parents will emphasize trust and safety. 5. Analyze your product’s job as if it’s a mini-documentary about your customer while they try to make progress in a specific situation. Look at the goal, struggle, and obstacles. Take note of what the person does to "make do" until they reach their goal. What tradeoffs will they purposefully make? 6. Once you understand your customers’ "Job to Be Done," you can bring your company's goal into sharp focus. You can reveal opportunities to innovate or make your product more attractive. For example, Intuit created QuickBooks because customers used Quicken to “make do” as they managed their businesses finances. 7. There is no one right way to identify Jobs to be Done. Don’t fixate on the tools you use, but rather the information you seek and how you piece observations together. You don’t have to throw out data you have already gathered -- look at it all through a new lens. 8. Sometimes Jobs to Be Done defies traditional data predictions. Sony temporarily halted its Walkman cassette player when market research predicted its failure. Sony founder Akio Morita chose to observe how people lived and predicted what they might want instead. Sony sold over 330 million Walkman units and began the age of personal music devices. 9. If you focus too much on the functionality of your product, you can overlook the real reason your customers use it -- or don’t. Proctor & Gamble designed a disposable diaper for Chinese consumers. Despite a lack of competition, it wasn’t until P&G addressed the emotional component – better sleep and cognitive development for baby – that the product sold well. 10. Consider what your product will replace because customers will want to stick with it even when it doesn't work. Airbnb storyboards different emotional moments for its future hosts and guests to preemptively address concerns that could make them return to old solutions, i.e., stay with friends and family or book a hotel. 11. Nobel prize winners Daniel Kahneman and Amos Tversky proved that loss aversion is twice as powerful psychologically as the allure of gains. It is essential to understand how customers make do with other products so you can overcome those obstacles. Online bank ING Direct reassured customers that it was a “real” business with physical bank cafes. 12. Each product or service sells an experience. Competition with similar functionality will always pale in comparison to the emotional component you offer. American Girl dolls are more expensive than other brands, but they offer an emotional experience that allows young girls and their parents to bond over stories and visits to the store. 13. When brands clearly identify their Job to Be Done and do it well, that product or service becomes synonymous with the job it performs. In England, to vacuum is to "Hoover," and everyone is prone to "Google" a topic on the internet. This phenomenon is a sign of a strong purpose brand. 14. Once you identify a purpose for your brand, don’t veer far from it. Volvo declared its primary purpose was to be safe in the 1920s. When Ford purchased the company, it changed course to compete with luxury vehicles and changed Volvo's brand purpose. Volvo became profitable again later once it returned to its original message. 15. Customers may not see your company's processes, but customers can feel them. Focus your team's process around what job your customer hires you for instead of productivity or efficiency. Jobs like "peace of mind," "a way to lower cholesterol," or "safety" will keep your sights trained on innovation. 16. Jobs Theory changes how you measure success; everything from internal financial performance criteria to external customer benefits. Amazon focuses on when orders are delivered as opposed to shipping costs. Review your process from the customer’s viewpoint to identify pain points and define solutions clearly. 17. When you review numbers, remember that data is not the phenomena — the primary function of data is to represent the phenomena. It creates a simulation of reality. However, passive data, like all data, is subject to bias and requires active management. 18. There are three fallacies of innovation data: reliance on operational data that describes products and customers but not the jobs they perform; concentration on growth instead of improvement; and preference for data that conforms to preexisting business models. Remain vigilant to make sure you don’t fall into these traps. 19. When your company’s Job to Be Done is well articulated, it creates meaning in employee duties at every level. Meaningful jobs eliminate the need to micromanage teams because employees are motivated by how their work fits into an overarching process to help customers get their jobs done. 20. Ultimately, all successful solutions to Jobs to Be Done can be considered services — even if you sell a product. Carefully design experiences for your customers that overcome any hesitation they might have to "hire" you and "fire" their existing solution.

SUMMARYA “Job to be Done” is the task that a consumer needs to fulfill by using a product. When a consumer feels pain, due to a lack of functionality or emotion, then there is a job to be done. Products fulfill the jobs that consumers have. For example, V8 tomato juice is the solution to the consumer's job of wanting to eat daily vegetables.

Jobs Theory doesn’t care about who did something and when. It doesn’t drop transactions into categories like “new or existing customer,” “male or female,” or “between of the ages of X and X.” Understanding the job you want to fill is about clustering insights into one big picture rather than a lot of small ones.

A product’s “resume” is an imaginary document that describes all the qualities, skills, and capabilities of the jobs that said product fulfills. It also describes the way in which users of that product use it in real life, as opposed to how it was designed or meant to be used. For example, toothpicks are not only used to clean your teeth but are also used to solve a myriad of other jobs. The same applies to a milkshake, a milkshake’s resume should list all the skills and capabilities it has to solve the jobs it faces, which in turn generate consumer experiences.

Solving the MysteryJobs Theory is a "Whydunnit," not a "Whodunnit."Your ultimate goal in using Jobs Theory is to understand the “why” so you can supply the “what.” As with any theory, anomalies can and will make themselves known along the way. You must be open to uncovering them and use them as an opportunity to strengthen your product's Job to Be Done.

Not all products or services will apply to this theory. For example, commodities traders don’t rely on emotional or social circumstances. A computer can make rational decisions to get the job done.

Jobs to Be Done can help you better understand and meet or exceed your customers' expectations for everything else.

Give your Product a Job Interview“Tell me about yourself.”Before you have your “ah-ha” moment with Jobs Theory, you’ll need to sit your product down for a serious interview. What are its qualifications, skills, and willingness to do the job at hand? What was it designed to do versus how people use it?

Another method to uncover your product’s resume is to imagine that you are a film director making a documentary about it. Instead of detailing how the product idea came about and how great it is, your film crews follow and interview customers to learn their stories.

Ask questions like:

• What are the experiences customers seek to make progress toward their goal?
• What obstacles can you remove?
• What are the social, emotional, and functional dimensions of this situation?

By the end of this process, you should have a better idea of your products' value regarding what job(s) it can perform. You may also be surprised to find that customers use your product for something you didn't intend for it to do. Customers often opt to use an inferior product to make do.

Be SpecificAbove all, you must clearly define what job customers hire your product or service to do. Organizations that lack clarity in this regard risk using a one-size-fits-all solution that satisfies no one at the end of the day. When you deeply understand your products' jobs, new avenues for growth and innovation come into focus.

You will begin to see “jobs-based” segments, including “nonconsumers" who do not buy your product. Understanding why they passed you by can create lucrative opportunities.

Mission statements are often phrased in a generic way that employees find hard to use as a guide for action and making decisions, much less innovation. Just like any goal, you need to be more specific. It's not enough to say, "I want to lose weight," or "I want to get more customers." You need to be more specific.

Instead, create a sense of purpose that drives action: “We solve problems this way because we know what matters and why.”

Be wary of jobs described in adjectives and adverbs, such as "convenience." That might be an experience necessary for the job to be done, but it is not the job itself. Use verbs and nouns, such as "I need to write books verbally, removing the need to type or edit by hand."

Jobs to Be Done are not technical specifications. “I need insulation that is tough and impervious to moisture” is not a job, but “I want my family to feel comfortable when it’s hot or cold out while lowering the cost of energy” is.

Example: The Dining Room Table DilemmaA midsize Detroit-area building company in the mid-2000s was trying to sell new homes and condominiums. They targeted "downsizers" – those who were retiring, divorced, etc. The company priced the units to meet its target consumer, and they had over 80 customization options to make each unit their own. However, all the bells and whistles weren't making a difference, especially in a declining market.

A man named Bob Moesta tried everything to sell these units, from focus groups to granite countertops to newspaper ads. It wasn't until he interviewed people who purchased one of the company's units that he began to understand the hesitation. It all came down to the dining room table. Downsizers were agonizing over which items to leave and which to take to their new homes. The biggest obstacle was finding a place for their dining room tables. It was an emotional decision. It turns out they didn’t care about all the features they could customize.

Customers kept saying things like, “As soon as I could figure out what to do with my dining room table, I was free to move.” The tables represented family memories and not being able to fit them into a new home was a stumbling block to signing on the dotted line.

The job to be done was not to “help people get into a smaller home,” but rather “moving people’s lives.” So, they changed their focus. The architect reduced the size of the spare bedroom and extended the dining room so a standard dining table would fit. The company gave customers a choice of three variations for finished units to help ease the burden of making choices. They provided moving services, two years of storage and a sorting room on-site to help comb through belongings without the pressure of a looming move date.

When Detroit's housing market was already struggling, the company raised profitability that covered the extra costs of moving and storage. They grew the business by 25%.

5 Ways to Uncover Jobs to Be DoneFive key methods to uncover what jobs need to be done:

1. If you want something done, do it yourself. Understand the unfulfilled jobs needed in your own life. Sheila Marcelo started Care.com, the online matchmaking service for childcare, pet care, senior care, etc., after struggling with her own childcare needs.

2. Why not? Even a mature market can find ways to innovate by exploring why consumers DON'T buy. Kimberly-Clark, manufacturers of incontinence products like Depends, realized that only a tiny percentage of people that suffer from incontinence would use their product because of the stigma. This discovery led to the development of Silhouettes, natural products that look and feel like regular underwear. Kimberly-Clark was able to expand its own business without cannibalizing its market share.

3. Watch the Do it Yourselfers. People are creative in the way they avoid products or processes that don't give them value. Trying to organize a group of people for a restaurant reservation can be a massive hassle if you call the restaurant, then your friends, then the restaurant again. Instead, they might make a reservation and see who shows up. The OpenTable app allows groups to make reservations in real-time, avoiding this hassle altogether.

4. Look for what people don’t want to do. Often, “negative jobs” can become the best innovation opportunities. Harvard business school alum Rick Krieger and some partners started QuickMedx, the forerunner of CVS Minute-Clinics, after several frustrating hours waiting for his son to get a strep-throat test at the doctor. In this case, the customer didn't want to see a doctor. The customer needed a quick fix. Minute-Clinics are now available in more than 1,000 CVS locations, so you don't have to.

5. Look for unusual Uses. You might be surprised to find that people use your product for other jobs you didn’t intend or imagine. Customers used NyQuil as a sleep aid, so ZzzQuil was developed. In the late 1960s, Church & Dwight found that customers used its baking soda for multiple uses besides cooking. This observation led to new products such as the first phosphate-free laundry detergent, cat litter, carpet cleaner, air fresheners, deodorant, etc. Arm and Hammer uses baking soda in multiple products — in everything from toothpaste to hand cream.

Define a job with specificity to ensure that it is functional. As the author explains: "If products can only meet the architecture of the system or product within the same product class, the concept of the Job to Be Done does not apply.”

For example, if you determine that the job you want your product to fill is, "I need have to a chocolate milkshake that is in a 12oz. disposable container," customers need not stray from the milkshake category to achieve this. But that's not their goal. Customers want to "hire" a milkshake for a multitude of reasons that compete with other products. "I want a cold, refreshing snack that I can eat while I'm driving because my car's A/C is out" is a much different reason. Now you're competing with an ice cream bar, a Slurpee, a cold piece of fruit, etc.

Data: Not seeing the forest for the treesIn an ever-changing world, data is king. Or is it? Think of data as a piece of a puzzle. It has distinct characteristics such as whether the customer is new or returning, age range, how they paid, etc. Jobs to Be Done is like viewing the entire puzzle put together. Data by itself isn't made redundant — but you can combine your knowledge to see the big picture instead of focusing on the pieces.

For this reason, you might go with your instinct because data doesn't always reflect customers' real needs and wants. American Girl founder Pleasant Rowland was unable to find dolls that would help her connect with her nieces. A focus group – the only one she would sit through at the behest of her team – insisted that pre-teen girls would not be interested in dolls, much less learn about history. They were wrong.

OnStar earned an estimated $2.5 billion in revenue and $500 million in net profit for GM annually despite negative net assets. GM initially designed the service for its luxury customers. The company was surprised to find that cost-conscious Chevy drivers were just as likely to purchase OnStar as Cadillac owners. It turned out users "hired" OnStar for peace of mind, not "nice to have" services.

You don't sell a product; you sell an experience.

OnStar had barely hit the market when Hurricanes Katrina and Rita battered the Gulf Coast in 2005. The company found itself inundated with calls from panicked drivers that needed help but did not buy a plan that included real-time directions. The company decided that anyone calling from the affected areas could receive all On-Star features without paying for an upgrade. It was a tricky maneuver that the founding CEO, Chet Huber, described as "cobbling together with duct tape and Velcro" to make it work. This new mission created more work for OnStar employees, but they were energized by the sense of purpose – offering peace of mind.

Three Fallacies of Innovation Data:Utilize data, but be wary of these common traps when doing so:

• Active Data vs. Passive data: Growing companies often begin to generate operations-related data (operational data) instead of Jobs to be Done, which doesn’t offer the whole picture.
• Surface growth: Companies focus energies on driving growth by selling more products to existing customers instead of focusing on how to solve the core job of the product better.
• Conforming data: managers focus on generating data that conforms to their preexisting business models. Conforming restricts data from showing what you need to see and instead shows what is comforting to believe.

In ConclusionWhy do some innovative ideas that sound great at the time never take off, while others that seemed unlikely to succeed to disrupt an entire industry? Because when you understand why your customer hires your product or service, you can do the job they hired you for better. That is innovation.

If you know how innovation works, you don’t have to rely on luck – although it never hurts.

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By: Benjamin Graham31-MINUTE AUDIO / 4,156 WORDS (8 PAGES)SYNOPSIS This book will not teach you how to beat the market. However, it will teach you how to reduce risk, protect your capital from loss and reliably generate sustainable returns over the long run. Warren Buffett calls the Intelligent Investor "by far the best book on investing ever written."

Benjamin's proven value investing approach replaces risky attempts to project future share prices with sound investments based on the underlying value of the company's tangible assets.

The Intelligent Investor by Benjamin Graham gives you everything you need to equip yourself with the investor's mindset necessary to avoid the panic of market fluctuations that plague the ordinary investor. Don’t be ordinary. Be intelligent.

