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# Section 11: Organizational Change

_All organizations must change, either because of a shift in mission or threats from the external environment. However, organizations must also put in place standard operating procedures in order to align action and resources towards specific organizational goals. Similarly, networks form organically in organizations that actively participate in problem-solving. In order to change, these processes and structures must be disrupted. Delicate political balances can be upset. As a result, inertia is very common in organizations. What are factors that lead to failed change processes in some organizations, and what can be learned from organizations that successfully implement change efforts?_


## Why Transformation Efforts Fail

_Kotter, J.P. (2007). “Leading Change: Why Transformation Efforts Fail.” Harvard Business Review, January: 96-103. Author: Tansits, Colin E; Editor: Perez, Philip A_

In John Kotter’s Leading Change: Why Transformations Efforts Fail, he explains that many managers and leaders in organizations do not understand that transformation is a process, not an event. Transformation occurs in stages that build on one another, and it takes a long time—years. Kotter explains that managers, who feel pressure to speed up the process, end up skipping stages. He warns that short cuts do not work when trying to effectuate a transformation.

In the article, Kotter focuses on eight errors common to several attempted corporate transformations: (1) Not Establishing a Great Enough Sense of Urgency, (2) Not Creating a Powerful Enough Guiding Coalition, (3) Lack of a Vision, (4) Undercommunicating the Vision by a Factor of Ten, (5) Not Removing Obstacles to the New Vision, (6) Not Systematically Planning for, and Creating, Short-Term Wins, (7) Declaring Victory Too Soon, and (8) Not Anchoring Changes in the Corporation’s Culture. Coincidentally, Kotter explains that positively addressing these errors creates the eight steps to transforming an organization.

Not Establishing a Great Enough Sense of Urgency is a common mistake that befalls many corporations. Kotter explains that a large percent must believe that a change to the usual course of business must occur. He says that, “From what I have seen, the answer is when about 75% of a company’s management is honestly convinced that business as usual is totally unacceptable.”

Not Creating a Powerful Enough Guiding Coalition is an error borne of only having a minimal amount of leadership on board with the transformation. Kotter explains that some minimum mass of leadership must join the transformation coalition for it to be successful.

Having a Lack of a Vision is a fairly straightforward error. Kotter explains that the guiding coalition must have a detailed picture of the future that is sought by the transformation. The vision should be more than a five-year plan—it should help clarify the direction in which the company needs to move. This vision should also include a strategy to achieve it.

Communication is essential to proper organizational management, and Undercommunicating the Vision by a Factor of Ten is all too common. Kotter explains that communications on all levels of the organization is necessary, and further, he explains that employees must be understanding and open to the communicated messages.

Despite creating a vision, Not Removing Obstacles to the New Vision can stop the transformation dead in its tracks. Kotter explains that the big obstacles must be confronted and removed. Obstacles might include decisions between moving the organization forward per its new vision and serving one's self interest. For example, budget cuts may be necessary for an organization, and if a manager cannot or will not cut his own salary, then others will question his commitment to the vision and the vision will be undermined. The manager should probably be let go.

Because the transformation process is so long and drawn out, small wins are important. By Not Systematically Planning for, and Creating, Short-Term Wins, there will be no goals for the organization to meet and celebrate. Kotter explains that employees need to see evidence of success in 12 to 24 months of the start. Further, Kotter makes clear that there is a difference between hoping for short term wins and creating them.

Tied directly to this is Declaring Victory Too Soon. Managers who do this can sink morale, and give little incentive for employees to follow them due to the lowered level of credibility. Declaring victory too soon kills the progress made on the organizational culture, progress, and other habits an organization is trying to create. Kotter states it takes 5-10 years for such progress to really "sink deeply into a company's culture," and declaring victory too soon may destroy any progress made. Kotter finds that "resistors" point to the declared victory as an indication that the "war has been won," and the old traditional habits that were toxic creep back in to the organization.

Lastly, Kotter explains that the transformation becomes the new norm when it becomes “the way we do things around here.” Not Anchoring Changes in the Corporation’s Culture is a harmful error that may lead to failure. For the transformation to fully succeed, it must become a part of the new norm.

## The Power of Crisis
_Duhigg, C. (2012). The power of habit: Why we do what we do in life and business (Vol. 34, No. 10). Random House. CH 6: The Power of Crisis: How Leaders Create Habits through Accident and Design. Author: Damon-Cronmiller, Christopher; Editor: Boucher, Timothy M._

Chapter 6 of Charles Duhigg's "The Power of Habbit: Why We do What we do in Life and Business," focuses on the major themes of "An Evolutionary Theory of Economic Change," by Yale professors Richard Nelson and Sidney Winter. Duhigg notes that this particular book is much too dense for the average person, and so takes the liberty of explaining its major themes of institutional habbits in layperson's terms. Institutional habits, according to Duhigg, are a response to inherent human nature and a fundamental characteristic of human organizations. Specifically, they are "battlefields in a civil war" with people constantly trying to vie for power and control. Most companies, nontheless, manage to survive because of artificially constructed "institutional" or "organizational" habits that prevent office politics from bogging them down (or even outright destroying them). Indeed, Duhigg argues that institutional habits actually give workers freedom to "experiment with new ideas without having to ask for permission" every time they try something new. He further finds, relying on Nelson and Winter, that institutional habits actually serve as a "rought organizational justice" in which internal strife "'follows [a] largely predictable path[]'" that is kept within certain confines so that work continues to get done. Furthermore, once institutional habits are formed, the only way to modify them is through crisis - that is, if an organization's life is hanging by a thread. To futher illustrate this concept, Duhigg draws upon two very different real-life cases that nontheless have a very similar theme.

The first case is that of the Rhode Island Hospital, which at the time was the only Level 1 trauma center in southeastern New England, and Brown University's primary teaching hospital. Despite its prestige, however, it was also a high-stress organization with an incredibly toxic work environment. In fact, nurses even set up a "color-code" system among themselves to brief each other of the doctors' personalities: from blue (nice and easy to work with) to black (can potentially put a nurse's job in jepoardy if they offer so much as one word of criticism). They also had a system to double-check orders from particularly "error-prone physicians." Technically, these habits worked for a time, but ultimately were unsustainable because they were constantly being developed on the fly. Ultimately the nurses' system began to fall apart when one day, a man in his late 80's arrived delirious and with severe bleeding from within his brain (sustained by a fall a few days prior). Due to a mix-up with the consent forms, the doctor in charge accidentally began to operate on the wrong side of his head; and beforehand when a nurse (not acknowledging at that moment this doctor was "code black") voiced concern about the consent forms, the doctor verbally attacked him and essentially threatened to kick him out of the room. While the doctor's team eventually drained the blood and stopped the bleeding, the man unfortunately never woke up from surgery and died a couple of weeks later. Some nurses claimed that this kidn of accident was inevitable because the hospital's institutional habits were abysmal.

Similar errors happened within the next couple of months, and the hospital ended up loosing roughy $500,000 in one year from fines alone. Before long the hospital became the sight of a media circus, forcing (among other things) an administrative change in staff and all elective surgery units to be shut down for an entire day while staff went through emergency team-building activities. As of Duhigg's book, safeguards are in place to make sure that everyone working in a trauma room has their voices heard, and the hospital has largely shaken off its reputation as a toxic place to work; and error rates went down significantly.

The second case is of a very different organization - King's Cross station of the London Underground (a.k.a., the city's metro system). Unlike the Rhode Island Hospital, the London Underground had a rigid, firmly planted system in place to make sure the organization ran smoothly and that no one stepped on each other's toes - drawn upon previous, legitimate altercations among staff and department heads. Unfortunately, the London Underground's institutional habbits were so deeply engrained it became very hard for staff to take on additonal duties, to grow professionally, and to take immediate action if they saw something was going wrong. This system of institutional habit fell apart during the King's Cross fire of 1987, which began when ticket booth worker Philip Brickell saw a wad of burning tissue at the foot of one of the station's wooden escalators and put out the fire. However, due to institutional habits, he was dissuaded from notifying anyone of (or doing anything else about) the incident, since an entierly different department handled fire saftey - and he knew better than to potentially get into trouble by overstepping his bounds. Several minutes later, a passenger hit the escalator's emergency stop button upon seeing smoke and "a glow from underneath the escalator's stairs." However, the station's chief saftey inspector Christopher Hayes did not initially call the fire department (a police officer on duty ultimately did) because he did not see any smoke at first and risked getting into trouble if he called the fire department before it was "absolutely necessary". When Hayes eventually entered the machine room to investigate, he immediately realized the fire was far larger and stronger than anyone could have imagined; however he, nor anyone else working in the station, could activate the sprinklers because the only people who knew how worked in an entierly different department (and even if they did the fire was already too powerful by the time Hayes officially discovered it). Additionally, King's Cross Station's Director of Operations was previously worried about the flamibility of the station's ceiling paint, but did not mention anything for fear of stepping on the toes of maintanance department officials.

The first firefighter arrived a half hour after Brickell first saw the burning tissue, but by then it was too late - a few minutes later a gust of wind from an arriving train triggered a flash fire throughout the station that killed 31 people and injured at least a dozen others. While such disasters are not entierly unheard of in metro stations, what set King's Cross station apart from other cases was what happened after the fire. When government special investigator Desmond Fennell probed into the specifics of what happened, he realized that the institutional habits that allowed the fire to happen had to be changed - and could only be changed through a crisis situation. A media circus developed from the 1987 King's Cross fire's aftermath, similar to that of the Rhode Island hospital - yet this one was deliberately orchestrated on Fennell's part through months of hearings, interviews, and a sharply critical report of his own writing. As a result, the administration of King's Cross station changed hands, and an entierly new institutional habit was formed - that of placing passenger saftey above all else.

## How a Charter School Revamped Its Culture
_How a Charter School Giant Revamped Its Culture to Put a Stop to Burnout. Author: Orlan, Samuel Lawrence; Editor: Lancto, Katelyn N_

This article is about how the KIPP charter schools tackled the difficult task of decreasing prevalent principal burn out that was leading to harmful turn over of talented teachers and principals at their schools.

KIPP is one of the largest charter school networks in the U.S. with over 180 schools in Washington, D.C. and 20 states. By 2010, KIPP had grown from one classroom in Houston to almost 100 schools. KIPP quickly realized that they had a problem; their principals were buring out after just one or two years. Approximately half of the KIPP principals who founded schools in 2006 were not in those same roles four years later. Research showed that principal turnover had a detrimental effect on student learning. In 2011, the National Bureau of Economic Research published a report stating that “the departure of a principal is associated with higher teacher turnover rates and lower student achievement gains.” It also said that “faltering organizations with high levels of turnover often have difficulty attracting experienced successors, who tend to be more effective. As a result, they become trapped in a ‘vicious circle’ of high managerial turnover and declining performance.” Dave Levin, a cofounder of KIPP charter schools, wanted to shift the way that people think about teaching, to viewing it as something you “could do for a career” and not just “thinking about it as something you do for a limited time, almost as a tour of duty.”

The broader education reform movement was also trying to dispel the perception that it was recruiting young individuals into the classroom that were only using the teaching experience as a stepping stone to other professions. Some charter schools have embraced this “revolving door of talent” system, accepting high turnover with teachers who are willing to work 80 hour weeks for a few years, while others have sought to retain educators deep into their thirties. These schools have tried various incentives including pay raises and “doctor days” which are semi-annual personal days dedicated to health and well-being. These changes were not enough. KIPP had a culture where the school leaders were seen as a “mythic figure.” Working long hours was a badge of honor, and that culture had to change. They were not sleeping; they were not exercising; they were not living in ways that were sustainable. KIPP hired a consultancy company called VitalSmarts to help change a culture where principals, similar to relay runners in a race, would “sprint for two years, and then pass the baton to someone else.”

The solution, VitalSmarts determined, was to “get help, so you can focus on what’s important.” A new approach, based on “vital behaviors,” was developed in an effort to change habits. The biggest task was changing the view of the principal and their primary responsibilities. Steven Epstein, executive director at KIPP school in Austin said "there’s nothing unique about your skill set that can do something better around a custodial issue or a food service issue, but there is something unique about coaching and professional development. The principal’s main responsibility is to develop the other people in their building." In 2011, KIPP introduced this new model and way of thinking. Of the founding principals who started that year, 82% were still in those positions four years later.

This new framework had many practical changes for principals. They shared “personal and professional goals with their managers, mentors, and staff [and] also [spoke] publicly about objectives like attending yoga twice a week, having dinner with friends once a week, and cooking healthy weeknight dinners for growing families.” The intent here was to link personal goals to the long-term success of the organization, which also helped eliminate some of the weirdness of talking about it. One principle lost over 60 pounds. The last “vital behavior” was “Renew to get stronger.” Levin chose this language because he felt “it removes all of the guilt.” He feels that the phrase “work-life balance” is too prosaic and can set the wrong tone. He reasons; "From an organizational point of view I tend not to think about issues of balance, I tend to think about issues of fulfillment. Everyone’s balance is going to be different, and there are going to be really long days. That’s just the nature of doing something great. But there’s an ebb and flow to this stuff and we want to create the condition for people to be successful and fulfilled by their roles."



