What is Management's Role in Business?

If you look at history or "best practices," it looks like we should keep improving what we're already doing. But if you look at evidence and outcomes, you realize it's time to reinvent management. It's time to start doing what works. 

Business agility is at the intersection of three main areas that impact your business more than you may think: 

1. Cognitive science

2. Experiments

3. Measurement and analysis

This white paper outlines the main concepts behind business agility and ends with a call to action. It is intended for managers, board members, investors, and decisionmakers. 

The Value of Strategy
How do managers make decisions at Google? They don't. Because Google employees spend 20% of their time doing anything they want, they are always trying hundreds of experiments. Probably no company fails as much as Google does. Once a project has momentum, volunteers swarm toward it and focus on execution. Google's products always come out half-baked and can stay in that condition for years as they iterate and scale. Yet Google’s products continue to improve every single day. Google is a company for the 21st century, because they don’t try to predict the future; they just try things and see what works.

More and more companies are seeing the wisdom of replacing strategy with experiments. A good experiment is cheap to run and gives you a signal to follow (or dies, providing valuable information). Experiments are often small and fast and you can get the results in a matter of days, not weeks. 

Experiments should come from many different directions. You should expect to look at several of them and wonder whether they could possibly work at all. Recently, a web site called WeeSpring discovered that when they forced people to register before visiting the site, more people registered and visited than when they made it optional. This was a surprising result, one they could only learn by trying something that looked like a mistake. In general, rather than answering a question with a prediction, it's better to say "I don't know, how can we try it?" 

Randomness can play an important role in experiments, especially when the cost of experiments is low and the payoff of a win is high. Recently, bike manufacturer BMC employed a software program that literally generated thousands of random possible designs, tested them all, and showed the winners - automatically. They called this "accelerated evolution." It led to the development of new frame features they wouldn't have produced by asking the design team to draw up their best ideas. This kind of random trial-and-error process using software to test and promote successful candidates has been used in drug and compound discovery for decades now. 

It's very likely that experiments can enhance, if not replace, almost all of your planning and strategy. It's easy to think of big strategies that have entered the market stillborn, from soft drinks to cars to advertisements to many exciting new consumer brands that just didn't take. Why were the companies taken by surprise? Because they ran focus groups that validated the executives' decisions, rather than trying it in the market and seeing what happened. 

Decisionmaking
Have you ever taken a course in decisionmaking? You may be surprised to learn that decisionmaking is a fairly well researched area; people with PhDs in the field can be a huge asset to your process. Most decisions are made based on poor or insufficient data, poor analysis, ineffective frameworks, personal preferences, and strong biases.

Psychologists use the terms "System 1" and "System 2" to refer to two very different uses of our brains. System 1 looks for shortcuts and tries to make decisions easily, with the least amount of energy. System 2 thinking is much more thorough and engaged and requires much more energy. Normally, during everyday interactions, we use System 1 thinking to make decisions, and that's where the problem lies. Cognitive scientists agree that we too easily substitute System 1 shortcuts for thorough System 2 analysis. In fact, true System 2 thinking is quite rare. We find that people with PhDs in statistics can do large amounts of System 2 thinking, while most of the rest of us cannot. 

Think of boards of directors who are blindsided when a black-swan event affects their company. In the late 1990s, the credit union for Enron was saved by its work with Decision Strategies International on a series of diversity and experiment exercises that resulted in several out-of-the-box proposals the board accepted just months before the collapse of its parent company. 

Cognitive Diversity

Kevin Dunbar’s research at the University of Toronto has shown that teams of people with different backgrounds and viewpoints solve problems faster and generate more ideas to choose from than teams of similar people. Yet teams are often assembled by the same person or process, building teams of people who are too similar.

At Google, for example, new potential employees are interviewed by a number of different people, even those they wouldn't be working with directly; then these interviewers tell another group (who haven't met the candidate) about their impressions and the second group makes the hiring decision. This avoids both groupthink and hiring people current employees like, which has no correlation with job success. 

Philip Tetlock says a “hedgehog” is a person with a single big idea who drives his agenda forward relentlessly. This describes many managers, executives, and pundits. A “fox” is someone who has many small ideas and changes her viewpoint as she gets new information. Tetlock’s work on prediction has shown that foxes consistently outperform hedgehogs in predicting future events. Since key executives tend to be hedgehogs by nature, their companies will be more agile if their boards are made up of a diverse group of foxes.

Agility means getting the most out of the time we put into projects. We can learn a lot from the agile software movement's use of pair programming. In pair programming, one person “drives” the keyboard and mouse, while the other watches, and they talk through the coding process. Pairs mix and match throughout the week to tackle different tasks. While this sounds wasteful, it has proven to be remarkably effective at reducing errors, cycle times, and support time. It keeps people focused and more engaged, helps eliminate bottlenecks, and gives teams more resilience. Pairs are supervised by a “scrum manager,” who keeps teams on track during the day and week. We could apply the pair-and-scrum-manager approach to critical business functions and measure whether it produces better results.

Diversity breeds resilience into an organization’s culture. It helps teams overcome obstacles and emergencies. Our aim is to help companies build cultures around resilience as much as capabilities. To do that, we: 

• Separate creativity and brainstorming from evaluation and decision

• Eliminate blame

• Eliminate performance pay

• Implement evidence-based HR practices

• Reward failure and integrate learning

• Systematically eliminate groupthink

• Implement feedback loops to help teams realize what actually worked, what didn’t, and what was due to chance

• Match hedgehog CEOs with foxy diverse boards

Purpose
Employees don’t work harder or stay longer for more money, unless it’s a lot more money. Once they have their needs (and some of their wants) met, they want to contribute something that has meaning and helps others. Too often, this results in a company putting together a half-hearted charity partnership or pro-bono cause that looks superficially like they are doing something good but has little lasting benefit or true meaning. The deeper the meaning, the more engaged employees are, the more they will contribute. We believe in giving employees the resources to find and implement their own programs to drive meaning. Ultimately, a strong corporate purpose fosters employee enthusiasm and retention. 

