Values and Culture. . . . People want to work in a place that feels right to them. They need to feel comfortable at work. In the way that a welcoming home with comfortable furniture is pleasant to be in, a company with good values and culture is pleasant to work in.
Location. . . . In the Bay Area and NYC, your employees are constantly getting hammered to leave for more cash, more equity, more upside, more responsibility, and eventually it leads to them becoming mercenaries. . . . If you are building your company in Ljubljana, Waterloo, Des Moines, Pittsburgh, Detroit, or Indianapolis, you have a way better chance of building a company full of loyalists than if you are building it in the Bay Area or NYC.
As Wilson notes, culture is one of the key ways to attract and retain loyalists, which should be the goal if you’re seeking 10x teams for the long term. When working to craft a positive organizational culture, there are a few tactical models to keep in mind as well.
First, you can show employees that you value their contributions by understanding that people in different positions need different kinds of support to make progress on challenging efforts. Consider what startup investor Paul Graham, in a July 2009 blog post, called the manager’s schedule versus maker’s schedule:
The manager’s schedule is for bosses. It’s embodied in the traditional appointment book, with each day cut into one-hour intervals. You can block off several hours for a single task if you need to, but by default you change what you’re doing every hour. . . .
But there’s another way of using time that’s common among people who make things, such as programmers and writers. They generally prefer to use time in units of half a day at least. You can’t write or program well in units of an hour. That’s barely enough time to get started.
When you’re operating on the maker’s schedule, meetings are a disaster. A single meeting can blow a whole afternoon, by breaking it into two pieces each too small to do anything hard in. Plus you have to remember to go to the meeting. That’s no problem for someone on the manager’s schedule. There’s always something coming on the next hour; the only question is what. But when someone on the maker’s schedule has a meeting, they have to think about it.
When you work with people who could benefit from a maker’s schedule, you must work to create a culture that allows them these long uninterrupted blocks of time. To do so, you need to ensure that people on the manager’s schedule are not consistently interrupting the flow of people on the maker’s schedule. Gabriel’s company (DuckDuckGo) has a policy of no standing meetings on Wednesdays and Thursdays, which facilitates schedules that incorporate deep-work blocks (see Chapter 3). Another approach is to allow people to work in environments more conducive to deep work, such as away from the central office, where they will get fewer interruptions from colleagues.
Next, you must be wary of culture eroding as your organization grows. Consider Dunbar’s number—150—which is the maximum group size at which a stable, cohesive social group can be maintained. (It’s named after anthropologist Robin Dunbar.) The idea behind Dunbar’s number is that at about 150 group members and below, you can relatively easily know everyone in the group and their roles within it. Above this number, however, you cannot easily remember everyone and what they do.
Organizational processes that worked before Dunbar’s number is reached all of a sudden seem to break down when it is exceeded, and new ones need to be constructed for the organization to be similarly effective again. A group of more than 150 people needs more explicit structures.
This concept of the stability of group dynamics being dependent on the size of the group extends to smaller groups as well. Two other well-known breakpoints are when the size of a small organization or team reaches about ten to fifteen people and when it further expands to between thirty and fifty.
When your group consists of only a few people, such as an immediate family unit or a tiny company, everyone can be involved in most major decisions and understand everything relevant to the group. At ten to fifteen people, though, this simple system breaks down, and you need some more organizational structure (subgroups, discrete projects, etc.), or chaos ensues. At thirty to fifty people, the same thing happens again—you need to create even more structure (teams, formal management, etc.) to avoid another round of disruption. And when you get to 150, Dunbar’s number, you start to need more traditional corporate structure (strict policies and procedures, processes to interact with other departments, etc.).
If you are a leader in a growing organization or team, you need to plan for periods of adjustment when you cross these thresholds. You should also be wary of growing your organization too fast. If you have too many new people—who by definition aren’t ingrained in your culture—come in at once, then that culture you’ve worked so hard to craft can quickly become diluted and much less effective. Anecdotally, this type of hyper-growth scenario risks significant trouble if an organization grows its team more than 50 percent in one year.
Another model to keep in mind that can quickly erode culture and morale is the mythical man-month. It comes from computer scientist Fred Brooks, who originally presented it in a book with the same name. Man-month, or person-month, is a unit of measurement for how long projects take (e.g., this project will take ten person-months). Brooks declares that this entire way of measurement is flawed, based on a myth that you can simply add more people (person-months) to a project and get it done faster.
A silly though memorable example is gestating a baby, which takes about nine months no matter how many people you try to add! The same is true for more mundane projects, especially the later it is in the project life cycle.
