Managers want to have their instincts validated before they act, such as waiting until all the data have been gathered before they launch a product. But relying on the tried and true doesn’t always serve managers well, especially when it comes to organic growth. The question of “Will it fly?” can be answered only by letting it fly – by launching the particular product and listening to the market respond. Growth leaders don’t do traditional research. As these authors explain, growth leaders win by placing small bets fast.
Despite their best intentions, organizations – like individuals – frequently get in their own way. Nowhere can we see this phenomenon more clearly than in the realm of organic growth. Everybody agrees that organic growth is good; senior executives believe that they are incenting it and managers know that it is expected of them. But when organic growth fails, it is a disappointment and cause of concern for all. What is going wrong?
Having recently completed a three-year study that tracked the behavior of successful growth leaders in large, established organizations, we believe that we have the answer: An astonishing 50 percent of leaders we interviewed told us that their organization’s system, culture, and processes actively hindered their ability to grow their business. Sadly, the managers in our study do not work for a few backwater corporations who are, perhaps, unaware of the latest best practices. In fact, they work for some of the very best of the Fortune 500. And so we must acknowledge a painful truth: Internal factors contribute as much – and probably more – to managers’ inability to grow organically as do market conditions and competitors.
Those internal factors are not meant to be obstacles. And therein lays the rub: The impediments that organizations put in their managers’ paths are almost entirely the result of unintended consequences. These impediments are put there because organizations believe that they will keep the existing business running well. When you step back and think about it, this is not really surprising. Large organizations are designed to ensure stability and control. Growth, on the other hand, is about uncertainty and exploration. Good management systems reduce variability, yet variability is the mother of innovation. It is a Catch 22 that would leave even Yossarian, the central character of the novel, Catch 22, duly impressed – a classic double bind that contributes in a big way to a phenomenon that we call “growth gridlock.” This situation bears a striking resemblance to the downtown rush-hour traffic in any big city – everybody has their engine running, but they are going nowhere. They are stuck at the intersection of where a manager’s need for flexibility and speed gets tied up with the corporation’s need for control. And there isn’t any easy way out.
Why? Large organizations, for good reasons, often share a set of beliefs (and attendant behaviors) that seem logical, if not praiseworthy, but that nevertheless trap their managers in growth gridlock. The first belief is a deep seated desire for seeing proof before acting; the second is a belief that bigger is always better; the third is the belief that career success and business results ought to be measured together. Understanding the pernicious effects of these seemingly innocuous beliefs is essential to understanding the dilemmas faced by managers tasked with growing their businesses. We take a closer look at each of these in this article.
1. Where’s the proof? Beware the professional doubters
Conducting themselves as stewards of shareholders’ resources is a big deal for publicly traded companies. Collecting information carefully and using it judiciously are essential. Analysis is the preferred method for validating the worthiness of an idea and justifying the use of corporate resources to develop it. Large organizations employ entire departments of people whose prime job is to safeguard those resources and ensure that none of that money is spent until its use has been carefully justified. These departments go by many names – Finance, Legal, perhaps Human Resources. No matter what they are called, these departments are often assigned the role of “professional doubter,” and they get not only a vote, but often the power to veto any manager’s spending plans.
There’s just one fundamental flaw in this logic: you can’t get the data to prove the value of an idea that hasn’t been tried. Of course, you can extrapolate from some data you’ve already got but the idea will probably not be very compelling – it will have to be based on all kinds of assumptions and leaps of logic in order to do the trick. It is easy to poke holes in such a business case. Thus, would-be growth leaders spend a lot of time in conference rooms giving PowerPoint presentations aimed at convincing the doubters, instead of using their time to grow their business. And they lose. They lose because professional doubters have home field advantage in corporate conference rooms. And everybody involved knows the game that is being played. And so they calm their fears and demonstrate their savvy by cutting the projections as they cross their desks. This is a process that one of the managers in our study described as having a predictable result:
“The numbers in my experience end up being too small to be compelling, because you discount them so much or other people discount them for you. So you end up getting very conservative numbers as opposed to numbers that actually reflect the opportunity that may be there.”
And these smaller numbers run would-be growth leaders smack into brick wall number two: the belief that bigger is always better.
