Marina Gorbis's Blog, page 1352

The Condensed November 2014 Issue

Amy Bernstein, editor of HBR, offers executive summaries of the major features. For more, see the November 2014 issue of HBR.

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Zumba’s Success Arose from Long-Term Trends

How do some brands manage to resonate so strongly with the public that they seem to get woven into the fibers of culture? How do their taglines become rallying cries for change (“Where’s the beef?”), their brand names become verbs (“to google” stands for “to search online”), and their products create completely new lifestyles (Apple iPad)?

These brands create their own cultural movements or advance emerging ones in ways that position themselves as the arbiters of popular culture. That’s why they outlast fads like cronuts, Silly Bandz, and Angry Birds. They establish meaningful, lasting connections between their products, people, and the world around them. They decipher where society is going in the long term and figure out how their brand adds value to that direction.

Zumba, the fitness dance movement, has achieved this level of cultural significance. Founded a little over a decade ago, the organization reports more than 15 million weekly participants in over 200,000 locations across more than 180 countries, and its social networks enjoy a combined following of 7.5 million. As the company releases a constant stream of videos, conferences, apparel, equipment, and music, the brand has become a phenomenon.

When Zumba launched, the concept tapped into several emerging trends that together created the right conditions for it: increasing Latin influence on mainstream American culture, emerging social networks, and growing awareness of physical activity’s importance to health. Instead of following a single trend, the brand thrived on several complementary developments and so was able to lead its own movement.

It started with a bold vision. “Our purpose at Zumba is to change lives through health, wellness, and overall happiness,” said Zumba CEO, CMO, and cofounder Alberto Perlman. This sweeping vision echoes the essence of Zumba culture: “FEJ,” which is pronounced “fedge” and stands for Freeing, Electrifying Joy. Like other brands that manage to elevate their perceived value above the merely commercial exchange of goods or services for money, Zumba believes it is on a mission. Its leaders are not satisfied simply to make the headlines – they want a place in history books. Being driven by a higher purpose serves as the foundation for breakthrough brands.

And, importantly, Zumba connects its internal culture, FEJ, to the larger external context, particularly by inspiring many students to become trained as instructors, entrepreneurs who run their own Zumba communities, and evangelists who recruit new students and instructors. As such, Zumba has established authentic relevance and deeper emotional connections with its customers. In fact, the connection between Zumba’s external and internal culture is so strong that the line between the two worlds has become blurred.

The Zumba brand flourishes in this self-reinforcing loop. Recently the company introduced a new mantra to its network of instructors, “Let It Move You,” that it’s now promoting to the public in a TV advertising campaign. The internal-external connection of the brand is evident in Perlman’s explanation of the campaign: “Our number one goal is to support our licensed Zumba instructors and inspire millions to get off the couch and moving in a Zumba class.”

Achieving Zumba’s level of cultural impact is the result of anticipating and advancing cultural movements instead of chasing trends. Great brands like Zumba constantly scan the cultural environment for signs of meaningful, long-lasting change that might affect them. They seek to understand the potential — as well as the existing — role of their brand in people’s lives and in broader culture. They keep abreast of new technology, demographic shifts, consumer tastes, laws, resource prices, and competitive behavior. And they identify possible ways to exploit developments in these fields to give their customers more reasons and more opportunities to engage with them.

Cultural movements represent forces that shape the way people live. Great brands use cultural movements to create futures in which they thrive and grow.

Experiment with Organizational Change Before Going All In

Think about the last time you considered introducing a significant change in your enterprise with the intention of improving organizational effectiveness. Maybe you were contemplating a change in employment policies such as flextime or one in customer-facing processes such as a new billing system. You likely studied the proposed change in detail, discussed it at length with relevant colleagues, came up with a strategy for implementing it, and then introduced it. A crucial step is missing from this process, however: a rigorous way to determine whether the change is accomplishing its intended objectives.

Why do organizations so often introduce such new initiatives without thinking about this step? Behavioral economics, the discipline that combines the fields of psychology, judgment and decision making, and economics, offers an explanation.

When we think that a particular course of action is the correct decision, our human tendency is to interpret any available information as supportive of that course of action. This tendency is known as confirmation bias — our perspective on the world is distorted in a way that tilts toward confirming our currently held views. Furthermore, once we start down a path and invest resources in it, we tend to justify our past investments by continuing down that path even when new information suggests that the path is unwise, a phenomenon known as the escalation of commitment.

Together, confirmation bias and the escalation of commitment lead organizations to refrain from evaluating changes because the key decision makers feel (erroneously) that they already know that the changes are good ones. The unfortunate result is that organizations persist in implementing ineffective policies and fail to even contemplate the possibility of superior alternatives.

