Marina Gorbis's Blog, page 1403

No Innovation Is Immediately Profitable

The meeting was going swimmingly.  The team had spent the past two months formulating what it thought was a high-potential disruptive idea. Now it was asking the business unit’s top brass to invest a relatively modest sum to begin to commercialize the concept.

Team members had researched the market thoroughly. They had made a compelling case:  The idea addressed an important need that customers cared about. It used a unique asset that gave the company a leg up over competitors. It employed a business model that would make it very difficult for the current market leader to respond. The classic fingerprint of disruptive success.

With five minutes left in the meeting, it was all smiles and nods. The unit’s big chief (let’s call her Carol) loved the concept, and in principle agreed with the recommendation to move forward. “I just need to see one more thing,” she said. “Can we talk about your financial forecasts? You’ve told me it’s a big market, but I’m not sure yet what we get out of this.”

The team members smiled, because they were prepared. They knew — and they knew Carol had been taught — that detailed forecasts for radically new ideas are notoriously unreliable. So they instead turned to their best guess of what the business could look like a few years after launch. They detailed assumptions about the number of customers they could serve, how much they could make per customer, and what it would cost to produce and deliver their idea. Even using what seemed to be conservative assumptions, the team’s long-term projections showed a big, profitable idea. Of course there were many uncertainties behind those projections, but the team had a smart plan to address critical ones rigorously and cost effectively.

Carol began to look impatient. “That all sounds good,” she said. “But can you double-click on the next 12 months? We can’t afford to lose money on this for more than nine months. When do you turn cash-flow positive?”

The team had estimated it would take at least two years of investment before there was any chance of crossing that threshold.  They were being careful to stage investment, since they knew their strategy would change based on what they learned early on in the market, so they expected to keep early losses modest. But there simply wasn’t a realistic way to meet Carol’s request.

My six-year-old daughter Holly and I debate the existence of unicorns, and Carol obviously would come down on Holly’s side. After all, she was seeking a disruptive idea that would deliver market magic; flummox incumbents; leverage a core capability; was new, different, and defensible; and produced financial returns immediately. Would that such a creature existed!

It’s not really Carol’s fault. She was running a business unit coming off a turnaround, and she had steep financial targets to hit over the next 12 months. If the momentum continued, she was in line for a promotion within the next 18 months. If momentum stalled, well, she faced a different outcome.

The simple truth is that Carol wasn’t in a position to absorb the early-stage losses that developing a disruptive idea almost always requires. As much as we like to believe in overnight success stories, most start-up businesses fail, and those that don’t typically go through a fair number of twists and turns before they find their way to success.

Every company should dedicate a portion of its innovation portfolio to the creation of new growth through disruptive innovation. But companies need to think carefully about who makes the decisions about managing the investment in those businesses. If the people controlling the purse can’t afford to lose a bit in the short term, then you simply can’t ask them to invest in anything but close-to-the-core opportunities that promise immediate (albeit more modest) returns.

That doesn’t necessarily mean pulling all disruptive work to a skunkworks-like home far away from your current operations, because that approach can deny your new-growth efforts access to unique assets of your company, like its brands, technology, market access, or talent. And certainly scaling the business will likely involve the existing business. But to have any hope of disruptive success, early-stage funding has to come from a budget that allows for a long-term view.

Ideally in this case Carol’s boss would have created a central pool of resources to test out early-stage ideas. Carol should have a say in how those funds are deployed on ideas that her unit will ultimately have to invest in to scale, especially since her staff will be called on to contribute to up-front work. But she shouldn’t have to feel the financial pinch from initial investments in software development, early marketing, and so on.

If Carol’s boss wasn’t willing to take the short-term hit, then frankly the company shouldn’t waste time pursuing disruptive ideas. That choice has long-term repercussions. But it can be very clarifying for staffers who would otherwise just end up frustrated that, as they get closer to toeing the first mile of disruption, their sponsors find ever more creative ways to say no.

