I can start not with wisdom from political science, but from the great baseball analyst Bill James, who had useful observations about both winners and losers that I think are worth learning from in the political context, even though it’s obviously quite different.

About winners, Bill James noted their tendency to invariably keep everyone.  That means not only keeping the good players who would help win the next year, but also the bad players that made winning harder (because you can always remember at least one positive contribution, and you’re going to be far more aware of the positives than the negatives); it also meant keeping the players who were useful now, but unlikely to be helpful in the future.  Translated to politics, this suggests that Republicans need to be wary about assuming that everything they did was successful just because they had a good year.  James counsels baseball teams to be ruthless in their self-assessments against the tendency to settle for what worked last time.  Republicans now should do the same.

For losers, James identified the tendency of fans, and sometimes management, to focus most of their criticism on the stars, on the perceived (or even real) flaws of the very best players.  In the baseball context, this is usually insanely self-destructive.  Does the same thing happen in politics?  Yup.  Is it self-destructive?  Yup.

When we succeed, whether in business or politics, we tend to attribute the bulk of that success directly to our efforts.  The Republicans won a significant electoral victory last week, but there is great danger in over assigning causality to their own efforts and under assigning causality to situational and structural factors that may not be in place come 2012 (as I previously discussed here).  Successful organizations must be “ruthless in their self-assessments” so as to avoid confirmation bias and ensure that future strategies match up with future structural environments.  Any event will be the product of agents’ actions and structural factors.  The trick is to untangle as best one can the relationship between and relative weight of both to understand the outcome.

One potential reason is that it is their very incompetence that is valued.  Incompetence acts as a credible, costly signal that they can be trusted by superiors looking to accumulate a power base.

Sociologist Diego Gambetta is a pioneer in the study of signaling.  In his 2007 book Codes of the Underworld: How Criminals Communicate, Gambetta uses the extreme case of cooperation amongst criminals to tease out more general dynamics of trust, signaling, and communication.  The Mafia can be considered a “hard-case” for theories of signaling trust; given the extreme incentives for criminals to lie and the lack of credibility they wield given the very fact that they are criminals, how is it that criminals manage to coordinate their actions and trust each other at all?  By understanding how trust works in this harsh environment we learn something about how to signal trustworthiness in broader, less restrictive environments.

Gambetta theorizes that one way that a criminal can signal their trustworthiness to another is through their own incompetence:

The mobsters’ henchman, so often caricaturised in fiction as an énergumène, epitomizes the extreme case of this class. If he were too clever he would be a menace to the boss. Idiocy implies a kind of trustworthiness.  [...] One way of convincing others that one’s best chance of making money lies in behaving as an ‘honourable thief’, is by showing that one lacks better alternatives.  [...] Incompetence is one way of telling people “You can count on me for even if I wanted to I would not be able to cheat.”

Through this mechanism, lower-level criminals can signal their trustworthiness to their bosses, since they are essentially dependent on their bosses for their economic gains given their lack of independent skill and intelligence.  This pervasive logic means that criminal organizations are likely to employ mostly incompetent criminals and that leaders will likely surround themselves with less competent lieutenants over time.

It is not hard to see this same logic play out in businesses, schools, and government.  If organizations are set up in such a way where the accumulation of loyalists is incentivized instead of performance, we should expect to see a greater number of incompetent employees relative to competent ones.  Additionally, we should see more incompetent employees advance as their “sponsor” advances.

WorldCom CEO Bernard Ebbers

The paper came out a few months ago, but NPR’s recent story reminded me of it.  Essentially, a professor and graduate student at Stanford’s Graduate School of Business tried to identify the linguistic signaling used by CEO’s and CFO’s during earnings calls that could be used to reliably predict when their companies were cooking the books (PDF of full report here).  Their methodology was to analyze thousands of transcripts from earnings calls and then look for relationships between words and phrases and those companies that later had to restate their earnings.

