Marina Gorbis's Blog, page 1434

Why Consumer Tech Is So Irritatingly Incremental

In the late 1960s, Michelin introduced the radial tire into the U.S. market. This was no surprise to the top five U.S.-based bias-ply tire manufacturers (Goodyear, Firestone, Uniroyal, B.F. Goodrich, and General Tire). After all, it was hardly a new technology; the first radial tire patents had been filed more than 40 years before. And they’d all seen radial tires take over the European market.

But even though radial tires were far superior to bias tires in terms of durability, cost per mile, and safety – and could be sold for an attractively higher price — they presented a challenge to U.S. incumbents. The process used to manufacture them was completely different from the one they used to make bias-ply tires. To produce radials, the U.S. giants basically needed to start their companies all over again — practically nothing of what they knew about producing bias-ply tires could be reused. Almost none of their patents would be useful (the tire business was the second most research-intensive industry in the U.S after chemicals). And so, even with the price premium, Michelin was the only company that had figured out how to produce radial tires profitably at scale.

Long story short, Michelin took over 50% of the entire tire U.S. market in the first 18 months after their introduction. And the Akron Ohio-based bias-ply tire manufacturing industry, which by 1920 had produced more millionaires than Silicon Valley has produced until just recently, essentially vanished. This is the transformational and dramatic effect of a superior technology entering an industry.

Again and again this story repeated itself in the 19th and 20th centuries. Gas lamps gave way to incandescent lamps. Refrigerators replaced ice boxes. Propeller planes yielded to jet engines. Joseph Schumpeter documented this pattern in Capitalism, Socialism, and Democracy, coining the term entrepreneur, which he described as the person who, when successful, revolutionizes an industry through the process of “creative destruction” (creative for the superior technologies, destructive for all the established firms that would go out of business).

Tesla, Nespresso, and Geox are current successful examples of such high-end disruptions. But how common is this phenomenon today? How often have you seen a firm revolutionize an industry by creating a superior product using a new business model? Not nearly so often.

Superior technologies do not take over industries as frequently as they once did because consumers today are different from those of a few decades ago. In much of the 20th century, technological innovation produced products that had plenty of room for improvement, opening up opportunities for high-end disruption. This went on in most industries until about the 1980s. Before that, most cars, for instance, were notoriously unreliable, prone to rust, and unlikely to last past 100,000 miles. Television picture quality remained unsatisfactory as the technology evolved from vacuum tubes to solid state to digital to HD. As a result consumers learned to compensate. They learned to repair their cars or to recognize which brand of a particular product was currently best.

But as established firms’ efforts to improve their products (what we call “sustaining innovations” in disruptive innovation theory), together with some occasional high-end disruptions, made products and services cumulatively better year after year, so many became so good that consumers either could not appreciate the product improvements or were simply unwilling to pay for them. And so we find that even though tire manufacturers today can produce much better tires than radials, consumers find that radials work just fine and aren’t willing to pay more for these superior technologies. As a result most of these designs end up being discontinued; a good example is the Michelin PAX tire.

When an industry reaches this point, opportunities at the high end dwindle, and there’s far more scope for low-end disruptions – offerings that combine a technology with an new, incompatible business model to produce an offering that’s not better than the incumbent’s offer (since they don’t really need to be) but are instead radically simpler, far more convenient, or very much more affordable (the classical definition of disruptive innovation introduced by Clayton Christensen). Crest Whitestrips, for example, are radically more affordable and convenient than going to the dentist to whiten your teeth. Digital photography is far more convenient than developing film.

So many industries have in fact reached this point that, as things stand in the 21st century, we know very little about when a high-end disruption will succeed. Recent research suggests that they would work in industries where the following criteria are met:

The majority of consumers are highly dissatisfied with the current products or services. This occurs today most commonly in highly regulated industries that are hampered in some way from improving their offerings (as was the case, for example, when AT&T held a monopoly over telephony in the U.S.)
The industry is fragmented, which means that even the leading firms are limited in their ability to retaliate against upstarts.
The new company is fully integrated from the beginning, which means that it does not outsource critical functional departments to keep its cost structure low. Rather, it has developed an entirely new business model to profitably exploit a new, superior technology.
The new entrant uses a different distribution channel from the incumbents. This is perhaps the most important criterion, since it’s relatively easy for incumbents to use their market power to bar start-ups from established distribution systems.

The odds of meeting all of these criteria is relatively small. And so the odds of success of a new high-end disruption are correspondingly small. In fact, the rarity of a successful high-end disruption is the reason so many new and superior technologies that could do so much to help industries evolve and benefit customers never gain a market foothold.

Most entrepreneurs still think that just because their technology is superior it will inevitably be widely adopted in the marketplace. But consumers don’t work like that. Next time you come across an engineer aiming to commercialize a superior new technology, ask if his industry meets the criteria described above. If not, he’d do much better to focus on low-end disruption by encapsulating the technology in a product that is in some way simpler, more convenient – and seriously more affordable— than anything currently on the market. After all, technologies don’t dictate how they must be commercialized, managers do.

How Companies Can Embrace Speed

John Kotter, author of Accelerate, on how slow-footed organizations can get faster.

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Generation to Generation: How to Save the Family Business

Most family-owned businesses—approximately 70%—last just one generation. Because an estimated 80% of businesses across the globe are family-owned, the low survival rate has alarming consequences. Consider this: In the United States alone, family-owned businesses (FOBs) are responsible for 60% of total US employment and generate 78% of all new jobs. Further, some of the world’s biggest companies are family-owned—News Corp, Samsung, Tata Group, and Walmart to name but a few—and more than a third of Fortune 500 companies are family-owned.