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TOP 20 INSIGHTS1. There are two kinds of investors. Defensive investors aim to protect their capital from losses, generate decent returns and minimize frequent decisions. Enterprising investors devote most of their time to manage their portfolios actively. An enterprising investor does not take more risks than a defensive investor but invests more in stock selection. 2. Part-time investors should stick to defensive investment strategies. Defensive investors can achieve a decent result with minimum effort and capability. However, even a marginal improvement from this result is challenging and requires extraordinary knowledge and skill. An attempt to outsmart the market by spending a little extra time and effort will primarily result in below-average gains. 3. Confusing speculation with investment can be a costly mistake. Speculators buy hot stocks based on future growth prospects. In contrast, investment is made on a thorough analysis of the underlying business to ensure the safety of principal and adequate — but not extraordinary — gain. Invest in a stock only when you can comfortably own it without following its daily share price. 4. If you cannot resist the urge to bet on the next big growth stock, set strict limits on speculation. Keep a separate speculative account with less than 10% of your capital for speculative activities. Never mix money from the investment account and speculation account. 5. It's a risky idea to speculate on high-growth industries, and high-growth stocks are a risky idea. The growth prospects for a business do not necessarily result in profits for investors. Because these stocks are often overpriced, growth may not result in proportional returns. Only eight of the largest 150 companies on the Fortune 500 list managed to grow earnings by at least 15% over two decades. 6. Graham strongly urges investors to stay away from Initial Public Offerings. IPOs often happen in bull markets and lead to inflated valuations. When the bear market begins, these overheated speculative stocks are the first to crash and cause severe losses. An investor who bought every IPO at its public closing price and held on for three years, from 1980 to 2001, would have underperformed the market by 23% annually. A sure way to predict the end of a bull market is when the stocks of new nondescript small businesses are priced higher than reputed medium-sized companies. The bull run of the 1980s saw over 4000 stocks created. This lead to the 1987 crash. IPOs dried up between 1988 to 1990, which lead to the 90's bull market. During this time, over 5000 new stocks were created, which led to the 2001 crash of the dot com bubble. 7. It is dangerous for ordinary investors to time the market. Value investors instead identify and invest in large, conservatively financed companies whose present value as estimated by tangible assets is substantially below their current stock prices. There is no attempt to predict an uncertain future, and there is enough margin to absorb unfavorable developments. 8. Never buy any security far above its tangible asset value. Though outstanding companies are often worth several times their tangible asset value, the investor becomes too dependent on stock market fluctuations. In contrast, an investor who purchases stocks close to tangible asset value can ignore market fluctuations, confident that he has bought an interest in a sound business for a reasonable price. 9. Price and value are two different concepts. Think of Mr. Market as an irrational investor in a business you also invested in. He frequently changes his mind and quotes wildly different prices for your share. His behavior will hardly change your fundamental perception about the value of the business. However, you would gladly buy when his price is far lower than the business value and sell when his price is far higher than the business value. 10. The start of a bear market is good news for intelligent investors. They recognize that stocks become riskier as their prices rise and less risky as their prices crash. A bear market is a considerably safer time to buy stocks close to their asset value and build sustainable wealth. 11. A defensive investor's portfolio must have 50% in high-grade bonds and 50% in common stocks irrespective of market conditions. Doing so will prevent them from buying excess shares in a bull market and rushing into bonds in the bear market. Once they set up their portfolio, the defensive investor checks every six months to rebalance it if market change alters this ratio by over 5%. 12. Enterprising investors' confidence in their professional analysis may reduce their stock component to 25% when the markets are dangerously high and raise their stock component to 75% at the bottom of a bear market. However, a minimum of 25% in bonds is essential as it will give investors the cushion to hold on to stocks even through the worst bear markets. 13. Purchase only tax-free municipal bonds unless you fall in the lowest tax bracket. Choose bonds that mature in five to 10 years as they remain relatively stable with interest rate fluctuations. Bond funds are an excellent choice for individual investors as they offer cheap and easy diversification to minimize risk. 14. Both Graham and Warren Buffet recommend index funds as the best long-term bet for defensive investors. Index funds own a cross-section of the entire market without any stock selection. While they may be unglamorous and show steady returns compared to more aggressive funds, index funds have low risk and have historically outperformed most mutual funds over 20 year periods. 15. If you enjoy stock selection, make the index fund the foundation of your portfolio and experiment with around 10% of funds. Buy only stocks priced below 22.5 times the average 12-month earnings. The stock price must not be higher than 1.5 times the book value. If the book value multiplier is low, the earnings multiplier can be higher. But the product of the multiplier of earnings and multiplier of book value should not exceed 22.5. 16. Do not be swayed by home bias. Familiarity often prevents investors from doing the required due diligence before picking a stock. Many average investors make the mistake of buying familiar stocks or stocks of their own companies. On average, 401(k) investors keep between 25% to 30% of their retirement assets in their company's stock. 17. Graham insists on using a multi-year average of past returns to calculate Price/Earnings ratio. Consider a company that earned $0.50 per share over six years but earned $3 over the last 12 months. At 25 times the P/E ratio based on the last year, the stock would be valued at $75. In contrast, valued at 25 times the average earnings over the past seven years, the stock would be valued at just $21.43. 18. Prevention of losses takes priority over improving gains. Assume an investor buys a stock at the peak of a bull market that can generate 5% above average market returns. The bull market ends, and the stock drops by 50% the following year. Even if the stock gains 10% every year, it will take beyond 16 years to overtake market returns. 19. The margin of safety is essential to ensure against loss and improve upside potential. The stock price must be substantially lower than its underlying tangible asset value. In 1973, Warren Buffet invested in The Washington Post when it was priced at $83 million, and its assets were worth at least $400 million. The investment had both a substantial margin of safety and massive growth potential. 20. Graham designed his approach to craft a reliable portfolio that requires minimum maintenance and offers maximum odds of a steady return. By sticking to a formula for investment decisions, the defensive investor gives up the risk of speculating on stock movements and gains steady returns. After the initial curation, if the investor trades more than twice a year, it is a clear sign something has gone wrong.

SUMMARYPrice and value are two different concepts, and stock prices frequently don't reflect a company's actual value. More risk does not necessarily correlate with more gain. On the contrary, a substantial margin of safety and the difference between stock price and fundamental asset value can protect against loss while improving potential upside. Value investing can help you create a core portfolio that frees you from the need to track market prices and guarantee maximum odds of a steady return.

Graham's value investing approach is a reliable, risk-free path to protecting one's investments and generating decent stock market returns. It replaces risky speculation on future stock prices with a systematic way to derisk investments and build wealth.

INVESTORS AND SPECULATORSIt is essential to distinguish investment from speculation. An investment, according to Graham, is based on thorough analysis that promises both safeties of principal and an adequate return. Three components of this definition are essential:

1. Base purchases on a thorough analysis of a company's underlying businesses.
2. Focus on preventing severe losses.
3. Seek "adequate" and not extraordinary gains.

Speculators, on the other hand, buy stocks based on projected future growth in price. Every nonprofessional who operates on margin or buys "hot" stocks is effectively speculating or gambling. Speculation lowers the odds of building wealth. Do not speculate under the illusion that you are making an investment decision. If you wish to speculate, put aside a small portion of the capital (below 10%) in a separate fund.

SPECULATIVE APPROACHES THAT DON'T WORK1. Betting on Growth StocksMany investors fall for the allure of growth stocks. Just because a growth stock performed better than average in the past and is projected to do so into the future doesn't mean it will — it's a risk.

• There is no foolproof way to select and concentrate on the most promising companies in the most reliable industries.
• Common stocks with good records sell for a corresponding premium. The investor may be right about the company's prospects and yet not benefit because he has probably overpaid for the stock.
• Unusually rapid growth cannot continue forever because the increase in size makes subsequent growth more difficult. From 1960 to 1999, only 8 of the largest 150 companies on the Fortune 500 list managed to grow earnings by at least 15% over two decades. Between 1992 to December 2002, funds investing in large growth companies underperformed the stock market by an average of 3.7 percentage points every year.
• Growth stocks swing wildly, giving rise to a highly speculative risk element. The more the stock advances, the higher the frenzy, the riskier it becomes. Experienced investors have had their investments wiped out speculating on hot Airline stocks in the 1950s and booming Internet stocks during the Dotcom Bubble.

• Avoiding a loss takes priority over improving gains. To make up for a 95% loss in value requires the investor to make an astounding gain of 1900%.

• Initial Public OfferingsGraham warns investors to avoid purchasing Initial Public Offerings (IPOs), particularly in bull markets — for two reasons. First, IPOs offer a higher built-in commission, leading to a harder sell. Second, new issues are nearly always sold near the peak of a bull market. The initial IPOs in a rising market lead to profits fuelling a frenzy for subsequent IPOs. A clear sign of the end of a bull market is when IPOs of small and nondescript companies have stock values higher than medium-sized enterprises with a long history. Since the prices of these new stocks usually crash to new lows, Graham warns investors to stay away from this kind of costly speculation.

In the 1980's bull market, 4000 stocks flooded the market, leading to the crash of 1987. IPOs dried up between 1988 -1990, contributing to the 90's bull market where nearly 5000 new stocks were listed. After the Dotcom bubble, only 88 companies issued IPOs in 2001. An investor who bought every IPO at its public closing price from 1980 to 2001 would have underperformed the market by more than 23% annually.

DEFENSIVE AND ENTERPRISING INVESTORSThere are two types of investors, according to Graham: Defensive and Enterprising Investors.

Defensive investors primarily seek to avoid losses, generate a decent return and minimize time spent on the stock market by creating a portfolio that virtually runs on autopilot.

The Enterprising investor is willing to devote more time and effort to researching securities, hoping to make a better average return than the passive investor over the long term. Graham's enterprising investor is not someone willing to take more risks than the defensive investor. Playing with risk is the domain of a speculator. The enterprising investor must have sufficient knowledge of securities to consider his investments equivalent to a full-time business.

The enterprising approach is physically and intellectually taxing, while the passive approach is emotionally demanding, asking the investor to do nothing for years. There is no room for a middle ground between a defensive and enterprising investor. An ordinary investor can achieve a decent result with minimal effort, but even a marginal improvement on this result requires extraordinary knowledge and skill. Putting a little more time and effort to improve outcomes through stock selection is sure to result in below-average returns. Therefore, most investors must recognize that they are defensive investors and should use suitable strategies.

PRINCIPLES OF VALUE INVESTINGThe Predictive and Protective ApproachesInvestors can take advantage of market swings in two ways. Prediction involves estimating the future growth of a company's earnings through mathematical methods. Speculators attempt to time the market by buying based on growth predictions and selling based on predicted declines. Projection is dangerous because the future is uncertain, and inflation, economic recessions, pandemics and geopolitical upheavals often arrive without warning. Graham argues that it is a fool's errand for an ordinary investor to attempt making money by timing the market.

Graham advocates for a protection-based approach that does not try to time the market. Value investors should identify and invest in large, conservatively financed companies whose present value (as estimated by tangible assets) is substantially below their current stock prices. A protection-based approach creates a margin to absorb unfavorable developments in the future. The focus is on ensuring tangible value in purchasing the stock at current prices.

Think Like a PartnerA shareholder can see themselves as the buyer and seller of shares whose prices vary by the moment or as a minority partner in a private business whose value depends on the assets and profits of the enterprise. While many companies are worth far more than their net assets, the buyers of their stock become dependent on the stock market fluctuations.

Investors should limit themselves to securities currently selling for not that far above their tangible asset value for both practical and psychological reasons. When an investor pays well above net asset value for a share, they become a speculator dependent on the vagaries of the stock market to generate a profit. However, an investor who buys shares near the net-asset value of a company can consider themselves the part-owner of a sound and expanding business acquired at a reasonable price. Unlike the speculator who paid high multiples of earnings and tangible assets, they can take a detached view and ignore stock market fluctuations. This conservative policy is likely to work out better than risky investments based on anticipated growth.

Meet Mr. MarketGraham gives the allegory of Mr. Market to illustrate the investor's ideal attitude to the stock market. Imagine you paid $1000 to buy a small share in a private business. One of the partners, Mr. Market, tells you every day what your share is worth and offers to buy or sell additional interest in the business. Unlike a private buyer, Mr. Market often quotes exuberantly high values or absurdly low ones. Given this situation, there is no way a sensible investor will rely on Mr. Market to understand the underlying value of their shareholding. However, they would be more than happy to buy from Mr. Market when he quotes meager rates and sell to Mr. Market when he quotes relatively high rates.

Similarly, a defensive investor who has made a value-based investment based on sound business fundamentals will ignore the stock market valuation apart from taking advantage of its swings. Graham goes so far as to say that the single biggest reason investors fail is that they pay too much attention to what the stock market is currently doing. Intelligent investors should be comfortable holding their stocks even if they don't see the daily stock market prices for years. Experiments have shown that investors who received frequent news updates about their stocks earned half the returns of investors who received no information at all.

A DEFENSIVE INVESTOR'S STOCK PORTFOLIOAsset AllocationGraham suggests a mechanical 50-50 split between stocks and bonds for defensive investors to guard against over-purchasing shares in a bull market and rushing into bonds in a bear market. The only action they should take is to rebalance their portfolio every six months if market developments alter this 50-50 ratio by over 5%.

On the other hand, enterprising investors can increase their stocks up to 75% when markets are low and reduce it up to 25% when markets are at their peak. However, a minimum of 25% in bonds is necessary to give investors the peace of mind to hold onto stocks in the worst bear markets.

BondsUnless investors are in the lowest tax bracket, they should purchase only tax-free municipal bonds. The only place to own taxable bonds is inside the 401(k) account. As interest rates rise, short-term bonds fall less than long-term bonds. But when interest rates fall, a long-term bond will outperform short-term ones. Therefore, to avoid guessing interest rates, it's best to buy bonds that mature in five to 10 years as they remain relatively stable. Bond funds are a better idea than individual bonds as they offer an easy way to diversify and reduce risk.

Mutual FundsA defensive investor can follow two approaches to stock selection. First, they can rely on a diversified cross-section of the market through an index fund. Second, they can create a quantitatively tested portfolio of reliable stocks.

Mutual funds are a fantastic way for a defensive investor to capture the upside of diversified stock ownership without the effort of actively monitoring one's portfolio. A defensive investor's best long-term bet is to invest in index funds that own all stocks in the market without trying to select the "best" stocks. The low trading costs and operating expenditures mean that an index fund will outperform most mutual funds over the long run. Both Graham and Warren Buffet recommend index funds as the best choice for individual investors to own stocks. Take advantage of dollar-cost averaging by investing the same amount every month in a portfolio of index funds. This simple practice ensures that you buy more shares when the markets are low than when it is high.

Stock SelectionIf you enjoy the intellectual challenge of picking stocks, you can make the index fund the foundation of your portfolio and experiment with a small portion of funds (~10%) on stocks. Here are Graham's rules for the defensive investor's stock portfolio:

1. There should be adequate diversification with a minimum of ten stocks and a maximum of 30. Avoid overexposure to a single industry.
2. Each company selected must be significant, prominent and conservatively financed.
3. Each company must have ten years of continuous dividend payments.
4. The investor must not pay more than 25 times the average earnings over seven years and not more than 20 times the average earnings of the last year.

Investors must not look for better than average returns by investing in growth stocks. They carry too much risk due to the high speculative element in their prices. Instead, they must confine themselves to large established companies with a history of profitable operations, stable financial conditions and reasonable profit/earnings ratio.

Wall Street calculates the Price/Earnings ratio primarily on next year's earnings. However, Graham insists on calculating the Price/Earnings Ratio based on a multi-year average of past returns, which lowers the odds that an investor will overvalue the company simply because it had an odd profitable year or has high revenue projections. Let's say a company has earned $0.50 per share over six years but earned $3 over the last 12 months. At 25 times the P/E ratio (based on the last year), the stock would be valued at $75. In contrast, valued at 25 times the average earnings over the past seven years, and the stock would be valued at just $21.43.

STOCK ANALYSIS FOR DEFENSIVE INVESTORSHere are Graham's criteria for stock selection:

1. Size of the Enterprise:

Choose companies with at least $2 billion in annual assets to ensure they are large enough to avoid high volatility in stock prices. 2. Strong Financials:

The company's current assets must be twice the current liabilities to ensure a cushion for difficult times. Long-term debt must not exceed working capital. In 2003, about 120 of the S&P 500 companies met this ratio. 3. Earnings Stability:

There must be some earnings for the common stock over the past ten years. 86% of companies in the S&P index had positive earnings every year from 1993 to 2002. 4. Dividend Record:

They should have processed uninterrupted payments for at least 20 years. Over 255 companies had paid dividends from 1993 to 2002. 5. Earnings Growth:

The company should show a minimum increase of at least 33% in per-share earnings over the past ten years. Over 260 companies met this standard as of 2002. 6. Moderate Price/Earnings Ratio:

The stock's current price should not be more than 15 times the average earnings of the past three years. This multiple, adjusted for 2002 levels, is 22.5 times the average earnings of the past three years. 7. Moderate Ratio of Price to Assets:

The stock price must not be more than 1.5 times the last book value. If the multiplier of earnings is below 15, it can justify a higher multiplier of assets.

Graham's rule of thumb is that the company's total multiplier of earnings and multiplier of book value should not exceed 22.5. The overall portfolio of stocks must have an earnings/price ratio at least as high as the current bond rate. If you find this degree of analysis difficult, avoid stock picking and invest entirely in index funds.

