Hayagreeva Rao Keynote Talk: Scaling Up Excellence at Stanford GSB (Full Transcript)

Hayagreeva “Huggy” Rao Keynote Talk: Scaling Up Excellence at Stanford GSB (Full Transcript)

Professor Rao was the keynote speaker for GSB Spring Reunion on May 2, 2014. He was introduced by Dean Garth Saloner.

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Dean Garth Saloner: It’s now my pleasure and my honor to introduce today’s speaker and my colleague Huggy Rao. Huggy is the Atholl McBean professor of organizational behavior and human resources. Here at the GSB he’s also a professor of sociology at the school of humanity and science. He’s also the academic director of a fantastic online program –our first online program the Stanford Innovation and Entrepreneurship Certificate program. This is a program that we built jointly with our engineering school. It has 12 modules, they built half a dozen, we built half a dozen. And it’s available online to people who don’t have the time or the ability to attend one of our in-person classes. And the attraction we’ve gotten from it has significantly exceeded actually what we have planned, so. I thank Huggy for his leadership in that.

He’s also the co-director of the Customer Focused Innovation Executive Program and the co-director of the Advanced Leadership Program for Asian American Executives. He has been working on the question of scaling together with Bob Sutton, he has a book on the topic, which I’m sure he’s going to tell you about, and I think you’re in for a real treat. It’s been a best seller, it’s one of the top 10 books listed by Forbes and by the Washington Post.

Please join me in giving a warm welcome to Huggy Rao.

Hayagreeva “Huggy” Rao – Atholl McBean Professor of Organizational Behavior and Human Resources

Good evening everybody. Let me begin by first saying thank you certainly on behalf of my faculty, colleagues. It’s just impressive to see so many out of staters and so many people from overseas as well coming here. Your affection for the GSB, of course, matters a lot to us, because we can, of course, continue to build on our traditions of excellence and do — and you know get to greater heights.

So I’m just actually going to begin this talk with a little bit of a confession. I finished business school in India in 1980. And the astonishing thing was, as I was finishing business school in India, the textbooks that we actually followed, I think the one in finance, if I recall, was by Jim VanHorne. If you can believe it, you know, the one in accounting was by Chuck Horngren. And we even had Jeff Pfeffer’s book on the external control of organizations. And in 1980 when I graduated I had no idea that all of them would eventually turn out to be my colleagues. It is truly sort of extraordinary in that sense.

And the other funny thing was in 1981 Tom Peters, an alum of the GSB, of course, wrote a remarkable book called In Search Of Excellence and at that time if you had told me I would have actually written a book on excellence, I would have said look you are out of your mind. But the amazing thing was that we did and Tom has actually been a great supporter. And we’re all very grateful to him. The book’s done well as Garth mentioned. You know, it’s nice to sort to be on the Wall street Journal best seller list or whatever, but really, what touches your heart is we did a little thing on NPR and there was this little — there was this lady from rural Georgia who actually emailed me and said, you know, I heard you on NPR. I went out and bought the book. And we’ve created a little learning group in rural Georgia to scale excellence in our schools there. That sort of really melted my heart.

And the reason it melted my heart is, my mom was a high school math teacher. She was, I guess, a tiger mom before that, that particular label kind of got constructed or invented.

So, what I’m going to do is share a few ideas in the hope that we can have a conversation. I’d like to leave a bunch of time aside for questions.

In many ways this book and this whole adventure with Bob Sutton would never have been possible without a program that Garth alluded to, called the Customer Focused Innovation Program. So what we do is we get 60 people, and the morning is all what we call clean models, social science, and the afternoon is all about dirty hands, or design thinking. And the participants love it, so they come in the morning, and they come in on Sunday. Mornings, they’re being exposed to social science and then, every afternoon, they have to solve a problem, a challenge, if you will, for some company or the other. And, several years ago, we were doing that with JetBlue. And, in fact the participants did some pretty amazing sort of things. You know, you go and, all the design thinking ideas that many of you, I’m sure, are familiar with.

So, at the end of the program, one of the participants asked us, how do I take this back and scale it in my company? So, I gave an answer, and my colleague Bob gave an answer, and that evening as we were debriefing in Menlo Park, we live there, over a nice glass of Pinot Noir, I said, Bob, what did you think of your answer? And he said, what do you think of yours? And I said mine was truly sad, I said. It was really bad. And I’m very disturbed about it because I just couldn’t say anything that really was interesting or challenging, or provocative or what have you.

So I asked Bob, what do you think, Bob? And Bob says, mine sucked too. And so, few more glasses later, so we said, what are we going to do about it? And we did something that Stanford professors do with great support and encouragement from everybody. And that is, if you really don’t know something, and you’re quite ignorant about it, the best thing to do is to actually dream up a course and offer it.

So, when you dream up a course and offer it, a couple of things happen. The first thing is, you are super motivated, because you’re clueless. You have to read a lot, you’ve got to put together something. And the students, they sense your excitement and your curiosity, they kind of engage with you and they teach you a lot. And, so we were kind of thinking, how do we teach people about how to scale something? And Bob and I thought, let’s give them a challenging, hard problem.