That’s where experimental testing comes in. By forcing organizations to clearly articulate their goals and then to rigorously judge their decisions by those metrics, experimental tests can help managers avoid costly mistakes and can open up the consideration of other possible solutions.

When pharmaceutical companies conduct clinical trials to test the safety and efficacy of their drugs as part of the process for obtaining regulatory approval, some patients receive the drug and others some standard existing treatment or a sugar pill (placebo). A comparison of the two sets of results tells us whether the drug improves patients’ symptoms and has side effects. Many potential changes in your organizations can be subjected to a similar experiment: implement the change in some places, but not in others, and compare performance in the two groups to learn whether the change is effective.

Why can’t you sidestep the hassle of an experiment and simply compare the performance before and after a change? In some cases, this approach is valid, but in many cases the results will be misleading. Say you introduce an innovative new customer-relationship-management (CRM) tool for your sales force, and revenue increases by 15%. The change is a success, right? Maybe or maybe not. What you have neglected to ask is what would have happened if you had not introduced the change. Revenue might have increased by 20%. Without some knowledge of what would have taken place in the absence of the change, it’s hard to evaluate your success.

A handful of organizations have already embraced the principles of behavioral economics and the experimental mind-set. One is the Walt Disney Company’s R&D department, where one of us spent a summer. After identifying areas for cost reduction or process streamlining, it would design randomized experiments to test the effectiveness of possible changes.

In one project, the group looked for ways to encourage hotel guests to reuse their towels, an environmentally friendly practice that could also save Disney money. Group members designed an experiment to test whether having guests make a specific commitment to practice sustainable behavior and giving them a pin to symbolize that commitment would lead guests to engage in more eco-friendly behavior. The result: Guests who were randomly chosen to be part of the program were over 25% more likely to reuse their towels compared to guests who were randomly chosen not to be part of the program.

Having an on-site lab may not be feasible for many organizations, but it is still possible to engage in experimental testing without devoting vast resources to the effort. Careful experiments require three key ingredients, which can often be implemented with little incremental cost.

Identify a target outcome. This outcome must be something specific and measurable. “The effectiveness of the customer service call center” is too vague and might be narrowed down to “the percentage of incoming calls successfully routed to the appropriate technician within three minutes of receipt.”

Articulate what exactly your proposed change will involve. Simpler changes are often better, since complex changes with many moving parts make it difficult to identify the component that is driving results.

Introduce the change in some places in the organization (the “treatment group”) but not in others (the “control group”). Take the unit targeted for the change and divide it into two groups. Ideally, you’ll be able to flip of a coin to determine which places are assigned to which group; randomization helps to ensure that the two groups are similar, on average, right before the experimental test begins. Any differences in outcomes between the two groups can then be attributed to the change. When such simple randomization is not feasible due to logistics, ethics, cost, or sample size, more sophisticated analytical techniques can be employed.

Testing workplace practices in this manner is important because our own intuition regarding what will or won’t work is often mistaken. Take the issue of productivity. Most of us believe that if we fall behind on deadlines or commitments at work, we should simply spend more time working. Yet it turns out that people are actually more productive when they work a bit less rather than a bit more.

One of us (Francesca) conducted a field experiment on this topic with Giada DiStefano (of HEC Paris), Brad Staats (of the University of North Carolina’s Kenan-Flagler Business School), and Gary Pisano (of Harvard Business School) at a tech-support call center in Bangalore, India. The research team studied employees in their initial weeks of training to serve a particular customer account.

They were randomly assigned to one of three groups. Each group went through the same technical training with a couple of key differences. On the sixth through the 16th days of training, workers in one group spent the last 15 minutes of each day reflecting (in writing) on the lessons they had learned that day. Employees in another group did the same but then spent an additional five minutes explaining their notes to a fellow trainee. Those assigned to a control group just kept working at the end of the day and did not write down or share any thoughts they might have about the lessons they had learned.

In a test given at the end of the month-long training program, employees in the first and second groups respectively performed 22.8% and 25% better, on average, than the control group. This was in spite of the fact that trainees in the control condition worked 15 minutes longer per day than trainees in the other two groups. Though we focused on performance during training in this study, we found that reflection had a similarly beneficial impact on how people carried out their jobs day in and day out in terms of things such as productivity in entering data, teamwork, and service quality.

Think about the most pressing questions your own organization is facing. Would employees be more productive if they had flexible hours or the ability to work from home? Would your clients be more satisfied with your services if your processes were more transparent? Would your company be more successful in retaining talent if employees had greater decision-making authority? Your intuition may suggest answers, but it may be worth it to put them to the test.