Graham designed this approach to create a core portfolio that requires minimal maintenance and a maximal chance of a steady return. After curating the initial portfolio, if the investor is trading more than twice a year, it is a clear sign something has gone wrong. The defensive investor wins the race by sitting still. By sticking to an autopilot formula for investment decisions, the defensive investor gives up the risk of speculating on stock movements and worrying about market swings.

MARGIN OF SAFETYAn investor must insist on a margin of safety in every investment to absorb negative changes. This margin of safety is the difference between the percentage of earnings at the price paid and the interest rate on bonds. The price at which you acquire the stock is the crucial determinant of being a good or a bad buy. You should skip even the best company if the price goes too high and consider even the worst company if its stock goes low enough to create a substantial margin of safety.

Assume an investor buys a stock that can grow at 10% per year at a time when the market grows 5% annually — but it's at the height of a bull market, and the stock drops by 50% the following year. Even if the stock continues to perform at 5% above market value, it will take the investor more than 16 years to overtake the market. All because they bought at the wrong price. By refusing to overpay, you minimize chances of wealth destruction.

With value investing, you can achieve satisfactory investment results over the long run with reduced risk and without losing sleep over periodic market fluctuations. All it requires is the discipline to never purchase far above tangible asset value, resist the urge to invest in glamorous growth stocks and replace the mindset of a speculator with the investment approach of a partner.

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By: Martin Reeves32-MINUTE AUDIO / 3,857 WORDS (15 PAGES)SYNOPSIS We live in a business world that is in constant flux. But when you learn and understand the five strategy archetypes and how to execute them, you will master your journey through this turbulent land of opportunity.

In Your Strategy Needs a Strategy, authors Martin Reeves, Knut Haanæs, and Janmejaya Sinha explain how to navigate these various approaches and avoid common pitfalls.

With a solid foundation of the five archetypal approaches, create a "pyramid" of strategy application. Combine multiple approaches and top the process off with solid leadership.

DIAGRAM

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TOP 20 INSIGHTS1. A classical strategy approach, i.e., "be the biggest," should be deployed in relatively stable and predictable markets with established competition. Homogenous business models are more likely to experience modest growth rates and few surprises or disruption. Most traditional businesses fall under this category but beware of the assumption that it applies to yours. 2. The turbulence of business return on sales has more than doubled since 1950, which has forced classical industries to re-think their approach. Analysis by BCG Strategy found that the top three market-share leaders' probability of also being the top three profitability leaders declined from 35% in 1955 to just 7% in 2013. 3. An author-created survey found that nearly 90% of firms intended to employ a classical approach of detailed forecasts, and 80% translate those into long-term plans. Classical shouldn't mean mechanical or overly complex, however. Use familiar tools to achieve new, uncomfortable, and surprising insights. 4. Emphasize scale if your business is among the top three in your industry. If not, focus on differentiation, especially if your targeted niche segment is sizeable. Products or services must be distinct and valuable to succeed. DHL invested $10 billion to enter the U.S. express freight business but struggled to compete until it focused on international delivery. 5. If you choose a classical strategy, you still need to adapt to slow but significant changes. Electrical utilities have deviated little over the last century but have begun to diversify into alternative energy sources. UPS employed a classical strategy in 1907 then adapted to e-commerce when it invested billions per year on IT systems. 6. Businesses should apply the adaptive strategy, i.e., "be fast," only when it operates in an environment that is both hard to predict and hard to shape. Examples include software, fashion, and any product that relies on minerals or resources, such as semiconductors. 7. Adaptive business models yield more consistent performance if you continually invest a portion of resources into the exploration of new options or adaptation. A simulation of 30 adaptive strategies executed within a turbulent environment showed more frequent but smaller drops in profit compared to a classical strategy. 8. Continually refresh your data on external change and have the analytic capabilities to uncover hidden patterns. Progressive Insurance uses its Snapshot program to track and analyze driver patterns, which creates real-time risk profiles for each customer. CEO Glenn Renwick called Snapshot one of the most important things he’d seen in his career. 9. An adaptive strategy can only succeed if you refuse to get comfortable. This attitude underpins company culture. Netflix has an internal reference guide to "Freedom and Responsibility" that says employees follow processes exceptionally well, but it strips a company of its ability to adapt quickly. Netflix tries to eliminate rules whenever possible. 10. The visionary strategy approach, i.e., "be first," should only be deployed when creating or recreating an industry. This strategy must be timed precisely to succeed, however. Megatrends that emerge, new technology, or consumer dissatisfaction with the status quo trigger the pivotal moment to act. 11. Visionary approaches are commonly associated with start-ups, but established firms should familiarize themselves with this approach -- if anything, to understand how companies can disrupt or help your industry. Genomic analysis firm 23andMe made DNA breakdowns available to the public. This data has become valuable not just to customers but to pharmaceuticals and hospitals. 12. Of companies that intended to employ a visionary strategy, 95% still used a classic development approach that included detailed forecasts. There are four steps to a visionary strategy: detect an opportunity, create a clear vision of what you want to achieve, “sketch” a plan that can be changed, and get people excited about it. 13. Don’t confuse detailed plans with clear direction. Expect to adjust a visionary strategy as you go. Ninety percent of entrepreneurs fail. If you do manage to become the first, you may not be for long. Once you establish your business, you may need to adopt other approaches to sustain a competitive advantage. 14. You can deploy a shaping strategy when an opportunity arises to write or rewrite an industry's rules at a time of evolution. This approach works best in highly fragmented, young, and dynamic industries, freshly disrupted industries, or new markets. Win this strategy through co-development of the market and industry with multiple players. 15. Shaping strategies focus on the ecosystem’s mutual value proposition. Apple focuses its efforts on the development of the App Store ecosystem to attract developers and users rather than hyper-focus on a particular app. Ask yourself what part you play in your business ecosystem and how you can collaborate with other players to create value for everyone involved. 16. A shaping strategy typically requires that you build a platform on which your desired ecosystem can grow. Examples include a digital marketplace, supply chain orchestrator, or digital distribution channel. The strategy is to manage the platform by controlling a few key variables, adding incentives, and making it unattractive for rivals to compete. 17. Adopt a renewal strategy when your industry or company displays low or limited growth, company funds are on the decline, your firm has suffered an internal or external shock, or your situation poses a viability risk for you. This strategy is also appropriate when your industry or company has restricted access to capital. 18. Painful cutbacks are not enough to survive in a turbulent business environment. Instead, think long-term by adopting a three-step renewal approach. First, economize to stay afloat, then pivot to a strategy of innovation so that the company can remain competitive or even visionary in your field. Lastly, use that innovation to facilitate growth. 19. Large companies that operate in multiple business environments can benefit from an ambidextrous approach to strategy. Lockheed Martin has used a separation approach as far back as 1943. Handle this approach in four ways: Separation of strategies between subunits or functions, switch between approaches, self-organize, or rely on an external ecosystem. 20. Global connectedness requires leaders to be more vigilant to changes than ever. Crises are no longer limited to one industry or region. Analysis revealed that roughly 53 out of 70 industries studied are so turbulent that businesses progress through various life cycles in half the time compared to 60 years ago.

SUMMARYThe world has never been so connected. While an ever-changing global economy creates opportunities that were once impossible, it has never been more difficult to pick a business strategy. Good news – you probably have more options than you think.

The Five Business Strategy ArchetypesImagine strategies as paint on an artist’s palette. Apply each "color" to different parts of your business, from geographies to industries and functions. Strategies can also be mixed and matched to fit various stages of a firm’s life cycle or an environment that each part of the business faces.

CLASSICALBe BigThe classical approach to business is the most common method taught in business school and used by long-standing industry giants. Simply put, your goal is to become the biggest and the best.

Mars, Inc. is an exemplar of classical strategy. As the most significant player in the chocolate industry and a major player in others like pet food and chewing gum, scale drives all facets of its strategy. It can focus on growth because the industry is established and predictable.

Paul Michael, President of Mars, Inc., says that he develops plans with a one-year and long-term horizon. He focuses on what they can control directly, such as costs and profitability. Mars is already a household name and has been for decades, so the goal is not recognition so much as driving category growth.

If we revisit the artist analogy, think of the classical strategy as a still-life painting. You aren't inventing the image. You can rely on the unwavering subject before you. As a result, employing a classical strategy does not require a great deal of agility. Analyze your industry to determine market attractiveness, the basis of competition, and your own firm's position, then execute step-by-step until your "masterpiece" is complete.

How to know if a classical strategy is right for you:* Your company is in a predictable, non-malleable environment. * Your business is in an industry similar to utility, automobile, oil and gas * Key indicators include low growth, high concentration, mature industry, and stable regulation

How to know if a classical strategy is successful:* You will achieve scale and grow market share.

Essential trap to avoid:* Overapplication: don't assume that a classical strategy is always appropriate just because your company has used it forever or because it's the traditional choice of your industry.

Size offers protection. Suppose you are buying your way into a classical marketplace but do not have the scale to compete effectively; focus on a niche within the market. For example, Huawei first gained a position in China’s rural telecommunication sector and used it to gain size and momentum before entering the competitive urban market.

ADAPTIVEBe fastEmploy an adaptive strategy when forecasts are no longer reliable enough to create accurate and durable plans. Since the 1980s, turbulence and uncertainty strike businesses more frequently and intensely and persist longer. For this reason, industries more associated with a classical approach may need to consider an adaptive strategy instead.

Fashion is the perfect example of an adaptive strategy. Like its competitors at the time, Spanish fashion retailer Zara had to guess which styles would be popular and hope for the best. This strategy resulted in a few wins — but also the need to discount half their stock each year. Zara holding company Inditex pivoted to an adaptive strategy and reacted to what customers were buying instead of trying to predict future trends.

The firm shortened its supply chain, purchased only tiny batches and constantly experimented in real-time. Up to half of Zara's clothes are designed and manufactured mid-season. Production costs are higher, but Zara's profit margins were double the industry average in 2010.

How to know if an adaptive strategy is right for you:* Your company is an unpredictable, non-malleable environment * Your business is in an industry like semiconductors, textile retail, software * Key indicators include volatile growth, limited concentration, young industry, significant technological change

How to know if an adaptive strategy is successful:* You will see cycle time and new product viability index.

Essential trap to avoid:* Planning the unplannable: Many firms cling to the top-down classical approach even as the market changes around them. Leaders should define an area of focus, rough direction, or aspiration, but strategies must remain emergent and dynamic.

Frequently, the data you need to adapt quickly is right under your nose. Convenience store chain 7-11 utilized its point-of-sale system in Japan to create useful pools of information such as customer demographics, time of day, and even the weather. The company used this information to test hypotheses about how these variables drove sales in real-time and how store variables adjusted to accommodate their unique customer bases.

VISIONARYBe firstReady to change the world? Then the visionary approach might be for you. Employ this strategy when your industry is ripe for disruption or can be re-shaped by an individual firm. It can also be appropriate if your industry displays high-growth potential but suffers from unsatisfied customers and few regulations.

Visionary strategies are exciting but easier said than done. It's a unique mix between a fixed goal and a flexible mindset. You'll need to deeply understand emerging trends or connect the dots between converging trends to steer into them at the right moment.

1. Identify an opportunity
2. Formulate your vision
3. Sketch the plan (keep it loose!)
4. Communicate your vision broadly to attract stakeholders

Before Amazon, UPS recognized the future potential of e-commerce and invested heavily -- $1 billion per year – on IT systems to handle future transactions. This new infrastructure paved the way for Jeff Bezos to launch the first online bookstore.

How to know if a visionary strategy is right for you:* Your environment is predictable, yet malleable. * You work in new industries or disrupted ones, i.e., the rise of the sharing economy (like Airbnb and Uber) * Key indicators include high growth potential, no direct competition, limited regulation

How to know if a visionary strategy is successful:* You will be first to market and achieve new user customer satisfaction

Essential trap to avoid:* Wrong Vision: It can be easy to obsess over a passing trend or an idea that doesn't offer a legitimate opportunity.

The visionary approach is only appropriate for so long in a company’s life cycle. After all, a great idea usually spawns great competitors. Once you’ve done your job changing the industry forever, it’s time to change your strategy depending on the current environment.

SHAPINGBe the orchestratorWhen an industry is new or recently disrupted, dynamic, and highly fragmented, the time could be suitable for shaping business strategy. Barriers to entry are often low, products are new to regulators, and the future is bright but uncertain.

Disruptive innovations like social networks or smartphones can thrust a previously stable, non-malleable industry into a new phase of unpredictability.

The Alibaba Group began with a B2B portal in 1999 to connect Chinese manufacturers with foreign customers. Its consumer variant, Taobao, launched just as internet browsers became more commonplace in the household and broadband replaced dial-up connections. Alibaba handled larger transaction volumes than Amazon and eBay combined by 2013 and accounted for over half of all Chinese parcel mail.

How to know if a shaping strategy is right for you:* Your environment is unpredictable and malleable * Your industry could be software or smartphone apps * Key indicators include fragmentation, no dominant player or platform, shapeable regulation

How to know if a visionary strategy is successful:* You achieve ecosystem growth and profitability and new product viability index

Essential traps to avoid:* Over-managed ecosystem: Control key elements like profitability and scale, but avoid dominating your ecosystem, lest it reduces variety and dynamism.

Implement a shaping strategy at all company levels, from culture to leadership and beyond. The point is to be the catalyst for innovation both inside and outside of your firm. Google holds developer conferences regularly to provide training feedback and encourages collaboration.

RENEWALBe viableWhen an established business finds itself in a harsh environment, it should consider a renewal strategy. This temporary solution allows a firm to react, economize, and – when things calm down – focus on growth once again.

American Express survived the 2008 recession with the mantra, “Stay liquid, profitable, and invest selectively to grow the business.” Then-CEO Ken Chenault said that although he launched a swift and aggressive restructuring program, he still had to be thoughtful and be governed by both short- and long-term considerations for the firm.

Chenault encouraged the company not to "hunker in the bunker" but rather "survive and grow." Businesses undergoing renewal should focus on emerging better than ever.

A successful renewal strategy requires a two-step approach:1. Economize: restore financial viability and close performance gaps 2. Pivot to growth: define a new strategic phase of transformation and reassess the current strategy approach

How to know if a renewal strategy is right for you:* Your environment is harsh * Your industry is in a similar position to financial institutions in the 2008-2009 crisis * Key indicators include low growth, decline, and crisis; restricted financing, negative cash flows

How to know if a renewal strategy is successful:* If you achieve cost savings and an increase in cash flow.

Essential traps to avoid:* Cost-cutting without a second phase: Don’t “burn the furniture” by continually cutting costs instead of looking to the future. Many firms declare victory after phase one but fail to develop a second phase of innovation and growth.

Leadership is critical to a renewal strategy. Initially, these leaders will have to make the tough decisions while offering hope through clear, optimistic messaging about the long-term plan. While everyone is busy saving the company, leaders must picture the end game and jump-start innovation to facilitate growth.

BONUS STRATEGY: AMBIDEXTROUSBe flexibleAmbidexterity is not a "color" on our symbolic palette, but rather a technique for mixing those colors to achieve the desired result.

Global businesses operate in multiple business environments that cannot operate with a "one size fits all" strategy. As a result, each unique geography, market, and product requires a different strategy or combination.

PepsiCo pursues a classical scale and positioning approach but mixes strategies depending on the situation. The company employs an adaptive strategy that responds to shifts in consumer behavior. Products and services test in one country before rolling out on a global scale.

As former PepsiCo CEO Indra Nooyi said, any large company must both run and reinvent the business in each business it operates inside.

Ambidextrous strategy is challenging to implement because it requires a combination of measures that can be diametrically opposed. Research by The Boston Consulting Group (BCG) found that, between 1960-2011, less than two percent of U.S. firms managed to outperform during both stable and turbulent periods simultaneously.