So, we had 60 students, we could have gotten more but we capped it at 60. 30 from engineering and 30 from GSB. And then we put them into teams and randomly assigned dorms and sports team on the Stanford campus to each of these student teams. And we give them one scaling challenge: Scale the use of bicycle helmets by bicyclists on Stanford campus. It’s a very hard thing to do by the way because, there’s memory loss and particularly the undergrads are fully persuaded of their immortality and invincibility and it was very, very hard.

But the students came up with like, amazing ideas. So one team I remember they were given EV, they scanted a village with these grad students. And so they kind of went to the grad students and try to persuade them and facts and, here’s what happens when you fall off a bike. None of these things worked. And finally these people said wait a minute. We really ought to go to the elementary school on the Stanford campus. Because a lot of the kids of grad students actually go there. Let’s actually organize a campaign amongst these kids.

And what they did was, they actually got the kids to write little notes for their parents, saying hey, wear a helmet. It was amazing. And by the way, the way we graded the course was, we knew what the base rate of helmet usage was, so the more you moved the needle, the better the grade, which caused some interesting challenges, I might add.

And so there was another team that went to the men’s soccer team. So, they told them look, if you fall off a bike, bad things can happen, you’re telling the men’s soccer team, they just said give me a break. But, then, they quickly realized, wait a minute, we need to communicate this to them in an interesting way, and they came up with the idea of a watermelon smashing competition. So they would go there, and tell these people after they dropped a water melon, that’s your brain when you fall off a bike. And people said, really.

And they said, you may think you’re immortal but if that happens to you, think of what’s going to happen to your team. And that got the attention of the men’s soccer team. And very quickly, their penalty if you will, if any of the men’s soccer team didn’t wear a bike helmet, they’d actually fling the watermelon at the kid. So, that kind of deviant behavior got punished. It sort of spread for awhile.

And the second year we actually did a project with the MBAs and the engineers again, and this time they were actually working with front line engineers and soldiers and that kind of stuff. It’s unbelievable. I mean when you sort of see we actually had a general in the rapid deployment force who came to us and said, hey, can they help. And we said oh, what a great problem. And so we once again told our students to go figure these things out. And the sorts of things they came up with were, like, simple but profound too.

One, just one example. So soldiers, of course, get redeployed, and you get rotated and you have replacements. And you have an interesting transfer of knowledge problem. How do you transfer knowledge from an outgoing cohort of soldiers to an incoming cohort? The U.S Army’s modus operandi is, you actually have a two hundred item questionnaire that you have to fill out. And, you can imagine what people are going to do when you give a two hundred item questionnaire and that’s given to you right after you land on the air base in the U.S. when you’ve come back from Kandahar. The response rate is abysmally low.

So, there’s just no way you’re going to get anything. Plus it goes to some place in the Pentagon. They do some statistical analyses and they really don’t turn out to be much either. So our kids actually thought about it for awhile and they came up with like one interesting idea that they came up with, for example, was look, why don’t we ask each soldier. Look, can you take ten minutes to talk to somebody who is going to replace you. Tell them three stories that actually are interesting examples of your experience. And if you spend ten minutes, we’ll make sure you get half an hour more web access when you talk to your family. But, by the way, it’s a very high powered incentive, as you can image. Web access is a very scarce resource, you give them half an hour, and you give these stories, and it’s amazing when these people would tell stories to the incoming soldiers. What they were doing is they were actually giving way more data than could be accommodated by a regression model.

You know, you sort of say, sunny days, sun on the arise, the enemies in the hills or whatever. Just look at the number of variables that are being incorporated in that story. And it is very efficiently being packaged. So the army is actually trying it out. So anyway after doing this for a couple of years, we sort of thought, we’ve actually learned, and we interviewed a number of people, we wrote case studies, we did a bunch of things.

So six years after the original question, we actually thought, okay, let’s write this book. And first, a word about excellence. We could debate this to what excellence is, Plato says this or Socrates says this. If you’re interested in eastern philosophy the Gita says this. But Bob and I are social scientists and for us excellence simply means people do the right job even when nobody is watching over their shoulder. That’s what excellence is. Because when you need people to monitor others executing a task, that’s not excellence. For every 10 people whom you hire, you can’t have three cops monitoring them. There is no way you can scale if you do that, because it’s just going to be huge in bureaucratic and expenses and so forth.

So what’s the problem of excellence? There are two dimensions to the problem. On the one hand, if you’re in a large organization, or even a small one, you might have a pocket of goodness, somewhere. And what your challenge as a manager is, or as an executive or leader is, how do I actually construct a domino chain of goodness? How do I spread goodness from one place to the others? The challenge is when you do that you have voltage loss. There is dilution.

There’s kind of another dimension of scaling up excellence and that is, if you’re a small organization and as you’re adding people how do you actually scale up excellence? So, one is, if you will, horizontal or cross divisional or cross business unit, the others, kind of much more temporal.

There’s also a little problem and the little problem is, the larger an organization gets, the more likely are smart people inside the organization to become dumber. And I don’t say this to be coy. And what I mean by beep smart people becoming dumber is, I don’t mean to imply obviously that they become stupid. But I certainly mean to imply that they become silent. And that’s the problem in a large organization. If they become silent, you’re basically in trouble.