Our research on boards of directors and corporate governance has shed new light on many board practices and reveals the need for improvement in several areas including skills and selection, succession planning, and diversity. Given the vast impact of FOBs on every economy in the world, we were keen to learn if there were differences between the boards and governance practices of family and non-family owned companies.

In 2012, we (in partnership with WomenCorporateDirectors and Heidrick & Struggles) surveyed more than 1,000 corporate directors across the globe and broke out the FOB boards from the non-FOB boards. The results were striking: There was not one meaningful measure—from missing skill sets to the effectiveness of succession practices to creating more diverse boards and workplaces—on which FOB boards outperformed non-FOB boards.

Director Profiles. To begin, we compared the profiles of directors on the boards of family-owned vs. non-family-owned businesses and found few differences. A similar percentage held advanced degrees: 75% of FOB directors and 77% of non-FOB directors. When we looked at board service, we found that FOB and non-FOB directors had served on an almost identical number of boards in their careers (5.8 and 6.0, respectively) and were currently serving on the same number of boards (3.1).

Skills and Assessment. Boards cannot govern effectively if they’re missing key skill sets. A greater percentage of FOB than non-FOB directors said skills were missing on their boards and the missing skill they named most was HR-Talent Management—to a degree almost 3 times that of non-FOB directors. There were other noteworthy differences: FOB directors said their boards lacked Succession Planning, Strategy, Financial-Audit, and Compensation skills to a greater extent than did non-FOB directors. Furthermore, less than a quarter of FOB directors (vs. half of non-FOB directors) said their boards had a process in place to determine skills required for the board and, therefore, new directors. We also found that FOB boards measured their own performance through regular, annual assessments less frequently than did non-FOB boards (45% vs. 67%, respectively).

Succession. Just 41% of FOB directors said their boards had an effective CEO succession planning process (vs. 56% of non-FOB directors). Perhaps the most telling finding, however, was that 63% of FOB directors said CEO succession was not discussed regularly at the board level. In addition, only 29% of FOB directors said their boards had an effective board succession planning process in place for directors.

Strategic Challenges and Talent Management. We asked board members to tell us the biggest challenges their companies face achieving their strategic objectives and found directors from family-owned and non-family-owned businesses aligned on many challenges. For example, attracting and retaining top talent and global competitive threats were leading concerns for both.

But we also identified notable differences: namely a greater percentage of FOB than non-FOB directors viewed innovation as their top challenge, and FOB directors were also more concerned than their non-FOB counterparts about the rising cost of materials and commodities, levels of debt and supply chain risk. Conversely, a far greater percentage of non-FOB directors than FOB directors were concerned about the regulatory environment.

As we noted above, attracting and retaining top talent, was a foremost challenge for directors on both family-owned and non family-owned business boards. In our survey, we asked board members to rate their companies’ performance on nine dimensions of talent management: attracting top talent; hiring top talent; assessing talent; developing talent; rewarding talent; retaining talent; firing; aligning talent strategy with business strategy; and leveraging diversity in company’s workforce.

We found that directors from FOB boards rated their companies lower than directors on non-FOB boards on eight of the nine dimensions while both groups gave themselves an almost identical rating when it came to effective firing practices. The biggest differences were on the practices of attracting and retaining talent—with FOB boards rating themselves considerably lower than did non-FOB boards. What’s more, for the majority of practices FOB board ratings did not exceed single digits. If FOBs want to perpetuate their business through generations it is critical that they be able to attract and retain top talent.

Diversity. We contend that in order to see greater progress in seating diverse boards, change must occur within three spheres: at the country, organizational and individual levels. Furthermore, although we have seen movement at the country and individual levels, much greater effort must be made at the organizational level, which we think may be the most determinative lever of change. Given that the majority of businesses in the world are family-owned, greater action on their part to create diverse boards and workplaces could have a substantial impact.

We found, alas, that FOB boards trailed behind non-FOB boards on diversity. Less than a third of FOB directors (vs. 49% of non-FOB directors) said that a diverse representation on their board was a priority. And when it came to actually implementing diversity, we discovered a stark difference: only 17% of directors on FOB boards said their board had adopted measures that successfully advanced diversity on the board (vs. 41% of non-FOB directors). Last, a smaller percentage of FOB directors than non-FOB directors said that diversity in the company was a high priority for their board.

How to Fix the Problems

Although our analyses found room for improvement on the boards of both family and non-family-owned businesses, we discovered that FOB boards lagged behind non-FOB boards—often substantially—on several important measures of board practice and governance. In fact, we tried to identify meaningful practices that FOB boards did better but could not find even one.

The lesser performance on family-owned business boards does not seem to be related to major differences in talent on FOB and non-FOB boards. Though our measures are very limited, we found director profiles and experience on both to be very similar. If a talent differential is not a factor, the lag would seem to be due to a greater extent of poor or non-existent practices and processes on FOB boards.

The good news is this can be fixed. It starts with the boards themselves. First and foremost, we recommend that FOB boards establish effective succession planning processes for both CEO and directors that include regular discussions of succession at board meetings. Not doing so could significantly limit the prospects of the business surviving into subsequent generations.

Second, FOB boards must institute a productive and regular assessment process of board and director performance. Regular assessment will help boards identify areas in need of development or change and also should help to identify skills needed on the boards—and when assessments are done at regular time intervals boards add a valuable contextual dynamism to the process.

Third, FOB boards should exert greater effort to make not only their boards but also their companies more diverse–especially in light of their concerns about innovation and performance on talent management. Improving their talent management practices with an eye toward adding talent with a diverse mix of backgrounds, skills, experience, and knowledge may help to address gaps in skills and spur innovation.

Overall, family-owned business boards need to become better at governing by implementing best practices and processes because good governance may lead to higher survival rates and smoother generational transitions.

