Why does the rabbit run faster than the fox?

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If your business is based on you beating the competition, life is going to get very tiring.

A perfectly competitive market is one where there are a large number of players in the market, the product is no different from others, it’s easy to enter the market and everyone has all the information they need.

Examples of these kinds of businesses exist everywhere. In knowledge work, web-design could be seen as a modern example. Most websites will be built using WordPress, there are any number of people that can design acceptable websites and it costs virtually nothing to get started in the business.

If your web-design business does what most other web-design businesses do, then you will experience the side-effects of perfect competition.

In a perfectly competitive market, the price at which you sell the product tends towards the cost of production.

In other words, you make hardly any money selling it and profits are low to non-existent.

There are few perfectly competitive markets, however, and the traditional ones try and create systems to prevent side effects. In commodity markets such as oil you see the emergence of cartels like Opec that try to control supply so that they can affect the price.

At the other end of the spectrum is a market where one company has a monopoly. No one else does what they do, the product is unique, it’s near-impossible for new companies to enter the market and information is protected or secret.

That’s quite a nice situation for a business to be in – except that comfort and complacency leads to sloth and poor service and eventually governments have step in to break up monopolies.

The ideal place is to be somewhere in between.

There will always be someone who is willing to get up earlier, work harder, spend more time away from home selling, and who can hire workers that are paid less than you can.

If you compete on their terms, you will lose.

The strategy that is going to work is to position yourself and your business so that you have few direct competitors, what you do is different and unique, your competitors cannot easily enter your market and where information needed to do the work is protected – perhaps because it costs something.

If you had to pick just one thing out of the list, Bruce Greenwald and Judd Kahn in their book Competition Demystified suggest focusing on barriers to entry.

If it’s hard for others to enter your market, then you have the potential to earn above average profits.

If that isn’t the case, then you could spend the rest of your time running just to stay in the same place. And who wins then?

The answer to that is the same as the answer to the question in the title.

The rabbit runs faster because the rabbit is running for his life, while the fox is running for her dinner.

The real learning curve

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How does the process of doing something new work?

Whether it’s learning a new language, picking up a new skill or starting a new business, we all go through a series of stages.

The typical learning curve is shown as learning plotted against time in a so called “S” curve. This shows that learning is low at the start, speeds up and then levels out later on.

The more natural way to think about learning, however, is that it is hard at the beginning, gets easy as you become more familiar with what needs to be done but then it needs a lot more effort to achieve mastery.

The first stage, getting started is often the hardest bit – when you are approaching something new for the first time. Everything is unfamiliar and different.

Take, for example, learning how to model a business case in Excel. At first, if you’re not that familiar with Excel, it takes time to understand the way in which the cells and formulas work.

After some time, you can get pretty competent at building models. This is the second stage.

Perhaps you can even create some very complex models that have lots of variables and connections to other sheets and perhaps use some VBA for automation and programming.

But then it gets hard once again to master the tool in the third stage.

Excel is a very accessible tool, but it is also a powerful programming language. You need to understand a lot more about the process of building a model to move to a stage where your model can be used to generate useful information in the form of scenarios, projections and sensitivities.

Most people don’t ever get beyond a model that gives you one answer. A model that helps you frame and investigate situations is a lot more complicated to think though and build.

Take another example – writing.

Almost everyone can learn to write. It’s hard at the start but most people probably don’t remember the effort they had to put into learning the shapes of letters and spelling out words when they were younger. It’s pretty natural now.

But then why is most business writing hard to read? Is it because you need jargon or complicated words to explain things, or is it because the writer hasn’t yet reached the point where they can express a big idea in small words?

Hemmingway talked about the idea of “one true sentence”. This was a sentence without decoration, without fancy words – just a simple sentence that said something meaningful.

But most business writers haven’t put in the effort that Hemmingway did.

It makes it easier to put in effort over time to learn a new skill once you know how the learning curve works and can see how it relates to how much you are learning.

At the same time, because it takes effort to learn something new, it makes sense to choose what you want to learn carefully.

In knowledge work – reading, writing and arithmetic are still the most useful skills to have.

How do we really make investment decisions?