Strategic Humor: Cartoons from the November 2014 Issue

Enjoy these cartoons from the November issue of HBR, and test your management wit in the HBR Cartoon Caption Contest. If we choose your caption as the winner, you will be featured in an upcoming magazine issue and win a free Harvard Business Review Press book.

“I was just looking for a simple yes or no.”

Bill Abbott

“Actually, no, his skill set isn’t evident at this point.”

Elizabeth Westley and Steven Mach

“There isn’t one.”

Crowden Satz

And congratulations to our November caption contest winner, Laren Hagen of Seattle, Washington. Here’s his winning caption:

“Introducing our newest member of the board: the CH2O.”

Cartoonist: John Klossner

NEW CAPTION CONTEST

Enter your caption for this cartoon in the comments below—you could be featured in an upcoming magazine issue and win a free book. To be considered for this month’s contest, please submit your caption by October 29.

Cartoonist: Paula Pratt

How Uber and the Sharing Economy Can Win Over Regulators

Sharing economy firms are disrupting traditional industries across the globe. For proof, look no further than Airbnb which, at $10 billion, can boast a higher valuation than the Hyatt hotel chain. Uber is currently valued at $18.2 billion relative to Hertz at $12.5 billion and Avis at $5.2 billion. Beyond individual firms, there are now more than 1,000 cities across four continents where people can share cars. The global sharing economy market was valued at $26 billion in 2013 and some predict it will grow to become a $110 billion revenue market in the coming years, making it larger than the U.S. chain restaurant industry. The revenue flowing through the sharing economy directly into people’s wallets will surpass $3.5 billion this year, with growth exceeding 25%, according to Forbes. The business model – where peers can offer and purchase goods and services from each other through an online platform – continues to be applied to new industries from car sharing to peer-to-peer fashion, among many others.

These firms bring significant economic, environmental, and entrepreneurial benefits including an increase in employment and a reduction in carbon dioxide emissions (in the case of car sharing services). Shervin Pishevar, a venture capitalist and an investor in Couchsurfing, Getaround, Uber and other startups in this space, believes these services will have a major impact on the economics of cities; “This is a movement as important as when the web browser came out.”

However, rather than rolling out the red carpet, city governments have resisted many of these new entrants issuing subpoenas and cease-and-desist orders. Just in the last month, Pennsylvania’s Public Utility Commission issued a cease-and-desist order on Lyft and Uber operations. The companies face fines of $1,000 per day, and 23 drivers face civil and criminal charges.

Regulation is often the most significant barrier to future growth for sharing economy firms. This is particularly unfortunate since the incentives of city governments and sharing economy firms are often aligned. Given the benefits these types of firms bring to cities and firms’ vested interest in the very consumer protections that city governments are seeking to ensure, one would expect a less rocky start for these new entrants.

The relationship between sharing economy firms and regulators will likely remain uneasy for the foreseeable future. But companies in this space can benefit from being more cooperative with regulators. As a manager in a sharing economy firm, you can increase the growth of your firm, reduce unnecessary delays, avoid conflict with regulators and expand access for consumers, by pursuing the following maxims:

Be offensive (rather than defensive) with regulators: The sharing economy is a new concept and many city regulators are unfamiliar with the business model. As a result they are often skeptical and assume sharing economy firms are trying to make a profit by skirting the regulations ‘traditional’ industries (i.e., taxis) face. It makes far more sense to be proactive and explain your business to regulators rather than wait for them to approach you with a concern. By approaching regulators yourself you can avoid misperceptions. It is likely in your interest to reach out to the regulators to explain your business and work with them early on to classify your business under the city’s existing regulatory infrastructure rather than having them come to you.

For example, Uber would like to be classified as a communications platform rather than a “transportation network company” and reaching out to local regulators could avoid challenges and conflicts down the road given the nature of the initial classification. Further, given the newness of the business model, regulators may not be aware of how existing regulation may unfairly bias one business model over another, particularly when comparing traditional and sharing economy businesses. For example, rules (currently under consideration in Washington D.C.) that prevent passengers using taxi services from specifying their destination in an effort to avoid discrimination would likely favor Uber and Lyft over Sidecar (which asks for your destination to facilitate true ridesharing). Firms should not hesitate to pro-actively make the case for fair policy to the relevant regulator.

Lastly, many sharing economy firms are true intermediaries, providing a platform for consumers rather than providing services directly, and should be regulated as such. Without explaining the nature of your firm you will likely be regulated as a traditional firm not as an intermediary resulting in higher taxes and requirements.

