Competitive Advantage Summary

In this "Competitive Advantage Summary"you will learn:
1. What competitive strategy is;
2. What factors affect your organization’s competitive strategy.

Competitive Advantage Summary

Types of Strategy

A company conducts activities that incur costs in hopes of generating value. Competitive advantage and profit depend on these linked activities in the value chain. Close attention to the value chain enables managers to identify the products or services that customers want most and will pay a premium to obtain. Corporations create competitive advantage by choosing which activities to engage in, and how and where. Your strategy is how you configure those activities.

Companies that decide to compete on the basis of cost arrange their activities differently from firms that decide to compete on the basis of differentiation. This way of looking at a company’s competitive choices bridges what might otherwise be a gap between strategy and execution. Competitive advantage rests upon how well the strategy you choose to execute generates value. Companies can choose among three generic strategies to produce competitive advantage:

“Cost leadership” – A firm may seek to become the lowest cost competitor, which it can achieve several ways, depending on its industry. Economies of scale, technology, raw materials and other factors can provide cost advantages. To become the low-cost competitor, a firm must understand and use the cost advantages that matter most in its particular industry. If a firm can achieve the industry’s lowest costs and still charge average prices, it will perform better than the norm. However, it cannot pursue cost exclusively. Differentiation still matters. Customers must regard its products as being at least as good as those of its competitors. Otherwise, they will force further price cuts. Pursuing cost leadership is harder if your competition is striving for the same advantage. Cost warfare risks damaging a firm’s profitability and an industry’s structure.

“Differentiation” – A company may seek to distinguish itself from its rivals by offering superior value, and particular service or product attributes. The various kinds of differentiation vary from industry to industry. Differentiation costs money. To out- perform the industry average, a company that is trying to be different must be able to charge a premium price. The premium can’t just compensate for higher costs; it also has to achieve higher margins. This means that the differentiator’s total cost should be relatively close to its competitors’ total costs. The firm must cut expenses in areas that do not impair its differentiating traits, such as the way it does something that customers value but that its competitors are not doing. An industry generally has just one cost leader, but several firms can pursue differentiation by emphasizing distinct attributes.

“Focus” – A focused strategy targets specific industry segments, ignoring all others. The buyers in these segments must have individualistic requirements, so that the focus area becomes a genuine competitive advantage. The strategy of focusing works best when your competitors are not meeting a segment’s needs.
Firms become “stuck in the middle” when they fail to select and stick to a particular strategy. Laker Airways, for example, started out with a price-sensitive strategy. However, it lost its focus and ended up bankrupt. Generally speaking, adopting more than one of these three strategies is quite difficult, unless your company assigns different strategies to different business units. In some cases, however, cost and differentiating strategies may be compatible, such as when:

1. Competitors have not made clear strategic choices and are mired in trying to decide.


2. Market share and relationships heavily influence cost.


3. A firm innovates in a unique, powerful way.

Companies must take industry wide factors into consideration, not just to determine cost and differentiation strategies, but to assess the five elements that affect the money- making ability of any industry: its suppliers, buyers, substitutes, new entrants and existing competitors. A competitor that steps in to offer customers a substitute service or product is a particular threat. Structural changes in an industry can also undermine a firm’s competitive strategy. K-mart did well challenging Sears on cost, only to be challenged in turn by discounters with differentiation or focus strategies. To secure a superior position in its industry, a firm must be able to sustain its strategy, even in the face of substitutions and other threats. Cost leaders may lose their advantage if their competitors also cut costs. Differentiators may lose their edge if buyers stop caring about their specific difference. Focusers may find that their strategy is unsustainable if competitors with a broader aim target their niche. Each strategy places its own demands on an organization, and an organization’s individual culture can make a given strategy more or less suitable.

“The Value Chain”

The value chain consists of a firm’s activities, which fall into two categories: primary (i.e. production and sales) or support (i.e. human resources). Each category includes direct, indirect and quality assurance activities, some of which are linked to each other. Such linkages occur when one activity affects another, such as product design and cost of servicing. A firm may create competitive advantages by making the most of such links. A manufacturer’s value chain affects its customers’ value chains. In fact, that relationship is a source of differentiation. The scope of competition helps to determine the nature of the value chain. Scope may refer to segments served, vertical integration, geographic reach or industry presence. This has tremendous applicability. Even your household has a value chain.

Cost and Competitiveness

You must understand your value chain to analyze costs. First, your company has to define its value chain. Then it can determine the costs that are assignable to each activity. Ten factors drive cost:
1. Scale – Scale can cost money, (i.e., by driving up the cost of materials) or it may save money by lowering the costs per unit.
2. Learning – As firms learn new and better ways to work, costs may drop.
3. Capacity – How your company uses its available skills, budgets, materials,
workforce, logistical support and energies will increase or decrease costs.
4. Value chain linkages – Some activities may affect the cost of other activities.
5. Relationships – Relationships with other businesses or business units (such as shared service centers) affect costs.
6. Integration – Vertical integration, on one hand, or outsourcing, on the other, offer opportunities for cost reduction.
7. Timing – First movers may have a cost advantage in learning and in branding; late movers may benefit from the first mover’s R&D or may develop better technology.
8. Policies – Firms make policy decisions about services, delivery, target customers, human resources and many other areas. These decisions affect cost.
9. Site – A firm may choose to locate its production, administration or other activities in an area with taxation, real estate, labor or material cost advantages.
10. Institutions – Regulations, unions, taxes and other institutional factors drive costs.
The Differentiation Advantage
To differentiate, a firm must produce some unique value other than lower prices. Firms may drive differentiation through:
Policy – Corporate decisions about services, technology, materials, quality, products, human resources, information and other factors can create differentiation.
Value chain linkages – Activities at one point in the value chain can affect the performance of other activities, for example, you can make fast deliveries only if you process orders quickly.
Timing – The first-mover and late-mover advantages also apply to differentiation. Site – The location of retail outlets or other activity centers may create customer
value.
Relationships – Business units may share a service department or a sales force to meet a broad spectrum of customer needs.
Scale – Scale means different things to customers in different industries. The ability to rent or return a Hertz car anywhere in the U.S. is an advantage of scale. However, in some industries, massive scale may make it difficult to serve niche markets.
Institutions – Unions and other institutions may affect a firm’s ability to differentiate.

Technology

Technology can drive competitiveness. However, technology is not valuable in and of itself. It is important only so far as it is a source of competitive advantage in a company or of structural change in an industry. Technology matters to competitive advantage in that it affects cost or differentiation opportunities. It matters to industry structure when it diffuses throughout an industry and changes the way competitors deliver value. In such cases, technology may not be an advantage to any single firm, but it may lower costs or increase profits for all the firms in the industry. Note that widespread imitation may destabilize the industry’s structure.

Competitors

Having competitors – good ones or bad ones – can improve a company’s competitiveness. Good competitors may help to cushion a firm’s use of its capacity from volatile or seasonal demand. They may provide a standard against which a firm can differentiate. They may serve segments that the firm prefers not to serve, but that it might have to serve if the competitor didn’t exist. Competition might let a low-cost producer charge a little more, because those prices would still look low in comparison to the competitor. Good competitors may also foster strong industry structures, help markets develop and create barriers to entry for challengers. Firms with good competitors should not attack them and may be better off not attempting to take their market share. Attack only bad competitors.

Industry Segments

Industries have distinct groups with separate needs and priorities. Creating a focus- based strategy requires defining, analyzing and distinguishing the segments in your industry, including markets, customers and products. These segments create competitive advantage if they affect costs, differentiation or value chain configuration.

Substitutes and Synergies

Substitution is a force to reckon with in every industry. Firms need to be aware of

products or services that can give their customers similar values. For example, both trucks and trains can deliver goods, and a buyer’s value chain may accommodate either. Buyers will change from one alternative to another when the benefit of switching is higher than the cost of the move. Competitors may promote switching, while incumbents seek to prevent it. Their strategies will be each other’s mirror opposites.
The word “synergy” has fallen on hard times, chiefly because companies did not understand and use it properly. In fact, interrelationships among business units can help create value. Firms need to manage horizontally, and develop strategies that take advantage of the relationships among their business units. For example, companies can reduce costs by sharing such activities as design, logistics, procurement or marketing. Diversified firms face a challenge in coordinating the activities and strategies of various business units in a way that builds competitive advantage.