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If you were rational, this is how you might make a decision:

  1. Set out the alternatives – what are the choice you have?
  2. For each choice, what is the payoff – what are you likely to get?
  3. Again, for each choice, what is the probability that it will happen?
  4. What is the expected value of the option (probability x payoff)

With choices that lead to other possible choices, you need a decision tree and the ability to work out sequences of expected value.

You then choose the approach that results in the highest expected value.

This approach, however, is not intuitive, and most people are not wired to approach decision making in this way.

In addition, it’s a little old. The statistical basis for this approach lies in the work of Thomas Bayes in the mid-1700s. Our knowledge of people has moved on a bit since then.

There are two situations people face often when making personal and business decisions.

The first situation is when they know the chances of winning or losing.

For example, lets say you entered a game where you could win £10 or lose £5 on a coin toss. There is a 50% chance of either, and you might be tempted to take a punt at this level.

Most people would not take the bet if the option was between getting £1,000 or losing £500. The fear of losing would overwhelm the prospect of winning.

The other situation is when they don’t know what might happen and the risks that could emerge.

Quite often, the next thing to go wrong is completely different from the ways in which things went wrong before – and all the planning and controls that were in place to avoid the last disaster fail to prevent the next one.

A more human approach to making these decisions is based on Plausibility Theory and in particular the idea that you may take a risk as long as your downside is capped.

In other words, you may be willing to take a decision that you expect to be profitable, as long as the loss if you are wrong is limited to a certain level.

This approach became popular around 15 years ago as the concept of Value-at-Risk (VaR). Using this approach, you put in place a management system that ensures that you limit your loss to a particular level, say 1 or 2% of your portfolio value, and then work to get the most profit out of the opportunity.

So… you avoid the ugly end result, limit the worst case to a bad result and work on achieving a good result.

But… mathematicians ruin everything.

VaR was quickly adopted in many financial models – from standard portfolio markets to energy, and complex models were used to justify the products that were being introduced. They even formed part of the Basel II rules used to regulate international banking.

Which then failed rather spectacularly to prevent the global financial crisis that kicked off in 2008.

Although arguably that was down to smart people who figured that they could use the methods to try and take greater risks with other people’s money while at the same time reducing their own personal risk to almost nothing.

After all, how many executives of banks have been tried and convicted for their role in the crisis?

So it looks like the people managing your money applied Plausibility Theory rather well, except they did it to benefit themselves rather than you.

The takeaway is perhaps that the next time you make an investment decision, figure out what will happen to you if things go horribly wrong before being enticed by the promises of future returns.

How to close the gap between knowledge and action

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How do you know what you know?

You’ve probably been working for a while, and by now have a number of views on how things should be done.

You know the right order, the correct approach or the most effective way to do things.

You might feel that what you learn and figure out on the job – the practical stuff you do there – is where real work is done, and academics in their ivory towers have nothing much to add to how you do things.

Or, you might be an academic, engrossed in research and evidence. You might know the ways that work across organizations from your research and know the precise way in which to articulate an idea so that it expresses a contingent truth.

Except, you lose most listeners at the word “contingent”.

This creates a barrier between the people who create new knowledge and the people that do work. It’s probably no exaggeration to say that most work done in organizations is based on ten to twenty year old research and methods and very few organizations are really at the cutting edge of what they do.

As John Maynard Keynes said, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Except today he would probably say practical people.

Writing in the Oxford Review blog, David Wilkinson outlines three main reasons for the gulf between knowers and doers.

1. Most people can’t get to the research or understand it when they do

Academics write for each other in peer-reviewed journals locked away behind paywalls in precise, terse and technical language.

Most people don’t get this language and what it means for them.

The Nobel prize winning physicist Richard Feynman gave a beautiful example of this. Look at the sentence “The radioactive phosphorus content of the cerebrum of the rat decreases to one-half in a period of two weeks.”

What does this mean?

What this sentence means is that the atoms in the rat’s brain, and your brain disappear and are replaced all the time – the very fabric of your body, the atoms that make you up are no longer the same as they were before.

The mind you have now is no longer the one you had a year ago – all its bits have been replaced. But you’re still here, thinking and feeling and with memories.