Methodology

We surveyed more than 1,000 board members in 59 countries. For the family-owned business breakout: FOBs made up 8% of the sample and non-FOBs constituted 92% of sample. The following multiple choice list of 14 skills was used for skill sets missing from the board question in the survey: Compensation; Evaluation-Assessment; Financial-audit; HR-Talent management; Industry knowledge; International-Global; M&A; Operations; Regulatory, legal and compliance knowledge; Risk management; Sales & Marketing; Strategy; Succession Planning; and Technology. Participants could choose as many as applied (plus there was a write-in option of “other”).

Why Your Employees Should Be Playing With Lego Robots

Two years ago, Swedish communications technology giant Ericsson found itself looking for a way to explain the value it saw in the Internet of Things. Rather than publish another whitepaper on the topic, the company struck on a different communication tool: Legos. More specifically, Lego robots.

Ericsson used Lego Mindstorm robots in a demonstration at the 2012 Mobile World Congress to bring to life its vision of how connected machines might change the way we live. A laundry-robot sorted socks by color and placed them in different baskets while it chatted with the washing machine. A gardening-robot watered the plants when the plants said they were thirsty. A cleaner-robot collapsed and trashed empty cardboard coffee cups that it collected from the table, and a dog-like robot fetched the newspaper when the alarm clock rang.

Rather than merely talking or writing about its vision, Ericsson saw robots as a perfect medium for explaining its ideas. This is more than just a smart marketing campaign. As a variety of researchers have argued, it may offer a way to better equip workers with the skills they need to succeed in the 21st century. Training programs that encourage the use of robots to achieve goals – not just by playing with them, but by building them — encourage participants to use their creativity and natural curiosity to overcome problems through hands-on experiences.

Lego’s Mindstorm robots (or education and innovation kits as they are sometimes known) were developed in collaboration with MIT Media Lab as a solution for education and training in the mid to late 90’s. The work was an outcome of research by Professor Seymour Papert, who was co-founder of the MIT Artificial Intelligence Lab with Marvin Minsky. Papert later co-founded the Epistemology and Learning Group within the MIT Media Lab. Papert’s work has had a major impact on how people develop knowledge, and is especially relevant for building twenty-first century skills.

Papert and his collaborators’ research indicates that training programs using robotics influences participants’ ability to learn numerous essential skills, especially creativity, critical thinking, and learning to learn or “metacognition”. They also emphasize important approaches to modern work, like collaboration and communication.

This form of learning is called constructionism, and it is premised on the idea that people learn by actively constructing new knowledge, not by having information “poured” into their heads. Moreover, constructionism asserts that people learn with particular effectiveness when they are engaged in “constructing” personally meaningful artifacts. People don’t get ideas; they make them.

Papert’s influential book Mindstorms: Children, Computers and Powerful Ideas as well as extensive scientific research into fields such as cognition, psychology, evolutionary psychology, and epistemology illustrate how this pedagogy can be combined with robotics to yield a powerful, hands-on method of training.

In training courses that use robotics, the program leader sets problems to be solved. Teams are presented with a box of pieces and simple programs that can run on iPads, iPhones, or Android tablets and phones. They are given basic training in the simple programming skills required and then set free to solve the problem presented.

Problems can be as ‘simple’ as building a robot to pass through a maze in a certain time frame, which requires trial and error and lots of critical thinking. What size wheels to use for speed and maneuverability, what drain on battery power, which sensors to use for guidance around walls. One team may decide to build a small drone to view and map out the terrain of the maze, this would require theorizing on the weight of the robotic drone and relaying data filmed to a mapping system which the on-ground robot could use to negotiate through the maze.

It is an entirely goal-driven process.

Participants get to design, program, and fully control functional robotic models. They use software to plan, test, and modify sequences of instructions for a variety of robotic behaviors. And they learn to collect and analyze data from sensors, using data logging functionalities embedded in the software. They gain the confidence to author algorithms, which taps critical thinking skills, and to creatively configure the robot to pursue goals.

Participants from all backgrounds gain key team building skills through collaborating closely at every stage of ideation, innovation, deployment, evaluation and scaling. At the end of the training teams are required to present their ideas and results, building effective communication skills.

It is quite astonishing to see how teams have developed robots to achieve tasks such as solving Rubik’s cubes in seconds, playing Sudoku and drawing portraits, creating braille printers, taking part in soccer and basketball games. These robots have even been used for improving ATM security.

Using robots in training programs to overcome challenges pushes participants out of their comfort zone. It deepens their awareness of complexity and builds ownership and responsibility.

The array of skills and work techniques that this kind of training offers is more in need today than ever, as technology is rapidly changing the skills demanded in the workplace.

Instead of programming people to act like robots, why not teach them to become programmers, creative thinkers, architects, and engineers? For companies seeking to develop these skills in their employees, hands-on goal-focused training using robots can help.

How China’s Growth Imposes Costs on the Rest of the World

It has long been assumed that China’s economic growth creates upward pressure on the price of oil, but to what extent? A team led by John Beirne of the European Central Bank estimates that the impact was about 1% of the global oil price in 2011 and will rise to 3% to 4% by 2030. If China’s economy continues to expand at 8% or more, by 2030 its growth will cost the world more than $180 billion in higher oil prices, the researchers say.

The Power of Your Vote Should Not Reflect the Size of Your Wallet

In September 2004, I attended a reunion of my class at Harvard Business School, four years after the Supreme Court decision putting George W. Bush in office and immediately before the next Presidential election. We invited Elaine Kamarck, then at Harvard’s Kennedy School of Government, to discuss elections in a country in which the electorate was so evenly divided. She explained how the too-close-to-call campaigns spurred the funding arms race to new heights.