## The Ballad of Paul O'Neill
_Duhigg, C. (2012). The power of habit: Why we do what we do in life and business (Vol. 34, No. 10). Random House. CH 4: The Ballad of Paul O’Neill. Author: Dieselman, Andrew; Editor: Whiting, Cal McCulley_

In the fourth chapter of Duhigg's "The Power of Habit," the author begins by introducing the new CEO of Aluminum Company of America (Alcoa). This new CEO, Paul O'Neill, was just beingfirst introduced to investors. He began, not with the usual CEO speak of profit and synergy, but safety. This confused investors, and they panicked. They were wrong to do so. O'Neill, the author explains, drove Alcoa to massive profits in his 13 years at the companywould exit the company 13 years later having driving Alcoa to massive profits, all while driving down intances of accidents. How? O'Neill explains it as targeting 'keystone habits,' or habits that, when they start to shift, dislodge and remake other patterns.

O'Neill used the education he gained on thefrom his job in D.C., observing various agencies utilize their institutional habits to do either do good, or do pointless work. He stepped into a very serious situation, one worker described it as "the Manson family, but with the addition of molten metal." He intended to bring the company together by focusing on something that everyone could agree on, safety.

He understood that he needed to find the root cause of injuries, - why the injuries happened in the first place. He needed to institutionalize habits that promoted safety. O'Neill did this by forcing VP's to contact him with a plan everytime someone was injured on the job, in order to ensure that that injury could not happen again. This shifted everything else at Alcoa, making it a safer and more productive company.

The author continues the chapter by using Micheal Phelps as an example. In order to make him into an olympian, Phelps' coach knew they had to do something extra. Everyone in the olympics is a good swimmer, but what phelps and his coach did was implemented a habit of visualizing the perfect race. By visualizing in his mind's eye, over and over agaiThrough continual visualization, Phelps was able to dive into the pool as if he had done it a thousand times before, and succeed.

The third portion of this chapter begins with O'Neill's experience with the U.S.'s high infant mortality rate. O'Neill was able to trace this phenomenon back to poor diets of mothers in rural areas, which was caused by poor education, which was caused by a lack of teacher training. Therefore, the solution was to educate teachers better on nutrition, so they ocould teach young women bettermore effectively. By creating strctures that help other habits to flourish, O'Neill helped lower the infant mortality rate by 68%. The key to O'Neill's success was getting at the root cause of institutional failures. At Alcoa, this was safety. For infant mortality rate, it was lack of teacher training. O'Neill did not just attempt to address problems he saw at face value, but rather the things that caused these problems to occur, thus eliminating the problem more effectively.


## eBay's $50 Billion Turnaround
_Carlson, N. “You Can Explain eBay’s $50 Billion Turnaround with Just This One Crazy Story.” Business Insider, February 8, 2014. Author: Uk, Bolary; Editor: Boucher, Timothy M._

The article describes an incredible visionary of eBay CEO, John Donahoe, who successfully turned around the company from an 80% decline in stock price. After joining eBay in 2005, Donahoe started to restructure the company by deemphasizing eBay’s auction business. He began to move the company towards being a “technology partner” to small and large retailers and helped the businesses cope with a world dominated by Amazon.

The story of turnaround at eBay started from this smart tactical adjustment. Donahoe realized the main problem of eBay was the death of innovation in that employees stopped creating and developing sophisticated search technology. The company lost profits to other tech companies. In turn, the quantity of sales declined as the company depended on the Google ads tool which made it hard for consumers to find products they wanted to buy. After the issues had been identified, Donahoe came up with a solution after consulting with eBay board director Marc Andreessen, who was best-known as the creator of the first Web browser. Andreessen strongly believed that the output of tech companies is innovation and that great innovative ideas come from the founders of the successful tech companies.

Knowing that the founder of eBay had no interest in re-joining the company, Donahoe decided to build a team of founders by acquiring 34 companies after becoming the CEO. Currently thirteen startup founders work for eBay. A great turnaround example is the two-week reinvention of the eBay homepage, which was based on a rough idea of Jack Phillip Abraham, the founder of an e-commerce startup called Milo. When Milo joined eBay and Abraham built Milo’s technology into eBay the team soon became known as eBay Local, a division of the company responsible for assisting customers in getting quick access to products from local retailers.

On Feb, 2012, Donahoe invited Abraham to join him and other senior personnel for a meeting on the topic of “Innovation." The purpose of the meeting was to bring to life the earlier idea pitched by Anreessen to revamp innovation in the company. Abraham got the idea to reinvent eBay by having a similar News Feed like Facebook. However, instead of displaying updates from friends, the page could show updates from eBay sellers and product categories. Based on the shopping history and searches of users, eBay would turn the feed on without waiting for users to start following any product. Donahoe was excited about the idea and asked Abraham to get him a plan for next few weeks. He also promised to give Abraham all the resources he would need. While Abraham still had his own daily work to do with eBay local, he decided to create a small team of 6 of the smartest people from eBay to turn his idea into a reality. He kept his team small because having a bigger team would be time consuming, due to the politics and bureaucracy of eBay. Abraham also believed that he needed to take the team to far-away location for a limited time to accelerate the project. With a long history of entrepeneurial spirit, Abraham has been the kind of person whose risk-taking has resulted in significant innovation and productivity. However, without a clear roadmap of what the team was going to do, the fear of uncertainty arose and Abraham began to second guess his plans to reform the eBay website. Despite this fear, Abraham moved forward and took his team of six to Sydney, Australia where they brought his dream into fruition. Over two weeks, the team worked together and built a functioning prototype of a reinvented eBay.com.

Upon returning from the secret trip, Abraham had a meeting with Donahoe and presented the prototype of the new eBay.com. Donahoe looked at the prototype on the computer screen and ultimately burst out laughing stating "this could be the future of eBay." Similarly, the entire board of directors loved the feed and soon the feed became the central part of eBay.com. With this valuable tool, eBay has been able to increase sales and engagement. This is but one example of Donahoe's innovative vision for the future of the digital world and his ability to reform a slacking tech company back into the market leader it once was.

## Failed Policy Change
_Greider, W. “The education of David Stockman and other Americans.” The Atlantic, December 1981. Author: Sears, Kicia Kimberly; Editor: Tansits, Colin E_

The article details the first year in office of the man behind Reganomics, David Stockman. To get the public behind the drastic changes in Washington, Stockman had weekly conversations with the author, explaining the ideology behind supply-side theory, the chaos of early budget meetings, the battles in Congress, and the adjustments made after failure—either in Washington or in the market.

Stockman grew up on a farm in Michigan, and was a conservative Republican congressman when he was appointed to run the OMB for President Reagan. He enjoyed a mild youthful rebellion against his conservative beliefs as an activisit and theology scholar, but eventually came back to republicanism after studying at Harvard under influential neo-conservatives in political science and history. When he was called to work for OMB, he was a newcomer to supply-side theory, and was tasked with making Reagan's campaign promises a reality.

Unfortunately, the doubters and naysayers would prove themselves correct. Reagan's promises to cut income taxes, raise defense spending, and balance the budget were mutually exclusive. But early on in his appointment, Stockman was confident. He and other supply-side economists were predicting that Reagan's dramatic policy action would be enough to shock the market: they expected interest rates and inflation to fall, employment to become more efficent, and a big boom in the private sector that would outgrow the government. This belief held strong, and Stockman was confident that these new methods would do a far better job than the mostly-democratic relief programs, which he had seen fail again and again in his home state of Michigan. He predicted some pushback from liberals but thought that they would be convinced if he went after weak ideas and claims rather than people.

The first few months in office were a whirlwind. Stockman and his staff were putting together policy papers that recommended drastic cuts in nealry every governmental program in existence in a matter of days. They were also forecasting with the help of a computer that modeled the national economy. However, after inputting their changes based on Reagan's campaign promises, the model showed massive federal defecits, to the tune of $82B in 1982 and $116B in 1984. These numbers would certainly not result in the kind of market shock Stockman was hoping for, so he and other supply-side theorists changed the computer's model.

Stockman used the deficit predictions, however, to get the President to commit to the massive cuts necessary to balance the budget. He calculated that $40B in cuts were needed across the board. However, with the way actual government spending works, these cuts seemed impossible. If the total federal spending were a dollar, 48 cents of it went toward the social safety net, which Reagan had promised not to touch, so that whole piece was exempt from Stockman's cuts. Defense was another 25 cents of the dollar, and not only could that not be touched, but Reagan had promised to increase its share. 10 cents of the dollar went to paying off interest on the national debt. The remaining 17 cents went toward everything else government does: operations and grants to state and local governments. This is where most of the cuts would have to be taken from. Even though this seemed impossible, Stockman didn't believe the numbers. He thought he could make the government run more efficently with his cuts and the effects wouldn't be as drastic as they seemed.

Additionally, the plan was to get cuts approved as quickly as possible, before new Cabinet members could fully get a grasp of their departments and put together effective counter-arguments and proposals. And this worked. As a result, "Stockman's agency did in a few weeks what normally consumes months; the process was made easier because the normal opposition forces had no time to marshal either their arguments or their constituents and because the President was fully in tune with Stockman."

The author also presents a nice summary of some of these changes that I will reproduce in full here:

"The check marks [programs that were approved by the President for cuts] were given to changes in twelve major budget entitlements and scores of smaller ones. Eliminate Social Security minimum benefits. Cap the runaway costs of Medicaid. Tighten eligibility for food stamps. Merge the trade adjustment assistance for unemployed industrial workers with standard unemployment compensation and shrink it. Cut education aid by a quarter. Cut grants for the arts and humanities in half. "Zero out" CETA and the Community Services Administration and National Consumer Cooperative Bank. And so forth. "Zero out" became a favorite phrase of Stockman's; it meant closing down a program "cold turkey," in one budget year. Stockman believed that any compromise on a program that ought to be eliminated—funding that would phase it out over several years—was merely a political ruse to keep it alive, so it might still be in existence a few years hence, when a new political climate could allow its restoration to full funding." (My note).

This all happened so fast, and eventually Stockman would come to lament the speed with which everything was done. He had to make snap judgements based on little information--something that barely ever works unless one is already deeply experienced.

One of the major fights that came up was regarding cuts to the Export Import bank (Ex-Im). Stockman was trying to prove that supply-side theory could be equitable, and make cuts on the wealthy, on big interests, etc. and not just cut social programs. However, the interests he was going after favored big American manufacturers. Though he got the cuts for the moment, he anticipated pushback in the future.

While this was happening, defense was running wild with spending. They had been told they couldn't be cut, and had been promised increases in the future. Their budget was basically rubber-stamped and then ignored.

Stockman was also preparing to increase revenue and reduce defecits. This next phase of his plan involved closing loopholes in the tax code, which he thought would assuage liberal fears. However, the President rejected this plan. Stockman, at least on the surface, wasn't upset, "The vulnerability of Stockman's ideology was always that the politics of winning would overwhelm the philosophical premises." When his ideas would get shot down by the president, fail or get mutilated in Congress, or fail to meaningfully affect the market, he was quick to shrug it off and move on. He felt like the drastic action by the administration was shocking politicians and more and more were coming to support supply-side theory. He even had a "spy" in Democratic meetings that helped him meet and respond to their budget proposals.

However, though he could rally after political failures, the market failures were a much bigger pill to swallow. In fact, the market was not only not booming, but going into decline. The CBO predicted future defecits of $60B, which forced the administration to face uncomfortable questions, questions that Stockman thought he had prevented by placing what he called a "magic asterisk" on any future defecit problems that came up in his recommendations, claiming that these issues could be taken care of in the future, with more cuts. At this point, Stockman and his analysts knew the plan wasn't working. But this is not what they said publicly. The author notes, "Reagan's policy-makers knew that their plan was wrong, or at least inadequate to its promised effects, but the President went ahead and conveyed the opposite impression to the American public. With the cool sincerity of an experienced television actor, Reagan appeared on network TV to rally the nation in support of the Gramm-Latta resolution, promising a new era of fiscal control and balanced budgets, when Stockman knew they still had not found the solution."

Instead, Stockman planned to make small changes to the Reagan policy that he hoped would go unnoticed in the political arena as being contrary to what was initially promised. He needed to cut the defecits, but he couldn't be perceived as abandoning the strategy. He hoped to make changes to the tax-cut plan, and to cut defense, Social Security and health costs (Medicare and Medicaid). He hoped that the uproar after the CBO's defecit numbers was enough to get people willing to do these things.

He anticipated delaying the tax-cuts would be easy, politically. He also anticipated that he could make compromises to Social Security and health costs by ignoring future predictions of problems (in 2010) and emphasizing how bad things would be immediately if these cuts weren't made. The hardest part was defense, and Stockman knew he couldn't make any changes that looked like contradictions to the Presidents promises. However, he thought that defense had gotten so greedy that they alienated themselves and the cuts wouldn't be opposed in Congress. He still anticipated a market boom, but pushed it from April to August.

When he was met with bigger resistance on Social Secuity cuts than he anticipated, he brushed it off, saying that he felt peopel would come around and that they were just too sensitive to reactions of the public and press. In the end, the President turned on these cuts and they were postponed, until they would be of no use in preventing huge defecits. They ended up modifying the tax-cut plan instead to help close the gap.

Through all of this, Stockman was beginning to doubt the supply-side theology. He had seen what happened with these ideas in action, and thought that instead of being revolutionary, supply-side was just a way to rebrand old Republican idology of "trickle down" economics.