Your consciousness and feelings and emotions come out from arrangements of atoms – a dancing pattern of atoms if you will – and are not the unchanging fixed entity that you think you are. Instead the “you” that you are emerges from this pattern of atoms.

It takes time and reflection and discussion to take apart and understand these concepts – time that people outside of academic rarely have.

2. People who do are busy and need to get things done now

People who do things need to worry about clients, deadlines, office politics and the need to ship and invoice now.

What they need are solutions that are practical, tested and effective. They haven’t got the time to discuss elaborate theories or ideas that apply only in very specific cases.

They also expect a healthy dose of “common sense”.

They way in which academic knowledge comes across doesn’t easily fit these requirements – it needs to be translated and explained and there often just isn’t the time, resource or appetite to do this properly.

This also means that many decisions and actions taken by organisations are based on gut-instinct, hunches and methods that have worked in the past rather than based on evidence and data, which is how academics would prefer that they did things.

3. Knowers and Doers simply have different objectives

An academic needs to do research and get published. That is their main objective and they get funding and support to create new knowledge, not to make it easier to access or more practical to apply.

A manager or worker in an organisation needs to get things done. Their main objective is to satisfy a customer.

The two are looking in completely different directions, and when they do come together the work they do needs to meet these dual aims of being applicable and practical while at the same time being novel and publishable.

These are not easy aims to reconcile.

Are consultants the answer?

Perhaps this is why consultants that are able to bridge the gap between research and action are so useful in organisations.

Well trained workers that have done a research based degree or have continuing links with academia can bring new ideas, approaches and methods into organisations that are tested and evidence-based.

Much of the ways in which organizations work – from operations to risk management to sales and marketing has been exhaustively researched and are well understood.

The challenge is to get and use this knowledge more effectively on a day-to-day basis.

How to create organic growth in your company

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How do you grow your company organically in today’s competitive marketplace?

A McKinsey survey looked at approaches used by companies and found that high-performing firms used a combination of three strategies:

  1. They moved investment and money into high-growth activities.
  2. They created new things to sell and new ways of delivering value.
  3. Tney worked on making how they did things internally better.

It appears from the survey that the best performing approach is one where firms focus on creating new products, services and business models, but also ensure that they allocate resources effectively and work on optimizing their own operations.

That sounds easy enough, so what stops organizations from doing this and setting off on a growth track?

There are three reasons, according to another article from McKinsey:

1. Inflexible structures

Your organization needs to have the right structure to enable growth, with the right teams, leadership and strategy in place to effectively serve its target market.

Simply working within an existing structure can mean that ideas and innovation can get lost in the unending stream of existing priorities and concerns.

2. Unscalable processes

A related problem is when existing processes just cannot keep up with new opportunites and demand.

If you have a bottleneck in your organization – perhaps when it comes to pricing, turning proposals around, evaluating opportunities or in your manufacturing systems, that will become an increasingly large problem as you grow.

3. Unprepared people

A growth strategy can come as something of a surprise to people in organizations used to doing things in a certain way.

This can slow growth down considerably – not because people are being difficult, but just because by being cautious and adding what they feel are reasonable checks to the process, they can end up slowing and even derailing the entire initiative.

So, what does this mean for us?

An organic growth strategy takes time, focus and investment.

Like growing plants, you need to prepare the ground, seed it, provide them with resources and keep away predators.

And then you need to wait.

The Matthew effect – why the rich get richer

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Have you ever wondered what makes a product or a person successful in today’s interconnected world?

Is it the quality of their work, how hard they work or a big dose of luck?

There are competing theories flying around – but some have been around for longer.

The Matthew effect comes from biblical parables and says “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath.”

In other words, the rich get richer and the poor get poorer.

This effect doesn’t have to do just with money – although that is one way of measuring it in real life.

It turns out that you see this in a number of situations:

  • The bestseller lists for music and books are dominated by a small number of well-known and rich artists.
  • The most eminent researchers get the credit for a discovery, even if it has been done by a team.
  • Children that learn to read early in life pull away from those that don’t.

There are two factors at play here.

The first effect is the principle of cumulative advantage. Small advantages build up to big ones over time.

