Marina Gorbis's Blog, page 1327

Why Online Retailers Are Starting to Care About Your Feelings

When I was growing up in suburban Cleveland, the mall was everything.  It was where I hung out with friends, earned my first paycheck, and exercised my newfound independence. Now that mall is practically empty. Storefronts are vacant. You can hear the footsteps of the few shoppers echo down the hall.

We all know that shopping is not just about buying stuff, and that there are emotional and social reasons that drive us to choose certain shopping experiences over others. In the rush to get online, retailers focused on building lower-cost digital equivalents of their stores that left behind many of the human connections we once enjoyed. But in the latest wave of digital business models, e-tailers are seeking to satisfy not just functional needs but also those complex emotional and social “jobs to be done” that once made malls destinations.

This approach is typified by San Francisco-based Weddington Way, a start-up that aims to harness the group experience of shopping for bridesmaid dresses—keeping it social even when members of the wedding party live in different cities. By creating their own private virtual showrooms, brides and bridesmaids can discover, recommend, and vote on dresses and colors in a collaborative online space staffed by personal stylists available by chat session. With 25,000 dresses sold in just the first half of 2014, the company is approaching the $10 million revenue mark, a sum that includes fees from both purchasing and renting bridesmaid dresses (recognizing that lots of bridesmaids actually can’t wear it again, no matter what the bride says).

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Other e-tailers are focusing on building experiences that eliminate the emotional angst and uncertainty of online purchases. In doing so, they are turning the “showrooming” phenomenon (browsing in-store then buying online) on its head. Zappos, Warby Parker, and others have proved that you can still turn a profit if you send consumers many choices to try on by mail and let then just keep the one item they like. But companies like Bonobos.com are now going a step further by integrating bricks-and-mortar services with the Web and mobile apps.

The men’s clothing site started online in 2007 but took off more recently when it began adding physical locations. The New York-based company has opened “Guideshops” in 10 cities that help alleviate the worry men have when buying clothing online. Will they look dorky? Does that shirt go with that tie? Do the clothes fit properly? What is the proper fit, anyway?  Men can make an appointment to visit the showroom, which like a traditional bridal showroom, has samples of goods but doesn’t stock everything in every size. At the showroom, customers can meet with a real-life Guide, a personal shopper who can help them select, try on, and order clothes to be delivered in the proper size to their homes. Not having to keep all its goods in stock in the store means the physical spaces can be much smaller than a typical retailer’s, significantly lowering their cost and letting Bonobos combine the advantages of large on-line selection with in-person service. On the strength of this model, Bonobos is reportedly approaching $100 million in annual revenues and is partnering with Nordstrom to sell its custom clothing line in 200-plus stores.

Other retail start-ups are developing business models that monetize social connections in new ways. For instance, Luvocracy encourages shoppers to recommend clothing and fashion items from anywhere else on the web. Friends can add “luvs” to products which increases the “trust” rating of the recommender. When someone buys a product that you’ve recommended, you earn a 2% reward. If you attract enough followers who buy those products, you can become a “tastemaker” and earn 10% commissions. This model of turning on-line shoppers into salespeople was so attractive that Walmart Labs snapped up the company in an acquisition this summer. While Walmart’s plans for the site are unclear, I’d bet that the retail giant will end up integrating many of its lessons into the overall Walmart digital experience.  

Interest from major retailers is one clear sign that these more-sophisticated digital business models are establishing a new basis of competition in the market.  No longer can retailers, offline or online, be successful just by being cheaper, more convenient, or offering a wider selection. As competition intensifies, these functional advantages will become table stakes. With carefully designed experiences that address emotional and social jobs, newer entrants are setting a higher bar for the more-established retail brands and business models.

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Why English, Not Mandarin, Is the Language of Innovation

Last October, Mark Zuckerberg shocked the world when he addressed a group of students at Tsinghua University in Beijing completely in Mandarin. Media praised or lampooned his elementary grasp; some even called it mind-blowing.

The story reignited a decades-old debate: Will Mandarin overtake English as the global language?

For Zuckerberg, it’s certainly proven effective – prompting China’s Minister of Cyberspace Administration Liu Wei to visit for a meeting at Zuckerberg’s own desk in December.

César Hidalgo and his team at MIT Media Lab, however, would still argue for the preeminence of English. They published a study in late December that identifies English as the most influential language in the world. Their data are illustrated in “The Global Language Network,” an interactive model they produced showing English to be the largest hub of information. Hidalgo says the model suggests not a bias toward English itself, but that English, through its relevance as the dominant language of the internet, is able to connect people across languages.

Still, it’s true that China’s economy today is undergoing rapid change: the middle class is expanding, purchasing power is increasing, and with loosening regulation, China is becoming a fertile new market for global companies. In addition, native Chinese tech companies such as Alibaba, Weibo, and Momo are having some of the most successful IPOs in U.S. history.

But even despite China’s impressive growth, it seems clear that English – not Mandarin – is and will remain the language of innovation. Why?

From how we code to how we type, much of the world’s biggest advancements were developed with the English-speaking market in mind. Standard QWERTY keyboards are designed for the Roman alphabet and can’t accommodate the 2,000+ Chinese characters considered necessary to achieve even basic literacy in Mandarin.

The popularity of the QWERTY keyboard means programming languages typically use the Roman alphabet as well. In fact, the top 10 programming languages in the world are English-based. Two of these, Python and Ruby, were actually created by native Dutch- and Japanese-speakers, respectively, which shows that nonnative English speakers adapt to learn and use English when trying to accomplish broad goals.

English’s importance in the early development of modern technology has cemented its global importance today. Fifty-six percent of all online content in the world is in English. Accessing this content and drawing revenue from it requires English skills, which businesses and consumers alike are eager to acquire.

According to the annual EF English Proficiency Index for companies, English is a top priority for the world’s fastest-growing markets because it’s the common language that diverse and international companies use to communicate. The necessity of speaking English in the workplace has therefore increased the number of individuals looking to showcase their English skills for potential employers.

Global estimates figure more than 1.5 billion people around the world are trying to learn English. The sheer diversity of this population – culturally, economically, geographically – has heightened the demand for English training tools that can be accessed easily and inexpensively. As a result, we are seeing a surge in demand for standardized English proficiency exams such as the TOEFL, IELTS, and now the EFSET.

It’s important to note that this doesn’t mean English will replace local languages. Companies still need to serve markets locally; with globalization comes an increased need for localization.

The challenge for companies is to create cohesion between culturally distinct workforces. English, often considered a relatively neutral language, acts as a bridge that connects employees across countries and cultures, providing a pathway for innovation.

And the best tool of innovation? Collaboration. Companies whose employees can work together in a common language are more effective, efficient, and better able to work together.

As a result, companies around the world are choosing English as their official corporate language. European aircraft manufacturer Airbus is one example, as is Japanese e-commerce firm Rakuten, French automotive company Renault, and Korean electronics firm Samsung. Smaller companies looking to expand into the global economy are also investing in English. These companies are even offering language training tools for their employees.

