"In an increasingly crowded, noisy global marketplace, innovation is not optional." Tom Peters
tompeters.com asks ...
The title of your book is Bigger Isn't Always Better. I've recently spoken with Seth Godin whose new book is Small Is the New Big. The copy on the back of another recent book says that the author helps companies get bigger by acting smaller. And there's yet another book sitting on my floor called The Small-Mart Revolution.
BT: There's a theme here, obviously.
So what's going on?
BT: Well, nobody wants to write about General Motors anymore, or why you should be like Wal*Mart or IBM or Microsoft. With my book, and I don't mean to criticize any of us writing on this topic, I'm not really a "small is always the most beautiful" advocate. That's not the message I want to get across. In some ways small is beautiful. But what I'm trying to say is that size is the wrong goal, whether it is to get too big or to stay too small. I think there are other things that are more important. Real growth is about moving forward, about progress, not bigness. When the focus is growth-defined-as-expansion, it blocks the vision of what business ought to be about. I'm trying to encourage people in business to get back on the customer-focused path that we've been on in the past and now seem to have veered away from.
For some reason, the idea that governed American business for a long time was that you should try to grow as big as possible. And now we're questioning that. Perhaps it's because all these mergers seem to go south. But what got us going on that "bigger is better" path?
BT: Well, "big as possible" was a post-World War II ethic. It's one that makes a whole lot of sense when it's in sync with the market. Think of the kind of market that we had in the United States in the late '40s, '50s, and well into the '60s. It was a boom market in terms of increasing consumer interest in almost anything. You had pent up demand from the war when nothing was available on the shelves. Then you had tons of people starting new families.
If you step back from the United States and look at the whole world, most of the other economic powerhouses of the 1930s world were bombed out, as with Japan and Germany, or they were in the process of losing their empires, as with Great Britain and France, that were the cornerstone of their own economies. So you had this focus of "Let's get big because that's where the market is taking us" hitting American industry. Those were the days of "What's good for GM or for U.S. Steel is good for America." You could actually say that then without really shading the truth all that badly.
You can't anymore. And you can't anymore because the market has changed so much. I think we all appreciate the way things now are; that we're not the only dominant player in the world's economy. American-based business is one of many. We don't have the lock on managerial wisdom. We don't have the lock on low cost, or ingenuity and creativity, the way we once did.
The things that drive bigness aren't really around anymore, at least not the natural, market-based factors that propel it. In U.S. businesses, I think we've created a lot of artificial drivers of bigness. Those are the things I write about in the book: the misguided focus on shareholder value, the out-of-control drivers of executive comp—
Could you talk a little bit about Michael Jensen?
BT: I admire him for his personal willingness to grow. He's wised up considerably since some of the early ideas that propelled him into fame as a business school professor at Harvard. He's often seen as the father of the idea of shareholder value theory, that if you focus mainly on one number, the stock price, everything else is going to fall into place for a business. He thought this out at a time when many top leaders of businesses were seen as focusing more on themselves, not really on generating value for the owners of the company. He was trying to correct a perceived wrong.
And as often happens when you're righting a wrong, you get some unintended consequences. I think, in this case, they've come back in seriously detrimental ways. He's been a strong advocate for using stock options as the primary way to try to link the interests of executives—and everybody else in the company who gets them—with the business owners, the shareholders.
Now I said both these things in the past tense because he's rethought things very significantly. I applaud him tremendously for this. He's taken a hard look at the recent business scandals and what's been behind them. He's realized that over-reliance on stock options has been a form of managerial heroin. You do get addicted to it. You do end up making very unwise moves, moves that boost the stock price in the short run but end up harming the business. You end up distorting executives' sense of reality about what the business is about, and what its economic and market situation actually is.
So that's my quick take on Michael Jensen.
Is he still teaching at Harvard?
BT: He's an emeritus. He, I believe, is still consulting and still doing some writing. It's certainly worth watching his thought process. It's fascinating to see someone who's applauded as a great thinker find out that reality doesn't support what he's been saying, and who then has the guts to come back and say, "Yeah, I might have been wrong." You don't hear that very much.
That's refreshing. You have a theory about true growth companies with two kinds of people who are running companies, fixers and growers. It may simplify it a bit, and yet these generic buckets work for your models. Can you talk about what those are, and what they mean for a company?
BT: Sure. Business writers are always great simplifiers. That's good and bad. What we do is take complicated situations and excessively simplify them, and then we try to give cute and memorable names to each of our simplifications.
At least you haven't succumbed to numerous three letter acronyms.