2. Bigger is always better: Supersize it
Big organizations like big ideas. This makes all the sense in the world. Billion-dollar organizations can’t afford to chase small opportunities. Executives can allocate only limited attention to individual issues and must be concerned about high overhead burden to boot; they can only keep so many balls in the air at one time. Common sense dictates a focus on initiatives capable of moving the needle. But common sense also dictates a few concerns about this approach: For example, “If it’s obviously such a good idea, why hasn’t anybody else thought of it?” There’s a sneaking suspicion that big ideas come with big risks.
The problem is that all big ideas start small – and at their birth, it is very difficult to determine which ones will someday become big and which will stay small. Couple this with the reality that management’s track record in assessing this belief is not very good and you’ve got an approach likely to lead to a very limited pool of options. (Just think back to former IBM chief Thomas Watson’s prediction in 1943 that there would be a world market “for maybe five computers”) Telling managers only to swing for the fences is likely to produce more strike-outs than put men on base. Add to that the expectation that they will bat a thousand and you’ve hit upon our third brick wall: the co-mingling of career and project success.
3. Career success and business results: Juggling with chainsaws
Venture capitalists expect less than one-third of the start-ups they finance to come home – and these people deal with uncertainty for a living! But in corporations, we often act like we expect all start-ups to come home. And the risks of derailing a career by producing or even presiding over lesser results are quite real. Despite an espoused enthusiasm for risk-taking, most organizations define success as meeting forecasts for revenue and profit. There is no credit for trying – or learning. Aspiring jugglers are told to start with bean bags, not chainsaws. You won’t draw much of an admiring audience with beanbags, that’s true. But they make the learning process easy – you’re not going to lose an arm trying. Growth is hard. Pursuing it takes managers out of a world that is predictable and knowable into one where the best you can hope for is the successful navigation of uncertainty. Forgiving mistakes – and rewarding learning – is the key to long- term success.
The organizational couch potato
Combine these three beliefs – the power of analysis, the anticipated glory from supersizing and the expectation of perfection – and you have a prescription for producing the equivalent of organizational couch potatoes: Getting up takes an awful lot of effort and the pay-off is questionable, at best. “So, why bother?” actually becomes the intelligent response – pass the chips and salsa and hand me the remote!
Is there no hope?
While there may be no easy answer, there is hope. The growth leaders we studied taught us that there is an alternative approach that works. For most leaders, it was a “work around” rather than a system solution. But that need not be true. The corporation’s obsession with data and size can be sated – but not by following business as usual, mainly because business as usual will keep your managers in idle in your conference rooms. You need to find a different route. Placing small bets fast is how we’ve come to describe the route shown to us by successful growth leaders.
Growth by betting small and fast
In pursuing growth, the leaders we studied displayed an intense bias for action and experimentation. They chose doing over analyzing. For them, leading growth was not about forming committees and writing presentations; it was about experimenting in the marketplace, making and selling things that customers wanted, and about iterating throughout the experimentation, making and selling. One of the leaders, Conrad Hall of Trader Industries, summarized his philosophy: “Our bias is that if it’s a good idea, let’s try it. Let’s not invest a fortune in market research, which many times gives you the wrong answer anyway. Let’s launch the thing and let the market tell us whether it’s a good idea or a bad idea.”
Waiting for the results of traditional research before moving ahead was not often something the growth leaders felt was worthwhile. John Haugh of Mars/Masterfoods explained his view:
“We didn’t know what the right answer was, but we also knew that doing another 12 months of research wasn’t going to get us any better answers. Because in the end, you have got to take this thing out and test-drive it, and see if it works. Most new products fail – most fail despite the fact that the research is always done, right? And it’s done by really, really smart people. The best way to get there is to put more ideas in the market. At least try. As Gretzky says, you miss 100 percent of the shots you never take. So at least start shooting at the net.”
The growth leaders never placed big bets when they could avoid them, even if they could afford them. They understood that often the only way to determine whether any particular initiative might be a “needle mover” was their willingness to make a series of small bets that at least got you a better field of vision, allowing them to see if something would be that “needle mover.” John Zahurancik, of the global utility AES, articulated the point well:
“It’s laying out reasonable milestones and saying, ‘Here are the uncertainties; here are the things we’re going to try and prove. At the end of the early stage we won’t know everything. We won’t have a huge success that changes the business of AES yet, but we’ll have the things proven that would lead us to taking the next steps. And if we take several of these steps over time, this may change the business of AES’.”