Be responsive to regulators’ legitimate concerns. Many sharing economy business models do raise legitimate concerns about user safety, privacy and access. Airbnb needs to be sure the apartments they list are safe for renters and Lyft needs to make sure the cars its drivers use are safe for passengers. Where regulators’ concerns are legitimate companies should respond, both because it is the right thing to do and because it will build credibility with the authorities. In making their case, companies should make arguments they would believe if they were regulators.

While it is easy to categorize business as in line with the free market and progressives as anti-market, the reality is far more nuanced. In fact it was a truly bipartisan coalition that drove the de-regulation of the trucking and airline industries in the 1970s. By being focused on consumer interest and responding to regulators legitimate concerns, sharing economy firms will reach a broader audience of advocates than they anticipated and better outcomes.

Use state of the art approaches to reaching out to government. Just as there are best practices in compensation or writing code, there are best practices in influencing public policy. Best practices in approaching government include, forming coalitions and industry associations to represent a shared point of view rather than each company approaching regulators independently and only in times of crisis. Further, sharing economy firms should seek outside validators. As President Lincoln once said about lawyers, “He who represents himself has a fool for a client.” This is even more true in the public relations sphere. Public officials are suspicious of self-interested argumentation and wherever possible it is best to use trusted external validators that can provide a credibility signal that government officials can trust.

Share your data: Data need not be made public in order to share it with government, and can help your case by reducing regulator concerns. Sharing economy entrepreneur, Shelby Clark, Founder of car-sharing service RelayRides, suggested the idea of metrics-based regulations. Under this model a firm such as RelayRides could share accident and insurance claim data that could lead to lower insurance requirements given a track record of infrequent accidents. Regulators, like the California Public Utilities Commission, need data to make sure ridesharing firms, for example, aren’t restricting access for people in particular neighborhoods or for the disabled. Sharing that data will likely ease these concerns for regulators and minimize requirements for firms. Sharing data about the number of users, for example, enables cities to see the benefits your firm is providing to their citizens in terms of increased transportation options.

Make a well-researched case for the value provided by your firm: Rather than relying on maxims about the usefulness of the sharing economy, it helps to have concrete data, especially in the face of skeptical regulators. Airbnb commissioned a study that found that; “Because an Airbnb rental tends to be cheaper than a hotel, people stay longer and spent $1,100 in the city, compared with $840 for hotel guests; 14% of their customers said they would not have visited the city at all without Airbnb.” These positive spillover effects are a compelling case for authorities in cities like San Francisco, the focus of the study. Although such research is inexpensive since much of it is already gathered by sharing economy firms, it is worth noting that supportive research may already exist, such as an analysis from Susan Shaheen, an expert from U.C. Berkeley, that found that, “car sharers report reducing their vehicle miles travelled by 44% (addressing travel congestion). In addition, surveys in Europe show CO2 emissions are being cut by up to 50%”. Firms should marshal such evidence and take it on themselves to publicize the benefits their firms provide.

Find the best regulations out there and share them with the government: City governments are often under-resourced and many existing rules are simply outdated and are not relevant given the business model of sharing economy firms. There’s no reason firms themselves cannot find the best rules out there and propose them to the Mayor’s office. It is a challenge for many cities to develop new regulations, and firms could take the first step to gather input from users and consumers to understand existing obstacles and identify outdated rules that need to be re-written in line with these new models. The California Public Utilities Commission decided that 16-point vehicle inspections were required in addition to background checks for drivers for ridesharing services, but a firm like Getaround could just as easily have proposed such a solution. Certainly city governments will make the final decision and firms should not be writing their own regulations, but if there are good rules out there, let the city know. 

It is easy to blame regulators for business problems and be right. It is more difficult but far more rewarding to avoid regulatory problems and enjoy business success. Since many of these businesses come out of Silicon Valley it is easy to think the largest risk is the underlying technology or competition. However, the major risk to the viability of many sharing economy firms is that a city or state government rules its business model impermissible. Hoping regulators play along is not an option, and antagonizing city governments is ill-advised. Instead, these firms need to find a new way to do business and should start by sharing with regulators.

Examining Columbus’s Complicated Leadership Legacy

Last spring I began offering a seminar for undergraduate business majors entitled “Mutiny and Entrepreneurship.” How to overthrow a leader, shift an authority structure, or (from an opposing perspective) quell a menacing mutiny, are among its principal topics. Coordinated defiance of power is almost natural in today’s entrepreneurial sector, but the way in which we study its dynamics is unique. We learn about mutiny by studying voluminous primary source accounts from members of seafaring ventures hundreds of years ago during the Age of Discovery.

