The book talks about randomness, associated maths, and the psychological biases which interfere in a more stochastic approach to thinking about life.
- Probability is not about odds but a belief in the existence of an alternative outcome.
- The right way to judge the performance in any field is not by the results but by the cost of the alternatives. A million dollar earned through dentistry is more valuable than a million dollar won via playing Russian roulette. The alternative outcomes in the case of Russian roulette are far worse.
- Our habitats have evolved faster than our ability to evolve with it. Things like probability do not come naturally to us.
- When a random process scales (“repeated”), its results regress towards the mean. A 15% return with 10% volatility implies a 93% chance of a positive return in a year (=> 7% bad years) but only a 67% chance of having a positive month (=> 33% bad months) and 50.02% chance of a positive second (=> every other second will have a negative return).
- Over a short time, one sees variability in the portfolio not returns. Over a long time, one sees returns, not variability.
- The wise man listens to the meaning; the fool only gets the noise.
- Law of large numbers – A population consisting of a large number of bad managers is virtually guaranteed to produce some who will have amazing track records. Moreover, the extent of the greatness of their results depends more on the initial sample set than their ability to produce results.
- In real life, a lot of events have skewed payoffs. The likelihood of an event can be lower but the corresponding payoff (or damage) can be much higher. Maximizing the probability of such events does not translate into maximizing the payoffs.
- An option seller makes continuous “small” amounts of income while an option buyer loses money and makes money in one-shot only in case of the occurrence of a rare event. Selling options gives psychological kicks while buying is economically optimal.
- Path-dependent outcome – Computer keyboards are QWERTY because typewriters are QWERTY and that’s because that was the preferred way to slow down the typists to avoid jamming the typewriters. It is not rational to have them today but path-dependent outcomes are the cornerstone of life.
- The same effect can explain why Microsoft’s Windows was able to win by creating a networks effect around its operating system.
- The endowment effect is a manifestation of that.
- Polya process is a more accurate model of the real world than “independent events” approach. Economists fail to realize that.
- We have two systems of reasoning – one is for fast decision making, the other one is for the slow decision making (more details in Thinking Fast and Slow).
- One major implication of it is that ideas do not sink in when emotions come into play.
- Consumers consider 75% fat-free hamburger to be different from only 25% fat hamburger. Mathematically, they are the same.
- Affect heuristic – the emotions associated with an outcome determine the probability of that outcome in our mind
- Attribution bias – People ascribe skills to their success and random unfortunate events to their failure.
- Simulation heuristic – playing alternative scenarios in the head. “I was about to exit the market right before the 2008 crash, I just missed it”
- Hindsight bias – We an incident happens, we believe that we knew that it was going to happen all along. Even though, if earlier, we were asked about our belief in the occurrence of the incident we would not have been that certain. The worst aspect is that it fools us into believing that we can predict the future.
- History appears deterministic even though it is just a manifestation of the potential random paths that were realized.
- Unlike hard sciences, one cannot experiment in history.
- Survivorship bias implies that the highest performing realization is most visible since the loser never speaks up (or survives).
- Availability heuristic – We assign probabilities based on how easily can instance of that incident be recalled.
- People don’t like to buy insurance against something abstract, only the vivid risks merit their attention, therefore, it is easy to sell travel insurance against terrorist act vs travel insurance against loss of life.
- Representativeness heuristic/Conjunction fallacy – We assign the probability of a person belonging to a particular group based on how similar the person looks to that group.
- A feminist student is deemed more likely to be a feminist bank teller than to be a bank teller. Even though the latter is a superset of the former
- Wittgenstein’s ruler – If you have a scale, whose accuracy you aren’t confident of, and you use that to measure the table then you are measuring the scale as much as you are measuring the table. Or more formally, unless the source of the statement is a qualified author the statement is more revealing of the author than the information intended by him.
- Sandpile effect – “The last straw on the camel’s back” are examples of how a linear change can have a non-linear impact on the complex systems (causing a collapse).
- Firehouse effect – A group of people with a similar mindset, after spending too much time can come to the conclusions which are ludicrous to an outsider.
- Psychologically, the frequency of positive events matters more than magnitude. A negative event of the same magnitude is more devastating than the positive event of the same magnitude.
- The inverse skills problem – The higher up the person is in a corporate ladder, the lower is the repeatability of their work, and hence, lower is the actual evidence of a contribution. A person engaged in repeatable work is easy to judge. One engaged in non-repeatable work cannot be easily judged since their results might be a pure manifestation of randomness.
- Humans and even non-humans start seeing patterns in randomness and develop superstitions around how those patterns can benefit or harm them.
- Rational thinking has little to do with risk avoidance, most of it is about rationalizing one’s actions by fitting some logic to them.
- Some details of our daily life like career decisions and investments can harm us or even threaten our survival, it is good to be rational and scientific about them. Other mundane details like the choice of religion can be a very irrational one.
- It does not matter how frequently something succeeds if the failure is too costly to bear.
- Common sense is nothing but a collection of misconceptions acquired by the age of 18.
- Depending on the use-case, extreme values are noise or devastating signals. Average temperature (excluding extremes) is great to decide next vacation destination but for climate scientists, it’s the extremes that matter. Similarly, extremely rare events can bankrupt a company.
- As per Karl Popper, there are two types of theories, falsified and yet to be falsified. Something which can not be falsified is not a theory.
- More knowledge does not always lead to more information, sometimes, it just leads to a stronger belief in meaningless noise.
- Markets always go up in 20 years more or less holds but only a few markets have really survived over time and it was not obvious with hindsight that which ones will survive. For example, Germany, Imperial Russia, Argentina blew up completely.
- Most humans stop when they are satisfied (satisfied + suffice) with a result than working towards the most optimal outcome. Satisficers are happier; optimizers end up being more successful on any traditional metrics of success. The causality is not clear though.
- At a given point in the market, the most successful traders are likely to be those that are the best fit for the latest cycle. This does not apply to dentists since that profession is more immune to randomness.
- People become leaders not because of the skills they possess but the superficial expressions they make on others (“charisma”).
- When people merely work hard, they lose focus and intellectual energy. Work ethics, however, draw people towards signal than the noise.
- Extreme empiricism, an absence of a logical structure, and competitiveness can be quite an explosive combination.
- Someone’s raw performance and personal wealth can sometimes (but not always) be an indicator of their success.
- We learn from mistakes by doing them not by reading/listening to them. Learnings from history cannot be acquired via pure reading either.
- Listening/reading current news neither provides one with any predictive ability nor improves one’s knowledge of the current world.
- Spontaneous remissions of cancer can suddenly cure the disease and the patient might think that whatever pill they have consumed in the meanwhile has the cancer-killing property.
- The unpredictability of the behavior is a deterrent. Sometimes, the government has to overreact on small things, so that, others cannot figure out the precise limits of tolerance.
The book provides a scientific perspective on the history of how humans came to dominate the planet. The books biggest focus is on the three revolutions the cognitive revolution which started 70, 000 years ago; the agricultural revolution which started 12, 000 years ago; and the scientific revolution which started 500 years ago which shaped the destiny of our species and the planet.
Species – Animals belong to the same species if they tend to mate and give birth to fertile offsprings.
Genus – Species evolved from the common ancestor. They, usually, won’t mate but can be induced to do so. Eg. Mule (Horse and donkey), and Liger (Lion and Tiger).
Homo Sapiens – “Homo” genus and “Sapiens” (intelligent) species. Some other members of our genus are, no extinct, Homo Erectus and Homo neanderthalensis. Homo Sapiens’ closest living species are Chimpanzees.
The Cognitive Revolution
The rise of Homo Sapiens
Homo genus has unusually big brains and big energy drains. Homo Sapien brain consumes 25% of energy at rest, 8% is the norm for other apes. The big brain is an even bigger cause of human infants which are born relatively prematurely (in terms of physical strength) compared to the other species. The long gestation period and the raising of the child implied that the evolution favored strong social ties in humans. Regular use of the fire started about 300, 000 years ago. The carefully managed fire was not only used to clear forests but can also be used for cooking food (faster to digest). Long intestines and large brains are both energy drains, it is hard to have both. Cooking food lead to shortened intestines and hence, our brains could grow bigger. As Homo Sapiens spread from East Africa to Arabian peninsula, Europe, and Asia, they drove other Homo species like Neanderthals to extinction. Some interbreeding did happen but it was mostly the Sapien’s superior social skills which allowed them to tribe up and drove other Homo species everywhere into extinction.
The Tree of Knowledge
About 100, 000 years ago, Homo Sapiens migrated out of Africa but retreated after losing to Neanderthals. About 70, 000 years ago they tried again, and this time they succeeded due to the invention of language which allowed them to invent tons of things like boats, lamps, needles, etc. This Cognitive revolution allowed Homo Sapiens to dominate the earth. Anthropologists believe that our complex language was used more for gossip than to discuss where the prey. And from there evolved the ability to create and believe in myths. The myths allowed us to collaborate and cooperate in large numbers in the form of tribes and now, in the form of nation-states.
A man can be convinced to die fighting for his nation for the promise of heaven; a monkey cannot be.
Religion is a myth; nation-states are myths; the Limited-liability corporation is a myth; US declaration of independence is a myth; all are figments of our imagination. Unlike animals, trees, fish, rivers, the aforementioned myths have no association with a real physical entity. These myths, surprisingly, allow believers to work together and collectively. These myths are not different from the primitive myths of the tribal men most modern people would laugh at. Homo Sapiens ability to believe in myths allows us to form big groups of millions of individuals who have never met each other. In other animals, groups are limited to the size of 25-30 animals who all know each other; such animals cannot form large groups. The other big advantage of passing myths via language is that it does not require any DNA mutations. Catholic & Buddhist monks pass on the celibacy, not via genes but by imparting their religion (myth) to the followers, some of who, convert. And that’s probably how Homo Sapiens defeated Neanderthals. While Sapiens would have lost one-on-one combat, they could form much larger groups which Neanderthals could not.
A day in the life of Adam and Eve – The hunter-gatherer society
Except for the past 10, 000 years, Sapiens evolved in pre-agricultural hunter forager societies. They shaped our psychological and social characteristics. These ancient foragers know a lot more about their surroundings than us. While we, collectively, as a human society know a lot more, the individuals today know a lot less. Forager societies tend to end the wide and varied diet and hence, had a lower chance of malnutrition than the farmers who would eat a few staple crops. Their working hours were lesser(30-35 hours per week), and since they neither engaged in the domestication of the animals nor stayed in dense settlements, the epidemics were rare. Some anthropologists, therefore, call hunter-gather societies the original affluent society (ashishb’s note: This is not without its own controversies). Little beyond that is known about these hunter-gatherers. They probably believed had animistic beliefs. No one knows whether they were monogamous or not, had a concept of private property or not, their festivals, and their taboos.
About 45, 000 years ago, some Sapiens living on Indonesian islands figured out the art of building boats and eventually reached Australia. This was the first time, Homo Sapiens stepped out of the Afro-Asian ecosystem, and they wreak havoc on the isolated Australian continent ecosystem. 23 out of 24 species larger than 50 Kg became extinct within few 1000 years. The marsupials, mammals with baby-carrying pouches, failed to adapt to the onslaught of the humans. Their slow pregnancy cycles with few kids, lack of fear of humans since humans don’t look that harmful, and potentially burning of the forests to set up agricultural land disrupted the food chain entirely.
Unlike the Afro-Asian animals who evolved with humans over thousands of years, the Australian animals were caught completely by surprise with no time, on the evolutionary scale, to adjust.
Climate change just worsened everything.
About 16, 000 years ago, the invasion of America happened via Siberia which was connected to North-western Alaska when the sea levels were lower. Unlike other species of Homos, Sapiens adapted to the harsh colder climate by sewing boots and thermal clothing. They thrived on eating the juicy animals like mammoths which given low temperatures can be eaten over days. Around 14, 000 years ago, global warming melted the glaciers in Alaska which blocked the way to rest of the Americas. And that’s when Sapiens ventured into the American continents. With 2000 years, Sapiens reached the southernmost point in America.
No animal had moved so quickly through variety of habitats virually using the same genes.
Americans fauna suffered. Mammoths (& mammoth ticks), Mastodons, and tons of animals which just like Australia, had survived in isolation from Afro-Asian ecosystem faltered. Fossils had repeatedly pointed these disappearances to be about 12, 000 BC in the Americas and around 5, 000 BC in Hispaniola, both times when Sapiens entered the ecosystem. The same story has been repeated island after island.
First wave extinction: Sapiens as hunter-gatherer enter the ecosystem
Second wave extinction: Sapiens become farmers and forests burnt and reduced to grasslands
Third wave extinction: Industrial revolution
Throughout the history, Homo Sapiens have been the deadliest species to enter any ecosystem.