To define a horizontal strategy, firms need to map relationships both within and beyond their boundaries, and to understand how these interrelationships affect their competitive advantage. Complementary products, that is, those used in conjunction with the firm’s own products (like hardware and software), represent a type of interrelationship that merits particular attention. Some complementary products will matter greatly to strategy; others will not. Strategic approaches for dealing with complementary firms include controlling, bundling and cross-subsidizing. However, organizational obstacles may make it hard to reap the competitive advantage of interrelationships.

Uncertainty

To a greater or lesser extent, all companies must deal with uncertain environments. Scenario planning can be a powerful tool for identifying possible futures and selecting appropriate strategies. Whether your firm leans toward a defensive or offensive strategy, never launch an attack on the industry leader by imitating the leader’s own strategy.

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Knock 'Em Dead The Ultimate Job Search Guide Summary

Competency vs. Competition

Corporations are trimming their ranks. Technology is making new demands on companies and employees. Add up the trends, and you won’t be surprised to learn that professional job descriptions have become more complex than ever before. Hiring decisions reflect these new realities as individual competency becomes increasingly vital to corporations and as the competition for good jobs becomes more and more intense. For the job seeker, interviews are harder to get and harder to master than they were in the past. And, of course, each interview matters more.


Preparation

Your job hunting process begins long before your first interview. It starts when you discover, define and package your skills and strengths. Then you must do the work that will prepare you to sell yourself to a prospective employer.

Your resume should show your experience and demonstrate that you are a problem solver. But, since a resume is, of necessity, too general to relate your experience and qualifications to each specific job, create an executive briefing. This added information enables you to customize your resume efficiently for each specific job. It also helps the person interviewing you focus on the areas you want to emphasize. The executive briefing is a cover letter with a twist; an opening paragraph in which you write that you have attached your resume and that you are also addressing the company’s specific needs. This opener is followed by a two-column presentation featuring a list of the company’s requirements for the job on the left side of the page, and a list of your skills that match those needs on the right.

To find a job in today’s market, you must not limit yourself to just one or a few scouting methods. Don’t just network or look in the newspaper. Also include the following:

Electronic job hunting via the Internet.

Direct research.

Public and private employment agencies.

Newspapers that advertise corporate openings, even if they’re not for your type of position. If a company is hiring in one area, it may have a position for you in another.

Contact your references and use them as resources. College placement offices and alumni associations. Professional associations.
Job fairs.

Trade and business magazines.
Networking beyond what you may consider your usual network. A job hunter’s network of support groups and organizations.

Getting to Square One

While you’re waiting for someone to call and ask to interview you, become proactive and make calls to prospective employers. When you call a company representative, your goal is to get attention, generate interest, create a desire on his or her part to learn more about you and make the company representative take action, preferably by offering you an appointment.

Being strategic can help you get the right person on the phone. The higher up your target person is, the more accessible he or she usually is - if you can get past the gatekeepers who screen calls. When you are on the phone, be alert for certain questions that are buy signals from the company representative, signs that he or she is interested in you. Those include:

How much are you making and how much do you want? Do you have a college degree?
How much experience do you have?

Certain strategies will help you turn door-closing statements that indicate that the firm has no interest in you into open doors and opportunities. Since not every company will have an opening for you, use the contact you just made as a possible lead to jobs elsewhere. Ask some of these questions:

Who else in the company might need someone with my qualifications?

Does your company have any other divisions or subsidiaries that might need someone with my attributes?

Who do you know in the business community who might have a lead for me? Which are the most rapidly growing companies in the area?
Who should I speak to there?
Are you planning any expansion or new projects that might create an opening? Do you know anyone at the such-and-such company?

When do you anticipate change in your manpower needs?

Whether you call employers, or they call you, remember that interviewers use the telephone as a step in the process of weeding out applicants. Not every phone call you receive will include an invitation to an in-person interview. However, using specific strategies will increase your odds of getting a meeting.

If you don’t look the part at every in-person interview, don’t expect a job offer. Your appearance should be in keeping with the image and corporate culture of the company where you are applying. Traditional and conservative clothes are the safest, within this consideration. The best advice is to dress "for the position you want, not the one you have." Body language strategies will help you enhance your non-verbal interview communications. Don’t assume a submissive role. Treat the interviewer respectfully, but as an equal.

Tough Interview Questions

Your first step is to understand the interview process from the employer’s and interviewer’s perspective. Job applicants frequently overlook the need to understand how an interviewer thinks. The employer has five main ideas in mind during an interview:

The hire must be able to do the job and fit industry and corporate sensibilities.

The hire must have a high degree of willingness and must be the kind of person who is prepared to do whatever it takes to help the company, to go the extra mile.

The hire must be manageable and able to work with others.

The hire must behave professionally. The hire must be a problem solver.

These ideas are behind all of the questions an interviewer will ask during your interview. Interviewers are always looking for more than they seem to be when they ask a question. Here’s how to break the code:

What are the reasons for your success in this profession? The interviewer wants to know what makes you tick. Keep your answers short and to the point. Answer with a combination of your work experience and personal strengths.

Why do you want to work here? The interviewer is testing your knowledge of the company and assessing how your contribution can fit.

What aspects of your job do you consider most crucial? A wrong answer to this one can eliminate you from contention. This question is designed to determine your time management and prioritization skills, and to detect any inclination to avoid tasks.

What did you like/dislike about your last job? The interviewer is seeking incompatibilities.

How do you feel about your progress? This question also rates your self-esteem. Be positive, but don’t give the impression that you’ve already done your best work. You want to work for this company so you can make a significant contribution.

What would you like to be doing five years from now? Your safest answer to this one is to indicate that you want to be a professional and a team participant.

Tell me how you moved up through the organization? This answer tells the interviewer a lot about your personality, your goals, your past, your future and whether you still have enough ambition and drive.

Can you work under pressure? Don’t just give a simple ’yes’ or ’no’ answer. Take the opportunity to sell yourself. This is a favorite among interviewers because the answer helps them judge the approach you take to problem solving. Describe a difficult problem you’ve conquered. Give an example of the problem and your solution, making sure you include evidence of ample, positive analytical skills.

Were you ever dismissed from your job for a reason that seemed unjustified? This is just a sneaky way of asking, "Were you ever fired?" The interviewer is taking a sympathetic stance to get you to reveal all the inner details. Don’t.

Toward the end of an interview, the hiring manager will usually ask, "Do you have any questions?" This is an opportunity that gives you one more chance to make an impression and to learn more about the company and the work environment. To use it to best advantage, create your questions out of these points:

Why the job is open, who had it last, and what happened to him or her? Did the last person in this position get promoted or fired? How many people have held this position in the last couple of years? What happened to them?

Why did the interviewer join the company? How long has he or she been there? What is it about the company that keeps him or her there?

To whom would you report? Will you get the opportunity to meet that person? Where is the job located? What are the travel requirements, if any?

The Stress Interview

While every interview is stressful, the stress interview is one in which you will be asked negative or tricky questions designed to make you fearful. The only way to combat that fear is to be prepared, know what the interviewer is trying to do and anticipate where the interview will go next.

Interviewers ask difficult questions to test your poise, to see how you react under pressure and to measure your confidence. You will ruin your chances if you react to these queries as if they are insults. They are challenges and, therefore, opportunities. In the past, stress interviews were used only for high level executives. Now, they are widely used at all levels.

Turn stress questions to your advantage or, if necessary, tap dance around them. One of the most frequently asked stress interview questions is: "What is your greatest weakness?" The best response is to focus on some minor part of the job you want, note that it is unfamiliar to you and explain that you are sure you will learn it quickly. This will change an apparent weakness into an easily resolved issue of personal development. Your best answer will indicate that your weakness turns out to be a positive attribute, thus transforming the stress question into another opportunity to sell yourself.