As things fell apart, his fears were confirmed. Politicians did what they (are supposed to) do best: compromise and make trades. Agreements were reached, and figures were decided. However, Stockman felt the figures that got approved were "ceilings" which could be reduced later on. Politicians were not on the same page, and when these figures were challenged later on, they turned on him. Eventually more agreements were struck and Stockman was forced to admit that his quest for equity in fiscal revolution had failed: "Now, as the final balance was being struck, he was forced to concede in private that the claim of equity in shrinking the government was significantly compromised if not obliterated."

Though it seemed like they had won politically, Stockman was no longer confident. He knew the numbers being presented to the public were imaginary. He said, " 'There was less there than met the eye. Nobody has figured it out yet. Let's say that you and I walked outside and I waved a wand and said, I've just lowered the temperature from 110 to 78. Would you believe me? What this was was a cut from an artificial CBO base. That's why it looked so big. But it wasn't. It was a significant and helpful cut from what you might call the moving track of the budget of the government, but the numbers are just out of this world. The government never would have been up at those levels in the CBO base.' "

Faced with failure, not just in the present but in the future, Stockman reflected on what had gone wrong. He blamed the speed with which he was asked to make cuts in the early months of his term, admitting they were made without much information. He turned on the supply-side purists, calling them "naive" and arguing that they had "gone too far." But more than that, he basically threw up his hands. He was scrambling to keep things together and said he couldn't put too much thought into how the system works, how slowly it moves, or what might happen, since he had little control over those things. He instead tried to focus on the immediate, and continue plugging away. He didn't know what would happen after the next election cycle, but it didn't seem to concern him too much. The reporter ends the article with a quote that seems to show Stockman calling supply-side a "crackpot" theory, but one that he is still going to push forward until there is another major shift in the economy or the political arena. He is defeated, but committed to lying in the bed he's made for himself. Unfortunately, it's not just his bed, but one he has made for the entire country as well.

## Organizational Change in an International NGO

_Lux, S. and Bruno-van Vijfeijken, T. (2013). “From Alliance to International: The Global Transformation of Save the Children.” E-PARCC Case Study on Collaborative Governance. Author: Whiting, Cal McCulley; Editor: Fantigrossi, Steven Marc_

**Part A - Barry Clark comes on Board**
In 2002, Barry Clark took note of many organizational issues when he joined an NGO named “Save the Children Alliance” (SC). The organization of the company did not connect between regional offices and there was no way to distinguish offices from each other. Even worse, the SC United Kingdom director barley even knew his counterparts. This decentralized organization was a result of World War II, where SC affiliates were on opposite sides and began to focus on different missions. As a result of SC’s lack of coordination, its reputation was damaged in the 1960s and 70s. Failure to respond effectively to disasters like the Guatemalan earthquake in 1976 plagued the organization.
To address the issue, SC members established an independent secretariat in Geneva, Switzerland in 1993 and named it the Save the Children Alliance (SCA) with the goal of facilitating collaboration. Due to its too few employees, lack of a clearly defined mission, and self-interested SC branches, SCA struggled to come together for the common cause.

Part B - In Search of Strategy
Clark noted that “[SCA’s] problem wasn’t so much a structure or organization or people problem, it was in fact a lack of coherent strategy.” While CEOs of the four major SC members representing United Kingdom, USA, Norway, and Sweden began to assert themselves in promoting a more centralized SC, but the many SC identities made its organization and strategy confusing to donors and also created inefficiencies. Many SC partners were not only not collaborating but were openly competing with one another!
Due to these inefficiencies, Clark convinced SCA to develop a new global strategy which included the adoption of independent board members to the Save the Children Alliance and the appointment of an independent Chair, a plan to develop a coordinated Alliance strategy for 2020, a 5-year plan, and an agreement on a common goal for the alliance to maximize contribution to the children,

**Part C - Give and Take, Changing Governance**
Three years after implementing the new global strategy, SC Alliance brought Peter Woicke onto its Board as Chair and appointed Charlotte Petri Gornitzka as the Alliance’s CEO. After receiving some resistance from the idea, Barry Clark took steps to coordinate work at headquarters, just as they do at the field level. Since Woicke believed that the four largest SC’s dominated the decision making process, he began to make changes to the structure and governance. The mission drove the structure; as Gornitzka stated, “We didn’t start with a decision about what would be the right organizational structure, instead, we focused on thinking about what children need, what the relevant role for Save the Children was, and what we were good at.” Unsurprisingly, the four large branches pushed back against the changes as they would be losing autonomy in decision making.
As part of the centralization process, SC established “managing members” of countries instead of “participating members” in order to make managing affairs in a country more clear-cut. SC established three workgroups focused on Fundraising, Strategic positioning, and People, Organization, and Governance (POG) group. These groups engaged in talks about the different options SC should look at.
In 2009, Members agreed to reconstitute Save the Children Alliance into what would now be Save the Children International. New bylaws for SCI board were then drafted and approved and the old alliance board stepped down. SC International’s board now consists of 14 directors – 9 drawn from the boards of the largest members by income, 3 elected by other members, and 2 independent external elected by the board. Peter and Charlotte resigned and took over responsibility for the next most significant task of SC’s organizational change, what became known as the “All Members Agreements.” To make the change, member organizations had to give up the operational control and direction of programs that occur in the field which was now facilitated by SC International through the regional offices and country programs as a direct outgrowth of the model of Unified Presence.

**Part D - Save the Children Org. Change: Implementation and Early Results**
Implementation of the new Members Agreement, in fact, would be more laborious, more time consuming, and more complicated than the change that SC had experienced to that point. The most daunting task that SCI faced were two key aspects of transferring country level programs into a unified delivery platform
Staffing issues became a difficult challenge, necessary for the new SCI. SCI needed to quickly recruit transfers from member organizations or hire externally into the new SCI positions that had been opened up. Budgets and decision making authority was lost by the program staff, national boards who raised funds no longer controlled the resources, and finance and audit departments lost authority over project finances. SC leadership faced pushback on the needed changes and relied on the values of organization to make the point that more children would be helped through the new structure.
The changes resulted in the members of the organization thinking of themselves as part of a larger SC team. Save the Children received increased media attention and was able to gain greater geographical coverage. Additionally, SC found attract talent and funders to help their efforts.

**Analysis**

Organizational change was needed at Save the Children because it lacked unity among its various field offices, which created inefficiencies in service delivery that cause funding to decrease. Since SC is an international organization, its offices throughout the world quickly developed their own identities, funding mechanisms, and decision making processes. These problems made it difficult to coordinate in its response and advocacy functions. Often, different field offices had different missions and visions for responding to certain crises or how to operate their individual office. All of these problems were manifest from a highly decentralized organization of the company that lacked an independent authority responsible for establishing a unified mission and coordinating between offices to ensure adequate delegation of authority and responsibilities.
SC organizational change was successful primarily because it centered on maintaining the mission and identity of SC. In the talks surrounding how to change the organization of SC, the main question asked was “how does this change assist in our mission of assisting as many children as we can?” By having organizational mission drive organizational change, SC was able to greatly enhance efficiency while maintaining and building its ultimate goal.
chapter12
# Section 12: Team Performance

_Team work is simultaneously one of the most important ingredients in organizations and one of the most difficult things organizations do. Teams rarely function well without effort. What are processes that can help teams function better?_

## Why Teams Don't Work

Why Teams Don’t Work: Harvard Business Review. Author: Sarawat, Fariha; Editor: Checksfield, Molly Wentworth

## How Teams Can Work Better

Sutherland, J. & Sutherland, J.J. (2014). Scrum: The Art of Doing Twice the Work in Half the Time. Crown Business, Happiness: pp 71-144. Author: Legnetto, Deanna Marguerite; Editor: Rodriguez Ranf, Daniela

## What Makes Teams Work

Cohen, S. G., & Bailey, D. E. (1997). What makes teams work: Group effectiveness research from the shop floor to the executive suite. Journal of management, 23(3), 239-290. Author: Farrior, Cheri Nicole; Editor: Dieselman, Andrew

## Review of Team Effectiveness

Mathieu, J., Maynard, M. T., Rapp, T., & Gilson, L. (2008). Team effectiveness 1997-2007: A review of recent advancements and a glimpse into the future. Journal of Management, 34(3), 410-476. Author: Berkley, Njeri N; Editor: Fantigrossi, Steven Marc

## Dynamics of Team Formation

Casciaro, T., Lobo, M.S. (2005). “Competent Jerks, Lovable Fools, and the Formation of Social Networks.” Harvard Business Review, June, 92-99. 8 Author: Wohlenberg, Danielle Irene; Editor: Uk, Bolary

## When Teams Fail

Holmes, A. (2006). Maine's Medicaid Mistakes. CIO. Author: Kim, Chung Myung; Editor: Berkley, Njeri N

**Why Teams Don’t Work: Harvard Business Review. Author: Sarawat, Fariha; Editor: Checksfield, Molly Wentworth**

J. Richard Hackman, the Edgar Pierce Professor of Social and Organizational Psychology at Harvard University is a leading expert on teams. Hackman’s research reveals that most of the time team members don’t agree on what the team is supposed to be doing and that team leaders have to assume great personal and professional risks to determine the team’s direction.

Hackman talks about how people are taught from very early on in life that teams are great and can get the work done in a shorter time. However, research shows that challenges with coordination and motivation negate the benefits of collaboration, making teams under-perform quite consistently. Even among teams of senior executives there are similar challenges and Hackman argues that choosing effective team members requires ruthless decision making.

One of the most critical aspects to leading a successful team, according to Hackman, is understanding who is on your team and utilizing the strengths of each member to reach a common goal. It is imperative that leaders set the tone and exert authority during the first meeting with their team so they can establish direction and set the tone for future collaboration amongst all participants. Leaders are critical in setting the direction of the team, however in doing so they encounter resistance so intense that it can place their jobs at risk.

Hackman also suggests that reverse causality can explain the confusion about the cause-effect relationship between effective teams and job satisfaction—‘When we’re productive and we’ve done something good together (and are recognized for it), we feel satisfied, not the other way around.’

Hackman’s research shows that smaller teams are more effective than larger teams and while the addition of new members can inspire creativity, injecting too many new members can actually reduce productivity and accuracy. Hackman thinks every team needs a ‘deviant’—a disruptor who questions them and pushes back on complacence—to be more effective. President Obama surrounded himself with intelligent, strong-minded figures at the beginning of his first term who exemplify Hackman’s model of success. By including not one but many deviants in a group at that time, President Obama was able to engage in further exploration of knowledge, as opposed to passive acceptance of the status quo.

Being critical of our own actions within organizations is crucial to developing creative solutions to problems. There is a balance between individual autonomy and collective action that needs to be reached in order to succeed because either extreme yields potential failure. Our society should not romanticize group work in all instances but should instead recognize the costs and benefits of relying on teamwork in each situation.


## How Teams Can Work Better

Sutherland, J. & Sutherland, J.J. (2014). Scrum: The Art of Doing Twice the Work in Half the Time. Crown Business, Happiness: pp 71-144. Author: Legnetto, Deanna Marguerite; Editor: Rodriguez Ranf, Daniela

Throughout these three chapters, Sutherland discusses the importance of cutting down waste and planning strategically and realistically before what he calls Daily Stand-Up meetings and Sprints.

_Chapter 4: Time_

_The Sprint:_ Companies frequently give their employees large amounts of time to work on projects, most of the time which they seldom receive feedback before it’s too late and the time is long wasted. Instead of working slowly on long, drawn out projects, the Scrum Sprint allows teams to move through product development in a short amount of time. Using an example of “Team WIKISPEED” a company that makes cars in Seattle, the team presented all the projects they expected to get done in a week (designated time is one Sprint) on a large white board. As the projects changed in stages, the team members would move the items from "Backlog, Doing, and Done", allowing their colleagues to see the progress.

_Daily Stand-Up:_ Sutherland builds on the Sprint idea by using daily, 15 minute meetings in which everyone participates and attends. These performance measurement meetings revolves around three questions that can be utilized to assess each Sprint by giving the team a chance to spot any weaknesses or problems and solve them right away. Since special titles and specialization seem to create tension between roles in a group, absolving titles can be a productive action before adopting this “Daily Stand-Up”.

_Time and Time Again:_ Sutherland uses an interesting scenario of a friend’s plan for remodeling his house and a neighbor attempting the same. By using the Scrum model of Daily Stand-Ups and Sprints, his friend was able to complete the project in six weeks, while the neighbor’s project took twice as long and cost twice as much. One of the main differences between the jobs was how much time was wasted waiting on each piece to finish before the other could start.

_Takeaways from Chapter 4:_
- Time is finite. Treat it that way by breakingdown the work into pieces that can be accomplished in regular and set periods of time.
- Demo or die. At the end of the Sprint make sure you have something done.
- Throw away your business cards. Titles are distracting and they influence team dynamics. Be known for what you _do_, not what you're referred to.
- Everyone knows everything. Communication saturation accelerates work.
- One meeting a day. For team check-ins meeting once a day is enough. Use Daily Stand-up model to see what can be done to increase speed.


_Chapter 5: Waste Is a Crime_

Sutherland stresses the importance of establishing a positive rhythm or pattern to improve our habits and avoid "waste", which can be waste of time, waste of energy, waste in inventory, or the emotional waste of unreasonable expectations.

