Fortune Favours The Bold: How Innovative Companies Think Through Important Choices
Consider this thought experiment.
You’ve run Sales at a business for three years. This year an opportunity presents itself, a fork in the road. You can select one of two choices:
Choice A: Deliver, with 100% certainty, one million pounds to your company’s bottom line (profits) this year.
Choice B: Deliver, with 1% certainty, one billion pounds to your company’s bottom line (profits) for this year.
[Attribution: Astro Teller, Innovation Leader at Google X]
Which do you choose ?
Choice A is tempting. And for the risk averse amongst us, it is a solid choice. Nobel prize winning scholars Amos Tversky & Daniel Kahnemann (1979) masterminded the field of decision theory which (very plausibly) contends that it’s the way most of us are actually likely to go. We tend to prefer avoiding losses, rather than acquiring equivalent gains. So much so that losses are felt twice as powerfully as gains i.e losing £10,000 is the same psychological experience as gaining £5,000 — a cognitive bias known as loss aversion.
“A Bird in the Hand is Worth Two in the Bush”
Then again surely we are not all these irrational, risk averse, individuals. Surely in some instances: say you had some other great sales prospects, or were confident in some new hire’s on the team to sell — it makes sense to go for Choice B. You’d reason that Choice B is mathematically the most logical, deducing that with 1% certainty, the expected utility is ten million pounds (1% x 1 Billion = 10 Million). With an order of magnitude greater return than Choice A — surely its unwise to pass up a 10X opportunity.
“Don’t look a gift horse in the mouth”
Now, consider this: do you think your boss would ever want you to pick Choice B? Would they even let you?
THAT is a problem (assuming that for most of you the answer to this is no — lucky you if its not!). As companies grow — these choices become a false dichotomy. The inherent logic here dictates that the mere existence of management (hierarchy / bureaucracy) in some way reduces the ability to even consider Choice B. ‘Better safe than sorry’ the guiding philosophy, adhered to so as to ‘protect the downside’ — all well and good except 10X-100X opportunities are the difference between Google and Ask Jeeves!
If you are persuaded, at the individual level, by decision theory indicating that our irrational cognitive instincts make us inherently risk averse; meaning that structurally, at the collective level, management may unwittingly impede the consideration of lucrative/existential opportunities a business may be presented with — then it is worth exploring why this is the case? And what we can do about it.
The Case for Considering Choice B
Founders, entrepreneurs and small teams are typically resource constrained, but have the autonomy to make risky decisions. As an organisation grows the number of stakeholders it is beholden to increases: investors, employees, customers, suppliers etc. To manage these complex interrelated relationships whilst pursuing a vision aligned to its core competences, businesses structure themselves to maximise core function productivity e.g. marketing, sales or innovation. This structure typically entails governance mechanisms such as a board of directors and management.
Some of the benefits of this organisational status quo include greater transparency, allocative efficiency and productive capacity. However a key drawback is that they mitigate the propensity for organisational actors to take advantage of and/or act upon significant, sometimes existential, opportunities. Opportunities we’ve defined above as “Choice B”.
Choice B options are inherently highly unlikely, yet deliver massive payoffs when they work. For example, Mattel (the toy company) possesses a classic Choice B narrative whereby Ruth Handler, their former president, visited Europe on holiday with her family and happened across the German Bild Lilli doll (sold in Sex Shops). She combines this concept, with the paper dolls her daughter plays with — to create Barbie.
A Choice B opportunity presents itself.
Given the modesty of the era (1950’s America) industry experts treat the idea with chagrin, & buyers are very reluctant to purchase dolls with ‘voluptuous’ figures. Yet at this crucial fork in the road, in the face of market rejection, backed only by the strength of her resolve, Ruth doubles down on the idea to (very expensively) go direct to market. She bets the company’s future on a national ad campaign to introduce Barbie. The rest, as they say, is history.
Yet whilst a business may recognise the value of optionality in enabling Choice B: how should it allocate resources amongst such choices? And what steps can it take to counteract institutional and behavioural forces that reduce their consideration in practice?
- Experimentation
- Moonshot Thinking
A problem for big companies — if you’re only looking to add new $1b product lines (or even $100m), then you won’t go into the micro-segments that you need to dominate to succeed. Zero To One, Peter Thiel & Blake Masters
Experimentation
Google runs constant experiments. Streams of data are analysed to evaluate opportunity. A marquee moment in the company’s history which exemplifies the potential that this Choice B framework offers is the ‘50 Shades of Blue’ experience shared by former Google Head of Design, Doug Bowman in 2009.