Here’s a summary of their findings:

Using conservative statistical tests, we nd that the out-of-sample performance of the models that are based on CEO or CFO narratives is signicantly better than random by 4%- 6% (with 50% – 65% accuracy) and provides a signicant improvement to a model based on discretionary accruals and traditional controls. We find that answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholders value and value creation. In addition, deceptive CEOs use signicantly fewer self-references, more third person plural and impersonal pronouns, more extreme positive emotions, fewer extreme negative emotions, and fewer certainty and hesitation words.

CEOs overuse words like “we” and “our team” versus “I”, since lack of “I” indicates that the speaker doesn’t psychologically own their statements or feel “responsible for what [they] are saying”.  This implies that investors and officials should regard such skewed ratios as possible indications of fraud.

Additionally, CEO’s overuse of superlatives to describe the current state and future outlook of their companies was also found to be diagnostic (from NPR):

Lying CEOs also tend to use a lot of words that express positive emotion — things are fabulous and fantastic and extraordinary.

Here’s what Enron CEO Kenneth Lay said when he addressed his employees at a time when the company was about to implode: “I think our core businesses are extremely strong. We have a very strong competitive advantage. Of course, we are transferring this very successful business model and approach to a lot of new, very large markets globally.”

Words like that can be a form of overcompensation.

“If all my speech is ‘fantastic,’ ‘superb,’ ‘outstanding,’ ‘excellent’ and all my speech sounds like a big hype — it probably is,” Larcker says.

It is interesting to think about language as a screener and/or signal.  One can think of a host of applications outside of earnings calls (politics, criminal justice, job interviews, etc).  Essentially, the language used by executives might be taken as a costly signal by investors.  Rather than cheap talk, the structure and nature of the words themselves may serve as a credible signal.  This makes intuitive sense, since only CEOs that are truthful in their representation of the company are likely able to provide detailed, certain answers that provide the good, bad, and ugly of a company’s performance.  However, while this signal may allow honest CEOs to communicate their veracity it will likely lead to a lot of false positives (i.e. suspected fraud), since the type of language cited by the researchers could be deployed for reasons other than fraud.

Creative teams made up of both incumbents who knew each other and newcomers who didn’t, however, were more likely to produce hit shows. Uzzi says that’s because teams with too many overlaps in their social networks are less creative — the team members all know the same stuff. Teams that aren’t networked at all, however, aren’t good at sharing what they do know. The most successful teams were those in which everyone knew one or two others but not everyone — and not no one.

Moreover, innovation and creativity are more likely to blossom when people are exposed to various ideas and knowledge that are outside of their narrow expertise.  This is more likely to happen in a network with a higher percentage of weaker ties, versus overlapping redundancy:

“Creativity depends upon a person’s ability to take ideas and information that may be well understood in one area and bring it into a new area where it’s suddenly received as invention,” Uzzi says. Therein lies the productivity potential of social networks — they take whatever useful material is circulating and put it together in new ways. “Much of creativity is just new combinations put together from different pieces of information and material,” Uzzi says. “That’s how networks can really amplify creativity.”

For that reason, Uzzi suggests that organizations subvert the “proximity principle,” or people’s tendency to create networks from those around them. “The problem with the proximity principle is it tends to create homogeneous networks that lack diversity,” Uzzi says. “To undo the proximity principle . . . locate people from different specialties in the same area rather than keeping all specialists located near each other.”

Bottom line: businesses should think about how to optimally organize their workers for innovation.  Critical to this is encouraging what I would term “social bumping“–the process of being exposed to new and diverse ideas on a frequent basis.  If work environments are organized in such a way where workers only interact with people they share strong ties with they are less likely to be exposed to new and diverse ideas (since those we share strong ties with typically have access to the same knowledge and interests as we do).  The key is to leverage–and increase access to–the weak ties of workers, since these ties are the pipelines of new and diverse knowledge.  As mentioned in an earlier post, this can include helping people build diverse social networks, promoting the co-mingling of various subject-matter experts (e.g. internal rotations, inter-firm collaborations), leveraging social network technologies that encourage broad reading and sharing of knowledge (particularly the knowledge that flows from weak ties), and encouraging people to share their ideas and perspectives when they might otherwise feel as though it wasn’t their place to speak up.