So lots of examples of scaling, a lovely little start-up called Pulse, they were two Stanford grads, and they would call us and say, we have a scaling problem. I’d say like, what kind of problem? There’s just the two of us, we’ve hired four more people, we have a scaling problem. I’m like, you guys are all working in one room, how could that be a scaling problem? But sure enough you realize they needed to coordinate, they needed to communicate.

And on the other extreme, you have the Institute for Health Improvement in Cambridge. They want to reduce debts caused by preventable medical errors. 100,000 people a year die. How do you do that when you don’t have cloud, when you don’t have authority, when you don’t have resources, and you have 3,500 hospitals? So that gives you, if you will, the breadth of the scaling challenge.

So, the, the main sort of point I want to suggest is, scaling up is deceptively easy but screwing up is easier. And the term — the scientific term Bob and I use is, we call it a clusterfug. And we can’t, of course, use the actual word. And so what we did was we suddenly remembered, wait a minute, Norman Mailer wrote about fug successfully, and so we thought let’s actually exploit this literally lineage of the term, so we called it clusterfug, and writing the case as we speak, On the Navy Seals, yeah I know, can you imagine a guy like me writing a case on Navy Seals. I know, even I’ve chuckled about the absurdity of this. So, I spent –we actually have two amazing students who are helping me write this case: Carter Bowen, who’s a Navy Seal himself, and Gib Lopez, who’s actually an MBA also. Both of them are helping me write this case, and Carter and I went and spent a chunk of time at Coronado.

When I was with the Navy Seal commander, they use a lot of abbreviations. And there was one abbreviation that kind of baffled me. They called it PFM. And after awhile I sort of had a pretty good idea of what the F stood for. I’m sure all of you know that. It was the P and the M that I was actually utterly befuddled by. And later when I asked the commanding officer, I said what is PFM? He said, pure, you of course know what the F is, and the M, of course, means madness. He said, that’s what happens to us when we try and scale sometimes, PFM.

Now, if you really look at, 30 years of social psychology, why is it that scaling ends up in a clusterfug? And this could be any decision. New product, new technology implementation, an acquisition, expansion overseas, whatever the articulation or realization of scaling. It turns into a clusterfug because of three things. The first is a sense of illusion. You actually have the illusion because the smart people have become silent. You’re not getting any feedback and it’s kind of like an echo chamber.

Impatience. Since you don’t get feedback, you get impatient, and then of course, you have the smart people becoming silent, the incompetent are the only ones you rely on, and so when you put the three of them together, you get a trifecta, and you have a spectacular kind of clusterfug. And you can quickly see, actually, in many organizations, teams actually taking the off-ramp to a clusterfug pretty quickly.

Now, what do you do? So, I love reading history. The Greek historian Herodotus says, the Persians had an interesting decision protocol to prevent illusion, impatience, and incompetence, and apparently what they would do is, they would debate an issue drunk one day and the next day, they would re-debate the same issue sober.

Now, you might ask, what is the value of such a decision protocol? And put simply, when people are drunk, they put a lot of information on the table. But their ability to derive a conclusion is debatable. But, on the other hand if you’re sober people are strategic. So they don’t put a lot of information on the table. However even from the thinnest sliver, you can certainly construct an inference if you will.

Now, our recommendation is not that you follow what the Persians did, which is, debate an issue drunk and then re-debate it sober the next day, one of the things we sort of talk about in the book is to actually rely on something called a pre-mortem, which is the opposite of a post-mortem.

So, for instance, if the six of you were in a company and you were thinking of, like, expansion, or IPO, or whatever the decision outcome, I would randomly assign three people to the failure condition and say, imagine the event has occurred, engage in time travel. And then write a story of how that failure happened. Write it just in one page. Remember it has to be a story, not a list, and the three people have to write that anonymously and independently because if they collaborate, you’ll have correlated error.

So on the other side, same thing, you give them, of course, the scenario of success. Imagine the thing has succeeded. Write a story of how that succeeded. And, what is amazing is, when you get these stories, it is incredible what — you know, when you write, when people write a story, what they’re doing is, they’re actually giving you, if you will, a state transition model. You have various transition points, you actually can see the downward spiral of a debacle, you can see the upward spiral of success, and then you can quickly sort of debug.

By way of example let me illustrate, I just recently did a version of this with the leadership of the Stanford Medical School. They really want to go big guns, create something called Stanford Medicine, where basic science has to actually work with the clinical hospitals and then, of course, the clinical investigators and you got to work with the hospitals. It’s amazing the stories of failure people wrote.

One person knew about side-effects, they actually sent it as PDF file, but their electronic patient records don’t accept PDFs. So the person who knew about the side-effects, sadly told this to everybody. But nobody knew that.

Another person said, “Oh my God, we don’t have nurses to run these trials.”

Another person would say wait a minute, we — the hospital is taking care of somebody in a trial. This person doesn’t know the basic science. They’ve misdiagnosed the cause of failure. You have an actionable lawsuit. So things like this when they were actually put on the table, the very smart people, of course, in the medical school faculty, they quickly said, “Oh my God, we’ve really got to get this going.” And very quickly they actually thought of lot of possibilities and began to put a lot of checks in measure.