The task at hand was to determine what shade of blue was to be used on advertising links in Gmail and Google. To do experiments like this (at the time) they’d show 1% of users a particular shade of blue, another 1% another shade of blue, etc up to 40 times! By allowing algorithms and consumer data to dictate design decisions that were mathematically most logical (with maximum expected utility — Choice B) this particular battle was widely seen as a turning point for the company, the moment it sided with engineers against designers. Marissa Mayer’s (Google VP) focus on such minutiae is reported to have delivered $200m to the company’s bottom line to date.
Experimentation is a founding and persistent principle of companies which have inculcated a culture that enables the consideration of Choice B. Experimentation recognises the reality that innovation often emerges from niche’s. Niche industries, niche communities, niche products/services. So, by experimenting, an organisation is able to source and realise superior choices.
Paypal for instance, founded by Peter Thiel and Max Levchin, initially delivered security software for handheld devices such as PalmPilots (Choice A) and realised that a small cadre of E-Bay users loved using the service as a digital wallet (Choice B). As we now know, Choice B paid off — big time.
Moonshot Thinking
On May 25, 1961 President Kennedy (USA) proposed a goal that would define the national ambition of a generation: The Mission to Put Man on the Moon.
Given the realities of technology at the time, this was an outlandish aspiration. Charles Fishman’s “One Giant Leap” captures a few reasons why. When Kennedy announced this mission, NASA had:
- No rockets to launch astronauts to the moon
- No computers small enough for a spacecraft
- No spacesuits to wear: they hadn’t been designed, let alone manufactured
- Computers (at the time) that were the size of three refrigerators
Note that to function in space, and fit into the modules, this had to be reduced to below the size of a briefcase (and be more powerful)
- No computer memory: didn’t exist as we think of it now on computer chips
Instead computer programme memory had to be weaved onto modules. The only way to get this right was to have seamstresses physically weave the wires using needles in binary code. One 1 & One 0 at a time. The entire memory for Apollo computers was 73kb (what was your last email?) and if one single mistake happened, the programme didn’t work. Also, the kicker, it took eight weeks of weaving (at sophisticated looms) to do the weaving for one computer.
No surprise then that, as that first Apollo mission launched in 1969, President Nixon had a speech prepared in case the astronauts died during the mission.
Absurd. Incredible.
In times of war we see time & time again that combining resources, pools of highly talented people, and the expectation they will produce miracles leads to startling leaps of progress. The behavioural cognitive framework underpinning such decisions is at the heart of Moonshot Thinking.
A system of thought that seeks to behaviourally inculcate the exigency of wartime periods into the level of expectation a group of people sets for themselves.
Moonshot Thinking is leaders saying:
I don’t want you to Choose A. Your job is Choice B.
Perspective Shift
Experimentation and Moonshot Thinking alone are not enough. Kodak actually invested in digital photos before their demise to the companies such as Facebook, a rather prescient form of experimentation. The unfortunate nail in the coffin for the market leader at the time was unequivocal attachment to the old model of printing, rather than pivoting to enable digital to flourish.
A shift in perspective was required.
Given an organisation is able to develop awareness of what these choices are, and why such choices are worth considering — two key questions remain: when to pull the trigger, and how.
Timing will depend on the resources available to the business for the most part. At one extreme, if there was no extra investment required to go for Option B, then it is a no brainer — go for it. On the other hand, typically this is unlikely to be the case. The more likely capital requirements, up front, with the possibility of failure, make such decisions inherently difficult. The choice between anything close to the extremes of Options A and B comes with a price tag, and then you have to work out whether that risk is worth taking.
With regards to how such choices are typically made, Paul Saffo’s maxim, Strong Opinions, Weakly Held, is a useful management construct to bear in mind. Bridgewater Associates for instance advocate radical open-mindedness and meritocracy as powerful directives that drive innovation & quality decision making. Ray Dalio, their billionaire founder, actively enacts this principle by seeking dissenting views from his own, developed by the smartest people he can find. Only after fully understanding their perspective is the decision made to accept or reject the argument in question. Choice B
We don’t have to wait for war to create Moonshot levels of exigency. By recognising that 10X opportunities are more important than the incremental 10% alternative, organisations can take vital steps to facilitate their consideration as they grow. The latter is a smartness contest you will likely lose in the long run. The former is moonshot thinking.
Given our inherent cognitive instincts, heuristics, biases and innumerable fallibilities as decision makers; our innate initial tendency is to maximise Choice A — and minimise Choice B. The perspective shift required to arrest this imbalance is almost never 100 times harder. The payoff IS.
