I’ve been reading a lot lately about the concept of a Corporate Startup. Not the book (http://thecorporatestartupbook.com/), which doesn’t yet exist, but the concept itself. The idea that large businesses need a way to stay nimble and look forward without necessarily sacrificing their core business is not particularly new.
A typical large business in the past could not move fast enough. Great ideas were lost in the bureaucracy or killed outright for fear of encroaching on their core business. Greatest example of all times: Kodak. A company which invented the first digital camera back in 1975, and was later put out of business by its own invention. If you want to learn more about, I recommend watching Dr. Tendayi Viki’s talk on Youtube
The reality is, big companies need to be both fast and nimble when generating and exploring new ideas, and slow and meticulous when it comes to their core business. A popular Harvard Business Review article on innovation accounting, commonly referred to as Nagji and Tuff, even suggests that a 70-20-10 investment (70% in core business, 20% in adjacent areas, and 10% new research), when used by “successful” companies, can bring a reverse, 10-20-70 return.
Finance folks like to talk numbers, and in that sense 70-20-10 is a perfect rule. While important, alone, it’s not going to make a company successful. Reading between the lines, a “successful” company spends 70-20-10 to return 10-20-70. The reverse is not necessarily true. The bigger questions are when to switch gears, how to align business, so the companies actually get an idea of how to invest those 70-20-10.
What interests me the most, perhaps, is none of that, rather how to run the 20-10. If we run them like the rest 70, we are doomed to fail long-term. That got me to think to think about the power of analogies. I’ve long been a huge fan of looking inside myself for ideas. Simon Sinek talks a lot about how we should look at the human history and physiology, and reflect it on everything from leadership to company structure. The Toyota Way is taking a very similar approach bringing together various aspects of humanity, Japanese culture, and simple common sense. Daniel Kahneman’s “Thinking Fast and Slow” made me think of a striking similarity between Human Psychology and The Corporate Startup.
In “Thinking Fast and Slow”, Daniel Kahneman introduces what has long been known as a Dual Process Theory. The theory itself has existed for quite some time, but for his ground-breaking research, Kahneman received a Nobel Prize in Economics in 2002. If you haven’t read the book, I strongly encourage you to do so. The basis of the Dual Process Theory is that we follow two kinds of thinking: associative and reasoning. Associative is what Kahneman calls System 1. It’s quick, intuitive, and requires no reasoning whatsoever. Stepping back when a car next to you is about to hit a puddle is an example of quick, associative thinking. This system is based on a gut feel, and will often produce a wrong answer or even and answer to a wrong question. Reasoning, or what he calls System 2, is slow and meticulous, where we have to build a line of reasoning and come up to a logical result.
Established businesses have an existing customer base and a revenue stream they do not want to endanger. They need this revenue stream for a variety of reasons, including a cashflow to help discover new revenue streams. Upsetting old loyal customers is typically not a good idea: it costs a lot more to attract new ones. That’s why the Corporate System 2 is a dominant factor for the the core investment (70%).
Investment in adjacent areas (20%) could use a hybrid approach. We could definitely use a combination of a gut feel (System 1) and some hard logical thinking (System 2). For example choosing and potentially profitable adjacent area definitely requires both the gut feel to look for direction and reasoning to determine its potential.
The un-adjacent area, the 10%, are of course, the most interesting and exciting one. You are like a firefighter entering a burning house. Did Google manufacture cars before they started their driver-less car business? They’ve entered a totally new area, with little or no in-house expertise in it, on a gut feel (also called a corporate vision these days) that this is something that could potentially change the future. And I am sure that some very hard reasoning went into justifying the short-term costs, such as useful research that could help existing Google products, such as computer vision, pattern recognition, robotics, AI and a lot more. Then System 2 would also get employed in finding appropriate personnel and resources, and building an environment where those employees could be the most productive.
There are 3 major rats to system 1: overconfidence, risk-aversion, and overestimating negative effects. Ever noticed that the stock market tanks on a negative news, but if the news is good, its effect is diminished? Someone told me that it’s because the the positive news was already expected and was priced into the stock. Perhaps, but there is another explanation: we like to panic once our overconfidence has been shattered. And then we get so risk-averse we start missing on opportunities. Our reaction to the news is driven by System 1.
A successful company is not the one that’s a near monopoly sitting on a pile of cash. It knows how to switch from System 1 to System 2: when it’s time to go into a panic mode and cut the losses, and when to invest in the future… More than 50% of the time, at least. That’s what made the likes of Goggle, Facebook and Apple successful so far, and the likes of Kodak, Motorola, Chrysler, and many others to wither away.
I didn’t start writing all of this just because I read Kahneman’s book and got excited. I feel privileged to participate in an experiment at one of those large companies that are open to running themselves as a corporate startup, by giving employees enough leeway to do the best job they possibly can, while keeping traditional controls in place to guarantee a painless switch to System 2 when necessary. We have a very small and lean team of data engineers operating in a Bitbucket/HipChat/Trello mode, in addition to a regular PM keeping his hand on the pulse of things. It’s an interesting experiment that I hope will set a precedent.