So just an example, so think of pre-mortems, if you will, the contemporary equivalent to what the Persians kind of do. So, what’s the core message? Why is it people take the off-ramp to a clusterfug? And the answer is, usually when you ask people what is scaling, they invariably think of it in terms of footprint-related metrics. And it’s perfectly sensible. They’re very important. But the catch is, if you ask people what’s desirable, social psychology tells us they actually think about this in a very abstract way. That’s why they love the metrics. So many customers, so many this, so many that, et cetera. They’re not really thinking about the mindset.

The mindset is actually what allows the footprint to survive and thrive. One example, people are really thinking about the mindset, we recently had founders of a company called Waze, they do mapping software, they got acquired by Google for a couple of billion. And he was actually in class and he was giving a fascinating example of focusing really on the mindset, and conveying a number of other important truths.

So they get $30 million in an earlier phase of the revolution, they get $30 million, and the VCs are telling them, “Scale!” You got 100 people, hire 400 more. And the employees also expect head count to go up, the company to grow, all these things. And the founders sort of think about it, and they thought about it, and then they made a decision and then they called all the employees of the firm, and they announced a hiring freeze. People were stunned. The employees said, are you out of your mind, we just got $30 million, they’re telling you to scale, is this a vote of no confidence in the future of the firm? Why a hiring freeze now? It seems insane.

And the founders stood up and said, look, we had 100 people, we’re going to hire 400 smart people, all of them have great ideas. The problem is when you hire 400 smart people and they come to you, I have to say no 400 times. Because we have to focus. We can’t just kind of get everybody’s idea into the mix, I’ve got to say no. And I don’t want to create 400 de-motivated people in one fell swoop. And he said, the smart people that we hire, they’re smart, but they’re also over confident. They think they can hit the ground running on day one. They can’t. They need to take three weeks to get ready. If I hire 400 people in one step, I’ve actually altered dramatically the ratio of unproductive to productive people. And then what am I going to do as a CEO? I’m going to spend time thinking about how to make the unproductive people productive. And I don’t want to do that.

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The real number we need to move is one metric, and that is, the three-month user retention metric. We have users, there’s a lot of churn, and the real test of our ability is, how many of them do we retain over a three-month period? And so, one of the employees then said, well, what’s my job? And you know he said, well, your job is simple. In fact, the job of everyone of us is very simple. Everyday we’ve got to ask, what did I do today to move that number? Think about it.

And this story is also particularly resonant with me, because what it sort of conveys to you is, scaling is actually about — when you scale an organization, you’ve really got to figure out that it’s not just mindless addition, it’s actually smart subtraction. In fact, when you’re in the business of scaling excellence, you really are like a race car driver. You’ve got to figure out when to accelerate but also, when to break and when to change the gears. And that’s what they figured out. And of course the company succeeded subsequently. And you quickly realize if people mindlessly add individuals, you’re definitely taking the on-ramp to a clusterfug.

So, I’m going to sort of move on. And the problem of course with scaling is if you don’t do this well, it’s dilution. Here’s a confessional, a little memo from Howard Schultz of Starbucks saying, as we moved from 1300 to 13,000, we of course lost sight of the customer. And the constant is, in all the excellent organizations we visited, the executives invariably see the glass as half empty. And nowhere did we find somebody who sort of says, we’re doing great and you just don’t find that at all, they all assume, my God, we got to do all these things all the time, and that’s kind of that relentless restlessness.

So, I’m going to give you a couple of big lessons, maybe a choice point or two, and a quick overview of some of the main principles. We obviously won’t be able to dive in too deep, because we end at 6:15, and I want to make sure there’s some time for Q&A.

So one of the big lessons is scaling up excellence isn’t just an air war. It’s actually a ground war.

So what are the characteristics of an air war? When you think of an air war what do you think of it? What’s that? High level. Abstract. No details. Absolutely. What else? Sorry, top down absolutely. What else? Collateral damage. Indeed collateral damage can actually be very high, there’s a fascinating historical account of the British bombing of Germany and they found out that, what is it? Twenty percent of the ordnance landed within five miles of the intended target. Yeah, the rest of it was like all over the place. That tells you something about collateral damage.

What about a ground war? Very personal. What else? More intense. Actual engagement.

So, when we go to companies, you can quickly find out who is thinking about and thinking in just an air war is not enough. I’m not saying air wars are bad, obviously you need a little bit of both. But what you want to think about is you really want to focus on the ground war. And the reason is the following: Because remember, when you think air war, you’re only thinking very abstractly. When you think ground war you’re thinking very, very concretely.

So for us the compelling distinction we found is when I go to companies, I ask people, hey, how do you think you need to get all these people to do something? And the people who are in an air war mode instantly leap to incentive based reasoning. We just need to figure out how to reward them if they do or punish them if they don’t. That’s it, that’s all we need to do.

But the people who think of it in a ground war term, they actually sort of think, motivation isn’t the problem, tools are the problem. The question is what kind of tools can we give these people to make them succeed? Very, very different.