BT: That's mostly because I don't think I'm smart enough to keep them in mind. [Laughter]
The first thing I tried to do is to make an argument that bigger is not always better, and that there are a lot of constraints that come with growing in size. There are organizational constraints, there are resource limitations, and there are regulatory barriers. Focusing myopically on expanding will lead you to behaviors that don't pay off after a while. They can pay off initially. Industries get caught up in the blockbuster syndrome. You know, we're going to produce one big product that will dominate the marketplace. This is something that has destroyed a lot of the value in the pharmaceutical business. It's an incredibly important industry, but it's shooting itself badly in the foot with its marketing practices that overly rely on blockbuster products.
That's the first thing I've tried to deal with in the book. Then I try to explain why this happens. That's when I cover the idea of shareholder value and I try to show that making the stock price the most important thing for a business isn't necessarily a good idea.
One of the tragedies of that way of thinking is that in the short term it seems very logical to bulk up to increase share price by acquiring other companies. So it's done, even in the face of decades of research that shows that companies that grow by acquisition generally don't do it very well and don't assimilate very well.
I started to think about why otherwise incredibly intelligent, certainly very well paid, business leaders would do things that just don't make sense. I looked into the psychology underneath all of this. I tried to focus on grandiosity, and how it is fueled by the approach to executive compensation that's now ingrained in many American businesses. These are ways of harming companies rather than actually helping them.
There is a way out of this. You've got to think differently about growth. It's useful to de-couple the idea of growth from the idea of getting bigger. I think getting bigger ought to be the result of doing other things, rather than something you go and directly pursue on its own. You should think about growth more as forward movement, as progress.
You should also try to distinguish people that are very good at moving the business forward from people that are good at something else that every company needs: fixing problems and keeping it afloat. These people keep the trains running on time. I make a distinction between the fixers and the growers because there's a very different mentality required to build a company for the future versus keeping the company-as-it-is-now working well.
I like that you sneak in psychology. My first impression when reading your book was that it's all about big organizations, and you were going to tell us what the drawbacks to a focus on size are. But then you examine the psychology of people, which I find very interesting.
BT: If somebody else hadn't taken the title, I would have called this book The Inner Game of Growth. Tim Gallwey wrote a terrific book on how to learn tennis called The Inner Game of Tennis. I don't know a thing about tennis, but I've taken one of his principles to heart. Tim says: Whenever there's something going on, there's an outer game and an inner game in play, both happening simultaneously. In tennis the outer game is the obvious one, where you're playing against your opponent. It's a game of skill and technique.
Simultaneously an inner game is going on in your mind. It's how you're thinking about yourself. You're either giving yourself good feedback or not about what you're doing, such as telling yourself that you're not going to ever recover from that last miss.
I think that same distinction applies in business strategy. That's what I've tried to write about in the bulk of the pages of this book. There's an external game, an outer game of growth and strategy. Most business books are written about that game. It involves market research, branding, product development and introduction.
What's missing is more thought about what's called the "inner game" of business growth. It's more about mindset than technique. What are the kinds of skills that differentiate places that are good at growing internally from those that aren't? These things are a lot less tangible. They have to do with how you spot opportunities; how you see things that other people don't see. After you've done that, how can you pull from the possibilities a concrete, medium term goal that you can go after? How do you size up the situation around you with respect to that goal? It ought to be simple, but it's a matter of telling the truth. And telling the truth is not an easy thing to do in most organizations.
It never happens.
BT: Maybe once or twice, maybe between you and me and that's about it. Those are the kinds of things I've looked at with respect to this inner game of growth. How do you generate forward movement? How can you use creative tension to do that? What do you need to do to win the hearts and minds of people? If there's one issue that causes new ideas to stumble and disappear, it's the inability to first sell them to your colleagues and friends, and then your boss, and then the outside world.
I've also tried to look at those issues involved with momentum and resiliency. Those are the things that I think distinguish people that are very good at driving organic internal growth. People that aren't tend to fall back a lot more.
Maybe I'm misreading it, but a lot of this positive growth seems to stem from optimistic people.
BT: Optimism is very important.
Is that something you guessed, or is it something you've discovered?
BT: There's been a whole new dimension added to psychology in the last five years. Since I was an undergraduate I've been a professional psychology watcher. My graduate work was in organizational behavior.
An exciting thing has happened in psychology research labs. It's led to a movement in the field called "positive psychology." Most of what psychology has focused on in the last 30-50 years has been helping people with problems get a little better. If you go from a minus 6 to a minus 4 that counts as progress, but what psychologists haven't focused on very much is how you get from a plus 2 to a plus 5. How can you give some attention to the benefits of positive emotions as well as the downside of the negative emotions?
It all makes sense when you think about it, but when you go back and look before 2000, the bulk of what was going on in psychology was more focused on effects of negative emotions and how you ameliorate them, not so much about what you get out of positive emotions.