David-and-Goliath Partnerships Bring Innovation to Health Care

Every CEO of a large company worries about the small competitor that will come from behind and change everything. Consider Southwest Airlines, which shook up the airline industry with its low-cost, high-customer service approach to air travel. Or that little book retailing site that opened its online door in 1995 and became the world’s largest online retailer.

That’s why leaders of large healthcare companies are looking over their shoulder and thinking, “What is that small startup that is going to shake up our industry? Who is that David to our Goliath?”

Historically, corporate Goliaths have taken one of two approaches to this kind of upstart competition—try to muscle them out of the market or bring them into the fold through acquisition. But increasingly we’re seeing a third option: collaboration. In these novel relationships, the Davids and Goliaths leverage each other’s strengths and perspectives – and everybody wins.

From a pure business perspective, the greatest value in joining forces is that it makes the pie bigger for everyone and creates more value for consumers in the process.

A concrete example comes from within my own company, McKesson, the largest health-care services firm in the US. In 2005, McKesson invested in a David called RelayHealth that was in the connectivity business before connectivity was hot. A year later, we did acquire them — but rather than swallow RelayHealth whole, we wanted to preserve its innovative DNA and disseminate it across our company.

For its part, the RelayHealth clinical business team is fiercely protective of its culture and thinks of itself as a nimble, high-performing, risk-taking group inside the larger organization. There is some tension in this independence, but with thoughtful management, we’ve been able to bring out best in both organizations.

What makes it work for our company? There are two critical elements: 1) buy-in at the senior level of the organization and 2) the willingness to compromise on some processes that are integral to a large company but can kill innovation for a smaller firm. To be sure, we are still working through some of these issues. Our team at RelayHealth would tell you that they have benefited from the financial and customer resources that McKesson brings to the table. At the same time, they have experienced frustration with some of the structure and requirements that a $137 billion firm has to have in place to manage risk and scale. But even as we work through these issues, we continue to collaborate on ways technology can transform healthcare, and our role in that.

In our relationship with RelayHealth and other similar partnerships, we are seeking new ways to innovate – and looking over our shoulder. We’re mindful of an admonition from Rushika Fernandopulle, the CEO of startup Iora Health: “If you don’t disrupt yourself, someone else is going to do it to you.”

Iora’s own partnership with Dartmouth College offers additional guidance for both the large organization seeking external entrepreneurial ideas and the smaller innovator looking to increase its reach.

Iora Health’s prescription is simple:  increase the connection between the patient and their provider. Iora’s reimagined version of primary care brings intense “coach-like” attention to the most costly patients to improve patient health and reduce costs.

The young company recently partnered with Dartmouth to provide primary care to their employees and retirees. As part of the relationship, Iora is collaborating with the Dartmouth-Hitchcock Medical Center, a traditional healthcare provider that would normally be considered a large and forbidding competitor. But the leadership at Dartmouth-Hitchcock wanted to inject innovation into their primary care program.

Buy-in from the Goliath’s top leadership was critical. From Fernandopulle’s perspective, it takes “pretty progressive leadership” to pull off a successful David-and-Goliath relationship. That buy-in has to come from very senior leadership—middle management typically can’t pull off such an unusual partnership.

Fernandopulle also advises other Davids to be realistic about their expectations for the relationship with a large organization. Sometimes Goliaths are most comfortable with the smaller innovator if the innovator is already partnered with a known entity, as Fernandopulle did when he partnered with Mercer to provide primary care services to Boeing employees.

Finally, Iora’s top doctor advises Davids to put their branding ego aside and let the larger organization get the credit for the successful partnership. The startup’s value will be seen through the results of the partnership—but sometimes the larger organization’s leadership may need to claim more of the credit at the beginning of the project.

