Marina Gorbis's Blog, page 1505

The Luck Factor in Great Decisions

Bill Gates made a bad decision early in his career. In fact, if it weren’t for the fact that some other people made even worse mistakes, we might not ever have heard of him.

Yes, Gates was and is brilliant, and he worked hard. Malcolm Gladwell, author of Outliers, attributes his success to the 10,000 hours he spent mastering computer programming at an early age. Like star athletes and musical prodigies, Gates invested serious time and effort to deepen his knowledge and hone his skills. Gladwell also acknowledges that Gates had the benefit of good education. He went to a private school with a computer lab long before such facilities were commonplace.

There is more to Gates’ success, however, than his talent, hard work, and education. It might be that we know his name only because of his amazing luck as a negotiator. The flip of the coin came up heads for him three times in a row at a critical point in his business life.

In 1980, Gates and a few fellow programmers had a small company in Seattle. IBM approached them about developing an operating system for personal computers that it was about to launch. Gates had never built an OS, however, so he referred them to Gary Kildall, a much better known programmer at Digital Research.

Luckily for Gates, though, those talks went poorly. Digital Research hesitated about signing a non-disclosure agreement. They later relented, but then wouldn’t budge in their demand for royalties instead of the $250,000 lump sum that IBM offered. It was only because of that deadlock that IBM came back to Gates.

There was a second twist after that. Both IBM and Gates knew of another operating system that had been developed by Seattle Computer Products. With IBM’s secret backing, Gates cheaply acquired the software — then called QDOS, an acronym for quick-and-dirty-operating system. Again luck came into play: SCP didn’t discover who was really behind the deal; otherwise the price could have been far higher. Microsoft then tweaked the program and rechristened it DOS: Disc Operating System.

Then Gates was lucky a third time in negotiating the licensing agreement with IBM. On the surface Big Blue got great terms, par for the course when a corporate behemoth is dealing with a start-up. IBM agreed to pay a modest royalty on each copy that would be sold with its new machines. (It’s just a guess, but IBM might have become more amenable to a royalty arrangement after their lump sum offer killed the deal with Kildall.)  But the critical point was that IBM’s rights were non-exclusive: Gates and his friends kept ownership of the DOS program.

Kudos to Gates and his pals, of course, for seeing that the real money would be in software, not hardware. But let’s also acknowledge the great luck that those they were dealing with were blind to that fact. Had IBM insisted on exclusive rights, it might have forced Gates to concede — or they might have sought out another developer. Who knows what would have happened to Gates and Microsoft if they hadn’t been able to keep DOS, which became the cornerstone of their business?  He and his partners still might have been successful, but the odds are not nearly so spectacular.

So it is with any decision: the chain of events that brings you to a choice point will be shaped by luck, good or bad. Prior circumstances may determine whether you’re in a position of power or relative weakness. (For that matter, luck governs whether rain or sun that day will make your mood sour or buoyant.) And the same is equally true for everyone with whom you deal.

Philosophers, political theorists, and strategists have long acknowledged the large role that luck plays in every aspect of our lives. Even Nicolo Machiavelli, the cataloger of each and every lever that a prince can pull in the pursuit of power, acknowledged that “I believe that it is probably true that fortune is the arbiter of half the things we do, leaving the other half to be controlled by ourselves.” What was true in Italian politics centuries ago is just as true in management today.

So, why does acknowledging this help business decision makers in any way? Once we acknowledge how much depends on luck, we do two things differently, I think.  First, we study decision making differently, no longer assigning brilliance to every decision that, viewed retrospectively, worked out well. Second, we might focus on different skills as important to important decision points, such as the flexibility to capitalize on changes in luck versus the ability to predict in advance how things will play out.

For better or worse, the intelligence, values, and needs of whomever you interact with impact your success as much as your own resources. Throw in external circumstances that are beyond your control (whether other deals for them fall through, as they did for IBM), and it’s obvious that your destiny isn’t entirely in your hands. Understand this and you act differently, knowing that your own skill will be tested by how well you play the cards you are dealt.

High Stakes Decision Making An HBR Insight Center




Larry Summers on His Decision-Making Process for the Auto Bailout
The Five Traps of High-Stakes Decision Making
High Stakes Decisions Are Rarely Dispassionate
Making Decisions Together (When You Don’t Agree on What’s Important)

Why It Pays to Feel Happy Just Before You Join a Group

They way you feel at the moment when you join a new group has a significant impact on your initial – and later – status among your groupmates, according to Gavin J. Kilduff of New York University and Adam D. Galinsky of Columbia University. For example, people who were induced to feel happy (via writing about a happy experience) were subsequently rated by their teammates in a hypothetical snowstorm-survival task as having higher status (2.13 on a 1-to-7 scale) than those who hadn’t been primed to feel happy (1.79); similar effects were seen when people were primed to feel eager and powerful, and the status perceptions lingered for days, probably because of the reinforcing nature of group hierarchies. The findings suggest that whatever your baseline personality, you can achieve higher status by increasing your happiness, eagerness, or sense of power just before you join a group.

Amazon Constantly Audits its Business Model

Amazon.com is in the headlines again because it started Sunday package deliveries in several large cities.  This offering follows the company’s recent strategic decision to offer same day delivery to most US addresses.  As a part of this strategy, the company is drastically increasing the number of warehouses all around the US.