The Agricultural Revolution
History’s Biggest Fraud
Agriculture started in about 9000 BC and domestication of crops was over by about 3500 BC. Today, we eat the same crops – Wheat, Maize, Rice, Potato, Millet, and Barley. Only a few species could be domesticated, and they were in the middle east, China, Central America but not in Australia or Africa. And that’s where, independently, domestication of crops started. Wheat went from an unknown crop to a crop which has spread everywhere on the planet. Human bodies were not designed for agriculture and farming. Wheat demand protection from pests, animals, and even other humans. The only advantage farming has is that it leads to more food per unit area and allowed humans to multiply exponentially. Overall, the agriculture revolution in the short run made the life of humans miserable, so, why did it happen?
The currency of evolution is not pain or misery but copies of DNA helixes.
Agricultural revolution leads to permanent settlements which allowed women to have more kids. Over time, as farmers multiplied they cleared, even more, lands, reducing the scopes for foragers even further. Just like the modern day luxury treadmill, agriculture soon became a necessity to support the ever-increasing population. And there was no going back. Similarly, domestication of animals proceeded with slaughtering the most aggressive, weak, and economically unworthy animals first. Over time, domesticated animals evolved to be more economically worthy and more submissive. While just like wheat, animals like chicken, sheep, pig, and cow spread over the world, they were treated brutally. From repeated impregnation to castration, their life became miserable compared to life in the wild.
The evolutionary correlated with the individual suffering for animals and humans.
The food surplus exploded the population from 5-8 million in 10, 000 BC to 250 million in about 100 AD. The food surplus eventually leads to the emergence of bigger political orders like cities and nation-states. Rather than being based on some ingrained human characteristics, these were imagined human orders based on shared beliefs and myths. “All humans are created equal” is completely incorrect from a biological stance. Humans born and they are all different from each other. Just like animistic beliefs are a myth, so are human rights. There is nothing biological about them. They only exist in our shared imaginations. A natural order is a stable order. If people don’t believe in gravity, apples would still fall. If people don’t believe in human rights, society will collapse. While some violence (police and army) is required to enforce an (imaginary) order, they themselves have to believe in something to organize in favor of that. And same goes for the elites who rule. Christianity, capitalism, democracy, all are imagined orders with a large number of believers.
Christianity, capitalism, democracy, all are imagined orders with a large number of believers.
The biggest lie though is to train a human right from childhood about the imagined order as a natural order. “God is one”, “People are equal because God created them that way”, and “Free markets are best because it is an immutable law of nature”. Over time, the order is embedded in the material world, for example, individualism is enforced via private rooms. The imagined order heavily controls our desires. Consider the desire to travel abroad, a millionaire today might solve his relationship crisis by taking his wife to an expensive trip to Paris. In ancient Egypt, he would have built a tomb, which she always wanted.
A millionaire today might solve his relationship crisis by taking his wife to an expensive trip to Paris. In ancient Egypt, he would have built a tomb, which she always wanted.
The two of the biggest imagined orders of the modern world are romanticism and consumerism. Romanticism teaches us that we must have as many experiences as possible to fulfill our expectations. Consumerism teaches us that we must consume as many goods as possible.
The imagined order is inter-subjective. Radioactivity is objective, it happens whether you believe in it or not. An imaginary friend is subjective, since it exists only as long as you believe in it. Preciousness of gold is inter-subjective since it exists not only in your imagination (belief system) but also in the belief system of millions of others.
To change an inter-subjective belief system, one has to convince everyone else and to convince everyone else; they have to believe in an even bigger imaginary order. For example, the existence of a particular company listed on NYSE is an inter-subjective order. To make everyone else not believe in its existence either, one has to go to a bigger imaginary order (NYSE). There is no way out of the imagined orders. We have to believe in a bigger one to dismantle a smaller one.
Unlike animals, humans pass a lot of information via teaching and not encoding it in the DNA. The empires generated a huge amount of information. The brain has a limited capacity to store information, humans die, and brains are best at storing social, topographical, and qualitative information. What empires want to store was numbers. And that’s how writing was invented by ancient Sumerians in about 3500 BC. The initial writing was only for the record-keeping, therefore, it was a partial script. A full script can express almost everything that can be spoken. Sumerians also invested in the cataloging of this information and the schools where these scribes were taught. This new bureaucracy specialized a new compartmentalized way of thinking as opposed to usual holistic thinking.
There is no justice in History
The American declaration of independence, empowered men over women, whites over blacks and native Americans. Many modern westerners scoff at one imaginary system (racial hierarchy) but believe that another one (different schools for rich and poor) is perfectly fine. Hierarchies allow two complete strangers to decide how to talk to each other. At the same time, they limit the potential of individuals.
Every imagined system disavows its fictional origins and claims to be natural and inevitable.
Racism in the US: Purity and pollution are used as a standard argument for all the social hierarchies, some based on birth, some on race, and some on religion. In the US, white Europeans decided to import slaves from Africa since it was nearby, there was an existing slave market, and Africans had partial genetic immunity towards Malaria and Yellow Fever. This eventually was justified by the imagined order of white skin being superior to black. Such an imagined order is easier justification than to say that it is economically expedient to import slaves from Africa. Over time, this acted as a vicious cycle, where blacks are inferior fueled discrimination which further leads to poverty among blacks.
The hierarchy between men and women: One hierarchy more or less same all around the world is the superiority of men over women. In many societies, women were seen as the property of men. And crimes like rape were property violations where marry-the-rapist was seen as a solution (ashishb’s note: This happens even today, even in the US). Of course, one notable difference between men and women is womb but as we have seen in modern times, women can vote, live independently, and think for themselves, all of which is the imagined reality of ancient cultures, they were incapable of doing. Since almost all societies (even before having any contact) around the world put men above women, it cannot be a pure coincidence, there are theories around it. One theory is that men have more muscle power, the objection is why are women historically excluded from less strenuous jobs like politicians and priests. Another theory suggests that men are more aggressive and thus, better suited to be soldiers, and wars have dominated our history. This theory falls apart as well since historically, soldiers from the bottom rung never rose to the top. The top was reserved for the aristocrats. Another theory suggests that since women need cooperation from men during pregnancy, they have to become more submissive to the man they are bearing the child of, so that, he sticks around. This theory falls apart since support network does not have to be a male. Bonobos have all female support networks.
How did this happen that the species, Homo Sapiens, whose success depends on being more cooperative with each other has less cooperative individuals (man) dominate woman is still a mystery
Biology is willing to tolerate a wide spectrum of possibilities. Nature does not prohibit homosexuality; it’s the culture which labels it unnatural to restrict it. Something which is unnatural like humans doing photosynthesis just won’t happen.
Biology enables, culture forbids
The unification of Humankind
The Arrow of History
Unlike the self-consistent law of physics, cultures have internal contradictions in them. Solving them leads to a change. The modern world continuously fights with contradictory ideas of equality and liberty. All cultures from a psychological perspective are “cognitively dissonant”. But the human-worlds has unified and connected to each other over time and have similar ideas, nation-states, a similar concept of monetary transactions (currency), and similar legal system (international law). For a long while, humans still believed in “us” vs. “them”. Merchants, prophets, and conquerors to expand their territories or customers, believers, and subjects made us believe in a new imagined reality of the global brotherhood.
The scent of Money
A barter system does not scale. If there are 100 types of goods than the two parties who are exchanging the goods have to know C(100, 2) = 4950 combinations of exchange rates every day. Money ends up being a central mechanism to linearize the problem since every seller has to know the price of their good in a single currency. Of course, just like religion, money is an intersubjective reality which only exists in our imaginations. And it does not have to be coins or notes. In Nazi concentration camps, cigarettes were a currency. The only requirement is that it should easy to transport, store, and has a wide enough acceptance.
Money is the most useful and efficient system of mutual trust ever devised.
The original form of money like Barley had an intrinsic biological value. Over time, we moved to unmarked gold and silver which had no biological value. Then to marked gold and silver coins, so, no weighing required to find the value. And then to fiat currency which had no intrinsic value, and then to the electronic currency which had no physical existence. Money as a source of universal convertibility and trust has replaced priceless things like honor, loyalty, morality, and love. When we use money as a medium of exchange, we don’t trust each other; we trust money. When someone runs out of money, we run out of trust in them.
An empire is characterized by cultural diversity and territorial flexibility. All empires have engaged in the brutal slaughter and assimilation of the people outside its borders to extend its territory. Slowly, the newly acquired population forgets what they stood for. For example, in the 7th century AD, Arab empire crushed Egyptians with an iron fist, today Egyptians think of themselves as Arabs. One major change which happened over time in the Imperial vision was that empires changed their imagined reality from “we are conquering you from our benefit” to a more benevolent “we are conquering you for your benefit”. Persian king changed from “Persian king” to “everyone’s king”. This was the first time in history, Sapiens were (pretending) to get rid of “us” vs “them” feeling. These imagined realities of benefitting the Conqueror exist even today when the US presidents use F-16 to deliver democracy and human rights
These imagined realities of benefitting the Conqueror exist even today when the US presidents use F-16 to deliver democracy and human rights in Iraq and Syria.
Of course, this benefitting the conquered approach still assumed the inferiority of conquered. That’s why M.K. Gandhi, a London-educated, qualified barrister was thrown out of whites-only seats from a train.
Almost, all imperial empires follow the same style. First, they conquered territories. Then those territories adopt the new culture. Then the people of these territories demand equal stature. And then eventually empire flames out but the imperial culture remains (ashishb’s note: Christianity, Islam, English, and French are some of those cultural remnants which can be seen all around the world).
Not only all empires are founded on blood and used war and oppression to maintain themselves, but also they are the source of almost all modern cultures. There is no untainted authentic civilization which is without those sins.
The Law of Religion
Along with money and empires, religion is the third unifier of mankind. Religion is a system of human norms and values founded on the belief in a superhuman order. The religions which are universal and missionary like Islam and Christianity succeed in spreading themselves.
Religion legitimises imagined realities (like “Eating pork is sin”) by claiming them to be coming from a superhuman entity.
Origin of Religion
Animistic religions originated since hunter-foragers wanted to maintain interests of other plants and animals (Eg. cutting a tree would anger the tree spirit, and it will take revenge). As Sapiens evolved to farmers, they desired absolute control over their animals. Gods acted as mediators. Sacrifice a lamb to fertility god and the god will ensure a bumper harvest. As kingdoms and trade networks established, multiple gods (like gods of war) appeared in a typical polytheistic fashion. While Animists thought Sapiens are just another creature, polytheists treated the world as a reflection of the relation between Sapiens and God. Polytheist religions like Hinduism believe that there is a supreme power which is devoid of any interest in the mundane desires of human beings. Therefore, a worldly human would not pray to that supreme power. They would, however, pray to a god with a sub-divided power like Lakshmi for wealth. Since these gods have only partial power, they have interests and biases, and it is possible to negotiate with them.
This plurality of gods results in open-mindedness, therefore, polytheists rarely prosecute infidels.
They don’t normally engage in conversion either. Romans, Egyptians, and Aztecs rarely send missionaries. When empires expanded locals were never asked to give up the gods, they can worship the new god along with the local god. Romans happily added Asian god Cybele to their pantheon. Though they refused to add monotheist Christ. Roman Emperor did force Christians to worship the Emperor’s protector god as a mark of political loyalty and prosecuted them when they refused. Romans prosecuted a few thousand Christians in three centuries, Christians prosecuted millions of other Christians over the next 1500 years to defend their slightly different interpretation of their religion. Over time, some polytheistic worshippers started to believe that their god, while having interests and biases, is supreme. Christianity, an esoteric sect of Jews, whose leader Paul of Tarsus, claimed that the Jesus of Nazareth was their Messiah and if he has incarnated in the flesh then his message is worth spreading to the world. The esoteric sect of Christianity took over the Roman empire. Islam, another monotheist religion, repeated this model of success. Since monotheists are usually more fanatical in their beliefs, they took over the world. Most of the world today outside of East Asia follows monotheism. Christianity, however, adopted most polytheist gods back as Saints. For example, Celtic Ireland uses to worship Brigid, today, Christian Ireland worships St. Brigid.
Monotheism also gave birth to Dualism. Dualism explains evil by saying that there are two powers – a good and a bad. This explains the existence of evil why mystifies monotheism but is itself mystified by the order which governs the universe (since “good” and “bad” have equal power). Zoroastrianism is a notable dualistic religion. Monotheists like Christians, Muslims, and Jews absorbed dualistic beliefs. They not only accepted the concept of a powerful Satan but also believed that the god need helps in its battle against Satan and labeled those battles Jihads and Crusades. Even the concept of Heaven and Hell is dualist in origin, with no mention in the Old Testament. Most modern monotheists are syncretic in their beliefs. Several natural law religions like Jainism, Buddhism, Confucianism, and Stoicism appeared as well. They disregarded the existence of super-human Gods and prescribed more in terms of the way of living to attain a good life. For example, Buddhism’s central teaching is that suffering arises from craving and the only way to liberate your mind from craving is to train your mind to accept reality as it is. Of course, since most Buddhists don’t spend their life attaining Nirvana but in the more mundane worldly tasks, they also go and worship in Boddhisatvas for bringing rains and even winning bloody wars in exchange of fragrance sticks and a gift of rice. Communism, Capitalism, and Liberalism, are modern religions with
Buddhism’s central teaching is that suffering arises from craving and the only way to liberate your mind from craving is to train your mind to accept the reality as it is.
