Monday, May 22, 2017

Genghis Khan's 3 Strategies For Success Could Change Your Life Immediately
Discover how one man became ruler of the largest empire in the world by applying a few simple strategies that can change your life forever

Really interesting thoughts from one of the great leaders in history

1. Mastery and Learning
It may seem somewhat self-evident, but in order to become an intelligent leader, you must possess an open-approach to learning. This means setting your ego aside, practicing humility and remaining open to new ideas, viewpoints and opinions. This very notion is the linchpin behind Khan's vast success. He wasn't born a prodigy; rather, as one biographer noted, Khan possessed "a persistent cycle of pragmatic learning, experimental adaption and constant revision driven by his uniquely disciplined and focused will."
So the first step to becoming a master of a subject is to master your ego, and realize that knowledge comes from being open-minded. Those who operate from a place of arrogance or inflated ego shut themselves off from growth. When you're running a business, you need to remember that no matter how experienced you are, there's always more to learn
2. Diversity and Flexibility
The Mongol Empire was famed for being a melting pot of culture. In fact, Khan actively sought to learn from other nations he conquered, taking the best of each to incorporate into his own ruling principles. He studied and mastered their techniques, tools and strategies, which enabled him to conquer cities more efficiently than any other Mongol leader before him.
Think of it this way: the more knowledge and ideas you consume, the more fit you'll be to take on and overcome new challenges and experiences. Remember, the best leaders are extremely successful because of their ability to learn, grow and adapt.
3. Laser-Sharp Focus
Many Westerners see Khan as nothing more than a ruthless barbarian conqueror, but the primary evidence and source material suggests otherwise. In fact, most historians agree that a large degree of Genghis Khan's success stemmed from his laser-sharp vision and focus.
So what can we take from this final piece of the puzzle? Well, first, we need to be careful about what we're focusing on. As Tony Robbins says, "Where focus goes, energy flows." This is both an incredibly powerful truth and a potentially devastating one. Remember, if you're focusing all your attention on lack of money, resources or ideas, you're going to attract more of the same. Use your energy efficiently and focus on what you want your outcome to be.

Saturday, May 20, 2017

A case study in combating bias

Following several disappointing investments, the German electric utility RWE overhauled its decision-making processes. Learn how from the CFO who spearheaded the effort.

I feel that decision biases are so critical; to first recognize and then combat, that we have two sessions now dedicated to this in our Driving Organic Growth Through Innovation class at Kellogg. This is an interesting article on how critical this is. This are excerpts from an interview with the Quarterly  with Bernard Gunther with the German electric company RWE.

The Quarterly: Tell us a bit about the circumstances that motivated RWE’s management to undertake a broad debiasing operation.
Bernhard Günther: In the second half of the last decade, we spent more than €10 billion on big capital-expenditure programs and acquisitions in conventional power plants. In the business cases underlying these decisions, we were betting on the assumptions of ever-rising commodity prices, ever-rising power prices. We were not alone in our industry in hitting a kind of investment peak at that time. What we and most other peers totally underestimated was the turnaround in public sentiment toward conventional power generation—for example, the green transformation of the German energy system, and the technological progress in renewable generation and related production costs. These factors went in a completely opposite direction compared to our scenarios.
Conventional power generation in continental Europe went through the deepest crisis the industry has ever seen. This ultimately led to the split of the two biggest German players in the industry, E.ON and RWE. Both companies separated their ailing conventional power-generation businesses from the rest of the company.