Small bets minimize the costs of learning
The growth leaders inevitably chose the risk-minimizing alternative – using partners instead of building new manufacturing facilities, or relying on extending already-developed capabilities instead of developing new ones. They also kept their experiments simple and local to start – where feedback is immediate and unambiguous, where corporate politics and layers of translation don’t get in the way of assessing the relationship between cause and effect. Small bets allow local learning to occur far earlier than do big ones.
The simplicity of the growth leaders bets was often extraordinary. John Haugh experimented with just four chocolate lounges in Chicago, and John Zahurancik looked for just 100 broadband customers to start. Another growth leader, Pfizer’s Jeff Semenchuk, approached just a few retailers early in the life of the portable medicine cabinet concept he and his team developed. They had a very small request:
“We said, ‘Would you give us a few stores and a little bit of shelf space just to try to do some early tests of this idea?’ Walgreen’s was the first one to say yes. They gave us five stores in Chicago and two in Florida…and we literally setup some new shelf space … we did this at our expense … with existing products and sizes.”
Customers and value chain partners play a big role in these experiments, as the above stories demonstrate. Growth leaders co-create with customers, engaging them early in the on-going development of the offering, to create a “pull” versus “push” strategy that uses the enthusiasm of outside partners to pry the new initiative out of the hands of an often reluctant organization.
Small bets maximize the ability to acknowledge and learn from failure
In many ways, minimizing the dollar cost of learning was a modest benefit – minimizing the human cost was the more significant accomplishment – because it unleashed the ability to acknowledge and learn from failure, rather than only from success. There is nothing new about the idea that organizations must take risks to innovate and grow. Yet, the human factors impacting risk-taking are often ignored. Primary among these is the fear of failure – of looking foolish – that worries most managers…
With risk comes the possibility of failing, of making mistakes. In fact, we know that failure is generally a better teacher than success – if only we were better at listening. A willingness to acknowledge failure quickly is fundamental to making “small bets fast” work. Interestingly, it is not only hard to start-up a new business in a large corporation; it is often just as difficult to stop it. And we need look no further than managers’ self-preservation instincts to understand why. In most large organizations, career success and project success are tied together. Though the odds of success may not be better than in the VC realm, the expectations for success certainly are. How hard is it to count the suddenly empty offices after a failure?
Because of this, only those courageous few who are hardwired to innovate in spite of the consequences of failure actually do take risks, just like the natural growth leaders in our study. Building a culture of innovation in a large organization begins by making the choice to become a growth leader a sane choice, rather than a career-ending possibility. Small bets greatly increase the odds of this. Zahurancik offered words of wisdom:
“Your challenge is always getting people to put both feet into the new enterprise and run it like a startup and not have one foot back in the old business, and sort of managing perceptions and managing their career…And those people are very concerned about taking any risks and hanging themselves out.”
Denial comes easily to most of us. How many of us see clearly when our own survival is mixed up with that of the project itself? The trick is to create a mindset that is always looking for ways to make the new business work – but that doesn’t mean you should resort to ignoring disconfirming data or use denial to accomplish this. Growth leaders have to pay just as much – if not more – attention to data than managers running existing businesses. But they believe in getting real data from the marketplace to start with.
The emphasis is on the pace of learning – if the model is small bets fast, the idea is not to dwell on anything – but to learn and move on. Pulling the plug when you need to is every bit as important as giving the go ahead. Maybe more. If you can’t get out well, getting in more frequently is a bad idea. The enemy of growth in large organizations is often not bad decisions, but no decisions at all.
Small bets allow new initiatives to operate below the corporate radar
Some readers may be disturbed by the almost-subversive nature of the behavior we have talked about here. But it is a sad truth of our research findings that conducting initial experiments below the corporate radar screen was often necessary to provide the flexibility, in the short term, to eventually accomplish big things. Operating below the radar screen usually meant avoiding the corporate bureaucracy and the glacial pace of its decision-making in areas like capital budgeting. It nearly always involved finding a supportive boss to run cover and partners to help you get into the market in a small way, long enough to collect the data needed to get the support of the professional doubters — and to enter the market in a bigger way.
Making small bets allows grants managers a level of freedom and decision-making autonomy that bigger bets just don’t allow. In many large organizations today, this is just a fact of life. You ignore this reality at your peril.
As researchers, we look forward to the day when the managers we study will tell us of the many ways that their organizational culture, processes, and systems help them meet their growth mandates. Until then, our research suggests that developing and strengthening individual managers’ abilities to place small bets fast is the horse to back in the growth race. It can produce big payoffs for managers and their organizations – even when their organizations can’t get out of the way.