A loose consensus has formed around the idea that basing CEO pay on, say, five years of stock returns would eliminate some of the reckless decision making that led to the Great Recession. But I suspect that even if you could build a compensation plan that focuses on long-term shareholder value, you’d solve only part of the problem.

That’s because such a scheme still ties CEOs’ motivation to one fickle number—company share price—and assumes that pay alone motivates chief executives to perform.

Any number of things can motivate CEOs—peer recognition, for example, and even a desire to change the world. In fact, CEOs usually have all the money they need. Why then does it seem that they care more about stock value and the compensation it produces than those other forms of motivation?

The answer is almost uncomfortably simple: CEOs care about stock value because that’s how we measure them. If we want to change what they care about, we should change what we measure.

Ariely goes on to argue that, in general, people align their behaviors with the criteria that others judge them on.  He suggests a number of additional metrics that CEO’s performance should be judged by, such as jobs created, pipeline of new products and patents, satisfaction level of customers, and trust in your company and brand, but says that these are difficult to measure.

I largely agree with Ariely, but slightly disagree on two points:

First, it isn’t simply that what gets measured gets done, but rather what gets measured and valued gets done.  It is a slight difference, but an important one.  Businesses today are flush with data, statistics, metrics, and dashboards.  The decision as to which of those metrics to value, i.e. to use as a measuring stick of employee (and, in this case, CEO) success is an important one.  Take an example from baseball.  For decades, managers, talent scouts, and front office executives paid little attention to walks and on-base percentage.   Both were measured, but they weren’t properly valued–players with a high number of walks and a robust on-base percentage were not compensated at a high level because of their performance in these two areas.  It isn’t enough to measure–specific measures must also be publicly valued in order to affect behavior in the way that Ariely suggests.  The issue of what gets valued is an issue of culture change to a large extent–it certainly isn’t easy, but without it measurement will not affect behavior.

Second, many of the items that Ariely suggests are quite measurable.  My current employer, Gallup, is a global leader in the science of measuring customer satisfaction (or, as we would argue, customer engagement) and brand confidence or trust.  Specifically, Gallup has developed metrics for both that have been validated in relation to business outcomes (e.g. customer retention, profitability, etc).  Often times we assume that things are inherently difficult or impossible to measure and, therefore, fail to measure them at all (to be fair, Ariely doesn’t suggest this, he simply states that it is more difficult).

Nobody wins forever. It just doesn’t happen.

What we see in reality are millions of corpses of businesses and ideas that have made their impact (or not) and then petered out into oblivion without leaving much more than a memory. Some of them get bought and swallowed by a bigger company, others have their ideas copied and commodotized and many just don’t have the business or financial chops to make it all work for more than a few years.

So what if instead of worrying about all that you just decided at the beginning you were going to end it all six years in?

I love questions like this, and Noah is great at asking them.  He suggests that such an arrangement may solve the problems that arise when management sacrifices the long-term interests of the company for the short-term, making decisions that optimize their current job security but may create problems for the firm down the road:

Company management doesn’t know how long the company will last, so they optimize for the now (they also don’t know how long their jobs will last, but I’ll get to that in a minute). It may be overly hopeful, but as long as one choose a reasonable time-frame (5-10 years) I wonder if you couldn’t lift the decision-making out of the immediate.

It is an interesting idea, but I think that what Noah is mostly interested in here is a shift in how employment is structured (i.e. knowing up front when one’s job will terminate), rather than how businesses as a whole are set up.   (If the business will shutter its doors in 10 years what precisely are the long-term interests of the firm?)  Additionally, he focuses more on the employment issue towards the end of the post.  In either case, I think that on the whole the uncertainty that exists in terms of business and employment termination is superior to expiration dates.  Here’s why: If businesses were set up at the outset with a planned time frame at the end of which the business would wind down it would likely play havoc with their ability to compete in the marketplace. Additionally, the beneficial economic conditions that obtain through competition would be warped. Why? Because businesses would not have to operate in the shadow of the future.

