Dream End State - Clark Gilbert’s two types of business inertia

Clark Gilbert’s two types of business inertia
This model explains why some large, established firms respond well to largescale disruption, while others struggle.

Imagine you run a chain of clothes shops. You sell the coolest, most popular clothes and you’re the king of the High Street, with a knighthood to boot. But a new generation of online retailers appears. You start your own website to combat the threat, but slowly your customers slip away, your shops close down and the challengers pick away at the carcass of your dying empire. Why couldn’t you, as the incumbent and dominant player in the industry, adapt to the change in the market?

And why do incumbent businesses fail in the face of major external challenges, even as their managers try everything to stay on top? That’s what Clark Gilbert attempted to solve with his model on inertia.

To understand the problem, he defined inertia as coming in two different forms — an unwillingness to invest (resource rigidity) and an unwillingness to change the way the business operates (routine rigidity). The first form is easy to overcome. Tell a manager that a new threat will put them out of business, and they’re usually happy to throw money at the problem.

The trouble is this causes an increase in the second form of inertia. Now they’ve committed extra resources, the manager wants to use tried-and-tested methods, to control how every penny is spent — and they certainly don’t want to take any risks.

Here are Gilbert’s three steps to overcome routine rigidity.

Bring in outside influence
If you’re a clothes shop setting up a website, put the digital marketers and social media experts in charge of what it should look like. If you put the old guard in charge, inevitably it won’t be a new product — it will be an extension of the old business, facing the same problems.

Separate the new venture
The new venture should operate independently, with its own management, its own processes and business model. Maybe it will even have a different name and a separate office.

See opportunities, not threats
Now that the new venture is separated from the parent business, its managers won’t see the rise of online shopping as an existential threat — they’ll see opportunities to reach new audiences, sell niche products and cut overheads.

The disruption is best framed as a threat within the resource allocation process in order to garner adequate resources. But once the investment commitment has been made, those engaged in venture building must see only upside opportunity to create new growth. Otherwise, they will find themselves with a dangerous lack of flexibility or commitment.
Christensen & Raynor, pp.114-115, The Innovator’s Solution (2013)

Watch out for

Why is it harder to overcome routine rigidity? The answer may lie in another model, prospect theory . This holds that the pain of a loss is greater than the pleasure of a win. Inertia over the use of resources is motivated by the fear of losing what you have — if you don’t devote resources to this threat, you’ll go out of business. But changing a business model to perceive opportunities rather than threats requires risk-taking and motivation by the prospect of gains.

With thanks to Ivan Edwards who wrote most of this post. Thanks Ivan!

Resources

Christensen. C. & Raynor, M. (2013). Innovator’s Solution, Revised and Expanded: Creating and Sustaining Successful Growth. Harvard Business Review Press
Gilbert, Clark G. (Oct. 2005), Unbundling the Structure of Inertia: Resource Versus Routine Rigidity, Academy of Management Journal
Gilbert, Clark G. (2002), Can competing frames coexist? The paradox of threatened response, Working paper 02-056, Harvard Business School
Prospect Theory: an ‘S’ curve and the relatively muted joy of winning

This is the model that explains loss aversion and risk-seeking when we’re losing. The famous “S” curve addresses flaws in Daniel Bernoulli’s expected utility theory that he proposed way back in 1738 – a theory which had remained unquestioned for more than two centuries until two psychologists came along in the 1970s.

Here’s a generous deal: I’ll give you a choice between a guaranteed £500, or we can toss a coin for £1000. You’d probably bank your £500. Thank you very much.

Now imagine I gave you a different deal. You can pay me £500, or we can toss a coin: either you pay me £1000 or you pay me nothing. You’d probably take your chances. Anything to wipe the smile off my face.

Each option has the same monetary value, but the decision you make is different, depending on whether you’re gaining or losing money. The reason for that lies in prospect theory. Understand this, and you can understand why people and organizations make the decisions that they do.

Prospect theory was first published by psychologists Daniel Kahneman and Amos Tversky in 1979. It aimed to challenge the previously accepted idea that people make rational decisions based on probability and the expected utility of an outcome as explained by Bernoulli. Instead, prospect theory accommodates the different attitudes to risk we have for gains and losses. Essentially, “losses loom larger than gains.”

Bernoulii’s theory assumes that the utility of wealth is what makes people more or less happy, but it lacks a vital moving part: the reference point from which gains and losses are evaluated.

The prospects of gains and losses are what drive the decisions made by companies and their managers every day. Businesses that are performing below expectations will be reeling from the losses and turn to increasingly risky strategies to try to recover. That may lead to throwing good money after bad, like a gambler making increasingly outlandish bets at the end of a day of heavy losses.