Worshipping The Man
Liberal Humanism is the most famous religion (“ideology”) which worships humans as being scared and with belief that they have certain basic “human rights” which cannot be normally withdrawn from them. A murder is effectively destabilizing the cosmos order and punishing the murderer brings nature back in order. Social Humanism thinks about humans in a collective way, it holds a strong belief in equality. Evolutionary Humanism, the most radical one, was popularized by Nazis, it thinks of humans as a mutable species, and strongly believes that advancing the quality of the species and eliminating everything which is of lower quality should be the end-goal of the humanity.
The Secret of Success
While a globally interconnected society was inevitable (given the ability of humans to form large networks), the contemporary global society is one of the possibilities which got realized.
History has wide array of possibilities, many are never realized.
The success of monotheism, nationalism, and liberal humanism was one of the potential outcomes out of several possible ones. History is a complex level 2 chaotic system (Level 1 chaotic systems like the weather is unchanged when we try to predict, Level 2 chaotic systems like the stock market react to predictions). Genes lead to organic evolution; memes lead to cultural evolution. Some scholars see culture as a mental parasite, as soon as one country is infected with nationalism, slowly, the surrounding ones catch the infection as well.
The Scientific Revolution
The Discovery of Ignorance
Before the scientific tradition, it was believed that religious books contained everything that was important. Scientific tradition, in western Europe, a part of the world which played little role in the history till about 1500AD. The scientific tradition is willing to admit that a lot is unknown and even what’s known can be incorrect if the new evidence to the contrary shows up. The focus of education has shifted from Theology to Mathematics and other “exact” sciences. Even the heavy emphasis on technology in the military is a recent phenomenon beginning in the 19th century. Most cultures used to believe that golden age use to be in the past and hence, nothing much can be done to improve things. Scientific myth busting fixed all that. The scientific progress has drastically elongated the life expectancies. The scientific research, however, is almost always funded by entities who have their own social, political, or economic agenda. Science in itself cannot set its priorities, an ideology (religious, racial, or economic) determines the same.
The Marriage of Science and Empire
Western Europe and Britain which had played almost no important role in the history of the human civilization till about 1500 AD started to emerge and Europe took over to become the economic powerhouse between 1750 and 1850. While the development of both modern science and capitalism in Britain in a mere accident. The similar social structures (and imagined realities) of France, Germany, the US, and the other western nations allowed them to quickly follow up and copy Britain’s success. Societies in India and China, the economic powerhouse of that era, were organized differently and hence, they could not do the same. While the Arab world, India, and China also produced intellectuals and scholars (which Europeans did study), it was only in Europe that these intellectuals worked alongside the capitalists towards for-profit initiatives. The Imperial voyages to the distant lands would consist not only of military but also some scientists to make discoveries.
Europe’s biggest success was the marriage of modern science and capitalism.
This scientific mindset is illustrated by the example of Columbus vs. Vespucci. Columbus reached the Bahamas and the Americas in 1492, but he simply did not want to believe that there exists a new continent which the Bible and all other religious text could have missed. Vespucci reached there around 1500, and he argued that this is a new continent unknown till then.
For the first time in the history of the world, a culture was making maps with empty areas marked for exploration.
Europeans did not have an exceptional technological edge in the 1500s over other cultures what made them different was their insatiable desire to explore and conquer. In 1492, Columbus reached the Caribbean; the local population was colonized, killed, and enslaved with an iron fist. And the Aztecs in Mexico knew nothing about it. In 1517, after hearing rumors about a powerful Aztec empire, 300 Spaniards landed in Mexico. An empire of millions, unprepared for interacting with unknown humans, did not perceive a threat from 300 Spaniards. They pretended to be the diplomats of the king of Spain and use that deceit to capture the king Montezuma. They held him, hostage, while planning out a coup. By the time, Aztec elite revolted and kicked the Spaniards out; they had found huge support among subjected people, who preferred unknown Spaniards over Aztec rulers. That miscalculation was costly. Within a century, 90 percent of the local population was wiped out. The survivors were under an even greedier regime. The same story was repeated by the Spaniards with the Inca empire.
Lack of interest in the world beyond their empire ended up being costly for the Incas and the Aztecs.
The Ottomans, the Indians, and the Chinese heard about these stories but showed little interest in Europe. Their world revolved around their empires while the Europeans enjoyed the undisputed mastery of America and Oceania. The wealth and the accumulated knowledge was then used to invade Asia. The detailed understanding of the local culture allowed Europeans to leverage and rule the populations far larger than theirs (ashishb’s note: The Spanish destruction of Inca and Aztecs; and the British colonial rule of India has strong parallels, the author missed out the right phrasing here which is divide and rule policy). While Imperialists claim that their empires were altruistic projects, a white man’s burden, the truth was locals were subjugated with an iron fist.
In 1764, Britishers conquered Bengal, the richest province of India, due to the policies of the British East India Company, a third of the population (about 10 million) died from 1769-73 in the Bengal Famine.
The linguistic basis of Indo-Aryan languages was further used to come up with the argument of a superior Aryan race – a race of tall, blue-eyed, blond, fair complexion, super-rational humans. They emerged in the north and invaded Persia and India, regrettably, degenerating themselves by intermingling with the locals (the core of Hitler’s argument).
The Capitalist Creed
Throughout human history, “economic pie/wealth is fixed in size and not growing” was the self-fulfilling prophecy. The idea of extending credit, therefore, was meaningless. The modern-day belief, based on The Wealth of Nations, is that the individual greed is good for collective prosperity. While the idea of reinvesting profits to increase production further sounds trivial today, for a long while, humans believed that the production and consumption are more or less fixed; and had it not been for the scientific revolution that would have been true. Many of the imperialist voyages could not have been easily funded by a single investor, and that’s what lead to the emergence of joint-stock ownerships and eventually stock exchanges (and bubbles). In many cases, the government came to the defense of the investors. In the Opium war in 1839 in China Britain fought Qing dynasty for protecting opium trade from India to China by British traders. Greek rebellions raised funds via bonds in London Stock Exchange, and where their fight against the Ottoman Empire started to lose momentum, the British Navy sent their ships to defend their bond investors by ensuring that Greece becomes free. The popular free-market doctrine wants us to believe that there should be no political interference in the market and left to its markets would benefit everyone. Except that is only a half-truth, all the Atlantic slave trade, most of the colonization, and millions of deaths of slaves on the plantations happened because of free markets and not the government. The European middle class happily bought shares of the slave trading companies and made about 6% a year in the 18th century.
While Nazism killed millions out of burning hatred. Capitalism killed millions out of cold indifference coupled with greed.
The Wheels of Industry
The invention of Steam Engine and further Electricity freed us from the day-night and winter-summer cycle of nature. The rise of industrial agriculture increased production drastically. And who will consume all this? Consumerism came to the rescue. All prior religions had encouraged austerity; consumerism encouraged conspicuous consumption. In fact, capitalism won twice when people overconsumed since it allowed them to sell the cure for overconsumption later. The capitalists follow the commandant of “Invest” while consumers follow the commandment of “Buy”. Two sides of the same coin.
Consumerism is the first religion in the history of mankind whose followers do what they are asked to.
A Permanent Revolution
The Industrial Revolution turned timetable and assembly into a template for almost all human activities. With the advent of the railroad, local time differences across cities became a nuisance. In 1880, Britain legislated a single time for the whole country. Today a single family has more timepieces than an entire medieval country. The biggest change, however, is how the Industrial Revolution broke the family into individuals. Throughout human history, the family and the community were the biggest support system a human had. Even the kings maintained themselves primarily via support of family heads. The market and the nation-state made a new offer to the individuals, free yourself from the family and become an individual, follow our rules instead, they won. The sacred parental authority, the (lack of) right to choose a spouse, and all such family powers have been taken over by the nation-state.
Previously, bride and groom met in the family living room and the money passed from one father to another. Today, courting is done at bars and cafes and money passes from the hands of the lovers to the waitresses.
The nation and the consumer are the new imagined communities of our era which have replaced families. And just like money and human-rights, these are inter-subjective realities which live in the minds of millions. Given that most wealth is not physical anymore, the wars have become less profitable. Simultaneously, due to trade, peace has become even more profitable. We are living in one of the most peaceful eras in human history.
And They Lived Happily Ever After
History talks about facts but rarely talks about how has human happiness evolved. Studies have shown that people with more money, good marriages, better social support, and lower subjective expectations (vs. the reality) are happier. Illness decreases happiness in the short-term. The subjective expectation is the most crucial aspect; advertisements make us miserable by increasing subjective expectations. The bigger question might be the meaning of life. From a scientific perspective, life has no meaning. But for our happiness, meaningless life is an unacceptable choice. It’s when our delusions about the meaning of our life synchronize with the collective delusions, that’s when we feel happy.
Its when our personal delusions about meaning of our life synchronize with the collective delusions, that’s when we feel happy.
Most of these studies take the “liberal” approach of believing that humans are best to decide when they are happy or not. Religious leaders, as well as psychologists, disagree. For example, Buddhism believes that real happiness comes when one disassociates oneself from inner feelings and can just calmly observe them.
The End of Homo Sapiens
Till now all evolution has been evolutionary, it is likely that the future evolution will be Intelligent Design based designed in Laboratories. Either we will enhance human genes (ashishb’s note: CRISPR/Cas9 gene editing), we will add non-organic parts (cyborgs), or we will create life from completely inorganic material based on Artificial Intelligence. Due to a massive PR risk around ethical issues, most of these debates have focused on targeting plants, targeting amputated humans, and building AI for targeted tasks.
The book talks about Martin’s experience as a brand consultant where he tries to expose the subtleties of marketing used by corporations to create or increase demand for their products. Some techniques mentioned in the book are morally questionable. Overall, it’s a great read into at the intersection of psychology and business. I would recommend reading this in conjunction with “Influence: The Psychology of Persuasion“.
Marketing to the kids (including the unborn)
Childhood memories and associations are more resilient to traumas than the ones formed later in life. A small hint of fragrance, surroundings, or familiar objects can bring them back. But it extends beyond childhood. A fetus can hear not only the maternal sound but also the sounds coming from the outside and studies have confirmed that newborns react positively to the music tastes of their mother. The one-off unscientific real-world marketing attempts have confirmed that this is not just limited to the sound but extends to smells and the taste of food as well. Kopiko candy brand gave out free candies in maternity wards and in just four years of existence became the third largest candy brand in the Philippines. Children who grow up recognizing brand logos not only prefer them later in life but also believe that the brand corresponds to personal qualities. Marketers love targeting kids entering precocious puberty (“early puberty”) since it allows them to form early preferences for things like razors, deodorants, and makeup.
- Organizations like Girls Intelligence Agency help brands convert young girls with free cosmetics and party invites to convert them into brand ambassadors.
- Gillette sends out free razors to boys on their birthdays (age varies according to state regulations). There is a 92% chance that a boy who has tried Gillette razor twice will use it for the rest of his life.
- Kool sends out cigarettes for the three months starting on the 18th birthday. If the boy or girl is not hooked in those three months, they are a lost cause. And if they are hooked, then they are able to milk them for life.
Marketing to kids not only sets their future preferences but also influences the preferences of the whole family. Many times parents would buy what the child is asking for just to calm him/her down. Marketers call this “pester power”. The reverse “hand-me-down influence” happens when parents shape the preferences of the child. Overall, both are in play simultaneously.
A fetus develops taste for the sound, smell, and taste. The effects last into the adulthood.
From flu epidemics like swine flu to hurricanes, marketers love capitalizing on fears selling food which boosts immunity with zero scientific evidence to hand sanitizers where hand wash would suffice. Fear raises adrenaline which leads to the release of epinephrine, which produces a satisfying sensation, more so for adrenaline junkies. Fear of failure is higher than the promise of success. More men end up going to the gym to avoid a flabby body than to develop muscles. Fear is used to sell
- Fear of failure is higher than the promise of success. More men end up going to the gym to avoid a flabby body than to develop muscles.
- Fear is used to sell home security systems to single women and life insurance to men with families.
- Mother of all fears is the fear of a first-time mother. Women are more prone to fear and guilt than men. First-time mothers even more so. From selling tons of child safety equipment to food items which require a small finishing touch, first-time mothers are the biggest opportunity for the marketers.