The shadow of the future is a concept that comes from game theory and relates to how actors’ incentives and behaviors change depending on whether they are playing a game that ends after only one round or if it will go on indefinitely.  In a single-round prisoner’s dilemma, each actor knows that they will not have to interact with the other after they make their decision to either stay quite or rat their partner out.  Since they’ll never interact again, their preferred choice will be to rat the other out in the hopes that they receive a mild sentence or get to go free.  In an iterated prisoner’s dilemma, the same choices will obtain unless the players are unaware of when the game will end.  The fancy term for this is backwards induction, but basically the idea is that if players know when the game will end it will create the same incentives as if the game was only one round.  However, if the game is repeated indefinitely, if players must operate within the shadow of the future, then cooperative behavior is more likely to evolve.

Businesses

In a market, we do not want businesses cooperating too closely.  Partnerships, licensing deals, sure.  But we abhor collusion.  Why?  Because it distorts the very market dynamics that are supposed to give rise to all the benefits of a market economy.  Open competition by individual businesses will lead to better products for lower prices.  Collusion amongst businesses or the formation of monopolies works against this.  And while collusion is to be feared, so to should any development that threatens the existence of competitive pressures on businesses.  If dominant businesses in a market are known ahead of time to be set to expire after, say, 6 years, other businesses that have not set an expiration date will feel little pressure to improve their product or service.  Why?  Because they realize that in a few years consumers will not have the superior products or services to turn to.  This being the case, the businesses that will survive the expiration of the dominant businesses will have no incentive to bring their performance up to the level of the best businesses.  When businesses are unsure as to the viability of their competitors they must assume continued competition and therefore better manage their firms in order to compete and survive.  Artificial expiration, particularly that which is decided up front, would likely decimate the competition mechanism.

Employees

But what about employees?  Would management and other employees make better decisions, decisions geared towards the long-term interests of a firm, if they knew ahead of time when their tenure would come to an end?  This argument has been floating around for some time, particularly with regards to GM’s in professional sports.  While GM’s are given long-term contracts, they can be fired at any time.  Towards the end of their contracts the amount of money due to them decreases and therefore the amount of money the team would have to eat if they fired the GM also decreases.  This can create perverse incentives to create short-term success at the expense of long-term competitiveness.  Think of a baseball team where a GM is on the hot seat.  If they don’t produce a playoff team the following year they will likely be fired.  One option is to empty the farm system in order to trade for older, proven players.  By bringing in proven talent, the GM increases the chances that the team will perform better in the short-term, securing their job and possibly another contract.  But by emptying the farm system the GM risks crippling the team in the long-term.  They will have less low-cost talent to deploy while having taken on large, guaranteed contracts which will reduce the team’s ability to build competitive teams in the future.

So what if management doesn’t have the uncertainly of a new contract hanging over their head?  Would they then shift to making decisions that are in the long-term interests of their companies (this assumes the firm has no expiration date)?  I am not so sure.  Since no new contract is possible, employees in this scenario would likely be motivated by reputation.  Their legacy becomes more important than short-term financial incentives.  But the problem with the long-term is that, well, it’s long-term.  It could be 15-20 years or more down the road.  The farther away we get from decisions the harder it becomes to connect future results with previous policies.  Whether or not the long-term fortunes of the company will be associated with the legacy of a former employee becomes less of a clear-cut issue.  So while expiration dates for management may not increase incentives for selfish short-term behavior, it may not decrease them either.  Incentivizing long-term decision-making requires creating the shadow of the future for employees, even after they’ve left the firm.  Stock options that are valued and redeemed years after management has left is one potential (but not unproblematic) mechanism.

All of this is not to say that the answer to Noah’s question is that it’s a bad idea.  However, I think that, on balance, there must be a prominent role for the shadow of the future in order to prevent the market from being distorted.