In a survey conducted by The Economist Intelligence Unit, 90% of executives at companies around the world report that if cross-border communication improved at their company, then profit, revenue, and market share would increase significantly. This, in turn, would set them up for better expansion opportunities and fewer lost sales opportunities. Nearly half of the survey respondents acknowledge that basic misunderstandings stood in the way of major international business deals.

What does this all mean? English facilitates the innovation economy because it allows individuals and companies around the world to communicate, and therefore collaborate toward a common vision or goal. Imagine if Yahoo’s founder, Jerry Yang, never learned more than “shoe.” Or if Mike Krieger, Sao Paulo native and founder of Instagram, never learned English to attend college in the U.S.? Going back a few years, a man named Andy Grove, a native of Hungary, escaped WWII and went on to found Intel. What if language barriers stood in the way of these technologies?

When asked about how he sees Facebook developing in the next 10 years, Zuckerberg has said his first priority is to connect the entire world.

I’m with him. And having common ways to communicate and collaborate is a good start.

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The Myth of the Tech Whiz Who Quits College to Start a Company

There are three common myths about tech founders: they are extremely young, they are technically trained, and they’ve often graduated from a prominent local university. The logic then follows that to accelerate the growth of a local tech sector, cities need to actively cultivate people who fit this profile and encourage them to start a business. But on all three counts, the data tell a different story.

Two of the most successful tech entrepreneurs in history—Bill Gates and Mark Zuckerberg—follow this model. Both were college dropouts who studied computer science by day, programmed by night, and built large public companies without ever having worked at one. Anecdotes from popular media have only added to the cult of youth. Last year, articles in The New Republic and The New York Times explored the role young entrepreneurs have played in shaping Silicon Valley. The verdict in both follows a familiar line: for better or worse, successful tech sectors are products of young entrepreneurs, who disrupt whole industries without ever having worked in them.

These founders, in turn, are invariably portrayed technical experts. HBO’s Silicon Valley is emblematic of this stereotype: its protagonists are nerds. What they lack in business and social skills, they make up for in technical brilliance. The show is satire, but not pure hyperbole, either. Science, technology, engineering, and math (STEM) education is now at the center of entrepreneurship policy, and cultivating technical talent has become an important goal of the White House’s Office of Science and Technology Policy (OSTP).

Where better to get that technical education than at a great local university? Stanford is the classic example, with hundreds of future Silicon Valley entrepreneurs passing through its Palo Alto campus. A university of this caliber not only creates great talent, the theory goes, but also helps a region to retain it. It makes sense, then, to assume that without a world-class university nearby, a city’s tech sector cannot thrive.

Over the last year, we at Endeavor Insight began studying the New York City tech sector, one of the largest in the world, to understand just how closely these myths align with reality. We started with publicly available data from Crunchbase, AngelList, and LinkedIn, and layered on top of it interviews with nearly 700 local tech founders. We found that none of these three stereotypes hold up.

We looked at the university start year for over 1,600 New York City tech founders, and found that college dropouts are the exception, not the rule. While the bulk of founders were in their twenties, the average founder in our analysis was 31 years old at company founding, and a full 25% were older than 35 when their companies got their start.

We also found that youth does not predict success. We took recent research by the Harvard Business Review a step further, by comparing founders’ age to traditional measures of success—investment amount, employee count, exit value—and found no relationship between age and company success.

The most successful entrepreneurs are not like Mark Zuckerberg or Bill Gates, and instead tend to be mid-career specialists with substantial industry experience. Take Alexandra Wilkis Wilson. She earned an MBA and worked for several years at retailers like Bulgari and Louis Vuitton before founding Gilt Groupe, a leading e-commerce business that has raised over $200 million. The same is true for Neil Blumenthal, who spent five years as Director of VisionSpring, honing his industry knowledge before founding online eyeglass company Warby Parker.

Tech founders are also much less technical than conventional wisdom leads us to believe. We divided New York City tech founders’ college majors into two categories: STEM (science, technology, engineering, and mathematics) and non-STEM, and found that just 35% studied STEM fields, while 65% majored in something else. In fact, these founders were more likely to study political science than electrical engineering or math.

When computer chips were made by hand, tech entrepreneurship was the domain of engineers and computer scientists. But today the barriers to starting a tech company have never been lower. With just a few clicks, a would-be entrepreneur can build a website, acquire new customers, and begin making sales. Scientists will continue to develop new technologies, but most entrepreneurs will succeed by applying existing solutions to new markets, creating a thriving local tech sector in the process.

Local universities certainly develop new research and talent, but their role in attracting and retaining entrepreneurial talent is less certain. In truth, talent flows to wherever opportunity is greatest. New York City is no exception, with over 90% graduating from college outside of the city. (The University of Pennsylvania, 100 miles to the south, is the school with the most alumni in our sample of New York City tech founders.)

Despite its world-class universities, New York City’s tech scene succeeds because people want to live there, not because they studied there. The average future entrepreneur initially comes to the city to work for one of its existing companies, taking the plunge to found a company almost a decade after graduating. Ultimately, it is not the cities that educate entrepreneurs, but rather the ones that attract and retain them that are building top-performing tech sectors.

Our research shows that entrepreneurs don’t fit the stereotypes. Policymakers looking to further local tech sectors need to base their decisions on numbers, not anecdotes. In reality, the entrepreneurs they are seeking to support are older, less technically trained, and more likely to have attended college elsewhere. Whatever their age, experience, or background, the best policies use data to help local entrepreneurs scale their businesses and reinvest as mentors, angel investors, and serial entrepreneurs in the city where they got their start.

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Advice for Dealing with a Long-Winded Leader

It can be tricky to tell people that they talk too much. And in cases where the offender is someone more powerful, like a senior executive or important customer, it can be downright risky. As a result, many “victims” have been suffering in silence for years in meetings that never end or conversations that drain the life out of them. As the saying goes, a rich man’s jokes are always funny.

How do you put an end to this agony? There’s no instant fix, but in addition to understanding why some people go on, and on, and on… there is a strategic approach you can use to spare yourself and everyone around you. While it shouldn’t be used all the time, it can help you build stronger relationships by moving from one-sided monologues to conversations.

First, more on why leaders can be long-winded. Executives sometimes find it hard to stop monopolizing a discussion because delivering a monologue feels so good. As a study by Harvard University researchers revealed, talking so much triggers a sensation of reward similar to that of sex, money, or food. It’s a power kick for big talkers to grab the mic — and hard for listeners to wrestle it from them once they’ve fallen in love with the sound of their own voice.

There are other reasons successful professionals tend to ramble. Sometimes they suffer from performance anxiety. They feel they have to put on a show. Or they may underestimate how busy and attention-starved their listeners are. The average attention span, they may not be aware, is now under 10 seconds.

So what to do? Here are some ways to counteract overtalking — without getting fired or losing a big account.