An example of this is described in Malcolm Gladwell’s book Outliers, where children that start playing a sport who are older than others in their cohort perform better because they are bigger at the start of the year, and so get more opportunities to play and develop their skills.

People who start a job and are slightly better are more likely to be invited onto a team to do more interesting work, and over time get more experience than others.

The second factor is the network effect. The more connections you have, the more connections you tend to make – and the more connections you have, the more opportunities come your way.

People who have large networks or are already wealthy tend to have more people approaching them with ideas or opportunities.

Publishers pay more attention to authors that already have a large social media following or email list.

Venture capitalists take entrepreneurs that have already been successful more seriously.

Artists that have a large following and existing sales find it easier to get their next album out and into the market because people are already looking out for them.

So what does this mean for us?

The main takeaway is that advantage builds up over time. If you want to get rich, the best time to get started is 10 years ago.

The second best time is now.

What do you need to learn to keep your job?

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You know that AI is coming for you, right?

A third of current jobs will be done by computers over the next 20 years. If you want to know if your job is at risk, type it in here.

There are a number of changes happening in the world of work – and these are foundational changes – changes in the very nature of society itself, enabled by interconnected technology.

Technology is enabling a move from the traditional industrial approach of cramming everyone in a large space and giving them small tasks as part of an assembly process to networks of smart people working together to create value.

The choice facing us in the future might be as stark as either choosing to learn more and create value that cannot be done by a computer, or learning how to clean and maintain the computers and automated cars that do the jobs that we used to do.

In an article in the McKinsey Quarterly, Amy Edmondson and Bror Saxberg point out that most organizations focus on the money, leaving it to their employees to worry about learning.

This might have been ok in a world where all people had to do was “do”, but not in a world where they have to “think”, “create” or “decide”.

It’s not enough to get a traditional education and then come into the workplace and never open a book again. In modern organisations you have to be ready to learn all the time, and learn while doing your job.

The military is very good at this. As Josh Bersin points out, they only really do two things: fight and train. Most of the time, they train.

They make a big deal of sitting (or probably standing) after an exercise and working through what worked, what didn’t and what they would do differently next time.

Learning doesn’t have to be classroom based and formal any more. For individuals, the amount of information and support out there to learn almost anything is staggering.

Just take Coursera, for example. This site has free courses that you can take that range from programming and management to abstract painting and dinosaur paleobiology.

Organizations have to create the conditions that enable people that work in them to learn. That means giving them time and space to experiment, research, get feedback and think.

The skills needed are not just technical ones, but also social – skills that make it possible to work collaboratively across organizational boundaries.

The challenge is making learning part of the daily routine – you need to learn as you race along doing your job day to day.

Do you have what it takes to be a great executive?

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You could argue that most of the momentum and drive that propels a business along comes from the work of a cadre of executives that are responsible for major parts of the organisation.

The way in which this group of people operate, make decisions and run their businesses has a huge impact on success or failure.

So, if you’re one of those people already, or want to become one of them, what skills do you need and can you learn them?

A 10-year study by Ron Carucci published in the Harvard Business Review set out to answer that.

It found four patterns that set apart great executives from good ones after analysing over 2,700 interviews with leaders.

The patterns are deceptively simple, which is why they are perhaps so hard to actually do.

1. Great executives know their industry

Industries have different economics and drivers and the best executives understand this.

The kind of strategies that apply in a fast-moving consumer goods space cannot be applied directly to a moribund regulated business.

Your industry makes money in a particular way, by meeting demand with supply and competing with others.

If you are curious, able to spot possibilities and test and challenge assumptions then you will be able to focus your attention on doing things that make the most difference.

2. Great executives know their business

Most people arrive at a senior position after spending years in a particular function or business unit.

This means that they often view the whole business through the lens created by their experience – sales leaders think about pricing, operations about supply chains and accounting about finance.

Great leaders think about the system – how all the pieces fit together to create value. They focus on the interaction between parts of the business, remove bottlenecks and improve coordination to make it easier for the business to operate optimally.

3. Great executives know people

A great strategy developed in a locked room is of no use to anyone.

To actually make things happen, you need to interact with other people, show them your plans, take into account their objections and get them to work with you to make things happen.