It appears that these undercover bosses are employing a one-way, top-down management approach and not actively engaging in a two-way dialogue with their employees to make more informed and effective operating decisions.  Employees are an organization’s best source of knowledge and can be their greatest asset for building a successful company if the employees are properly engaged.

True enough.  Any organization that does not employ adequate feedback mechanisms are just asking for trouble.  However, watching the show made me think of something else–research methodology.

I recently read Tim Brown’s Change By Design. Brown is the CEO of the highly-acclaimed design firm IDEO. In his book, and at his firm, a great deal of stock is put into field observation and even participant observation. These are qualitative methodologies through which researchers can learn a great deal about a subject by observing them in their own environment versus simply asking them questions.  While interviews and surveys are great sources of information, often times subjects may not realize all that they do or what is truly important.  They view the world and their environment through their own lens and as a result emphasize and de-emphasize various items.  Observing subjects directly, and in some cases participating oneself, can lead to greater insights and pertinent details even if the subject is unaware of them:

The psychologist Jane Fulton Suri, one of the pioneers of human factors research, refers to the myriad “thoughtless acts” people perform throughout the day.

In each episode of “Undercover Boss” the CEO’s are jolted by the outcomes of the policies that they or their management team instituted from their corner offices.  Many times, what they witness is that the assumptions they made about efficiency and staffing, while looking good on paper, do not work so well in practice.  Either the policies do not work as intended, or they create unintended consequences that are severely detrimental to employee satisfaction and morale.  In some cases, the employees point the problems out themselves (classic interview), in others the problems emerge simply by observing how employees go about their day (human factors approach).  In the very first episode, the CEO of Waste Management rides along with a female driver and realizes that the performance goals they set as a result of their new efficiency initiative did not take into account a driver’s need to use a restroom.

While I freely admit that “Undercover Boss” is certainly produced and staged, as any ‘reality show’ will be, I think that it does illustrate the value of not only leveraging qualitative methodologies to evaluate business decisions, but of their necessity in serving as a counterbalance to an overly quantitative, theoretical approach.

In its 1980s heyday, the band became notorious for a clause in its touring contract that demanded a bowl of M&Ms backstage, but with all the brown ones removed. The story is true — confirmed by former lead singer David Lee Roth himself — and it became the perfect, appalling symbol of rock-star-diva behavior.

Get ready to reverse your perception. Van Halen did dozens of shows every year, and at each venue, the band would show up with nine 18-wheelers full of gear. Because of the technical complexity, the band’s standard contract with venues was thick and convoluted — Roth, in his inimitable way, said in his autobiography that it read “like a version of the Chinese Yellow Pages.” A typical “article” in the contract might say, “There will be 15 amperage voltage sockets at 20-foot spaces, evenly, providing 19 amperes.”

Van Halen buried a special clause in the middle of the contract. It was called Article 126. It read, “There will be no brown M&Ms in the backstage area, upon pain of forfeiture of the show, with full compensation.” So when Roth would arrive at a new venue, he’d walk backstage and glance at the M&M bowl. If he saw a brown M&M, he’d demand a line check of the entire production. “Guaranteed you’re going to arrive at a technical error,” he wrote. “They didn’t read the contract…. Sometimes it would threaten to just destroy the whole show.”

In other words, Roth was no diva. He was an operations expert.

Roth was using the M&M’s clause as a signal that, theoretically, would tell him something about the quality or ‘type’ of the stagehands–were they thorough and conscientious, or lazy and haphazard? The only way for the stagehands to know about the brown M&M’s would be to read through the entire contract–making it hard for someone who wasn’t the same type (i.e. thorough) to duplicate their behavior. In some ways it was a costly signal–sending such a signal is too costly for someone who doesn’t possess certain traits, making it harder to fake.