Diagnose the problem. Many senior leaders are long-winded in some situations and not others. Does your boss tend to deliver an Oscar acceptance speech only when big clients come to the office and meet you in the conference room? Will your biggest client complain for hours about his divorce case over lunch, but not if he stops by the office? Are management monologues more likely to occur when there’s no formal agenda, if you’re on a phone call with no time constraints, or when no one asks any questions?

Take note of when your culprit tends to dominate the conversation so you can change the setting or circumstances. All of these clues can indicate what the core problem is — and help you devise a plan of attack.

Identify your approach. There are a few different methods to help someone be more succinct. Before you choose one, consider the payoff to the offender. Perhaps he or she will benefit from a more productive team, greater collaboration, faster results, less frustration, fewer misunderstandings, or a savings of time. Once you’ve honed in on a benefit, consider how direct you should be. If your target is not good at picking up cues that listeners are getting bored, you may need to be direct. Other excessive talkers may require a more diplomatic approach.

A more direct approach works well when you have a strong enough relationship with the culprit to be brutally honest. Come prepared with a point — and a payoff — and be brief.

When Mitch Golub, the president of Cars.com, realized his team couldn’t stand working for a top client because meetings and calls dragged on so long, he decided the situation was so critical he had to raise the topic of brevity to maintain the partnership. He took the straightforward approach and said, “You’re an important client, but we are having trouble getting people on our team to work with you.” Golub shared a number of examples of how the client’s lack of focus was preventing his employees from delivering results. Afterward, the client thanked him — and did cut to the chase more. Golub is glad he took the risk. “Today, our relationship has never been better,” he says.

Regardless of whether you feel you can be brutally honest, you can explain and model the many benefits executives gain when they embrace brevity — a new business essential in an attention-starved economy.

Brian Ames, vice president, employee communications at The Boeing Co., recommends connecting brevity to a key business issue like credibility or leadership development and waging “a running battle against jargon.” Frame the issue as one that can help transform the corporate culture and improve the vendor relationship. Brevity is, in fact, a shift of thinking and acting for leaders that delivers tangible results immediately. A key measure of your success at this, says Ames, “is whether the end user of the message feels respected or not.”

You can also remind your listener that it is challenging to communicate in an information-driven economy: People are exhausted. They check their smartphones more than 100 times a day, and get interrupted six to seven times an hour. They’re at the saturation point and can’t take in much more information. The more we talk, the less they hear.

Everyone needs to adapt when the issue is framed as a significant social change. Brevity is a prime area of improvement for senior executives and people in a position of authority.

Reinforce brevity. Many leaders get better at being clear and concise once they work on it, then fall back into bad habits.

To keep them from losing ground, use some practical techniques to set limits or expectations. A junior employee might say to a boss, “I know your time is valuable. Let’s keep this to five minutes.” Another approach that works: “I’d like talk with you about the Jones account. I’ve prepared a three-bullet-point agenda. Could we discuss each of these items for five minutes?” On a conference call with a client, you might mention early, “I’ve got a hard stop at noon. Is there anything you’d like to tackle right away?”

I’d also suggest embracing brevity in your meetings by using tighter agendas and shortening or eliminating PowerPoint presentations to foster better, more concise conversations. In other words, personally commit to being brief as well to set an example. It can help you spread the challenge of being better by being brief.

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Stop Enabling Gossip on Your Team

Every Friday, the CEO of a prominent tech company (I’ll call him Ken), gathers his troops in the courtyard of their campus for critical updates. The level of candor in these meetings is impressive but the most fascinating part — and what makes this company so unique, is the Q&A that follows. It’s a no-holds-barred exchange that would take the breath away of most corporate managers. The CEO implores people to ask tough questions. On a recent Friday at 4:55pm with seconds left in the meeting Ken points to an employee with a hand raised. The employee says:

“Ken, when I got here I was told you wanted a culture of candor and respect. I have an email thread that included dozens of us here from one of our top managers that demonstrates he is a flaming jerk. He was abusive, condescending and threatening. So, I have three questions for you: 1) did you know this? 2) do you care? 3) what are you willing to do about it?”

Exchanges in the Q&A are breathtaking not because the sentiments are unusual but because in most organizations they are firewalled off in gossip where they can never get to those who can do something about them. I’m not suggesting that excoriating someone in front of thousands of co-workers is a preferred way of solving problems. It’s not. But I would argue that clumsy efforts that get problems in the open are almost always preferable to collusive gossip that disavows responsibility.

First, let’s talk about why gossip happens. People wouldn’t do it if it didn’t serve a purpose. In fact, gossip serves three: informational, emotional, and interpersonal.

It is a valued source of information for those who mistrust formal channels. “Word on the street is that the new test facility funding didn’t make the cut.” It’s also the most common way of gaining valued information about our most important social systems. “Don’t have Ted do your graphics unless you’re satisfied with clip art.”
It sometimes serves as an emotional release for anger or frustration. “Chet made us look like idiots in the project review today. I was so humiliated!”
It is used as an indirect way of surfacing or engaging in interpersonal conflicts. “I heard Brett slammed your capital requests—and mine—in the planning meeting. I see no reason to keep processing his claims with the same urgency.”

Gossip is an effective way of achieving these goals in an unhealthy social system. People engage in gossip when they lack trust or efficacy. We become consumers of gossip when we don’t trust formal channels — so we turn to trusted friends rather than doubtful leaders. We become purveyors of it when we feel we can’t raise sensitive issues more directly — so we natter with neighbors rather than confronting offenders.

The problem with gossip is that it reinforces the sickness that generates it. It’s pernicious because it’s based on a self-fulfilling prophecy. If I lack trust or efficacy I engage in gossip — which robs me of the opportunity to test my mistrust or inefficacy. The more I use it the more I reinforce my need for it.

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Over time gossip weakens the will. Like all palliatives, it provides relief from problems without actually solving them. Reliance on gossip can sap the strength it takes to participate in complex social life. Risk-free yakking about problems temporarily distracts us from our sense of responsibility to solve them. It also anesthetizes us from the painful uncertainty that inevitably accompanies mature interpersonal problem solving.

Leaders at the tech company discussed above see gossip not as a problem but as a symptom of a lack of trust and efficacy. They address the underlying problem in three ways:

Stop enabling. The best way to stop gossip is to stop enabling it. Gossipers are rewarded when others respond passively — by simply listening. To stop it, force it into the open. At the tech company, employees know that gossip comes with a risk — the risk that you will be called out. Recently some employees noticed a number of others had begun to use a third-party app, Secret, which allows people to share message anonymously, to complain about colleagues and policies. When they recognized their colleagues’ complaints, longer-tenured employees began calling out those who were whining rather than confronting responsibly. They even posted their names and contact information in the app to offer support for those who wanted to learn how to truly solve their problems.