_Doing One Thing at a Time:_ Evidence shows us that working on more than one thing at a time presents extreme cases of waste, even if you’re a business executive and you are trying to juggle several projects at once. Similar to talking on the phone and driving, one’s brain cannot concentrate equally on both tasks. Teams can suffer tremendously from trying to multi task on three projects simultaneously instead of working through the first part, then the second, and finally the third. Rotating through projects creates wasteful time trying to get back on track when switching gears.

_Half Done Isn’t Done at All:_ Sutherland discusses the importance of having fully finished products or tasks rather than a bunch of half-finished ones. It is wasteful to invest in effort without the positive outcomes.

_Do It Right the First Time:_ A team that stops and works together to fix a problem, will achieve success faster than a team that has to make corrections following completion. Fixing it later Sutherland says, will take you more than twenty times longer than if you fix it now.

_Working Too Hard Makes More Work:_ Working longer hours is not necessarily an indication of working harder and in many cases can be seen as working slower or more inefficient. This idea syncs up with “ego depletion” and the notion that an individual is limited to a certain number of good or mindful decisions each day.

_Be Reasonable:_ Sutherland discusses Toyota’s Taiichi Ohno three types of unreasonableness waste and the effects on teams. Absurd goals can frustrate and destroy teams, unreasonable expectations sets teams up to fail, overburden can waste valuable time with monotonous tasks, and also “Emotional Waste” usually comes from a poisonous employee whom incessantly causes trouble. Anyone who causes emotional chaos, inspires fear or dread, or demeans or diminishes people needs to be stopped cold.

_Flow:_ He finishes chapter five by suggesting teams should strive to create an effortless flow of discipline that does not succumb to waste. Sutherland explains that Scrum is about enabling the most flwo possible.

_Chapter 6: Plan Reality, Not Fantasy_

Planning can easily get out of hand and buried underneath piles of paper. Grouping similar points together and organizing where to start first allows groups to prioritize their work.

_Wedding Planning:_ Sutherland relates estimating goals for a business to planning a wedding. It is important to make a priority list, which is consistently reviewed and updated and organized by value. Sutherland advices to only plan what you need to keep yout teams busy instead of ttrying to project everything out years in advance.

_Size Does Matter, but Only Relatively:_ Once a prioritized list is created, it’s important to scale these items in terms of size or amount of involvement. One scale is the Fibonacci sequence or “Golden Mean”, which is a pattern of numbers where the following number is always the sum of the previous two. This pattern allows our brains to better handle estimating large jumps than slight changes, which is more comfortable for the human mind.

_The Oracle of Delphi:_ It is common for certain things to occur when dealing with groups, such as “the bandwagon effect” or following the common ideas, “informational cascade” or over-valuing the judgement of others, and the “halo effect” or allowing one characteristic to influence other unrelated characteristics. In the case of the Rand Corporation during the Cold War, these three effects were avoided by the use of anonymous surveys given to each team member, so as to get rid of potential bias and locate commonalities in thinking.

_Planning Poker:_ Similar to Delphi, the art of “Planning Poker” is a faster and more accurate way of estimating. Each team is to use Fibonacci sequence labeled cards to estimate the size of each piece of the project. If each card is not within two sequences then the group must come together and share their reasoning, and re-submit their cards. This too allows groups to work without bias effects.

_There Are No Tasks; There Are Only Stories:_ Without giving individuals or teams a context of the items that need to be done, workflow may suffer. Similar to telling a story, providing an outline of who the task is being done for, what the particular goal is, and the motivation of why this individual wants this done will provide clear reasoning and may even improve estimates. These stories however, are best told as short, to the point stories that pinpoint straight forward tasks.

_Be Ready and Be Done:_ Sutherland uses the INVEST criteria to identify if a story is ready: Independent (able to self-complete), Negotiable (be flexible), Valuable (delivers value), Estimable (provide a scale), Small (to make for easy planning), and Testable (a way to test for completion). Tying this back to Sprints, these stories are commonly discussed at Sprint Planning meetings where accomplishments can be estimated.

_Know Your Velocity:_ By using all the applications discussed in this chapter, teams can develop a velocity and use this to calculate the time for a finished product. Using the Medco example, this velocity can and should be used to identify and correct for waste.


## The Shift in Management Philosophy

Denning, S. "Why do Managers Hate Agile." Forbes Magazine. Part I (January 26, 2015) and Part II (January 28, 2015). Author: Farrior, Cheri Nicole; Editor: Dieselman, Andrew

This article discusses the worlds of management and Agile. Management is when everything is vertical and being run top-down. Management functions systematically. The top bosses appoint workers, assign tasks, make decisions, and assess performance. Employees compete with other employees for compensation, and compensation is tied to rank. There is tight control and a heavy focus on efficiency. On the other hand, Agile is horizontal. The goal is customer satisfaction and money is a result, but not the ultimate goal. There is a focus on innovation which enables those doing the work to be able to utilize their talents and abilities. Firms with the horizontal mindset are thriving, while those firms with a vertical mindset are struggling.

The article states that the Agile approach consists of self-organizing teams working to deliver additional value directly to customers. Teams trying to go the distance as a unit, passing the ball back and forth, is more effective in today’s competition verses the relay race approach to product development. The agile approach is now becoming more popular in all sectors of the economy.

The agile approach was a result of hierarchical bureaucracy, which consists of individuals who report to bosses who have control and tell them what to do. Hierarchical bureaucracies created order in times of chaos and was scalable, efficient, and predictable. However, the focus was internal, it was non-collaborative, its plans were linear, and it was dispiriting to staff. However, none of these liabilities didn’t matter much because firms could overcome them, but then all of a sudden the world changed due to a number of factors: globalization, deregulation, new technology, and the Internet. The buyer gained power in the marketplace and the customer was now central. Average performance as no longer good enough. Innovation was required. This led to managers rethinking the way in which organizations were run and the birth of the agile world. Work was now done by self-organizing teams that could utilize the talents of all involved in the work and there was a main focus on satisfying customers needs.

The Agile approach there is a belief that if you put the customers needs first then the organization will flourish. Making money is the result not the goal.

At the team level, firms use the Product Owner to interpret what the customer wants. At firms like Apple, those doing the work are able to deal directly with the customers. Apple has been able to achieve a massive scale by having a platform serving as a lens to the need of the customer. They have hundreds of thousands developers working to meet the needs of its hundreds of millions of customers and because of that the hundreds of millions of customers have a product that is customized to meet their own interests and needs.

Scrum teams and the Apple platform are similar in that they have total focus on the customer, they have an ideology of enablement rather than control, they have a flat horizontal structure, they have the same iterative dynamic, and they both are inspiring people to do the work.

Another example of the dynamic of Agile is Autodesk, which is a leader in the CAD/CAM software and building system modeling. Autodesk has created a platform where companies in construction and civil engineering can utilize a number of apps to help large construction companies simulate all aspects of a giant building project before it begins. This allows these companies to anticipate problems and coordinate suppliers. As a result, Autodesk has been able to outperform the S&P 500 index.

Agile is not easy to accomplish, as there will be losses for the first few attempt, which can be costly. However, if companies are dedicated and persistent they will get to the goal, which will exceed any losses and failures they encountered a long the way.

Another component of Agile is continuous deployment. Etsy.com deploys more than 30 software improvements each day. By releasing small changes on a daily basis, its easier to spot and fix problems than it would be by releasing a bundle of many changes at once, as this can be difficult to figure out exactly where the problem was. In addition, management does not have to approve changes to the site. Improvements that have been fully tested are deployed immediately, with the staff devising the improvement overseeing their implementation. This creates mastery and autonomy. These small changes are significant and can create additional millions of dollars in sales. This method also enables rapid innovation and learning.

Managers are now having to ask new questions and with these new questions, the person at the top of the hierarchy doesn’t have the best answers anymore. There are some organizations who transition partially. You have one part of the company operating in a hierarchical bureaucracy, while the other part is operating under the agile and scrum mode. These different ideologies within the same organization can lead to a lot of friction within the company.



## Building Effective Teams

Duhigg, C. What Google Learned from Its Quest to Build the Perfect Team. The New York Times Magazine, February 25, 2016. Author: Berkley, Njeri N; Editor: Fantigrossi, Steven Marc

Twenty-five year old Julia Rozovsky wanted to find a job with a social aspect that would allow her to "be a part of a community". Upon being accepted to Yale School of Management, Rozovksy "was assigned to a study group carefully engineered by the school to foster tight bonds". Business schools have recently altered their curriculums to emphasize "team-focused learning" and reflect the enlarging demand for employees who can adeptly navigate group dynamics. Rozovsky met with her four teammates daily, and found that despite their shared experiences, the study group was stressful. She recalls feeling constant pressure to prove herself to the group, whose dynamics "put her on edge".

Rozovsky later joined a team as part of "case competitions". Rozovsky found this experience to be completely different from her study group, with members coming from different backgrounds. Everyone got along and worked well together in a fun and easygoing environment that they created and socialized prior to meetings. No team memberes were worried about other team members judging their suggestions. Rozovsky couldn't figure out why her experiences with the two groups were so dissimilar: she had friendly one-on-one interactions with the study group members, but when the group gathered, tension would arise. On the other hand, her competition team members seemed to have gotten along better as a group than as inidividual friends.

Psychologists, sociologists, and statisticians are now studying work habits and team composition, like Rozovsky's, in order to find out how to make employees more efficient and productive. Valuable firms have concluded that "employee performance optimization", the practice of "analyzing and improving individual workers," is not enough. Studies show that managers and employees' time spent on collaborative activities have increased by 50% or more over the last twenty years. Studies also show that groups tend to innovate faster, find better solutions, report higher job satisfaction, and increase profitability. It is imperative for companies to ensure effective teamswork if companies want to beat out their competitors.

After graduating from Yale, Rozovsky was hired by Google and assigned to Project Aristotle, where she studied the habits and tendencies of Google teams to figure out why some teams failed where others didn't. The researchers for Project Aritstotle reviewed academic studies regarding team functionality and scrutinized the composition of Google's groups. The researchers drew diagrams to display overlapping membership and looked at things like gender balance and group longevity, but were unable to find patterns that indicated an impact of team composition. Rozovsky and her colleagues continuously came across research that may provide insight to her previous conundrum: "group norms". Norms are the behavioral standards that can be unspoken or openly acknowledged. Norms can have a heavy impact on the way individuals act, but when the group gathers, the group's norms will often override individual inclinations. Project Aristotle's researchers began looking for group norms in their collected data and concluded that understanding and influencing group norms was the answer on how to improve Google's teams. Now they just needed to figure out which norms mattered the most.

In 2008, a group of psychologists from Carnegie Mellon, M.I.T. wanted to find out if there was a collective I.Q. that emerged in a group setting and is distinct from any individual. The researchers found that the right norms could raise a group's collective intelligence, while the wrong norms could be detrimental. Although not all successful groups behaved in the same ways, two behaviors were prominent: equality in distribution of conversational turn-talking (members spoke in same proportion), and average social sensitivity (intuiting how others feel based on tone of voice, expressions, etc.). These traits are aspects of psychological safety: a group culture defined by the Harvard Business School Professor Amy Edmondson as a "shared belief held by members of a team that the team is safe for interpersonal risk-taking". The concept and research of psychological safety led Project Aristotle to particular norms that are critical to success. After identifying the most critical norms, Rozovsky and her colleagues had to fgure out how to formulate communication and empathy into an easily scalable algorithm.

In late 2014, Project Aristotle publicized its research to select groups in the hopes of prompting employees to come up with ideas of their own. After one of Rozovsky's presentations, the group met Matt Sakaguchi, an ex-SWAT team member who currently manages technical workers at Google. Sakaguchi's previous team did not get along too well, and he wanted his new team to be different. Partnering up with Project Aristotle, Sakaguchi distributed a survey to his team which produced results that indicated a disconnect between members' work and overall impact. At a requested off site gathering, Sakaguchi related psychological safety to emotional conversations and began opening up to his team members. The experience allowed team members and researchers to realize that in order to feel psychologically safe, individuals must be able to share personal thoughts and feelings, and not just focus on efficiency.

Google's intense data collection did not lead to any new thinking, but actually confirmed what was already known: in the best and most successful teams, members listen to each other and show sensitivity to feelings and needs. Google did however demonstrate the usefulness of figuring out how to create psychological safety faster, better, and in more productive ways. Project Aristotle's data proved that success is often built on experiences and supported giving people a common platform and operating language.



## Dynamics of Team Formation

Casciaro, T., Lobo, M.S. (2005). “Competent Jerks, Lovable Fools, and the Formation of Social Networks.” Harvard Business Review, June, 92-99. 8 Author: Wohlenberg, Danielle Irene; Editor: Uk, Bolary

Informal social networks play a large role in resolving tensions and are crucial for success. These networks pose both positive and negative effects, and there are ways for organizations to learn how to emphasize the positive effects.

Competence and likability are the two most important factors for employees, and to determine how they matter, the Harvard Business Review has completed social network surveys at four different organizations, and studied more than 10,000 work relationships. The goal of this study was to see if they would be consistent among organizations and cultures, and if the findings would remain consistent with different measures of likability and competence. The study accounted for various biases and determined that among all organizations, people wanted to work with the “lovable star” (the person who is competent and likable).