If you bring someone in to a project late, you need to get them up to speed, and usually this onboarding actually slows down the project timeline. Often it is just faster for the existing people to complete the project. However, you run the risk of burning out the team, especially if you have a strict deadline. But if you extend the deadline and do bring people in, you risk demoralizing the team that way as well, since you had to bring in reinforcements. Better planning can prevent you from ending up in this no-win situation.
A final tactical model to keep in mind when building positive culture is another military one: boots on the ground. It refers to actual troops on the ground in a military conflict, who are wearing boots as part of their uniforms. It is often referenced in the context of making the point that you need boots on the ground to be successful in a military campaign, and that conducting a war just from afar—for example, using only air power—will not achieve the ultimate goals.
A military case is also often made that to really win hearts and minds, you need boots on the ground to interact with the population and humanize the outside intervention. That is, you cannot just broadcast and enforce your message from afar. This concept has taken hold within the U.S. through community policing, where police spend time in the community building ties and therefore trust with the population they are policing.
The same is true in an organizational setting when you want people to buy in to your organization’s vision and culture. You can’t just define the culture from afar and hope that it will take hold. Instead, leaders must lead by example and put their own boots on the ground. This is way more effective than leaders who are always set apart, seen as sitting in their ivory tower. There are several common phrases that showcase the desired behavior: rolling up your sleeves, getting in the trenches, showing that you are one of us.
As a leader, your job of winning hearts and minds and setting your teams up for success is never done. You must continually reinforce vision and values, doing your best to evolve culture in a more optimal direction, setting up the conditions for those around you to grow. If you can do that well, then the culture you create will help set up your organization to be one that supports and cultivates 10x teams.
KEY TAKEAWAYS
People are not interchangeable. They come from a variety of backgrounds and with a varied set of personalities, strengths, and goa
ls. To be the best manager, you must manage to the person, accounting for each individual’s unique set of characteristics and current challenges.
Craft unique roles that amplify each individual’s strengths and motivations. Avoid the Peter principle by promoting people only to roles in which they can succeed.
Properly delineate roles and responsibilities using the model of DRI (directly responsible individual).
People need coaching to reach their full potential, especially at new roles. Deliberate practice is the most effective way to help people scale new learning curves. Use the consequence-conviction matrix to look for learning opportunities, and use radical candor within one-on-ones to deliver constructive feedback.
When trying new things, watch out for common psychological failure modes like impostor syndrome and the Dunning-Kruger effect.
Actively define group culture and consistently engage in winning hearts and minds toward your desired culture and associated vision.
If you can set people up for success in the right roles and well-defined culture, then you can create the environment for 10x teams to emerge.
9
Flex Your Market Power
IN 2016, HATCHIMALS WERE the hottest toy of the Christmas season. They are cute little electronic bird toys that you can take care of, kind of like a modern Furby. Supply was short, and people went to great lengths to get their hands on them. As RetailMeNot reported on December 6, 2016:
Last Sunday, Toys “R” Us stocked its shelves with Hatchimals, and shoppers lined up overnight to get their hands on the toys. Toys “R” Us handed out tickets to those in line, and reports revealed that some people turned right around to sell those tickets for over $100 to others in line. Long story short, you should likely expect to have to camp out for these toys, especially if Target decides to implement a ticket system. You don’t want to (literally) be left out in the cold.
While Hatchimals retailed for about $60 at the time, they were selling for as much as $1,200 on eBay. As you can see, people will pay very inflated prices when the supply available for a product is low relative to its demand.
With that type of profit opportunity, enterprising individuals perennially buy Christmas-season toys from retail stores so that they can resell them at higher prices on secondary markets (like ticket scalpers do for desirable concert tickets). When you take advantage of price differences for the same product in two different settings, it’s called arbitrage.
Back in the nineties, when eBay launched, it created numerous arbitrage opportunities by connecting newly minted salespersons to customers anywhere in the world. In college, Lauren found eBay to be a great source for making spare cash by pairing small-town anime lovers, who didn’t have anime shops in their own towns, with products she bought at a local anime shop near MIT.
Sometimes she would even find arbitrage opportunities within eBay itself. She found she could make a profit by relisting items in a better category or by using better keywords so that more people would find the listing. For example, she once found a designer wedding gown on sale for fifty dollars in the dress-up and costume section but thought she could resell it for hundreds of dollars if she listed it in the pre-owned wedding dress section. She was right—it went for more than two hundred dollars!
Price differences like these tend to not last very long, because others notice and pursue the same discrepancies until they no longer exist. It can certainly be profitable to take advantage of these short-term opportunities, but you need to keep finding new ones to continue turning a profit.
In this chapter we explore the opposite of arbitrage: sustainable competitive advantage. This mental model describes a set of factors that give you an advantage over the competition that you can sustain over the long term. A working flywheel (see Chapter 4) can drive such advantage—think of what Amazon has on its competition with regard to shipping because of its size and investments in warehousing and delivery.