We are all accustomed to new offerings from Amazon.com: in fact, since its inception in 1995, Amazon has fundamentally changed its business model several times.  Back then, Amazon’s operation was organized around a “sell all, carry few” business model: while offering more than a million books it actually stocked only about 2,000. The remaining titles were sourced through several arrangements but predominantly by “drop-shipping”: Amazon simply forwarded customer orders to book wholesalers or publishers, who then shipped the products directly to consumers using Amazon’s packaging materials and labels.

As the scale of Amazon’s operations grew, its catchment area became larger than that of many publishers or distributors, who, it turns out, were not that good at shipping goods to individual consumers. And as online retail matured, it became harder to dominate the space based on product selection alone. Although Amazon was still ahead of brick-and-mortar retailers in the breadth of the selection — in many categories, not just books — other Internet retailers adopted variants of drop-shipping and were able to offer similarly wide and deep stockless product availability.

All of these advances led to a reversal of the “sell all, carry few” business model, which morphed into “sell all, carry more.”  This is when Amazon drastically expanded the number of warehouses to more than 10 around year 2000 and started stocking most products that it sold. The focus shifted to a business model built around excellent delivery performance and efficient logistics. Customers were amazed at how quickly their orders arrived on the doorstep.

Amazon did not stop reinventing its business model here.  In 2006 it went further and unveiled a program called Fulfillment by Amazon, whereby independent sellers could use Amazon’s warehouse network to fill orders and delegate to Amazon their logistics-related decisions.

Under this new model, Amazon essentially became a wholesaler of goods sold by many much smaller virtual storefronts. What the distributors and publishers, in the aggregate, were to Amazon in its early days, now Amazon was to the participants in its fulfillment-for-hire program.  What used to be outsourced became the core proposition and strength.

Amazon’s recent decision to further develop its fulfillment capabilities (by spending close to $14 billion to build about 50 new warehousing facilities) to bring a large fraction of the US population in the same day delivery catchment area reflects that, for Amazon, the Internet retail model has now come full circle.

The moral that we draw from this tale is that smart businesses like Amazon.com develop ways of constantly questioning what they do. Business models and the advantages that flow from them are transient. What is a competitive strength today might be a burden tomorrow.    From the time he founded the company, Amazon CEO Jeff Bezos was aware that its business model might become outdated. The need to counteract the effects of growth-induced stagnation and confront irrelevance of existing business models was thus embedded in Amazon’s DNA.

If only more companies would do the same.  Top managers spend countless hours analyzing the financial statements of their company; they would be well advised to do the same with their business model.  This isn’t going to be easy, especially for young companies; it takes real brass to turn against the founder’s wisdom.   But Amazon teaches us that a company can’t afford to sentimentalize the icons of its past: it needs to be disciplined about challenging and breaking its existing business models.

China Needs a New Generation of Dreamers (and New Dreams)

China leads the world in population, and probably in sheer numbers of entrepreneurs as well, but does it lead the world in innovative dreams? Dreams power innovation, and innovation is key to all of our futures, but who’s dreaming on China’s behalf?  Lately, we’ve heard a lot about President Xi Jinping’s “China Dream,” which, in short form, according to China Daily, is “to build a moderately prosperous society and realize national rejuvenation.”  But this is a sweeping nation-building dream, not the sort of dream that we would expect most Chinese entrepreneurs to be dreaming about.  So, where are those innovation dreams coming from, and what are they like?

We live in a time when many of the great entrepreneurs are associated with dramatic dreams. Google’s Larry Page and Eric Schmidt are investors in Planetary Resources, devoted to Asteroid mining. Richard Branson, who is also a Planetary Resources investor, is already selling tickets for space-travel on Virgin Galactic’s commercial spacecraft, and he’s competing with the dreams of Amazon’s Jeff Bezos’ Blue Origin, and Elon Musk’s SpaceX. Musk, who is also seeking to disrupt the conventional automobile industry with his dreams for the Tesla electric vehicle, has had his companies (and their associated dreams) characterized by entrepreneur Peter Theil, with whom he co-founded PayPal, as:  “… executing against a vision measured not in years but in decades.” The same could well be said of Bill Gates, who has left mere connectivity behind in his quest to eradicate major human diseases.  What all of these entrepreneurs have in common is that they are dreaming big — much bigger than the rest of us. So what about China?

Can you, in fact, name ten Chinese entrepreneurs who you think dream dreams big enough to be likely to build the future?  Can you name five? Jack Ma, founder of Alibaba, the world’s largest online B2B global trading marketplace, is probably the most obvious choice. He has spoken repeatedly about his dreams, going so far at one point to advise: “Don’t let your colleague work for you, but work for their dreams!” In Ma’s case, this dream is not only about establishing a successful and sustainable internet company, but about the type of company that can accomplish this:

The company [Alibaba] will remain a ‘start-up’ no matter how long it has been in existence. Whatever has been stable, I will disrupt that stability. The company needs to continue to innovate and grow. I want the employees to believe that we are a small company, no matter how big we get. I believe we can create a system and culture to perpetuate this culture of entrepreneurial and start-up spirit.