Christopher Columbus is the subject of the seminar’s first case (Ferdinand Magellan, Sebastian Cabot, and Henry Hudson are the others).  Now, Columbus was far from a saint — by today’s standards, and even by some of his own time. He was likely seduced by fortune. He aimed to govern new territories as viceroy, and he sought personal riches to a greater extent than other seafarers. He kidnapped and urged what amounted to the enslavement of people encountered on his first enterprise. These deplorable actions made sense only in a pure context of colonial expansion. Those colonial activities, to be sure, turned wicked. Columbus himself lamented the atrocities in a letter to his son Diego in 1504, two years before his death.

Most people do not know that Columbus dealt with at least three mutinies during his most famous enterprise. Rather than focus on those mutinies here – they are fascinating, but you can read about them elsewhere – let us look at more closely at the leader who managed not only to survive them, but to harness the power of mutiny to serve his enterprise.

A foreigner. Even by the standards of the Age of Discovery, when evolving national and cultural boundaries were less clear than they are today, Columbus was an immigrant. He was a foreigner to Spanish culture and to almost all the members of the ventures he led. Today, immigrants engage in entrepreneurial activities far more frequently than their domestic counterparts. In the Age of Discovery, too, many bold entrepreneurial ventures were led by immigrants, Christoforo Columbo among them. Such leaders often hailed from Italy, learned new languages, and modified their given names. Besides Columbus (Colón) in Spain, other examples include Giovanni Caboto (John Cabot) in England, his son Sebastian (Gaboto) in Spain, Vespucci (Vespúcio) in Portugal, and Verrazano (Verrazane) in France.

As a leader, Columbus the foreigner acted in novel ways that implied special knowledge or advanced techniques. He wrote important notes in Italian and recorded distance and weight using sophisticated Italian or Portuguese units of measurement. He spoke with a heavy accent. He detected elements of context that were invisible to most of the acculturated, who often take such elements for granted. For example, he had an objective outsider’s view on Spain’s growing power in the world, which he often leveraged in addresses to the enterprise. The effect was so powerful that it spirited the Niña and Pinta to race each other on the ocean.

As transformational as such leadership can be, it has limits. Columbus’s connection to the members of his enterprise was not always genuine. Despite the authority Spain granted him, members tended not to trust him; they admired him, but did not share his values. When such an enterprise faces radical uncertainty or probable failure, then the trust gap that was invisible can become stark and salient. Mutiny can flash, as it did for Columbus.

A world-class expert. Columbus worked amazingly long and uncommonly hard to develop competence as a leader of seafaring ventures. His first experiences came when he was barely a teenager, along the Mediterranean coast between Genoa and Naples (circa 1459). Mentored by his uncle for a decade, Columbus’s ambition eventually outpaced those around him. He departed to learn navigation from the world’s best seafarers: the Portuguese. Portugal’s culture was forged by ocean-borne geography and its tense relations with Spain hindered land-based trade. Thanks to these accidents of history, no nation’s ventures into the unknown were more daring or successful during the Age of Discovery. Columbus arrived in Lisbon around 1473, in his mid-20s. A few years later, he married a daughter of Porto Santo’s governor.

By that time, the Portuguese had already crossed the equator and regularly explored southward down the African coast. However, these ventures had to first navigate far west, beyond sight of land, to round the infamous and terrifying Cape Bojador. This cape had finally been rounded a few decades earlier, after hundreds of failed attempts. Columbus served on such bold Portuguese enterprises until 1486. Almost 15 years of experience in Portugal made him a world-class expert and further fueled his personal ambition.

Intensely passionate. In Columbus’s day, the classical idea of a western passage to the east had seemed out of reach for so long that it had acquired the status of a myth – equivalent to science fiction. Columbus saw ways to turn fantasy into reality. It is unclear how or exactly when he got the idea, but the “aha” moment happened in Portugal. To call him passionate about his idea would be an understatement. He was almost maniacal. During the late 1480s, with help from his brother, he was pitching venture plans to royal courts in Portugal, Spain, and England. He needed funding. They all rejected him. When Portugal’s Bartolomeu Dias rounded Africa in 1488-1489, it focused Portugal on a passage to the east through that part of the world, which was opposite to Columbus’s planned approach. Dias’s success rendered Columbus’s plans redundant, yet only made him more desperate to undertake a similarly notable achievement.

Columbus invested inhuman levels of time and energy in research. He knew everything about Prince Henry, the original champion of Portuguese seafaring who had died in 1460. He studied every single relevant work, annotated maps, and produced many sketches. He wrote hundreds of letters and he kept journals. He filled a copy of Marco Polo’s narrative with marginalia. Like today’s most impassioned writers, bloggers, and twitterers, there was a theme. It all bespoke a passion for seafaring’s biggest questions.