On the other side, everyone is loss averting to some degree. Loss aversion is often heightened in business settings when managers feel there’s no room for failure. For example, a speculative investment of £1 million for a 50% chance of a £10 million return would have an expected value of £4.5 million and should be an investment that’s made by any objective standard but might be rejected by the manager because she fears losing her job if the investment fails.

You can measure the extent of your aversion to losses by asking yourself a question: what is the smallest gain that I need to balance an equal chance to lose $100? For many people the answer is about $200, twice as much as the loss. The “loss aversion ratio” has been estimated in several experiments and is usually in the range of 1.5 to 2.5. This is an average, of course; some people are much more loss averse than others.
Daniel Kahneman, p.284. Thinking, Fast and Slow (2012)

Watch out for

Whether an event is considered a gain or a loss depends on expectations rather than reality. If my share portfolio rises 10% in a year when my friend gains 20%, that will feel like a loss. If I only lose a bit of money in a market crash, that will feel like a win. This ‘reference point’ between gains and losses can change over time, or from person to person.

Kahneman states that like Bernoulli’s theory, Prospect theory has flaws of its own. Most notably, the reference point usually has a value of zero, which can lead to some absurd results. It means that winning nothing when you have a 90% chance of winning $1 million and a 10% chance of winning nothing is assigned the same value as losing when you buy a lottery ticket. Prospect theory doesn’t take into account disappointment or regret.

With thanks to Ivan Edwards who wrote most of this post. Thanks Ivan!

Resources

Bendickson, J., Solomon, S., & Fang, X. (Summer 2017), Prospect Theory: The Impact of Relative Distances, Journal of Managerial Issues
Kahneman, Daniel & Tversky, Amos (March 1979), Prospect Theory: An Analysis of Decision Under Risk, Econometra
Kahneman, Daniel, (2012), Thinking, Fast and Slow, Penguin Books
Newell, Benjamin R.; Lagnado, David A. & Shanks, David R. (2007), Straight Choices: The Psychology of Decision Making, Psychology Press
Maslow’s Theory of Motivation: the five steps to Nirvana
Everyone has seen some version of this pyramid. But what exactly does it do?

American psychologist Abraham Maslow created his hierarchy of needs to explain what motivates certain behaviours. His theory was that once you’ve largely satisfied one need, it no longer motivates you. The next need in the hierarchy becomes the main motivation, and you feel its absence more noticeably.

Managers can use it to work out what does and doesn’t motivate their team members.

The basic needs are:

Physiological: the most basic needs for survival, such as food and water.

Safety: not just physical security, but also structure, stability and order. This is why people prefer secure jobs and savings accounts to starting a business or investing.

Belongingness and love: friends, family, socialising and working with familiar colleagues. Maslow blamed urbanisation, mobility and the breakdown of traditional groupings for the rise in feelings of alienation and loneliness, half a century ago. Plus ça change.

Esteem: this comes in two parts. The need for respect, recognition, attention and appreciation from others. And the need for self-respect and self-confidence — ultimately, liking yourself.

Self-actualization: a feeling of fulfilment, achieving your potential and being true to your own nature. As Maslow described it, “a musician must make music, an artist must paint, a poet must write”.

To put it another way, if you’re alone on a desert island with plenty of food and water and no obvious dangers, you’ll probably wish you had some friends with you. You won’t think about food or safety much, or yearn to write poetry.

Maslow argued that people who satisfy all five basic needs are more intuitive, creative, curious, calm and open. They lose prejudice and “robot-like conventionality.”

Therefore, employees who are respected and have opportunities to pursue their goals and win recognition will not only be motivated to succeed, but more effective in getting there.

Watch out for

Achieving self-actualization doesn’t mean job done, and they lived happily ever after. There will always be a new goal to reach, a new desire to motivate you. Maybe the poet will one day find they don’t like writing poetry any more. If you expect eternal satisfaction, prepare to be dissatisfied.

You also don’t need 100% achievement in one need to move up to the next. In fact, Maslow said that most people are “partially satisfied in all their basic needs and partially unsatisfied in all their basic needs at the same time.” Of course, it’s possible to move down as well as up the hierarchy as your needs and motivations change over time.

Despite the popularity of the Maslow’s hierarchy, there’s scant recent data to support it…

Contemporary science — specifically Dr. Edward Deci, hundreds of Self-Determination Theory researchers, and thousands of studies — instead points to three universal psychological needs. If you really want to [take] advantage of this new science – rather than focusing on a pyramid of needs – you should focus on: autonomy, relatedness, and competence.
Susan Fowler, (2014, HBR)

Still, the pyramid could be a useful lens through which to assess your own life choices and consider whether the needs of your family and work colleagues are being met.

With thanks to Ivan Edwards who wrote most of this post. Thanks Ivan!