There are upsides and downsides for both organizations when large and small come together. But because large organizations may find it difficult to innovate from inside, looking outside the enterprise can help force change, bring fresh perspectives and challenge status quo thinking. At the same time, economic pressures mean companies need to be efficient and operating at scale. Goliaths can bring efficiency and scale to the table for the smaller organizations.

Given the unprecedented level of change gripping the health care industry, large and small health care organizations will need to depend on innovation, creative thinking and sometimes each other to successfully navigate the evolving marketplace.

History Backs Up Tesla’s Patent Sharing

Yesterday, Elon Musk, CEO of Tesla, the electric car company, announced that Tesla would make its patents freely available to competitors. To many people this announcement seemed surprising if not shocking. After all, the conventional wisdom holds that patents are essential to keep competitors from imitating innovations, especially for small startup companies. If rivals imitate, they will drive down prices, wiping out the potential profits on innovation, thus making it difficult or impossible to earn a return on R&D investments.

But while this conventional wisdom applies to mature technologies, it is often wrong during the early stages of major new technologies. Indeed, since the Industrial Revolution, innovators have made their inventions and knowledge freely available to rivals during the early stages of critical new technologies including textile technology, Bessemer steel production, the personal computer, wireless communications, and the Open Source software that powers the Internet. Often innovators did not patent their inventions or when they did, they allowed other innovators to use them freely. Nearly two hundred years ago, the Boston Manufacturing Company, the leading producer of cotton cloth using the most important technologies of the Industrial Revolution, stopped enforcing its patents, allowing competitors to use its innovations, much like Tesla.

Moreover, these innovators shared knowledge for sound economic reasons. Some commentators have noted that Tesla’s move will help it hire talented engineers. Others see it as a brilliant PR move. They are right, but Tesla’s action is also central to their business strategy. There are real benefits to sharing knowledge that substantially outweigh the costs and this economic logic is very similar to the economics that motivated past innovators to share.

Consider first the benefits. Musk tells us “We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform.” In order for Tesla to succeed, a lot of complementary knowledge and infrastructure needs to be developed. Auto mechanics need to learn how to repair electric vehicles; drivers need to learn to drive and to maintain them; new marketing and distribution channels need to emerge; and the roads need to be populated with charging stations for long distance travelers. All of these developments will happen faster if multiple electric vehicle makers coordinate around common, open standards, each contributing knowledge as new techniques are tried. The success of electric vehicles will benefit most from powerful “network effects” when they share enough knowledge to create a “common, rapidly-evolving technology platform.”

These benefits were much the same for early stage technologies in the past. A large body of complementary knowledge was needed to implement these technologies. The engineers of the early US Bessemer steel mills met regularly with their rivals as a self-described “band of loving brothers” until they had developed common standards for producing steel, slashing production costs by 78% in the process.

But what about the argument that competition will destroy profits? The critical thing about many major new technologies begin as a competition between two groups: those using the old, dominant technology and the other startups using the new technology. Musk realizes that, “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.” This is likely to remain true for a decade or two. And as long as it remains true, the prices and profits of Tesla will be determined by the market share of gasoline cars, not by the trickle of rivals with whom Tesla is sharing its inventions. Sharing knowledge with them will not undercut profits in the near term.

This pattern, too, is seen in past examples of knowledge sharing. The early Bessemer steel mills competed mainly against makers of iron rails for the railroads, not against the trickle of other Bessemer mills. The early textile makers competed against home weavers and British imports.

This history explains why the conventional wisdom is sometimes wrong, but it also contains a warning for the future: the conditions that make knowledge sharing advantageous today won’t last forever. Eventually electric vehicles will replace much of the market for gasoline-powered cars. Then competition from other electric vehicle makers will affect Tesla’s profits and such extensive sharing might no longer be beneficial. But that is tomorrow’s problem. Elon Musk is shrewd to grasp today’s opportunity firmly, despite the conventional wisdom.

Why We Fight at Work

Disagreements and debate at work are healthy. Fighting is not. That’s because fighting with one’s boss is just as confusing and destructive as fighting with a powerful family member. Fighting with a colleague feels like fighting with a friend or a sibling. Fighting with people who have more or less power than we do feels like bullying.