Managers commonly reported that they prefer competence to likability but the study determined that reverse is true in practice, but would look “unprofessional” to profess.

The bias that everyone has different preferences, in which they like, plays a relevant role because people tend to like those who are similar, familiar, reciprocal, and attractive. However, there are positive and negative effects of “liking” the person you work with. “The objective is to then leverage the power of liking while avoiding the negative consequences of people’s affect-based choice.”

This study recommends to 1) manufacture liking in critical relationships, 2) position universally likable people to bridge organizational divisions, and 3) work on the jerks. This can be accomplished through “peer assist” knowledge management process, where environments are fostered for peer collaboration. There can also be less-formal Friday afternoon get-together.

Distrust and animosity can hinder these efforts and sometimes “intense cooperative experience” can be facilitated by organizations. In addition, when there is an employee who is a “lovable fool” (likable but incompetent), this employee should be identified so that they can be used to bridge gaps between diverse groups that may otherwise not interact.

This study determined that likability is a very important trait in employees, more so than competency. Likable individuals can be great assets to an organization and help to foster a positive work culture. When individuals are identified as good connectors and likable employees, it is important to position them strategically and take measures to keep them in the organization. It is also necessary for organizations to identify the “jerks” and reward good behavior, punish bad behavior, and assess their contributions, and reposition if necessary.


## When Teams Fail

Holmes, A. (2006). Maine's Medicaid Mistakes. CIO. Author: Kim, Chung Myung; Editor: Berkley, Njeri N

In October 2001, the state of Maine made a $15 million dollar contract with CNSI to create new generation of end-to-end system to process Medicaid claims and payments. It was expected to process claims much faster, cost efficiently, and accurately than its old Honeywell mainframe. From the beginning, it suffered from serious problems as a result of several mistakes. The contractor hired to develop the system (CNSI) had no previous experience in devleoping Medicaid claims systems. No training or testing was done before the switch to the new unproven technological platform, and the transition was done without any backup system in place. Furthermore, when the state of Maine issued an RFP for creating its new system, only two companies Keane ($30 million) and CNSI ($15 million) turned in their proposals. When contracting this type of project, government and agencies are supposed to expect more bids within the similar price ranges, however, Maine only had two proposals with totally different bidding price. As a result, CNSI, which did not have any experience in creating Medicaid claim processing system won the bid. CNSI was given 12 months to finish their project, but it was oblivious that they were not going to meet the given deadline. Only 65 people from DHS IT staffers and CNSI representatives were assigned to the project and did not have any Medicaid experts within the team, so they had difficult time communicating with those Medicaid experts in the Bureau of Medical Services. For the next two years, DHS IT staffers and CNSI workers worked intensively writing codes, but they still could not meet the extended deadlines, so they decided to reduce the testing procedures. They only went through 10 providers and claim cases, and there was no training for the staff to answer providers’ questions.

When they finally opened their new system to public, the system had sent 50 percent (24,000) of the claims into the ‘suspended’ files within the first week, which is much higher than the previous system’s 20 percent rate of sorting into suspended files. Inadequate training and technological glitches resulted in the state owing health care providers about $310 million in Medicaid payments and misprocessed or unprocessed claims had reached almost 647,000. Although, state of Maine finally hired XWave, an integrator and management consultant to resolve the issue, the decision that state of Maine made to spend over $25 million new system that is not any better than previous system is questionable.






chapter13
# Section 13: Innovation


_Innovation is the process of solving large-scale organizational problems or developing new technologies and processes to more effectively pursue goals. What can we learn from past examples of innovation? What types of organizational policies and processes inhibit innovation? What are characteristics and leadership practices in organizations that have been innovative?_

## The Anatomy of Innovation


Bornstein, D. (2007). How to change the world: Social entrepreneurs and the power of new ideas. Oxford University Press. CH3 – Fabio Rosa: Rural Electrification. Author: Gobbo, Andre Francis; Editor: Rodriguez Ranf, Daniela

Lerner, J. (2012). The architecture of innovation: The economics of creative organizations. Harvard Business Press. CH1 – The Search for Innovation and Growth. Author: McCully, James I; Editor: Legnetto, Deanna Marguerite

Gladwell, M. “The Creation Myth: Xerox PARC, Apple, and the Truth about Innovation.” The New Yorker, May 16, 2011. Author: Boucher, Timothy M.; Editor: Berkley, Njeri N

Collins, J., & Hansen, M. T. (2011). Great by Choice: Uncertainty, Chaos and Luck-Why some thrive despite them all. Random House, CH4 – Fire Bullets, Then Cannonballs. Author: Lancto, Katelyn N; Editor: Legnetto, Deanna Marguerite

Christensen, C. (1997). The innovator's dilemma: when new technologies cause great firms to fail. Harvard Business Review Press. CH5 – Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them. Author: Rodriguez Ranf, Daniela; Editor: Swartwood, Hilary Ann

Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 4: Find Someone Who Has Solved Your Problem.

Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 3: Multi-Track.

Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 7: Ooch.
*The Light in My Head Went On*

Fabio Rosa was a recent graduate in agronomic engineering in Brazil and wanted to help bring electricity to rural areas of the country. One day he received a phone call from a university classmate who invited him to Palmares, which was a rural, depressed area inside of a wealthier state. The town could be described as “...reminiscent of the Mississippi Delta”, and had zero infrastructure to work with. Rosa found out that the father of his friend who invited him there was the mayor of the municipality. After a few conversations, Rosa was hired as the secretary of agriculture.

After starting the job, Rosa quickly found that there was a disconnect between what the politicians wanted (to build roads) and what the farmers wanted (for their kids to escape poverty and to maintain ownership of their farms). About 90% of the land was used solely for producing rice. In order to produce rice, the farmers needed water, which was controlled by wealthy landowners who set a high price for access to the irrigation channels and dams. Rosa had an idea to create artesian wells in order to increase access to water; however, he needed electricity in order to make this happen. Unlike the U.S., Brazil had no government work programs that brought electricity out to rural farms. As a result, about 70% of people in Palmares had no electricity.

During his research, Rosa stumbled upon an interview with Ennio Amaral, who was a professor at the Federal Technical School in a nearby rural municipality. In this interview Amaral mentioned how he brought electricity to his rural area. Instead of a conventional power distribution system involving three wires that provided more electricity than farmers needed and was subsequently too expensive, he put together a high-tension “monophase” current system that was more suitable for modest energy consumption. This monophase system had one wire, carried the current through a transformer to the house, and grounded the system in nearby soil. His plan also substituted cheaper materials than the conventional system (e.g. wood for cement, steel instead of copper, etc).

Upon further research, Rosa found that there was enough water of appropriate quality for him to implement his idea of building wells. However, the system taht Amaral developed at his community, that Rosa wanted to implement at Palmares was technically considered illegal by the state electrical companies who determined what technical standards were considered “appropriate.” If the system didn't comply with the Norm determined by the companies, then the power wouldn't get turned on. Because of this, Rosa went to the town's mayor, who eventually opened the political doors necessary for Rosa to experiment.

One of Rosa's main challenges wasto convince the farmers that his means of bringing electricity would actually work and be implemented, unlike promises that were made before Rosa arrived. Fortunately Rosa was able to collaborate with the farmers by using their materials and his ideas to create a type of well that didn't need the conventional type of power distribution. By creating this workaround, Rosa had solved one of the most serious problems with providing low-cost irrigation to farmers.

However, there was still an issue with “red” rice. Red rice is basically a weed that grows when land is continually cultivated. Because of this, farmers in Palmares only cultivated ¼ of their land at a time. Rosa had the idea of flooding the fields before planting the rise, which would prevent the red rice from growing due to a lack of oxygen. Farmers could then pregerminate the proper rice seeds and then transplant them underwater, allowing for only the proper type of rice to grow. This strategy had previously been unvailable to the farmers due to the high cost of water. However, thanks to low-cost irrigation system Rosa had created, each farmer could multiply the productivity of their land by a factor of four. Rosa had created a new equation allowing this to happen:

- **Inexpensive electricity** + **shallow artesian wells** + **monophase pumps** = **cheap irrigation **
- **Cheap irrigation** + **water seedling** = **more efficient land use, increased income, and a future for rural communities **

In Brazil, people in rural areas were leaving in order to find work in the cities. As a result, people were forced to live in shantytowns, unemployment was driven up, and crime rates were increasing. Rosa's equation struck at the root of this problem by giving people in rural communities the access to create their own sustainable wages.

Rosa took this idea to the federal agency that was involved with long-term national development funding, who pounced at the idea. However, there was a substantial obstacle due to political opposition from the state electric company, Companhia Estadual de Energia Eléctrica (CEEE), and from cement and aluminum cartels. As such, Rosa had to muster up political support for his cause for the ensuing battle.

During this time, Rosa had found a means to cheapen the costs of implementing his strategy. He contracted with two state companies in order to build five kilowatt-amp transformers that were necessary for his system. The farmers supplied trees from their properties for electric poles, which Rosa had managed to configure such that he could use fewer than what was required by the government. Rosa even found a way to extended the life cycle of the poles by dunking them in a chemical solution called creosote.

As this was going on, CEEE withdrew Rosa's permission to engage in his project. Because Rosa's model was threatening that of CEEE's, CEEE held a meeting where they tried to cut a deal. CEEE would provide electricity to Palmeras through the proper grid if Rosa's idea was completely abandoned. However, Rosa countered by saying that his solution could be implemented throughout the entire country, whereas the preexisting electric grid couldn't. Fortunately the national development bank got involved and managed to get the state electric company to stand down.

As a direct result of Rosa's work, 400 families were provided with electricity at a cost of $400 per family, which is significantly cheaper than the government's cost of $7000 per family. Those farmers that switched to the water seedling approach saw their incomes jump from $50-$80 per month to $200-$300 per month. Almost a third of the houses (130 of 400) were people who returned to the rural town from the city because of the project.

Due to the popularity and success of the project, CEEE got involved again because they didn't want a major challenge to their distribution norm. They claimed that the results from Rosa's system were inconclusive and couldn't be recreated anywhere else. It took another year before the CEEE caved and turned Rosa's system into a norm, called the 025 Norm. This meant that Rosa's system was no longer breaking any laws.

Shortly after these successes, the mayor of Palmares was forced out due to term limits, and the new mayor completely halted Rosa's project. Fortunately Rosa's work had taken root in various parts of the municipality, and had positively affected the lives of many. However, Rosa was now out of a job.

Fortunately, the national development bank put Rosa in a different municipality. From there Rosa continued to promote rural electrification, and was leased land to experiment with rice planting techniques. He eventually started another project to bring electricity to 25,000 low-income rural dwellers. Through this project he discovered that the technique of delivering electricity he developed in Palmares could be applied widely to other forms of farming. Rosa and a colleague at the national development bank partnered with the best electrical engineering university program in the country to establish a resource center that utilized the newly established 025 Norm as the central standard. This had ended any and all conflict that the could only work in one place. A credit line was even established with this as the Norm, however economic issues eventually forced the credit line to get slashed.

Due to these political constraints that Rosa kept encountering, he gave up on working with the government and decided to establish a private company. Through this company he started to spread photovoltaic solar cells around the country. However in order to offset such high costs of implementation he had to package the solar cells with something else. He eventually discovered that if he sold solar energy as a package with electric fences he could bring down the prices of fences by about 85%. This meant farmers could receive electricity, increase farm production, and improve land management all at once. Over the course of 5 years he established 700 solar electric and fencing systems in 16 different Brazilian states.

As this was happening, different states had continued to consult with Rosa about the 025 Norm in order to pursue rural electrification. One state launched a $34 million plan to bring electricity to 160,000 people, while another state launched a $240 million project to bring electricity to 800,000 people. However both of these projects eventually fell short of their goals due to a lack of motivation and follow through.

In the mid-1990s a political movement started by farmers who could no longer subsist on their land began to gain traction. As a result of this, the government sought a short-term solution by placing these people on certain tracts of land, but without any electricity. The lands they were put on were grass lands, which were best for grazing instead of farming. This resulted in farming practices that caused environmental degradation and the perpetuation of poverty. A quarter of people who received land had abandoned it in 2 years, while some regions saw almost half of their land get deserted. Rosa saw this problem, and sought to find a solution.

Rosa found it in a book by Andre Voisin published in 1957, who developed the idea of rational or managed grazing. This technique was designed to avoid overgrazing, and was implemented successfully in parts of France, New Zealand, Canad, and the U.S. It was originally introduced to Brazil in the 1970s, however it was met with disappointing results and was ultimately scrapped.

Rosa found that the system only worked if there were several small paddocks created a low cost. He eventually found that small paddocks could be created with the use of electric fencing and appropriate technology. By adjusting the original formula from the 1970s to account for things like fences being drained of their currents by tall plants and other region-specific issues, he was able to develop a system that maintained an effective current throughout the fence. This led Rosa to creating another equation:

- **Solar energy** + **polywire** + **fiberglass posts** = **inexpensive fencing**
- **Inexpensive fencing** + **Voisin managed grazing** = **higher yields, sustainable land use, and a future for even more rural communities **

As a result, he saw that most farmers' yields doubled or tripled. Unlike his previous innovations, this time he didn't have to worry about government involvement because the system was being propagated through market demand.