This is a big dream worthy of our attention, and Alibaba has won the world’s admiration as an exciting and viable organization. Haier’s Zhang Ruimin has also weighed-in with a big dream regarding talent, when he remarked, while visiting IMD, that:

My dream is that all Haier employees go to work cheerfully every day. This happiness is due to the fact that Haier [has] created a platform for everyone to fully exploit their potential and realize their value, rather than taking orders passively or bearing huge stress. To quote Peter Drucker, “The purpose of an organization is to make ordinary people do extraordinary things.” I hope that thanks to the platform we have created, every Haier employee will be able to do extraordinary things.

Robin Li, founder of China’s largest search-engine, Baidu, is a talented software engineer who returned to China from the U.S. in 1999 with the dream of: “changing people’s lives with science and technology” — and then he delivered this in a big way, becoming probably the richest person in China, and the only Chinese member of Forbes’ “top 12 most powerful entrepreneurs for 2013”.  

And, then, there are Tencent founder Ma Huateng, and Huawei’s Ren Zhengfei, both of whom have transformed the underlying logic of their industries; Ren with Huawei’s amazing growth as a global telecom infrastructure provider, and Ma with Tencent’s QQ messaging and WeChat.  Maybe, even, another Chinese big-dreamer would be Huang Nubo, founder and chairman of Beijing Zhongkun Investment Group, who is both a philanthropist (at Beijing University) and an entrepreneur who tried to buy 300 square kilometers of land in Northwestern Iceland as a site for Chinese tourism and leisure. All of these individuals have dreamt bigger than the norm, and they are all also notable for “begin[ing] with consumers and their needs, and [coming] up with innovative products and services to accommodate them, amassing wealth in the process.” This is quite a bit different from the all-too familiar earlier stereotypes of Chinese entrepreneurs succeeding merely on the basis of lower costs, and cheaper labor — surely, it’s evidence that China does indeed have entrepreneurial dreams and dreamers!

Yet, all of these Chinese big dreamers are also at the top of their organizations and have the power to move their dreams as well as author them.  In fact, at this point in time, it’s still hard to drill deeper into most Chinese organizations to identify who the dreamers really are — those whose dreams can carry an organization forward, especially for expatriate managers who are limited by culture and language in their ability to truly assess the potential of their talent.

For those operating in China, this is, indeed, a quandary. You look around at the resources that characterize China’s wealth, and see human talent that has to be among the most promising on the planet.  It’s a big country, filled with smart, ambitious people, but who are the ones who are dreaming big enough?

One lesson on how to address this question comes, ironically, from an old-economy company. What white-goods producer Haier has chosen to do is to offer every employee (and there are 80,000 of them) the opportunity to effectively become the CEO of a real operating company, provided that their dreams have real merit. Searching for new ideas at Haier involves a competitive screening of business model proposals, open to all, out of which projects and project leaders are chosen.

Project proposals that are selected become the basis for self-organizing, autonomous business units, led by the proposal author, and responsible for not only their own staffing, but also for the design, manufacturing and marketing of the resulting product. They literally are small companies who must face all of the same business decisions that we typically associate with larger companies. What’s different, in Haier’s case, is that the opportunity is offered to all, and selection is based on the quality of the proposal. As they say at Haier: “Haier doesn’t offer you a job, it offers you an opportunity.”  As an illustration of this, in one example that we studied (for three-door refrigerators), the leader of this business — who was chosen in a business model competition — was in his early 40s, at most, and yet was running a $1.5 billion business after two years.  It’s something that could never have happened in most other large, complex organizations.

Haier is unusual in that the leaders of the vast majority of Chinese organizations are not trying such exciting approaches to unleash the entrepreneurial talent residing in their organizations.  But, neither are the majority of their foreign counterparts.  For a long while, China’s dreamers have existed almost exclusively within the government and the Chinese Communist Party: Deng Xiaoping and Zhu Rongji were among the most ardent of these dreamers, and their dreams changed the world. At some point in the future, however, as it moves more assuredly onto the global stage, China will need both a new generation of dreamers and new dreams, especially in business. Entrepreneurial leadership in China will increasingly be measured by the ability to involve more individuals, from a greater range of experiences, and with a richer facility for dreaming big dreams, into the decision-making process. The promise of large complex organizations should be to get more value out of the talent assembled, rather than less.  This will require big changes in both the leaders and those who follow them. Haier’s choice to organize around great business proposals, no matter where they come from, is indeed a bold choice, and one which really does place its bets on the ability of Chinese entrepreneurial thinkers to dream big.

China’s Next Great Transition

An HBR Insight Center




Understanding Chinese Consumers
China’s Bad Bet on the Environment
Jack Ma on Taking Back China’s Blue Skies
What Business Can Expect from China’s Third Plenum

Don’t Get Defensive: Communication Tips for the Vigilant

When we get defensive, we make it that much harder for our conversational counterparts to hear what we’re saying. We also make it harder to really listen to what *they* have to say. Soon, we’re shadow-boxing, defending ourselves against attacks that aren’t real, and wasting energy — and relationship capital — on damage control instead of solving the problem at hand.

If you get hooked into defensiveness — and most of us do — you probably already know it. It’s likely come up in conversations with your boss or your spouse. And when it did, you probably got defensive about being defensive. After all, it felt like you were being attacked! What else were you supposed to do?

Well, I’ll tell you. It’s a procedure I call “three strikes and you’re in.”