The signature of sustainable competitive advantage is what economists call market power, the power to profitably raise prices in a market. For instance, when Amazon has raised its Prime price, it hasn’t lost many customers. An extreme showing of market power is a monopoly. Monopolies have vast market power because they have little competition.
As an example, consider the EpiPen, a medical device needed by people with severe allergies to treat potentially fatal allergic reactions. In 2016, Mylan, the company behind this well-known brand, controlled more than 90 percent of the market for these types of devices. From 2007, when it bought the brand from Merck, through 2016, its market share hadn’t decreased despite having raised the price for the device by more than 500 percent. This price increase is an incredible showing of market power, aided by the recall of a competitor’s device and the U.S. Food and Drug Administration’s rejection of another one during this time frame.
If a monopoly raises its prices, you can either pay the higher price or forgo its product, which in many cases (such as for needed life-saving devices) is not an attractive option. The other extreme is perfect competition, markets where many competitors provide the exact same product, perfect substitutes (also known as commodities). A thirty-two-ounce bottle of isopropyl alcohol is thirty-two ounces of isopropyl alcohol no matter whom you buy it from. If a commodity supplier raises prices, you just buy from another supplier at the lower price. Consequently, these commodity providers have no market power.
Market power also applies to you personally in the labor market. If you are just starting out in an industry and have only basic, undifferentiated skills, you can be a commodity. That means you have no advantage over other potential employees for the same job. From the employer’s perspective, you are interchangeable with other applicants for the position. In this situation, you have no ability to negotiate compensation and must accept the market rate for your services.
However, this situation doesn’t necessarily mean you get paid minimum wage. As with the Hatchimals, market price, in this case compensation, is a function of supply and demand. Plenty of people right out of school can make good money because the demand is high for their services. For example, there are many newly minted nurses each year, but nurses are in high demand right now (at least in the U.S.), so new graduates can find work at attractive starting salaries. On the other hand, even though the number of new graduates with PhDs in history is relatively small, there are even fewer tenure-track teaching positions available for them, and consequently it is very difficult even to secure one of these jobs.
When you are undifferentiated—with no sustainable competitive advantage and therefore no market power—you are completely subject to the supply-and-demand forces in the market, and the price they deliver to you. That speaks to picking an industry in high demand for the long term, such as nursing. It also speaks to the need to differentiate yourself from your peers by developing a unique set of skills that the market values. Then you have the opportunity to demand higher compensation by demonstrating the distinctive value you bring to your employers or clients. For example, in nursing, such differentiation could be achieved by a combination of experience and continuing education in a nursing specialty like critical care, anesthesiology, or pain management.
Of course, if there is no demand for your special set of skills, then there is no opportunity for you to flex market power. For example, many Olympic athletes need day jobs because there just isn’t enough market demand for their sport. They cannot support themselves on their extraordinary skills alone.
Having market power—individually or organizationally—is an attractive position because you can use your advantages to sustain profit for a long time. That’s why it is called sustainable competitive advantage.
Nothing lasts forever, though. New technologies arise that disrupt the old. Monopolies fall. Patents expire. Regulations evolve. New job skills crop up, supplanting the way things were done before. In Chapter 4, we examined how to watch out for, anticipate, and even engender such change. In this chapter, we exami
ne super models to help you find and hang on to market power.
SECRET SAUCE
Major life, career, and organizational choices can be thought of as bets on the future. You can be either right or wrong in those bets. If wrong, you won’t achieve the success you wanted; if right, you will. However, to achieve a really high degree of success, you need something extra: to be contrarian in your bet. In “Demystifying Venture Capital Economics, Part 1,” venture capitalist Andy Rachleff summarized this concept, originally formulated by investor Howard Marks, with the consensus-contrarian matrix:
The investment business can be explained with a two-by-two matrix. On one dimension you can be either right or wrong. On the other you can be consensus or [contrarian]. Obviously you don’t make money if you’re wrong. . . . The only way to generate outstanding returns is to be right and [contrarian].
Consensus-Contrarian Matrix
Wrong
Right
Consensus
No return
Regular-sized returns
Contrarian
No return
Outsized returns
Rachleff elaborates:
Being willing to intelligently take this leap of faith is one of the main differences between the venture firms who consistently generate high returns—and everyone else. Unfortunately, human nature is not comfortable taking risk; so, most venture capital firms want high returns without risk, which doesn’t exist. As a result they often sit on the sideline while other people make the big money from things that most people initially think are crazy. The vast majority of my colleagues in the venture capital business thought we were crazy at Benchmark to have backed eBay. “Beanie babies . . . really? How can that be a business?”
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