The Four Approaches to Ambidexterity:1. Separation: Deliberately manage which approach to strategy belongs in each subunit; division, function, etc. 2. Switching: Manage a shared pool of resources and switch between approaches over time or mix them as needed. 3. Self-organization: Each unit chooses which strategic approach to implement. 4. External ecosystem: Different approaches are sourced externally through an ecosystem of players that self-organize.

Essential traps to avoid:* As with the adaptive strategy, beware of planning for the unplannable. Avoid being too rigid in your approach.

Be open to discovery. Apple uses several approaches depending on its function. The Apple Store is a shaping approach; the iPhone was and continues to be visionary while shaping the manufacturers' ecosystem. The company adapts to changing needs and those it anticipates, too, while scaling the company to remain a global leader.

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By: Scott Galloway32-MINUTE AUDIO / 3,857 WORDS (15 PAGES)SYNOPSIS What will the world of business look like after the coronavirus pandemic? The pandemic will accelerate every trend by a decade and redefine entire industries. Foundational sectors like healthcare, education and transportation are on the verge of unprecedented disruption as the market rewards innovators like Tesla with massive valuations.

Scott Galloway, a professor at NYU Stern School of Business, presents a clear-eyed overview of this great transformation, the new business environment, Big Tech’s dominance, and who stands to win and lose in this new age.

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TOP 20 INSIGHTS1. Ecommerce's share of U.S. retail, which had been growing by one percent every year, jumped by 11% within eight weeks of the pandemic hitting the United States. The strong performance of big companies fueled the U.S. stock market recovery. However, medium companies declined, and smaller companies got hit the hardest. While the S&P registered growth by mid-July 2020, mid-caps were down 10%, and small caps dropped by 15%. Brands that were already going down, like JCPenny and Neiman Marcus, got hit the hardest. 2. A large portion of the stimulus capital that entered U.S. capital markets went towards innovative firms. Tesla's valuation exceeds Toyota, Daimler, Volkswagen and Honda combined, even though it will manufacture only 400,000 cars rather than 26 million cars manufactured by the other four in 2020. 3. Sectors will witness market consolidation around innovators or market giants with solid balance sheets, high-value assets, cheap debt and low fixed costs. Firms like Costco, Honeywell and Johnson and & Johnson, which have $11 billion, $15 billion and nearly $20 billion respectively in their bank accounts, will have their pick of assets and customers when weaker competitors shut down. 4. A company's survival depends on the sector's health and its position within it. Non-dominant companies within weak sectors must leverage current assets to pivot to new lines of business. Thryv Holdings, America's largest yellow pages company, used its relationship with thousands of small businesses to pivot into Customer Relationship Management. 5. Companies must become capital-light and move to a variable cost structure by leveraging other people's assets. Uber rents space in other people's cars driven by non-employees. So when revenue went to zero during the pandemic, Uber's costs went down by 60- 80%. Despite the hospitality industry taking a huge hit, Airbnb is well-positioned to take a more significant industry share. 6. 82% of corporate leaders plan to allow partial remote work, and 47% intend to offer full-time remote work in their organizations. But remote work has its share of drawbacks. Serendipity is key to innovation, and presence strengthens accountability. Companies must offer creative perks like home office supplies and grocery debit cards to support remote work. 7. After Covid, more employees will demand work from home from their organizations. Individuals with salaries over $100,000 will have an easier time making the demand. This will create a higher separation of classes after Covid. 60% of jobs that pay over $100,000 can be done from home compared to just 10% of jobs that pay below $40,000. 8. The Brand Age, where companies sold mass-produced products for irrational margins by creating emotional associations through advertising, has ended. The Product Age powered by online discoverability has begun. When advertising spends return, they will flow towards online platforms. Facebook and Google will account for 61% of the digital ad market in 2021. 9. There are primarily two digital business models. Companies sell products for a profit or monetize their users. Android offers cheaper, privacy-invasive smartphones, while iOS demands a premium for a product that respects privacy. As privacy becomes more central, these models will become incompatible. Apple will abandon Google search even when Google pays $12 billion every year. 10. Post Corona, Amazon, Google, Facebook, Apple, and Microsoft's market dominance will only grow stronger. Big Tech makes up 21% of the value of all publicly traded companies. Amazon and Apple added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery and Lionsgate to their market capitalization between Jan 2019 to February 2020. 11. Big Tech companies leverage their market dominance to create flywheels - virtuous cycles that generate growth without proportional costs. Apart from rapid delivery, Amazon Prime offers video streaming to increase the time spent on its platform. Apple dominated the wearables business (Apple Watch, AirPods and Beats) with $20 billion in revenue in 2019 because its flywheel connects phones, watches and wearables, an advantage that Rolex or Bose cannot compete against. 12. Big Tech has transformed entire industries into features. Amazon has outperformed FedEx and made the delivery industry into Prime feature. The media industry, worth hundreds of billions of dollars, will become a customer acquisition vehicle for Apple and Amazon's core business. 13. Massive market capitalization also creates problems for tech giants. Investors expect Big Tech companies to add nearly a trillion dollars in revenue over five years. Only a few sectors can provide that growth: Healthcare, Life Insurance and Education. Big Tech firms will have to enter these markets and compete with each other. 14. Amazon's signature move is to transform cost centers into revenue heads. It does this by leveraging its scale and access to limitless cheap capital to make massive investments that others just cannot match. Amazon built the best data center capabilities in-house and sold them to other companies through Amazon Web Services(AWS). It leveraged its warehouse and distribution expertise to launch Amazon Marketplace. 15. Amazon has more customer insight than any insurance actuary. It can leverage that to foray into insurance. Further, it can enter healthcare and offer telemedicine services through Alexa as the pandemic has removed regulatory bottlenecks. Combined with its retail, pharmacy and wearables, Amazon can offer an integrated healthcare product to rival hospitals. 16. Companies must find ways to create recurring revenue models by offering bundled services. As a product manufacturer, Apple should have taken a hit during the pandemic. However, it had transitioned into a software company with recurring revenue through massive investments in iCloud, Apple T.V., Apple Cloud and Arcade. Recurring revenue contributed 23% of Apple's 2019 revenue, cushioned it from the pandemic and doubled its valuation. 17. Most products depreciate. To dominate, companies must build Benjamin Button products that become more valuable with every use. The Benjamin Button effect is the result of more user data and network effects. Spotify adds more users every year, attracting more artists and giving the company more data to improve its personalization. Similarly, Netflix's recommendations improve each time a user watches a movie or a T.V. show. 18. Evolutionary psychology says that brands can appeal to customers in three ways. They can target the "brain," the "heart," or "genitals." Brands that appeal to the brain make rational claims of higher value or lower prices like Amazon. Companies like Facebook tap into the heart's instinct to care for friends and family. Finally, brands can appeal to the sexual instinct to feel more attractive to sell premium products at irrational margins like Tesla. 19. Academia, healthcare and insurance are waiting for disruption. Industries are open to disruption when there is a dramatic increase in price without a corresponding increase in value, a heavy reliance on brand equity or customer ill-will. College tuition has increased 1400% over 40 years without significant value addition. The average family coverage premium has increased 54% in 10 years. 20. After Covid, Big Tech will move into academia. Clayton Christensen predicted that 50% of colleges and universities would go out of business in the next 10 to 15 years. Big Tech firms may partner with academia to offer 80% value of a four-year degree to thousands at 50% of the cost. MIT and Google could jointly design a $50,000 two-year program that enrolls 100,000 students to generate $5 billion every year.

SUMMARYThe pandemic has accelerated every social and business trend by ten years and opened the floodgates for disruption in multiple sectors. This book tries to predict the future of business, education and society in the post-pandemic world.

THE GREAT ACCELERATIONEcommerce's share in U.S. retail was growing at about one percent every year. Within eight weeks of the pandemic, the number jumped from 16% to 27%. A decade of ecommerce growth took place in eight weeks. Apple took 42 years to reach $1 trillion in value and just 20 weeks to grow to $2 trillion. Trends in economic inequality and unemployment have accelerated as well. Twenty million jobs were added over the last ten years. Forty million jobs were lost within ten weeks. Forty percent of households with income below $40,000 were laid off or furloughed compared to just 13% percent of households over $100,000.

The pandemic opens opportunities for innovation as well. The three largest U.S. consumer categories - healthcare, education and grocery are being fundamentally disrupted. Most people were forced to access healthcare and remote learning and order groceries online. A decade's worth of habits became forged in a matter of weeks.

The Strong Get StrongerAfter a brief plunge, markets continued to climb even as the death toll hit 100,000. This "recovery" is due to the outsized gains of Big Tech and a few other giants. By July 31, the S&P 500 had recovered to January 1 levels, but mid-caps in the S&P 400 were down 10%. Small-caps in the S&P 600 were down 15%. Firms with weak balance sheets were being slaughtered, including prominent names such as Neiman Marcus, JCPenny, Gold's Gym and California Pizza Kitchen. When weaker competitors shut down, the firms like Johnson & Johnson, which has $20 billion in the bank, will choose the best assets and customers. The most significant damage from an economic standpoint will come from medium and large companies with weak balance sheets and many employees.

Markets make big bets on vision and growth narratives over hard numbers, leading to significant gains for innovators and market giants and steep declines for smaller firms and incumbents. Companies that have been doing well have benefited remarkably while weaker competitors have been shut out of capital markets had debt ratings cut, and customers worried about long-term deals. Firms that are deemed innovative are seeing valuations that reflect estimates of cash flows ten years from now discounted back at low rates. That's why Tesla's value exceeds the value of Toyota, Volkswagen, Daimler and Honda combined, even though it will produce just 400,000 cars in 2020 while the other four will build 26 million cars.

ADAPTING TO THE CRISISThe company's sector and relative strength within the sector are critical determinants of survival. Companies in weak sectors without market dominance will have to explore pivots into more substantial sectors. Are there assets that can be leveraged to create a new line of business? The country's largest yellow pages company successfully leveraged its relationship with many businesses to pivot into a Customer Relationship Management(CRM) company. If the business is in structural decline, generate the last drop of revenue from the brand instead of giving it another lifeline. Plan a graceful exit by using those profits to ease the transition for employees and customers.

Radical Cost CuttingFor weak companies, survival depends on radical cost-cutting. Get to the lowest cost-base as fast as possible by suspending rent-payments, selling inventory at reduced prices and reducing compensation, beginning with the highest earners. Explore alternative means of compensation like equity and vacation. Apart from cutting costs, try to do more with assets that cannot be shed. Universities have high fixed costs due to tenure, solid unions and facilities. However, many of them are investing in technology to lower costs per student by reaching more students.

Cloud Cover for Big DecisionsNow is a good time for businesses to start afresh and rethink their value proposition for a post-corona world. Companies get the cloud cover to make big decisions and bold bets as there is no pandemic playbook. Use this to reimagine market strategy, labor composition and place big bets for the future.

The Covid Gangster MoveThe killer move is to have a variable cost structure by leveraging other people's assets. Uber rents space in other people's cars driven by non-employees. When revenue hit zero in the pandemic, Uber's cost correspondingly went down by 60% to 80% and its share price held value. For similar reasons, Airbnb is well-positioned to survive the pandemic and take advantage of the work-from-anywhere model enabled by a boom in remote work.

LOOKING AHEADThe Future of Remote WorkThe open question is whether technology can disperse work without sacrificing innovation and productivity. Ideas emerge from serendipitous conversations, and presence is key to fostering accountability and building relationships. However, presence is costly in terms of real estate, commute and other costs. As of June 2020, 82% of corporate leaders plan to allow remote working some of the time, and 47% intend to offer full-time remote work going forward. Companies need to think of creative ways to support employees. Reduce office snack spends and offer monthly grocery debit cards.

Offer gift cards for office supplies to set up good home offices. While remote work offers flexibility, a reduced commute and more savings, it also has its share of risks. A job moved out of metro areas can be moved overseas. Presence has implications for who is on the top of the executive's mind for promotions and opportunities. Remote work benefits will distribute unevenly to society. 60% of jobs that pay over $100,000 can be done from home compared to just 10% of jobs that pay below $40,000. Flexible satellite offices, distributed across the country, where people can work alone or in teams, could be the future.

From Brand Age to the Product AgeFrom World War two till the rise of Google, the formula for shareholder value was to create compelling brand associations for mass-produced products. Branding injected emotion into inanimate products resulting in consumers willing to pay irrational margins. In 2020, the Brand Age gave way to the Product Age. In the Brand Age, a traveler to New York would go to the Ritz because that's the brand she knows. In the Product Age, a Google search reveals that the Ritz is overpriced, and instead, she finds a boutique hotel based on crowdsourced recommendations. The losers in this transition are the media companies and advertising firms. When advertising spending returns, it will flow only to Product age firms like Google and Facebook and not traditional media. Predictions put Google and Facebook's combined share of the digital ad market at 61% in 2021.

Two Conflicting Business ModelsThere are two fundamental business models. A company can sell a product for more than the cost of production. Otherwise, companies can offer subsidized products to sell customer attention and behavioral data. Most digital industries will bifurcate along this divide. Android phones offer a great product for low upfront costs but at the cost of privacy, while iOS offers a luxury privacy-conserving product for premium margins. These models will become increasingly incompatible as privacy becomes a core issue. Apple could give up its $12 billion a year contract to make Google the default search engine and develop a competitor. Similarly, Shopify leveraged exploitation by Amazon to offer a simple product to sellers. Sellers control the data, branding and the customer while Shopify gets a simple fee.

THE MONOPOLY ALGORITHMFive months into the pandemic, major American companies like ExxonMobil, Coca-Cola, JPMorgan Chase and Disney were down 30%. But Amazon, Google, Facebook, Apple and Microsoft were up 24% in mid-2020. These five companies make up 21% of the value of all publicly traded companies.

The Flywheel ModelCompanies like Apple and Google leveraged the lead given by innovation to create effective monopolies. They did this by concealing their market position and exploiting outdated antitrust laws. Finally, they have a flywheel to grow revenue without increasing input or cost. Amazon Prime attracts shoppers who want rapid fulfillment. The subscribers enjoy Amazon Prime Video, which increases Amazon Prime's stickiness and time spent on the platform. This business model makes sense for Amazon as the Net Promoter Score is zero for eCommerce companies, but it is strong for streaming video. This revenue model, combined with a lack of antitrust action, has led to massive companies that turn entire industries into loss leaders for protecting their core business.

Similarly, Apple dominates wearables, becoming the largest watchmaker by a factor of four. Apple's wearables business generated $20 billion in 2019, making it one of the 20 most valuable firms in the world. Apple has created a Flywheel of connecting phones, watches and headphones, an advantage Rolex or Bose cannot compete against.

From Industries to FeaturesTech turns entire industries into features. Amazon has turned the delivery industry into a Prime feature. Amazon has leveraged its online penetration into 82% of American households to beat FedEx.

With hundreds of billions of dollars in value and massive cultural influence, media is being "featurized." Media firms like Comcast, AT&T and Verizon will bleed value to Apple and Amazon, to whom it is not a core business. Between January 2019 and February 2020, Apple and Amazon added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery and Lionsgate to their market capitalization. Media has become a customer acquisition vehicle, not a standalone business.

Size ProblemsSize creates its own problems for Big Tech firms. Investors expect them to add nearly a trillion dollars to their revenue over five years. They have to enter new markets and compete with each other. There are only a few sectors large enough for this appetite: Education, Healthcare, Life Insurance and Education.

Turn Expense Lines into Revenue LinesAmazon's killer move is to turn expense lines into revenue lines using scale and ultra-cheap capital. Amazon took advantage of its massive data center volumes and its ability to invest nearly unlimited capital to build the best data center management capabilities. Then Amazon turns it around and sells it to other companies through Amazon Web Services. Amazon did the same thing with warehouse and distribution and launched Amazon Marketplace.