There is one problem, however. As long as the M&M clause remains buried in the contract and does not become well known outside of individual venues and the stagehands that work there, Van Halen could reliably use it in a diagnostic fashion. However, if the stagehands are mobile (which they likely were/are) or if that particular clause becomes a story that begins to circulate it would no longer be a reliable signal. Why? Because if stagehands know ahead of time that Van Halen requires all of the brown M&M’s to be taken out of the bowl in their dressing room they can easily do that without plowing through the massive contract. Bottom line, stagehands of one type (lazy) can pass themselves off as another type (thorough), even if they aren’t doing it intentionally.

Using tricks like the brown M&M’s clause to manufacture a diagnostic signal is a great idea, but you must remember that unless you can ensure that the signal will not be made public or travel between different contractual parties it has the potential to be gamed.

It reminded me of a concept I’ve been toying with for a while–free-rider businesses.  Mancur Olson discussed the problem of free-riders and the incentives that produced them in his classic The Logic of Collective Action.  Large groups have trouble creating public goods since each individual has an incentive to free ride on the efforts of others (since the good is non-excludable, meaning there isn’t a practical way to prevent specific individuals from benefiting from the public good once it’s produced).  In many instances there will be individuals or small groups that have a large enough incentive to create a particular good, thereby creating the opportunity for their work to be exploited by free-riders.  My thought was that there are some business that are free-riders, or at least benefit from this practice.  Free-rider businesses are those that develop a product or service that relies in some significant way on the physical resources or creative content produced by others without providing compensation to those third parties or having helped create the resource or content themselves.  In most cases, the third party resources serve as a critical input (sometimes even the main content) for a firm’s key product or service.  The most obvious example of this type of firm is Google.

The core of Google’s business is to mine, analyze, and organize the massive amount of content produced by third parties on the web. In this way they are dependent on others to create a critical input, an input that they don’t pay for (Ed. although, the recent deal with Twitter is an exception to the rule). Media mogul Rupert Murdoch has publicly characterized the practice of news aggregators and, in particular, Google’s use of this content as “theft”. One can easily scan the Internet and stumble on other examples.  Certainly the explosion of data and content that the Internet has facilitated creates an environment that is quite conducive for firms of this type.

The Airnergy product, on the other hand, would be an example of a free-riding device that relies on some kind of physical input or infrastructure. Airnergy is leveraging a preexisting infrastructure built and maintained by third parties who, to my knowledge, would not be compensated for the use of their WiFi networks. It’s as if the WiFi networks have become a massive public good that, after being established by a small group of actors that had a greater interest in their existence, can now be leveraged by all sorts of players free of charge. (I am still trying to figure out how this is not illegal.)

Noah and I tried to think if this was a trend unique to this time period or if there were historical analogs. We couldn’t come up with one at the time, but after some reflection I can think of a couple.

One would be the automobile industry. While manufacturers do not leverage some kind of input for their product they do rely on the physical infrastructure that makes car travel possible (i.e. roads, bridges, etc.). However, the difference here is that the physical infrastructure they rely on was established and is maintained by the government, who funds that work through taxation (which automakers must pay).

To be fair, the term has somewhat of a harsh connotation, and I certainly don’t mean it to. I’ve been struggling to come up with a term that more accurately reflects the relationship I’ve been thinking about. These businesses do provide something of value (to consumers, if not to the source of those inputs or the greater society at large). Additionally, these businesses are developing their own unique and innovative offerings that happen to leverage these inputs. For example, no one questions the innovative value of Google’s PageRank or the utility of LinkedIn or Facebook.

As I said, it was an idea I have been toying with and I am obviously still trying to work through the logic.  Would be curious to hear others thoughts on this.

I have always believed that there is a natural, organic rate at which a business should grow, and that if we expanded too fast, the wheels would come flying off.  Then I came across a quote from Geoffrey Moore, who is best known for his best-selling book Crossing the Chasm, which is about how businesses cross over from their initial niche markets to dominate larger markets. In another book, called Inside the Tornado, Moore writes about the great battle between Oracle and Ingres in the early 1980s. The winner of that battle is well known: Oracle now has a market cap of more than $100 billion, and I’ll bet you’ve never heard of Ingres.  Moore explains that “for pragmatist customers, the first freedom in a rapidly shifting market is order and security. That can only come from rallying around a clear market leader. Once the apparent leader-to-be emerges, pragmatists will support that company, virtually regardless of how arrogant, unresponsive, or overpriced it is.”