After someone has said something that causes you to arch your back and want to become defensive:

Strike 1 – Think of the first thing you want to say or do and don’t do that. Instead, take a deep breath.  That is because the first thing you want to do is defend yourself against what you perceive as an attack, slight, or offense.

Strike 2 – Think of the second thing you want to say or do and don’t do that, either. Take a second breath.  That is because the second thing you want to do after being attacked is to retaliate.  That is only going to escalate matters.

Strike 3 – Think of the third thing you want to say or do and then do that.  That is because once you get past defending yourself and retaliating, you have a better chance of seeking a solution.

The main reason to stop getting defensive is that it usually triggers the same response in the other person. If instead you look for ways to be more solution-oriented, you will soon find yourself on your way to more cooperation and collaboration.

If you’re struggling with what that non-defensive, non-retaliatory, solution-oriented statement might be, focus on being a “plusser.” A plusser is someone who listens to what the other person says and then builds on it.

One way of plussing is to use the phrase, “Say more about ______.” Think of the words they used that had the most emphasis and invite them to say more about that topic.  You will buy yourself time to think and calm down, let your counterpart feel heard, and disarm a counterpart who has bad intentions. Another way to do it is to say, “If we do that, what would be the next step to keep it going?” or “If we do this, what would be the way to get the most out of it?”

Similarly, you can replace “yes, but” with “yes, and”  As you probably know, when you say, “yes, but” they hear, “Everything up to now was just being polite and should be disregarded; now I’m going to tell you what the real deal is and you better pay attention.” (Isn’t it amazing how “yes, but” can mean so much more?). “Yes, and” validates what has been said — and adds to it.  For example, “Yes, that’s a good point and to make it work even better…” or “Yes, I heard everything you said and help me figure out the way to make sure it gets incorporated…”

If you often find yourself in defensive conversations where you can’t figure out why you’re arguing — if you find yourself frequently saying, “Hey, I think we actually agree here…” — you might be guilty of saying “yes, but” when you actually mean “yes, and.”

But what if the person is genuinely unfairly attacking you? What if they’ve said something you really believe is untrue — you can’t say “yes and,” or “say more about ____” in that case, can you?

In that case, you might try a “controlled confrontation.”  You do this by pausing after they speak for a full count of three in your head.  This will both take the conversation away from escalating and may cause the other person to become nervous.  If they do, that will work in your favor. When you don’t take the bait, they are in unfamiliar territory and this can have a slightly disarming effect.

At that point, look them squarely, calmly, and firmly in the eye and say, “Whoah! Let’s each take a breath here because I am feeling very reactive and I know until I calm down a bit, whatever I say or do now will only make this conversation worse.  And I am not going to do that.”

Then take that breath and say, “Okay, what’s clear to me is that something is frustrating you.  What, in your mind’s eye, would you like me to do to make that frustration go away?  If it’s doable and fair to you and me and everyone it affects and in their best interest, I think I’ll be happy to oblige.  If however it isn’t fair or in everyone’s best interest, I’m going to have a problem going along with it.”

Then be quiet, let them respond and if it doesn’t seem fair and in everyone’s best interest say, “I’m having some difficulty understanding how that will be fair to everyone and in their best interests. Perhaps you can explain otherwise or we can brainstorm on how to make it so.”

By being unflappable and standing up for the principles of fairness, and reason, and mutual best interest, you will be better able to stand up for what’s right — and stand up to them in a way that is neither defensive or provoking.

Why Men Won’t Drink Diet Coke

Diet Coke vs. Coke ZeroShould Men's Products Fear a Woman's Touch?HBS Working Knowledge

"Gender contamination" is the loaded and fascinating term coined by HBS senior lecturer Jill J. Avery to describe just how uncomfortable women and (more often than not) men become when a product they use to symbolize their gender is extended to appeal to another gender. She first noticed this phenomenon while working at Gillette, where the company was careful to call its women's line "Gillette for Women" in order to create separation between pink razors that smell like papayas and black manly-man razors that smell like manly-man things. This piece describes a couple of other examples stemming from the research, including the struggle to get men to drink diet sodas (black cans and avoidance of the word "diet" help) and how gents on Porsche message boards managed their insecurities when the car company came out with an SUV. I also learned that there's a yogurt called "Powerful Yogurt" aimed at the "Broga" set. [Silence.]

Gather, then Ignore Why Facebook Pages are a Bust for BrandsPando Daily

If your brand doesn't have a social media presence these days, you're probably in the minority. Companies of all kinds are on Facebook, “interacting” with their customers. That opportunity, however, has passed, argues Joseph Pigato. Branded Facebook pages are now merely a publishing platform, pumping out messages for the masses and receiving half-hearted likes and "LOLs" in the process. The problem stems partly from how Facebook is designed: There's no way to say "Hello" or "Welcome" to a new person who likes your page (as is standard with e-newsletters), and the social network is based on an advertising model, not brand engagement. But marketers bear a certain responsibility too. In designing contests and promotions, they've simply gathered consumers who may want a free this, that, or the other thing, and who, after not winning, pay you very little mind. "With subsequent interactions not extending beyond a tiny sliver of fans," says Pigato, "a large fan count is really a signal of just how many people you've gathered to ignore you." 