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Green to Gold Summary

In this Green to Gold Summary you will learn:

1. Why sustainability is a new source of competitive advantage;
2. How to use eight realistic strategies for going green;
3. What mistakes to avoid in improving your green practices; and
4. How your company can jumpstart its sustainability program.

Green to Gold Summary

Sony's Nightmare Before Christmas

Christmas time usually brings visions of carols, candy canes and sugarplums. But as Christmas approached in 2001, Sony executives instead had visions of toxic cadmium dancing in their heads. The Netherlands had impounded more than a million PlayStations destined for Santa's sleigh. A cable on the machines, it turned out, contained too much of the element cadmium, in contravention of Dutch environmental regulations. Sony fixed the problem, but it wasn't cheap. $130 million later, Sony found the source of the tainted cables after inspecting 6,000 factories. This crisis led to a new – and better – supply chain system. From a small bit of cadmium in some PlayStation parts, Sony learned a valuable lesson: Smart management of environmental issues is about more than hedging against downside risk. Other companies, including GE, Wal-Mart and Goldman Sachs have learned the same lesson. As Wal-Mart CEO Lee Scott sees it, environmental initiatives "will make us a more competitive and innovative company." Environmental responsibility needn't be a fetter wrapped around your ankle. Instead, make it your comparative advantage. Let your competition be fettered.

Causes of the "Green Wave"

Companies are facing, and will continue to face, two kinds of pressure to go green. The first comes from the physical world and the second comes from your organization's stakeholders. Nature is an asset. The physical world makes economic life possible. While different businesses use different natural resources – oil companies need oil, frozen fish stick companies need fish – almost all businesses will feel the effects of ten major environmental problems in the short or medium term: climate change, changing energy sources, water quality and quantity, biodiversity, toxic substances and chemicals, air pollution, waste management, ozone depletion, ocean health and deforestation. Make sure you know which of these issues will affect your business.

Strong scientific evidence proves the seriousness of each of these problems, but even if you don't believe the data, remember that many influential people do. Environmental issues engender strong feelings in various powerful, vocal stakeholders who are pushing organizations to catch the "Green Wave." Though you may hear from others, most stakeholders fall into five large groups:

1. "Rulemakers and watchdogs" – Governments and nongovernmental organizations.


2. "Idea generators and opinion leaders" – Traditional media, academics and think tanks.


3. "Business partners and competitors" – Industry associations and your suppliers or buyers and your peers.


4. "Consumers and community" – Customers, green activists and local communities.


5. "Investors and risk assessors" – Insurers, banks and shareholders.

The Green Playbook

These pressures create opportunities to compete. How? By running green "plays" that are working pretty well for best-in-class companies, such as GE, Wal-Mart, Shell, Toyota, DuPont and 3M. These eight plays hit either the downside or the upside. Downside plays cut costs (such as waste disposal fees) and decrease the risks of regulatory fines. The upside plays boost revenue by bringing new green products to market, and enhancing brand value and other intangibles. Some bring predictable, short-term benefits; others are more speculative and offer long-term gains. But they all work and if you aren't running them, your competitors probably are.

The first play is improving your use of resources. Often, this is "low-hanging fruit" you can pick without strain. Staples re-engineered its lighting and HVAC systems in 1,500 stores and saved $6 million. The second play is cutting your environmental costs, such as pollution treatment or energy use. The third play is simply removing extra links in your value chain. IKEA's "flat packaging" means it can carry more packages per truck, reducing its fuel costs up to 15% per package. The fourth play is preventing an environmental problem before it can occur. How can you see the unseen? Look at your operations and those of others in your industry. Check your suppliers, distributors and end-users. Stay ahead of regulations and laws – or help draft them yourself so that you can comply (and your competitors can't).

The fifth play is to make products that environmentally conscious customers want (but don't neglect the more "mundane" aspects of your product – it still has to work for the customer and earn profits for you, as well as being green). The sixth play is to show off your green bona fides, thus increasing public approval and brand loyalty. Display "eco- labels" on your products (Energy Star in the U.S., the European Eco-Label and others in the EU). The seventh play can be captured in two words: "Toyota Prius." To use it, innovate; bet on next generation, environment-friendly products – even if they don't fit your existing product categories. Who'd heard of "hybrid" before the Prius? The eighth play puts a "green halo" over your company. Look at what BP is doing with its "Beyond Petroleum" initiative or at GE's "Ecomagination" campaign. Even when BP suffered a PR disaster at a Texas refinery, its image remained largely untainted. But with any of these plays, be sure you can walk the walk if you talk the talk. Ford took a drubbing after Bill Ford committed to going green while his company continued to make Exxon Valdez-sized SUVs.

Running the Plays

Look at your business through a green-tinted lens. This means seeing the forest, not just the trees. Think about the opportunities up and down your value chain. Consider longer- term, more speculative payoffs as well as short-term, certain and tangible payoffs. Start green initiatives at the top of your organization. Senior management must be committed. Inspire people with big challenges. Accept that "feelings are facts" to the public. Remember when Shell planned to sink the Brent Spar oil rig in the North Sea, and Greenpeace raised a hue and cry? Sinking the rig would have been environmentally safe. But that didn't matter: Greenpeace won the PR battle and only later admitted that it got the facts wrong. Inspire your people by doing the right thing. Placards inside IKEA headquarters read, "Low prices – but not at any price."

What gets measured gets done, so collect data and measure your performance against clear metrics. Keep your ear to the ground with an AUDIO analysis. Go through the ten big environmental problems (climate change, biodiversity, etc.) and note how each problem applies (A) to your business. Then look upstream (U) and downstream (D) in your value chain. Spot the issues (I) you should guard against, such as liability, increased costs or scarcity. Then seek opportunities (O) in new products, increased efficiency or links with stakeholders (say, the World Wildlife Fund).

After your AUDIO audit, conduct a Life Cycle Assessment (LCA). Chart your product from cradle to grave. Where do your raw materials come from? Do you face extraction issues? Look at every step. Where do your products go when they are no longer in use? When a customer tosses your product in the landfill, does it leach toxic chemicals? As you run these analyses, look at both absolute and relative numbers, and draw data from throughout your company and your value chain. Get creative. For instance, consider partnering with a government agency, NGO or stakeholder group. Let it measure for you. It may have already discovered many of your environmental issues. Be careful to pick the right partner: you want it to broadcast your successes, not just your failures.

Traditionally, green process re-engineering focuses on the three Rs: Reduce, Reuse and Recycle. Now, consider two more: Redesign and Reimagine. Try "designing for the

environment" (DfE). Rohner Textil makes a carpet so eco-friendly scraps of it can be used as mulch. Investigate "industrial symbioses." Can you sell your waste to another company for use in its product? Try building or leasing green buildings, as Bank of America is doing. Attempt to get your supply chain partners to go green with you. Audit your suppliers and buyers, and share best practices. Embed re-engineering and reimagining in your company's culture with "stretch goals" and big, inspiring environmental bets. Build green thinking into strategic planning. Create incentives for staffers to go green (performance goals, bonuses, awards) and tell compelling stories.

Avoiding Fumbles

Ford dropped the ball when it gave $25 million to create Conservation International's Center for Environmental Leadership in Business. That NGO focuses on tropical biodiversity, an issue that has little to do with Ford's business of making cars and trucks that spew carbon. Yes, biodiversity is good, but why didn't Ford do something closer to its work, like create a high-quality, Toyota-esque hybrid? Ford saw the trees but missed the forest. Other mistakes to avoid include:

"Misunderstanding the market" – Unilever tried to save cod fisheries by substituting a fish called hoki in British fish sticks. Great idea, but the UK is "Cod's Country" and customers found hoki heretical.

"Expecting a price premium" – Few green products can sell for an extra amount, though the Prius does.

"Misunderstanding customers" – McDonalds asks Swedish customers to sort their garbage and they do. When it tried the same thing in the U.S., customers balked.

"Middle-management squeeze" – Don't give middle managers objectives they can't accomplish. Get incentives right so managers can hit performance goals by being green.

"Silo thinking" – Look at the big picture. If you install a scrubber, you have to dispose of the sludge it collects. Instead, maybe seek an energy source that doesn't need scrubbing.