Build trust in the alternatives. Leaders at the company also reduce the supply of gossip by decreasing demand. They proliferate options for raising problems. The all-hands meeting is just one example. The company also uses an internal social network platform to model candor and openness on a host of topics that would be terrifying at other places. For example, some employees grumbled when execs announced a recent multi-billion dollar acquisition. Monday-morning quarterbacking is common at all companies but at this company it was done with attributed comments in a discussion group – and Ken participated! One employee kicked it off with: “What’s up? We already have a business unit that does the same thing with even better margins?” The concern was addressed openly rather than metastasizing in gossip because there were credible channels for the discussion to take place.


Build skill. Gossip is a form of learned incompetence — an acquired skill that produces poor results. Overcoming it requires replacing that skill. The tech company starts re-scripting employees on day one. In a rigorous orientation employees are asked to describe things they hated about other places they worked. At the top of the list is always gossip and politics. Managers leading these discussions use this moment to offer alternative skills and strategies for surfacing emotionally and politically risky concerns—and to challenge employees to create the culture they want by using them.

When the employee finished her statement to Ken, other employees erupted in applause. She was rewarded because she was transparent. Every employee standing there that day got the message: “At this company we do things in the open.”

And CEO Ken followed suit: “First,” he said, “I did not know about the concern you described. Second, I care deeply. And third, I don’t know what to do, yet. I need information. Are you available now to talk?”

Gossip is not a problem; it’s a symptom. The symptom disappears when a critical mass of leaders stop enabling it, create trust in healthy communication channels, and invest in building employees’ skills to use them.

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Investors Fawning over Uber Should Recall AOL’s Stumbles

January 10 marks the 15th anniversary of the announcement of a merger that most observers agree was just about the worst in history: the fusing of the start-up AOL and the venerable Time Warner. This year also marks AOL’s 30th birthday as a company. Finally, it’s also the 30th anniversary of a pivotal piece of research that we ruefully keep re-discovering with each entrepreneurial boom that comes along.

At the time the merger negotiations began, AOL was enjoying intense investor interest, to the point where a company that was only 15 years old and had been public for only 8 years had a higher market capitalization than media powerhouse Time Warner. Many thought the world had truly been turned upside down when a company that flooded mailboxes with CDs and infuriated customers with frequent busy signals could acquire Time Warner. Ah, the magic of the marketplace.

The merger was originally heralded as “transformative” – the first actualization of the long-promised fusion of content and delivery channel. Time Warner would instantly solve its concerns about being relevant in an online age, and gain access to tens of millions of AOL customers. AOL, for its part, could leverage the beloved Time Warner brands across its properties and make its dial-up subscription services more valuable — even as the threat of always-on broadband was making itself known. Other companies wondered whether they should pursue mergers of their own, thinking that perhaps this deal was going to be the wave of the future.

Unfortunately, for that strategy to work, the people in the merged company would have to work across silos, cooperate, and otherwise play nicely together. And they hated each other. What was simple friction and cultural distaste in the beginning hardened into visceral enmity after the dot-com crash led to the deflation of the company’s market cap (from $226 billion to about $20 billion) and the company had to write-down nearly $99 billion of goodwill in 2002, a number that even hardened Wall Street Journal reporters termed “astonishing.”

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But today we’ve learned our lesson – there’s no way we’ll support the wacky valuations that those smoking-something dot-com-boom investors did, right? I’m not so sure. Riddle me this: Uber, the car sharing service, was recently valued at $41 billion. As critics have pointed out, the entire taxi and limousine industry in the US generates $11 billion in revenue per year.

Yes, one might argue, Uber is “transformative” (there’s that word again) because it will dramatically increase the number of people who can afford to hire a driver rather than drive themselves or own a car. But this assumes that Uber can somehow lock in the lion’s share of that business. With few barriers to entry, there’s no reason many more players wouldn’t jump into the business, including existing taxi drivers. Unlike Google, Facebook, or Twitter, which have strong network effects (meaning that the more people that use them, the more valuable they become), Uber really doesn’t, beyond its ability to maintain adequate driver coverage. Further, as it deepens its reach into more of the population, its troubles with safety, privacy, driver vetting, and even criminal behavior are likely to increase as well. $41 billion looks pretty rich to me.

Back in 1985, Bill Sahlman and Howard Stevenson of Harvard wrote a brilliant case and article they called “Capital Market Myopia”. The phenomenon that drew their attention was that participants in capital markets were ignoring the collective implications of their individual investment decisions. They were simply unwilling to back away from a market all the experts agreed was going to be tremendously exciting.

Their original study was of new entrants into the Winchester disk drive industry, a sector every bit as hot and exciting back then as start-ups like Uber are today. Between 1977 and 1984, venture capitalists invested over $400 million in 43 manufacturers of the drives. Some (12) of the firms had an IPO, and collectively enjoyed valuation that at its peak was $5.4 Billion. At the peak of the frenzy, some 70 companies participated in this space. It didn’t end well. The public companies’ valuations dropped to $1.4 billion in 1984, and investors lost millions in the ensuing shakeout.

So what does an old bubble in now-dusty disk drives have to teach us about investments today? Well, for starters, Silicon Valley is once again awash in capital, which in turn means companies are burning through that capital quickly, which in turn increases the likelihood of irrational investing. They are also amidst the frenzy of a winner-take-all mentality: the theory of the case is that the firm that gains the biggest market share first will ultimately triumph in its sector. It’s set up perfectly to induce what is sometimes called increasing commitment to a failing course of action – if you stop spending, you know what you’ll lose, while if you keep investing, the dream of a big return can be kept alive. But, people, we have been there before – remember WebVan, Value America, Boo.com, Pets.com, and all the rest?

So here’s a little statistic to ponder: According to the Wall Street Journal, there are now 48 private companies in the US valued at over $1 billion. During the peak of the dot-com boom, there were only 10 companies valued over $1 billion.

But all 48 of them are transformative, right?

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Why Europe Tops 2015’s List of Global Risks

Russia and Ukraine. ISIS. Iran and Syria. The Sony hack by North Korea. In 2014, global political volatility reached an intensity not seen since the end of the Cold War. What are the biggest political and economic risks heading into the year ahead? Taken together, what do they mean for global businesses?

For an expert perspective on these questions and more, I talked to  Ian Bremmer, president of Eurasia Group. The firm has just published its annual assessment of Top Risks. An edited version of our conversation is below.

Europe is at the top of your risk list for 2015. Why? That seems somewhat surprising given that the Euro economic crisis seems to have tailed off, or at least plateaued.

You notice it’s the politics of Europe, not the economics of Europe. Clearly the economics of Europe are better than they were in the teeth of the Eurozone crisis. I hate to say it, but that’s actually part of the problem. In the United States we complain about governance from Washington constantly; and in Europe they complain even more about Berlin. But the fact is that when there’s a big economic crisis, we are capable of responding. When Lehman fell apart, the U.S. put hundreds of billions of dollars together almost overnight. And the Germans were capable of responding with the European governments immediately when there was a true rubber-hits-the-road moment, like the Greek exit or Cyprus.

