Riff on Uncommon Sense

I just enjoyed Uncommon Sense, Common Nonsense by Jules Goddard and Tony Eccles. Below are some ideas I took from it. All credit for the inspiration goes to the authors, all critique of the rendering to me.

All happy families are alike; each unhappy family is unhappy in its own way — Leo Tolstoy.

Business is the reverse of this. All failing companies are alike; each successful company is unique in its own way. Success is rare, and it doesn’t derive from following a rule book, it is a singularity.

Success in business, as in all creative endeavors, comes from standing apart from your competitors, from offering something unique, or finding a unique way to build or deliver it. You are searching for something that as yet does not exist in the world and there is no formula for discovery. There are however plenty of formulas that don’t focus on discovery. The most obvious is trying to be like your competitors, or trying to be like last year except just a little better. Which interestingly enough is the strategy of 80% of companies.

We can break companies into 3 categories:

• Successful — defined as being companies that have more than once added significant value to the sum of human wellbeing. In economic terms they created a large value add over the cost of their inputs, and sustained this over a period of time. These companies are rare, and even rarer the ones that can keep playing this trick over generations.
• In equilibrium — companies that roughly match input and output. They neither add to nor subtract from the overall sum of human wealth. This book, and most business texts, would call them unsuccessful because they are not the stars of the show. They are neither succeeding nor failing, but they probably represent 60% of companies and keep vast numbers of people employed so merit much more attention. I want to write more about that later but I digress, that will be for another post.
• Failures — companies that are value destroying, and that therefore come unwound. They are usually acquired for spare change by bigger companies who steal their remaining functioning organs and leave the rest to wither in the economic version of the ecological cycle of life.

Let’s consider success first, the focus of the book. They share a lot of good insights outlined below.

Don’t competitor benchmark. Beware of a strategy of being better than your competitors. How are you defining better? Are you using the same metrics as them? Quality, Price, Features? If you’re all thinking the same, you’ll arrive at the same destination. To win, don’t be making the same decisions as your competitors, you need to carve out a different road.

Beware of logic. Underlying this is the danger of rational reasoning — the bedrock of many approaches. The danger of logic is that with the same set of facts it will lead to the same conclusions, and you’ll all be in the same place. Logic can keep you away from fallacies, but you need creative mutations to take you off the mainline path of logical reasoning which will take you to a local maxima, but can’t jump across the board to territory you didn’t know was there.

Operational excellence is not enough. Being great at implementation is not the magic formula. Doing the wrong thing right is worse than doing the right thing wrong. At least in the latter case you can try to fix it on the second iteration. In the first you’re still in the dark. The righter we do the wrong thing the wronger we become.

Beware best practices. There is a flaw at the heart of the capitalist model: managers have much more at stake in their company than investors, and all the forces drive them towards playing safe. They protect themselves with a variety of tactics that are not value generating: a concern with compliance, a fear of making mistakes, a deference to seniority, excessive attention to internal or competitive benchmarks and a weakness for current fashions. This can take the form of best practice — defined as doing things the way everyone else does it — the road to mediocrity.

Beware cost efficiencies. If the main priority of the company is chasing cost efficiencies you can be sure the product strategy has failed and you’re fighting a losing battle. Strategy is the rare skill of staying one step ahead of the need to be efficient (love this one :-)). You need to be a price maker, not a price taker.

Budget rituals are value killers. Budget setting is a pernicious activity that occupies far too much time in too many companies based on the idea that control and predictability is the road to success. Budgets are typically set benchmarked to the prior year, and done in a fashion that structurally inhibits change. They are internally focused and disconnected from customer value generation, and the internal benchmark can be a very low bar compared with judgment against the market — we should see how we’re doing relative to competitors and the broader market opportunity, not what we did ourselves last year.

Avoid performance targets. They motivate no-one and they don’t reflect the true purpose of value generation. Focus on fulfilling customer needs, and the money will flow. Focus on making money and chances are you’ll miss seeing the customer needs. Imagine swapping the time spent managing performance spreadsheets and spend that time on direct customer research instead. Which would likely lead to better results?

Judge on strategic potential, not excel business plans. What are the reasons to believe a business plan, rather than the stated net present value? The latter is totally fakeable, the former harder. It is notoriously easier to invent positive cash flows than viable winning strategies.

Focus not on aims but on methods. While goals seem the logical driver of activity, they are likely to be similar between competitors. What can distinguish two companies is how they approach the problem. Above all what we seek is market insight, and the ability to rapidly pivot towards it.

Look at the formulas for failure, not success. Success is unique, but failure is common and easier to study. Most failures are internal and come from common roots:

Strategic:
- Lack of innovation
- Premature abandonment of core business
- Rash diversification

Organizational
- Incompatibility of senior team
- Organizational design flaws
- Talent shortage

Behind this are systemic managerial biases:
- Loss aversion — turning away from acceptable risks
- Overconfidence — exaggerating one’s own prospects
- Sunk cost effects — throwing good money after bad, to avoid admitting an error of judgment
- Herding instincts — comfort in being part of the pack
- Mental accounting — valuing an idea based on who proposed it rather than its merits
- False Anchoring — seeing only part of the picture
- False Consensus — assuming everyone agrees when they don’t

Mismanagement is coming down hard on sources of error, while being indifferent to the sources of incompetence

Being first is better than being better. Competitive strategies that focus on being better than the competition are expensive and do not have a strong record of success. Generally, the company that creates the market is the one that dominates it. Once you have set yourself in the minds of the consumer as the provider of a certain service, it is hard to change peoples preferences.

Avoid linear thinking. 80% of the value comes from 20% of the customers/products/channels/… Assuming everything is even leads to poor distribution of resources.

Success is its own multiplier. Build on what you have. It is hard to expect someone to make a well informed choice, iIt is easier to go for ‘I’ll have what he’s having’. Lesson — focus less on the intrinsic qualities, more on creating the perception of a product’s popularity, creating contagion and addiction.

A business does not make money on the beliefs that it shares with its rivals, only on the beliefs that set it apart. The purpose of planning should be to set out the belief system on which the intended business results will depend.

Join thought and action. Avoid the idea of forming a strategy and then executing a plan against it. All the learning happens in the action, and the strategy should be emergent from the market discovery. It should a continuous process where both sides feed each other, just as in life we learn who we are from what we do, not the other way round. A corollary is to not separate those that prepare strategy from those that execute it. Find ways to sample the wisdom of the crowd, in the way a market distills the winners from the losers in a distributed system.

Search for the surprises. Strategy feeds on uncommon knowledge, and surprises are the evidence of the world running contrary to our theories, and an excellent window into insight and opportunity

The best ideas make no sense when first expressed because they go against our orthodoxy.

Redundancy can be a virtue. If you’re trying to address a creative problem where the solution is not clear in advance, have several teams work on it in parallel. The additional costs will be outweighed by the upside of the increased chance of discovering value.

Insert randomness and mutations into your system. Leave enough slack for experimentation to occur.

The best insights never happen in the office.

Creative people give themselves more time to solve problems.

Beware rules and regulations that let you outsource your moral compass. Think of the bankers who say that if it isn’t illegal, it can’t be unethical. Own your decisions.