"Cutely Morbid" How “Dumb Ways to Die” Won the Internet, Became the No. 1 Campaign of the Year AdvertisingAge

I’ve read few memoirs set in Australia that didn’t include some kind of near-death experience (from rip tides, wildfires, deadly spiders, etc.), so I’m not totally surprised to hear that McCann Australia is rolling up awards all over the world for a public service campaign it did for Melbourne’s Metro Trains entitled "Dumb Ways to Die." Still, the campaign’s "cutely morbid" video, which buries its point about train safety in a blizzard of irrelevant references to bears, spacemen, piranha, and whatnot, might cause some people to rethink what goes viral, if not the nature of effective communication. A hit from day one, the video is still in the top 20 of the most-shared global ads 10 months later, and it was cleverly extended by the introduction of a game that quickly became the No. 2 free app in more than 20 countries, as well as posters put up all over Melbourne featuring the strange androgynous suicidal creatures, which became fodder for Instagram and other social media. 

"It was the counterintuitive nature of the idea," explains executive creative director John Mescall, "the weirdness and positivity of the execution, the sheer joy of the song and the video, and the attention to detail across all elements of the work that ensured its success." Well, perhaps. Take a look at it here and judge for yourself. —Andrea Ovans 

Whither RussiaThe Crumbling Kremlin? Economist

In all the talk about emerging markets' bright future, the BRIC countries are so often lumped together that it's easy to overlook the great differences between them—especially between Russia and the three others. The Economist picks up on a U.S. National Bureau of Economic Research paper to highlight the potential weak spots in Russia's economic future. Russia faces possibly huge declines in its oil and gas revenue in the coming years, just as it's going to be called upon to meet vast pension obligations to an aging population. Today, 13% of Russians are 65 or older; by 2050, nearly one-quarter will be in that bracket, as the working (read: paying) population shrinks. It looks as though, in GDP at least, R may be destined to part ways with BIC as the years pass. —Andy O'Connell

Does School Matter? The Economy Does Not Depend on Higher EducationChronicle of Higher Education

Sure, a university education helps you reason scientifically and appreciate aesthetics and all that, but for the most part, it doesn't help you get a job, says a Chronicle of Higher Education article that's annoying a few people in the higher-ed world. The piece, based on a book by three experts, including an emeritus professor at UCLA, argues that academic credentials aren't necessary for a lot of U.S. jobs. In fact, 52% of employed college grads under the age of 24 are working in jobs that don't even require college degrees. "Self-interest" on the part of university educators is partly to blame for the hype about the value of advanced schooling, the authors say.

Not so, argues researcher Jonathan Rothwell of the Brookings Institution. Higher ed is expensive — it requires sacrifices from taxpayers, parents, and donors — but the payoff is real. The wage benefits of advanced learning have risen steadily since 1980. "An identical twin raised in the same family but with more education earns significantly more than his or her less educated sibling," Rothwell says. And how about this statistic: In the struggling U.S. manufacturing sector, the demand for workers is actually rising—but only for educated candidates. Employees with at least some college have seen a net increase of 2.5 million manufacturing jobs in recent years. —Andy O'Connell 

Working Hard for the Money

This is How Much Money People With Your Personality Make (Washington Post)
Why Wal-Mart Can Afford to Give Its Workers a 50% Raise (Fortune)
Microsoft Kills Its Hated Stack Rankings. Does Anyone Do Employee Reviews Right? (Businessweek)

Why Governments Should Get Behind Ridesharing

While the sight of an oversized fuzzy pink moustache adorning the grill of a car would amuse most people, some see it not only as a threat, but as something that could lead to the collapse of an entire industry. The moustache is the trademark of Lyft — one of many ridesharing companies that have burgeoned across the country, much to the vexation of the taxicab industry.

These companies allow ordinary motorists to turn their personal cars into a prearranged transportation service. Smartphone apps pair riders with drivers in the vicinity, while also providing information about their ride. This includes estimated wait time, a picture and a rating of the driver, and a description of the driver’s vehicle.  When riders reach their destinations, most services suggest a donation amount that’s shared between the driver and the company. Riders are free to pay more or less or even nothing at all.

While customers love the convenience and novelty ridesharing offers, the cab industry is crying foul. Battle lines have been drawn between taxi unions and ridesharing companies as disruption of the ride-for-hire industry seems imminent. So far ridesharing companies have been fighting the opposition, one city at a time. And it hasn’t been pretty.

Before SXSW in Austin, the Austin City council declared that unlicensed drivers charging a fee for rides was illegal, so SideCar — a ridesharing company similar to Lyft — offered free rides, and then filed a lawsuit  to overturn the law. Last April at San Francisco’s international airport, police officers started arresting ridesharing drivers on grounds that their vehicles didn’t meet the airport’s regulations for pickup and drop-off.  And in Seattle where the market for alternatives to taxis is growing, taxi drivers circled city hall, blocked streets, and honked their horns to protest ridesharing companies.

But focusing on the fight between the incumbents and the disruptors misses the bigger picture: the enormous potential public benefits provided by ridesharing.

In the United States, the average commuter loses 34 hours a year to congestion delays; that’s 4.76 billion hours among all American commuters. The economic opportunity cost is staggering: $429 million daily or about $160 billion every year. And that’s just the cost to individuals. Every twenty-mile commute costs government a dollar, and those costs add up. If you include the cost of congestion, air pollution, or even lost property value near roadways, the total estimated external cost of driving runs between $0.27 and $0.55 per mile.