I was faced a few years ago with the challenge of writing a book about how you make growth happen. As I started to look at people who were good at it, I noticed that most of them tend to deliberately use positive emotions. They're not motivated by fear as much as opportunity. That made sense to me; being optimistic sounds intuitively like a good way to go. But why does that make such a big difference? That led me to look hard at some of the psychological research. This is the other recent development in psychology, we can stick people into machines now and have them think thoughts and see what goes on inside their mind in ways that before, Freud and everyone else could only have some informed speculation about.
Among the things we've learned from the research is that when you do get caught in negative emotions, when you get caught in fear and in anger, which is something that seems to drive a lot of corporate behavior, you end up narrowing your vision. This is just the way your mind is wired to work. You develop tunnel vision. You lose peripheral vision. You lose your sense of creativity. You tend to act and react just in the short term. You tend to be kind of disagreeable and not very friendly.
Whereas people that are caught up in positive emotions, they trigger a whole different set of wiring and chemicals being released. Your mind operates very, very differently in a positive mindset than in a negative mindset. You're much more expansive. You're much more open to new thoughts. You don't feel the need to reject them and defend yourself. You're much more able to connect ideas.
What I tried to do is to grab these pieces of psychology research and apply them to business growth strategy.
You point out that negative thinking is much more powerful than positive. In order to balance them, to have the positive and negative equal, you have to have three times as much positive input or thinking to equal one dose of negative.
BT: Exactly. That surprised me and didn't make much sense until I looked a bit harder at the research people have been doing in this area. I talk about Barbara Fredrickson who I think is the real star in this at the University of North Carolina. What she and others, especially at the University of Michigan, have found is that the way our emotions developed from, say, cave-dweller time on is that the parts of the brain that deal with negative emotions came first. They were hardwired in first and they tend to trigger first. That made sense when most of your life was eat or be eaten.
But it seems that as civilization has moved on to being less hunter-gatherer and a lot more agriculturally-oriented and built around larger social enterprises, evolution has selected the attributes that rely more on positive emotions. Positive emotions let you draw people together and work on cooperative enterprises. For survival purposes, the negative aspects haven't left. They tend to trigger first and can overwhelm us. So if you really do want to consciously hone in on the positive emotions, you've got to put a lot more effort into it.
Research from Marcial Losada helps us understand just how much effort it takes. He studied dozens of strategic planning meetings at businesses, and he coded the transcripts with how many references there were to essentially negative things like fear and anger versus supportive or optimistic comments.
What he found was that the teams that developed the most successful strategies out in the marketplace were the ones that were best able to overcome negativity in the meetings. It took three to five times as many positive statements to overcome a negative one. This is not an iron-clad rule. But you can't assume that one positive statement is going to undo the damage of one negative statement.
I think the way you find your guide posts about which way to move a business forward is from your mistakes. When a mistake happens, you do one of two things. The common thing is to disown it or hide it. Or, you do the rare act of figuring out what happened, what caused it, and how you could do something different next time. This is called "double loop learning." It's a process that allows you to go back and question some of the assumptions. If you can rethink them, you're going to have a better chance of being in sync with where the market is going, where customers are going. It makes a whole lot of sense, but it's really hard to do.
There's a quote related to this in your book by a researcher named Kathleen Sutcliffe. "While the best growers feel very positive about the opportunities available, at the same time they are modest and humble about their expected ability to control the future course of events."
BT: That's a tricky but important thing.
"A leader who admits to not having all the answers about how to proceed while remaining highly confident about the benefits of moving forward creates an environment that encourages others to take the initiative and act creatively." That reminds me of someone Tom has been quoting. I think it's Karl Weick, who says, "The best thing that a leader can say is 'I don't know.'" The Sutcliffe findings seem to explain why that can be so powerful.
BT: Exactly. Sutcliffe and Weick are colleagues and have worked together for many years. So they're reading from the same prayer book. Weick is a tremendous guy. There's a lot that he has said that needs to be heard by a broader audience.
I think what you've described explains why a lot of problems happen. But I don't know that it gives us the answer to them. In my consulting work, for many years, I've worked with senior executives, often chief executives. And I'd be very hard pressed to identify many chief executives that would be willing to do what you just suggested. That is, if they're wrong, admit they don't quite know where they're going.
If you do that publicly, you're shot down. And it's not in a blaze of glory. So people learn circumlocutions. You learn that if there's a mistake you'll only have to admit it privately. As a paid consultant, you're often the confessor. People will say things to you that they can't say otherwise.
That was the old rap that companies, when they were in trouble, brought in management consultants not to fix it, but so they could blame them. Right? It's so easy to be cynical.