Foreignness, expertise, and passion would have leapt out to anyone who encountered Columbus. But what about those who worked closely with him – how would they have perceived his leadership style? Our studies of the primary accounts of those individuals show evidence of some of the same leadership behaviors that define the boldest entrepreneurial leaders today.

Optimistic to a fault. At sea, Columbus would rationalize anything in the environment (seaweed, changing wind, birds, whales, currents) as signs of sure success. However, he also kept misleading logbooks to allay member fears related to how far they had actually traveled. When the Santa Maria sunk on the shores of the New World, he pronounced the tragic wreck as divine providence, as it simplified decisions about whom to leave behind to establish a community. The same pros and cons of strong optimism apply to entrepreneurs today. Like them, Columbus appeared naive to many before his objectives were met, and he would have looked very foolish had his enterprise failed. However, as his enterprise succeeded, he was hailed as a hero.

Politically deft. Perhaps because of Columbus’s experiences in other cultures and places (including Lisbon, the Age of Discovery’s Silicon Valley), he was able to deal with all types of people and make progress through clever maneuvering. For one thing, he talked his way out of seemingly certain arrest by the Portuguese living on the Azores, during his return to Spain. Earlier, when he had trouble recruiting members to join his seemingly foolhardy enterprise, he managed to have a royal decree issued that any convicts who joined would have their criminal records erased. Even though this action repelled some qualified seafarers, the convicts gave him the numbers he needed – and Columbus could move among both camps with ease. His political skills show in his particularly effective communication with the Spanish royal court, which also made him some jealous enemies.​

Polarizing. Like today’s entrepreneurs, Columbus understood something about exciting the jealousy and the animus of others. He had enemies. Examples include Rodríguez de Fonseca, a powerful chaplain who sought to defeat Columbus even as he was ordered to support him. Martín Pinzón, captain of the Pinta, never respected Columbus, deserted him during the enterprise, and seems to have tried to return first in order to claim the discovery. Dias, mentioned above, whose 1488 venture justified Portugal’s rejection of Columbus, had a tense interlude with Columbus at Lisbon during the return trip. The historic lesson for today’s leaders is that Columbus never engaged petty jealousies directly. He would always vehemently engage poor performance by members of his enterprise, but his cunning sense of diplomacy regarded the menacing jealousies of other individuals as beneath him.

The legacy of Columbus’s leadership has been both celebrated and condemned. Nonetheless, the success of historic enterprises such as his 1492 venture required breathtaking entrepreneurial leadership by the standard of any age.  Such leadership deserves study and, to some degree, emulation.

Interpersonal Trust in the U.S. Hits a Historic Low

A prediction by some social scientists that the trauma of September 11, 2001, would usher in an era of greater cooperativeness among Americans appears to have been incorrect, according to a team led by Jean M. Twenge of San Diego State University. The team’s study of 37,000 people shows that trust in others, as well as in institutions such as health organizations, government, and the media, fell to a historic low in 2012, the last year for which data was available. The decline in trust may be attributable to the widening gap between rich and poor in the U.S., the researchers say.

More and More Companies Want a Piece of the Next Snapchat

Corporate America wants in on the next “big thing” and is willing to pay for the privilege. Fresh off its big win with Alibaba, Yahoo appears close to investing in the messaging app Snapchat, and it’s not alone. Venture capital investment has reached levels not seen since the dotcom crash, and corporate money is playing a significant role.

There’s a case to be made for corporate venture capital as a strategy, but research suggests that this is probably the exact wrong moment to be using it.

First, the numbers. As recently as late 2012, U.S. corporate venture capital amounted to roughly $1.5 billion invested each quarter. In Q2 of this year it totaled just over $4 billion. That’s an even more dramatic increase than VC investment overall; corporate money used to account for 20-25% of all U.S. VC dollars, but this year that number has hovered around 30%.

Much of this activity is driven by a handful of highly active funds at firms like Intel, Google, and Qualcomm. But the number of corporate venture funds doing deals each quarter has increased about 50% since 2012.

In light of the spectacular exits of companies like Alibaba, WhatsApp, and Oculus Rift, it’s perhaps unsurprising that companies are getting into the VC game. But research suggests the surge of dollars into VC will likely be followed by a dip in returns. A paper last year by academics at the University of Virginia, Said Business School, and the University of Chicago confirmed what previous researchers had discovered: that increases in capital committed to VC are negatively correlated with funds’ performance.