Amazon will likely foray into healthcare, leveraging its massive customer insights to disrupt a bloated and much-reviled industry like insurance. It could also move to reduce the financial cost of healthcare by providing telemedicine services through Alexa. Amazon's healthcare platform could integrate with its retail, pharmacy and wearables platform for a "holistic approach" to health. The opportunity is open as the pandemic removed regulatory bottlenecks to telemedicine.

THE TRILLION DOLLAR DNAThe T Algorithm lists the eight essential elements for a company to have a shot at a trillion-dollar valuation.

Appealing to Human InstinctThe most potent firms target the "brain, the heart, or the genitals" of a customer. Rational claims appeal to the brain. Brands that target knowledge (Google) or rational claims of value like Dell tend to have small margins. Brands that target the heart exploit the instinct to care for our own. Facebook appeals to the heart exploiting our need to connect to our friends and family. Luxury brands leverage the instinct to improve our sex appeal to sell products that make us feel more successful and good-looking.

• Career Accelerant: A company seen as a potent career accelerant attracts top-notch talent leading to higher innovation and greater success.
• Balancing Growth and Margins: Usually, fast-growing firms sell high volumes of low-margin products while luxury brands sell high-margin products at low volumes. Only a few firms can combine both.
• Bundle: A bundle of goods and services that create recurring revenue.
• Vertical Integration: This is a firm's ability to control the end-consumer experience by controlling most of the value chain. Apple controls end-user experience through controlling both the iPhone and the App Store.
• Benjamin Button Products: Unlike traditional products like cars, some digital products become more valuable with time. Facebook and Spotify become more valuable over time as the number of users increases the richness of personalization and data profiling.
• Visionary Storytelling: The ability to demonstrate progress against a bold vision motivates employees and attracts cheap capital.
• Likeability: The ability to insulate a firm from media and government scrutiny and create positive brand associations in customers' minds.

TeslaElon Musk's vision, storytelling and far better products have provided cheap capital that other players can't beat. The firm is vertically integrated, selling cars directly. However, its core advantage is appealing to "sexual instinct" through every aspect of its strategy. Owning a Tesla is the ultimate status symbol indicating that the owner is wealthy with a conscience. Further, it makes its customers perceive themselves as innovators and visionary rebels.

SpotifyWith recurring revenue and a "Benjamin Button" product, Spotify has all the ingredients of a trillion-dollar firm. However, it has a valuation of just $47 billion. Apple Music has most of the music available on Spotify, along with the advantage of vertical integration. If Spotify and Netflix merge and acquire Sonos for vertical integration, they could control video and music and establish devices in America's wealthiest homes.

DISRUPTING HIGHER EDUCATIONIn the past 40 years, college tuition has increased 1400% without any remarkable value addition or innovation. Premium universities have leveraged scarcity(low admission rates) to increase prices. These price rises have been enabled by federally subsidized student loans, leading to a total student loan debt of $1.6 trillion. In 2012, Clayton Christensen predicted that 25% of colleges and universities would go out of business over the next ten to fifteen years. By 2018, he raised the number to 50% pre-Covid.

In exchange for time and tuition, a college offers a credential, education and the college experience. The pandemic gave most institutions a fiscal shock. Schools like Harvard that have low acceptance rates and offer exceptional credentials will be fine. So will schools that offer solid education at a great price without an emphasis on experience. However, schools that offer an elite-like experience at premium prices without credentials will face the heat.

Online education holds tremendous potential as it can scale. Top professors and administrators in the top 10 universities will see classroom sizes expand and revenues rise. Almost everyone else in academia will make less. The most significant disruption could be Big Tech firms partnering with academia to offer 80% of a traditional four-year degree at 50% of the cost. MIT and Google could offer joint 2-year STEM degrees, enrolling 100,00 students at $25,000 per year in tuition, yielding $5 billion for a two-year program. In August 2020, Google began offering courses with career certificates that it and other participating employers will consider equivalent to a four-year degree in that domain.

There is no going back to the previous normal. This pandemic will reshape entire industries, and the way we work and learn will change. Iconic old brands will die, industries will consolidate, and newer innovators like Tesla will see their fortunes rise. The world has fast-forwarded decades in one year.

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By: Brian Christian and Tom Griffiths24-MINUTE AUDIO / 3046 WORDS (13 PAGES)SYNOPSIS Can computer science teach us the secrets of life? Perhaps not, but it can shed light on how certain everyday processes work and how to exploit them. Algorithms are everywhere, from following a recipe to the order in which you sort your email.

In Algorithms to Live By, programmer and researcher Brian Christian and psychology and cognitive science professor at UC Berkeley Tom Griffiths share the many ways that algorithms shape everything from the way we remember things to how we make big and small decisions.

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TOP 20 INSIGHTS1. The "37% rule" refers to a series of steps, or algorithms, that someone must follow to make the best decision within a set amount of time. Someone allots 37% of their time to research before they make a decision, then commits to the very next "best choice" they find. 2. The "explore/exploit" trade-off refers to the need to balance the tried and tested with the new and risky. The payoff of this algorithm depends entirely on how much time you have to make decisions. People are more likely to visit their favorite restaurant on their last night in town than risk something new. 3. Developed in 1952 by mathematician Herbert Robins, the "Win-Stay, Lose-Shift" algorithm uses slot machines as a metaphor. Choose a machine at random and play it until you lose. Then switch to another machine; this method was proven to be more reliable than chance. 4. A psychology study found that given choices, people often "over explore" rather than exploit a win. Given 15 opportunities to choose which slot machine would win, 47% used Win-Stay, Lose-Shift strategies, and 22% chose machines randomly instead of staying with a machine that paid out. 5. Hollywood is a prime example of the exploit tactic. The number of movie sequels has steadily increased over the last decade. In both 2013 and 2014, seven of the Top 10 films were either sequels or prequels. The trend is likely to change if new movie ideas draw more box office dollars. 6. The A/B test is similar to the two slot machine scenario in that you stick with the option that performs best. More than 90% of Google's $50 million in annual revenue is from paid advertisements, which means that explore/exploit algorithms power a large portion of the internet. 7. The Gittins Index provides a framework of odds that assume you have an indefinite amount of time to achieve the best payoff, but the chances reduce the longer you wait. For example: choose a slot machine with a track record of one-to-one wins/losses (50%) over the machine that has won nine out of 18 times. 8. "Upper Confidence Bound" algorithms offer more room for discovery than the "Win-Stay, Lose-Shift" method. This algorithm assigns a value based on what "could be" based on the information available. A new restaurant has a 50/50 chance to provide a good experience because you have never been there. 9. The "Shortest Processing Time" algorithm requires that you complete the quickest tasks first. Divide the importance of the task by how long it will take. Only prioritize a task that takes two times as long if it is two times as important. 10. Laplace's Law calculates the odds that something will occur with only small amounts of data. Count how many times that result has happened, add one, then divide by the number of opportunities plus two. For example: Your softball team plays eight games per season. It has already won two games. 2+1/ 6+2=3/8, or a 37.5% chance you win the next game. 11. The Copernican Principle allows you to predict how long something will last without much of anything about it. The solution is that it will go on as long as it has gone on so far. Based on this principle, Google will reasonably last until 2044 (23 years since 1998 + 23 from 2021). 12. "Power-law distribution" considers that, in life, most things fall below the mean and a few rise above. Two-thirds of the US population makes less than the mean income, but the top 1% make almost ten times the mean. Few movies make "Titanic" level money in the box office, but some do. 13. The "Nash Equilibrium" explores the phenomenon of two-player games and the way that players form strategies that neither wants to change based on what the other person does. This creates stability. In Rock-Paper-Scissors with three options, players adopt a 1/3-1/3-1/3 strategy unless the other person changes tactics, and the process starts again. 14. Human brains have a nearly infinite capacity for memories, but we have a finite amount of time to access them. This results in the "forgetting curve." A study by Hermann Ebbinghaus found that he could recall nonsense syllables 60% of the time after he read them, but it declined to 20% after 800 hours. 15. Ebbinghaus' "forgetting curve" was shown to closely match how often words are used in society. The recurrence of words found in headlines of The New York Timesdeclined at a rate of 15% over 100 days and implied that human brains naturally tune their processes to the world around us. 16. The stock market "flash crash" of May 6, 2010 was caused by an "information cascade." When one person does something different, then other people follow suit, assuming that the first person knows something they don't. This behavior causes people to panic buy or exhibit mob behavior. 17. Sociologist Barry Glassner noted that murders in the United States declined by 20% throughout the 1990s, and yet the mention of gun violence on American news increased by 600%. An information cascade can be caused more by public information than private information. 18. When authors Brian Christian and Tom Griffiths scheduled interviews for the book, they found that experts were more likely to accept a narrow, predetermined window than a wide-open one. It is less challenging to accommodate restraints than find another solution. 19. Believe it or not, randomness is part of life's algorithm, too. Nobel prize-winner Salvador Luria realized that random mutations could produce viral resistance by watching his friend win the jackpot on a slot machine. 20. The best-laid plans are often the simplest. Jason Fried and David Heinemeier Hannson, founders of software company 37signals, use a thick marker when they start to brainstorm because it limits room and forces them to keep it simple and focus on the big picture.

SUMMARYOptimal StoppingLook versus leapLife is full of situations that require us to make the best possible decision in the shortest amount of time. Drivers search for the perfect parking space. Managers search for the best job candidate for a job, and property owners must decide on whether or not to accept a sale offer before the real estate market changes again. This dilemma is called "optimal stopping."

"Optimal Stopping" problems refer to dilemmas that require the best decision in the shortest amount of time. How do you balance the need to get all the facts with the need to act before it's too late? Common examples include searching for the perfect parking spot, when to rent an apartment before they're all taken and when to hire the best candidate for a job. The latter has been thoroughly examined and discussed by mathematicians since the 1950s.

This problem is known as the "Secretarial Problem."

• If an employer interviews 100 secretary applicants, that person should allocate the first 37% percent of interviews to familiarize themselves with the talent pool and best qualities.
• If they hire the very next applicant that appears to be the "best so far," the company has a 37% chance of that person being the best candidate.
• The odds become greater with fewer applicants.

A renter on the hunt for an apartment in San Francisco might be inclined to take the first available unit due to high demand. If that renter needs to find a new place to live within 30 days, the "Optimal Stopping" algorithm suggests that the renter commit 37% of their time, or 11 days, to explore options without any commitment. On day 12, the renter must be prepared to commit to the first place that they consider to be the "best so far."

Explore versus ExploitLaura Carstensen, a psychology professor at Stanford, hypothesized that people strategically reduce their social circles as they get older. In one study, people were asked if they would rather spend 30 minutes with an immediate family member, an author that wrote a book they read recently or someone they'd met who appeared to share their interests. Older respondents chose the family member, while younger people chose to make new friends.

When time was added or taken away, however, something interesting happened. If older people were allowed to live 20 years longer, their choices matched those of younger respondents. If younger respondents imagined they were about to move across the country, they chose family members instead.

Life is full of uncertainty, making the decision process that much more of a struggle at times. To take some of the life or death pressure out of the equation, let's turn instead to something a bit less dire – the casino slot machine.

Dubbed the "one-armed bandit," slot machines come with various payout odds that have baffled gamblers and fascinated statisticians for centuries. In 1952, mathematician Herbert Robbins proposed a solution to the age-old dilemma of whether you should hold out for the next big win or quit while you're ahead. He called this the Win-Stay, Lose-Shift algorithm.

Robbins proposed that a person should choose "an arm" at random (explore), then pull it as long as it pays off (exploit). Once the machine fails to pay, the person should move to another one, and so on.

Minimal RegretSometimes you have to weigh the risk with potential regret to find the solution to your particular problem. Amazon CEO Jeff Bezos had a steady, well-paid job on Wall Street before starting Amazon. The risk of the first online bookstore, he found, was outweighed by the possibility that he might regret not trying, a "regret minimization framework."

"I knew that when I was 80, I was not going to regret having tried this," Bezos said. "I was not going to regret trying to participate in this thing called the internet that I thought was going to be a really big deal. I knew that if I failed, I wouldn't regret that, but I knew the one thing I might regret is not ever having tried."

"Upper Confidence Bound" algorithms offer more room for discovery than the "Win-Stay, Lose-Shift" method. This algorithm assigns a value based on what "could be" based on the information available. A new restaurant has a 50/50 chance to provide a good experience because you have never been there.

Algorithms can't guarantee a life without regret, but they show how our willingness to take risks is reduced by how much time we think (or know) we have to take them. When we are children, we explore our worlds and discover new things with great enthusiasm. As we grow older, we tend to rely on the "tried and true" decisions based on what we've learned, i.e. exploit them.

Plan with PurposeOften, those tasks with a due date can be tackled from the nearest deadline to the furthest. If you have multiple tasks due simultaneously, it is best to sort them by how long each will take.

To approach this type of schedule, especially if you have multiple clients, you can reduce the amount everyone must wait using the Shortest Processing Time algorithm. Simply put, always tackle the quickest task first and so on. Imagine a Monday morning in which you have one big project that takes four days to complete and a smaller project that takes one day. If you deliver the big project first on Thursday (4 days) and the small project on Friday (5 days), your clients will have waited a total of nine days. If you deliver the small project first on Monday (1 day) and the big one on Friday (5 days), your clients will have waited for a total of six days between them. This is known as the "sum of completion times."

Another approach is to assign a weight to each task, such as how much money it will bring in. Divide each task's weight by how long it will take to complete, then work in the highest to lowest order. For a freelancer or independent contractor, this allows you to determine each task's hourly rate. Divide each project fee by its size and work from the highest hourly rate to the lowest.

Predict the FutureAstrophysicist J. Richard Gott III developed the Copernican Principle in 1969 – a method to predict how long something will last. When he visited the Berlin Wall, he wondered how long the wall would last. Since he didn't know how long the wall's life span would be, Gott could assume that, on average, his arrival would be around halfway through. Therefore, he guessed that the wall would stand for another eight years. In this case, the Berlin Wall stood for 20 years, not eight.

The Copernican Principle isn't perfect – a 90-year-old man is unlikely to live to be 180 – but there are instances where it works well. Long before Gott gave this algorithm a name, statisticians tried to estimate how many tanks the Germans produced each month during World War II. The solution was to double the serial number seen on the tanks and estimate that at least twice as many existed. In this case, they estimated 246 tanks were manufactured each month, compared to the 1,400 suggested by aerial reconnaissance. After the war, German records confirmed the actual number to be 245.

Forget About ItYour brain was designed to forgetThe human memory seems to be a fickle thing at times, but there is a method to the madness. Hermann Ebbinghaus, a psychologist at the University of Berlin in 1879, studied himself to understand memory better.

Each day, Ebbinghaus would memorize a list of nonsense syllables and quiz himself. He then created a graph to show how long it took for his memory to fade. The likelihood of recall predictably declined with time, from close to 60% just after reading something to just 20% after 800 hours.

John Anderson, a psychologist and computer scientist, reexamined Ebbinghaus' work in 1987 to see if he could design computer systems around the human brain. He discovered that our brains forget information when it is no longer relevant to the world around us. Anderson analyzed headlines from The New York Times and found that a word is most likely to reappear right after first being used. The likelihood of seeing it again reduced more over time. Side by side, the appearance of the chart looked nearly identical to Ebbinghaus' data.

Seek Balance… or NotThere is a natural balance in everything, especially in two-player games or scenarios that include at least two competitors. Mathematicians call this phenomenon "equilibrium" because it is stable. Equilibrium is especially evident in poker, where players stick to their strategies unless a significant change occurs.

Example: In Rock-Paper-Scissors, there are only three options for players to choose from. Players naturally pick a random choice or 1/3 strategy. If one of the players starts to use rock more often, the other play adapts and uses paper. The other player will then balance things out again by changing strategy, i.e. scissors, etc., and the process starts again.

Mathematician John Nash, immortalized in the book and film "A Beautiful Mind," proved in 1951 that every two-player game has at least one such equilibrium. This discovery earned him the Nobel Prize in 1994 Economics. Often referred to as the "Nash Equilibrium," this principle offers a prediction of the stable long-term outcome of any set of rules or incentives.