But they don’t face that right now. So the economics are better, but the politics are worse – and they’re worse on every front. Internally, you’ve got the growth of populist movements within European countries. The potential that Syriza actually wins a snap election in Greece. You look at Podemos in Spain, with elections coming up in 2015. The rise of UKIP  in Britain and how that forces Cameron to talk internally about Europe, about Germany, about immigration. The Front National in France. Combine this with fairly anemic growth, no opportunities for Europe’s youth, visceral anti-immigrant sentiment, growing Islamist radicalization – all this is making it much harder for these countries to govern. And it’s likely to start returning governments that are much more alienated from Berlin and from Brussels.

At the same time, you have extremely challenging geopolitics, specifically around ISIS and terrorism, and Russia. Look at the horrific attack this week in Paris. I think we’re more likely to see a kind of metastasis of the ISIS brand and ethos causing one-off attacks in major capital cities in Europe than in the U.S. or in Australia. And certainly Europeans are alarmed about Russia, which is absolutely on a road to ruin: low oil prices, increasing concern about default, about expansion of the fight in Ukraine, about near misses between Russian military aircraft and European commercial aircraft. The geopolitical environment is much worse for Europe now than it has been historically. And because Europe is the world’s largest single common market, all of this redounds very negatively to the global scene.

Russia is your number two risk. Obviously, Russia’s offensive actions in Ukraine last year shocked the world. Should the U.S. have responded differently? And what’s the continuing risk in dealing with Putin?

We could have done a lot of things differently. The U.S. and NATO have spent 80% of our effort in punishing the Russians, and 20% in supporting the Ukrainians. That is exactly the wrong balance. It should have been 80/20 in the other direction. We have pushed the Russians to the point that Putin believes we’re trying to undermine him personally and that our goal is regime change. The U.S. view is that we just want to punish him, enough so that he changes his behavior. But he’s not going to change his behavior. He’s only getting more aggressive. And he does control his country. I don’t know how far he’s going to go, but I know that we’ve seen major cyberattacks against American banks, and against the White House that have come from Russia.

Think about the Sony attack. What are we going to do if a major American bank suddenly has all of their dirty laundry exposed and it turns out it came from the Russian government? What happens if next time it’s not a near-miss, but a direct hit of a commercial airliner by a Russian plane that turns its transponder off?

And look at instability in the Baltics. We have pushed the Russians to the point that people are concerned about a default. That doesn’t necessarily mean there will be a default, but it absolutely leads to more capital flight from Russia and the kind of market sentiment that can drive a panic. Combine this with the fact that Russia’s economy is deteriorating quickly, that Putin’s popularity is unlikely to stay at 85% over the course of next year, and that he’s not going to give up on Ukraine. Also, low oil prices – these are generally an enormous good for the world, helpful for global consumers. But major oil producers get hit and Russia’s a big one.

All of these things make Putin and Russia the biggest, most powerful wildcard in the entire world, with the potential to cause a lot of damage to the global economy.

The “weaponization of finance” is also high on your list. Are you talking about the usual economic and trade policy kind of hardball?

A lot of people are talking about how the United States is becoming more isolationist, that we should lead from behind, and that the U.S. isn’t as interested in doing engaged foreign policy. I don’t agree with any of that. I think the U.S. is still very, very assertive around the world in ensuring that its interests are met.

But what’s changed is that the U.S. is becoming much more unilateral. Less focused on collective security and NATO, more focused on drones and surveillance and the NSA. And actually, the biggest projection of American unilateral power is on the economics side. In terms of America being a superpower, U.S. dominance of the global financial system is much greater than if you look at America’s role with regard to nuclear weapons or conventional military forces or even surveillance. And America’s willingness to weaponize finance has grown substantially as a consequence.

When it comes to fighting ISIS, for example, militarily we don’t want boots on the ground, we’re not doing that many bombing runs, we don’t want to kill civilians. But America’s willingness to use the dollar, to use the banking and financial system to squeeze countries that are not doing what the U.S. wants with regard to rogue regimes and rogue actors, that’s getting much more severe.

And what’s interesting is that while the U.S. is the country imposing sanctions, it’s our allies that are actually bearing the biggest cost. This is particularly true for Europe, which has the world’s largest banking system, but whose companies are significantly more exposed to all of these rogues – Russia, Iran, South Sudan. This leads to a growing transatlantic rift, because the Europeans become increasingly frustrated with American unilateralism that the Europeans pay for.

Of course, when the Obama administration imposes sanctions, the intention is to support democracy and to combat terror, in the service of the American national interest and to promote global security. We’re sanctioning bad guys, so who wouldn’t want that? But the point is, a lot of countries are on the wrong side of that, financially.

Your number seven risk, on the rise of business sectors that are strategic to governments, seems to confirm the thesis of your 2014 HBR article, in which you described a world of “guarded globalization,” with emerging markets wary of opening more industries to multinational companies, and an overall economic dynamic that is more selective and nationalistic. Do you see this dynamic continuing?

Yes, it’s going to continue. There are a few things to look at here. First, the U.S. is going to start hiking rates and that’s clearly a challenge for emerging markets. Broadly, China is slowing down, and intentionally so, and that will be a challenge for other emerging markets. So there are definitely some headwinds that make it more difficult if you’re a country like Brazil or Indonesia just opening up and being more competitive. Whether it is populist policy from governments that want to maintain approval, or more hostile sentiment toward foreign companies as a result of the leadership’s geopolitical leanings, many countries will shift more toward nationalism in the marketplace. All of those trends can come hand in hand with deeper government intervention into more sectors of the economy.

Russia is the extreme example on this front. Talk about strategic sectors – McDonald’s has had stores shut by the Russian government because they’re an American company, and perceived as such. The Russians are putting sanctions on Western firms precisely because of politics and because of nationalism, and I think we’ll see more of that. We see Russia orienting itself overwhelmingly toward emerging markets and towards China. This eventually leads to a breakdown of U.S.-led global standards as the Russians form their own ratings agency with the Chinese; their own financial transaction management organization with the Chinese; their own Internet standards. Russia is developing their own Wikipedia. All of this pushes against U.S.-led globalization-slash-Americanization.

China is different, but just as powerful as an example. They’re engaged in serious economic reform at home and it has been very successful. But the Chinese government has no interest in liberalizing their political system. They do not want to create a free market private sector-based economy. They’re still very much state capitalists. As Chinese state-owned enterprises (SOEs) continue to gain more influence on the international stage, China will be able to create and enforce rule sets which reflect their own norms and priorities and values.

That is what the creation of the BRICS Bank was all about. Also the Chinese and the Asian Infrastructure Investment Bank, and the China Overland and Maritime Silk Route programs. All of these institutions are oriented bilaterally between China and other countries in their region, transacting billions and billions of dollars and at the same time making these countries more accountable and leverageable according to Chinese economic and commercial preferences. This is a huge driver towards guarded globalization.