"Eco-isolation" – Integrate green thinking into your company. Don't create an isolated "green" team that will be ignored.

"Claims outpacing actions" – Walk the talk.

"Surprises" – Start small to see what will happen and forecast cautiously.

"Making the perfect the enemy of the good" – Accept second-best when best is unattainable. Expect trade-offs.

"Inertia" – Communicate a vision, then break it into smaller, actionable components to achieve incremental gains. Don't get stuck.

"Ignoring stakeholders" – Get buy-in all along the value chain.

"Failing to tell the story" – Tell your story in your company and externally. Letting staffers be surprised by public stories of your green initiatives undermines morale.

Getting into the Game

Now that you know what to avoid, get started. To make your task more manageable, map out what you'll do in the short term (within six months), the medium term (six to 18 months) and the long term (18 or more months from now). In the short term, use AUDIO and LCA analysis on the "big ten" environmental problems. Next, map the five categories of stakeholders along two dimensions: how powerful and influential they are, and how much attention you are giving them. Going in, pay the most attention to powerful, influential stakeholders, and the least to weak ones. Figure out your strengths and weaknesses, and then prioritize initiatives that play to your strengths. Start small. Often, you want to begin with a pilot or test project, kicked off with a compelling statement from a charismatic executive.

In the medium term, set up tracking and data gathering. Consider "dashboard" tools that are continuously updated with environmental issue data (such as GE's internal PowerSuite, a complex system for "tracking environmental results"). Create internal ownership of green issues by offering bonuses and including green metrics in performance reviews. Rev up your external communications. Tell your story to the press, NGOs and your internal audience. Conduct scenario planning and "blue sky thinking" about future risks.

In the long term, get your supply chain auditing system running smoothly. Consider new product categories and markets, and start engaging deeply with external stakeholders. Determine which shareholders you can collaborate with long term, and which ones you must defend against. Determine who you should monitor and who can sustain only a moderately deep connection (but not full collaboration). Do these things and you'll not only be green, you'll be golden.

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Management Summary

In this Management Summary you will learn

1. Why management is critical to modern enterprises,
2. How the discipline evolved and
3. How to organize the managerial function.

Modern Enterprises Need Managers


The rise of management as an organizational discipline arguably is the most important business development of the 20th century. Management practices came into demand when labor transitioned from manual work to “knowledge” work. In the early 1900s, 90% of those employed anywhere in the world worked at blue-collar or domestic service jobs. As economies and businesses grew, however, the need for skilled professionals grew as well. “Knowledge workers” carry their capabilities with them; they “own their means of production.” And as companies sought to compete on a basis other than cost, the quality and efficiency of their managers become the “competitive advantage” that could set one firm apart from the others.

Management Summary

One telling case history illustrates the critical role that managers play in a big organization. Henry Ford started the Ford Motor Company in 1905. Fifteen years later, Ford was the pre-eminent US automobile manufacturer. Yet by 1927, it had fallen to a distant third in US car manufacturing, a position it clung to for the next two decades. Why did it plunge so far so fast? Henry Ford did not believe in management; his corporate concept posited an all-powerful “owner-entrepreneur” assisted by “helpers.” In fact, he immediately would sack any employee who acted like a manager or who made an independent decision. Henry issued orders and expected compliance. His traditional command-and-control approach turned his firm into a failing enterprise.

While Henry Ford ruled the auto industry, General Motors – a loose conglomeration of small car companies – ran a weak second to his winning firm. GM had no dealer organization and no one outstanding automobile model. But Alfred P. Sloan Jr., its president, believed strongly in management. On taking command of GM at the start of the 1920s, Sloan quickly formed a team of empowered managers. Within five years, GM toppled Ford to become the leading US car maker. In 1946, Henry’s grandson, Henry Ford II – understanding the competitive advantages management practices conferred – revamped Ford and led it back to the top to compete with GM.

Management’s History

The discipline of management came into its own with the development of universal banks in Europe and the transcontinental railroad in North America during the late 1800s. These huge enterprises changed the business dynamic from that of a centrally located, single owner-entrepreneur to a multiple-shareholder, internationally dispersed organization. In the 1880s, industrial engineer Frederick Winslow Taylor became the first to measure American worker productivity. Around the same time, Frenchman Henri Fayol helped develop the concept of “organizational structure.” Before the outbreak of World War I, German writers theorized about large industrial organization’s impact on society; this new field of study, known as Betriebswissenschaft (“the science of enterprise”), spawned the classic management sciences – “managerial accounting, operations research [and] decision theory.” Contemporaneously, in the US, Hugo Muensterberg became the first to relate psychology and the behavioral sciences to the practice of management in large organizations.

At the end of World War I, Herbert Hoover, then just an American engineer, and Thomas G. Masaryk, a Czech historian, relied on management principles to arrange aid to war- ravaged Europe. These two statesmen, destined for public service later as, respectively, the president of the US and the first president of the Czech Republic, promoted management as an organizational tool for rebuilding Europe after the war. The post-World War II Marshall Plan bore the hallmarks of their ideas. The leaders of growing corporations like the DuPont Co., Unilever and Sears, Roebuck & Co. first applied management methods such as objective setting and strategy planning. “Big business” began defining the concept of decentralized management.

Management’s Primary Goal: Make People Productive

Management is essential in all complex organizations that rely on people to make indispensable contributions. Managers direct workers to ensure that all their actions directly support the organization’s purposes. Generally, managers:

Contribute to forming a mission for the organization and implement actions to achieve it.

Guide employees to attain corporate objectives in a productive manner.

Help the organization meet its “social responsibilities.” For businesses, this means responding to customer demands; for service organizations like hospitals and schools, it means delivering healthcare and education.

Five primary functions, which enable “the integration of resources into a viable, growing organism,” delineate the role of management. A manager:

1. “Sets objectives” and establishes the goals that employees need to reach.
2. “Organizes” tasks, coordinates their allocation and arranges the right roles for the right people.
3. “Motivates and communicates” in order to mold staffers into cooperative teams and to convey information continually up, down and around the organization.
4. “Establishes targets and yardsticks” that measure results and clarify outcomes to ensure that the firm is moving in the right direction.
5. “Develops people” through finding, training and nurturing employees, a firm’s primary resource.

Managers make informed decisions that keep everyone moving smartly ahead in the right direction. They should be superb communicators who explain what needs to be done and why. They plan, organize and monitor budgets to ensure that their organization spends its resources wisely. They monitor and share internal information so that everyone in the firm operates with the most accurate data. They secure external data that the company needs to stay current.

Defining and Designing Managers

Enterprises need to develop savvy, expert managers. To define a manager’s job, be sure the title denotes a specific function, such as market research manager. Design the role around the task, not the personality who will fill it. A job description should set out the exact contributions that the manager and his or her group are supposed to make to the organization.

Don’t base a manager’s “span of control” on the number of individuals managed, but rather on the “span of managerial relationships.” For example, relatively few executives may report directly to a CEO, but those executives work together to run the company, representing many relationships for which the CEO is responsible. Conversely, a Walmart regional supervisor normally oversees hundreds of store managers as direct reports; each of those individuals performs the same function but none of them interact with one another, allowing the regional manager to handle a greater number of subordinates.

A management job exists in a network of relationships – “upward, downward and sideways” – so, appoint managers who can relate to their superiors, subordinates and peers equally well. In addition, establish levels of authority according to the job’s parameters; unless explicitly prohibited, managers should assume responsibility for decisions they make in executing the company’s mission. Use regular performance appraisals to determine management capabilities. Make sure managers play a direct role in establishing their objectives and performance standards.


The way top executives organize managerial roles helps determine how effective people

will be in them. If you are designing management jobs, avoid these common mistakes:


“The too-small job” – Managers should grow in their roles, or their performance will suffer. Better to assign a job that is “too big” than one that is too small.

“The nonjob” – Beware of “assistant to” roles. A job with no clear objectives, duties and accountability is corrosive both to the individual in it and to others in the company.

“Failing to balance managing and working” – Managing is not a full-time effort, so managers should be proficient in their own careers. The ideal manager is a “working boss” rather than just a “coordinator” of others’ work.