So, I’ll give you a little illustration of how powerfully somebody thought of a ground war literally in the context of a war and that was a general called Matthew Ridgway. Now this was actually in the Korean War, which is for some strange reason not as you know, given the kind of attention, because some of the most brilliant acts of leadership really in the 20th century occurred in the Korean War.

So imagine, MacArthur is there in Tokyo and, he’s consumed by sense of both illusion and delusion, and then Truman fires him. And you’re Ridgway. You’re 42 years old. You’ve never fought in Korea. You’re in charge of like 500,000 men who have simply been beaten, bruised, battered, basically by the Chinese first army. You can’t go and get new troops. You can’t give people a speech and say jeez, let’s kind of go and do something, you can’t do all that.

But look at what Ridgway does. The first thing he does is, he actually, he says, I need to understand the topography of Korea. So he goes to on a bomber and there’s a navigator and he tells the navigator, can I take your seat? I want to see what the topography is. And then he realizes oh my God, lots of hills and ridges and rivers and then he meets these regimental commanders and he says, do you know the name of the river close by to you? They said, no. Do you know how the deep the water is? No. You’re fired, because you’re putting people in harm’s way, you have no idea.

Apparently what the Pentagon had done is, there were a lot of people in the Pentagon who apparently weren’t given leadership opportunities in World War II. They moved a lot of files and somebody thought, we really need to kind of give them leadership opportunities so let’s send them to Korea as regimental commanders.

When the heaviest thing you’ve moved is a file between two desks, it’s not exactly the right kind of person to send to Korea. And so the things that he sort of does to give you a sense, no speeches, none of these things. But when he travels, no fighter escort, most shot at General, in the 20th Century. He says, my men are getting shot. Why do I need a fighter escort? Every time he goes and visits troops, it’s the cold Korean winter. The only thing he has in his Jeep, ample supply of gloves. He gives gloves to soldiers and say, you can hold your carbine.

So he goes to a forward operating post. And he looks at a map. And, blue pins US, and red communist forces. So if you’re Ridgway, you got 20 men in the room. What’s the question you’re going to ask? What’s the diagnostic question you’re going to ask? Imagine. It’s clear. You know where the US forces are, where the Communist forces are. There are 20 men sitting there. You’re the general. What’s the — if you had one question to ask to diagnose what is going on, what would that question be? Come on, somebody take a guess. Come on.

What do you need, that’s good. Which direction, that’s good. What else? Wind. How many people? They’re all very legitimate questions, but the question he asks is, how old is the information on which the pin positions are based on? And the men look at him and say, they’re 15 days old. What does that tell you? Obviously, it’s obsolete. But it also tells you the men are afraid. They don’t want to go on a foot patrol. Because they’re afraid of getting ambushed. That’s the reason you’re not getting high quality information. And that’s when he tells these people, look, I need information that’s three hours fresh, we’re going to support you in this way, we’re going to do this, etcetera. And, it’s these same people who were refusing to go, as it were, on a foot patrol, the very same people pushed the Chinese and North Korean Communist forces to the 36th Parallel.

There’s actually a lovely story of a crazy Marine General whose unit is surrounded on all sides and the men tell him, the enemy is in front of us, behind us, to the left, to the right, what do we do? And this guy is slightly maniacal, so he says, wonderful. They’ve got nowhere to run. You’ve got to be crazy to think like that. They actually punched through the corridor.

So here’s — this is what one McKinsey consultant told us, the real thing about the ground war is, you got to get a thousand people to move one foot forward at the same time. In an air war, obviously, one person can go a thousand feet forward.

So, the second thing is, scaling is a lot about felt accountability. Everybody talks of people feeling a sense of ownership, and that’s true. You certainly need to feel you own the place. But if that’s the only thing you do, that can be dangerous. You can quickly begin to think of yourself. It can get very swiftly egocentric. And so what we find out about felt accountability is you really need not only the feeling that you own the place, but you also need the feeling the place owns you. So you need actually the pull of obligation, and then the push of commitment. Both of those are needed.

And one of the SEPs, there are a couple of SEPers sitting here as well. I was actually talking about this interesting case study. Anybody remembers this? What’s the hotel on the — what’s the building on the left? I gave the game away by — The Taj, exactly. November 26, you had terrorists attacking the hotel. And, you had employees like these young ladies on the left, doing things.

And, what’s amazing is, when you have a terrorist attack, what do you expect employees to do? Head for the exit, because they know where the exits are. And that day there was no command and control, the general manager is rushing in from somewhere, can only get to the lobby. His family is being consumed by fire in the 35th or the 36th floor. Nobody’s giving orders, nothing, everything is in disarray.

Well, what was amazing is young ladies like this who were actually overseeing the reception for the outgoing CEO of Unilever in a conference room quickly barricaded the room, made sure that people were hydrated, the wives were separated from the husbands. Cooks escorted people down the stairs. A lot of cooks lost their lives. Because they gave their bodies as shields.