During the Q&A, a member of the audience offered the thought that many voters had little grasp of or interest in the issues debated in the campaign, and asked why everyone had the right to vote.  Shocked silence.  “How,” she asked, “would you propose to decide who should have a vote?”  He responded with one word: “Money.”

From his lips to John Roberts’s ears, apparently.  This week’s McCutcheon v. Federal Election Commission decision, removing a limit on the amount individuals could contribute to political campaigns, came down to this, in a New York Times recap:

Leveling the playing field is not an acceptable interest for the government, Chief Justice Roberts said. Nor is “the possibility than an individual who spends large sums may garner ‘influence over or access to elected officials or political parties,’” he added, quoting Citizens United.

Justice Breyer, writing for the four-Justice minority, disagreed. “Where enough money calls the tune,” he wrote, “the general public will not be heard.”

And even as cases like Citizens United and McCutcheon make it easier for the wealthy to influence the government, it’s getting harder for people with less money to vote—for example, Ohio and Wisconsin have recently reduced weekend voting hours “favored by low-income voters and blacks, who sometimes caravan from churches to polls on the Sunday before election.” Voter ID laws have been passed in 34 states; these laws are more likely to make it difficult for the poor to vote. A spate of other restrictive laws were passed in the months immediately following another Supreme Court decision, Shelby County v. Holder, in which a major section of the Voting Rights Act were overturned.

A lot of attention has recently been paid to the data on the concentration of income.  It’s harder to measure influence inequality than income inequality—the power of the “1%” is not as easy to quantify as their dominant financial assets. But the same dynamics of concentration are at work—and they reinforce one another. Consequently issues of public good are not decided in favor of the public, as Breyer suggests. (For example, who would net neutrality benefit?  Only the public—now facing a diminished power to make their votes count.)

As the case of Egypt—as well as Ukraine and Russia—have recently demonstrated, elections alone are no guarantee that democracy will flourish. Lawrence Lessig, in his book Republic, Lost, describes the change in the attitudes of Congress have shifted in the past thirty years. He cites John Stennis in 1982, balking at appearing at a fund-raiser at which defense contractors would be present (Stennis was then Chairman of the Armed Services Committee.) Stennis asked, “Would that be proper? I hold life and death over those companies. I don’t think it would be proper for me to take money from them. “ He goes on to quote then-Senator, now Secretary of Defense Chuck Hagel: “There’s no shame anymore. We’ve blown past the ethical standards, we now play on the edge of the legal standards.”  The McCutcheon decision redraws that edge.

The United States is hardly the only democracy to suffer from corrupt interactions of money and power.  Several years ago, I was flying from Mumbai to Boston shortly after the Indian elections in which the BJP Party was voted out of power for the first time in decades.  The Times of India reported that the new administration would have to adjust the responsibilities of the Ministries so that its coalition partners could hold offices with the opportunities for patronage and graft commensurate with their contributions to the victory (reportedly the telecoms responsibility was particularly rich in this regard.) This was written about—including the word “graft”—as how politics was to be conducted in the ordinary course of business, not as any sort of inappropriate behavior.

Landing briefly at Heathrow, I picked up the Times of London, and read about Members of Parliament writing off their mothers’ country cottages as part of their expenses, charged to the taxpayer.  This, however, did excite a high degree of outrage, if little surprise.  Finally, arriving home to the Times of New York, I read that executives of energy companies had been invited to Vice President Cheney’s office to discuss their views on energy policy.  Each of these democracies seems to have it’s own way of dealing with issues of corruption—but the McCutcheon case is one more step towards legalizing it.

Back at my reunion, Professor Kamarck paused a beat, and then went on with the Q&A.  No one rose to point out the danger represented by thinking of electoral power for sale. I assumed that signaled that others in the room saw what she saw—a suggestion so outside the bounds of democratic practice that it wasn’t worth addressing. Now I’m not so sure they weren’t just nodding in silent agreement.  But at least, ten years later, in response to McCutcheon, campaign reform groups held rallies in 150 towns in 41 states and in front of the Supreme Court, according to Money Out/Voters In. And Lessig is walking 185 miles across New Hampshire to build a coalition to fight the influence of money in politics.

They are doing the Founders’ work. When Ben Franklin’s was asked, at the end of the 1787 Constitutional convention,   “Well, Doctor, what have we got, a republic or a monarchy?” Franklin responded, “A republic, if you can keep it.”

Managing Creativity: Lessons from Pixar and Disney Animation

Ed Catmull is a co-founder and the longtime head of Pixar Animation Studios, which struggled for 10 years from its founding in 1986 until the runaway success in 1995 of its first feature film, Toy Story. With the acquisition of Pixar by Walt Disney in 2006, Catmull became president of Walt Disney Animation Studios and Pixar.

In his new book Creativity, Inc., Catmull expands on his ideas about managing a creative company that he explored in his 2008 HBR article “How Pixar Fosters Collective Creativity.” I spoke with him by phone. This Q&A has been edited and condensed.

Walt Disney is a huge company with some overlapping activities in different areas. For instance, Pixar, obviously, does computer animation and so does ILM [Industrial Light & Magic]. Does this create pressure to adopt the same technology or the same processes?

We had a conference here yesterday of 250 technical people from the various divisions around Disney. There was obviously Pixar, but also Walt Disney Animation, WDI [Walt Disney Imagineering, which designs the company’s theme parks], Industrial Light and Magic, Disney Interactive [Disney’s game division], and ESPN. It was based upon something that we brought to Walt Disney Animation when John Lasseter [the chief creative officer of Pixar and Disney Animation] and I went down there eight years ago [to head it]. The thing that would happen in most companies is to say, “Well, here are two businesses that are similar. So let’s consolidate the tools and the workflow, that is, the way of working, and let’s consolidate the R&D so that we’re not duplicating it.”