- Pharma companies capitalize on the fear of social isolation due to being overweight, being bald, having sexual performance issues, having cancer, etc. Sometimes they terrorize with minor things like restless leg syndrome and even shyness. Among big pharma, twice as much money is spent on advertisement than actual R&D.
- Fear of staleness – Whole Foods use chalked boards to display prices to evoke the feeling of freshness, toilet papers in hotel rooms are sealed to imply room cleaning, seafood sold on ice, tomato-colored bottle of Heinz and sweating cans of coke are all meant to disguise into believing that the food is fresh and free of preservatives.
Among big pharma, twice as much money is spend on advertisment than actual R&D.
Dopamine, the feel-good neurotransmitter, is behind our addictions from cigarettes to smartphones. The greater we use a dopamine inducing substance the more the tolerance we build up of it for generating dopamine, and more we have to use it to generate the same amount of dopamine and feel better about ourselves.
Our lives are divided into two states, the routine state (the weekdays), and the dream state (the weekends). It’s during the dream state, we experience new brands, and bring them back into our routine lives. For the craving to build up, some subtle clues are dropped in the environment, like the sound of the soda can popping up or addictive ingredients like MSG, corn syrup, caffeine, and sugar. Studies have shown again and again that addictive ingredients trigger the brain the same way narcotics does. Games & Gamification cause severe addiction by providing a repetitive task with increasing level of difficulty, causing a regular release of the “feel-good” dopamine.
Sex does sell. While men respond more to explicit imagery or sexual innuendos, women, on the other hand, respond more to ads with a romantic touch. Seeing a scantily dressed young person of the same sex puts us into the dream state of imagining ourselves as desirable as them.
The story of Axe body spray
Unilever surveyed 12, 000 single men and teenage boys, asking uncomfortable questions ranging from their fantasies to their pick up strategies. They concluded that the ultimate male fantasy was not to be irresistible by a woman but by several women. They further accompanied several men to bars & nightclubs and segmented the males into six categories –
- Predator – a loser & mostly likely liar looking for a drunk woman
- Natural talent – someone whom most women would actually desire. Due to positive self-delusion, most men thought they are a natural talent
- Marriage material
- Friend – the ones who get friend zoned
- Insecure Novice – looks creepy like a predator but pure at heart
- Enthusiastic Novice – looks really eager
Unilever decides to target two groups, the insecure novice, and the enthusiastic novice. They also decided to target natural talent mainly to provide a finishing touch to them. The boundary-pushing sexist ads campaign which showed an ax-sprayed man with several women worked wonders for Unilever, earning $71M in 2006 ($50M more than the nearest rival Tag). Eventually, as more and more dorks started to cover themselves with ads, the brand became the brand of losers and took a huge hit in sales. Unilever’s Euphoria was another success where the idea was to design a fragrance which gave women the feeling of imprisoned lust (euphemized as melancholic).
- One car company looked for a particular animal name to design a car targeting middle-aged men. (ashishb’s note: The book does not mention the name but gives enough clues that it was Rolls-Royce Stallion), the car was themed by the smooth, black, and silky appearance of the animal.
- Simpon’s strategy – where a term like “golden showers” or “12 inches of flavor” which is not overtly sexual but obvious to the wallet-carrying adult is used for producing humor suited both to the child and the adult.
- In the US, the rise of single mothers, fearmongering among men, and new cosmetics marketed towards men to smooth out their rough edges while keeping them look masculine have all contributed to the growth of the male grooming industry.
- Termites, bees, and birds appear to move in unison as if they are communicating with each other. In biology, these are called complex adaptive systems where simple individual actions result in a complex final outcome. Humans to some extent behave the same way.
- Humans flock behind more confident individuals. Even toddlers have been studied to play with toys similar to how they have seen other toddlers playing with them.
- When people look at the photos of a party they attended, they first check out their photos, and then they check out people surrounding them in those photos (to compare and to see their reactions towards them).
- In 2009, Cepia staged Zhu Zhu Pet Hamster giveaways at Zoos, hospitals, and MLB games. Then they staged several influential parties for mommy bloggers, organized radio shows, and cut the production to create artificial scarcity. This created a demand big enough that Cepia made millions by selling this toy.
- Viral phenomena like Smirnoff Icing game (with no role from Smirnoff) or small clips uploaded by Viacom on YouTube to market its shows, if successful, can result in a huge windfall for the marketers.
- Bestsellers list recommended music, and all such curation system help us guide what to purchase. We love buying what is already popular since it implies implicit social approval of our taste.
- In a survey of 100, 000 teenagers in30 countries, roughly 50% said that they won’t buy an item of clothing without a visible branding on it.
- Using counterfeit products, not only, fails to improve our self-image but undermines our internal sense of authenticity.
- A reverse peer pressure develops when older people start using the product, in that case, younger ones try to dissociate themselves from it. A product which is going to be explicitly disapproved by the older generation has a high chance of success with younger ones.
- Most Russians drink a large amount of Vodka quickly (after Nostrovia – Russian cheers). Neither they like the taste, nor they like binge drinking but peer pressure keeps this ritual alive. Younger generation hates it, therefore, a new brand of Vodka capitalized on that by having a better taste and a slow drinking ritual decided to take on the Russian market ( the author did not reveal the brand name).
We love buying what is already popular since it implies an implicit social approval of our taste.
First experiences might not always be better but they always seem better in the hindsight. We always remember beautiful memories and associations of the past. Many memories, especially of childhood and teenage are usually of fewer responsibilities and youthfulness and hence, are more beautiful. We are attracted to small things which remind us of that nostalgic past. When we buy a product from the past, we are not just buying the product but a nostalgic trip to our childhood. We know that the time is fleeting and just the mention of the word “time” in an advertisement makes it more likely for us to act.
Nostalgia demands authenticity and nothing authentic can be perfect. From pre-washed T-shirts to (apparently) randomly broken chocolate pieces, (machine generated) chalk signs a Whole Foods, all these are attempts to fake authenticity with imperfection. Perfection, like a perfect burger, makes us conscious of mass-produced factory goods.
When we buy a product from the past, we are not just buying the product but a nostalgic trip to our childhood.
When Evian water, a French bottled water company, entered China, their first attempt to sell bottled water flopped since they chose a well which tasted more like the modern day urban China than the rural farmland, most of China was a few decades ago, after realizing this, they found new wells with grassy moldy taste and this time it succeeded.
- In modern democracies, royal families are effectively celebrities. Things like royal marriages and royal births boost their popularity. They have to project an aura of being special but at the same time not too aloof from the commoner.
- While the childhood dream of most boys is powerful superheroes and princess for the girls, the future-self of everyone is the same: rich, attractive, and famous. And that’s what attracts us to celebrities, we envy what they have.
- South Beach Diet published in 2003 was relatively unknown until the “celebrity” Clintons endorsed it. And it wasn’t just 15 minutes of fame, the book still commands strong sales in the US.
- Vitaminwater gave shares to celebrities hoping to get endorsements in return which they indeed got.
- Companies come up with preferred, exclusive, and club offerings all the time, marketing them as exclusive, even though, anyone who is willing to pay an exorbitant fee can get in.
- Cosmetic companies put doctors on their board since the recommendation from experts (even where there is a perceived bias) is pure gold.
- Celebrities lend their names to products or publicize products in return for either ownership stake or royalty based on goods sold. Despite this bias being visible, it still works since consumers do want to associate themselves with Elizabeth Taylor by buying perfume with her name on it. And this is not just limited to useful goods, Marilyn Monroe’s empty prescription bottles were sold for $18,750. The key is celebrity association and not usefulness.
- Just like “peer pressure”, celebrity endorsement is a way for us to let someone else make a decision for us.
Marketing Health – physical, mental and environmental
- Goji berry is found in China and Malaysia but is associated with Himalayas and Buddhism to imply purity, authenticity, and Eastern enlightenment. In fact, most of Freelife’s Goji berry juice is produced in Arizona. Marketers exploit the mental shortcut which looks at the bottle and associates it with Eastern enlightenment. Acai Berry uses “Brazilian rainforest” for the same effect.
- Pomegranate marketing overemphasizes the absolute benefits of pomegranate without admitting that it is not much better than most other fruits and vegetables.
- In the US, “organic” is a regulated term but “natural” is unregulated. And marketers love adding the word natural whenever they think it can give them a boost.
- “multigrain” just means more than one grain and it might or might not be healthy.
- “energy drink” is a positive spin to a drink with more calories.
- “contains real fruit” does not mean much, technically, any little amount of real food in a drink would qualify for it to claim that it contains real fruit.
- “zero trans fat” usually implies the presence of saturated fat, both being equally bad for the heart.
- Cosmetics and clothing can make even more outrageous claims due to little regulation. VitaSea -shirts, claimed to be made from Seaweed, contained no seaweed.
- Green, recycled, and socially responsible good are usually more expensive, even when they don’t have to be. Companies love creating this aura of it costs more to be socially responsible and environmentally friendly while milking extra money.
- Buddhism, yoga, new age spirituality, and halal labels are all used for selling goods in the pretext of purity.
Data Mining (consumer insights)
- Before a hurricane, Walmart analyzed data from a past hurricane to conclude that top selling item was not flashlights but beer and Strawberry Pop-Tarts.
- Credit card purchase monitoring, which is further sold to third-parties is the most common way to find customer behaviors. This data is used for further sending targeted emails.
- Homeowners spend ~$12, 000 in the first six months of a move and that’s why property deeds are a major source of data for the companies.
- Loyalty cards while giving a discount to consumers allow the stores to profile the buyer even more closely.
- When Mark & Spencer in the UK spotted in the sales data that a lot of Indians dishes and food is being purchased there, they realized that a lot of Indians are coming there to shop. They started both currency exchange and travel right inside the store to make money off of the trend.
- Shoppers who go counterclockwise spend twice as much as those who go clockwise. A store decided to put an entry to the right to ensure counterclockwise motions.
- Given the amount of information which is being tracked about us, both online and offline, it is safe to say that we are living in a post-private world.
It consists of 12 chapters, with one story each, most of them from the Wall Street of the 1960s. On the surface, the stories will appear completely unrelated but underneath the idea is to touch all aspects of the business. The stories can roughly be divided into two parts
- R&D – The story of Xerox is a company’s dangerous bet on making photocopying work
- Product – The story of Ford’s Edsel is about the failure of overhyped products
- Communication – The story of GE is about illegal price fixation and intra-company communication
- Trade Secrets – The story of Goodrich engineer leaving the company for a competitor is about the role of trade secrets
- Insider Trading – The story of Texas Gulf Sulpher is about employees ability to trade on insider information
- Public vs private sector – The story of Lilienthal is about the role a person coming from the public sector played in the private sector
- Market manipulation – The story of Piggly Wiggly is about how publicly traded companies have to face market manipulation
- Market fraud – The story of Haupt is about the role of exchange in protecting customers of the exchange member firms against fraud by those members to increase confidence in the market for the retail investors
- Market Crash – The story of the small market crash of 1962 is about the role of exchange and the mutual funds to prevent the irrational behavior from causing wide swings in the market.
- Currency crisis – The story of the British Sterling’s fight against its devaluation is about the role of central banks in preventing a currency crisis.
The book also contains a general discussion on Federal Income Tax and the role of the stockholder meetings. Both of these, in my opinion, can be skipped.
Carlson and Kornei came up with a basic photocopying process in 1938 at a non-profit industrial research Institute Battelle Memorial Institute, Columbus, Ohio. Carlson patented it and sold it to Battelle, who resold it to Haloid for royalty. From 1947 to 1960, Haloid spent $75M (twice its earnings) on the photocopy process, more stock issues were raised, employees were paid in stock. By 1960, the fortunes were completely turned around. The investment, not only made Xerox employees richer but produced tremendous value for Carlson and the University of Rochester which invested in Haloid (now Xerox) in its early days. (ashishb’s note: This is worth contrasting with how Xerox being analogous to photocopying prevented Xerox from ever succeeding in the PC business since consumers never associated Xerox with PCs)
In 1955, Ford wanted to come out with a new compact car for the emerging middle class of the US, they did except by the time car came out it was too late to the market and the compacts had taken over. Edsel is the name of Henry’s son and that didn’t bode well with the employees either who felt that it had dynastic connotations. This was further followed by high-handedness in selecting the dealers. In July 1957, the stock market took a nosedive. It was introduced in the last quarter of 1957 with a lot of fanfare only to be criticized for its poor manufacturing quality, bad appearance, and high price. Eventually, the Edsel division was folded into other divisions and the car was removed from the market. Overall, loss to Ford was about $250M.