For decades, governments have tried in vain to come up with solutions by adding high-occupancy vehicles (HOV) lanes to roads and spending billions on elaborate public transportation networks. Yet, traffic congestion and the cost of commuting continue to grow.

The beauty of ridesharing lies in the fact that it taps into an abundant yet underutilized resource: the empty seats in cars. It is a transport option that doesn’t add any new vehicles to the system and that’s part of why it could effectively and economically reduce the traffic congestion that plagues most cities today.

Our analysis suggests that shifting about 15 percent of drive-alones to car sharing or ridesharing could save 757 million commuter-hours and about $21 billion in congestion costs annually. To achieve these savings through traditional means would require billions of dollars of infrastructure investment. At a tiny fraction of that cost, ridesharing apps such as Zimride, Lyft, Carma, Sidecar, and Carpooling.com, could engage the millions of commuters needed to generate a sizable impact.

But for ridesharing to reach its potential, thoughtful regulation and support are vital. Public officials are gradually beginning to look for ways to legitimize it. For example, the California Public Utilities Commission (CPUC), which regulates and licenses passenger carriers, proposed a set of rules back in July for rideshare companies, including insurance requirements, driver background checks, and drug tests. And on September 19, the CPUC made history with a unanimous vote to authorize peer-to-peer transportation in California, assigning a new legal label to all of the companies –Transportation Network Companies or TNCs — distinguishing them from taxis. It was the result of a long and thoughtful process. Ridesharing companies and community members worked with regulators for months leading up to the decision, clarifying business practices while ensuring safety and quality service.

The CPUC decision reflects the growing recognition that peer-to-peer technologies can reshape society’s ability to solve problems. As is the case with all great innovations, some resistance is expected. But if we can take advantage of the ridesharing phenomenon and unlock the public value associated with it, it gives society one more tool for reducing congestion and traffic gridlock.

Like the railroads that powered the Industrial Revolution in the 1800s and the Interstate Highway System that accelerated economic growth in the 1900s, it will be exciting to see what the twenty-first century peer-to-peer economy can contribute to getting the most out of our transportation network.

Make Sure New Features Match Your Brand

Here’s a thought experiment. Imagine the engineers working in the product development labs at Volkswagen A.G. develop three innovations: a suspension for a smoother ride, a more fuel efficient ignition system, and a better safety restraint system. The strategic question for the company then is: which of its brands will carry each innovation?  It wouldn’t make sense to introduce all of the innovations in all of its brands — not just because that would be too costly, but because the meaning of the innovation would differ depending on the brand that carries it.

So if you had to choose, you would probably suggest that the better suspension naturally belongs in the Bentley and Audi brands while the better fuel efficiency may be best introduced by the Volkswagen, Seat, and Skoda brands. The optimal strategy for the safety system may well be to do something unconventional: to license the innovation to a competitor, in this case, Volvo, to get that brand to first introduce it in its cars. Pioneered by Volvo, the safety innovation would then gain traction and market credibility.

Features or innovations introduced by the wrong brand can fall flat.  A recent example from the news business provides a case in point. Henry Farrell, a professor of political science writing in the Washington Post, describes how Wikileaks grew frustrated that the general public wasn’t paying attention to its highly newsworthy stories. Eventually the organization realized that, in order for its revelations to have any impact, it needed brands such as the New York Times and The Guardian to make the news “impossible to ignore.”

Similarly, every product and feature innovation is a potential story whose impact on the marketplace is a function of the brand that carries it. Innovation is not just about R&D efforts or new product and feature development. Without brands that consumers trust, the story of any innovation is incomplete. In other words, brands are just as critical to innovation success as are new products. Trustworthy brands do three things:

They reduce the customers’ risk of trying new products and features.  American consumers are willing to try a finger-print sensor on the iPhone from Apple, but might not be so eager to try one from Huawei. Similarly, we will soon find out if the fear of ridicule when wearing a set of computer-enabled glasses is somewhat reduced when the glasses are from Google.

They position the innovation and give it meaning. Suspension systems developed by Volkswagen engineers make more sense in an Audi, a brand known for its comfort, than in a Skoda, an economy brand. Similarly, a quick lace-up system on Rockports would be interpreted as adding to convenience and comfort, while the same system would connote performance and speed to action on a pair of Nike shoes.

And finally, brands normalize the new product or feature; they give it credibility. MP3 players were invented as the MPMAN by Saehan Information Systems of Korea, but it wasn’t until the iPod was launched that the market truly took off.

Downstream, marketplace assets such as brands aren’t just nice-to-have complements to upstream assets such as R&D labs. They are a necessary condition for innovation success. Brands facilitate consumer acceptance and pave the market path for innovations.

The Big Barrier to High-Value Health Care: Destructive Self-Interest

In the mid-Atlantic region of the United States, an effort is under way to get insurers, providers, employers, and unions to cooperate in creating a system that can reduce total health care costs and premiums while achieving better outcomes. Our organization — the Institute for Healthcare Improvement — is assisting because we believe that this kind of regional initiative is the most promising way to move the U.S. to a system that achieves the “Triple Aim”:  better care for individuals, better health for populations, and a lower per capita cost.