And later, when they asked some of these employees, you guys were heroic. They said no, we actually were doing our job. What’s their job? Their job actually is not to be an ambassador of the Taj to a customer, but to actually be an advocate of the customer. The Taj actually hires very carefully, though. You obviously can’t do that in the United States for legal reasons. But one of the things they do is they never hire people who are usually from the major cities of India. They always hire people who are from the smaller cities of India. Because the tradition of guests being god is actually quite vibrant. In the bigger cities, modernization has actually kind of assaulted all of those norms.

They do a whole bunch of other things. As I was in this SEP class, talking about, there’s one of these executives made a very sensible point. And he said, Professor Robert, surely this is a case of crisis. You obviously expect your employees to rally around this. You know, isn’t the real test what the Taj does every day? And I was about to say something. We actually had another participant who was a senior executive at [Grand Bus], guy called John Thomas. He said, let me tell you about my experience. He said, I flew with my wife and three year old to India. Jet lag tired, the kid’s crying, we’re all ornery, the Taj sends a car to pick us up, on route the baby is crying and I’m thinking, oh, my God, we got to go through checking, check-in delay and everything. They come to the Taj and somebody meets them and says, you’ve already been checked in. They take them to the room. They open the doors and there’s a little flask of milk and a bunch of cookies for the three year old. So John looks at them and says, how did you know? And the guy says, when you got in the car your baby was crying, the driver called the front desk and said, baby on board, jet lagged. Expedite.

Now, isn’t that an amazing case of accountability, felt accountability? That’s what felt accountability is. And by the way, the driver isn’t an employee of the Taj, but a contractual individual. So here’s this one woman called Fifi. And when we did a study of Wyeth. At one of the Wyeth plants, what did they do? They actually thought of equipment changes as breaks. So, mentally, when you categorize something as a break, you’re kind of like, loose and easy, and you don’t, there’s no sense of urgency. But these people sort of said wait a minute, it’s not a break, we’ve got to organize ourselves as though it’s a pit stop. Just that person and her team members and look at sort of what they did, in terms of, not just the number of syringe production, but how they cut down the changeover time and the like and so forth.

Here’s a quick example of a United Pilot saying I used to do all these things. And now, what do I do? I gave up. And I’m an Eagle Scout, and I’m an entrepreneur.

So I’m going to be very quick here, and talk about a couple of ideas. So, the most important choice point is when you scale, do you want more, or do you want them to be better? So that’s kind of one important choice point.

The second choice point is, and this is the one I want to spend a little more time on. Do you want to be a Catholic, or do you want to be a Buddhist? I went to Jesuit school in India. I actually meditated and extracted from St. Francis of Asisi every morning. So, even though I was born a Hindu. So, certainly Jesuit education has an enormous imprint on you.

But what do we mean by Catholic versus Buddhist? So, if you’re a Catholic, it’s like you’re, like In-N-Out Burger. You’ve got a specific design or like Intel’s Copy Exactly model. But, if you’re a Buddhist, what you do is, you don’t allow a thousand flowers to bloom but you give them good guard rails, in the form of principles or protocols where you can actually allow for local realization. And one of the heroes in our book is Chip Conley, who actually just has joined Airbnb as their chief customer relations person. He used to own a chain of hotels called Joie de Vivre that he sold. And they’re all over the place, like the Phoenix Hotel to the Rex Hotel, and their range in price from 100 bucks a night to 700 bucks.

So when we asked, Chip, how do you go about building these hotels, look at his Buddhist protocol. He asks his employees, any time you come to me with a request for funds to start a new hotel, you need to answer four questions.

Question one: What magazine does your customer read? If it’s The New Yorker, I know exactly who they are. You don’t need to tell me anything else.

Question two: What are the five adjectives you would use to describe the experience? So, if it’s The New Yorker, is sophisticated one of the adjectives, for example? If that’s indeed an adjective, how will the customer quickly sense that through his or her five senses? Nobody needs to tell the person this is a sophisticated place. You walk in, you instantly know, you know? Maybe they’re playing a particular kind of music, through a sense of ear, or you see the bar’s like a library, whatever.

And the next question is, how do the employees know this through their five senses? You know, what kind of uniform are you wearing? You know from that onwards. So, when he’s getting people to look at how detailed he’s making people to think through a problem. Seemingly simple protocol, but in every hotel you actually have to come up with different answers to the same five questions.

So, I want to sort of give us a little bit of time. There are a number principles. I won’t talk about all of them. I’m actually going to talk about a couple of things.

The first one is, when you scale, most of us think that structure is the way to coordinate. And that certainly is useful. But smart leaders very quickly realize stories are actually very powerful coordination devices. Sometimes they’re a substitute for structure, at other times they’re a complement to structure, and the kind of — so stories can be very powerful.

So one lovely experiment done by Lera Boroditsky, who used to be in the psych department here, she and her graduate student Peggy Thebadore did a brilliant experiment. So they took a large group of people like you, randomly put you into two conditions and gave you one page of information that was completely identical about a fictional city called Addison in California. So they gave you information about the crime rate in California, income, education, all these things. There was just one difference. People on this side of the room, they were told that crime is lurking like a beast in California. And this side of the room, they said crime is lurking like a virus in Addison City.