Naturally, we have to learn to deal with aggression at work. But first, we need to understand the real sources of conflict—not the textbook “struggle over resources” issues—but the underlying psychological reasons why people fight. Then, we can develop ways to engage in conflict that keep us sane, help others, and hopefully support the organization.

What does conflict at work look like?

Conflict at work comes in several forms. First, there are the people who pretend there’s no problem when there’s an obvious problem. They may say something like: “I don’t see an issue here.” When you try to explain, you’re hit with: “You’re being illogical.” When things escalate, this becomes the ultimate insult: “You’re too emotional.” (Women, beware.) Turning the conflict around so it’s about you is a tactic—a crazy-making tactic. No matter what you do, you’re seen as unreasonable or you’re labeled as the one picking a fight. In this scenario, they win and you lose.

Another common approach to conflict at work is outright aggression. People who habitually choose this approach are bullies. They are the hyper-competitive, anything-goes, take-no-prisoners, narcissists among us. These people prove their worth by dominating. They’re especially dangerous because they often have vicious followers who do their bidding. When these bullies get mad, watch out.

Then there’s my least favorite tactic of all—passive aggressiveness. Passive aggressive people seem to be supportive, logical, and even helpful—until you read between the lines. Their attacks don’t seem like attacks because they are so good at hiding their word-weapons. Sometimes, you don’t even know you’ve been hit until later. Fighting with these people is like shadow boxing.

Why do people fight at work?

Disagreements and even true conflict are inevitable at work, for some pretty good reasons: the constant flood of information means that we are always touching different parts of the elephant and constant change requires constant debate. In a perfect world, we follow the textbook advice, treat these sources of conflict logically, behave like adults, and get on with it.

The problem is, we’re not working in a perfect world, and none of us is perfect. We each bring our own baggage to work each day. And, some of our issues rear their heads again and again. At the top of my list of sources of work conflict are: personal insecurity, the desire for power and control, and habitual victimhood. Let’s take these each in turn.

Insecurity. We are all insecure about something. And when insecurity gets triggered, we can find ourselves behaving in ways that don’t make us proud. We try to hide our mistakes, avoid healthy debate, shy away from disagreements and even lash out unnecessarily, just to protect ourselves. Sometimes we even start fights just to distract people.

Nobody’s perfect. So why spend so much time and energy trying to prove that we are? Wouldn’t it be better to just work with our shortcomings, rather than create complicated work-arounds that confuse people and inevitably cause conflict?

Desire for power. Most people want to feel that they have some control over their lives and actions—at work as well as at home. We want to have impact. We want to help people achieve goals, and we want the recognition we deserve. This is natural and healthy: proactively looking for ways to influence and impact people for the sake of the group is the epitome of good leadership. Unfortunately, many people are at the mercy of this very human need. Instead of working with others, the goal becomes to position ourselves above others. When it’s pathological, shared goals don’t really matter anymore, and shared credit isn’t an option. This stance, however well hidden, puts everyone on high alert and on the defensive. This is because we know that even normal disagreements about things like resources are actually primal struggles about who has power over whom.

Habitual victimhood. Insecurity can be a good thing—it can mean that we are in touch with our shortcomings and that we are ready to learn. And many people use their power well, for the good of the group. Habitual victimhood, however, has no redeeming value whatsoever. Still, it is all too common to find perpetrator-victim pairs in organizations. The script is so predictable: “He does thus-and-so all the time and I can’t do anything about it.” Really? You can’t do anything about being metaphorically kicked to the ground over and over again? Why do people put themselves in this position? It’s deep, for sure, and quite honestly if you find yourself the victim over and over, it wouldn’t hurt to talk with a good therapist. Or at least a good friend. You need to figure out how being a victim serves you. For example, giving up control means that we have a ready-made excuse and can’t be held accountable.