“Poor job design” – Managers should be able to fulfill their functions without too many meetings, too much coordination or too much travel.

“Titles as rewards” – Don’t inflate job titles as compensation; unearned ranks are “empty gestures” that demean both the organization and its managers.

“The widow-maker job” – Some jobs crush the best managers, usually because the roles are inherently flawed.

Decisions, Decisions

Decision making is a manager’s stock-in-trade. To reach good judgments, always check the validity of the information you have. Then follow seven rules:

1. Make sure it is imperative to make a decision. Issuing too many unnecessary pronouncements misuses resources and can undermine your credibility.
2. Understand what type of problem you face: Is it “generic” or “unique”? Can it be solved under usual operating norms, or will it require wholly new ways of thinking?
3. Delineate the issue by asking: “What is this all about?” “What is pertinent here?” “What is key to the situation?”
4. Compromise, if necessary, to get the “right” decision in place.
5. Secure “buy-in” from all the constituents who will have to implement your decision.
6. Ensure that actions follow decisions. Spell out what needs to be done, and assign responsibility accordingly.
7. Monitor, in person, the actual result of your decision. Get the necessary feedback to test the validity of your choice.

Manager: Manage Thyself

Today knowledge workers dominate many spheres of business and work within every organization. These expert specialists are independent-minded individuals who generally are responsible for their own productivity. Those who manage knowledge workers are, in effect, knowledge workers themselves and thus are responsible for assessing their own capabilities – their strengths, their “work style,” their values and their contributions.

Effective managers also know that “managing the boss” is a critical component of success. To make the most of this simple but important opportunity and responsibility, take these seven steps:

1. Put together a “boss list” that records, by name or function, those to whom you report. It also should show those who have input into your work, who evaluate you or your team, and who you rely on to get your work done.
2. Ask each person on your boss list, annually, what you do that “helps and hampers” their work and request that they do the same for you. Reflect on their responses and respond promptly with ways to improve.
3. “Enable your bosses to perform” by understanding how they manage. For example, consider whether your manager prefers scheduled or ad hoc reports, whether you should present them verbally or in writing, and what time of day works best.
4. “Play to the bosses’ strengths” and downplay their weaknesses to establish trust.
5. Keep your manager apprised of what you and your team are doing, not just for approval but to build his or her confidence in you.
6. Make sure your boss isn’t caught by surprise. Keep him or her informed.
7. “Never underrate a boss” – it may cost you your job.

Buy Management Summary by Peter F Drucker

The Black Swan Summary

In this "The Black Swan Summary" you will learn

1. Why highly significant yet unpredictable events, called "black swans," are underappreciated;
2. Why people continually see misleading patterns in data; and
3. How to embrace randomness and come to terms with black swans.

When All Swans Were White

The Black Swan Summary

Before 1697, teachers confidently taught European schoolchildren that all swans were white. They had little reason to think otherwise, since every swan ever examined had the same snowy plumage. But then Dutch explorer Willem de Vlamingh landed in Australia. Among the many unlikely creatures down under – odd, hopping marsupials called kangaroos, furry duck-billed platypuses, teddy bear-like koalas – Vlamingh found dark feathered birds that looked remarkably like swans. Black swans? Indeed. Once observed, they were as unmistakable as they had been unimaginable, and they forced Europeans to revise forever their concept of "swan." In time, black swans came to seem ordinary.

This pattern is common. Just because you haven’t seen a black swan, doesn't mean that there are no black swans. Unlikely events seem impossible when they lie in the unknown or in the future. But after they happen, people assimilate them into their conception of the world. The extraordinary becomes ordinary, and "experts" such as policy pundits and market prognosticators kick themselves because they didn't predict the (now seemingly obvious) occurrence of the (then) unlikely event. Think of the advent of World Wars I and II, the terrorist attacks of 9/11, the popping of the 1990s Internet stock bubble, or world- changing inventions like the internal combustion engine, the personal computer and the Internet. Cultural fads like the Harry Potter books are the same. These events and inventions came out of nowhere, yet in hindsight they seem almost inevitable. Why?

The human mind is wonderful at simplifying the onslaught of today's "booming, buzzing confusion" of data. This makes perfect sense: After all, the brain is the product of evolution, which works with what it has, and so it has not crafted some new, ideal cognitive mechanism. The human brain is a marvel, but it is built for living in hunter-gatherer groups on the African savannah 200,000 years ago. Then, it just needed to be good enough to allow humans to survive until they reached reproductive age. Simplifications, mental schemas, heuristics, biases, self-deception – these are not "bugs" in the cognitive system, but useful features that allow the human mind to concentrate on the task at hand and not get overwhelmed by a literally infinite amount of data. But human simplifying mechanisms are not without their costs. Take stories, for example.

The Narrative Fallacy

Stories help people remember and make sense of the past. Think of a typical business magazine profile of a successful businessman. The story begins in the present, after he has become rich beyond his wildest dreams. The story then cuts back to his humble beginnings. He started with nothing and wanted to get rich (in terms of story structure, his "dramatic need"). He faced obstacle after obstacle (perhaps he had a rival – the "antagonist"). But he made shrewd decisions and flouted the wisdom of the Cassandras who counseled caution ("Idiots!"). As success built on success, he amassed a fortune. He retired early, married a model and now has brilliant children who play Chopin blindfolded and will all attend Ivy League colleges. His virtues will be extolled in a B-School case study. Wide-eyed M.B.A. students will sit rapt at his feet when he visits their schools on a lecture tour promoting his latest book. He is a superman, an inspiration.

Now consider an alternative hypothesis: He got lucky. His putative "virtues" had nothing to do with his success. He is, essentially, a lottery winner. The public looks at his life and concocts a story about how brilliant he was, when, in fact, he was merely at the right place at the right time. This is the "ludic fallacy" (ludus means game in Latin): People underestimate luck in life – though they ironically overestimate it in certain games of "chance." Even the businessman himself falls victim to flawed thinking through the self- sampling bias. He looks at himself, a sample of one, and draws a sweeping conclusion, such as, "If I can do it, anyone can!" Notice that the same reasoning would apply had he merely bought a winning lottery ticket. "I'm a genius for picking 3293927! Those long odds didn't mean a darn thing. I mean, after all, I won didn't I!"

Not all success is luck. In some professions, skill matters (for example, if you are a dentist), but luck dominates in others. In the case of the inspiring businessman, consider his population cohort. Where are all the similarly situated people who started out like him and have the same attributes? Are they also rich? Or homeless? Usually you can't find this sort of "silent" disconfirming evidence. Artistic success provides a perfect illustration. While Balzac is famous now, perhaps countless other equally talented writers were producing comparable work at the same time. Yet their writings are lost to posterity because they did not succeed. Their "failure" hides the evidence that would undercut Balzac's "success" as a uniquely great writer. The evidence is silent, lost in the graveyard of history.

The mind uses many more simplifying schemas that can lead to error. Once people have theories, they seek confirming evidence; this is called "confirmation bias." They fall victim to "epistemic arrogance," becoming overconfident about their ideas and failing to account for randomness. To make their theories work, people "smooth out" the "jumps" in a time series or historical sequence, looking for and finding patterns that are not there. Their conceptual categories will limit what they see; this is called "tunneling." They turn to "experts" for help, but often these expert opinions are no better – and often they are worse – than the "insights" gained from flipping a coin or hiring a trained chimp to throw darts at the stock listings. Worst of all, people steadily fail to consider "black swans," the highly consequential rare events that drive history.

"Mediocristan" or "Extremistan?"

So the human mind tends to smooth away the rough features of reality. Does this matter? It can matter, and a lot, depending on whether you're in "Mediocristan" or "Extremistan." Where are these strange places? Nowhere. They are actually memorable metaphors for remembering two wildly different classes of natural phenomena. Mediocristan refers to phenomena you could describe with standard statistical concepts, like the Gaussian distribution, known as the "bell curve." Extremistan refers to phenomena where a single, curve-distorting event or person can radically skew the distribution. Imagine citing Bill Gates in a comparison of executive incomes.