We took the exact opposite approach, which was to say to each studio, “You may look at the tools that the other has, you may use them if you want, but the choice is entirely yours.” They each have a development group that’s coming up with different ideas, but because we said, “You don’t have to take ideas from anybody else,” they felt freer to talk with each other.

The underlying hardware keeps changing, the software keeps changing, everything’s changing. So the best thing we can have is different groups pursuing different ideas and then sharing them. And it helps it move faster.

There was some unhappy news about one of your films in production. Pixar announced in September that the release of The Good Dinosaur, originally scheduled for 2014, would be postponed to 2015. This will be the first year since 2005 in which Pixar has not had a feature film to release. There must have been some difficult conversations leading up to this decision.

We have had a substantial difficulty with every film that we made. That has included complete restarts. Toy Story 2 was a restart. Ratatouille was a restart. And The Good Dinosaur is a restart. In the past, because we were a little company, nobody paid attention or they didn’t know. It’s because Pixar is successful that now people are paying attention and saying, “Oh, what’s going on there?” What’s going on is what has always gone on: Ultimately, there’s a criterion whether the film is good enough and we don’t let the other stuff get in the way of it.

One thing I don’t believe in is the notion of a perfect process. Our goal isn’t to prevent all the problems; our goal is making good movies.

Pixar has around 1,200 employees and a lot of them are in on secrets about Pixar’s film pipeline. Yet it’s very rare for information about Pixar films to be leaked. Why is that?

There’s a very good reason for it. I will use a counter-example: When we first got to Disney Animation, there were a lot of leaks. People were going crazy trying to stop them. All I knew was that it was one or two people who were talking inappropriately and it was not good for the morale of the studio.

I got up in front of everyone at Disney Animation. I pointed out that when you make a movie, when you first put it up on the reel, it doesn’t work. [A story reel is a video of a series of sketches, often with some simple animation − in effect, a mock-up of the planned film.] In fact, the first versions are disastrous. We have meetings afterwards where various directors, story people, and others get together and have hard discussions about making the film work. When that meeting is over with, the director and his team have to go back to their crew and talk about the things that didn’t work. They have to trust the crew with what they’re telling them. And the things that don’t work will then seep throughout the studio. I said that if somebody goes and speaks to other places or talks to a blogger, which is what was happening in this case, what they do is they break that trust.

When I said that, the entire audience burst into applause. For the one or two people who were talking to bloggers on the outside, what they saw was that everybody else in the studio was really upset that somebody was doing this. So the message didn’t come from me, the message came from that response of the audience − and whoever was doing it stopped doing it.

My belief is that the way you keep secrets is you tell people the information; you let people know what the problems are so they have ownership in the solution. If we don’t trust them, so we’re trying to keep secrets away from everybody, then they feel less ownership and in fact they’re more likely to talk about it outside. So it’s by an act of collusion that we get the ownership that keeps the problems in-house.

Do you think that the success that you and John Lasseter have had with Disney Animation and Pixar after the acquisition helped to give [Disney CEO] Bob Iger the confidence to make the other big bets he’s been making on acquisitions, such as Marvel and Lucasfilm?

We took Disney Animation, which at the time eight years ago was completely dysfunctional, and we turned it around. Every one of the six films that have been made since we’ve been there has been a critical success. By the time we got to Frozen, the marketing organization completely lined up behind it worldwide, built upon the earlier successes. It has passed a billion dollars. There’s a good chance that by the time we’re done, Frozen will be the number one animated film of all time. [This did happen in late March.] So, yes, Bob Iger is very happy.

The one thing we were really adamant about was that the two studios not be integrated together. We established an absolute rule, which we still adhere to, that neither studio can do any production work for the other. For me, the local ownership is really important. We put in place mechanisms to keep each studio’s culture unique.

It’s a model that Bob’s using at Marvel. Marvel has a completely different culture than Pixar does, or Disney Animation, and he lets them run it their way. You want to have mechanisms to bridge between them, but you don’t interfere with that local culture.

Do you think 3D animation is going to become democratized the way publishing has been? For instance, in the way that desktop publishing has made tools of design and layout accessible to anyone?

Well, the underlying hardware and software tools are continually changing and their price points are changing. What that means is that it will become increasingly easy for smaller groups to get together to try something and when that happens it will give certain people opportunities to be creative in unforeseen ways. The very existence of the tools and the changing cost structure means that you are more likely to have some unexpected event happen.

You can look at a lot of areas and say that. We’ve watched this in the music. We see it in publishing. There are a lot of people that try to resist it, but the underlying economics will basically overpower the resistance. The resistance is actually wasted time. If people accept the fact that it is coming, whether or not they like it, then try to learn from and adapt to it and get expertise in it, the better equipped they are to deal with it and help formulate what the new thing is.

The second part of the issue is what is that new thing? For years, I’ve had people ask me, “What’s the next big thing?” I’ve realized that although I had been part of a group that has helped change the technology, I’ve never predicted well the rate at which it’s going to happen or how it’s going to happen. I’ve relied upon general trends and openness to change. But my predicting powers are notably weak.

I will give an example. As I was leaving school, the University of Utah, it was clear to me that the next thing that was going to happen was computers would be used to help in manufacturing. It was crystal clear.

And it didn’t happen, or it took another 30 years. The reason it didn’t happen was that companies went for a more short-term gain, which was to go to lower-cost labor overseas. The people who did that are now retired; they consider themselves to be management geniuses, but they basically dismantled the U.S. manufacturing infrastructure.

In other words, we can look and say, “Okay, what does the technology allow?” But, in fact, it sits in an ecosystem of short-term gains, ego, misconception, fear of losing market position, and so forth, which can mess the process up and make it highly unpredictable.