What can you do about conflict at work?

The first thing we can do is to admit that conflict at work is real and pervasive, and just as painful as fights and struggles in other areas of life. Let’s stop pretending that somehow it is more rational, more sterile than conflict elsewhere in our lives.

Second, we need to cultivate real empathy and compassion for others. What drives them? What are they insecure about? How would it feel to be them? This kind of reflection isn’t easy, and it is tempting to let your biases and stereotypes guide your conclusions.

Finally: Our feelings matter, and they need to be attended to first and always, not as an afterthought. So, dealing with conflict at work starts with self-awareness. What are you insecure about? Why? Is it rational, or are those old tapes from childhood still there, playing long after they stopped being true or useful? How do you feel about power—yours and others’? What happens when your freedom is threatened, or when someone tries to control you? And…do you make yourself a victim? Why? How does this serve you? Where else in your life do you do this? Is it really working?

This kind of self-awareness isn’t superficial—it’s deep. And it will help. Not just you, but your colleagues and your organization, too.

Focus On: Conflict




When and How to Let a Conflict Go
Managing Two People Who Hate Each Other
Get Over Your Fear of Conflict
How to Repair a Damaged Professional Relationship

Where Dads Do Moms’ Chores, Daughters Have Unstereotypical Career Hopes

Surveys of families with children aged 7 to 13 show that when fathers take on stereotypically female roles at home, such as child care and cooking, their daughters more easily envision balancing work with family and having careers that are less gender-stereotyped, says a team led by Alyssa Croft of the University of British Columbia. The reasons are unclear; one possible explanation is that counterstereotypical fathers unwittingly model future potential mates, signaling to their daughters that they can expect men to help at home. Also unclear is why boys are unaffected: When fathers enact more-egalitarian gender roles at home, their sons don’t internalize these roles, the researchers say.

Working Dads Need “Me Time” Too

Mother’s Day is widely recognized as a day to acknowledge moms who all-too-often forsake relaxation and self-care for the sake of family, work, and community responsibilities.  It’s no surprise that many Mother’s Day gifts are designed to give Mom one day to put herself first (e.g., sleeping in, a break from chores and cooking, getting a massage or pedicure).  Yet, as Father’s Day nears, few people acknowledge the fact that dads, too, are now increasingly engaged in childcare and household responsibilities, in addition to demanding jobs.

Fathers are more likely than mothers to log long hours at the office, and they report feeling even higher levels of work-life conflict than mothers do. In addition, fathers who give higher-than-average levels of childcare, ask for paternity leave, or interrupt their careers for family reasons are harassed more at work, receive worse performance evaluations, and get paid less than men who either don’t have kids, or who don’t spend much time with them. And when fathers ask for flex-time, they’re often even more penalized than mothers are for making the same request.

We need to recognize that working fathers, like working mothers, are susceptible to the “putting everyone else first” challenge of modern working-parenthood. We’re already seeing this starting to happen. For instance, this year, for the first time, the White House convened sessions on working dads as part of their Summit on Working Families, TODAY released the findings from their Modern Dad survey about the changing roles of fathers in our society, and Scientific American just published the book Do Fathers Matter?: What the Science is Telling us about the Parent we’ve Overlooked.

This increased visibility will hopefully lead to the systemic interventions we know work best; but in the meantime, how can individual dads start solving the problem of work-life conflict?

We set out to study working fathers of young children in our Total Leadership program – a widely recognized leadership development program that focuses on integrating four areas of life (work, home, community, and self) for improved performance in all four.  The process starts with each participant diagnosing what matters most to him and engaging in dialogues with key stakeholders (spouse, boss, kids, and so on). Each participant then experiments with new ways of getting things done that serve all the different parts of their lives; they pursue “four-way wins.”  (See this HBR article for descriptions of the nine types of experiments.)