This isn’t surprising. When start-up exits heat up, more “dumb money” sloshes into VC. (You might argue that the spike of corporate money going into early-stage start-ups rather than more mature ones last quarter falls into this category.) Rather than uncovering more promising ventures, more capital largely just competes for a limited number of attractive deals, bidding up the price of investment. Corporations that jump into VC at the peak of the market end up overpaying.

None of this is to say that starting a corporate VC fund is a bad idea. To the contrary, a 2013 HBR article by Harvard Business School’s Josh Lerner explains how firms benefit from placing such bets. Not only can they generate returns, he argues, they help identify and respond to competitive threats.

But when I asked Lerner earlier this year about the right time to get started with corporate VC, he agreed that firms should be wary of rushing in at the market’s peak. A more prudent strategy would be to set up a fund in the next downturn, since such “contrarian” timing has historically been associated with higher returns. For those firms that are investing at present, he suggested avoiding overheated sectors like social media.

The takeaway for firms is that following the crowd is generally a bad venture investing strategy. Investing in the next big thing may have to wait.

Amazon’s Brick-and-Mortar Store Shouldn’t Come as a Surprise

Did you do a double-take when you heard that Amazon’s opening an actual brick-and-mortar outlet? The web’s biggest store, the one that has posed such a threat to traditional retailers, is planning to open an outlet right in the heart of New York City, just footsteps from that department store grande dame, Macy’s.

Actually, it’s not as surprising as you might think. As Darrell K. Rigby, a partner at Bain, explains in a recent HBR feature, many retailers are now combining digital and physical consumer experiences. We’ve seen it for years, but in the more familiar storyline of traditional retailers create websites. “In the early days of the digital revolution, many leaders of established companies did their best to ignore the upheaval, convinced that the threat from new technologies wouldn’t ever amount to much,” writes Rigby. “As that premise faltered, many flipped in their thinking, concluding that digital would inexorably destroy their positions. To survive, it seemed, they’d have to stop throwing money at the old businesses, salvage what they could, and launch independent digital ventures. The existing units probably wouldn’t survive, but disruptive digital businesses could replace the zombies in a company’s portfolio.”

We all know how that turned out. (I’m looking at you, Sears.) Digital operations don’t tend to obviate the physical ones.

The problem with this binary thinking — digital or physical, not both — is that customers weave the physical and digital worlds together seamlessly and they want business to do the same. They expect to pay the same price for a TV at Acme Appliances that they’d pay on acmeappliances.com. In fact, notes Rigby, some of the biggest retailing success stories showcase strategies that fuse digital and physical experiences. Macy’s, for example, now allows customers to order merchandise online for store pickup. Soon its Herald Square flagship will have interactive directories and apps that guide shoppers through the stores. Digital technologies are transforming physical businesses — not annihilating them.

Thus, the Amazon move makes a little more sense. As others have noted, digital retailers like Warby Parker and Bonobos have already opened physical stores. Andy Dunn, the CEO of Bonobos, told Rigby, “We were wrong at the beginning. In 2007 we started the company, and we said, ‘The whole world is going online only. All we’re going to do is be online.’ But what we’ve learned recently is that the offline experience of touching and feeling clothes isn’t going away.” In Amazon’s case, the New York store will start out as a place to pick up and return orders — bringing greater convenience to customers in the city, especially for last-minute needs during the holiday season — but it could evolve to become more of a traditional store that sells Kindles and Fire smartphones (devices people may want to try before they buy). Will Dunn’s insight hold true for Amazon’s vast array of products? We may soon find out.

Getting People to Believe in Something They Can’t Yet Imagine

What would you do if you had a working prototype of a revolutionary tablet computer that was receiving rave reviews well before Apple came out with its iPad? Cancel further funding for the project in favor of developing an updated version of an existing company product? In hindsight that seems crazy, but it’s exactly what Microsoft did with its prototype “Courier” tablet.

Similar fates often befall innovations within large companies. It is not enough to come up with next great idea. To turn that idea into a reality you have to influence people and gain their support. You must do that in the face of vast forces arrayed against innovation within an established organization, which include inertia, resistance to change, fear of failure, financial disincentives, and the tendency of people and organizations to favor what has worked in the past. Then there’s what might be the biggest hurdle of all, people’s inability to envision something that is truly different.

Gaining support for an idea for which people have no point of reference is a huge challenge for innovators. It is hard to win over someone who cannot see what you see. Traditional influencing theory — as expounded, for example, by Robert Cialdini in Influence: The Psychology of Persuasion — offers “invoking authority” as a way to persuade others to support things that are new to them. If you are a recognized expert in the field, your audience may trust that you know what you are talking about even if they don’t exactly understand it themselves. Often, however, truly groundbreaking innovation comes from people that do not yet have a track record of success. What then?