More evidence shows that companies who treat employees and their families as one big family get better workers and more loyalty. When people feel connected, they support each other. When people feel supported, they perform better. When people are allowed to mix personal and business activities, they are more likely to stay. All of this contributes to a sense of wellbeing and purpose.

Mindfulness
We are getting more evidence in favor of mindfulness. Mindfulness can be a key contributor to agility and resilience. While it may sound wacky and belief-based, getting people to spend time doing nothing could be a very good investment. Some research is starting to show that mindfulness trains people to calm their reactions and be more resilient to unexpected events. It reduces anxiety, stress, and depression.

Mindfulness also contributes to happiness and satisfaction. Studies show that too often people’s happiness comes from making comparisons - to their neighbors, their coworkers, their friends, even themselves a year ago - mindfulness helps them find happiness without comparisons.

Neuroscience is starting to show us how important mindfulness is in a business context. Decisions are made in our brains long before our minds become conscious of them. Many decisions are not only biased, they come from reflex reactions we can barely control. By training your brain to be calm and neutral, you’ll make better decisions.

Neutrality
While passion is important for driving projects to success, it’s critical to adopt a neutral attitude toward which projects to pursue. Too often, the evidence is run over by someone with an agenda and a convincing story. When making decisions, you must learn to ask neutral, open-ended questions and make decisions based on likely outcomes, not personal guesses. Small experiments are enough to kill some ideas, but when other ideas look promising, they must be further tested. In an agile business, you take small steps, looking for new directions at each turn. 

An agile business puts less emphasis on gut feel and reactive decisionmaking. To strike a neutral balance, we go from skepticism in deciding to enthusiasm in execution. By alternating slow careful evaluation with speedy implementation, passion, and even a false sense of overconfidence, you will increase your chances of winning tremendously. 

Most investment portfolios are inherently “long” in one or more dimensions of risk. That is, they will go up if their forecasts are correct, and they will go down if they are wrong. Many hedge funds, though, are “market neutral,” which means they are unaffected by overall market shifts. A trend in hedge funds over the past ten years is risk parity - building a portfolio where each component has the same amount of risk, rather than the same allocation of cash. Is your company betting on certain external factors to make your projects or products succeed? If so, you may want to build a portfolio of offsetting risks, so you are hedged against adverse events.

In Poynton, a small town in England, the town council planned and measured and discussed their traffic problem for a decade, until someone had the idea to try covering up all the traffic signs and lights and let people figure it out for themselves. As you will see in this video on Poynton's traffic experiment, it worked. Portishead, another town in England, got rid of its traffic lights years ago, with the result that traffic accidents, injuries, and fatalities are all down. There is now a growing movement to make urban traffic more self-directed and safe. A few other experiments in this direction haven't had the same results - it works better in towns with more pedestrians and fewer bikes, for example - but  these kinds of experiments, rather than town planning, are showing the way forward. 

Innovation
How do they do innovation at Google, Amazon, and Space-X? Do they have "innovation days" and bring in consultants? These companies would laugh at the idea. Every day is innovation day.

Most companies don't suffer from a lack of ideas. The problem is that their systems don't support innovative ideas from making it past the idea stage. Their cultures don't support experiments, tinkering, and failure. This is why "innovation days" fail - not because the ideas aren't worth trying, but because they die in committee, usually the victim of groupthink and "that won't work" opinions. Endeavors like education and large parts of medicine have systematized failure to such a degree that no one questions how to do things differently.

Companies that really innovate have innovation built into the system. They don't support big risk-taking, but they do support a lot of small risk-taking. They forgive failure. They don't tie salaries to project or company success, since it isn't fair. They are always making many small radical experiments and incremental improvements. A good example is Urban Outfitters, who recently gave fashion design students the chance to make small production runs of their creations and actually put them up for sale in their stores - this is far more innovative than putting prototypes in front of focus groups and hiring consultants to analyze the results. 

Marketing
If companies make decisions based on myth and stories, how do consumers make their decisions? This is the realm of behavioral economics, where rational people make irrational choices all the time. Rather than building models of consumer behavior, we believe it’s better to test and learn. Today, we can learn from real-time Google searches and other “big data” queries what customers are doing right now. Sentiment analysis from sources like Twitter and Facebook are already proving valuable to marketers. As the “Internet of Things” grows, we’ll see more real-time consumer behavior on our dashboards. This is what Nike hopes to achieve by driving data through its products.

Yet critical thinking and analysis often leads marketers astray. As an example, the Nike FuelBand, while a very successful product, has no measurable health or fitness benefit. Anything people think they are trying to accomplish by buying a FuelBand is not later accomplished - they simply have a cool little "data driven" trinket on their wrist. This product, like so many others, fails to deliver measurable results for customers but fools them into thinking they are doing something right. 

I don't believe in a world full of rational consumers. I don't believe in always providing measurable benefit - often simple delight and customer loyalty will do. The truth is that people don't change very much. Old habits and misinformation are difficult to dislodge. Storytelling remains the most important way to inform, even when it influences people to do things against their best interest. By combining experiments with storytelling, I believe we can optimize the sales process. By nudging consumers, we believe we can help them get better results in their lives.

To develop better strategies and innovate faster, I believe you should develop your corporate culture and infrastructure around experiments:

Trust is a precious resource, do not trust people who are inherently bad.