We conducted an in-depth analysis of 36 working fathers of young children (under age three) who participated in this program as part of their Wharton Executive MBA.  At the beginning of the program, it was clear that these fathers were skipping sleep, exercise, healthy eating, spiritual growth, and relaxation for the sake of their work and family responsibilities.  Indeed, at the start of the experiment, they rated their satisfaction with their personal well-being as an average of 4.3 on a scale from 1 (Not at all Satisfied) to 10 (Fully Satisfied).  This is in contrast to their reported satisfaction with work and with family, which were both rated significantly higher, with averages of 7.4 and 6.5, respectively. In other words, they were putting everyone else first – and themselves last.

So it wasn’t surprising that when asked to design experiments to enhance performance in all areas of their lives, the most popular type of experiment for these new dads was “rejuvenating and restoring” (as compared to, say, planning or time-shifting). R&Rs involve taking care of yourself (e.g., changes in diet or physical activity, doing meditation, taking vacation, etc.) to increase capacity and performance at work, in your family, and in the community via positive spillover – indirect effects that ripple out from the self to other parts of life.  In an earlier study of the nine kinds of experiments (forthcoming in the Journal of Management Development), 57% of program participants completed an R&R.  However, 75% of those in our working fathers sample did so, indicating a greater need for this sort of change in their lives.

After their conversations with key stakeholders and some intensive coaching, the fathers in our sample implemented their experiments over the course of the subsequent twelve to fifteen weeks.  One decided to do yoga for three hours each week, with the expectation that it will “improve my physical fitness, mental concentration at work and school, outward confidence, and show importance of exercise to my kids and other stakeholders.”  Another committed to “exercise three times regularly a week because this will allow me to have more energy at home for the limited time I have for my wife and kids, providing me with the energy at work to handle stress better, be more patient, and be a much better leader… it will allow me to regain the health and peace of mind I so desperately need for myself.”

The goal is not for participants to implement their experiments perfectly, exactly as designed.  Instead, the purpose is to gain experience with trying new ways of doing things and thereby increase one’s confidence and competence in one’s capacity to initiate change that’s truly sustainable.  We were not surprised to find that many participants struggled to implement their well-being initiatives exactly as designed, given the intensive demands of their work, school, and family responsibilities.

Yet, even for those who struggled to fully follow through on attending anew to their personal needs as they had mapped out in the designs for their experiments, there was much growth and an increase in optimism.  For instance, one father wrote that “this experiment and the introspection I have gained has taught me that without a healthy ‘you’ it is very difficult to excel or be your very best in other areas.”  Another wrote, “Giving time to oneself is very important. In our daily lives which have become so wired and busy, we hardly do that. Exercise and diet is just one of the ways to achieve that.”  Just as with working moms, several of the dads noted the importance of caring for oneself as a foundation for caring for others.  One father aptly wrote, that “I heard someone refer to this as the analogy of putting on the oxygen mask before helping others, and that is how I feel.”

At the conclusion of our program, we asked participants to again rate their satisfaction with the different areas of their lives.  Working fathers’ satisfaction with the “self” domain improved from 4.3 to an average of 6.5, a statistically significant increase.  And these gains in the personal domain were not accomplished at the cost of reduced satisfaction other domains.  Significant increases were also observed, as satisfaction with work and family also rose, to an average of 8.4 and 8.5, respectively.  On separate measures, participants also reported significant improvements in physical health and mental health, as well as a reduction in stress.

All of us fall into the trap of saying we can’t afford to take time for ourselves; what’s important about our study is that it shows that on the contrary, we have to take time for ourselves in order to effectively serve others. It isn’t only moms who tend to put themselves at the bottom of the list, nor is it only mothers who can benefit from more self-care.  Today’s fathers need it, too. This Father’s Day, let’s acknowledge the changing role of fathers in our society and appreciate that they may need a little encouragement to put themselves first.  Instead of buying Dad a new power tool or another necktie, give him something that helps him take care of himself so he can really be there for all the people who depend on him.