This algorithm is used to plan and shape economic policy and social policy – but sometimes, "stable" does not necessarily mean "good."

If a town has two shopkeepers that attract the same customers, the first will lose business if they work six days a week while the other works seven. The Nash Equilibrium suggests that if both businesses take a day off, they will both get rest, but both lose business. So, both owners work seven days a week.

Change the GameIf your friend jumped off a bridge, would you do it, too? The human instinct to copy one another can be a survival trait, like turning to look when you see others do just in case danger lurks nearby. Fads and fashions come and go. Is it better to play it safe or make your own way for better or worse?

"Whenever you find yourself on the side of the majority, it is time to pause and reflect," said Mark Twain.

People tend to make decisions based on assumptions they derive from the actions of someone else. If everyone bought Beanie Babies, they must be valuable, right?

When this process begins to avalanche out of control, it is called an "Information Cascade." The real estate crisis of 2007-2009 was an example of home prices rising due to demand, only to crash. People assume that because many others do something that urgency exists. (Toilet paper in 2020, for example.) The results can be catastrophic.

Be wary of cases where public information seems to exceed private information. The representation of events in the media does not match frequency in the world. Sociologist Barry Glassner noted that murders in the United States declined by 20% throughout the 1990s, and yet the mention of gun violence on American news increased by 600%.

Sometimes, in the face of an Information Cascade, you have to change the game. If you are a Christian shopkeeper or have strong convictions about work-life balance, to close on Sunday is a non-issue. If you see people around you fall into an urgent trend, start to panic buy or become disturbed by sensational newspaper headlines, you can alleviate the stress by inserting more data.

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By: Ashlee Vance26-MINUTE AUDIO / 3,700 WORDS (16 PAGES)SYNOPSISOn January 7, 2021, Musk was named the richest person in the world with a net worth of $188.5 billion. Remarkably, Musk not only topped Jeff Bezos, but accrued $150 billion of that net worth in the prior 12 months alone. Experts described it as the fastest bout of wealth creation in history.

In Elon Musk, the South Africa-born inventor opens up to writer and reporter Ashlee Vance about the rocky road he traveled to become America’s most innovative modern industrialist.

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TOP 20 INSIGHTS1. Musk has always been a man with a mission and a higher calling. In college, he became convinced there were three areas that would change the future of the world for good: the internet, sustainable energy and the ability to live outside our planet. Musk came to see man’s fate in the universe as a personal obligation. If that meant man should pursue cleaner energy technology or build spaceships to extend the human species’ reach, then so be it. Musk had a deep commitment to explore Mars and he would find a way to make it happen. 2. Vance believes Musk will leave an indelible mark on the world through his transformative work. Vance asserts that Musk has what so many in Silicon Valley lack – a meaningful world view. “He is less a CEO chasing riches than a general marshaling troops to secure victory. Where Mark Zuckerberg wants to help you share baby photos, Musk wants to [...] save the human race from self-imposed or accidental annihilation,” Vance writes. 3. When the dot-com bubble burst in 2007, it left behind a slew of empty-handed investors and mediocre companies. Silicon Valley sank into a deep depression. Although Google emerged and began to thrive in 2002, and Apple soared when it launched the iPhone in 2007, these startups were anomalies. And the hottest new things – Facebook and Twitter – looked nothing like their predecessors Intel, Hewlett-Packard or Sun Microsystems, all of which employed thousands of people to make physical products. Silicon Valley had morphed into a play-it-safe haven as countless entrepreneurs and dot-com strivers chased easier money and churned out simple apps and advertisements. 4. By all accounts, Musk should have been part of the malaise that washed over Silicon Valley. Instead, he founded his first startup in 1995, Zip2, bought by Compaq in 1999 for $307 million. He took the $22 million he made on the deal and invested all of it in his next start-up, X.com, which eventually morphed into PayPal. 5. As the largest shareholder in PayPal, Musk became enormously wealthy, when eBay bought PayPal for $1.5 billion in 2002. Musk headed for Los Angeles and threw $100 million into SpaceX, $70 million into Tesla and $10 million into SolarCity. Musk had become a business titan who, in one fell swoop, brought about the most significant advances the aerospace, automotive and energy industries had seen in decades. 6. Musk and other Silicon Valley influencers at the time shared the belief that innovation had come to a hard stop after the bubble burst. Jonathan Huebner, a physicist at the Pentagon’s Naval Air Warfare Center, used a tree metaphor to describe what he saw as the state of innovation. Man has already climbed past the trunk of the tree and gone out on its major limbs to mine most of the really big, game-changing ideas – the wheel, electricity, the airplane, the telephone and the transistor. We now dangle at the end of the branches at the top of the tree, left only to refine past inventions. 7. PayPal, the first blockbuster initial public offering after the 9/11 attacks, came to represent one of the greatest assemblages of engineering and business talent in Silicon Valley history. The founders of startups such as YouTube, Yelp, and Palantir Technologies all worked at PayPal. Its employees pioneered techniques in online fraud that have formed the basis of software used by the FBI and CIA to track terrorists and of software used by the largest banks to combat crime. This group of super-talented employees became known as the PayPal Mafia, or essentially the “ruling class” of Silicon Valley, with Musk as its most famous and successful member. 8. Musk’s willingness to tackle the impossible has earned him the respect and reverence shown to the greats like Steve Jobs, Howard Hughes and Google founder Larry Page. Only Steve Jobs could claim similar achievements in two completely different industries, such as when he launched an Apple product and a new Pixar movie when he ran the two large industry behemoths simultaneously. The difference between Musk and his innovative peers is that Musk wants to build something far grander than anything Hughes or Jobs produced. Musk’s mission has always been to rethink conventional norms in the aerospace, automotive, and solar industries and then make as much as possible from scratch in his own startups. 9. Musk’s software skills and ability to apply them to machines would drive his success. Famed software engineer Edward Jung marveled at Musk’s gift of integration – the ability to harmoniously meld software, electronics, advanced materials and computing horsepower. Musk also is a self-taught coder with a natural ability to master complex physics concepts in business planning and conceptualize a path from a scientific concept to a for-profit enterprise. Musk is determined to pave the way toward an age of awe-inspiring machines and sci-fi dreams come true. 10. Musk always managed to find bright, ambitious people. He snagged the best talents in the aerospace industry and the same could be said for Tesla, where engineers got to work on things not typically done in U.S. auto companies. Musk would personally reach out to the aerospace departments of top universities to inquire about the students who had finished with the highest exam grades. It was not unusual for Musk to call students in their dorm rooms and recruit them over the phone. 11. It was not until Vance walked through the doors of SpaceX that he realized the magnitude of what Musk had done. “Musk had built an honest-to-God rocket factory in the middle of Los Angeles. And this factory was not making one rocket at a time. It was making many rockets – from scratch,” Vance writes. 12. Musk wanted SpaceX to build the workhorse for a new era in space and establish the U.S. as the world leader that can take cargo and humans to space. It’s a threat Musk believes has earned him a great number of fierce enemies. 13. SpaceX represented America’s attempt for a fresh start in the rocket business, which Musk believed had not evolved over the past 50 years. If SpaceX could make rockets cheaper than what the Russians offered at the time, SpaceX would have the technology needed for his mission to establish life on Mars for at least a million people over the next century. 14. The aerospace companies built a “Ferrari” for every launch when a simpler car could do the job just as well. Instead, Musk would apply start-up techniques from Silicon Valley to run SpaceX fast and lean and capitalize on the advances in computing power and materials that had occurred over the past two decades. SpaceX would operate as an independent company and avoid the waste and cost overruns often associated with government contractors. 15. Tesla defied all odds for success in the auto industry. Its automotive expertise amounted to two guys who loved cars with one who created a series of science fair projects based on technology the auto industry considered to be ridiculous. But Tesla did what start-ups do. They hired a bunch of young, hungry engineers who figured things out as they went. Never mind that the Bay Area had no real history that this model would work for something like a car, or that building a complex, physical object had little in common with software application writing. 16. Tesla revealed that each electric car it built would cost $90,000 and had a range of $250 per charge. Thirty technology billionaires had committed to buy a Roadster in 2006. Musk promised that a cheaper car – a four-seat, four-door model under $50,000 would follow in a few years. 17. By the middle of 2007, Tesla had grown to 260 employees and did the impossible. It had produced the fastest electric car the world had ever seen. All it had to do was build a lot of the cars – a process that would nearly bankrupt the company. The greatest mistake Tesla’s engineers made in the early days were assumptions about the Roadster’s transmission. The issue forced Tesla to delay its November 2007 launch of the Roadster and begin developing a new transmission in early 2008. 18. Tesla consumes a huge portion of the world’s lithium-ion battery supply and will need far more batteries in the future to meet the needs of its businesses. This is why in 2014, Musk announced plans to build what he called a Gigafactory, or the world’s largest lithium-ion manufacturing facility. Each Gigafactory would employ about 6,500 people and help Tesla meet a variety of goals. 19. Musk helped his cousins, Lyndon and Peter Rive, develop SolarCity’s business model and became the company’s chairman and its largest shareholder. Unlike other companies, SolarCity would not manufacture their own solar panels. Instead, they would buy them and then do just about everything else in-house. They built software to analyze a customer’s current energy bill, the position of their house and the amount of sunlight it typically received, and built up their own teams to install the solar panels. 20. When Vance asked Musk one final question for the book: Just how much will you put on the line? His response was: “Everything that other people hold dear. I would like to die on Mars.”

SUMMARYBy 2012, Musk’s companies had done such unprecedented things and disrupted so much industry that even his greatest critics couldn’t help but recognize all he had accomplished. SpaceX flew a supply capsule to the International Space Station and returned it safely to Earth, Tesla produced an alluring all-electric car that took the auto industry by surprise, and as the largest shareholder of SolarCity, Musk created a successful solar energy company ripe for an initial public offering.

UNIFIED FIELD THEORYThe simple way Musk manages his businesses and decides business strategy to start is embedded in his Unified Field Theory. Each of Musk’s businesses is interconnected in the short term and long term. This operating theory reduces workload and helps all of his companies provide mutual external support to each other so they grow and prosper by. For instance, Tesla makes battery packs that SolarCity can then sell to end customers. SolarCity supplies Tesla’s charging stations with solar panels, which helps Tesla to provide free recharging to its drivers. SpaceX launches satellites for Tesla, which allow Tesla to provide user navigation services, and SpaceX uses batteries manufactured by Tesla to power their system. They exchange knowledge around materials, manufacturing techniques and the intricacies of operating factories that build so many things from the ground up.

To this day, Musk manages his companies through a business model of full integration and support, and if he encounters obstacles he cannot solve, he starts a whole company on it.

SpaceXMusk has always believed that the very idea of America was intertwined with humanity’s desire to explore. However, his fears that mankind had abandoned all gumption to push technology boundaries were confirmed when he visited NASA’s website, where he found nothing, not even a mention, of any future plans to explore Mars. Dumfounded, he headed to Russia to see if he could buy a rocket himself. The Russians pushed Musk around with ridiculous prices and other skullduggeries, which strengthened his commitment even more. Elon studied intensely how rockets are built and declared he would build the rocket himself from a spreadsheet that detailed exactly how to do it. That is how SpaceX was born in 2002.

SpaceX tested reusable rockets that could deliver payloads to space and return to their launch pads on Earth with precision. If the company can perfect this technology, drastically reduce the price per launch and perform launches on a regular schedule, SpaceX would deal a devastating blow to its industry competitors. These innovations could potentially cripple industry giants of the U.S. military industrial complex such as Lockheed Martin and Boeing. Musk also competed with nations, most notably Russia and China, in the space race.

SpaceX made a name for itself as a low-cost supplier in the industry. But that alone was not enough to win in the space business. Musk also had to navigate the politics, favoritism and protectionism that undermined the fundamentals of capitalism. Steve Jobs faced similar challenges when he took on the music recording industry to bring iTunes and the iPod to market. However, compared to Musk’s foes who built weapons and countries for a living, Jobs's challenges may well have been a “walk in the park.”

Vance captured the following key milestones that SpaceX, Tesla and SolarCity had achieved at the time of this writing:

SpaceX Key Milestones* September 2008: The Falcon 1 rocket was the first privately funded liquid-propellant rocket to reach orbit. This launch paved the way for the development of the Falcon 9 rocket. * December 2008: NASA awarded SpaceX a $1.6 billion contract for commercial resupply services to the International Space Station. * July 2009: The Falcon 9 Flight 5 made history as the very first privately developed liquid fuel rocket to deliver a commercial satellite to Earth's orbit.

TeslaWith Tesla Motors, Musk has tried to transform the way cars are made and sold, as he built out a worldwide fuel distribution network worldwide. When Musk started up Tesla, he was well aware that Chrysler was the last successful startup in the U.S., founded in 1925. To design and build a car from the ground up is wrought with challenges, but the ability to get money and know-how to build cars by the thousands is what stunted efforts to get any new company going.

Elon had always seen a future of all-electric cars. So, when Martin Eberhard and Marc Tarpenning approached Musk to become the first investor in a company called Tesla, Elon was all in. He wanted the car to be a luxurious representation of a sustainable future.

As Tesla began to fulfill its first round of pre-ordered Model S cars, things were shaky. Parts for the car were way too expensive and everything was behind schedule. Musk was not happy and called for the board to replace CEO Martin Eberhard as CEO. They agreed and the original founder of the company was gone.

When Musk took over in 2008, the future of Tesla and SpaceX hung in the balance. By Musk’s calculations, he only had enough money to save one company. Rather than panic, Elon was able to keep his cool long enough for SpaceX to win a contract to become NASA’s official supplier for the International Space Station. Another “Tesla might go out of business” occurred again in 2013. It was so bad that Elon had a handshake deal with Google for them to buy and save Tesla. That scenario never materialized because Tesla’s sales team was able to beat projections, which sent the stock through the roof.

Instead of hybrids, which in Musk speak are suboptimal compromises, Tesla aims to make all-electric cars people lust after, which push the limits of technology. Teslas would not be sold through dealers but rather through Apple-like stores at high-end shopping centers. Unlike traditional car dealers, Tesla does not expect to make a lot of money on service for its vehicles, since electric cars do not require the oil changes and other maintenance of traditional cars. Tesla’s solar-powered recharging stations now run along many major freeways in the U.S., Europe and Asia, which reenergize a Tesla in about 20 minutes. Tesla owners also pay nothing to refuel.

As much of America’s infrastructure crumbles, Musk’s goal is to is build an end-to-end transportation system that enables the U.S. to eclipse the rest of the world. His vision and execution have been described as a blend of the best of Henry Ford and John D. Rockefeller.

Tesla Key Milestones * 2010: Tesla goes public, raised $226 million in its IPO. * 2012: Tesla delivered an electric car that goes over 200 miles, goes from 0–60 mph in under four seconds, and looks great. Tesla achieved that target with the Roadster, and then again with the Model S. * 2013: Tesla posts its first quarterly profit. * 2014: Tesla announces its Nevada Gigafactory, where the company will manufacture the batteries for all its products. * 2015: The company enters the solar power market and announced a line of products to power homes and businesses based on a combination of solar panels and batteries.

SolarCityMusk’s cousins, Lyndon and Peter Rive started up SolarCity with a $10 million investment from Musk, who became its chairman and largest shareholder. They developed a plan to drive down solar costs by controlling the experience from sale to installation (while third-party manufacturers provided the panels). They hired 150 employees, the majority of the construction workers, and by the next year, the company had installed about 70 solar systems per month around Northern California. The business began to grow, and the company eventually expanded to more than a dozen states. Musk was not involved much beyond the board level so he could take time to grow Tesla and SpaceX.