Eventually Rosa stepped down from his business in order to build up a nonprofit that he had started a few years prior to spreading solar cells and electric fences. He sought to use this nonprofit to apply the models he developed in his private business to those poorer areas where the for-profit model didn't quite fit. He started by focusing his efforts in southern half of Rio Grande do Sul, where 250,000 people lacked electricity, and then targeted 13,000 poor families.

Rosa conducted a market study and found that more than half of families were spending $13 each month on diesel fuel, kerosene, and batteries. He correctly thought that people could instead spend this money on monthly payments for a renewable energy supply, equipment, and service. Farmers could rent systems or slowly pay them off at a rate close to $13. Poorer people could also afford this, but they needed more help. So in order to reach the entire market, Rosa designed two projects: one nonprofit, and one for-profit.

The nonprofit was called the Quiron Project, which was a venture designed to boost the incomes of 7,000 poor families through a combination of solar energy, organic animal production, managed grazing, and other means of resource conservation. The for-profit was called the Sun Shines for All project, which sought to provide solar energy to 6,100 families that had no electricity but could afford rates of solar panels through renting. His company would break even between 42 and 48 months, and provide 20-30% return for investors in addition to social and environmental benefits.

As a result of all of this work, Rosa was recognized as one of the first 40 people to be honored by the Schwab Foundation for Social Entrepreneurship. He also won a $50,000 award from the Tech Museum of Innovation associated with the San Jose Tech Museum for applying technology to benefit humanity. He was one of 5 winners that were chose from 400 nominees hailing from 50 countries. The good news kept coming, as the Solar Development Group, a company based in Washington, DC, agreed to invest in The Sun Shines for All project in 2002. He also received funding fro the Quiron Project from a wide variety of other wealth funders. Thanks to Rosa's tireless work, he helped bring about a fundamental change that institutions can establish reliable, long-term credit relationships with poor people across the world.

## Origins of Innovation

Gladwell, M. “The Creation Myth: Xerox PARC, Apple, and the Truth about Innovation.” The New Yorker, May 16, 2011. Author: Boucher, Timothy M.; Editor: Berkley, Njeri N

This article describes the struggle that exists between the innovators and the management that oversees them in a business structure. The article uses as its primary case study the Xerox Palo Alto Research Center (Xerox PARC) to describe the inevitable clash that frequently exists in in an organization where innovators are relied upon to generate new product ideas (or reforms) but also reeled in by management that is fearful of wasting precious resources on potentially unprofitable ideas.

The article starts with a discussion of how Steve Jobs visited Xerox PARC’s facilities in Palo Alto, California in 1970. He had worked out an agreement with Xerox wherein he would allow them to buy 100,000 shares of his company for $1,000,000 and in exchange PARC would “‘open its kimono’” so that Jobs could see what they were working on. It was during this open door adventure that Jobs got to see the prized PARC personal computer, called the Xerox Alto. Jobs saw how someone operating the Alto could command the computer to do things using a “mouse,” a concept that up until that point was unheard of. Jobs also saw how the mouse could be used to seamlessly move from task to task on the computer, an idea that fascinated him.

Jobs would later take the innovations he saw and PARC and work with others at his company to hone, refine, and to a certain degree re-invent them into a marketable product that would ultimately become the first Macintosh. Jobs later commented that “‘If Xerox had known what it had and had taken advantage of its real opportunities, it could have been as big as I.B.M. plus Microsoft plus Xerox combined – and the largest high-technology company in the world.’” Jobs’ guiding principle, it appears, was to have the PARC ideas become manufacturable for a fraction of the cost and that would last the consumer a considerable amount of time before breaking. However, he made explicit to his designers that he did NOT want them to reproduce the concepts at PARC, but rather he wanted them to simply build off the ideas from PARC and make them better. Xerox’s principles, on the other hand, appeared to be more driven by analytics to determine what research and innovation had the best marketability.

The rest of the article cites numerous other instances in which creative types take the ideas of others and hone, refine, and improve them in order to develop the modern marvels that we have all come to see in the marketplace. For instance, the article references the development and use of Revolution in Military Affairs (R.M.A.). This concept, which is “the way armies have transformed themselves with the tools of the digital age – such as [using] precision-guided missiles, surveillance drones, [etc.]” was first pioneered by the Soviet Union. However, the Soviet Union’s “centralized military bureaucracy, with a long tradition of theoretical analysis” was not equipped to turn the concept of R.M.A into workable technologies that it could utilize. It took the entrepreneurial culture of the U.S., which was “orient[ed] toward technological solutions” to develop a technology (here next-gen command and control systems). But the U.S. didn’t really “need” those technologies at the time, and it took a country like Israel, who was “resource constrain[ed]” and under “constant threat” to take the technology developed by the U.S. and put it into practice during their conflict with the Syrian Air Force.

The above serve to show that innovation does not necessarily take the stereotypical form of in-house research and design (R&D) by one company and that company then suddenly creates the latest and greatest technology. Instead, many of the world’s most useful and creative innovations have come from collaboration that crosses typical competitive boundaries between businesses, and even countries. Similarly, the article informs innovators that they should not be discouraged by corporations refusing to take to market every one of their ideas. The article notes that genius is the idea that one pushes out thousands of ideas for the hopes of getting just one published, put to market, or further developed. Because businesses have to make money, they cannot possibly produce every idea that an innovator comes up with, and instead have to pick and choose (usually based on analytics) how they will proceed. It may be that a given idea would have made a fortune, but companies cannot always know that. Instead they have to take gambles on certain innovations while leaving others behind. This is the struggle that resulted in Xerox not pursuing the personal computer market, and leaving open a void for Apple to fill.

Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 4: Find Someone Who Has Solved Your Problem.

Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 3: Multi-Track.



## Experimentation and Risk Management

Collins, J., & Hansen, M. T. (2011). Great by Choice: Uncertainty, Chaos and Luck-Why some thrive despite them all. Random House, CH4 – Fire Bullets, Then Cannonballs. Author: Lancto, Katelyn N; Editor: Legnetto, Deanna Marguerite

**Great by Choice: Uncertainty, Chaos, and Luck – Why Some Thrive Despite Them All
Chapter 4: Fire Bullets, Then Cannonballs**
Jim Collins and Morten Hansen

This reading looks at what makes a company successful when compared against lower performing companies in the same field. When the authors began their research, they believed that innovation might be one of the primary distinguishing factors for success in industries characterized by rapid change. However, their research ended up showing that the most successful companies are not necessarily the most innovative.

The authors begin by looking at two airline companies, PSA and Southwest Airlines. In the early 1970s, PSA was widely successful in a California market, providing a fun environment, consistently on-time flights and low fares for their customers. Southwest decided to copy their model down to the smallest detail in the Texas market without innovating much, if anything. This case study is interesting because today, PSA no longer exists despite having one of the most successful airline business models of the 20th century.

In the biotechnology industry, you might expect the correlation between innovation and success to be 100%, different from the airline industry. Looking at two particular companies, Genetech and Amgen, the authors found that Genetech far outpaced Amgen in patent productivity (innovation), while Amgen far outpaced Genetech in the area of financial performance (success). Even though Genetech was known throughout the industry for having an “unparalleled record in the industry at creating major new breakthroughs” Amgen was the company that consistently saw profits.

The evidence indicates that 10X companies (companies that outperform others in their industry by a factor of 10) are not necessarily more innovative. In some surprising cases, such as Southwest versus PSA and Amgen versus Genetech, the 10X companies were in fact less innovating than the comparisons.

A study done by Gerard J. Tellis and Peter N. Golder in Will and Vision discovered that only 9% of pioneers ended up as the “winners” in a market. In fact, 64% of pioneering companies failed outright. What this really showed is that pioneering innovation is good for society, but statistically “lethal” for the pioneer.

However, the study did not find that innovation is unimportant. Every company in the study participated in innovation. 10X companies innovated less than would be expected relative to their industries and their size. They were just innovating enough to be successful, but they are not generally the most innovative in a given field. Therefore, the authors of this reading concluded that there is a level of “threshold innovation” in any industry that you need to meet in order to be a contender in the game. If you don’t meet that threshold level of innovation, you cannot win. But once you’ve met that threshold, being more innovative doesn’t end up mattering much.

What really matters is a combination of creativity and discipline. “The great task, rarely achieved, is to blend creative intensity with relentless discipline so as to amplify the creativity rather than destroy it. When you marry operating excellence with innovation, you multiply the value of your creativity.” (Collins, page 78). For example, in the early 1970s, Intel introduced a 1103 memory chip into the market months behind the completion, but they passed and utterly crushed the competition with a simple model, “Intel Delivers.” Intel obsessed over manufacturing, delivery and scale, which ended up leading to great success. The core value of Intel is discipline, and this paired with creativity and innovation leads to success.

One of the most useful tools to succeed in this combination is to fire bullets, then cannonballs. Imagine you are stranded on a ship at sea with a hostile ship approaching, and you have two options; you can use all your gunpowder for a single cannonball that would destroy the ship if it hits, but you run the risk of missing completely. Or, you could fire some bullets until you are able to hit the ship, calibrating the distance, ensuring that your cannon could hit when you do fire it. That is how successful companies approach innovation.

Take Amgen, for example. In 1980 they began working on a small company with a simple idea; get the best people, fund them to throw the latest recombinant-DNA technology at a bunch of different ideas until they hit something that would work, then create the product and build a successful company. They tried the technology on virtually everything, firing bullets until they landed on a success with erythropoietin (treats anemia). Then they fired a cannonball by building their company around this success and EPO became the first super-blockbuster bioengineered product in history. You start by firing bullets to see what works. Once you have empirical confidence, you concentrate your resources and fire a cannonball. Then you focus on production to make the most of your success.

A bullet essentially is an empirical test aim at learning what works and it mist meet three criterial; (1) it must be low cost; (2) it must be low risk, meaning that there is minimal consequence if the bullet hits nothing; and (3) it must be low distraction for the enterprise overall.

10X companies were much more likely to fire calibrated cannonballs, versus comparison companies that were more likely to fire uncalibrated cannonballs before ever firing a bullet. The study found that whether fired from a 10X company or a comparison company, calibrated cannonballs had a 4 times higher rate of success than uncalibrated cannonballs (88% to 23%).

Returning back to the demise of PSA, in 1968 PSA launched the “Fly-Drive-Sleep” initiative, pairing airfare, hotel and car rentals all in one company. They leased hotels and bought car companies on a large scale. However, this initiative led to consistent losses every single year. Even further, in the 1970s PSA bought five L1011 super-wide-body jumbo jets at a high price. It required substantial upfront investment, they made modifications that would make resale difficult, and the oil embargo led to increased gas prices. These were uncalibrated cannons. PSA never returned to its prior greatness and continued firing uncalibrated cannons until they were forced into a buyout. “If an enterprise gets slammed by a series of shocks just as its uncalibrated cannonballs go crashing off into space, it’s more likely to have a catastrophic outcome.” (Collins, Page 85).

Another key difference between 10Xers and comparison companies is that 10Xers learn from their follies. When a 10Xer fires an uncalibrated cannon, they quickly recover and learn from their mistakes, returning to the bullet-then-cannonball approach. Look at Progressive, for example. This insurance company had a policy of limiting new business to 5% of total corporate revenue until it can be fine-tuned for sustained profitability. In other words, they fired bullets, then cannonballs. But they mad a mistake in the mid-80s by firing an uncalibrated cannonball by taking on the trucking industry, which led to heavy losses. Progressive vowed never to make the uncalibrated cannonball mistake again and applied the lesson to its move into standard auto insurance. Progressive used bullets to test out the standard insurance industry in states where it was familiar before expanding. By 2002, Progressive was the #4 auto insurer in the country.

What’s more, Progressive used the same model with home owner’s insurance, which helped it avoid losses. They decided to fire bullets in the home owner’s market by testing in a handful of states, but these bullets hit nothing. Progressive decided to pull the plug and did not fire a cannonball. “In the face of instability, uncertainty, and rapid change, relying upon pure analysis will likely not work, and just might get you killed. Analytic skills still matter, but empirical validation matters much more.” (Collins, page 88). You don’t even need to be the one firing the bullets if there is empirical experience available from others (such as with Southwest copying the previously successful PSA model).

The importance of empirical validation cannot be understated. It’s not that 10X companies were predictive geniuses, but they are skilled at the fire-bullets-then-cannonballs approach. Bill Gates and Steve Jobs are thought to be technological visionaries, but even they cannot perfectly predict. In 1987, Bill Gates needed to decide between the DOS/Windows operating system or OS/2. He chose OS/2, but at the exact same time, he hedged his bets by continuing Windows development, just in case. It was this productive paranoia that made him successful. “Gates was smart enough to know that he wasn’t smart enough to predict with certainty what would actually happen to OS/2.” (Collins, page 89). In 1989, Windows was winning and Gates was able to switch gears and bet on Windows. By 1992, Windows was selling more than a million copies per month.

Fast-forward to when Steve Jobs decided to move Apple into retail stores in the early 2000s, he hired Mickey Drexler, CEO of the Gap, to share his empirical experience. He suggested that instead of a big launch with 30 or 40 stores, that they start by building a prototype and adjusting until they got it right before any big launch. Jobs followed that advice and it paid off. This was a prime example of firing a small bullet before unleashing a large cannonball.