 

Succeeding Quietly in Our Recognition-Obsessed Culture

David Zweig, author of Invisibles, on employees who value good work over self-promotion. For more, read his article, Managing the “Invisibles”.

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What Tesla Knows That Other Patent-Holders Don’t

Tesla made a seemingly unusual move today: it invited competitors to use its patents, for free. In a post on the company’s blog, CEO Elon Musk declared that Tesla’s “true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.”

Rather than worrying about car companies copying their technology, Tesla now hopes they will do so, in order to expand the overall market for electric vehicles.

This counterintuitive strategy is more than good PR — although that too — say several IP experts. In fact, it reflects a keen understanding of both innovation and talent.

The first thing to note is that Tesla is not truly giving away its secret sauce, the source of its competitive advantage. “There’s a lot of thinking in the research these days on the gap between the codified knowledge that is patentable and gets disclosed versus tacit knowledge that really exists in how you actually produce,” says Orly Lobel, a law professor at the University of San Diego specializing in intellectual property. “That gap is probably relevant in this market.”

A Tesla vehicle is quite literally more valuable than the sum of the parts, even when the value of the patented technology is included. “They have this sexy car that people are increasingly liking,” says Lobel. “It’s something different from just the aggregation of the knowledge in the patents.”

That thinking is echoed by Alberto Galasso, another IP expert at the University of Toronto, who put it this way: “A patent on a great technology is worth nothing if there is no threat of imitation.” Access to the patents doesn’t ensure that a competitor can execute on an equally innovative product.

Tesla is trying to thread the needle of expanding the industry without giving up its competitive position. By giving away access to its patents it is offering competitors a leg up, but not fully ceding its lead in innovation.

“Tesla is very much the dominant innovator in the industry, so it can afford making that move,” Lobel told me, adding that the company may hope that it will trigger reciprocal action by others equally committed to furthering the industry.

But there is another advantage to the strategy. The move may also help with recruitment, says Lobel, either directly, by attracting engineers committed to open innovation, or indirectly by boosting the brand.

Tesla will presumably keep patenting for defensive purposes, Lobel suggests. But the basic idea articulated in Musk’s post that “Technology leadership is not defined by patents” holds. As Lobel puts it, “Really, the innovation is in creating the end product really well.”

Why Smart People Struggle with Strategy

Strategy is often seen as something really smart people do — those head-of-the-class folks with top-notch academic credentials. But just because these are the folks attracted to strategy doesn’t mean they will naturally excel at it.

The problem with smart people is that they are used to seeking and finding the right answer; unfortunately, in strategy there is no single right answer to find. Strategy requires making choices about an uncertain future. It is not possible, no matter how much of the ocean you boil, to discover the one right answer. There isn’t one. In fact, even after the fact, there is no way to determine that one’s strategy choice was “right,” because there is no way to judge the relative quality of any path against all the paths not actually chosen. There are no double-blind experiments in strategy.

To be a great strategist, we have to step back from the need to find a right answer and to get accolades for identifying it. The best strategists aren’t intimidated or paralyzed by uncertainty and ambiguity; they are creative enough to imagine possibilities that may or may not actually exist and are willing to try a course of action knowing full well that it will have to be tweaked or even overhauled entirely as events unfold.

The essential qualities for this type of person are flexibility, imagination, and resilience. But there is no evidence that these qualities are correlated with pure intelligence. In fact, the late organizational learning scholar Chris Argyris argued the opposite in his classic HBR article Teaching Smart People How to Learn. In his study of strategy consultants, Argyris found that smart people tend to be more brittle. They need both to feel right and to have that correctness be validated by others. When either or both fail to occur, smart people become defensive and rigidly so.