To understand the difference, think about human height versus movie ticket sales. While a sample of human beings may contain some very tall people (perhaps someone eight feet tall) and some very short people (perhaps someone two feet tall), you wouldn't find anyone 3,000 feet tall or an inch tall. Nature limits the heights in the sample. Now consider movie ticket sales. One hit movie can have sales that exceed the median value by such a radical extent that modeling the sample with a Gaussian curve is misleading – thereby rendering the notion of “median value” meaningless. You'd be better off using a different kind of curve for such data, for instance, the "power law" curve from the work of Vilfredo Pareto (of 80/20 "law" fame). In a power law-modeled distribution, extreme events are not treated as outliers. In fact, they determine the shape of the curve.

Social phenomena are impossible to model with the Gaussian normal distribution because these phenomena exhibit "social contagion," that is, abundant feedback loops. For instance, one reason you want to see a hit movie is that everyone else has seen it and is talking about it. It becomes a cultural event that you don't want to miss. And neither does anyone else. In these situations, the "rich get richer": The hit film gets increasingly popular because of its popularity until some arbitrarily large number of people have seen it. And speaking of rich, wealth follows this pattern, too. The extremely wealthy are not just a little bit wealthier than normal rich people; they are so much wealthier that they skew the distribution. If you and Bill Gates share a cab, the average wealth in the cab can be north of $25 billion dollars. But the distribution is not bell shaped. When this happens, odds are you're no longer in Kansas. You're in Extremistan.

Phony Forecasting (or Nerds and Herds)

Extremistan might not be so bad if you could predict when outliers would occur and what their magnitude might be. But no one can do this precisely. Consider hit movies. Screenwriter William Goldman is famous for describing the "secret" of Hollywood hits: Nobody can predict one. Similarly, no one knew whether a book by a mother on welfare about a boy magician with an odd birthmark would flop or make the author a billionaire.

Stock prices are the same way. Anyone who claims to be able to predict the price of a stock or commodity years in the future is a charlatan. Yet the magazines are filled with the latest "insider" advice about what the market will do. Ditto for technology. Do you know what the "next big thing" will be? No. No one does. Prognosticators generally miss the big important events – the black swans that impel history.

Chalk these errors up to "nerds and herds." Nerds are people who can only think in terms of the tools they have been taught to use. When all you have is a hammer, everything becomes a nail. If all you have is Gaussian curves, sigma (standard deviation), and mild, ordinary randomness, you'll see bell curves everywhere and will explain away disconfirming data as "outliers," "noise" or "exogenous shocks." (The proliferation of Excel spreadsheets allowing every user to fit a regression line to any messy series of data doesn't help.) Further, humans follow the herd and look to "experts" for guidance. Yet, some domains can't have experts because the phenomena the expert is supposed to know are inherently and wildly random. Of course, this discomforting thought requires a palliative, which is to think that the world is much more orderly and uniform than it often is. This soothing belief usually serves people well. Then comes a stock market drop or 9/11 (on the downside), or Star Wars and the Internet (on the upside), and the curve is shot.

Befriending Black Swans

Even given these grim facts, the world need not become, in Hamlet's words, "a sterile promontory," nor need a beautiful sky appear "a foul and pestilent congregation of vapors." You can tame, if not befriend, the black swan by cultivating some "epistemic virtues:"

Keep your eyes open for black swans – Look around and realize when you are in Extremistan rather than Mediocristan. Social contagion and rich-get-richer phenomena are clues that you've just gotten off the bus in Extremistan.

Beliefs are "sticky," but don't get glued to them – Revise your beliefs when confronted with contrary evidence. Dare to say, "I don't know," "I was wrong" or "It didn't work."

Know where you can be a fool and where you can't – Are you trying to predict what sort of birthday cake your daughter wants? Or the price of oil in 17 years after investing your life's savings in oil futures? You can't help being foolish – no one can. But sometimes foolishness is dangerous, and sometimes it is benign.

Know that in many cases, you cannot know – Think outside your usual, customary conceptual categories. Eliminate alternatives that you know are wrong rather than always trying to find out what is right.

As a forecasting period lengthens, prediction errors grow exponentially – Suspend judgment where evidence is lacking and be wary of overly precise predictions. "Fuzzy" thinking can be more useful. Often you should focus only on consequences, not overly precise probabilities.

Expose yourself to "positive black swans" – And, at the same time, hedge against negative ones. "Bet pennies to win dollars." Look for asymmetries where favorable consequences are greater than unfavorable ones. Maximize the possibilities of serendipity by, say, living in a city, and having a wide circle of diverse friends and business associates.

Look for the nonobvious – Seek out disconfirming evidence for pet theories. Think, "What event would refute this theory?" rather than just stacking up confirming evidence for the sake of consistency, and turning out any evidence that contradicts your notion. In other words: Amassing confirming evidence doesn’t prove a theory or a mental model.

Avoid dogmatism – "De-narrate" the past and remember that stories mislead. That's the whole point: They are psychological armor against the "slings and arrows of outrageous fortune." Think for yourself. Avoid nerds and herds.

This universe, this planet and your life were highly unlikely. But they happened. Enjoy your good fortune and remember that you are a black swan.

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The Evolution of Cooperation Summary

In the The Evolution of Cooperation you will learn:

1. What is game theory’s Prisoner’s Dilemma


2. How it proves that a “Tit-for-Tat” strategy is effective;


3. Why an even more forgiving strategy could achieve even better results;


4. How this applies to the concept of cooperation; and


5. How a spirit of cooperation can prevail even in unpromising situations.

The Evolution of Cooperation Summary

The Prisoner’s Dilemma

Consider cooperation in a few different forms. If you are in a long-term relationship with another person, does it make the most sense in terms of your personal goals to cooperate with that individual? Do you gain any advantage by showing kindness to someone who never reciprocates? What could your business gain by working with another company if it was soon going to go bankrupt? How should your country react to an overt hostile action by an enemy nation? Can your country deal with – or manipulate – this enemy so that it will cooperate? A helpful way to portray and answer such questions is to use an iterated (repeating) “Prisoner’s Dilemma.”

The original conundrum is: The police capture two criminals and separately offer them a deal. The men are not allowed to confer. If one informs against the other and confesses, he will be released from prison, and the other will get a 10-year prison term. If they both remain silent, they each will get a minor, six-month term. If both inform against the other, they each get a two-year term. The dilemma is, if both inform, they each gain less than if they remain silent. In game theory, a Prisoner’s Dilemma again provides three possible outcomes between two players: 1) Both players benefit modestly when they cooperate with each other; 2) One betrays the other and benefits handsomely if, at the same time, the other player is trying to cooperate (that player gains nothing); and 3) Both players receive minimal benefits if they betray each other simultaneously.

The Prisoner’s Dilemma always has two players. Both have two distinct choices: cooperate or betray (that is, defect or inform against the other player). Each player chooses to cooperate or not without knowing what the other player will do. Defection always pays better than cooperation. The dilemma? If both players defect, they each gain less than if they both decide to cooperate.

Picturing the Prisoner’s Dilemma

To visualize the Prisoner’s Dilemma graphically, think of a simple matrix, like a box, with two rows and two columns resulting in a square cut vertically and horizontally to form four adjoining boxes. One player selects a horizontal row, either betraying or cooperating. The choices are symbolized by letters: “R” for reward, “T” for temptation to defect, “S” for sucker’s payoff and “P” for punishment for mutual defection. The other player chooses a vertical column. Together, these choices provide one of four separate outcomes as shown in each box of the matrix:

• Box 1: Cooperation column and cooperation row – When both players cooperate, each receives R, the reward for mutual cooperation, worth three points.

• Box 2: Defection column and cooperation row – When the column player chooses to defect and the row player chooses to cooperate, the defecting column player wins. This player receives T, for yielding to temptation and defecting. This is worth five points. The row player earns S, the sucker’s payoff, worth zero points.

• Box 3: Cooperation column and defection row – When the column player chooses to cooperate and the row player chooses to defect, the winner is the defecting player. This player receives T, worth five points. The column player earns S, worth zero points.

• Box 4: Defection column and defection row – If both players defect, each receives P, the punishment for mutual defection. This is worth one point each.