Because the effort is still in the early stages, the parties are not ready to be identified. But we can say that the largely low-wage, multilingual workforce in question has had to give up pay increases in recent years in order to cover the rising cost of health benefits. This prompted a local labor-management trust fund to begin to consider a new approach: one in which players in the local heath care system address the challenges from the perspective of their region as a whole. To this end, they are using data about costs, outcomes, and practice patterns to identify underlying problems and create new system solutions. This article offers a framework that players in other regions can use to cooperate and fix their own health care systems.

Not surprisingly, it has not been easy for the organizations involved in the mid-Atlantic region to make progress.  A collaborative project with a health care provider to tackle patients with complex illness has had an uneven course, with some early wins offset by relationship challenges. A coalition with a local employer has been formed, but it is taking time to develop an implementable model of something truly new. Each small success, however, is helping to build a foundation for a system that will focus on the people who should matter the most: workers and their families.

One of the best-kept secrets in the United States is that workers pay almost all of the costs of their health care. They do so through employee contributions to premiums, out-of-pocket payments for services, a shift of compensation dollars from wages to benefits, and state and federal taxes such as the payroll tax that supports Medicare.

But instead of serving workers’ best interests by trying to give them the best care at the lowest cost, insurers, providers, employers, and unions act like adversaries. Insurers leverage their purchasing power to exact discounts from providers and their administrative power to reduce benefits. Dominant providers leverage their market position to raise prices independently of cost or quality. Employers leverage their power in labor markets where workers have limited job options to extract higher deductibles and out-of-pocket payments from employees. Unions, which now represent a tiny share of American workers, resist to the extent they can.

The numbers spell out the sorry result. On average, family premiums and out-of-pocket costs are about 40% of median household income (and even more if the payroll tax for Medicare is included). Meanwhile, health care outcomes for the population as a whole are improving at a rate far slower than premiums are increasing. This continuing transfer from wages to health care does not reflect better value for money.

To get on to the pathway to lower total costs with better outcomes like the parties involved in the mid-Atlantic region are trying to do, players in other regions must understand that they are in a common system with a common pool of limited resources and that separate, zero-sum strategies are destructive. With that in mind, they must seek four changes.

1. Establish Common Goals

The goals should reflect the Triple Aim articulated by the Institute for Healthcare Improvement — again, better care for individuals, better health for populations, and a lower per capita cost. Each should be measured, reported transparently, and tracked over time. The metrics of per capita cost should include health care premiums paid directly by the wage earner and indirectly by the employer from the compensation pool as well as payroll taxes to support Medicare. Goals should include a mutually agreed distribution of the risks and benefits of cost reduction among all actors.

2. Build Trust Among the Actors

Lack of transparency stifles competition based on real value and encourages leveraging strategies. Shared measurement systems and unprecedented and complete transparency about costs and outcomes will help build trust among former adversaries. Key to trust is an agreement in advance on consequences when cost and outcome goals are not met. This is hard work and failure will happen; therefore, it is essential to test ideas on a small scale and increase the scope of the system change as trust builds and we gain confidence.

3. Develop New Business Models

All actors will need to develop business plans compatible with the agreed premium-reduction goal to allow everyone to succeed in a system that costs less. Such plans may include revenue enhancement by attracting more patients or members from competitors; sharing savings; increasing productivity through care redesign that allows more people to be helped with the same resources; and contributing to non-health-care jobs and economic development to sustain or grow the pool of commercially insured patients.

4. Define the Respective Roles of Competition and Cooperation

Both competition and cooperation can help but only if each is used where appropriate. Cooperation should dominate in goal setting, administrative simplification, measurement and transparent reporting of costs and outcomes, community-based prevention, public education, learning systems for care innovation, and planning of elements of care for which it is technically best to have only one supplier.

If costs and outcomes are transparent, competition among some clinical specialists, chronic-disease-care managers, and highly specialized services may be a good thing. But in the many communities that have and need only one dominant health care system anchored by a hospital, it is far better for the players in the region to focus on improving the design of the overall system and reducing premiums through cooperation than attracting new (unneeded) specialty and tertiary care providers to enter the market. To make this work, it will take external pressure from employers and unions in the region to keep the health system focused on the Triple Aim.

***

Since wage earners finance care, they should receive the lion’s share of the resulting savings — in the form of increased wages, job security, or enhancement of non-health-care benefits. It is only fair that the new system not only provide better care at lower cost but also return the money saved to those from whom it came.

Follow the Leading Health Care Innovation insight center on Twitter @HBRhealth. E-mail us at healtheditors@hbr.org, and sign up to receive updates here.

Leading Health Care Innovation

From the Editors of Harvard Business Review and the New England Journal of Medicine




Fix the Handful of U.S. Hospitals Responsible for Out–of–Control Costs
Saving Academic Medicine from Obsolescence
Constraints on Health Care Budgets Can Drive Quality
A Role for Specialists in Resuscitating Accountable Care Organizations

Smarter Consumer Cost Sharing Using Clinical Nuance

There is strong bipartisan consensus that our current level of health care spending does not deliver sufficient value in terms of individual or population health.  Since there is more than enough money in the system, our attention should turn from how much we spend to how well we spend our health care dollars.  To encourage a shift from volume to value, insurance benefits and payment models must be redesigned with the basic tenets of clinical nuance in mind.  These tenets recognize that 1) medical services and providers differ in the amount of health produced, and 2) the clinical benefit derived from a specific service depends on the consumer using it, who provides it, and where it is delivered.