This does not imply that smart people should be kept away from strategy. It does imply however that strategy should not be a monoculture — as it can become in strategy consulting firms — of high-IQ analytical wizards. Great strategy is aided by diversity of thought and attitude. It needs people who have experienced failure as well as success. It needs people who have a great imagination. It needs people who have built their resilience in the past. And most importantly, it needs people who respect one another for their range of qualities, something that is often going to be most difficult for the proverbial smartest person in the room.

Adding Fees That Consumers Won’t Hate

TicketMaster recently settled a pricing-related class action lawsuit that provides important pricing lessons to all businesses. In addition to paying for admission to an event, the ticketing giant used to tack on additional charges such as convenience, facility, order-processing, and delivery fees to purchases. The class action plaintiffs claimed these fees were misleading; had they known TicketMaster was making profit off the order-processing and delivery fees, the suit claimed, they might not have purchased.

As a pricing consultant who goes to a lot of concerts, I’m particularly interested in this litigation. When I read the lawsuit, my first thought was that it’s crazy. Why is it anyone’s business how a company’s profit is structured? Isn’t it the final price that matters—if you pay $25 to attend an event, does it really matter what individual fees (and the associated profit structure) that cumulatively make up the final price?

But then I thought about a purchase I recently didn’t make. I send engraved thank you cards to friends and business associates as an expression of my gratitude. Recently, I was pleased to see my favorite cards on sale for $19 (for a box of 10) on a leading ecommerce site. Ready to purchase, at checkout a $6 shipping fee popped up. “Six dollars to ship a box of cards?” I noted with a twinge of anger. I felt the e-tailer was taking advantage of me and as a result, I didn’t make the purchase. I later reflected on this experience and concluded that had the price been structured as $25 including shipping, or even $22 plus $3 shipping, I would have purchased. It was simply the $6 shipping fee – not the total price – that bothered me. All of a sudden, $25 wasn’t $25.

Understanding this consumer behavior, StubHub recently moved to an “all-in” pricing strategy. Market research by the eBay-owned ticket reseller revealed their buyers didn’t care for the mandatory additional fees that were tacked on at checkout. Previously, after agreeing to a ticket price, customers were hit with a delivery charge as well as a sketchy 10% “buyer fee.” While a delivery charge is reasonable and customary, this “buyer fee” seemed out of place (or at least could have been phrased better). For example, since StubHub provides excellent fraud insurance (if a resold ticket is fake, one call to StubHub will get you into the event no matter what), this charge would have been more consumer friendly had it been labeled a “buyer security fee.” Now Stubhub includes all fees in the initially viewed price. As a result of moving to this all-in pricing strategy, StubHub claims its customer satisfaction ratings have increased by 10 points and sales are growing.

Since $25 is indeed $25, why do individual component prices matter? To be clear, customers don’t always behave in an economically rational manner. After all, is 99 cents significantly cheaper than one dollar? Most consumers behave as if it is, which is why so many prices for consumer goods are set at a penny below a round dollar value.

The key lesson is that many customers evaluate prices sequentially. Each presented price in a transaction is judged for fairness. Thus, even if the total price is acceptable, a charge that is not customary or seems unusually high puts the entire transaction at risk.

Companies can use this understanding of sequential pricing decision-making to their advantage. To be clear, I don’t recommend including all of the customary charges into the initially presented price – as StubHub now does – for two reasons. First, this “all-in” price will likely be higher than the “first” price (before additional charges) of competitors, which can be disadvantageous. But more importantly, it’s the act of having customers review (and evaluate) these customary charges that is critical to boosting a company’s brand. For instance, if shipping is “free,” we all know that it is baked into the price. However if shipping is presented as a low-priced “pass through” cost to customers, many of us will code this as being fair.

I’m dubious on the merit of class action plaintiffs’ key claim – they might not have purchased had they known TicketMaster was earning profit from ancillary fees. After all, what’s next? Outlawing “free shipping” in favor of “shipping included?” Still, the lawsuit highlights how all companies can benefit from smarter sequential pricing. By strategically setting customary additional charges in a manner that engenders a sense of fairness, companies can enhance their brand.