From 1956 to 1959, 29 companies selling heavy electrical machinery engaged in illegal price fixation. In 1961, these companies, with GE as the ringleader, were prosecuted for both civil and criminal violations. Two things went wrong, employees in sales were reminded that price fixation is illegal with a wink, and employees who were engaged in such meetings (referred with code words) were being rewarded.
I receive my business guidance from the communication, oral and written, and through a more visceral medium of “impacts” – a GE manager during Senate testimony on price fixation
The actions of people in managers in GE were the impacts that influenced the thinking and taught many what the true attitude of the company is. As the senior managers tried to cut down on these price-fixing meetings, they faced another problem, employees would simply ignore such instructions thinking that what’s being communicated is the opposite. Many were fined, lost careers, and sent to prison eventually.
In 1961, A Goodrich engineer Wohlgemuth working on space suits decides to leave and join International Latex Corporation (ILC), which has recently won a govt contract for spacesuits. Goodrich took this to court claiming that the engineer knew too much about the trade secrets and if he joins the competitor he will leak them. ILC fought back the case. Media attention was on the case since the decision implied whether companies can enforce proprietary trade secrets from leaking or can they just steal it. The other implications were on the career of these researchers who could become a slave for life for a firm if they weren’t allowed to join the competitor. The final decision went in favor of the engineer and consisted of two arguments.
- One free bite – Every dog has one free bite before it is considered vicious. Wohlgemuth would be assumed to be not leaking secrets unless proven otherwise.
- With the number of co-workers, the engineer has, if something is leaked then there is a high chance someone will inform Goodrich.
Texas Gulf found huge Sulpher mines in Eastern Canada. As the discovery for being confirmed, many insiders bought shares. After the public announcement of the news, a director immediately called his family members to buy shares. SEC bought cases on both counts. In the first case, the judge decided that the confirmation was not strong enough, so, information was not material enough. In the second case, the judge decided that as soon as the news is made public, taking actions on that is legal and SEC is welcome to change rules for the future but not retroactively.
Public vs private sector
(ashishb: The chapter focuses too much on a private individual, Lilienthal, and is not of much use except for a few beautiful quotes)
Lilienthal was heading Tennesse Valley Authority and left that to start working in the private sector, he had a great career.
Business has its man-eating side, and part of the man-eating side is that it’s so absorbing.
Making a million – I was surprised of course. It’s like when you are a boy and you try to jump six feet. Then you find you can jump six feet, now what?
Piggly Wiggly stores were started in Memphis, Tennessee. Once successful, they went in with a franchise model, when some of the franchise closed in 1922, then some players on the Wall street decide to short the share. Adamant at beating the pros at their game, the founder, Saunders decided that he will “corner” the market by buying all the stocks which were being traded and then lend it for short selling, and once no publicly trading stock is available will demand that his stock is returned. Since he will be the only one holding the majority of the stock, he can charge whatever price he can for that. The plan was great, except, the pros had better connection them him. The exchange suspended the trading of the stock. And the pros figured out that many widows and pension funds are holding the stock which cannot be traded anymore. They happily sold those stock certificates. Saunders who borrowed the money to buy this stock was in the deep red (badly under debt). New York stock exchange apologized by stating that the public harm was more dangerous than keeping the southern pride alive. Saunders had to file bankruptcy and his future entrepreneurial attempts were failures.
Haupt, a member of the New York Stock Exchange, was doing Cottonseed trading on behalf of a client, Alliant. The account was not only leveraged and largest for Haupt, but it also turns out later that the collateral receipts were fake. The company was bankrupt and the exchange took a major step in ensuring that the innocent customers of Haupt, should not lose anything in the process. The exchange convinced its members to put the money, it even convinced European banks who were the creditors to let the customers get to the “whole” first. The event was lauded as confidence-inspiring by major newspapers. Eventually, customers got everything, creditor banks got about 50% back.
Psychological gestures on the Wall Street work when they are neither really needed; nor intended.
In 1962, the stocks were trending downwards and the biggest theory was that the small investors were losing confidence and during the panic were pulling money out of the mutual funds which were forced to sell stocks to raise cash for redemption. What turned out is that most of the selling was due to margin calls, so, most sellers were playing the market on the borrowed money. And downward trending forced them to sell. Eventually, a fund manager spotted a deal for Telephone (AT&T) and decided to buy it, as it started trending upwards, the other stocks moved upwards as well. And the market changed from seller dominant to buyer dominant. And as the stocks keep climbing upwards, the mutual funds cashed out on the profit leading to more stabilization. Overall, mutual funds acting in their selfish interest provided stabilization to the market.
In 1964, the British pound was guaranteed to trade in the range of $2.78 to $2.82, if it is trading closer to $2.78 than Bank of England will buy it off the market by making payments in Gold, and in the reverse scenario Bank of England will accumulate Gold. But the balance of payments was against Britain and the pound was tilting closer towards $2.78. As the bank lost more and more Gold, many central banks came together to prevent the collapse of the British pound by pledging $2.85 B. This pushed the speculators back but since the balance of trade was broken, 3 years later, Britain was in the same situation, with the earlier loans unpaid for. This time the market won and the pound was devalued to $2.38 to $2.42 range. This immediately was followed by the buying of Gold (or selling of Dollar) in many parts of Europe including London. It became clearer that France has a hand in this to cause the devaluation of the Pound and the Dollar. Members of the Gold Pool met, introduced many sanctions to cut down the shortage, and then introduced special drawing rights for the paper gold (ashishb’s note: The book was published in 1969 before the US govt. in 1971 decided that convertibility of the Dollar to Gold won’t be allowed anymore).
The book presents a robust theoretical framework around how good ideas emerged in human history and debunking myths associated with the same. The underlying theme of the book is how coral reefs, big cities, and the world-wide-web provide the right platform for innovation.
The right platform for innovation provides liquid networks that encourage rapid information sharing, serendipitous encounters, the formation of slow hunches, the exploration of the adjacent possible, and exaptation of the existing solutions for solving seemingly unrelated problems.
- Kleiber’s law: Metabolism slows down with mass in proportion to (mass)3/4, so bigger animals have slower heartbeats. City growth (gasoline stations, road surface area, etc.) follows Kleiber’s law as well. However, innovation in larger cities had super-linear growth (~(size)4/3) with size.
- 10/10 rule: It takes about ten years to develop new technology and another 10 for its mass adoption. The web has compressed it to 1/1.
The Adjacent Possible
- Stephane Tarnier, an obstetrician in 1870, took inspiration from chicken incubators to construct human incubators. It was difficult to repair the same incubators in the developing world, and a new one built out of auto spare parts turned out to be better.
- The adjacent possible innovations come from the first-order combination of what’s already available (“spare parts”).
- The inventions whose raw material is not available are ahead of their time and fail to materialize.
- Difference Engine was in the adjacent possible, but Analytics Engine was ahead of its time.
- YouTube succeeded in 2005; it would have failed, if launched, in 1995.
- The environments where the adjacent possible can be explored lead to good innovation.
- Challenging problems don’t clearly define their adjacent possible. A right solution combines what’s available to solve the problem.
- Good ideas spill through connected “liquid” networks of individuals.
- Lone wolves do not make most inventions and discoveries but a group of humans exchanging ideas (“spare parts”) and problems they are trying to solve.
The slow hunch
- An FBI agent filed a memo in July 2001 stating that Osama Bin Laden is sending students to attend civil aviation in the US. The memo was marked speculative. A month after his memo, Pan Am Flight Academy in Minnesota reported to the FBI about a suspicious student who has more interest in cockpit doors and communication than the actual flying. The search warrant to check his laptop was not granted until Sep 11, 2001. The two agents in Arizona and Minnesota had hunches, but only if they were connected, it would have lead to something.
- Slow hunches stay in mind and develop into an idea over time, and liquid networks allow such feelings to be passed around and intermingled with other hunches.
- Commonplace books and nowadays, DEVONthink and Evernote, are ways of collecting hunches.
- Tim Berner’s Lee took inspiration from Enquire Within Upon Everything over time to develop his hunches around how the World Wide Web should look like. Similar ideas lead to the invention of products like Google News.
- Dreams and sudden sparks of thoughts explore the adjacent possible, combining various unrelated ideas and sometimes reveal unusual solutions to problems at hand.
- Dmitri Mendeleev had a dream that elements cannot be ordered by atomic weight and suggested him to use the atomic number instead.
- Kekulé had a dream about Ouroboros, which lead him to the structure of Benzene.
- Sleeping on the problem has demonstrated a strong positive impact on problem-solving ability.
- Large clusters of neurons occasionally fire at the same frequency, and it is positively correlated with IQ.
- Daphnia, a water flea, reproduces asexually under normal circumstances. The reproduction, when subjected to stress (harsh weather), starts producing males and switches to sexual reproduction. It’s a biological innovation strategy. When life is going well, it makes sense to keep doing what you are doing. Innovation is required when it’s not.
- Reading is an unprecedented vehicle for transmitting new ideas. But if it’s spread over a long period, then serendipitous connections won’t happen. Bill Gates takes annual reading vacations to read a large amount of text in a short period.
- Internal and external idea exchange platforms are all about finding and sharing hunches. (ashishb’s note: I feel that the author is over-emphasizing their success, the GreenXchange mentioned touted in the book is not even active anymore).
- Triode, Penicillin, Photography, Pacemaker, all were results of mistakes made during the experimentation.
- The white noise of cosmic radiation was believed to be an error till it was realized that its a proof of Big Bang.
- The error acts as a dark background for exhibiting the bright truth.
- Good ideas emerge more from surroundings with a certain amount of noise and error, which leads to the exploration of the adjacent possible.
- DNA transcoding introduces a few mutations as a way of evolution & innovation.
- Gutenberg used wine-producing screw presses for printing.
- Feathers first emerged for warmth were later exapted for flying by birds. If they haven’t provided heat in the first place, the evolution would not have pushed towards making them worthy enough of flying. Therefore, exaptation is the only way for flying feathers to evolve.
- Many scientific inventions are borrowing/exaptations from one unrelated field to another.
- Big cities, due to their population density, support subcultures more effectively than small towns. Therefore, big cities encourage exaptation and cross-fertilization (“collision”) of ideas.
- Diverse, horizontal social networks are way more innovative than uniform, vertical networks of similar individuals with shared beliefs. The latter damps the creative sparks. The individuals who maintain active links to multiple diverse groups are the real source of innovative exaptations.
- Coffeehouses, research labs, and similar high-density places of a diverse group of individuals lead to more collisions and exaptations.
- Cholera was believed to be air-borne, but Snow‘s work as an anesthesiologist convinced him that it could not be airborne, and he, eventually, proved that it is water-borne.
- Before Darwin, the belief was that atolls are dormant volcanoes, Darwin realized and proved that they are built up by reef-building coral. Coral reefs occupy 0.1% of the earth’s surface but 25% of marine life species (Darwin’s paradox).
- Physicists came up with an idea of tracking Russia’s Sputnik satellite using Doppler’s shift, and that leads to the reverse idea of determining the location of objects on the surface of the earth, which has become the modern-day GPS.
- The most generative platforms are like stacks; the person working at building level 5 has to only understand level 4 and nothing beneath it.
- Platforms have a natural attraction towards recycling waste and abandoned. In big cities, chain stores and restaurants occupy the new construction while bookstores, struggling artists, and antique dealers occupy the old one. The riskier enterprises always have to go for the less valuable spaces, that’s why, Google, Apple, and HP were started in garages. Old ideas can sometimes use new buildings, but new ideas must use old buildings, new construction is too expensive to support them.
- Coral reefs have various species living in a symbiotic relationship.
Earlier, when connectivity was weak, and it was harder to capitalize on one’s innovation, the individuals mostly drove it for a non-market motive. After the printing press, the connectivity became better, and then the most innovation was driven by the networked groups for a non-market purpose. As capitalism took a firm grip on the economies, more and more innovation was produced by the networked groups working for the [captialistic] market. One problem with that, however, is that financial rewards discourage open sharing of the information and hence, make the networks less liquid. Both universities and the world-wide-web have played an active role in encouraging networked innovation with non-market motive (“commons”), leading to open-source movements and open research. And even markets have benefitted from it.
The book presents Goldsmith’s experience on what causes the most talented, ambitious, and successful professional to hit a career roadblock. Almost all the professionals which Goldsmith worked with had interpersonal issues of one form of the other which either didn’t matter in the early phases of their career or the professionals were so talented that they progressed despite those issues.
Put a comma in the wrong place and the whole sentence is screwed up.
Why we resist change
Successful individuals resist change, they believe in their skills and talent, they are confident and optimistic about themselves, they underestimate the role luck plays in their success. They have delusional beliefs about themselves, which ironically are empowering as well. That’s the kind of people you want to surround themselves with. But the downside is that their optimism can lead to overcommitment. Sometimes, they fail to realize that they succeeded despite behavioral flows and not because of them. They carry a superstitious belief that their behavioral flaws made them succeed. Higher they are up in the career; more problems are behavioral since no one reaches the top without being strong in their technical skills.