Resources

Abulof, U., (2017) Introduction: Why We Need Maslow in the Twenty-First Century.Society 54. Springer.
Bolton, J. & Naybour, P., (2014) The APM Project Management Qualification Study Guide. Association for Project Management.
Fowler, S. (November, 2014) What Maslow’s Hierarchy Won’t Tell You About Motivation. Harvard Business Review
Kremer, W. & Hammond, C., Abraham Maslow and the pyramid that beguiled business (2013), BBC News Magazine.
Maslow, A. H., (1970). Motivation and Personality.Harper & Row.
Innovator’s DNA: Do what Bezos, Cook and Musk do
This model explains what it takes to be a successful innovator.

We’re talking DNA. Not the long chains of nucleotides that are the blueprint of organisms, but what Jeff Dyer, Hal Gregersen and Clayton Christensen consider the foundational building blocks of great innovators.

After an eight-year study, meticulously collecting data from 500 innovators and 5,000 executives, the authors came up with a list of five behaviours that make up the “Innovator’s DNA.”

The 5 behaviours of great innovators

Associating: making connections between ideas and concepts from unrelated fields

Questioning: posing queries that challenge common wisdom

Observing: (in highfalutin circles, also called ethnography) examining the behaviour of customers, suppliers, and competitors to identify new ways of doing things

Networking: meeting people with different ideas and perspectives

Experimenting: constructing interactive experiences and provoking unorthodox responses to see what insights emerge

The authors also find that the world’s most innovative companies are populated, perhaps unsurprisingly, with innovative people, processes and a culture that gives employees courage to try out new ideas and take smart risks.

If the people running Amazon don’t make some significant mistakes, then we won’t be doing a good job for our shareholders because we won’t be swinging for the fences.
Jeff Bezos, The Innovator’s DNA, p.27

Watch out for

The authors find that innovators asked more questions than answers in a normal conversation.

Innovators tend to spend a lot of time testing ideas using different networks of people with different backgrounds.

Leaders at the most innovative companies, lead from the front and spend 50% of their time trying to come up with new ideas.

The authors rather humbly assert that they’ve “cracked the code for generating business ideas, and it’s one that anyone can follow. Creativity is not just a genetic predisposition – it’s an active endeavor.”

So, you have no excuses. Go innovate!

Innovator’s DNA is the third in the trilogy of Clayton Christensen’s books on innovation. Here’s more on his concept of how large companies often leave themselves open to disruptive innovation from the low end of the market.

Resources

Dyer, J. H., Gregersen, H. B., & Christensen, C. M. (2019). The Innovator’s DNA: Mastering the Five Skills of Disruptive Innovators (Updated). Cambridge, MA: Harvard Business Review Press
Dunning-Kruger: Novices Don’t Know How Much They Don’t Know

This is the model that explains why after two hours into an edX Python course you’re stuffing a backpack, searching for motels in central Menlo Park and muttering gibberish to your cat about s3 buckets and a world-beating app that’s the Uber of dentistry.

Still, on the flipside, the model offers solace when you know nothing after six months. Keep going, it gets better.

This is a phenomenon that, in the words of David Dunning, “visits us all.” It’s not a model that’s about others, or them, it afflicts everyone. It forms part of a wider cognitive bias called naive realism. Our brains are authors of our own reality. We rationalize. Our “self-talk” normally paints us – our ego, what we’ve done, who we are – in a glowing, radiant light.

Unfortunately, this witness cannot be trusted, m’lud.

The first rule of the Dunning-Kruger club is you don’t know you’re a member of the Dunning-Kruger club.
David Dunning

Watch out for

The original effect has morphed incorrectly from the original research. It’s “poor performers are overconfident,” not “beginners are overconfident.”

Try to think in terms of probabilities rather than certainties.

Don’t confuse facts (which can be found true or false) with opinions (that can’t). Opinions can usually be prefaced with words like “I think”, “we should” and “they ought.” They are beliefs. The trouble comes when we bend the facts to fit our opinions. Facts shouldn’t bend. And, yes, that’s an opinion.

This is the is-ought problem or Hume’s law. This brilliant, animated illustration from BBC Radio 4 read by Harry Shearer (aka Principal Skinner) explains it sweetly in less than 90 seconds. The whole series is great, so go listen.

Also see the will vs skill coaching matrix. Managers will often see this behaviour.

Resources

Dunning, D. (2011). The Dunning–Kruger Effect: On Being Ignorant of One’s Own Ignorance. Advances in Experimental Social Psychology, Volume 44, Pages 247-296
Kruger, J. & Dunning, D. (1999). Unskilled and unaware of it: how difficulties in recognizing one’s own incompetence lead to inflated self-assessments. Journal of Personality and Social Psychology
Resnick, B. (June 26, 2019). An expert on human blind spots gives advice on how to think. Vox