How to Discuss Pay With Your Employees

Talking about money with your employees can be uncomfortable. Even when you’ve got good news to share — a generous bonus or a well-deserved promotion — assigning a number to the value of someone’s work is tough. It’s especially difficult if you’re not the one calling the shots (most managers don’t set their own compensation budgets). Whether it’s your decision or not, one thing is certain: it’s a critical part of a manager’s job to have frank and open discussions with employees about pay.

What the experts say

According to a recent PayScale survey, 73% of leaders don’t feel “very confident” in their managers’ ability to have tough conversations about compensation with their employees. This is in part because many bosses lack the information they need to do so, notes Tim Low, Vice President of B2B Marketing at PayScale. But it’s also because these types of discussion can be challenging — for the manager and the employee. “It’s awkward for everybody,” says Karen Dillon, author of HBR Guide to Office Politics and co-author of How Will You Measure Your Life? Still, avoidance is not an option. As V. G. Narayanan, the Thomas D. Casserly, Jr. Professor of Business Administration at Harvard Business School and chair of the Board of Directors Compensation Committee Executive Education Program, says, “These are the most important conversations you have throughout the year.” Here’s how to master them.

Talk early and often

When you sit down with an employee to talk about salary, there shouldn’t be any surprises. “The more frequently you have the conversation, the easier it is,” says Narayanan. He suggests you start the year by discussing compensation. Talk about what kind of bonus or raise the employee might expect if she meets her goals — or doesn’t. Then have regular check-ins throughout the year to talk about how he is performing. That way, he won’t be taken aback by your formal evaluation and salary decision at the end of the year.

In that initial conversation, you might consider asking the employee what they expect in the coming year in terms of a raise and bonus. Narayanan says this can help stave off later disappointment and level expectations. Plus, he explains, if you allow your employees to imagine themselves in the decision-making role, they’re likely to be much fairer.

Do performance evaluations separately

Compensation should be linked to performance, but Low advises discussing the two topics separately. “If you talk about money in the shadow of performance, it will sound like white noise and your employees will just fixate on the compensation,” agrees Narayanan. Instead, deliver the formal evaluation first, focusing on personal growth and development. Then wait several weeks to deliver news about raises or bonuses.

Involve others, if possible

Everyone has favorite employees — “We’re human beings — we like some people and don’t like others,” Narayanan says — but there are ways to counteract those natural biases. He recommends working on compensation decisions in teams of two or three.  “When more people make the call, employees know there are checks and balances, and that the process is fair and consistent.”

Prepare for the conversation

Dillon says that rookie managers often make the mistake of walking into these conversations without a plan. Even if you’re a seasoned leader, it’s helpful to work out what you’re going to say ahead of time. Write down your main points and rehearse them. Think through how you’re going to represent the company while also being yourself. “You have to wear the corporate hat but you don’t have to act like a robot,” says Dillon. She suggests using empathy to prepare. “Ask yourself: How is this person going to hear my message? It’s unlikely that you’ll be giving them a raise they’ll be absolutely joyous over. But what you say should persuade them that what you are giving them is fair,” she says.

Communicate their value

In most cases, this conversation is an opportunity to tell employees how important they are to the organization. “You’re in a partnership with your employee and you have to let them know that you deeply value their contributions,” says Dillon. Don’t just let the bonus or raise figure speak for itself. Make it clear that you appreciate their work. “You want to inspire them to continue to create value,” says Narayanan.

Provide context

When employees are disappointed by their raise or bonus, it’s often because they lack information. “They might be a cog in a wheel but they have to understand the wheel,” says Narayanan. Share the big picture with them: How the company is performing compared with competitors and the range of raises or bonuses the organization is offering this year. Low suggests: “Ground it in facts. Explain what people are getting for this job with this title in this market with these skills,” says Low. “It’s incumbent on you to understand what it means to be paid fairly.”

You’ll also want to explain how the decision behind the numbers was made. This can be difficult if you weren’t the one making the call — but give as much information as you can. Don’t engage in conversation about other employees’ pay. If someone gripes that a colleague is making more, respond with something like, “I’m only willing to talk with you about your compensation and performance. It’s not fair to talk about others.”

Be ready for a reaction

Even if you think you’re giving great news, be prepared for some emotion. These are loaded conversations. “You can’t be Santa Claus and give everyone everything they wish for,” says Narayanan. “When an employee gets upset, make sure you hear them and recognize their emotions but don’t cave,” warns Dillon. If there’s a way to address their concerns — perhaps you can see if there’s more money available — offer to get back to them in a few days. It’s your job to go to bat for the employee if you feel it’s warranted. “But don’t leave the door open unless you intend to take action,” she says. Whatever you do, don’t reward managers for throwing tantrums. That sets a bad precedent for future conversations.

Principles to Remember

Do:

Make clear how much you value the employee — don’t let the bonus or raise speak for itself
Explain how the decision was made so the employee understands you’re being fair
Rehearse what you’re going to say and how you’re going to respond to any complaints

Don’t:

Wait until the end of the year to talk about compensation­­ — it should be an ongoing conversation
Deliver compensation news at the end of a performance review — space the two conversations out
Be surprised if the employee gets upset — even if you think you’re delivering good news, it might be less than she expected

Case study #1: Help your employee prepare for bad bonus news

Ravikrishna Yallapragada had a tough message to deliver. One of the software developers on his team (we’ll call him Chad) wasn’t hitting his targets. “As a result, he wasn’t going to receive a salary increase, bonus, or stock,” Ravi says.  Fortunately, the news didn’t come as a surprise. Ravi had been talking with Chad since the beginning of the year about how compensation decisions would be made. “At that time, I explained how performance was linked to pay,” he says. Chad knew that if he exceeded expectations, his bonus would be within a certain range, but if he missed his goals, it would be zero.