As you advance in the career, behavioral changes are the only significant changes you can make.
How successful people respond when asked to change
- They (the others) are confused
- Denial: Maybe they are not confused but their criticism does not apply to (a successful individual like ) me
- Attack: Maybe they are right but why is a smart guy like me listening to a loser like you
People will do something – including changing their own behavior – only if it can be demonstrated that doing so is in their best self-interest as defined by their own values.
The usual motives behind self-interest are money, power, status, and popularity. And these are the hot buttons to press to make them change. Ones people realize their mistakes, they usually overestimate their weakness, just like their strengths. That discourages fixing the behavior when the fix is really a small fix.
The bad habits
The underlying thesis of all interpersonal flaws
All interpersonal flaws have two themes – information and emotion. Information related flaws are of two types, sharing when it is not required (eg. adding too much value) and sharing too little leading to information withholding. Emotion-related flaws are of two types, sharing when it is not appropriate (or vice-versa), and conveying too much (or too little).
Knowing when to stop
Avoiding a mistake or stopping a wrong thing is as important doing the right ones but rarely do that get a notice. Gerald Levin as a chairman of Time Warner, turned it around, only to destroy it by merging it with AOL in 2000. It turned out to be the worse merger in history. Of course, no one would hear about CEOs who avoided the dot-com mania.
Fix: Have a to-stop list, a list of things which you would stop or won’t do.
Avoid being negative
Not all behavior is positive or negative. To be nicer, just stop being a jerk is sufficient.
Fix: Rather than struggling for a positive response, just don’t give a negative one.
Adding too much value
Successful people try to add their two cents to everything. The problem here is that, even if they add say, 5% value to an idea, the overall commitment of the person goes down by a much larger amount, say 50%, since they have lost the ownership of the idea.
Fix: Don’t try to add value unless you are certain that it’s substantial enough. More so, higher up you are in the organization.
Passing (unnecessary) judgment
While making judgments is essential, in many cases, passing unnecessary judgments is dangerous. When you judge others, they might decide not to help again or give a half-hearted effort (it will be judged anyway?). Something as naive as a boss saying “great idea” to one presenter and “good idea” to another can be misinterpreted as a ranking. The other problem which judgment brings is an argument. When you don’t judge an idea, no one can argue with you.
Fix: When someone expresses an idea, just say “Thank you. I hadn’t considered that “, don’t pass any judgment.
Starting with No, but, or however
When a sentence starts with no, but, or however, you might be making a great remark but the only thing the other person hears is that they are wrong. Nothing productive happens after that.
Fix: Start self-monitoring of how often you say these words. Try to replace them with “Thank you”.
Displaying how smart we are
Being smart turns people on. Telling them “how smart you are”, turns them off.
Fix: When a friend comes to you with something you already know, don’t tell them you knew that (are they suppose to second-guess before sharing something which they found to be useful with you?). Just say “Thank you”.
Information withholding flaws
Not sharing information breeds mistrust and suspicion. As soon as the other person learns about it, they wonder what else might be hiding. Many a time, the underlying cause of keeping others in the dark could be that you are too busy. The intentions aren’t bad, but the outcome still is.
Fix: Share information as much as possible. It is better to err on the side of oversharing than to be seen as withholding information.
Failing to give recognition
Successful people become great leaders when they learn to shift the focus from themselves to others.
Fix: Recognize people for what value they add to your life, even if it’s their job.
Claiming undue credit
Claiming credit for what you haven’t done is theft. It creates bitterness which won’t be forgotten.
Fix Every time you feel you did it, dig further, check if it was really you or someone else, this will expose the bias of crediting yourself too much.
Failing to express gratitude
When someone shares something or says a compliment, thank them. It is obvious but a lot of time people make the mistake of either judging the compliment (“Thanks for this effort? this wasn’t even my shot”) or express negativity or add too much value (see previous bad habits).
Fix: When someone helps you, compliments you, or suggests you an idea, say thank you, most of the time anything more than that does more harm than good.
Refusing to express regret
The thought of apology brings in feelings of loss, humiliation, and cession of power and control. All things which successful people hate. But refusing to apologize not only cause ill will at the workplace but other interpersonal flaws.
Fix: The bitterness against you for not apologizing lasts for long. If you made a mistake, apologize for it, you can’t fix it but you can prevent others from being bitter against you.
Making destructive comments
Destructive comments or jabs are forgotten quickly by the commenter but the target remembers them. And they remember that as your personality trait and avoid you.
Fix: Before making a comment, wonder how would it help relationship/employees/customers. If it won’t, just don’t make it.
Winning too much
Successful people argue more to prove their point. They withhold information to get an edge. They ignore others or put them down to prove their dominance. The end goal again is winning for the sake of it even if there is no reward.
Example: Most people would criticize a restaurant for a bad dinner despite the visit being decided by their spouse even though the relationship is more important than the food.
Fix: Stop trying to make everything a game to be won. Don’t just think of the pleasure of prevailing over the other but the relationship lost in the process.
Speaking when angry
Anger has value as a management tool against sleepy employees. But used too often and you get branded as a person with a temper. And that’s the persona which clouds all other positive traits of yours.
Fix: Keep your anger to yourself. If you keep your mouth shut, no one will ever know how you feel. Most often the cause is in you than in the other person.
If you have a habit of responding with “let me explain why it won’t work”, then you are just telling the others not to come back to you again. It is equivalent of a “Do Not Enter” sign outside your office.
Fix: Start monitoring your statements when someone offers a helpful suggestion. Think again, before responding with a negative remark, it might just be an attempt at conveying how smart you are.
Some people make blunt excuses (“I missed the lunch since it was marked for the wrong date”) while some make more subtle ones (like stereotyping themselves as an impatient person). Neither work.
Fix: Don’t make blunt excuses just accept your mistake and fix it. Rather than making subtle excuses ask yourself why can’t you fix it. Most likely you can, you just never questioned it.
Clinging to the past
Clinging to successes, failures, achievements, and mistakes of the past is a bad idea. Don’t use the past as an excuse towards your future. Even if people understand why your past trained you to behave in a certain way, they simply won’t accept you for continuing the same way.
Fix: Stop blaming others for your past. Accept whatever happened has happened and move on.
People love their dogs more than their spouses and kids. The dog’s liking, as opposed to its importance, for its owner clearly plays a role in terms of deciding who gets more love. The weird thing about playing favorites is that we see it all the time, we see it in others (and others see it in us) but we cannot see it in ourselves.
Fix: Think about what the person’s importance is to you (or the company) and then decide whether you like them more than that, if yes, you are playing favorites.
When you fail to pay attention when someone else is speaking you are effectively saying that you don’t care about them or what they say; they are wrong, stupid, and are wasting your time. People might tolerate many other forms of rudeness but not this one.
Fix: Become a better listener.
Punishing the messenger
Punishing a well-intentioned messenger, even when in your opinion the value they are adding is worthless, is dangerous. It tells others not to share anything useful with you since they never know how to respond.
Fix: Never punish someone from bringing a piece of bad news or warning you of a potential pitfall. Thank them for the same instead.
Blame everyone except oneself
No one is infallible and a desire to make oneself leads to passing the buck. Passing the buck is the flip side of claiming the credit you don’t deserve. Saddling someone with your failure is dangerous. You might think no one sees it but everyone around you notices it.
Fix: Never blame others for your mistakes.
An excessive need to be me
Some successful people suffer from an excessive desire to think about themselves. They think people want to talk to them or they have to project themselves as the sole owner of a project. This desire leads them to act in a very self-centric fashion.
Fix: Give the excessive desire to be self-centric. Remember it’s not about you but what others think of you.
Being obsessed with a goal is great but failing in the larger mission while being obsessed with a goal is not. It is equivalent of heading in the right direction but reaching the wrong town.
Fix: While being focused, don’t forget the larger picture. Attaining goals is good but not at the expense of annoying people around you, violating laws, or engaging in any other short term tactics which would lead to a failure in the long run.
How we can change for the better
1. Get the feedback
Get hold of your colleagues and ask them to help you improve, now you both are responsible for the same struggle. And when they give you feedback, thank them, don’t express your opinion (or you will never get another feedback).
There are four types of knowledge about us
- Public – known to us, known to others
- Private – known to us, unknown to others
- Blind spots – unknown to us, known to others
- Unknowable – Unknown to us, unknown to others
The real goal of the feedback is to find your blind spots.
It is easier to see our problems in others then to see it in ourselves.
- The indirect feedback – Make a list of people’s casual remarks about you and try to see the meaning behind them. You will find they are giving cues to your personality flaws.
- In a meeting, ignore the sound and see people’s body movements as you speak.
- Try sentence completion.
- Listen to your self-aggrandizing remarks – the things you boast as your strengths might be your biggest weaknesses
- Observe your behavior at home – People don’t behave differently at home than they do at the office. The same personality flaws persist.
“I’m sorry. I’ll try to do better in the future.”. Don’t explain it. Don’t qualify it. Just stop there.
It’s a lot harder to change people’s perception of your behavior than actually to change your behavior. It takes time and persuasion before they change their perception. Therefore, you have to actively tell them that you are trying to change for the better.
Most of our success in learning from others comes from how well we listen to them. Listen with respect (no secondary activity). Think twice before you speak while listening to others, is it worth it (even if it’s correct), is it adding sufficient value, or are you trying to show you already know that. The more you subsume your desire to shine in other person’s eyes, the more you end up doing that. The near-great are careful about listening most of the times. The great are careful listeners all the time.
5. Expressing gratitude
Learn to thank others when they, in their perception, share something valuable with you. It does not matter whether you knew it or not. It does not matter whether you find it to be useful or not.
6. Following up
There is a huge gap between understanding and doing something. Not everyone responds to your messages the way you intend them to. Follow-up ensures that people do what you want them to do. People don’t get better without follow-ups. Becoming a better leader is a process and not an event.
Feedback asks about what you did. Feed-forward asks about what you can do to improve in the future. Rather than asking people just about your mistakes, ask them how you can correct them and try to act on that advice. A side benefit is that, since they gave this advice, they will be focused on helping you improve as well.
The rules for changing
- Behavioral changes cannot cure non-behavioral problems – Sometimes, people think problems are behavioral while the real issue might be something else. If a CFO does not know how to spin the media during bad times, then behavioral changes cannot solve that.
- Pick the right things to change – There is a difference between miswanting and mischoosing. We want to be seen as a better person in some particular dimension of our choice. However, we cannot choose the path to success. The wrong path will lead to failure. The only right approach is to act on the issues which the people around us suggest.
- Don’t delude yourself about what you really must change – Sometimes, we think that the problem is somewhere else. Eg. your colleagues think you are bad at communicating but the underlying reason is that my health is in a bad shape. These links usually are superfluous. What you really have to fix is communication with colleagues.
- Don’t hide from the truth you need to hear – Sometimes, we avoid negative feedback since we don’t want to face it. We want to believe that it does not exist when it does. Facing the truth is better than living in denial.
- The desire for ideal behavior – There is no ideal behavior. Everyone has some flaws. The desire to fix them is great. But an unhealthy desire to be perfect is bad.
- Measure it – If you measure it, you can improve.
- Monetize the result (as a way to measure)
- The best time to change is now – Don’t live in a dream that you will start the process of improving some day. Start it now.
The book is Ben Horowitz’s memoir with a particular focus on his company Opsware and the lessons he learned there.
From Communist to Venture Capitalist
Ben’s father was a communist, and he grew in the People’s republic of Berkeley. His first job was at NetLabs, which was run by professional management with little appreciation for the product or the technology. This job taught him the importance of founders CEOs. The job took a toll on his personal life, and to stabilize that, he left and joined Lotus. As soon as he came across Mosaic, he was mesmerized by the Internet and applied for Netscape. Marc Andreessen interviewed him, and is now his business partner at A16Z.
Leadership is the ability to get someone to follow you even if out of curiosity.
I will survive
Ben started LoudCloud, which was doing well before the dot-com bust. Its primary customers were all startups, and the customer bankruptcies decimated the revenue growth. The private funding was hard to come by, and Ben decided to take LoudCloud public. The Saas model of recognizing revenues only when they are earned (whereas the software revenue is recognized as soon as it is sold) and similar issues made the S-1 filing look bad. It got termed as IPO from hell. The reverse split to keep the stock price high enough further destroyed the fantasies of the employees. The IPO roadshow on the east coast was severely impacted by his wife’s west coast allergic reaction leading to the emergency room. The IPO happened at $6 per share. No one, not even the underwriting bankers were happy. The macroeconomic condition worsened, and the revenue guidance could not have met in the further quarters. So, the finance department suggested that let’s reset it completely, rather than doing that in steps.
If you are going to eat shit, don’t nibble.