Most efforts to control costs or improve quality of care have focused on provider-facing “supply-side” initiatives.  These efforts have addressed the infrastructure, processes, and financing (e.g., accountable care, medical homes) of care delivery.  Far less attention has been devoted to “demand-side” programs that directly engage consumers (e.g., price transparency) in the dual objectives of enhancing quality and containing costs.

One typical consumer-facing initiative that insurers use to control health care spending is cost shifting – requiring beneficiaries to pay more in the form of higher premiums, larger deductibles, and increased cost sharing at the point of service.  Most health insurers — including Medicare — implement consumer cost sharing in a one-size-fits-all way such that beneficiaries are expected to pay the same out-of-pocket amount for every service within each category of care (e.g., office visits, diagnostic tests, or formulary tiers of prescription drugs).   In nearly every instance, consumer cost sharing is based on the type and price – not the clinical value – of the service provided.

Increases in consumer cost sharing, however, lead to decreases in the use of both nonessential and essential care.  For example, when consumers are asked to pay more for high-value cancer screenings, clinician visits and potentially life-saving drugs, they use significantly fewer of these services. For example, when cost sharing was increased for office visits in Medicare Advantage plans, patients visited their physicians less often, as expected.  However, individuals with increased cost sharing for office visits were also hospitalized more frequently, and their total costs outpaced those of patients whose out-of-pocket costs did not rise.

Two common clinical examples demonstrate how a clinically nuanced cost sharing approach can improve the outcomes and efficiency of health care.  Screening for colorectal cancer is an important life-saving service that is provided with no cost sharing under the preventive health provisions of the Affordable Care Act, because it is recommended by the U.S. Preventive Services Task Force (USPSTF).  The task force recommends screening only for adults of average risk between the ages of 50 and 75 (and states that screening beyond the age of 85 is generally harmful). This recommendation demonstrates the crucial principle of clinical nuance, in that the value of a service depends on the needs of those who receive it. In contrast, patients outside the recommended age range should not be eligible for zero cost sharing unless they have a family history of colorectal cancer (for those under 50) or have had precancerous polyps on prior screening exams (for those over 75).  Such a nuanced approach ensures that patient cost sharing is eliminated or substantially reduced when a service is clinically necessary, while allowing health plans to impose higher copayments for services that lack strong clinical evidence to support their use.

Another example of using clinical nuance to make health plans more efficient is the evidence-based recommendation that individuals with diabetes undergo routine eye examinations.  While it is not clinically appropriate for everyone to receive such exams, the delivery of this evidence-based service to patients with diabetes is a frequently employed quality metric.  In a nuanced design, cost sharing for eye exams would be substantially lower for those with diabetes than for those without.

Although clinical evidence and specialty guidelines frequently determine treatment recommendations for specific diagnoses (e.g., asthma, cardiovascular disease, depression), most benefit designs do not tailor consumer cost sharing to specific conditions.  This lack of clinical nuance in cost sharing levels may reduce short-term medical expenditures through reduced utilization.  However, lower rates of adherence to evidence-based recommendations — especially by specific patient groups most likely benefit — can lead to inferior health outcomes and, in certain circumstances, higher overall costs.  This undesirable effect of higher cost sharing on high-value services in targeted populations demonstrates that the aphorism “penny wise and pound foolish” applies to health care.  Conversely, when cost sharing is set too low – as in certain Medicare supplemental insurance plans – those who do not have an appropriate clinical need may overuse services that are potentially harmful or provide little clinical value, resulting in wasteful spending.

To encourage consumers to take better advantage of high-value services and actively participate in decision making about treatments that are subject to misuse, private-sector payers began to implement the value-based insurance design (V-BID) concept more than a decade ago. The basic V-BID premise calls for a clinically nuanced benefit structure that reduces consumer cost sharing for evidence-based services and high-performing providers.  V-BID programs that lower cost sharing for targeted services have consistently demonstrated improved adherence with no net increases in aggregate expenditures when compared with plans without such clinically nuanced cost sharing.

More recently, V-BID programs have incorporated nuanced disincentives to discourage the use of low-value care.  Key stakeholders, such as the medical professional societies participating in the Choosing Wisely initiative, agree that discouraging the misuse or overuse of identified low-value services must be part of the strategy. These “stick” programs, while more difficult to implement, are substantially more likely to achieve short-term cost savings.

To build public support, efforts to bend the health care cost curve must be linked with a focus on patient-centered, high-quality care.  By basing consumer cost sharing on the clinical value – not the price – of services, payers can actively engage consumers in seeking high-value care and foster more regular conversations with providers regarding low-value services.  Moreover, as provider-facing initiatives are implemented, it is critically important to align these supply-side programs closely with approaches intended to assist consumers.  The potential impact of such carefully aligned approaches to contain costs and improve quality will be far greater than any single strategy can achieve.

Follow the Leading Health Care Innovation insight center on Twitter @HBRhealth. E-mail us at healtheditors@hbr.org, and sign up to receive updates here.

Leading Health Care Innovation

From the Editors of Harvard Business Review and the New England Journal of Medicine




Fix the Handful of U.S. Hospitals Responsible for Out–of–Control Costs
Saving Academic Medicine from Obsolescence
Constraints on Health Care Budgets Can Drive Quality
A Role for Specialists in Resuscitating Accountable Care Organizations