Six years later, SolarCity had become the largest installer of solar panels in the country. The company had lived up to its initial goals and made panel installation painless. Rivals rushed to mimic its business model. SolarCity had benefited along the way from a collapse in the price of solar panels, which occurred after Chinese panel manufacturers flooded the market with products. It had also expanded its business from consumers to businesses with companies like Intel, Walgreens, and Wal-Mart who signed up for large installations. In 2012, SolarCity went public and its shares soared higher in the months that followed. By 2014, SolarCity was valued at close to $7 billion.

SolarCity Key Milestones * 2012: SolarCity went public and its shares soared in the months that followed. * 2014: SolarCity was valued at $7 billion. * 2016: Tesla acquired SolarCity $2.6 billion to make the company a truly integrated sustainable energy company that could develop, produce, sell, install and service these products in the most seamless way possible.

Vance’s up-close look at Musk’s life in order to write the book convinced him that Musk’s relentless commitment to his mission and his indomitable spirit will leave an indelible mark on the world. “Because of Musk, Americans could wake up 10 years from now with the world’s most advanced transit system run by thousands of solar-powered stations and traversed by electric cars,” said Vance. “By that time, SpaceX may well be sending up rockets every day, taking people and things to dozens of habitats and preparing for longer treks to Mars. These advances are simultaneously difficult to fathom and seemingly inevitable if Musk can simply buy enough time to make them work.”

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By: Walter Isaacson28-MINUTE AUDIO / 3,500 WORDS (16 PAGES)SYNOPSISAs the icon of innovation and applied imagination, Steve Jobs revolutionized six industries and made Apple the most valuable company in the world.

But what principles made him one of the greatest inventors and product visionaries of the 21st century?

Biographer Walter Isaacson raises the curtain on this secret. Based on more than 40 interviews with Jobs, as well as insights from 100 family members, friends, rivals and peers, Isaacson’s book is a comprehensive study of a man who changed history.

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TOP 20 INSIGHTS1. Computers in the 70s were for business use and did not have screens and keyboards. Steve Wozniak and Jobs started Apple to market a personal computer that came with a keyboard and screen. Apple II was a commercial success and launched the Personal Computing revolution. In 1980 Apple was valued at $1.79 billion, and Jobs was worth $256 million at only 25. 2. The Apple Marketing Philosophy, written by Mike Markkula, shaped Jobs's approach to product design and branding. It had three principles: empathy, focus and impute. Empathy meant to deeply understand customer feelings. Focus was to eliminate unimportant opportunities and excel in a few things. Impute meant that people judge a product or company by its cover. 3. Jobs recruited people with a passion for product. He would show them the Macintosh prototype, and if they got excited and started to use it, he would hire them. 4. Jobs ruthlessly fired B players. "The Macintosh experience taught me that A players like to work only with other A players, which means you can't indulge B players," he used to say. 5. During his second stint, Jobs became a manager. He displayed a pragmatic, detail-oriented approach. This was visible in his decision to completely outsource his passion, hardware manufacturing. As Board Member Ed Wollard said, "He became a manager, which is different from being an executive or visionary." 6. Jobs' famous “Reality Distortion Field” was the ability to convince anyone of practically anything. His team achieved the impossible because he convinced them that it was possible. 7. Jobs made the team see their work as art and was obsessed with the design of invisible components like circuit boards. Craftsmanship had to be end-to-end. When the Macintosh was complete, he had the signatures of every team member engraved inside the Macintosh. 8. Most companies would ask designers to design cases according to engineering specifications. At Apple, Jobs ensured that design drove engineering. Jonathan Ive, the Chief Design Officer, was virtually second-in-command. Every day, Jobs would tour the design studio. This would give him a big-picture view of Apple's strategy and its roadmap for the next three years. 9. There were three elements to Jobs's dazzling product launches. The first was great advertising like Apple's iconic 1984 and Think Different campaigns. The second was to stoke excitement and leverage journalists' competitive instincts to create blasts of favorable media coverage. The final element was a flawlessly choreographed product launch that made it look like a moment in history. 10. Jobs learned from Markkula that companies that endure know how to reinvent themselves. HP started as an instrument company, became a calculator company and ended up as a computer company. Microsoft had thoroughly beaten Apple in the Personal Computer business, so Apple needed an HP-like metamorphosis. 11. Jobs believed in focus. For companies and products, to know what not to do is as important as to know what to do. So Jobs ruthlessly shut down dozens of product lines and drew a simple four-square chart with "consumer" and "pro" on the columns and "Desktop" and "Portable" on the rows. Apple's product strategy was to make one great product for each quadrant. 12. Every year, Jobs took his 100 most valuable employees on a retreat to brainstorm ten things Apple should do next. Employees would compete to get their ideas on the list and rank the ideas by priority. At the end, Jobs would slash the bottom seven ideas and announce that "[they could] only do three." 13. Oracle founder, Larry Ellison, once said that "Steve created the only lifestyle brand in the tech industry." Every Wednesday, Jobs held a three-hour meeting with his marketing and communications people. He would take his advertising team to the design studio to show them prototypes. He shared his passion for products with the marketing team and infused every ad with Apple's unique emotion. 14. Jobs realized that to sell Macs with other brands meant to make them look like a commodity. He came up with Apple Stores to completely control the end-user experience and convey the essence of Apple's products. By July 2011, the average revenue per store was $34 million. The Apple Stores catapulted Apple from a tech commodity to a luxury brand. 15. To position Apple for a post-PC future, Jobs pioneered the Digital Hub strategy. The Macintosh became a hub to sync "lifestyle devices" from music players to mobile phones. The computer handled complex applications and allowed devices to become simpler and more intuitive. The Digital Hub strategy birthed three iconic products: iPod, iPhone and iPad. 16. The iPod was intuitive in use and held 1000 songs when its clunky competitors held just a few dozen songs. Jobs invested $75 million in marketing because he believed the iPod would make Apple look cool and spur Macintosh sales. The bet paid off. By January 2007, the iPod accounted for nearly 50% of Apple's revenues and beat Macintosh sales. 17. Jobs convinced record companies and artists to sell songs in the iTunes store. Each song would cost only 99 cents and save users fifteen minutes they’d spend to pirate it. The iTunes store sold one million songs in just six days. The iTunes database of 225 million active users positioned Apple for digital commerce powered by the App store. 18. The Digital Hub strategy produced two more groundbreaking devices: the iPhone and the iPad. Within three years, Apple cornered more than 50% of global cell phone profits. Jobs said: "The reason Apple can create products like the iPad is that we've always tried to be at the intersection of technology and liberal arts." 19. Jobs initially did not allow outside developers to build apps for Apple products. Then he discovered a middle ground with the iTunes Store. Developers had to meet strict quality standards and sell only through the iTunes store. Apps became an overnight industry, extended the iPhone and iPad's functionalities and powered the success of Apple products. 20. Jobs had a theory about why companies decline. According to him, innovative companies reach near-monopoly positions and begin to prioritize salespeople over product designers and developers. When salespeople run the company, it results in mediocre products and eventual decline.

SUMMARYThe best way to create value in the 21st century is to connect creativity with technology. This is a biography of a creative visionary who built the world’s most valuable company that combined leaps of imagination with remarkable feats of engineering. This book covers Jobs’ achievements, mistakes and thought processes. And touches upon all aspects of his life: from childhood to all the groundbreaking projects business leaders and entrepreneurs can draw wisdom from.

Launching the personal computer revolutionAfter university, Jobs spent his days auditing Stanford classes and working for Atari. Jobs and Wozniak would attend the Homebrew Computer Club meetings, which encouraged hackers to build their own computers. During one of the meetings, Wozniak had the epiphany of putting together a keyboard and screen in one integrated computer for everyday use. Jobs convinced him to start a company together to sell personal computers and managed to get orders for two hundred pieces. That is how Apple was born. Its successor, Apple II, launched the era of Personal Computers and became a huge commercial success. Over the next 16 years, nearly six million units of the Apple II would be sold. Apple went public on December 12th, 1980, valuing the company at $1.79 billion. At only 25, Jobs was worth $256 million.

THE STEVE JOBS PLAYBOOKDesigning great productsTo bring marketing flair to Apple, Jobs got Markkula on board. Markkula wrote his principles in a one-pager, titled "The Apple Marketing Philosophy" that emphasized three points.

• The first was empathy, truly understanding customer feelings better than any other company.
• The second was focus, "to do a good job of those things that we decide to do, we must eliminate all of the unimportant opportunities."
• The third was a fundamental principle named impute.

People judge a product or a company by the signals it conveys. If a product is presented as slipshod, it will be perceived as slipshod. If the company presents them "in a creative professional manner, we will impute the desired qualities." These principles have been at the core of Jobs's approach to products. As Jobs recounted later, Markkula taught him that the tactile experience of opening an iPhone box will set the tone for how the customer perceives the product.

Jobs was convinced that great industrial design would set Apple apart. The designs had to be "intuitively obvious." The products were minimalist with both seriousness and a sense of play. The best products were "whole widgets" designed end-to-end with software and hardware closely tailored together.

Jobs insisted that the machines must look friendly. He would not even spare the printed circuit board and other components from scrutiny. When engineers interrupted that no one would ever see it, Jobs said he wanted the Mac to be as beautiful as possible. The aesthetic and craftsmanship should be carried all the way through. When the Mac was completed, Jobs engraved the signatures of every member inside the Macintosh. With moments like this, he made the team see their work as art.

Building A-class TeamsJobs' test for recruiting people on the Macintosh team was to make sure they had a passion for the product. He would dramatically unveil the prototype and, if their eyes lit up and they went for the mouse, he would hire them. Jobs was ruthless with firing employees he called "B players." As a team grows, naturally, B players seep in, and they begin to attract C players. "The Macintosh experience taught me that A players like to work only with other A players, which means you can't indulge B players." In his presence, reality was malleable and people were hypnotized.

Jobs' Reality Distortion Field was a self-fulfilling distortion. Because he could convince his team that it was not impossible, they achieved the impossible. Jobs infused in Apple employees an abiding passion for creating groundbreaking products and the belief that they could accomplish the impossible. "By expecting them to do really great things, you can get them to do great things," Jobs explained.

Memorable Product LaunchesJobs excelled in product launches. For the Macintosh launch in 1984, he hired Ridley Scott to make an edgy commercial that portrayed IBM as the Big Brother from George Orwell's 1984 and Macintosh as a cool, rebellious woman who stood for personal freedom. The ad was a sensation and was selected by Advertising Age as the greatest commercial of all time. The second part of the playbook was igniting blasts of media coverage that would feed on itself like a chain reaction. Jobs knew how to stoke excitement and leverage the competitive instincts of journalists to gain favorable coverage. The third component was unveiling the product in a way that seems like an epochal moment in history. The Macintosh became the first computer to introduce itself.

EXODUSDespite the excitement, Macintosh sales began to decline rapidly as the computer was underpowered. Jobs’ temperamental nature increasingly resulted in conflicts with Apple employers and a tug-of-war with CEO John Sculley. When things came to a standstill, the board forced Jobs to leave Apple. As Arthur Rock, Apple Board Member, said: "The best thing ever to happen to Steve is when we fired him, told him to get lost." It was a learning experience that prepared him for his later years at Apple.

Jobs was unbound and indulged in all his instincts. The first was his passion for design. Jobs paid a $100,000 flat fee to get the logo designed for his second venture, NeXT. He insisted that the workstation be shaped like a cube forcing suboptimal engineering compromises. His obsession with perfection resulted in the NeXT product launch getting delayed by years. When NeXt's computer was finally released in 1989, it sold just 400 units a month, and the company began to bleed badly. NeXT was forced to license its operating system and give up making hardware. Jobs was more successful with Pixar, where he produced a series of digital animation blockbusters and exited as a billionaire.

THE SECOND COMINGReturn to AppleIn the '90s, Apple had lost market share to Microsoft. It was desperately searching for an operating system that could solve its networking and memory management issues. NeXT's operating system was the best fit. Apple eventually bought NeXT for $400 million, and Jobs was back as an advisor to the chairman. Immediately, he put trusted people from NeXT into the top ranks at Apple. Soon, Jobs took the helm as CEO. When Jobs asked Marakkula for advice on turning around Apple, he responded that lasting companies know how to reinvent themselves. Microsoft had beaten Apple in the Personal Computer market. Apple had to undergo a metamorphosis and become a company that builds something new.

FocusOne of Job's great strengths was focus. He made every product team present their work and justify their reason for existence. Apple's product line was chaos, with over 12 different versions of the Macintosh being manufactured. After a few weeks, Jobs drew a simple four-square chart with "consumer" and "pro" on the columns and "desktop" and "portable" on the rows. Apple's job was to make one great product in each quadrant.

Unlike his previous stint, Jobs displayed a detail-oriented realism in managing the company that shocked those who were used to his reality-distortion field. As Board Member Ed Wollard said, "He became a manager, which is different from being an executive or visionary." He let go of his desire to build everything in-house and completely outsourced hardware manufacturing.

Once a year, Jobs took 100 of his most valuable employees on a retreat. They would discuss what were ten things Apple should be doing next. People would fight to get suggestions in, and after much debate, 10 things would be on the board. Jobs would then slash the bottom seven and announce that "we can only do only three."

Think DifferentAs CEO, Jobs wanted to signal that Apple was still alive and stood for something special. So he requested Lee Clow, the creative director of Chiat/Day who made the 1984 ad, to create an iconic campaign. As Jobs said, "We had forgotten who we are. One way to remember who you are is to remember who your heroes are." The Think Different campaign was one of the most memorable print campaigns in history. It featured uncaptioned black-and-white portraits of iconic figures like Dalai Lama, Lennon, Edison and Richard Feynman with the Apple logo and the simple phrase: "Think different." Jobs made people think of themselves as creative rebels just by the computer they used. As Larry Ellison said, "Steve created the only lifestyle brand in the tech industry."

Design dictates engineeringIn most companies, engineering departments would share specifications, and the designers would be asked to come up with cases. Under Jobs, design dictated engineering. Every day, Jobs would tour the design studio, inspect products under development and suggest changes. This gave him a big-picture view of Apple's strategy and its roadmap for the next three years.

The iMac, a stunningly translucent all-in-one computer, was the first iconic new product that came from Job's obsessive product and design focus. The iMac became the fastest-selling computer in Apple's history, with 32% sales from first-time buyers. In January 2000, the next-generation Macintosh Operating System, OSX, was released.

Apple goes retailJobs was obsessed with controlling every aspect of the end-user experience. He hated that the futuristic iMac had to sit on retail shelves with Dell and Compaq, making it a commodity. Placing Apple Stores on prominent malls and streets would make Windows users drop by out of curiosity. Apple would then get the chance to communicate its vision of innovation and convert them. Apple Stores would impute the ethos of Apple products: playful, easy, creative and hip. By July 2011, there were 326 Apple stores. The average revenue per store was $34 million. Apple Stores catapulted Apple into luxury brand status.

DIGITAL HUBS FOR THE NEW MILLENNIUMIn 2001, after the dot-com bubble burst, Jobs launched Apple's Digital Hub Strategy, where the computer would become a central hub that connected devices ranging from music players to video recorders. These devices would sync with the computer, and it would manage the user's pictures, music, video and all aspects of a "digital lifestyle." This allowed devices to become much more straightforward. The strategy would work only with tight end-to-end integration between devices, computers and applications. Apple was the only company that could do this.

iPod and iTunesThe iPod was the first device that emerged from the digital hub strategy. Music players in the 2000's were incredibly complicated to use and could hold only a dozen songs. The iPod held a thousand songs and was stunningly easy to use. Jobs had a simple mantra to ensure design simplicity: No song or function can take over three intuitive user-clicks. Jobs moved $75 million of the marketing budget to the iPod, outspending his competitors a hundred times over. He believed that the iPod would associate Apple with innovation and youth, spurring the sales of all products. Apple completely dominated the market, and iPod sales drove Macintosh sales. By January 2007, iPod sales were half of Apple's revenues.