That does start to sound something like a new Cold War. Are we already in it, or not quite yet?

We’re headed in that direction. If you’re a Western multinational company you may have thought, historically, well, OK, I know China’s getting bigger and they may have challenges, but eventually they’ll get wealthy, and then we can work with them. But what if it’s not just China? What if it’s China and Russia? What if it’s China, Russia, and Russia’s neighborhood, and then some of China’s neighborhood? And what if that starts to grow? The potential for this to continue and develop into a more fragmented system where regional powers have enormous sway – from a security perspective, a political perspective, and an economic perspective – over their own peripheries certainly seems closer to reality as a consequence of what’s happened with Russia in recent weeks and months, with the collapse of the ruble, dropping oil prices and continuing tensions around Ukraine.

What does business leadership look like in this changed context? In a recent piece, you said: “We now live in a world where no single power or alliance of powers is willing and able to provide global leadership. Call it geopolitical creative destruction.” How should individual leaders be thinking and acting differently in such a world?

In an environment of geopolitical creative destruction, you will see much more global volatility in the markets. As a result, the quality of returns on investment and the quality of global growth is actually going down. This means that in order to achieve the same amount of growth as in the past, you will have to take on more risk.

For most multinational leaders, that means they need to focus a little less on growth and a little more on resilience and anti-fragility. This is hard to do, particularly for American CEOs because they’re not there for long, with a typical stint of four years or so. They’re focused on increasing shareholder value and getting as much profitability as possible, and not as much on sustainability. I know that’s become a great buzzword, but I’m not talking about climate – I mean sustainability of the corporate models themselves. That’s going to be a big challenge for leaders. It’s easier, perhaps, for a Japanese CEO to think in those terms.

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How to Handle Difficult Conversations at Work

Difficult conversations — whether you’re telling a client the project is delayed or presiding over an unenthusiastic performance review — are an inevitable part of management. How should you prepare for this kind of discussion? How do you find the right words in the moment? And, how can you manage the exchange so that it goes as smoothly as possible?

What the Experts Say

“We’ve all had bad experiences with these kind of conversations in the past,” says Holly Weeks, the author of Failure to Communicate. Perhaps your boss lashed out at you during a heated discussion; or your direct report started to cry during a performance review; maybe your client hung up the phone on you. As a result, we tend to avoid them. But that’s not the right answer. After all, tough conversations “are not black swans,” says Jean-Francois Manzoni, professor of human resources and organizational development at INSEAD. The key is to learn how to handle them in a way that produces “a better outcome: less pain for you, and less pain for the person you’re talking to,” he says. Here’s how to get what you need from these hard conversations — while also keeping your relationships intact.

Change your mindset

If you’re gearing up for a conversation you’ve labeled “difficult,” you’re more likely to feel nervous and upset about it beforehand. Instead, try “framing it in a positive, less binary” way, suggests Manzoni. For instance, you’re not giving negative performance feedback; you’re having a constructive conversation about development. You’re not telling your boss: no; you’re offering up an alternate solution. “A difficult conversation tends to go best when you think about it as a just a normal conversation,” says Weeks.

Breathe

“The more calm and centered you are, the better you are at handling difficult conversations,” says Manzoni. He recommends: “taking regular breaks” throughout the day to practice “mindful breathing.” This helps you “refocus” and “gives you capacity to absorb any blows” that come your way. This technique also works well in the moment. If, for example, a colleague comes to you with an issue that might lead to a hard conversation, excuse yourself —get a cup of coffee or take a brief stroll around the office — and collect your thoughts.

Plan but don’t script

It can help to plan what you want to say by jotting down notes and key points before your conversation. Drafting a script, however, is a waste of time. “It’s very unlikely that it will go according to your plan,” says Weeks. Your counterpart doesn’t know “his lines,” so when he “goes off script, you have no forward motion” and the exchange “becomes weirdly artificial.” Your strategy for the conversation should be “flexible” and contain “a repertoire of possible responses,” says Weeks. Your language should be “simple, clear, direct, and neutral,” she adds.

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Acknowledge your counterpart’s perspective

Don’t go into a difficult conversation with a my-way-or-the-highway attitude. Before you broach the topic, Weeks recommends asking yourself two questions: “What is the problem? And, what does the other person think is the problem?” If you aren’t sure of the other person’s viewpoint, “acknowledge that you don’t know and ask,” she says. Show your counterpart “that you care,” says Manzoni. “Express your interest in understanding how the other person feels,” and “take time to process the other person’s words and tone,” he adds. Once you hear it, look for overlap between your point of view and your counterpart’s.

Be compassionate

“Experience tells us that these kinds of conversations often lead to [strained] working relationships, which can be painful,” says Manzoni. It’s wise, therefore, to come at sensitive topics from a place of empathy. Be considerate; be compassionate. “It might not necessarily be pleasant, but you can manage to deliver difficult news in a courageous, honest, fair way.” At the same time, “do not emote,” says Weeks. The worst thing you can do “is to ask your counterpart to have sympathy for you,” she says. Don’t say things like, ‘I feel so bad about saying this,’ or ‘This is really hard for me to do,’” she says. “Don’t play the victim.”

Slow down and listen

To keep tensions from blazing, Manzoni recommends trying to “slow the pace” of the conversation. Slowing your cadence and pausing before responding to the other person “gives you a chance to find the right words” and tends to “defuse negative emotion” from your counterpart, he says. “If you listen to what the other person is saying, you’re more likely to address the right issues and the conversation always ends up being better,” he says. Make sure your actions reinforce your words, adds Weeks. “Saying, ‘I hear you,’ as you’re fiddling with your smartphone is insulting.”

Give something back

If you’re embarking on a conversation that will “put the other person in a difficult spot or take something away something from them,” ask yourself: “Is there something I can give back?” says Weeks. If, for instance, you’re laying off someone you’ve worked with for a long time, “You could say, ‘I have written what I think is a strong recommendation for you; would you like to see it?’” If you need to tell your boss that you can’t take on a particular assignment, suggest a viable alternative. “Be constructive,” says Manzoni. Nobody wants problems.” Proposing options “helps the other person see a way out, and it also signals respect.”

Reflect and learn

After a difficult conversation, it’s worthwhile to “reflect ex post” and consider what went well and what didn’t, says Manzoni. “Think about why you had certain reactions, and what you might have said differently.” Weeks also recommends observing how others successfully cope with these situations and emulating their tactics. “Learn how to disarm yourself by imitating what you see,” she says. “Handling a difficult conversation well is not just a skill, it is an act of courage.”