And they ask people, what do you think the city of Addison ought to do? So what do you do to a beast? What do you do to a beast? Kill it. Cage it. Slay it. All of that.

And so when you ask people what should the city of Addison do? What did they say? More cops, more jails, tougher enforcement. And by the way, this is independent of political persuasion. You could be a Democrat, who hates all this, but the moment you’ve got this like beast framing there in your head, you’re saying more jails, more this, more that.

What do you do to a virus? Treat it? You inoculate, you cure it. So, what should the city of Addison do? What the city of Addison ought to do is more counseling, more rehabilitation, and even if you were a fervent republican who was against government expenditures, you said we need to do all of this. It’s amazing, so Ben Leda and her colleagues said, maybe we are using words like praying, what if we just use beast and virus. Same result.

So they would use the word beast or virus in the first two, three lines. And they said, what happens if we do it at the very end? No effect. But when you actually have a small word like that, very quickly what the story is doing is, all of us have mental butlers in our heads. And these word cues. You instantly initiate the story telling in your head, and they reflect, of course, in your political preferences.

Sometimes stories can be even more — I mean, the stories or cause can be even more dramatic. And one of the things we chronicle in our book is about British Petroleum where the head of their retail unit wanted to go after Shell. And his storyline, was slam the clam. So who’s the clam? Shell.

So I went to him and I said, Phil, come on, this sounds kind of hokey. I mean, you just say slam the clam and stuff happens? Come on, tell me how does stuff happen here? And he said, I think, you might think it’s a simple little thing, but it’s extraordinarily how powerful the effect is.

First, he said, I didn’t need a slide to get that idea across. I just told people, slam the clam. They got it, it stuck. So it survived the car journey home. Most of us listen to leaders who when they make big announcements, you simply sit in your car, you drive home, you’ve forgotten what they said. So this guy said, look, it survived the car trip home. And I said, okay, I grant you that.

What else did it do? And he said, people would sit in a meeting, and they would say, where should we put new gas stations? Ultimately, it would all come down to one thing. Does it slam the clam? Where do we put advertising dollars? Does it slam the clam? Where do we put R&D dollars, where do we hire people, anything you did, you just had one question to actually focus on, and that’s the power of the story. So, that’s something you really ought to think about.

The second important point I want to make is, I want to focus on number four called cut cognitive load. So, one of the most famous articles in Psychology is by George Midler, it’s called the Magic Number 7, Plus or Minus 2. And, the idea is that there are seven things we can actually keep in our head. And, that’s what we can keep in working memory, that’s what we can actually process in terms of attention.

You actually increase the load to beyond seven. What happens is, willpower is amazingly eroded. So here is a lovely experiment done by Roy Baumeister and his colleagues. They took a large group like you and randomly put you into two conditions. So both groups, of course, they don’t know that the other group is there. They’re given 10 math problems, and you have to answer them, in exactly the same sequence. Unbeknownst to the participants in the experiment you can only answer four of the 10 in the ten minutes given to you.

So what they experimenters do, is they actually tell people in this one group, hey, before you solve the 10 math problems, just write a two paragraph essay, some topic. Hypothetically, let’s assume it’s the City of New York, write an essay without — but make sure you don’t use words that actually have the letters Z, or X, which is easy, because a lot of English words don’t have this particular conjoining of the letters.

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This group, they amped up cognitive load, they say, write a story about New York, but don’t use the letter M and the letter A. That’s tough, and then please solve the math problems. So everybody does that and the experimenters go back to these people and say, you know what, instead of like getting each of your answer sheets, physically verifying it and giving you a dollar for each correct answer, why don’t we scream the answers, and you tell us how many of you got right. We’ll give you a buck.

But this is where the experimenters become very clever. So, they actually make sure in each room there is a paper shredder. So, they tell the participants, take your physical answer, shred it. Nobody will know how many you got right, and tell us how many you think you got right, and we’ll pay you a buck. They do this for this group as well.

Now this group that was asked to write an essay without using the letters M and A, how many answers do you think they claim they got right? And remember, you can only get four right. The average number they claim they got right was eight. And what about that group there? 4.75, now, because you’ve randomly assigned people, it’s not that dishonest people were here and honest people were there. You’ve randomized with respect to inclination towards honesty.

What happened in this group, what happened was they increased load, they put temptation in their way. What form did the temptation take? The paper shredder. And once you use the shredder you can tell me how many answers you think you got right. I’m going to give you a buck for every correct answer. For four extra bucks, basically they cheated and they lied.

And, why is that? It’s not that people are saying, oh my God, this was a hard task, that’s why I’m trying to get more money out of you or something like that. When you — what is it you need to actually resist temptation? Willpower, that’s exactly right. Most of us think willpower is here, brain power is here, but they’re actually much more interdependent than we ever have realized.

And what do we do in companies? To our employees. What do we do in terms of their brain — demands on their brain power? Is that going up or going down? Going up! And then what do we do? We sit and stand in front of them and say use your willpower. You think they have any to use? Obviously not.

And what a lot of executives therefore, the smart ones do is they’re constantly thinking about, how do you actually lower load? How do you actually make sure that the willpower kicks in? Because, remember, excellent organizations, you don’t need to tell people what to do. They know what the right thing is, they’ll do it.