Steve Jobs ultimately left Apple in the 1980’s because of differences with the ten-CEO. He watched the company flounder and stagnate before his return in 1997. After his return, he did not focus on rapid innovation, but rather, discipline. Without discipline, there was no chance for creativity. He started by cutting perks and cutting the fat that was slowing the company down. Instead of looking for the “Next Big Thing,” they focused on building the success they already had, namely, the Macintosh personal computer. While furthering computer innovation, Apple pursued additional emerging technologies in the market.

Apple was not the first company to introduce music file sharing and MP3 players. Jobs felt that they were behind when that technology surfaced. Apple pulled together an MP3 player along with supporting software for macs, but they didn’t see this as a cannonball, more of a bullet. It was an expansion of what they already had. They were increasing empirical validation. They took a step by launching an online music store where people could buy music instead of stealing it. This only added to their empirical validation. Then, the big cannonball; they made iTunes and iPods for non-mac computers.

In the end, it is not rapid innovation that predicts success. What is important is discipline, combined with innovation and expansion based on empirical validation. Creativity and discipline are the brick and mortor of some of the greatest success stories from Southwest Airlines to Amgen to Apple.


Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Random House. CH 7: Ooch.


## The Financial Architecture of Innovation

Lerner, J. (2012). The architecture of innovation: The economics of creative organizations. Harvard Business Press. CH1 – The Search for Innovation and Growth. Author: McCully, James I; Editor: Legnetto, Deanna Marguerite

The article begins by detailing two business acquisitions, starting with Google’s acquisition of Motorola in August 2011. The author details the manner that Motorola focused on incentivizing innovation despite the company not being known for a while, to be particularly innovative. Motorola had focused on filing patents and any employee that was successful in doing so was rewarded with a bonus worth several thousand dollars. Researchers who made at least ten patent filings were given gold-colored employee badges, twenty-five filings awarded a platinum-hued one, and all these plateaus came with additional financial bonuses. This incentivized getting as many patents filed as possible but Motorola failed to pursue the innovations that led to fundamental changes in their key markets. Between 2006 to 2010, Motorola fell from number one to number eight in U.S. shipments of mobile handsets; they were not being innovative in the right areas. In contrast, eBay’s purchase of Skype began with the failure of Kazaa, a peer-to-peer sharing network that was enormously successful but was brought down by the music industry over illegal sharing of music files. However, after this initial demise, the idea of using a peer-to-peer network was revamped for making phone calls without any costs. With the support of venture-backer, Howard Hartenbaum, this idea was refined and together with other early investors nurtured the company and the rough idea blossomed into the production juggernaut we have today. It was eventually purchased by eBay for $2.6 billion. Therefore, the author askes how do we distinguish the two situations and how do we innovate in the right manner to be successful?

“The Architecture of Innovation” looks into the importance of innovation and the process to accomplish it successfully. Many feel it is a random process where a few get lucky and many fail without any concise logic or system to abide by. However, the author focuses on the power of incentives in shaping the behavior of those who design and commercialize innovations. Appropriate rewards are required, if not many good ideas languish unused, and researchers end up pursuing useless ideas instead. But creating incentives for innovations is not simply a matter of “more is better” as too-strong and too-short-term incentives can actually be counterproductive in boosting innovation.

Using the two examples given earlier regarding Motorola and Skype, the author proposes a hybrid model that combines the best features of the corporate research laboratory and the venture-backed start-up. Through this method, the powerful motivations and focused goals associated with venture capital can be preserved, while the limitations that circumscribe the effectiveness of this intermediary can be overcome. However, this is more easily conceptualized than implemented, with corporations launching a variety of initiatives to foster “open innovation,” or the development of ideas from outside the corporate walls have generally failed. Failure can be pointed at corporations’ unwillingness to offer significant rewards or to relinquish control. Therefore, an examination into the experiences of corporate venturing programs can illustrate these issues since in theory the resources and long time perspectives of a large firm should make these programs particularly effective.

An example given by the author is from the Xerox Palo Alto Research Center (PARC) failure and the resulting birth of Xerox Technology Ventures (XTV). PARC was remarkably successful in developing ingenious products that fundamentally altered the nature of computing, such as the Ethernet, the graphical user interface (the basis of Apple Computer’s and Microsoft’s Windows software), the “mouse”, and the laser printer. The culmination of all these innovations came in the form of the Alto, a very early personal computer. The Alto’s prototype was placed in the White House, Congress, and various companies and universities. Despite the early success, the Alto project was terminated due to internal differences and discouraged employees leaving to form their own companies in search of more recognition and financial rewards. Eventually, the value of these companies would be worth ten times more than Xerox. The XTV was established as a result of these previous failures. As Xerox chairman, David Kearns stated at the time, “XTV is a hedge against repeating missteps of the past.” Therefore, the modeling of XTV was unique since it was a corporate division and not an independent partnership like most venture organizations. The XTV partners crafted an agreement with Xerox that resembled typical agreements between limited and general partners in venture funds. The spinout process was laid out so that there was no ambiguity, great flexibility to respond to investment opportunities and full autonomy when it came to monitoring, exiting, or liquidating companies. The partners were allowed to spend up to $2 million dollars at any one time without getting permission from the corporation. Additionally, the level of compensation and time frame for partnerships were analogous to independent venture organizations. This structure was also extended to companies in which XTV invested in, as they were structured as separate legal entities with their own boards and officers. XTV also insisted, against the objections of their lawyers, that the employees would receive options to buy real shares in the venture-backed companies, in line with traditional Silicon Valley practices. This independence of management was also extended to technological decision making in these companies as the traditional Xerox products was designed so that it could be operated and serviced in almost any country in the world. No such restrictions were made for XTV ventures since they could produce products for “leading edge” users, who emphasized technological performance over extensive documentation. Under this system, XTV was able to successfully commercialize technology that was lying fallow in the organization but also generated attractive financial returns as well.

One example of the successes of XTV in the commercialization of technological discoveries was Documentum, which marketed an object-orientated document management system. Xerox had previously undertaken a large number of projects in this area for over a decade but had not shipped a product. By recruiting two specialists, they were able to assess the market and Xerox’s knowledge in the area, in turn creating a marketable product. Documentum went public with a market capitalization of $351 million, a conservative calculation indicates that the $30 million invested by Xerox generated capital gains of at least $175 million. Additionally, the same assumptions suggest a net internal rate of return (IRR) for Xerox of at least 56 percent, which compares very favorably to independent venture capital funds IRR of 14.9 percent. This does not include the ancillary benefits generated by this program. Since it is possible that other high expected value projects might not have been funded due to high risk but were because of fear that it might have been funded by XTV and be successful.

Despite this success, Xerox terminated XTV and replaced it with Xerox New Enterprises (XNE) that sharply cut the autonomy that was a large reason for XTV's success. A reason behind the change was that the program was only rewarding those working on marginal technologies that distracted researchers from their critical job of designing better copiers and printers. Another reason was that corporate leaders felt the financial compensation for successful venture teams was too high and that having midlevel functionaries in an obscure initiative being the highest-paid executives in the corporation did not create great enthusiasm for those in control. Regardless, XTV as a hybrid program did show that this system is not impossible to pull off and is not part of any random outcome, but rather came together with careful thought and planning.

The author states that this type of hybrid model is very different from the usual “pipeline model” where innovation results inevitably from spending more on basic research. Furthermore, these "pipeline model" initiatives have had miserable results, citing to Jimmy Carter’s creation of U.S. Synthetic Fuels Corporation to stimulate advanced energy research as one of those failures. The author believes that it is necessary to predict the future for innovation but it is not the complete solution. Innovation is complex and multifaceted; evidence shows that greater attention to the ways in which organizations and incentives can shape the innovation process, can produce significantly better results. Given the importance of innovation to both developed and developing countries' economies, the proposed solution of using a hybrid model for better and greater innovation is necessary.



## The Organizational Architecture of Innovation

Christensen, C. (1997). The innovator's dilemma: when new technologies cause great firms to fail. Harvard Business Review Press. CH5 – Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them. Author: Rodriguez Ranf, Daniela; Editor: Swartwood, Hilary Ann

_Clayton M. Christensen_

**Chapter 5: Give Responsibility for Disruptive Technologies to Organizations Whose Customers Need Them**
In this chapter Christensen elaborates on the idea that in practice, it is a company’s **_customers_** who effectively control what it can and cannot do. He also explains the **resource dependence theory**, a controversial theory supported by a minority of management scholars that suggests that a company’s freedom of action is limited to satisfying the needs of those entities outside the company (customers and investors, among others) that provide the resources it needs to survive. The theory further posits that organizations will survive and prosper only if their staff and systems serve the needs of customers and investors by providing them with the products, services, and profit they require; and that organizations that don’t structure themselves in this way, will ultimately die off. The controversial aspect of this theory is that it stipulates managers are powerless to change the direction of the companies against the desires of their customers: “it is forces outside the organization, rather than the managers within it, that dictate the company’s course.” According to resource dependence theory, the real role of managers is only symbolic in companies whose staff and systems are ‘well adapted to survival’. This is a disturbing idea for anyone who has managed companies and people, particularly those who see their role as change-makers. However, Christensen explains that findings reported in this book provide support to the resource dependence theory. Particularly, the point about how customer-focused resource allocation and decision-making processes of successful companies are far more powerful in directing investments than decisions from executives.

The question then is, if customers employ vast power in influencing and directing a company’s investments, **what should managers do when faced with disruptive technology that the company’s customers do not want?** Christensen proposes two options: 1) to convince everyone in the company that they should pursue it anyway by explaining the long-term strategic importance, despite rejection from customers who provide revenue and despite lower profitability than the upmarket alternatives; or 2) to create an independent organization and embed it among emerging customers that _**do**_ need the technology. Cases presented in this chapter serve as evidence for why the second option offers higher probabilities of success than the first.

**INNOVATION & RESOURCE ALLOCATION**
The mechanism by which customers control the investments of a company is through the resource allocation process: the process that determines which initiatives get staff and money, and which do not get resources. Resources determine whether a project will survive or fail. As Christensen describes it, “only those new product development projects that get adequate funding, staffing and management attention have a chance to succeed; those that are starved of resources will languish.” Resource allocation and innovation are then two sides of the same coin and patterns of innovation in a company will mirror the patterns of where resources are allocated in a company. A good resource allocation process includes a vetting process to filter out proposals that customers don’t want. According to Christensen, if this process works well products that customers want will get funds and products that customers don’t want should not. This is how companies must work and the better companies follow this approach the more successful they will be. From an internal process and company dynamics perspective, Christensen explains that non-executive participants make their resource allocation decisions by 1) deciding which projects to propose and give priority to senior management based on an understanding of what types of customers and products are most profitable; and 2) by how their involvement or sponsorship of a potentially profitable innovation project/program could impact their career trajectory. It is through the combination of seeking company profits and personal success that customers wield a profound influence on resource allocation.

**SUCCESS IN DISRUPTIVE DISK DRIVE TECHNOLOGY**
Christensen breaks down the system of customer control through three cases from the history of the disk drive industry to demonstrate how managers can develop strong market positions in a disruptive technology. In two cases for Quantum and Plus Development, as well as for the Control Data Corporation in Oklahoma, managers spun out independent companies to commercialize the new disruptive technology, which allowed them to harness the forces of resource dependence. In the third case of Micropolis Corporation, the manager chose to fight the customer forces from within the mainstream company. The company survived the project through sales of a new product line, but not without enduring many losses that included walking away from all of their major customers. The manager of this last case concluded that the experience of transitioning was one of the most exhausting of his life.

**DISRUPTIVE TECHNOLOGIES AND THE THEORY OF RESOURCE DEPENDENCE**
Disruptive technologies have had a deadly impact in many industries beyond disk drives. Christensen presents three other examples of the effect of disruptive technologies in the following industries: computers, retailing and printers. These examples highlight how only companies in these industries where those that harnessed rather than fought the forces of resource dependence survived.

_**DEC, IBM, and the Personal Computer**_
The company that was most affect by disruptive technology is Digital Equipment Company (DEC), which failed in just a few years as stand-alone workstations and networked desktop computers avoided most customer’s needs for minicomputers. It failed four times to build a profitable business model, and to withdraw from the personal computer market. Christensen argues that in trying to enter the desktop personal computing business from within its mainstream company, DEC was force to straddle two different cost structures based on two different value networks. In contrast, IBM had significant success in the first five years of the personal computing industry. The emergence of the minicomputer represented a disruptive technology to IBM, the industry’s first leader and its competitors. Customers didn’t yet have a use for it, and the market was initially significantly smaller, so as a result makers of mainframe computers ignored the minicomputer for years. Apple and IBM who were the leading desktop makers did not introduce portable computers until the portables’ performance trajectory intersected with the computing needs of their customers. Its success was due to IBM’s creation of an autonomous organization in Florida that was free to procure components from any source, sell through its own channels, and develop a cost structure appropriate to technological competitive requirements of the personal computer market.

The conclusion is that it is very hard to manager two cost structures and two profit models within a single company, as the positon in one market will suffer unless two separate organizations, embedded within the appropriate value networks pursue their separate customers.