As the breakdown shows, the game assigns points based on each prisoner’s specific choices. A set number of points accompany each choice, that is, R (3), S (0), T (5) and P (1). Considering these payoffs, if you are the horizontal row player, defecting is always to your advantage, no matter what choice you think the other player plans to make. Thus, defection, not cooperation, is your sensible, strategic choice. This logic also applies to the other player, who should always choose to defect, too. Thus, it is always logical for both you and your opponent to defect. However, in such a scenario (Box 4), you and your opponent receive only one point each. This is a smaller payoff than if you both cooperate, which earns three points each (Box 1). What a conundrum! Rational choices lead to poorer individual payoffs. Thus the dilemma.

There is no way around this fix. If you and your opponent take turns defecting, the outcome will, nevertheless, always be worse than if mutual cooperation prevails. The three-point reward for mutual cooperation is greater than the average (two-and-a-half points) each player gets if one earns five points for defecting and the other earns zero points for being a sucker. When the Prisoner’s Dilemma is played only once, both players logically choose defection, and win one point each, a less successful payoff than if both had cooperated. If two people play the game a finite number of times, defection remains a logical, rational choice for both. Each player assumes defection on the other player’s part based on the last move and, by extension, the next to the last move. Thus, cooperation makes no sense. In such a scenario, it just isn’t the logical choice.

The Emergence of Cooperation

This logic changes if the game is played repeatedly and indefinitely. In that case, a cooperative strategy can emerge if the individual players are not certain when the game (that is, the interaction) will reach its last move. With that unknown, cooperation may make more sense than defection. This indefinite scenario is more realistic and lifelike than one in which two individuals (or groups or businesses or nations) precisely plan a finite number of interactions. In an indefinite scenario, cooperation becomes possible because both players understand that they may be interacting with one another again and again. Choices that individual players make now can influence subsequent choices. Thus, the future affects the present. But as in life, present payoffs are always more attractive than future ones. Therefore, the payoff for the current move always seems more valuable than the payoff for the next move.

“Tit for Tat”

Considering all of this, what is the best strategy for an individual player in an iterated Prisoner’s Dilemma of indefinite length? To find out, researchers organized a tournament. They invited psychologists, economists, political scientists, mathematicians and sociologists to submit computer programs that would compete with one another. They received 14 entries.

The winning program – which also was the simplest submitted – was “Tit for Tat,” entered by Anatol Rapoport, a University of Toronto professor. Tit for Tat’s first move is cooperation. After that, it always mimics the other player’s previous moves. In a 200- move game, Tit for Tat averaged 504 points per game. Other programs that did well in the tournament all shared a common characteristic with Tit for Tat: They all were nice. They never defected on the first move. It makes sense that the nice programs performed well. The tournament included a large enough number of them to demonstrate that they worked well with each other, thus raising their average scores. Tit for Tat incorporates a high degree of what can be termed “forgiveness.” If the other player defects, and subsequently then cooperates, Tit for Tat does the same. Plus, Tit for Tat is virtually nonexploitable. If the other player defects, so does Tit for Tat, quite remorselessly.

A subsequent, actual open-for-all-entries Prisoner’s Dilemma tournament drew 62 proposals from six countries. Tit for Tat was the clear winner in the first and second rounds. Its simplicity gave it an edge over other tactics. In the second tournament, as before, “Nice guys finished first.” The programs that did best against Tit for Tat capitalized on its niceness. A hypothetical “Tit for Two Tats” game would have done even better than the actual Tit for Tat program. In it, defection would occur only if the opposing player defected on the two previous moves.

If researchers projected a large number of Prisoner’s Dilemma tournaments, the results would show that the nice programs would thrive, while the other programs (called the “meanies”) would tend to drop out eventually. Thus, cooperation, in effect, evolves over time to become a dominant strategy when repeated interactions occur. Indeed, in such circumstances, it is logical that Tit for Tat would become a universal strategy that everyone would apply.

What about the Real World?

In addition to the artificial construct of the Prisoner’s Dilemma, the efficacy of Tit for Tat applies in far more practical realms. Consider the value of reciprocity (Tit for Tat’s ruling principle) in the U.S. Congress, where “you vote for my bill and I will vote for your bill” is a philosophy that has been in play for years. Individual congressmen cannot succeed without their colleague’s assistance. Their bills would never pass. Eventually, their constituents would deem them ineffective and vote them out of office.

Other examples of the logic and sensibleness of cooperation abound, not only in terms of human relations, but also widely throughout nature. Consider the relationship of ants to acacia trees (also known as thorn trees). The acacias provide food and domicile for the ants inside their inflated thorns; the ants protect the acacias from hungry herbivores and trim competing plants. Similarly, alga and fungus join in symbiosis to form lichen. Even bacteria sometime employ a conditional strategy to thrive. Cooperation, based on reciprocity (Tit for Tat), evolves even among nonthinking life forms.

“Live and Let Live”

Activity at the Western Front in France and Belgium during World War I provided a vivid example of the all-consuming cooperative power of reciprocity among human beings. Enemy soldiers shooting from trenches fought gruesome and bloody battles against each other for years, often for gains of only a few small yards of territory. But in between the actual battles, enemy soldiers commonly exhibited remarkable restraint about attacking each other. German soldiers would walk about, in clear sight and within rifle range, but the Allies would not shoot at them. This applied equally to Allied troops. Often, shelling on both sides would cease precisely at meal times. Snipers and artillery gunners knew not to attack certain areas marked by flags. Often, between battles, riflemen and artillery operators on both sides would purposely shoot to miss each other. And, the troops would not fire on each other when bad weather prevailed.

Both German and Allied troops honored such unspoken rules. Indeed, this “live and let live” philosophy, while not formalized in any way between the deadly trench combatants, was nevertheless starkly evident across the entire 500-mile Western Front. One British veteran explained it this way to a comrade who was new to the trenches, “Mr. Bosche ain’t a bad fellow. You leave ’im alone; ’e’ll leave you alone.”

What took place in those trenches was nothing less than an iterated Prisoner’s Dilemma. Since the opposing soldiers routinely attacked each other’s trenches, a policy of mutual defection (always shooting and shelling to kill) was the sensible choice in the short term. This would weaken the enemy. However, the enemy troops that faced each other across that No Man’s Land did so for extended time periods. Thus, the combatants could develop conditional strategies that fit their lengthy interactions. Therefore, it should come as no surprise that, given these circumstances, a mutually cooperative policy based upon reciprocity developed among the enemy combatants.

In the trenches, reciprocity was the controlling factor. If the Germans began shelling the British at the dinner hour, then the British would immediately follow by shelling the Germans at dinner, and also at breakfast. If the British snipers suddenly become accurate marksmen in between battles, then so would the German sharpshooters. This was essentially Tit for Tat with machine guns. Throughout most of WWI, cooperation was a spontaneous, self-replicating and evolving phenomenon along the entire Western Front. This proves that cooperation is an immensely powerful strategy. In fact, it can quickly take shape, unspoken, amongst the deadliest of enemies.

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The Innovator's Dilemma Summary

The Innovator's Dilemma Summary

Why Good Companies Go Bad

This book is about the failure of good companies. It is not about firms that suffer stifling bureaucracy, can’t plan, make lousy investments, neglect quality, ignore customers or commit other well-known managerial sins. On the contrary, this book is about companies that do everything right, have excellent management, stay close to customers and continuously improve the quality of their products - yet fail.

For many decades, Sears Roebuck was the preeminent name in retailing. Sears managed an existing business, and pioneered many innovations, such as the department store credit card, the catalog, supply chain management, store brands and more. Yet Sears failed. It did not notice or counter the threat from the discount retailers and box stores that eventually supplanted it. It failed to exploit its advantage as a first mover in store credit cards, allowing upstarts Visa and MasterCard to eat its lunch. Sears has plenty of company in the list of great companies that struggled to innovate successfully. Consider IBM, which let the minicomputer market go to disruptive innovator Digital Equipment Corporation (DEC). Consider DEC, which excelled in minicomputers only to founder in personal computers. Consider U.S. Steel and Bethlehem Steel, which could not counter the threat from mini-mills.