The underwriters, Goldman Sachs and Morgan Stanley, dropped analyst coverage in response; the stock fell to $2. Then 9/11 happened. Then 26/11 Exodus, Loudcloud’s largest competitor, a $50 billion market cap company with $800 million raised filed bankruptcy. Ben realized that the operations are too fragile; he thought of acquiring Data Return and realized that neither’s future is bright. So, he decided to exit the cloud business completely and extract out the software business, which was built for cloud automation (Opsware). The stock slowly rose to $4, and Ben decided to raise $50 million from private investors. That’s when Atriax, the largest customer who owned $25 million, filed for bankruptcy. The plan to raise money was put on hold, and the acquisition was sought out. EDS and IBM were played against each other on an artificial deadline of eight weeks. EDS wanted to Loudcloud more than IBM. It eventually made the acquisition, excluding Opsware, for $63.5 million. It even licensed Opsware for $20 million a year. 140 employees got laid off, another 150 went to EDS, and 80 were left with Opsware. On Bill Campbell’s recommendation, Ben stayed with the employees on the west coast when the announcement happened in New York. In Bill’s words, “If you don’t treat the people who are leaving fairly, then those who stay back would never trust you again.”
If you don’t treat the people who are leaving fairly then those who stay back would never trust you again
This time with feeling
The stock price has fallen to $0.35, and NASDAQ warned that the stock would be delisted. Some members of the executive team who did not understand software accounting & sales had to let go of. The stock price rose to $7. But then EDS, which accounted for 90% of the revenue, wanted to cancel the contract since the deployment has not gone as smoothly as expected. EDS gave Opsware 60 days to fix all the issues. The head of the EDS servers’ team loved Tangram and hated CA products. EDS was going to get the latter for free in a deal. Opsware did the diligence of Tangram, found it to be bad, but even then acquired it for $10 million, which was a 67% premium to its market value at that time. Opsware offered Tangram for free in that 60-day window. The problem seems to have been solved. But then BladeLogic started to beat Opsware. The stock price was back to $2.90. The company went for another war-mode for the next six months. When things were going well, it was decided to go beyond server automation and look into network automation.
All decisions are objective until the first line of the code is written. And then they are emotional.
Ben could have built something internally or acquire another company. All decisions are objective until the first line of the code is written. And then they are emotional. Ben, therefore, decided to see if there is a possibility to acquire before starting an internal effort. Among the four automation companies, the cheapest one (Rendition networks) had the best architecture. Ben believed that the market was wrong. Opsware acquired Rendition networks for $33 million, three months later, Cisco paid $30 million to license its technology. Slowly the acquisition offers started to tick in. Virtualization was also taking over. The share price was about $7. Ben talked to the team, and almost everyone wanted to exit. He decided that the price would be $14. HP acquired it for $14.25 per share ($1.65 billion in cash).
When things fall apart
No Plan B
Startup CEOs should not play the odds. Statistics are against them, and they don’t change the difficulty of the task at hand. A good startup CEO can focus and make the best move when there are no right moves.
A good startup CEO has the ability to focus and make the best move when there are no good moves.
An excellent principle to follow is the first principle of Bushido: keep death in mind at all times. So, you may conduct yourself properly in all actions. Being a startup CEO is a fierce struggle, if you don’t like it, don’t do it, but if you do it, don’t take it personally, find the best move, persist, and convince the team to follow you.
Share all the news
As a startup CEO, share the news, both bad and good. It builds up trust, brings in diverse opinions, and allow bad news to be known faster. When people bring problems out in the open, they get solved. A culture that punished people from talking about the problems prevents the free flow of information. An example would be “don’t bring me a problem without bringing a solution”.
In any human interaction, required amount of communication is inversely proportional to the level of trust.
Loudcloud went through three layoffs but still got sold for more than a billion-dollar. Layoffs destroy the morale of the employees who are left. Unless they are done right.
Layoffs destroy morale of the employees which are left. Unless they are done right.
If the financial situation requires, the CEO should clear off his head of the past glory, execute quickly to avoid leaks, be honest about the reason that its company’s failures and not the individual’s performance issues, layoff must be completed by the manager since the employee is going to remember every last detail of this day, the CEO should address the entire company, and after the layoff, the CEO should be present and visible. Messaging and execution are essential for people who are staying.
The messaging and execution [of layoffs] is important for the people who are staying.
Firing an executive is relatively more straightforward since they have been on the other side of the table.
- Root cause analysis – Figure out why the executive was hired in the first place. It could be a poor job role definition based on some abstract idea. Hiring could have been for lack of weakness. Hiring for the scale too soon, which might be attained in some hypothetical future. Hiring a generic “great” head of sales, ignoring the unique situation of your company. An Executive who had a mismatch of ambition or failed to integrate into the company.
Hiring should be for strengths not for the lack of weakness
There is no great head of sales. There can only be a great head of sales for your company for next 12-24 months.
2. Inform the board
Call board members individually and face them, then call the board meeting, give a good severance package to the executive, ensure that his reputation is preserved.
3. Prepare the conversation
State decisively (“I have decided” not, “I think”), be clear on the reason, and have the details of the severance ready. Let him decide how to communicate the decision to the company and the world. You cannot let him keep his job, but you absolutely can let him keep his respect.
You cannot let him keep his job, but you absolutely can let him keep his respect.
4. Inform the company
Inform their direct reports, other staff members, and the company, in that order, on the same day. CEO should ideally fully take over the role in the interim. It will also help the CEO decide whom to hire for the position.
Demoting a friend
As the company grows, sometimes, it is crucial to demote an early employee who can no longer head the bigger unit anymore. It is essential to sacrifice his good for the good of other employees. This ends up messy. He might want to leave; if he stays on the same team and reports to a new boss holding his position, he might try to sabotage things. Acknowledge his contribution, be decisive in the language and admit the reality that if you as a CEO are under-skilled, it is even harder to develop him and that in itself is a bigger recipe for failure.
Humans listen to leading indicators of good news. Revenue grows, immediately hire more. Revenue falls, no immediate action. When a company struggles, leaving employees are labeled with “they were bad anyway”, lost sales deals are deemed to be lost because competition gave the product away for cheap. These are all lies that we tell ourselves. It is important not to fool ourselves with them.
Sometimes, there are no silver bullets, and there are several lead bullets that are required to improve the product. This saying is true more often when the customers are buying a similar product from the competition because it is simpler, faster, and/or easy to use. At that time, pivoting or building a new feature is akin to looking for a non-existent silver bullet.
Nobody [except you] cares about the underlying cause of why things are going wrong. It does not help them at all. Don’t waste time explaining why things are going wrong; spend it on trying to make them right.
Don’t waste time explaining why things are going wrong, spend it on trying to make them right.
People > Product > Profit
Ben wanted to hire a new head of sales, Mark Cranney aced the interview but was from a lesser-known university and did not look like the head of sales. The more time he spent with him, the more he was convinced that Mark is the right guy. He fought against the whole board, and the decision turned out to be great in the long run. Hiring the right people and taking good care of them is of the highest importance to an organization.
A good place to work
Being a good company does not matter when things go well but can be the difference between life and death when things go wrong. The only reason someone would stay at a company going through a bad phase is that he likes his job. When things go wrong, a bad company won’t be able to hold onto the employees, and that’s when the death spiral begins.
Even new workers at Mcdonald’s get the training. Training is one of the highest leverage activities a manager can perform. It sets the basis for performance expectations. It ensures consistent product quality. Training ensures employee retention, since people leave, primarily, because they hate their manager or aren’t learning anything new. The most basic training to start with would be the functional training for the job functions and the management training for the managers.
Hiring from Friend’s company
Hiring from a friend’s company is always tricky. Either you will hire mediocre people or their top-notch employees. It will never go down well since the trickle of employees leaving will begin after that. During the interview process, tell the candidate that you need to do a background check with that CEO friend and to let you know if you don’t want that to happen.
Big companies execs transitioning to small companies
In big companies, execs are interrupt-driven. They always have incoming requests to process; their job is not about taking new initiatives but fine-tuning the existing ones. In small companies, the requirement to take the initiative is much higher. Big company execs are good at following processes, at small companies, they have to create one. Screen them right at the time of the interview by ensuring that they have the self-awareness of this. Train them heavily by assigning them an initial set of tasks.
Hiring an Executive
The two biggest mistakes which can happen are “looking for the lack of weakness and not strength” and “hiring on some abstract look & feel”. Hire the right person for your company at this particular point in time. List the specific set of strengths you are looking for. The CEO must make a final solo decision without being influenced by anyone else.
When employees misinterpret managers
An organization should not be run as a black-box with the sole focus on metrics and quantitative goals. Such a focus usually leads to an incorrect prioritization of the goals. Run the organization as a white box, many questions to judge its progress and performance would be more qualitative; for example, long-term competitive edge, customer satisfaction, etc.
Short-term, expedient decisions with expensive long-term consequences can lead to a management debt. The three most popular ones are – putting two in a box (promoting two people to the same position and making them share responsibilities when only one is required), overcompensating someone (because they got another job offer), and no performance management. Most experienced CEOs opt for hard choices in these cases to avoid management debt. A good HR division provides management quality assurance; it designs a good process, works with managers to identify bottlenecks, and finds out unspoken problems inside the company.
CEOs who avoid politics, accidentally, end up encouraging it.
The right kind of ambition is ambition for the company’s success and the individual’s own success being a by-product of it.
If one executive complains about another’s behavior, get both of them into one room to resolve the issue. If an executive complains about another’s performance and you already knew it, then it is already too late; you should fire that executive since improving skills is doable, but regaining the support of the organization is hard for him/her. If an executive complains about another’s performance and it’s new news, strongly disagree right there and then evaluate the complaint objectively. Individuals optimizing personal achievements over the company are bad. Worse if they are managers since that encourages employees to do so.
Titles and promotions
Employees love titles, and for an organization of beyond a few tens of employees, everyone needs to know who is who. The author believes that titles are one of the cheapest things which a company can offer, so if a better title helps to hire an employee, use it. Mark Zuckerberg has the opposite thinking, where he prefers leveling down the new hires to avoid giving them better titles than existing employees. People at any level compare themselves to the worst person at the next level and want promotion as soon as they reach that level. Such promotions lead to the law of crappy people. A good promotion process, to avoid that, must ensure the criteria of whether an employee is ready for the next level is an objective one.
When smart employees are bad employees
Some smart employees are bad.
- The heretic – The one thinks a bunch of morons runs the company. This thinking usually happens because he feels disempowered, is fundamentally a rebel, or is immature. It is difficult to fix this situation since once an employee has taken a public position, it is a credibility hit for them to change their stance.
- The flake – If an employee is not reliable, all the intelligence is a waste.
- The jerk – Bad behavior cripples communication. If the VP of marketing is a jerk, then no one will bring up the issue of marketing in the meeting, communication will slowly break down, and the topic of marketing will never come up. A few jerks who are making massively positive contributions are ok, but adding more of them will destroy the company.
If anytime someone raising a concern about marketing is attacked by VP of marketing then topic of marketing will stop showing up in the meetings.
Hiring senior people into a startup is like an athlete taking a performance-enhancing drug; if all goes well, you will achieve new heights. If all goes wrong, you will start degenerating from the inside out.
A one-on-one is an employee’s meeting where he can talk about issues, frustrations, and a manager must have regular one-on-one with their employees.
Properly designed culture might look bizarre from the outside, but that’s a coincidence, not the end goal. Amazon has desks made out of doors, A16Z fines its partners 10$ a minute for being late in a meeting with founders, Facebook has the motto to move fast and break things. All these things reflect the core values of the company.
Scaling a Company
Scaling a human organization requires an organizational design (all have shortcomings, choose the one which suits best), and a corresponding [communication] process. The organization should dictate the individual leaders and not the opposite scenario, where the personal ambitions of the individuals dictate the organizational structure. If you want particular individuals or groups to communicate more, put them under the same manager. The further away people are in the organizational chart, the less they will communicate.
The further away people are in the organizational chart, the less they will communicate.
The Scale Anticipation Fallacy
Hire executives who will do the job for the next 12 months, don’t anticipate and try to hire executives who can handle scale longer than that. Any judgment passed on an executive by comparing them to some hypothetical size of the company in the future is a bad idea. Scaling is an acquired skill, the act of judging them in advance creates prejudice. And even hiring a more experienced executive does not help since you would have to reevaluate eventually whether s/he is the right person or not. Rather than passing an absolute judgment, always think about whether you can hire a better person at this point and who will s/he be.
How to lead when you don’t know where you are going
After Ben sold Loudcloud business to EDS, the stock price of Opsware fell to $0.35 a share, putting the market cap half of their cash in the bank. NASDAQ threatened to delist them. Ron Conway told Ben to talk to Herb Allen (Allen & Company). Herb and their clients bought the share over the next few months, bringing the price to $3 a share. Herb later told Ben that even though he knew nothing about technology, he decided to invest in Ben’s courage and determination.