Principles to Remember

Do:

Take regular breaks during the day; the more calm and centered you are, the better you are at handling tough conversations when they arise


Slow down the pace of the conversation — it helps you find the right words and it signals to your counterpart that you’re listening


Find ways to be constructive by suggesting other solutions or alternatives

Don’t:

Label the news you need to deliver as a “difficult conversation” in your mind; instead frame the discussion in a positive or neutral light


Bother writing a script for how you want the discussion to go; jot down notes if it helps, but be open and flexible


Ignore the other person’s point of view — ask your counterpart how he sees the problem and then look for overlaps between your perspectives

Case Study #1: Be clear, direct, and unemotional

Tabatha Turman, the founder and CEO of Integrated Finance and Accounting Solutions, a financial firm with both government and private sector clients, knew she had a problem with a certain employee. “He was a nice person and he worked long hours but his productivity was an issue,” she says. “He wasn’t right for the position he was in.”

She and her team tried a number of interventions — including having him work with a professional coach — but after six months, she needed to take action. “We kept kicking the can down the road, but I realized I was going to have to be the bad guy.” She was going to have to lay him off.

Tabatha dreaded delivering the news. “I really liked this person,” she says. “We’re a small company and all really close—you know about people’s families and you hear about their vacations. At the same time, everybody plays a position on the team and one weak link can bring it down.”

To steel herself for the conversation, Tabatha called on her 20 years of experience as an officer in the army. “I grew up in a military environment where there’s no bluff,” she says. “When you’re at work, you’re at work. You need to be strong for the people around you and take your feelings out of it.”

Her words were simple. She told the employee that he was “not a good fit.” She explained that the company would keep him on until the end of the month and then provided details about the severance package. Tabatha says that while the employee “wasn’t happy” he took the lay-off “like a trooper.”

Even though she didn’t show her emotion during the meeting, Tabatha still says the conversation “lingers” in her mind today. “I still feel badly that it didn’t work out, but it wasn’t right,” she says. “We had to move on.”

Case Study #2: Put yourself in the right frame of mind and show empathy

As Chief Personnel Officer at Booz Allen Hamilton, Betty Thompson, is accustomed to having hard conversations. Recently, for instance, she had to tell a successful, longtime employee that his position was being eliminated.

“Over time, his role had become less relevant to the organization,” she says. “There were also proximity issues — his team was on one side of the country but he was on the other side. It just wasn’t going to work anymore.”

Betty decided that the message would be best delivered not in one conversation, but in a series of multiple discussions over a couple of months. “I didn’t want to rush things,” she says. “It was a process.”

Before even broaching the subject with the employee, she reminded herself of her good intentions. “You need to have the right energy going into something like this. If you’re coming from a place of frustration—which can happen, we’re only human — it will not be a constructive conversation. You have to think: ‘What’s the best way for this person to hear the message?’”

Her first step was sitting down with the employee to ask how he thought things were going. “I wanted to know what frustrations he was having,” she says. “I wanted him to look in the mirror, not poke him in the eye.”

After he spoke, she offered her own perspective on the problem. He was initially defensive, but by the second time they spoke, he had come around and agreed there was a problem.

By their final conversation, the employee had decided to leave the company. They had a great talk and even ended the conversation with a hug. “He knew that I cared,” she says.

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Fixing the Euro Zone and Reducing Inequality, Without Fleecing the Rich

What do deflation and rising inequality have in common? The answer is that we have too much of both and they threaten the nascent global recovery. The US economy is in cyclical full-steam-ahead mode, but it’s mainly benefitting the owners of financial assets – wage growth is missing. In Europe, deflation and rising inequality are combining to make a bad situation much worse.

Prior to the global financial crisis, deflation looked like a uniquely Japanese problem. But today this malaise is most acute in the euro zone, where demand has been depressed due to counterproductive fiscal policies.

Increasing inequality of income and wealth has occurred across the developed world for the past 30 years, with the majority of the gains from technology, globalization and deregulation accruing to a small minority in each country. Setting aside the issues of political legitimacy this raises in democracies, high and sustained levels of inequality are bad for long-run growth. This is now accepted as fact by organizations as diverse as the IMF and Standard and Poor’s.

The policy response to the global financial crisis exacerbated and entwined these trends still further. The traditional response to the problem of insufficient demand is government-led infrastructure spending. Yes, no doubt many countries would benefit from better infrastructure, and the current low cost of borrowing for governments suggests that it would be a good time to make such investments. But the recent attempt to launch a major infrastructure program in the euro zone – the so-called “Juncker plan” – illustrates that such proposals are hindered by politics, are rarely timely, and are often insufficient in scale to make a real difference to the larger economy.

In addition, rather than continue their stimulus spending, many economies began to cut back excessively, especially in Europe, which made their economies slump further. With fiscal remedies on the sidelines, monetary policy had to take up the slack. Interest rates of zero meant that central banks took to targeting asset prices – stocks and bonds – to boost spending. But the ownership of financial assets is highly concentrated and the effect was to compound the existing trends of wealth and income inequality, with muted effects on demand.

Both of these reinforcing trends have created a tax revenue problem for governments. Today, the burden of income tax is increasingly being borne by middle and upper-salary households. Those with the lowest incomes have their income supplemented by transfers, often as tax credits, while at the other end of the distribution, many of the super-rich owe their wealth to capital – which is taxed at a lower rate — not salary. With the recovery in Europe failing to materialize and wages in the US stagnant despite the improved economy, tax receipts will continue to fall, which only leads to wider deficits and more demands to cut spending.

In short, the middle is being squeezed, the top doesn’t spend enough, the bottom doesn’t earn enough, and the policy mix is fatally flawed. We need new policies.

The European central bank is close to exhausting conventional approaches – official interest rates are negative, and even large-scale asset purchases are unlikely to significantly increase private sector spending. Encouraging already stretched households and corporates to borrow more, as a way to spur recovery in the midst of deep recession, is both ineffective and negligent. So one solution suggested by a growing number of economists in Europe is for central banks to “helicopter drop” money, and directly finance private sector spending.

Milton Friedman imagined a helicopter flying over a community and dropping dollar bills from the sky. Conveniently, he assumed each household picked up an equal share. To Friedman, it was obvious that this would result in an increase in spending. All the empirical evidence on analogous policies, such as tax rebates, suggests that Friedman was correct: unsurprisingly, if you give people more money, they tend to spend it. They don’t rationally-discount it, save it all, or give up their jobs in the hope of a handout.

How could this work in practice in a modern economy? And wouldn’t it all result in hyperinflation and the end of civilization?

The simplest way to boost demand is to give power to central banks to transfer cash in equal amounts to all households. For example, the European central bank, which by law is prohibited from financing government spending, could simply credit the bank accounts of all tax-paying euro zone citizens.

Such a policy would be cheaper than the alternatives and more effective.  Quantitative easing (QE) by the Fed, Bank of England and the Bank of Japan, has involved asset purchases equivalent to more than 20% of GDP. A payment of cash to Eurozone households of 3-5% of GDP would probably suffice to generate a recovery. This policy is also fairer. Each household gets the same amount of money and there is no favoring of borrowers, lenders, or owners of assets. It’s also faster and more direct than infrastructure spending.