_**Kresge, Woolwoth, and Discount Retailing**_
Few industries have been impacted more severely by disruptive technology than in retailing, where discounter companies seized dominance from traditional department variety stores. It was disruptive because the quality and vast selection offered by discounters created a chaos in the traditional metrics for quality retailing and the cost structures were radically different to compare between their value networks. Just as in disk drivers, a few traditional retailers like S.S. Kresge (K-mart), F.W. Woolwoth, and Dayton Hudson (Target) saw the disruptive approach coming and invested early. None of the others (Sears, JC Penney, among others) made significant attempts to create business discount retailing. Kresge and Dayton Hudson both created focused discount retailing organizations that were independent from their traditional business and they succeed. By contrast F.W. Woolwoth (Woolco), tried to create it from within the traditional variety store company and failed. Woolwoth’s organizational strategy for succeeding in disruptive discount retailing was the same as DEC’s strategy for launching the personal computer, and neither could achieve the cost structure and profit model required to succeed in the mainstream value network. Kresge achieved alignment by cutting off the customer base that historically had provided the company’s resources, thereby intensifying Kresge’s dependence on the new source of resources in discount retailing.

_**Survival by suicide: Hewlett-Packard's Laser Jet and Ink-jet Printers**_
Hewlett-Packard’s experience in the personal computer printer business illustrates how a company’s pursuit of a disruptive technology by spinning out an independent organization might entail killing another one of its business units. Ink-jet printing was a disruptive technology because it was slower than laser jet, the resolution was worse, and its cost per printed page was higher, but it was smaller and less expensive than the laser jet. Rather than attempting to commercialize both from the main HP printer division, it created a completely autonomous organizational unit in Vancouver, Washington responsible for making in-jet printers a success. HP then let the two compete with each other. Ultimately, the ink-jet printer was more successful and one of HP’s businesses may have killed the other. However, Christensen suggests that had HP not set up its ink-jet business separately, the ink-jet technology would probably have failed within their mainstream laser jet businesses.

**ADDITIONAL ORGANIZATIONAL IMPLICATIONS OF DISRUPTIVE TECHNOLOGIES**
Aside from creating organizational distance between mainstream enterprise and the organization charged with commercializing the disruptive technology, Christensen suggest there is a second dimension: the team should be structured to facilitate the cross-functional interaction that is characteristic of different types of projects. The best projects of a industry’s development are best managed by a tightly integrated teams. According to Christensen’s research, scholars have found that overtime the patterns of interactions and communication between the individuals and groups within the organization will come to mirror the manner in which the components themselves interact within the product architecture. Christen emphasizes that “the organizational structure and the patterns of working together work well as long as the innovations are modular, meaning as long as the technological change is largely self-contained within each component and does not require that other components in the system be redesigned to accommodate the change.” He explains that when a new project involved a new architectural design, then the structure and patterns become barriers rather than facilitators. The same thing applies at the broader level when a product requires manufacturing, purchasing and marketing to coordinate their activities around different questions at different points than the norm, then a strong team is important.

It is important to note that no single model is appropriate for all types of products and technologies. Major development projects that involve significant architectural innovation, that require different patterns for working, but that are sustaining in character, can be managed by a strong team within the mainstream organization. However, disruptive projects, can only thrive within organizationally distinct units.








chapter14
# Section 14: Public Private Partnerships

Lerner, J. (2009). Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed--and What to Do About It. Princeton University Press. Author: Hamlin, Madeleine Rose; Editor: Creedon Jr, John Thomas

Mazzucato, M. (2013). The Entrepreneurial state: Debunking Public vs. Private Sector Myths. Anthem Press. Author: Perez, Philip A; Editor: Tansits, Colin EChapter 4, “Things Get More Complicated”
In this chapter, Lerner reviews research about the effectiveness of government intervention in catalyzing innovation. He argues that while there are many reasons for government to play a catalytic role, government programs to boost venture activity have frequently fallen prey to incompetent decision-making or outright distortions by special interests.
1. Arguments for government intervention:
a. There is a “virtuous cycle” in entrepreneurship and venture capital: pioneers pave the way for subsequent generations. Government subsidies may spur the cycle of knowledge creation, and should be used to do so in the case of activities that generate positive externalities that will benefit wider society.
b. Government involvement can also provide a ‘stamp of approval.’ Government investments have a ‘certifying effect’ that venture capitalists themselves may not be able to provide. For example, if government programs can identify and support neglected firms, they might provide the stamp of approval that high-potential, underfunded firms need to succeed. This type of support will require governments to overcome information asymmetries to identify the most promising firms.
c. Public entrepreneurship may also result in knowledge spillovers, for example when innovations are not very profitable to a firm but prove very beneficial to society as a whole.
2. Arguments against government intervention:
a. Incompetence - Public officials may be inadequate to the task of managing entrepreneurial or innovative firms.
b. Capture – Entities, whether part of government or industry, may organize to capture the direct and indirect subsidies that the public sector hands out. In some cases, individuals or firms who are not the intended recipients of public funding may appropriate some of the funds for their own purposes.

Chapter 5, “The Neglected Art of Setting the Table”
Lerner argues that government initiatives meant to stimulate new venture activity can be divided into three broad categories: the first two (demand-side) interventions focus on creating a more hospitable environment for entrepreneurs and venture capitalists (a.k.a. “table-setting”), and one (supply-side) intervention that encompasses direct efforts to boost the availability of financing.
1. Enhancing the entrepreneurial climate
The most dramatic example comes from Singapore, which launched a variety of ‘indirect’ initiatives to attract investors, including: increasing spending for academic research, encouraging associations for small and new enterprises, subsidizing research expenses of corporations, and expediting paperwork for foreign entrepreneurs. The government also created the “Biopolis,” a seven-building research park with state-of-the-art labs and amenities, and which has attracted top researchers from all over the world.
a. To enhance entrepreneurialism, governments have to get the laws right. They must ensure that the legal system supports entrepreneurial activity—i.e. allowing investors to enter into complex contracts, where different outcomes can result if the company’s progress varies. In most cases, this has meant copying the American system.
b. Governments must also ensure access to cutting-edge technologies. This means encouraging development, transfer, and commercialization of university technologies.
c. Not all entrepreneurs come from universities, so governments should create tax incentives—such as lowering capital gains tax rates—to increase the attractiveness of becoming an entrepreneur. Additionally, policies that punish individuals who are involved with failed ventures can be counterproductive.
d. Providing education and training can also encourage entrepreneurialism. Entrepreneurial training programs have been launched in at least 30 countries.
2. Increasing the venture market’s attractiveness
Governments should make efforts to attract local entrepreneurs and domestic sources of capital, as well as international investors. In some cases, venture capital industries will be driven by investment from global players.
a. Governments must allow true partnerships between international and domestic actors by ensuring that local and national tax and partnership laws are in compliance with global standards. In particular, limited partnerships must be characterized by limited liability (outside investors can’t lose more than they invest) and tax flow-through (individual partners are taxed as if they had made the investments themselves).
b. Governments should enhance local markets for publicly traded firms, so there are nearby opportunities to take venture-backed companies public.
c. Entrepreneurship efforts should make use of human capital abroad. By leveraging human resources outside the nation, venture capital can overcome information gaps surrounding risky investments.
3. Direct interventions to increase the supply of capital for entrepreneurs and venture capitalists, which differ along many dimensions, including: who provides the funds (governments, universities, non-profits, or private sector organizations?), amount of funding (entire amount or matching funds?), structure of the funding (outright grants, or return on investment?), conditions of capital (extent to which government contracts have constrained the activities of the firms?), and relationship between the government and the firm (what level of oversight?).

Chapter 6, “How Governments Go Wrong: Bad Designs”
More government initiatives to promote entrepreneurship have been unsuccessful than successful. Why is this the case?
1. Failing to understand the venture market – Public efforts make three common mistakes when it comes to understanding the venture market:
a. Timing: Building a venture capital industry is a long-run investment, which cannot be rushed. Governments must not be daunted by initial failures.
b. Sizing: Programs can encounter difficulties if they are too small or too large. Programs that are too small may not be able to make a sizeable impact. Programs too large may crowd out or discourage private funding.
c. Flexibility: Flexibility is central to venture capital investment; young firms face tremendous uncertainties in technology, product market, and management. Changes of direction are thus an integral part of the investment process.
2. Not listening to the venture market – Decisions about how to allocate public funds may be distorted by a lack of understanding about how the market works, or by political rather than economic considerations. For example, if politicians feel the need to fund programs evenly across all fifty states, or if policymakers make decisions based on ‘buzz’ or incomplete information.
Overall, these two pitfalls reveal that “table-setting” alone will not prevent investment failures. Venture capital markets are complex, so any number of poor decisions can doom an effort. Additionally, taking a top-down approach, in which bureaucrats mandate which sectors or locations to fund without listening to the market, can be problematic. One solution is to utilize matching funds, whereby entrepreneurs receiving public funds have to raise matching capital from private sector sources, which helps ensure viability.

Chapter 7, “How Governments Go Wrong: Bad Implementation”
Even if an entrepreneurship program is well-designed, things can go wrong in the implementation phase. Three common errors include:
1. Not worrying about incentives – Governments should think carefully about incentives before establishing entrepreneurship initiatives. Otherwise, investments may be linked to the fund’s financial returns, but not to the broader objectives of the innovation.
2. The need for evaluation – Government officials should examine the track record of the venture capitalists and entrepreneurs who receive public funding. Public programs should also be evaluated on a periodic basis. Officials cannot rely on success stories alone as a measure of program effectiveness. Randomized studies are problematic; instead, “regression discontinuity” analyses exploit the fact that when program managers assess potential participants, some applications will fall just above or below the cut-off line. They can then compare these entrepreneurs, which are likely to be similar to each other except that some were chosen and others weren’t, and get a good sense of the program’s impact without randomization.
3. The need for a global perspective – Governments should encourage the development of strong connections with venture funds elsewhere.

Mazzucato, M. (2013). The Entrepreneurial state: Debunking Public vs. Private Sector Myths. Anthem Press. Author: Perez, Philip A; Editor: Tansits, Colin E

This article reviews the book by Mariana Mazzucato entitled The Entrepreneurial State: Debunking Public vs. Private Sector Myths.

**Main Article**

The author begins by giving the reader an idea of Mazzucato’s argument, which is essentially that while Apple and other technology companies are widely considered to be the embodiment of a grassroots, bottom-up type innovation style, these companies would not have succeeded without help from the state.

The armed forces created the internet, GPS, and also provided early funding for Silicon Valley. The author provides other examples such as that publicly funded university scientists developed touchscreens and HTML, a government body lent Apple $500K before it went public, Google’s search engine algorithm was financed by a grant from the National Science Foundation, and that pharmaceutical companies benefit from research by America’s National Institutes of Health. The author notes that Mazzucato thinks it’s an injustice that Apple reduces its US tax burden by moving money overseas and assigning its IP to low-tax states such as Ireland.

The author notes one of Mazzucato’s arguments is that governments that invest in entrepreneurship do more than makeup for market shortcomings—they actually create and shape future markets. According to the author, Mazzucato thinks the U.S. government has successfully funded innovation by “talking like Jeffersonians but acting like Hamiltonians,” which essentially means the government has sought to be viewed as having a limited role, yet in reality has been involved in innovation. The author notes that the government has historically been involved in spreading existing technologies, such as railways, and in seeking scientific breakthroughs, as demonstrated by financing 60% of basic research.

The author states that Mazzucato failed to acknowledge that some governments invest in companies that fail, and whereas private capital will eventually stop funding such projects, governments may continue to set taxpayer money on fire.

The author suggests that Mazzucato’s criticism of private capital, that private businesses are too shortsighted, also applies to governments. The author also responds to Mazzucato’s suggestion that anti-statist ideology is preventing the government from making long-term investments by pointing to entitlement spending by the government—a highly expensive long-term program that diverts funds from being invested in entrepreneurship.

The author finds that Mazzucato offers an incomplete answer to the question posed by her book, which is “why are some states successful entrepreneurs while others are failures?” However, successful governments promote competition among those seeking funding and leave decision-making to experts rather than politicians.

The author concludes by acknowledging Mazzucato was right to argue that the U.S. government played a central role in fostering innovation, and that the government’s “contribution to the success of technology-based businesses should not be underestimated.” The author concludes by arguing that the government’s role in innovation justifies “moderni[zing] the state and bring[ing] entitlements under control.”

**Author’s Response**

Mariana Mazzucato responds to the author’s review of her book in a featured comment. She clarifies three points and elaborates on her argument.

First, she clarifies that her point is that the government _can be_ entrepreneurial, not that governments have always been entrepreneurial. She makes this point because there is a widespread ideological view that government inhibits business and technological innovation, despite the fact that no empirical data supports this idea.

Second, her argument is that the form of government assistance matters as to whether an investment is successful, as evidenced by the Silicon Valley example. Top down decisions are less successful than bottom up decisions made by decentralized, well-funded, and coordinated government agencies. To attract the top talent required to produce innovation, governments must create the right kind of missions and give the appropriate agencies major funding.

Third, the government must consider the risk-reward relationship in innovation, which does not mean seeking profits, but instead means avoiding ventures in areas being pursued by private capital, and investing in big ideas for which private venture capital is too risk averse.

The author suggests that the government’s role is to “make[] things happen that otherwise would not,” and that if the innovation is being funded by the taxpayer, then the rewards should also go to the taxpayer in the form of reinvestment in government innovation funding.




Case Study on Public Private Partnership