Ravi also had several one-on-one meetings with Chad through the year to give him feedback on what was going well and what needed improvement. Because his employee was underperforming, Ravi also documented the discussions every two months. At their year-end meeting, Chad was initially upset. “But as I showed him the data, he accepted the fact. He knew why he wasn’t getting a raise or bonus,” Ravi says. “I then coached him on how he could avoid this next year and asked him to take responsibility to improve his performance.”

Unfortunately, despite Ravi’s best efforts, Chad didn’t improve his performance and he was eventually let go.

Case study #2: Explain the rationale behind compensation decisions

Two years ago, Mila Deconda (not her real name), the COO of a New York state agency, hired a deputy CIO to join her team with the intention of quickly promoting her. The current CIO had been underperforming and Mila wanted to let him go once Sara (also not her real name) was up to speed. After eight months, Mila offered Sara the senior position. “But when I told her what the salary was, she was kind of shocked,” Mila says. It was a $10K increase over Sara’s deputy CIO salary but still significantly lower than what she’d made in her previous job. “She had taken a significant pay cut to come here and I knew she was expecting more, especially because she had an insider perspective and knew how hard the job was going to be,” Mila says. “So I knew going into the conversation that she was going to be upset.”

She started by explaining how valuable Sara had become and how much she wanted her to take the role. Then she explained the reasoning behind the limited raise: The agency was under incredibly tight budget constraints and simply couldn’t have salary parity with private sector jobs or other public sector ones.

Sara came back to Mila a few days later with a PowerPoint showing what people in similar positions at other agencies and in the private sector were making. “She wanted to demonstrate that the number wasn’t competitive, and she was right,” Mila says. “But I asked her to see the situation from my perspective. She knew she was already the highest paid person on my team. If I increased her salary, I would lose credibility with everyone else. It was a really hard conversation but she understood the position I was in.”

Instead of additional money, Mila offered Sara other benefits, including a bigger staff. “I’ve compensated by letting her hire new people to her team and finding other ways to signal to her that I support her hard work.”

Gratitude Is the New Willpower

Patience is a virtue, especially when it comes to building capital. But as with most virtues, it’s not always easy to muster, since it usually requires resisting temptations for gratification on the sooner side. Should you put the extra $1,000 earned this month in your retirement savings or use it to buy a new suit? Should you approve money from the firm’s “rainy-day” fund to cover travel for senior executives (yourself included) to a lavish conference this summer or let it continue to accrue as a buffer for future challenges? Such decisions – a type referred to by economists as intertemporal choices – are characterized by options that offer different rewards as time unfolds. That is, they contrast smaller pleasures or gains now with larger pleasures or gains later.

Almost everyone – from individual investors to CFOs of large corporations – would probably agree that the best way to choose between such options would be to objectively weigh the potential costs and benefits offered by each. But, as the past two decades of psychological research has revealed time and again, the human mind isn’t entirely objective. It’s a well-established fact that we discount the value of future rewards. For example, if given the choice between receiving $75 dollars today or $100 in a year, most people would opt for the former even though a 30% annual return on an investment is difficult to beat. Of course, discounting as a function of time isn’t inherently illogical. Some level of it makes good sense; you never can be absolutely sure you’re going to be around in the future to reap the reward. But our minds tend to discount future value quite excessively – a phenomenon that significantly contributes to problems ranging from credit-card debt to substance abuse.

The usual advice for combatting the desire to spend money for short-term gratification has centered on using willpower to tamp down emotional responses. Squelch that craving for a shopping spree! Although this strategy certainly can work at times – especially since emotions like sadness have been shown to exacerbate financial impatience – it’s not optimal. The big mistake comes from assuming that all emotions pose a problem for financial decisions and need to be controlled. If you stop to think about it, not every emotion we feel is tied to present desires. Some, like gratitude, are associated with situations that involve accepting a short-term cost to further future gains. Feeling grateful reminds most people that they should expend capital – time, effort, or money – to repay another, thereby solidifying a relationship that might be beneficial in the future.

My colleagues Ye Li, Jennifer Lerner, Leah Dickens, and I decided to test how the experience of gratitude effects discounting and financial impatience. We designed an experiment (now in press at the journal Psychological Science) that presented participants with a set of 27 questions, which pit a desire for immediate cash against a willingness to wait for larger rewards at various times in the future. For example, one question required study subjects to choose between receiving $54 now or $80 in 30 days. To increase the stakes, participants knew they had a chance to obtain one of the financial rewards they had selected; it wasn’t purely hypothetical. If they chose the immediate cash, they’d be paid then and there; if they chose the delayed amount, we’d send them a check. However, before they made these decisions, we randomly assigned each one of them to recall and briefly write about an event from their past that made them feel (a) grateful, (b) happy, or (c) neutral.

As we expected, individuals who wrote about neutral or happy times had a strong preference for immediate payouts. But those who’d described feeling grateful showed significantly more patience. They required an immediate $63, on average, to forgo receiving $85 in three months, whereas the neutral and happy groups required only $55, on average, to forgo the same future gain. Even more telling was the fact that any given participant’s degree of patience was directly related to the amount of gratitude he or she reported feeling. It’s important to note that positive feelings alone were not enough to enhance patience: Happy participants were just as impatient as those in the neutral condition. The influence of gratitude was quite specific.

We see broad implications for these findings, since they suggest that gratitude can foster long-term thinking. We all recognize the fact that willpower can and does fail at times. Having an alternative source of patience – one that can come from something as simple as reflecting on an emotional memory – offers an important new tool for long-term success. And that itself is something to be grateful for.