Jobs convinced record companies and top artists to fight piracy by selling their songs on the iTunes store. Getting a pirated version took fifteen minutes, whereas buying an iTunes song would cost just 99 cents. The iTunes store sold a million songs in just six days and a billion songs by 2007. More importantly, it positioned Apple for the next generation of digital commerce by building a database of 225 million active users by 2011.

Three Revolutionary DevicesJobs' next target industry was smartphones. Jobs and the team relentlessly worked to simplify what other phones made complicated. Apple pioneered multi-touch and made a phone that replaced physical keyboards with a fluid software interface. At the launch in 2007, Jobs said that he was introducing three revolutionary products: a widescreen iPod with touch controls, a revolutionary mobile phone and a breakthrough internet communications device. Then he revealed that it was one single device: the iPhone. Within three years, Apple had sold 90 million iPhones and cornered more than half the global cell phone market profits.

The iPad and the App StoreFor years Jobs had been eager to show how tablets could be done right. He insisted that the screen was the core essence of the device, and everything else: a feature or a button, had to get out of the way. The iPad's reception was even more frenzied than the iPhone's. The Economist put him on its cover and the New York Times featured articles. He said, "The reason Apple can create products like the iPad is that we've always tried to be at the intersection of technology and liberal arts." Within nine months of launch, Apple had sold 15 million iPads.

The App Store drove the Ipad's success. Users could download hundreds of thousands of apps, each for a few dollars. Jobs initially resisted allowing outside developers to build apps for Apple devices due to quality concerns. Soon he figured out a middle ground: developers could write apps, but they would have to meet Apple's strict quality standards and be sold only through the iTunes Store. This way, thousands could build apps for Apple devices while preserving the integrity of the user experience. The App store created an industry overnight.

One of Jobs's last acts was sharing with Google's Larry Page his recipe for building a great company. He had a theory for why companies decline. Innovation-led success results in a monopoly in a field. Then product quality becomes less important, and salespeople end up running the company. This results in mediocre products, stagnation and eventually decline. Jobs best-embodied innovation at the intersection of technology and liberal arts. His innovations resulted in a series of industry-changing products and took Apple from bankruptcy to being the most valuable company on earth. Ultimately, he fulfilled his greatest dream: building a company with a DNA of innovation that outlasts its founder.

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By: Laszlo Bock24-MINUTE AUDIO / 3,300 WORDS (12 PAGES)SYNOPSIS“Why are Google employees so happy?” Laszlo Bock, Google’s innovative Senior Vice President of People Operations, offers his best answers to this and more puzzling questions in his book Work Rules!

Bock shares valuable insights and experiences from 15 years as a leader of Google’s strategy to attract, develop and retain the world’s top talent.

He credits Google’s distinctive management philosophies and its unique approaches to people, culture, talent and leadership as the reason why Google is recognized as the most sought-after place to work on the planet.

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TOP 20 INSIGHTS1. All that’s needed to replicate Google’s people success in your own workplace is the belief that people are fundamentally good, and a commitment to create a culture of “high-freedom,” which values liberty, authority and ownership. “If you believe people are good, they should be free,” Bock says. This belief will profoundly impact how you treat employees, the freedom and empowerment you give them in the business and the resulting happiness they will feel about their work. 2. Everyone wants to feel like what they do matters, so help your employees see the meaning in their work. Show them how it contributes to a greater good or benefits others. Google’s mission is to organize the world’s information and make it universally accessible and useful. Google knows it will never achieve its aspirational mission because there will always be more information to organize and more ways to make it useful. That is what inspires Googlers to constantly innovate and push beyond anything they can imagine right now. If you think of yourself as a founder with a mission that matters, so will your employees. 3. Trust your employees to behave like a founder and create an ethos of ownership in the team. Ask what frustrates them in their work and let them fix it. Be transparent and give them a voice to help shape the team or organization. You will feel vulnerable when you give away some authority to employees, but that is exactly what must happen for genuine trust to grow. If you have to pull back authority in the future, Bock suggests you tell employees each change is a test for a few months. If deemed effective, the change will remain. 4. Give people slightly more trust, freedom and authority than you give them now. If you are not nervous, you have not given them enough. Bock says that if you let people be free, they will absolutely amaze you. 5. Be transparent and share information. Openness shows employees you think they are trustworthy and have good judgment. Give them deeper context about the business along with details about why things are the way they are. This will motivate employees to do their jobs better and contribute in ways a top-down manager could never envision. 6. The existence of a huge corporate training budget is not a bragging point about an investment in your people, but the evidence that you failed to hire the right people in the first place. Invest your HR dollars to recruit first and the return will be better than any training program you could develop. 7. Slow down and invest time upfront to hire the best people. “Hire by committee, set objective standards in advance, never compromise, and periodically check if your new hires are better than your old ones,” advises Bock. “The proof that you have hired well is that nine out of 10 new hires are better than you are. If they are not, stop hiring until you find better people.” 8. Learn as much as possible from your top performers. Data shows they find it easier to get work done, they feel valued, believed their work is meaningful and they leave the company at one-fifth the rate that lowest performers do. Find out what they do best and then build programs to measure and reinforce the best attributes for the entire company. 9. Build an environment of deliberate learning and let employees be your faculty. Bock believes most corporate training is a waste of time and money because it is often ill-targeted to the audience, delivered by the wrong people and does not measure what employees actually learned or how their behavior changed as a result. Instead, empower your people to teach one another new skills in their respective areas of expertise. Ideally, the person with maximum expertise in each topic area delivers the training. 10. If you help those who struggle most to improve substantially, then you have created a cycle of continuous improvement. Google has observed that when someone helps a struggling employee, that person’s performance improves to an average level. 11. Employees, managers and HR departments alike dread the performance management process. It is bureaucratic, administrative, critical and carries professional and economic consequences for people. That is why Google and other companies including Adobe, Expedia, Kelly Services and Microsoft have eliminated performance reviews altogether. If you want your people to grow, have separate discussions about their development and performance. 12. Make developmental discussions with your employees safe, productive and consistent. Always approach development discussions with a positive spirit and goal to help the employee be more successful. Otherwise, defenses go up and learning shuts down. If you make development discussions a normal part of everyday business, there will be no surprises at the year-end performance review discussion, which should focus on outcomes and rewards. 13. Your company has two tails that represent employees at both extremes of the performance distribution. The top tail represents the top 5% of employees in the company and the bottom tail represents the bottom 5%. Most employees are classified as average employees in the middle of the organization. The tails are where your greatest opportunity to improve lives. 14. Many companies get rid of their bottom 5% of employees, but not Google. Instead, it chooses an approach “compassionate pragmatism,” tells the employee they are part of that group and then takes action to help improve and grow. Google has found that such “interventions” improve teams because people will either improve their performance dramatically or go somewhere else where they can be successful. 15. In a veiled attempt to be “fair,” most companies design compensation systems that encourage the best performers and those with the highest potential to quit. The problem is that it’s possible for an employee’s contribution to grow faster than their compensation, and today’s internal pay systems don’t move quickly enough or offer enough flexibility to pay the best people what they are worth. As a result, people are underpaid relative to their contributions early in their careers and overpaid later in their careers. At Google, fairness in pay does not mean everyone at the same job level is paid the same or within 20% of one another. Google pays “unfairly” compared to most companies because it believes your best people are better than you think and worth more than you pay them. 16. You can implement many perks and benefits Google offers, but this doesn’t mean you have to spend a fortune on them. In fact, much of what Google offers is free or carries a negligible cost. Google is frugally generous with employees because it wants to improve their quality of life, save them time, make things more convenient and efficient and simply delight and refresh the people who create and share in Google’s success. 17. The best things in life really are free, so remember that the best “perk” you can offer employees is to be there when they need you most. They will trust you and never forget your empathy, kindness and support. 18. Use nudges to influence the choice, not mandate it. Nudges are intended to change poorly planned current conditions that result in less health, wealth and happiness for employees. With transparency at the heart of Google’s culture, nudges do not need to be secret. They just need to be timely, relevant and simple to put into action. Due to their data-driven nature, Googlers often nudge one another at moments of decision and use research, academic citations and results from internal studies to make the decision. 19. Reject entitlement. People quickly get used to what is offered, and it becomes a baseline expectation rather than something positive and delightful. One way to address this is to be unafraid to change benefits once the original reason for them disappears. 20. Manage expectations. To build a great culture and environment, ensure constant learning and renewal. It is not a one-time effort and you will have critics. Experiment with one idea from Work Rules! or a dozen, learn from the experiment, tweak the initiative, and try again.

SUMMARYWork Rules! is a detailed playbook for leaders who strive to emulate Google’s people success in their own teams and organizations. This manifesto of simple truths offers transformative guidance to leaders who want to improve teams from the inside out instead of top down. That will not happen by institutionalizing some complex quality or productivity improvement methodology such as Six Sigma or Total Quality Management. This is about human beings and how we treat one another. Everything that has made Google wildly successful in the past 22 years is rooted in the fundamental belief that people are good and can be trusted. This is what has enabled Google to design a workplace where Googlers feel free, fulfilled, happy and able to efficiently manage both their personal and work lives. It doesn’t get any more complicated than that.

Getting it Right Out of the GateLarry Page and Sergey Brin knew exactly the kind of company they wanted to create when they started Google 22 years ago. The founders have always been humble and generous people who believe that the value and success Google and its employees create together should be shared fairly. Yes, it is true, you can earn or be awarded large sums of money at Google.

Page and Brin’s founding philosophies have stood the test of time as Google has grown to 50,000 strong in 70 countries. During Bock’s 15-year tenure, Google was named the number one employer more than a hundred times in the U.S. and 16 other countries, the top diversity employer, the best company for women in technology and honored with a perfect score from the Human Rights Campaign.

Bock admits Google has made plenty of mistakes along the way, but that its failures and lessons learned have helped it grow even stronger as a fair, just and happy culture. Bock is convinced that any team can be built around the very same principles Google has used and offers actionable advice so leaders can do just that. He cites impactful data, industry examples and research discoveries about human nature as he nutshells the valuable lessons that continue to shape Google’s culture.

Hire the best talent up frontIf you are committed to transforming your team, hiring better is the single best way to do it, according to Bock. Google’s greatest growth constraint through the years has consistently been the ability to find great people. Google front-loads its people investment and spends most of its time attracting, assessing and cultivating new hires. Google invests more than twice in recruiting, as a percentage of its people budget, than the average company spends. Bock knows from experience how difficult it is to take an average performer and through training make them a star. Yet the massive training budgets of most companies are evidence that Bock’s belief is not widely shared.

Google hires more slowly to find the best people up front who will be successful in the context of Google’s business and inspire success in those around them. The way Bock sees it, if you get the best up front, there is less work you need to do with them when they hire in. Plus, you can reallocate all those training dollars to support hiring.

Bock acknowledges that Google could certainly hire people in the traditional week or two instead of the six weeks it takes to hire into Google. He confirms the company can certainly move faster when needed, and occasionally must expedite the process for candidates with offers from other companies that will expire if the candidate does not respond quickly. Google is constantly working to balance its speed, error rate and experience for candidates and Googlers.

• Google has done years of research and experimentation to hire more efficiently. For example, it has done one-day recruiting events on college campuses in the U.S. and India to see if its offer acceptance rates improved. The company found that the accelerated speed didn’t materially improve the candidate’s hiring experience or acceptance rates, so it remains focused on finding ways to hire people they might overlook rather than move faster.
• Google’s hiring process consists of six parts designed to ensure that the bar for quality is not compromised and that hiring decisions are fair and free of bias. In the early days, the founders hired by committee and often interviewed candidates together while sitting around a ping-pong table, which doubled as their only conference room table. From the beginning, Page and Brin considered hiring to be everyone’s job because no individual interviewer will get it right every time, an instinct Google formalized in its 2007 “wisdom of crowds” study.
• Google’s hiring bench still runs deep as teams, not individual managers, hire new employees. The company follows the science of hiring and combines behavioral and situational structured interviews with specific assessments of every candidate’s cognitive ability, conscientiousness and leadership.

The major benefit to hiring the best people up front is this: In most organizations, you join and then must prove yourself. At Google, there is such confidence in the hiring process that new people join and on their first day they are trusted and full members of their teams.

Set the inmates free to run the asylumIt is easy to tell a team what to do and then make sure they deliver. But it is exponentially harder to build a high-freedom work environment because everything about today’s traditional management power dynamic pulls against freedom. This is a significant root cause of the unhappiness and disengagement in today’s workforce. Unfortunately, many organizations are low-freedom workplaces, hard-wired to mistrust and operate with a command-and-control management philosophy. Both high- and low-freedom companies can operate profitably, but the most talented people crave high freedom environments and will gravitate to the companies where they can do meaningful work and help shape the future of their company.

Default to open and operate transparentlyThe way to balance individual freedom with overall direction is to be transparent. Employees need to understand the rationales behind each action that could be perceived as a slippery slope that collides with the company’s values. The more central your values are to your culture and how you operate, the more you need to explain to employees.

Bock has seen transparency improve both individual and company performance at Google. He says that helping a struggling employee typically improves that person’s performance to average levels. It may not sound like much but think of it this way: out of a group of a 100 people, Jim was one of the five worst performers. After intervention, Jim became the fiftieth-best performer. Not a model employee, but Jim was now better than 49 others, where previously he was only better than four. Imagine the possibilities if you could get all the company’s worst performers to improve as much as Jim did. Better yet, what if the bottom 49 were still better than the competition?

The transparency of Google’s culture also provides a natural avenue to improve the company’s performance. Google uses a powerful technique commonly used by technology firms called “dogfooding,” where Googlers are the first real users to try new products (such as Google Glass and self-driving cars) to provide open feedback on practical daily use so teams can refine the products further before going to market. The term “dogfooding” originates with the makers of Kal Kan pet foods, who literally used to eat their own dog food.

Transparency also helps with the softer side of things by curbing conflict, internal rivalry, politicking and “backstabbing.” If you write a nasty email about someone at Google, you should not be surprised to see that person added to the email thread. Bock recalls the first time he ever complained about someone in an email and his manager promptly copied that person, forcing them to resolve the issue quickly.

Level the manager-employee playing fieldGoogle is open about its deep skepticism of management. Not managers per se, but it is “profoundly suspicious of power, and the way managers have historically abused it. Google has found the sweet spot between every manager’s susceptibility to the conveniences and small thrills of power and employees’ inherent conditioning to create their own hierarchies, yield to authority or defer to a superior.

If you want a non-hierarchical environment, you need physical reminders of the company’s values. Google wants its people to behave like owners in a non-hierarchical workplace, rather than employees, so it eliminates signifiers and symbols of hierarchy. For instance, the most senior executives receive the same benefits as its newest hires.

Google deliberately levels the playing field between managers and employees in many ways. Unlike most companies, Google has no executive dining rooms, parking spots or pensions, and it makes compensation programs available to all employees, not just senior executives.

Google also takes away the proverbial sticks and carrots that managers typically dangle in front of employees. There are many decisions Google managers cannot make:

• Whom to hire;
• Whom to fire;
• How someone’s performance is rated;
• How much of a salary increase, bonus or stock grant to give someone;
• Who is selected to win an award for great management;
• Whom to promote when code is sufficient quality to be incorporated into Google’s software code base;
• The final design of a product and when to launch it.

Alternatively, each of these decisions is made by either a group of peers, a committee or a dedicated, independent team. Google believes the best way to see the heart of great management is to strip away all the tools on which managers most rely.

In closing, Bock imparts that “Google has a constant paranoia about losing the culture, and has a constant, creeping sense of dissatisfaction with the current culture.” But he considers that a good thing and would be concerned if the company stopped worrying. The feeling of being on the brink of losing a great culture keeps everyone vigilant to protect it.