The Quarterly: As you analyzed the decision-making dynamics at work, what biases did you start to see?
Bernhard Günther: What became obvious is that we had fallen victim to a number of cognitive biases in combination. We could see that status quo and confirmation biases had led us to assume the world would always be what it used to be. Beyond that, we neglected to heed the wisdom of portfolio theory that you shouldn’t lay all your eggs in one basket. We not only laid them in the same basket, but also within a very short period of time—the last billion was committed before the construction period of the first billion had been finalized. If we had stretched this whole €10 billion program out over a longer period, say 10 or 15 years, we might still have lost maybe €1 billion or €2 billion but not the amount we incurred later.
We also saw champion and sunflower biases, which are about hierarchical patterns and vertical power distance. Depending on the way you organize decision processes, when the boss speaks up first, the likelihood that anybody who’s not the boss will speak up with a dissenting opinion is much lower than if you, for example, have a conscious rule that the bigwigs in the hierarchy are the ones to speak up last, and you listen to all the other evidence before their opinion is offered.
And we certainly overestimated our own abilities to deliver, due to a good dose of action-oriented biases like overconfidence and excessive optimism. Our industry, like many other capital-intensive ones, has had boom and bust cycles in investments. We embarked on a huge investment program with a whole generation of managers who hadn’t built a single power plant in their professional lives; there were just a few people left who could really remember how big investments were done. So we did something that the industry, by and large, hadn’t been doing on a large scale for 20 years.
The Quarterly: On the sunflower bias, how far down in the organization do you think that went? Were people having a hard time getting past their superiors’ views just on the executive level, or all the way down?
Bernhard Günther: Our investigation revealed that it went much farther down, to almost all levels of our organizational hierarchy. For example, there was a feeling within the rank and file who produced the investment valuations for major decisions that certain scenarios were not desired—that you exposed yourself to the risk of being branded an eternal naysayer, or worse, when you pushed for more pessimistic scenarios. People knew that there were no debiasing mechanisms upstairs, so they would have no champion too if they were to suggest, for example, that if we looked at a “brilliant” new investment opportunity from a different angle, it might not look that brilliant anymore.
The Quarterly: So, what kind of countermeasures did you put in place to tackle these cultural issues?
Bernhard Günther: We started a cultural-change program early on, with the arrival of our new CEO, to address our need for a different management mind-set in light of an increasingly uncertain future. A big component of that was mindfulness—becoming aware of not only your own cognitive patterns, but also the likely ones of the people you work with. We also sought to embed this awareness in practical aspects of our process. For example, we’ve now made it mandatory to list the debiasing techniques that were applied as part of any major proposal that is put before us as a board.
It was equally important for us to start to create an atmosphere in which people are comfortable with a certain degree of conflict, where there is an obligation to dissent. This is not something I would say is part of the natural DNA of many institutions, including ours. We’ve found that we have to push it forward and safeguard it, because as soon as hierarchy prevails, it can be easily discouraged.
So, for example, when making big decisions, we now appoint a devil’s advocate—someone who has no personal stake in the decision and is senior enough in the hierarchy to be as independent as possible, usually a level below the executive board. And nobody blames the devil’s advocate for making the negative case because it’s not necessary for them to be personally convinced; it’s about making the strongest case possible. People see that constructive tension brings us further than universal consent.

Friday, April 28, 2017

Five Overlooked Principles Shaping the Destiny of Your Business
Until you grasp Turing’s theory of computability, Coase theorem of transaction costs, Bell’s law of computer classes, Baldwin and Clarke’s concept of modularity, and Nakamoto’s law of the distributed ledger, you’re not prepared to lead a digital company.

On the surface, this may seem highly technical but take the approach of extracting the insights on the possible but potentially profound impact on your businesses.

The most important changes are often the least obvious. That’s especially true in business, where changes are taking place on a greater scale than ever before. The advent of digital technology has brought a number of these dynamics to the forefront. They can be thought of as principles. Like Moore’s law or Murphy’s law, they explain the way the world works.
If you’re in business in the 2010s, an understanding of these five principles is crucial, because digital disruption is quickly becoming the new normal. Many growth strategies that may have worked well in the past no longer pack a punch. The principles help explain not just what will happen to your company next, but why.