The most challenging CEO skill
In a human organization, things are bound to go wrong. A CEO usually takes two extremes, one where s/he takes the blame for everything and gets too stressed out and other who s/he tries to casually pass up every broken thing as normal, which frustrates the employees and turns the organization into crap.
The fine line between fear and courage
The most critical decisions test courage far more than intelligence. The right decision is obvious, but the pressure to make the wrong one can be overwhelming. Going with the crowd is always the safer choice but not always the best outcome. Every correct decision makes you more courageous and the wrong one more cowardly. The financial bar for starting a company has gone down; the courage bar remains high it has ever been.
The most important decisions test courage far more than intelligence.
Ones and Twos
There are two core skills for running an organization. Knowing what to do and getting the company to do what you know. The “ones” are good at knowing while the “twos” are good at getting the company to move. Ones gather data from many sources and make good decisions. They dislike execution-related tasks like process, goal setting, and performance management. Twos have a love for action and find it challenging to make critical decisions. An ideal CEO should have both skills. This leads to a tricky CEO transition problem. Most CEOs will be ones and have twos reporting to them, promoting the twos to the CEO could be harmful. Microsoft did that with Bill Gates to Steve Ballmer transition in 2000. Promoting one from deep within can cause the executive twos to leave, GE did with Jack Welch in 1981, and that turned out to be phenomenal. No easy way to do the transition.
Follow the Leader
There are characteristics of a good leader. Ability to articulate a vision (“Steve Jobs”), right kind of ambition – ambitious but not selfish (“Bill Campbell”), and ability to achieve the vision (“Andy Grove”). A peacetime CEO maximizes and broadens current opportunity, wartime usually has just one bullet to hit the target. Google moved from peacetime (“Eric Schmidt”) to wartime (“Larry Page”) as of the writing of this book.
Making yourself a CEO
CEO has to make a lot of unnatural moves, constantly evaluating people is one of them. The end goal of your feedback is to open up rather than close down the discussion. Don’t try a shit sandwich, be authentic. As a CEO have an opinion on everything. Continuously give feedback so that people won’t take it personally and will focus on the content instead.
How to evaluate CEOs
Some employees make products; some make sales, a CEO makes decisions. That’s what a CEO is judged on. The best way to judge CEO is on his/her strategy, decision making, ability to convey that to the company and achieve desired results measured against a set of objectives.
The first rule of entrepreneurship: There are no rules
Right when Opsware was in a bidding war between BMC and HP, the E&Y partner from BMC’s diligence process claimed that the reinstatement of finances is required unless the contracts were amended in 48 hours. Ben was able to gather the three [bank] customers and change the contract. BMC still backed out, and acquisition happened for $14.25 when Ben was expecting it to be $15. His learning was that there is no point arguing when things go south, accept it, and get on.
Accountability vs. Creativity paradox
If you punish people for not meeting deadlines regularly, they will avoid hard problems. If you don’t hold them accountable to the deadlines, then hard-working employees will feel bad. This paradox is hard to deal with. As a general rule, senior employees should be better at forecasting. Deadline slips are more probable if the task is tough. And always hold people accountable if they took a stupid risk.
Freaky Friday Management Technique
Read it at Ben’s blog
Should you sell your company?
If your company is getting an acquisition offer for its product or the business, consider the eventual market if you think that the final market can be much bigger than what your company has realized and can you be number one in that. If it is yes on both counts, then it is better to stay on the course. For example, Google rejected $1B offers, and they were pursuing a massive market. Pointcast, on the other hand, was not pursuing a large market, and by rejecting $1B offers, it made a mistake.
The book consists of the learnings which the author had while working on his startup IMVU. The book focuses on the concept of validated learning and the build-measure-learn feedback loop. It tries to bring in a systematic approach to measuring the progress at a startup. A startup has a true north, its vision. It employs a strategy that includes a business model, a product road map, and a view of partners, competitors, and customers. The product is the result of the strategy. Products constantly change (engine tuning). Strategy changes occasionally (pivot). Vision rarely changes. In general management, failure to deliver results is caused by failure to plan or failure to execute. Both are frowned upon. But in the modern economy, both are useful tools for testing new ideas.
A startup is a human institution designed to create a new product or a service under conditions of extreme uncertainty. Success under such scenarios requires rapid experimentation.
There is a lot of learning involved in the process, and sometimes, when things go south, people resort to saying, “I learned a lot”. What’s more important is to figure out validated learning. The goal is to cut down to the absolute minimum effort required to learn what customers want and eliminate everything else. Eric Ries wrote 3-D avatars as IM add-ons for popular IMs in 2004. During the user testing phase, he realized that not only do users not understand what an add-on is, they also don’t mind installing a new IM software. A lot of heavy IM integration turned out to be a waste of effort. After this, Eric and his team launched several experiments regularly to test what works and what doesn’t.
Another counter-intuitive thing that IMVU experimented with is charging early. Many startups delay charging their customers. Not having any revenue is better than having low revenue since the former invites the imagination of overnight success once they start charging. The downside is that it can lead to the creation of a product no one is willing to pay. Conclusion: start with a low-quality prototype, charge customers from day one, and use low-volume revenue targets for accountability.
Nick Swinmurn had a hypothesis that people will buy shoes online. Rather than purchasing inventory upfront, he took photos of shoes at local shoe stores, and if the users bought it, he would buy and ship it to them. This minimum product tested customer demand as well as many other business issues like payments, returns, and customer interaction. Amazon acquired Zappos acquired for $1.2 Billion.
- An experiment starts with a hypothesis. A value hypothesis tests whether the product/service will deliver the value to its users. A growth hypothesis tests whether new customers will be able to discover the service.
- To test the value hypothesis, find some customers to experiment. Don’t go for an average customer but find an early adopter, whose needs are most accurately served by the product.
- Now, build a concierge minimum viable product. Such early adopters are more forgiving of the quality of the product, and their feedback is useful to know whether the product fulfilled their needs or not. If users complain about a missing feature and they’re on the roadmap, that’s a good thing, since it implies that the team understands their customer. If there is a feature that is on the roadmap, but the user does not complain about it being missing, then that’s an indication to remove that feature.
- The results will guide you to validate the hypothesis.
The Build-measure-learn feedback loop is at the core of the Lean Startup model. After building the MVP, the goal is to rapidly learn and iterate upon the product based on the user’s feedback.
All startups make some assumptions (leap of faith) about their viability. In the case of iPod, there were two assumptions, users would put earphones in a public place (“analogous to Walkman”), and they would pay for the music (“antilogous to Napster”). Only the second one was a leap of faith. Verifying these assumptions is paramount. Toyota does it via Genchi Gembutsu (“go and see for yourself”). Toyota’s minivan, Sienna’s chief engineer, drove through North America. He realized that kids are most appreciative of their environment and launched the new model with a particular focus on interior comfort for long trips. This lead to significant success for Toyota. Scott Cook, the founder of Intuit, believed that someday people would use a computer to pay bills and track expenses. He verified that the market for such a product by calling random people over the phone. One pitfall to avoid here is analysis paralysis. One can keep repeatedly talking to customers and whiteboarding over and over again. But many errors in such a strategy would go unnoticed since they depend on subtle interactions between the user and the product.
Groupon started as a “collective activism platform”. That assumption failed. Andrew Mason experimented with a WordPress blog and a mailing list to sell discount coupons. They had no fancy forms on the site. The idea took off, and slowly every aspect of it was automated. It is essential to get early results with a buggy product then to perfect about based on assumptions that might not hold in the future. It is counter-intuitive for entrepreneurs who want to build a high-quality product.
Drew Houston had a hard time convincing investors about DropBox. VCs thought that the market is crowded, no one made money, and the problem was not an important one. Drew believed that all that was because all the current products were of low-quality. Rather than spending years doing thorough integrations, he made an excellent video demonstrating the seamless behavior.
Wizard of Oz is a useful testing process for such situations. Rather than building an automated system, fake it with a human. It is faster for learning what users want.
Sometimes, a user’s quality metrics are very different. Users care about how much they enjoy the product, not how much time was spent building it. IMVU had no time to build a smooth movement of avatars from one place to another. So, they decided to and were ashamed of, cheat by making avatar re-appear at the destination instantly. Users rated this teleportation among the top three most liked features. Therefore, it is of paramount importance to remove any feature, process, or effort which does not contribute to the learning you seek.
Some entrepreneurs fear the competition that MVP will bring in, usually, from large companies. Most of the time, the Product Managers at the big companies are overwhelmed by good ideas. If not, they can still copy the product at a later stage. And the fear of being out-executed remains.
After building an MVP and putting it out for the early adopters, test the riskiest assumptions first. Now define a baseline metric, a hypothesis to improve the metric, and a set of experiments targeted towards the same. Once you have the results, decide whether to pivot or persevere. One of the biggest dangers is to get stuck with vanity metrics like total registered users. They paint a rosy picture but does not tell you whether the product improvements are making it better for the user or not. AAA (actionable-accessible-auditable) metric would measure the impact of a particular feature.
Grockit followed the Kanban model, where there are four buckets – backlog -> in progress -> built -> validated. Each was containing at most three features. After validation, either they made the feature or discarded it.
Pivot or Persevere
A startup’s runway is the number of pivots it can make. Votizen started as a social network for verified voters to discuss civic actions. That did not take off. Then it pivoted to @2gov, which allows users to recruit more verified voters for their petitions. This product has higher usage, but still, very few were willing to pay for it. They pivoted further to businesses as customers, who, despite signing the letter of intent, decide to eventually not buy the product. The final pivot was to use Google Adwords for acquiring users who want to pay to acquire more users. That worked out. Startup Visa Act was solely a result of that social lobbying.
Wealthfront pivoted from a virtual stock trading/gaming platform to an online service offering money management by professional money managers (ashishb’s note: and after the book was written, further to index-based investing).
Most entrepreneurs regret delaying the pivot. Vanity metrics, not having a clear success hypothesis, and being afraid of the failure, are the usual causes of delaying the pivot.
Types of pivots
- Zoom-in Pivot- A popular feature becomes the new product. Votizen moved from voter social network to a voter contact product.
- Zoom-out Pivot – The current product becomes a feature of the new product.
- Customer segment Pivot – The target customers change.
- Customer needs Pivot – where the customer base remains the same, but the product changes to suit them more. Potbelly Sandwich shop started as an antique store in 1977. It decided to sell sandwiches to bolster traffic. It eventually pivoted to become a sandwich shop.
- Platform Pivot – The product changes from a single-use product to a platform for the other products.
- Business Architecture Pivot – Geoffrey Moore observed that most companies follow either a high margin, low volume model; or a low margin, high volume product. Former is usually for B2B, and the latter is generally for B2C. A business architecture pivot is jumping from one to the other or vice-versa.
- Value Capture Pivot – where the way business makes money changes.
- The Growth engine Pivot – The business’ way of reaching new customers changes.
- Channel Pivot – The distribution channel for the product changes.
- Technology Pivot – The underlying technology to do task changes.
When pivoting to a strategy followed by a successful company, it is crucial to copy the essential and not just the superficial features.
It is counterintuitive, but smaller batches are much better for lean startups. They appear inefficient but allow faster turnaround for the product leading to a more rapid iterative cycle. It helps in earlier detection of a problem as well as quick feedback from the customers. Toyota used the small-batch approach to compete with its much more capitalized American counterparts whose batch sizes were relatively bigger.
New customers come from the actions of past customers. They inform others, end up showing the product to others, or end up purchasing the product again. Sabeer Bhatia grew Hotmail by adding a signature “Get your free e-mail at Hotmail” to every outgoing email. If you are asking whether your startup has achieved a product/market fit, then you are not there yet. When the product/market fit happens, it leaves no room for doubt.
As a startup grows, it has to adapt to the changing customer base. Early adopters are more forgiving of the quality; later ones are not. Five whys help one to diagnose the problems and build the right set of things that should go into an employee training manual.
Big companies can innovate, but for that to happen, they should secure resources for internal teams, provide an independent development authority, and the internal team should get a stake in the outcome. Toyota calls the manager in charge of running the development of a new vehicle, shusa (Chief Engineer). The parent organization must be protected to create this platform for experimentation. If the existing managers feel threatened, they will have an incentive to work against the new project. Also, if such a unit is kept hidden, it will attract more political battles since existing executives will be wondering what else could be hiding. Therefore, any team should complete ownership to run an experiment and see the end-to-end results. Every company has to deal with four types of works – launching a new product, scaling it for the broad adoption, combating its commoditization by incremental improvements, and maintenance of the product in the long run as a part of the company’s product line. All the steps are essential, but the last stage of becoming the status quo is a hard one to swallow as an entrepreneur.