What about inflation, or worse still, hyperinflation? These fears are emotional and fade under clear analysis. Any impact on prices would depend on how much spare capacity there is in the economy. Firms in the euro zone are desperate for higher sales; price increases would be corporate suicide in the current, intensely competitive economic environment. For Europe to have an inflation problem, there would need to be a boom first – and nothing could be further from the current reality. Still, to mitigate fears of inflation, we recommend tying the cash drops to a Taylor rule (a nominal interest rate/inflation rate target) and when the economy hits that target, the drops stop.

All central banks should be given this power, even if they do not need to use it immediately. It would provide the Fed and Bank of England with a contingency plan should their economies faced renewed shocks. In Europe it is an immediate remedy to deflation, which if it is not halted, threatens the very unity of Europe.

But even if this works, can we do more to reverse the huge increase in income and wealth inequality that makes recessions deeper and recoveries more fragile?

Substantial benefits of globalization, deregulation, and technology accrue to almost all of us, but the financial rewards appear have gone disproportionately to capital. In the United States, corporate profits as a percent of GDP are close to historic extremes and yet higher corporate investment spending has not materialized. One policy would be to tax the top more, but a better solution would be make sure that all segments of society have significant equity ownership.

One lasting consequence of the global financial crisis is a high global equity risk premium. This risk premium is a measure of the likely excess return of the stock market relative to government bonds. Sine the crisis, investors have had a strong preference for assets which are perceived as low risk, such as government debt. Combined with an expectation that interest rates will stay low for a long time, this creates a world where the cost of borrowing for most developed governments is now negative in real terms. In contrast, global equity markets are priced to deliver something close to historic long-run returns of around 5% in real terms. Even in the United States, where many correctly observe than equity valuations are above their long run averages, equity markets are still priced to beat government bonds by around 4% in real terms. This gap implies that governments have an opportunity to buy equity cheaply on behalf of the population.

We propose that governments should exploit this excess return by funding large sovereign wealth funds housed within central banks (so that politicians can’t get at the funds), financed by issuing government bonds. Alternately, the Fed and other central banks, which have trillions of dollars of “safe” bonds via QE programs, could sell these and buy global equities. Creating sovereign wealth funds along these lines would allow governments to dramatically expand the ownership of equity, without any increases in taxation.

For example, if the US government issued 30% of GDP in bonds and invested the proceeds in an index of global stocks, there would be no immediate impact on the government’s balance sheet. It would have a liability (government bonds) and an asset (equity holdings) of equal value. But over 15 years, the real value of the government bonds will be unchanged, or lower, because after inflation the yield is negative, and the value of the equities is likely to have doubled – the compounding effect of a 5% real return. The wealth created, equivalent to 30% of US GDP, could then be distributed to the poorest 80% of households. This is not alchemy. The government is simply broadening equity ownership by exploiting the shorter time horizons and risk aversion of global investors.

The politics of fiscal policy and the tools of monetary policy are out-of-date and dysfunctional. Modest innovation to address the intertwined problems of deflation and inequality is needed. Financial markets currently provide a unique opportunity for governments to acquire equity on behalf of a majority of the population. If rising job insecurity and lower wage growth is the price we must pay for globalization and technological innovation, let us at least broaden the ownership of equity so we all share the upside.

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Sometimes Cutting R&D Spending Can Yield More Innovation

This may sound as though we’ve got our facts backward, but your company can significantly increase its knowledge output by cutting R&D spending.

It’s all a matter of when you cut your spending, and why.

Take Cisco, for example. The company’s R&D expenditures dropped by about $1.5 billion from 2002 through 2004. Drawing on data from the U.S. National Bureau of Economic Research, we found that during this period, the company’s patented knowledge output increased significantly.

The chart may appear to show merely that Cisco’s patent filings lagged its R&D spending by three years, but in fact the decline in spending and the rise in patents were part and parcel of a deliberate strategic shift by the company in 2001.

So what was going on? How could a decline in research spending stimulate an outpouring of patents?

What Cisco was doing was shifting its R&D approach from exploration to exploitation. Exploratory R&D, in which researchers cast about for radical new ideas, is expensive and iffy, typically resulting in patents that are relatively few in number but packed with valuable knowledge. Exploitative R&D, in which companies focus on making use of the best ideas they’ve discovered, is less costly and more of a sure thing, often resulting in a vast quantity of incremental and defensive patents built on the foundation of prior exploration. Cisco followed this pattern: In 2001, its patent activity narrowed dramatically from a broad array of technological areas to relatively few.

Over time, many of the best tech companies cycle between exploration and exploitation. Sometimes exploration means creating inventions; sometimes it means acquiring small, inventive companies. But whatever form it takes, exploration in these companies is typically followed by exploitation (a few companies do both simultaneously, but we’ve found that the sequential approach is much more common, probably because trying to do both at once is really difficult).

Exploitation allows companies to monetize their exciting new ideas and thereby relieve some of the stakeholder pressure for short-term earnings. It gives the CEO a breather until the company has to return to exploration to restock its supply of radical ideas.

We’ve found that, in general, companies that move between exploratory and exploitative R&D exhibit superior performance, in comparison with companies that budget R&D expenditure as a fixed percentage of sales, committing neither to exploratory nor exploitative R&D.

Our research shows that Cisco is unusually adept at this sequential ambidexterity, shifting between the two approaches at opportune moments. In fact, we think Cisco is one of the all-time best at this corporate skill.

During exploratory periods, when new opportunities are opening up, Cisco spends generously in search of radical innovations for competitive advantage; once it has identified a good number of them, it shifts to exploitation, which allows the company to cut its R&D budget while producing large numbers of valuable patents, although with narrower scope than during the exploration phase.

Having gone through a period of intense exploration and discovery at the beginning of the 2000s, when the internet was still fairly new, the company changed tack, focusing mainly on exploiting inventions related to the internet’s backbone. It issued numerous upgrades that increased the speed and throughput of its routers and improved the accompanying software platform. Although it expanded into new markets, these moves were based on the company’s existing knowledge: Cisco’s storage-area network products were modified versions of its routers, and even its move into consumer wireless internet relied on mature Cisco technologies.

As of late, Cisco is back into exploratory territory as it leads a push into multimedia conferencing, in large part by acquiring smaller companies. Where will this period of discovery take the company? If the past is prelude, before long we’ll see the company amass a number of valuable ideas related to conferencing, then shift to a lucrative period of exploiting its best ideas.

Cisco’s example demonstrates that corporate vision comes in many flavors. It’s not always just about hiring great minds and giving them the freedom to look for the next big thing. It’s also about knowing when to shift from one mode to another. That requires an understanding of when a set of radical ideas is ripe for monetization and, later, when the returns to incremental R&D are falling, necessitating a return to search mode. Visionary leadership is also about helping the company overcome inertia so that it can shift effectively from one frame of mind to another when the time comes. Few companies pivot easily, but those that do position themselves to ride wave after lucrative wave of exploratory, then exploitative, R&D.

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