Turing’s theory of computability: Machines can calculate any of the ever-growing number of problems that are possible to calculate… He identified what he called “computable” activities: any task that a theoretical machine (in this case, a mathematical model with a process similar to a computer) can address. Having determined that computability can be identified mathematically, Turing then postulated that machines have the capacity to perform computable tasks as well as human beings can….
…. It would be hard to exaggerate the significance of Turing’s work on computability and artificial intelligence. It launched the computer age, establishing the fact that everything digital, from the first computer to the cell phones that are ubiquitous today, has the potential to overtake work currently done by people. When highly valued digital technologies emerge, such as search engines, ride-hailing apps, automated teller machines, travel-booking websites, and many others, they inevitably displace human effort — and in the process, they fundamentally change their industries.
The impact of increasing computability explains why established companies are so strongly affected by digitization. In a world where anything businesses do might soon be done by a computer, they have to continually redefine themselves along digital lines — whether it’s Walmart acquiring Internet retailer Jet, GE making its industrial products “smart,” or John Deere developing robotic lawn mowers. Among the tasks expected to become computable before long are basic due diligence in M&A transactions, real-time language-to-language translation (such as English to Chinese), some forms of programming, and most of the world’s motor vehicle driving.
Coase theorem of transaction costs: Aside from transaction costs, the most efficient outcome will prevail in any market. The critical phrase in this theorem is aside from transaction costs. The theorem means that the investment of money, time, and attention devoted to the exchange of goods and services will determine how well your company competes. Or, put another way, the only companies with growth potential are those that keep their internal transaction costs (their own expenses) lower than their external transaction costs (the expense of doing business with others)…
….. A company can grow only as long as its internal costs, including all overhead, are lower than its external costs. Once internal costs equal or surpass external costs and the company has reached the point of diminishing returns, it will stop expanding. Because internal transaction costs are often difficult to spot, the leaders of the company may not realize why it’s struggling…
As digitization continues, transaction costs will continue to decline. This will affect decisions about which activities to keep inside an organization and which to acquire from the outside. Some things that used to be cheaper on the inside will now become more expensive — for example, the maintenance of R&D staffs. Hence the value of open innovation. Meanwhile, things that used to benefit from outsourcing, such as HR and training, may now become less expensive internally, because the de-layering of hierarchies may allow more informal (and therefore less expensive) talent management and recruiting. The only thing that won’t change is the basic equation: The lower your internal costs compared with your external costs, the more likely your company is to grow.
Bell’s law on the birth and death of computer classes: Roughly every decade, a new class of lower-priced computing devices emerges — and changes everything…..
…. When highly valued digital technologies emerge, they inevitably displace human effort — and fundamentally change their industries.
Every time a shift in computer classes takes place, the impact goes far beyond technology. New platforms, new forms of programming, and new types of network interfaces appear. In business, a distinct new industry emerges, often with completely different companies in the lead. The old companies either adapt (as Apple did with the smartphone and Microsoft did with the cloud) or decline (like Digital Equipment Corporation, Gateway, Kaypro, Osborne, and many others).
Baldwin and Clark’s concept of modularity: Breaking a technology or process into functionally relevant components facilitates innovation…. It breaks a complex technological project into a number of functionally relevant components — standardized where standardization is called for, and individually designed where differentiation is needed.
In a system with high modularity, the standardized parts, or modules, can easily be swapped out, upgraded, and adapted in different ways for different systems. Modularity makes it easier (and less expensive) to manage the complexity of a design…. A truly modular system can be tailored to individual customers without the entire design needing to be reinvented.
Nakamoto’s law of the distributed ledger (discussed the concept of Blockchain in our March 6 posting): Transactions improve when trust is managed by the system, not by mediators:… the Internet commerce of that time relied on financial institutions as a trusted third party to process electronic payments. This was unnecessarily complex and was vulnerable to deceit or failure. He posited that if two parties could electronically transact with one another without the need for an external overseer, online transactions would be easier and cheaper.
A few months later, Nakamoto released the first version of bitcoin: a digital currency with a distributed ledger, a peer-to-peer data technology that ensures verification through a software process called blockchain. Blockchain uses a digital distributed ledger to record transactions electronically, linking each new entry by code to the entry that came before. Verification takes place through network coordination. Computers all through the network contribute to bitcoin’s computation, storing the ledger and exchanging the codes that create new bitcoins. This distributed approach ensures that all the posted transactions are legitimate. No single member or group can compromise the integrity of a ledger distributed among so many participants.

The Power of the Five Principles

Taken together, these five principles have enormous economic ramifications. Although it’s impossible to predict the full extent of their impact, it’s clear they will change the structure and source of profit in a variety of industries around the world. Already, the shifts in computability, computer classes, transaction-cost dynamics, and modularity have enabled companies such as Amazon and Google to reach untold numbers of vendors and customers without racking up crushing operating expenses.
These principles also help us better understand the ways in which winning companies compete in today’s rapidly digitizing market. At the end of the day, great strategy depends on understanding the fundamentals of innovation, economics, and marketing, which are changing in terms of value creation. Power will flow to enterprises that embrace automation, reduce internal costs, make better use of advanced devices, design modularity into their products and services, and participate in blockchain-style verification systems. To be sure, the optimal approach will vary from one industry to another: A human third party may be enough to guarantee the security of transactions in some markets, whereas other markets will require virtual third-party validation through a blockchain system.