Paradoxically, great companies do not fail because they do bad things. They fail because they keep doing better at the things that made them great. They fail because they listen to their crucial customers; invest in the highest return opportunities; improve product quality; study market trends and strive to surpass the competition. The paradox of failure, the innovator’s dilemma, is that there is a point at which the right things are dead wrong. Sometimes, a company has to ignore its best customers, invest in lower return opportunities, take a poor quality product to market and fly blind, without market research. Sometimes, the right thing to do makes no sense in the context of the past and present, and only the wrong things can work. Great companies have understandable difficulty making that adjustment. So they fail.

Sustaining vs. Disruptive Innovations

Innovation comes in two forms. Sustaining innovations improve on existing, established products. They deliver higher performance in the dimensions that existing customers value. Sustaining innovations include, for example, bigger, more powerful mainframe computers. Disruptive innovations, such as personal computers, under-perform existing products. They disrupt the value proposition. They are less sophisticated, less powerful and of lower quality - but often they are also less expensive, simpler, more convenient, adequate and easier to use.

Sustaining innovations are a strong suit for established companies that continuously improve their products. But they almost inevitably hit a point at which they offer more quality than customers need, want or can afford. In pursuing higher margin business from more demanding customers, established firms sacrifice the low end. This creates openings for disruptive innovations, which usually debut at the market’s bottom among new consumers.

Driving Disk

This pattern is particularly evident in the disk drive industry’s history. Disk drives became progressively smaller, dropping from 14-inches to eight, five and then 3.5 inches. The established market leaders in 14-inch drives failed in eight-inch drives; the eight-inch drive leaders failed in five-inch drives; and the five-inch drive leaders failed in 3.5-inch drives. While established market leaders in each generation of disk drives focused on improving their products for existing up-market customers, the disruptive innovators found a low-end opening. It did not make sense for established companies to invest early in the disruptive technologies, because the margins tended to be much lower and the market was unproven.

Engineers at established companies often discover and develop disruptive innovations, but their firms’ customers generally have no need for the changed products. Typically, the least profitable customers are first to embrace a disruptive technology. Thus, established firms that heed their key customers probably cannot make a case for investing in disruptive technologies. These firms do not do the wrong thing; they do the right thing - and go the wrong way.

Why Is the Right Action Sometimes Wrong?

Managers do not really decide where they will allocate investments. Their customers and investors decide. Investing in disruptive technology does not serve existing customers and does not promise the initial return that investors demand. So the best-performing companies kill great ideas and do not invest in disruptive technologies until existing customers demand them - by which time a disruptive innovator leads the market.
Big companies look for big growth opportunities, which the small or uncertain markets for disruptive innovations do not promise. Disruptive innovations typically appeal to the least desirable customers. Steel mini-mills, for example, started out making such poor steel that it was only suitable for reinforcing rods. This end of the market was low in quality, price and margins. Because of their higher cost structure, the established steel companies couldn’t make much money in this market and were glad to abandon it to the upstart mini-mills.

Mini-mills had cost advantages that let them make money in this market. Once they established a base, they improved quality and moved up the market chain. They added products such as bars and iron angles from the bottom of the established companies’ market, lower in price and margin than the more desirable segments. The established companies again gladly abandoned those products. The mini-mills continued to improve, moving on to structural steel. The established companies closed their structural steel mills and focused on higher quality, more demanding, more profitable products. Investors and the most demanding customers were pleased. But the established companies had sacrificed industry leadership and the lion’s share of the market. They never mastered mini-mill technology, and their burdensome high cost structures made it impossible for them to compete with the upstarts.

Organizational capabilities are an outgrowth of the organization’s processes and values, the considerations that determine which customer to emphasize. Individuals can change the way they work, but that is very difficult for organizations. Because established organizations listen to their most profitable customers, they typically improve quality to the point that their products offer more than most of the market can use. When established competitors improve their quality beyond what the market demands, relative quality differences no longer affect customer decisions. Customers begin to focus on reliability, convenience and price. Over and over, in industry after industry, established companies focused on the top of the market and created opportunity at the bottom. Disruptive innovators stepped in.

The Value Network

An organization’s structure and way of working determine what it can do. But organizations do not operate in a vacuum. The value network - which is central to the concept of disruptive innovation - is the context in which the firm operates, assesses customer needs, responds to customer demands, gets resources and deals with competitors. A company’s product is typically a component in another firm’s product, which may be a component in another network member’s product. Value networks measure value with their own metrics, which tend to be consistent across the network. Value networks have characteristic cost and margin structures. Manufacturers of 14-inch disk drives usually obtained 60% margins, as did their drive’s primary users, the mainframe computer makers. Similarly, suppliers of 8-inch disk drives obtained 40% margins, similar to those of the minicomputer firms that used those drives. Small disk drive suppliers earned 25% margins, comparable to those of the personal computer makers who bought their drives. Because profit margins were progressively lower on each disk drive generation, no wonder 14-inch drive makers saw 8-inch drives as unattractive, and the makers of 8- inch drives disdained desktops. Each generation of drives existed in a distinct value network. It is difficult for companies to switch value networks.

Trying to Join In - Too Late

Established companies’ efforts to commercialize disruptive technologies often go like this:

1. Established firm develops disruptive technology - Very often, paradoxically, engineers at established firms develop disruptive technologies. Engineers at Memorex, manufacturers of 14-inch drives, first designed 8-inch drives. Engineers at Seagate Technology, maker of 5.25-inch drives, pioneered the 3.5-inch disk drive.

2. Established company shows the innovation to important customers - Marketers show key customers the innovations. Because the innovations usually offer lower performance in dimensions that customers value, typically they are not interested.

3. Established firms shelve the disruptive innovation - They invest more in sustaining innovations, responding to customer demand by giving them more of what they want. The firm focuses on the competitive threat from other high-end manufacturers, not the threat from disruptive innovators below. Thus, although its engineers developed the 3.5-inch drive, Seagate shelved it to focus on improving its 5.25-inch drives.

4. New companies form and find markets for the disruptive technologies - Employees of 14-inch drive maker Pertec left to found 8-inch drive manufacturer Micropolis. Employees of Seagate and MiniScribe, the 5.25-inch drive manufacturers, founded Conner Peripherals to enter the 3.5-inch drive market. Disruptive startups concentrate on new customers, not the leading firms’ old customers. By trial and error, the innovators find applications for their new products. Micropolis served the minicomputer market; Seagate sold to the embryonic personal computer market.

5. Disruptive innovators move up the chain - Once innovators establish a market base, they improve their technologies and move up. Customers who initially rejected the low performing disruptive innovation eventually adopt it because the established firm’s sustaining innovations improved the product beyond market needs and made it too expensive. Meanwhile, the disruptive innovators improved their product enough that it came to meet the user’s needs, usually at a much lower price.

6. Established firms enter the market as latecomers and fail - Typically, by the time established firms enter a market, disruptive innovators have an unbeatable lead. Control Data, leader in 14-inch drives, could not penetrate minicomputers. Seagate, maker of 5-inch drives, offered a 3.5-inch version, but could not break into laptops.

Value networks have an important, even defining influence on what a company can or cannot do. Most companies’ capabilities apply only within the context of a given value network. A company that is well adapted to one network will be ill adapted to another. To succeed at disruptive innovations, companies may need capabilities very different from the ones that brought success in their existing networks. Thus, a firm that addresses the needs of customers in its value network is apt to find it difficult to satisfy customers in a different network. So, customers cannot lead a company to disruptive innovations. In fact, customer feedback may lead companies to avoid the most important innovations. Companies pursuing growth through disruptive innovations must find new markets, outside their existing customer base, that value the disruptive technology for what it delivers. Thus, disruptive technology investment is a marketing initiative, not a technological initiative.

Companies almost invariably do not have adequate information to justify large investments in disruptive technology. Disruptive technology investments are hard to justify at precisely the point when that investment is crucial to develop a first mover advantage. Established companies must create the right environment, with capabilities that fit the new market. Risk is high. Failure and learning from failure are part of the path to disruptive technology success. Although any individual disruptive technology may fail, companies that treat disruptive technologies as a portfolio, making small investments and learning from mistakes, can succeed.

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