The reasons why breakneck growth may be preferable to steady, conservative growth can be summed up in two bullet points:

1. As noted above. network effects that attach to the market leader
2. Generation of revenue and capital that can be reinvested in the firm to improve systems, products, as well as increase advertising spend and bolster sales efforts

To be sure, these are logical arguments.  However, I think to what extent the logic holds is dependent on a few factors, such as product and/or industry.  Additionally, whether a high-growth strategy will be successful depends in large part on whether their is a plan at the outset that includes provisions for how to effectively manage the growth.

First, network effects do not obtain in every industry or for every product. In some cases, like software, social networking websites, etc, a product’s worth is highly dependent on how many people use it. Issues of compatibility, integration, and utility will push customers to select the service with the highest volume of users. This in turn makes the service more attractive to additional users, etc, etc. When you look at business models like Twitter or Facebook, they’ve absolutely pushed to expand membership (basically, their customer base) at a pace that at times has outpaced their infrastructure and ability to delivery crisp service. However, they’ve built up such a lead in terms of users and customers that the barrier to entry for additional social networking or micro-blogging sites is extremely high. But this isn’t necessarily the case for all other products or industries. Take breakfast cereal. Is there some advantage customers gain by purchasing the highest-selling cereal in the market as opposed to the cereal that meets their taste and nutritional requirements? To be sure, branding can provide customers with a shortcut for their buying decision, but if quality deteriorates their are no shortage of competing products for customers to flock to.

A better example might be strategy consulting. McKinsey is often mentioned as the Cadillac of strategy consulting. To be sure, they are a market leader and employ tens of thousands of consultants. However, what makes them so dominant is not simply that their client base encompass most of the Fortune 500 or that they have thousands of consultants–it’s the quality of their work. McKinsey didn’t become a market leader because they grew rapidly. They became a market leader because the quality of their work was unmatched. McKinsey has relied less on a network-effect than on a halo-effect–the perception that their work is far superior to their competitors and, as a result, other firms feel compelled to leverage their expertise as a result. (If anything, the latter may have caused the former.) In other words, working with McKinsey is a best-practice. As the saying goes, no one ever got fired for hiring McKinsey.

Hypothetical Returns from Growth

Second, given the advantages listed above a business should certainly push the envelope but only to the extent that it can manage its rapid growth. Think of the relationship between growth rate and the return from that growth as a parabolic function. Like the Laffer Curve, the idea is that while increase growth theoretically bestows all sorts of advantages on a firm there comes a point where the growth will actually bring negative returns. As Spolsky notes, rapid growth can strain a firm’s ability to delivery quality to its customers. However, I would argue the difference between the wheels falling off altogether and reaping the full rewards of the growth is whether the business built itself as a platform for growth. What I mean by this is that firms that will be successful pursuing a high-growth strategy will have likely been engineered to deal effectively with that growth.  Here are just a few provisions/topics I think would need to be addressed at the outset:

• developing a strategy for recruiting and retaining top talent during growth phase, as competitors will likely try to siphon off employees in an attempt to catch up (this would include pay, recognition, promotion requirements, etc).
• identifying tasks that will need to be automated sooner rather than later as volume crosses various thresholds
• building systems that are scalable and amenable to rapid expansion and integration with customer and partner systems
• identifying alternative ways of meeting manufacturing requirements, either through acquisition, partnership, or outsourcing

Admittedly this is easier said than done.  However, the choice isn’t all or nothing.  Companies that consciously pursue a breakneck growth strategy out of the gate should do what they can to support that growth with a forward-looking strategy, not one that only focuses on how to grow, but also with what to do once you grow.  As they progress, the strategy will obviously need to be revisited and revised, but I would think trying to think through the implications of growth ahead of time will make a big difference.