BT: There's good and bad in consulting. Consulting has gone through several revolutions. It's gone from a number of medium sized, partnership-oriented, professional service firms into big business, and to massive hierarchy. As that has happened, there's been an industrialization of what used to be more of a professional activity. That change is accompanied by a lot of the Dilbert-like things that are very fair Pot shots to make.
Exactly. Speaking of Dilbert, no one makes cartoons about the optimists in the workplace.
BT: You've got to give people something they can relate to. There are too few optimists around in many organizations.
It seems to me that optimism is not nearly as interesting as pessimism. Movies about upbeat people just don't make it. We're not interested in that story.
BT: Well, maybe we're not interested because it's so hard to relate to. I do want to be careful here. I've tried to write about the balance. I think too much of business has been driven by the fear and anger, and that limits your options. But you can also go off to the other extreme. I've learned Ken Lay was described as an incredibly optimistic fellow, up until the end of Enron. That's not the kind of optimism I'm talking about.
There's an important role for pessimists on any kind of growth team. Because the optimists and the pessimists each have strengths and weaknesses that are incredibly complimentary if they're able to understand each other, rather than go to war with each other.
I think you suggest having a devil's advocate, but to always switch who plays it.
BT: Otherwise they'll become domesticated. Optimism and pessimism are not an inherent part of human fabric. They're roles, sets of skills, mindsets. A mindset is something that I can take off. I can put another mindset on when I need to. I think the key thing is to figure out when I want to be the fixer, having the skills of the pessimist, and when I want to be the grower, when I want to focus more on positive emotions. You can be led down a bad path by both of them. It's that ability to pull back and be a switch hitter that I think is vital.
Yet nearly impossible. You give us a lot of examples. Bill Greenwood, at Burlington Northern Railway [now Burlington Northern Santa Fe Railway] tries changing the mindset of the railroad industry and he struggles the whole time.
BT: It took him ten years but he was successful. Once his boss realized what Bill was doing, he essentially tried to torpedo him. It's a great story because Bill ended up getting the boss's job. That's an example I've tried to use of management getting so caught up in a negative, embattled, entrenched way of thinking about what their business is about, that they just proceeded down a dead-end path.
This is something that has been planted in my mind from Tom Peters' work over the years. So much of the impetus for organic, real growth doesn't come from the top of organizations. This was another surprise for me as I did the research for this book. Most of the growers that I uncovered were people that were in the middle of the hierarchy, not the top. This is something Tom has highlighted for a long time, and he's done a great job of putting a spotlight on these people. In his books, he's given them some great ideas for what they should do.
Right, because they can operate without people staring at them.
BT: If you're in a situation where you have to make mistakes, you really do need to be able to do it quietly until you can get some successes. The head of a company never has that luxury. The head of a company always has two incredibly important responsibilities: the care and feeding of the business as it is today, and the creation of the business needed for the future.
Usually the "today" responsibility tends to overwhelm the other. It certainly makes it a lot harder while you're defending the current practices to try to torpedo them at the same time. Some executives at least talk like they're trying to do that, but it's a difficult thing to do.
Other people in the organization that have less at stake in the status quo are going to be more likely to see opportunities differently. I've tried to write Bigger Isn't Always Better as a field manual for these folks, those in the middle or on the margins of their organizations.
The idea of the optimist and the pessimist working in conjunction lends some credence to two-person teams, like Hewlett and Packard. It seems to be a great recipe for success—somebody who has a mind for numbers and the dreamer.
BT: Absolutely. Each party in one of those dyads, in order for them to stay together as a couple, has to be able to appreciate what the other is good at and what the other is weak at. That's a level of maturity that I don't see enough in business.
I think you point out that you can't do this kind of thinking about the future while the phone is ringing and you have 28,000 emails to answer. It's important to pull yourself away and give your mind a little free rein. Given the current business atmosphere, it's hard for people to carve out that time.
BT: It's very hard. The first book I wrote was about downsizing [Downsizing], so I can't totally disassociate myself from that. That's been a badly overdone and misused approach to try to eliminate bureaucracy. What gets eliminated are the soft spots in organizations, the places that weren't doing things that were paying off now, but that were the side bets, or the seeds for the future, that had to hide in dark alleys in organizations.
Well, guess what? We don't have any more dark alleys. Or, a whole piece of the business is now operated in India, and owned by somebody else. That can make it harder to grow. These kinds of false approaches to growth—mindless downsizing and outsourcing—don't really get you anywhere. They get you the crazy business combinations ...
The huge dinosaurs, as Tom would say. Bob, it's been a pleasure. And we'll look forward to keeping up with what's going on at your blog, because I think you have a great opportunity to build on this book.
BT: Thank you.