You can only do this if people trust you and your judgements at all levels of the organisation. If you try and control, manipulate or steer people you’re probably going to be found out.

People aren’t stupid.

If you help other people get what they want and they can trust what you say, you have a good chance of moving in the right direction.

Great executives know how to make good decisions

If you know your industry, know your business and have good relationships, the last part of the puzzle is being able to make good decisions.

How do you take data and information and combine it with your gut instinct to create insight?

The key is having decision making processes that help you arrive at reasoned decisions that are free from bias – yet that incorporate the human element that comes from a deep understanding of your own circumstances.

As the article says, you can learn these skills if you don’t have them already.

It’s a simple enough list really.

But just because it’s simple, don’t make the mistake of assuming it’s easy.

How to get your timing right

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Why do some people succeed and others fail? Is it because the successful ones were just better? Or were they lucky?

This is a hard thing to take apart. All we have to go on is the evidence of success or failure – we don’t know what would have happened if the situation had been different.

“Luck is what happens when preparation meets opportunity”

This quote has been attributed to Seneca, the Roman philospher, but probably wasn’t said by him. It’s still good, however.

If you get yourself ready, then when you are able to react when the opportunity presents itself, you improve your chances of being lucky.

When it comes to timing investments in markets – this is a good strategy.

In investing – if you decide ahead of time what is good value, and the market comes close to that number – you should buy.

Much too often when prices fall people don’t buy, hoping they can get it cheaper. And when they rise they don’t buy either, hoping they will come down again. That doesn’t work.

Another way of thinking about this is with a surfing analogy. If you’re a surfer, you don’t just go to the beach, scan the waves for a big one and then head out towards it.

Instead, you get in position, and when the big wave comes along it lifts you up and you get going.

It’s all about getting in place before the opportunity starts. If you can see a trend, see the wave, see what is about to happen – then you are probably too late to do anything about it.

This is perhaps why people who take risks, start new ventures, try out new ideas are sometimes regarded with pity, sometimes with scorn by those around them.

Until they succeed. And then it looks like it was inevitable after all and anyone could do it. Except they didn’t.

Can you increase your chances of getting your timing right and being lucky?

A ten-year study by the psyschologist Richard Wiseman suggests there are four things lucky people do more than others:

  1. They create and notice chance opportunities
  2. They use their intuition to make lucky decisions
  3. They have positive expectations
  4. They are resilient – and that sometimes changes bad into good

This study suggests that how lucky you are may be related to how you think and behave.

Perhaps the approach to take is a combination of Oliver Cromwell’s maxim “Trust in God and keep your powder dry”.

In other words – think and act lucky, but also do everything you can to have the capability and tools needed to seize an opportunity when it comes along.

Why body language isn’t enough

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If you have ever attended a team building event or communication seminar or similar training programme, the topic of body language probably came up.

93% of communication is non-verbal, they probably said. How you say something is far more important than what you actually say.

The problem is that this is wrong.

Professor Albert Mehrabian’s research in the late 1960s found that when trying to communicate feelings, 7% of the impact came from the words you used, 38% from the tone and 55% from your expression.

In other words, if you said you were happy when looking sad and sniffling, or said you were fine while looking very angry and snarling, people could work out how you really felt most of the time.

It doesn’t follow that when you try and communicate in general, only 7% of what you get across to someone else is the verbal component.

The research has been misinterpreted for decades – until TED.

TED – a conference on Technology, Entertainment and Design – is now probably the world’s best known repository of great ideas. It has videos of short talks where speakers talk billiantly about an area of interest and expertise.

They don’t just saunter up on stage and perform. The words they use are crucial – their words are used to “tell a story, build an idea, explain the complex, make a reasoned case, or provide a compelling call to action”.

TED made what you said important – because the speakers were talking about great ideas and insights and research that mattered and was making a difference.

Why does this matter to the rest of us?

Virtually any important decision you are involved in will require communication and persuasion. Either someone else has to make the case to you, or you need to make the case to someone else. And people have to agree.

In a connected world filled with information noise, we need to get better at making the case for doing something important.

What you say is just as important as how you say it.