We have been conducting a series of interviews with individuals who have successfully championed innovation in large organizations and traditional settings, overcoming resistance and inertia within those organizations, in order to identify the commonalities in their efforts. Our research suggests that these influencing approaches offer innovators a possibility of success:

UNDER THE RADAR: Incremental improvement which can be readily understood is not considered nearly as threatening as groundbreaking innovation. So in some cases the best course of action is to present what you’re doing as simply building on current practice, keeping the truly innovative aspects hidden under the radar until it is so far along, and showing sufficient promise, as to make it impossible to shut down.  George Petsching, who led the incubation of the Courier tablet at Microsoft, told us that he attributes its demise to the research team’s product plans being “leaked” to the media. That gave the project a much higher profile, leading many at Microsoft to try to become part of it — which may have played into then CEO Steve Ballmer’s decision to abandon the project in favor of devoting resources to improving existing product lines. It hadn’t stayed under the radar.

When Instinet launched the first electronic trading system for automated buying and selling of securities in 1983 it introduced the system to brokers and exchanges as an incremental improvement rather than as the transformative innovation that it turned out to be, former Executive Vice President David Manns told us. Manns described the approach as “getting to breakthrough innovation indirectly by letting the end users get comfortable incrementally until you have achieved a critical mass that cannot be reversed.”

DEMONSTRATION: It is difficult for people who have never experienced the benefits of a particular innovation to recognize its value. That is why a demonstration can have a far greater impact in terms of gaining support than data or studies showing why the innovation makes sense. Gary Starkweather, the inventor of the Xerox 9700, the high-speed laser printer that revolutionized the printing industry, initially had to work on it his spare time behind a black curtain because his superiors thought it was a silly idea. After he threatened to leave for IBM, Starkweather was transferred to Xerox’s newly opened Palo Alto Research Center, where he did get the resources to build a prototype. But Xerox management remained skeptical — it was only after Starkweather was able to demonstrate the superiority of his prototype in a competition pitting it against incremental product innovations that management thought were more promising that he began to break through the resistance.

PILOT PROJECT: Another of the major methods of persuasion outlined by Robert Cialdini is the “principle of consistency.” That is, once we have taken an action, we experience personal and social pressure to behave consistently with it. Those pressures will cause us to respond in ways that justify our earlier decision. This principle can be applied to gain support for an innovative idea. When additional support or resources are needed to develop your innovation, and simply keeping your work under the radar will not suffice,  proposing an innovation as research or as a pilot project that does not require a major commitment can garner support. Once managers have committed to the research or pilot project, it becomes difficult for them not to support the implementation that naturally follows from its success.

For example, after demonstrating that his high-speed laser printer prototype outperformed the alternatives, Starkweather still faced internal resistance in bringing it to market. He and his boss came up with the idea of grafting lasers onto older, excess inventory printers, turning them into working laser printers at minimal cost, and offering them for free to several good customers to test. The response to these first laser printers was overwhelmingly positive, spawning a multi-billion dollar business for Xerox.

INEVITABILITY: When an industry is changing rapidly, it opens the door to obtaining support for an innovative idea that, in a more stable business environment, management might not consider. Particularly when coupled with one of the above techniques, such as under the radar or the pilot project, it can be effective to argue that since change is inevitable the organization ought to get ahead of it.  The choice then becomes either support the proposal now and exert control over how the business evolves, or be forced to accept changes later on others’ terms.

Colin Foster described to us how, in 2008, when he was the head of online and internal communications at drug-maker Novartis, he was able to overcome strong resistance to employing social media to engage customers. The company’s lawyers and its top management, to the extent they understood social media, opposed its use because of their inability to control the content. So Foster arranged a meeting with the company’s president, bringing along an expert from IBM to explain social media. At the start of the meeting Foster opened his computer and typed “Novartis” into a Twitter search, stating “We’ll get back to this later.” About an hour later, as the meeting was ending, Foster turned back to his computer. Over 600 tweets mentioning Novartis had been generated, all without any participation from the company. The president seemed to suddenly recognize that the company was going to be the subject of social media conversation regardless of what it did, and directed Foster to form a high-level team to examine how the company should use social media.

The more successful an organization, the more likely it will continue to do what has made it successful in the past and resist breakthrough innovations. Leaders can, and often do, try to make corporate cultures more receptive to innovation. However, providing innovators with the influencing tools needed to gain support for their ideas within the prevailing corporate culture, whatever that culture may be, will likely have a greater impact.