What Business Can Learn from the Greatest Comeback in Sports History

During last fall’s America’s Cup, Oracle Team USA staged the greatest comeback in modern sports history. On September 18, Skipper Jimmy Spithill’s crew was behind 8-1 in the best of 17 series. In just over a week, they rattled off eight straight victories to defeat Team New Zealand, 9-8. New Zealand didn’t get slower; Oracle got that much faster.

Hoping to find some generalizable lessons from the spectacular turnaround, we spent time learning about what happened that week from one of the crew, grinder Gilberto Nobili.  What we heard suggested six pieces of advice that leaders of land-based businesses might do just as well to heed.

Cross-fit your company. This Cup was a departure from previous ones in various respects. For one thing, to attract a wider audience, it was held within the confines of San Francisco Bay. And to amp up the spectator experience, the AC 72 – a boat that sails faster than the wind powering it – was introduced. Both put new demands on crews. On a traditional ocean course, a great deal of activity would go into tacking and setting a course, followed by a long period of relative inactivity. On an AC 72 in a bay, there is no such thing as inactivity. The boats require nearly constant maneuvering – and a crew continually in motion.

Nobili credits a cross-fit training regimen for helping the team prepare, not just physically but also psychologically: “A key element of the cross-fit approach is that every day presents a different challenge. It got us used to thinking and doing different things together every day.” It’s that mental exercise that carries over as a lesson for businesses. Companies tend to creating rigid routines for specialized tasks to achieve productivity, but they pay for that in reduced agility and resilience. They, too, need to build the “connective tissue” that will allow people to make smart, spontaneous moves to create customer value, in coordination with others.

Learn quickly from disruption. This Cup also featured a disruptive innovation: the practice of “foiling.” Sailboats have always sailed through the water; the new speed possible with the AC 72 allowed them to rise above the water. But it’s no small matter to control a foiling boat – and the reigning champion Oracle saw no reason to take the risk. As Nobili explained, “We designed our boat for displacement sailing. We didn’t think about foiling. New Zealand approached the race differently. They designed a 33-foot foiling boat years ago and then built their AC 72 with those lessons in mind.” As Oracle’s losses mounted, the new reality became clear: “We wouldn’t win if we couldn’t foil; New Zealand had a head start of many months.”

To Oracle’s credit, it responded fast. Designers reworked the boat itself, reshaping and repositioning foils and wings and redistributing weight; meanwhile the crew practiced the techniques. The stunning outcome underscores the lesson for any business: When disruption hits your business, recognize it, and start making your own transformation instantly.

Make your luck. Both teams assumed foiling was a downwind technique. Downwind legs are essentially straight (and thus don’t require lateral resistance from the underwater foils) and the angle to the wind (wind from “behind” the boat) offers enough boat speed to lift the boat from the water. So the first thing Oracle set out to learn was how to foil downwind.

But San Francisco Bay is a relatively small area. Oracle couldn’t sail downwind for a long distance to practice. They would quickly run out of Bay and need to work their way back upwind to try foiling again. The crew could have used the time sailing upwind to recover. Instead they tried foiling upwind – and discovered a winning strategy. Our study of the race interval data makes it clear that it was Oracle’s upwind foiling that drove their comeback.

The generalizable point here is that what began as an irritating constraint turned into a piece of luck – but only because Oracle approached it with curiosity. If the race had been held on a traditional ocean course, the ideal conditions would have prevented the discovery. Likewise, managers make their own luck when they look with fresh eyes at conditions they are facing and refuse to be limited by assumptions.

Gather resolve from your setbacks. Race preparation presented a number of challenges to Oracle. Nobili recalled, “We broke a foil the second or third day we had with the first boat. That stopped us for a month.” When the boat was repaired, they sailed for five days before crashing it. As a result, “we had to commit to the design of the second boat without enough time sailing the first to learn what worked and what didn’t.”

But the team found an upside. The setbacks, Nobili said, “put our team in a situation where we realized: we need to stand up.” The benefit – which has just as much application to business settings – was to instill a rough-and-ready mindset that they could call on later. “It ended up serving as something that made us a little bit stronger in spirit and changed how we reacted to the situation of falling behind.”

Keep the focus on “How could we do better?” In the early days of the Cup, as Oracle’s losses mounted, there were many opportunities to second-guess and point fingers. Instead, Oracle kept the focus on the only thing that mattered: getting faster in the next outing. Nobili told us, “After each race, crew members did their best to offer ideas on how to improve performance. When someone offered an idea, others would quickly try to build on it.”

The race format doesn’t provide a chance to test ideas before committing to them. Each evening the sailors needed rest. Overnight, technicians made adjustments to the boat. The next morning, the crew would be sailing a boat rather different from the one they raced the previous day. How could Oracle decide which risks to take?

The answer is contained in an example Nobili recalled: “When we were down 6-1 or 6-0, I began talking with the guy in front of me about an idea and he said, ‘Let’s try it – it won’t be worse.’ Elaborating on a point we think managers should take to heart, he explained: “If a change could slow the boat down, you don’t even try. But if an experienced crew and skipper agree it might make the boat faster, you must try.”

Respect the data. Sailors pride themselves on their ability to feel when their boat is in a groove, performing at its peak. But the AC 72, as the most “wired” race boat ever built, produces data that sometimes counters that gut feel in challenging ways. As Nobili said, “In the AC 72, sometimes you have to trust the number more than your feeling – and that works only if you have good numbers and good tools.”

Of course, the same is true for businesses where executives are often inclined to ignore data that doesn’t match what a trusted manager or important customer said in some recent conversation. Better metrics often produce surprises – by revealing, for instance, the loyal customers who are actually unprofitable to serve – and the disloyal ones who are profitable. But if sailors with their feet planted on a deck can learn to rely on data, then managers surely can, too – and whichever type of helm they stand at, they might stand to win.