So, and for you, as you think about your – I was just actually at a company whose name I can’t mention. And I asked one of their executives, hey when you had to order laptops in your company, how many people had to approve it? He looked at me and said 18 approvals. I’m thinking to myself 18 approvals. That’s a lot of approvals for a laptop purchase. What are most people going to do? They’ll give up, just screw the laptop. I’m not going to go and get like 18 approvals to do this, and that giving up is the worst kind of problem you can have. So you really want to think carefully about cognitive load.

The last thing I want to touch on is, most people think that going from good to — I mean, going towards excellence is a journey where you just pour in good into a system. And that’ll get you to great. It turns out that the real thing is bad is way more powerful than good. In fact, a basic finding in psychology is bad dominates good all the time. So if I ask you, what are your most powerful memories, bad memories rush to the forefront. What are the most formative relationships, bad memories kind of quickly — bad relationships surge to the forefront. In one study of marital couples, married couples, they found that for every nasty thing you said to your partner, you had to at least say a minimum of five good things to offset it, so you can imagine.

Now the point is, if you don’t focus on the bad and only focus on the good, you’re in trouble. So, the best experiment on bad versus good was actually done by Philip Zimbardo here, that’s the broken windows experiment. It wasn’t some cop in New York who figured this out.

Philip Zimbardo did a brilliant experiment in 1969. He took a VW, put it in Brooklyn, broke the windows of the car, and started filming. And guess what? If you see the film, you actually have a father with two kids, he sees the broken windows, quickly steals the radio. And within an hour the car’s like wiped clean, ransacked. It’s become a playground.

So, Zimbardo says, maybe we ought to try the experiment in Palo Alto, after all Stanford University, maybe people are better, maybe people are more civic minded, et cetera. So, he keeps the car, people are kind of puzzled, they say hey, whose car is it? But Zimbardo says, let me break the windows here too. And he breaks the windows here too. What do you think happens in Palo Alto? Exactly the same thing that happened in Brooklyn. What do broken windows tell people? That’s exactly it. Nobody cares, and that’s what you’ve got to really focus on first.

So, there’s a lovely case of this Chinese refrigerator company called Haier. Lousy refrigerators, they were making bad, lousy refrigerators. What would most companies do? Let’s get black belt, blue belt, green belt, whatever it is, and beat you them, et cetera. You over invest in them. But this guy said, wait a minute. It’s nuts doing all this statistical quality control and TQM, when the bathrooms the workers using are terrible. That’s the broken window I need to fix. Because what do the lousy bathrooms tell the workers? Nobody cares. And how can you ask them to care for the customer? So, that’s where he started.

So, the real question for you is, you’ve got to always ask yourself, what is your broken window? And one other piece of interesting research. There are a number of women in the group here, and I know the WIN folks just came in a little bit late as well. Particularly for women executives, the scaling challenge is always more likely to be bad to great. And the reason is, because of something called a glass cliff.

It turns out that a glass cliff is obviously very different than a glass ceiling and so on, terms, I’m sure all of you are familiar with. The problem with the glass cliff is, women are actually given leadership opportunities where the chance of failure is very high. So, they’re given actually precarious jobs. Stuff to sort of succeed in these jobs. One reason is, the men have declined them, which is one reason. They get these jobs, and the women accept them, because they’re not sure they might get a second chance. But there is also experimental evidence that suggests that people, when they ask women to be leaders in situations where the performance is poor, usually when you think of crises they actually gravitate towards a more female stereotype of a manager. But that’s the experimental kind of evidence.

The long and short of it is, I was of course giving a talk to a group of 300 women executives. Of course I was telling them this and they said, of course, we know this. They call it the glass cliff, we’ve known this for a while. But the challenge is you always have to figure out how is it you’re going to start from the bad to the great.

We have — I thought I’d give a little more time for questions, but I’m a professor. I got caught up with my own, little sharing of the book idea, so pardon me for that. But if we have time, let’s take a couple of questions. And then I’ll make a quick closing remark, and then you can head on to wine and food and merriment and enjoyment. So, any questions that you might like to ask?

Question-and-answer Session

Audience: What was about the implications from feature expert obviously, that might be viewed as a model, and about scaling assets?

Huggy Rao: Yeah. The fact that she was actually saying I am not going to wait for anybody, I’ll do it myself. That’s what real excellence is. So, the people who are excellent, that’s kind of what they do. Let me — one of the heroes in our book, and thank you for asking that question. One of the heroes in our book is a guy called Doug Dietz. Doug is a senior executive at GE Healthcare. You go to his office he’s got plaques, awards, but that one day went to a pediatric, radiology section and you had young kids afflicted with cancer who actually were — had to have MRIs. And Doug sees these young children screaming with fear. Nearly all of them had to be sedated. And he says, is this the kind of product I’m making? That’s scaring young kids, and they have to be sedated. Parents have to entrust their seven year old to somebody, who’s going to sedate them.

So what did Doug do? Doug was one of the first additions of our customer focused innovation program. The guy goes back, spends time in daycare and kindergarten, observing young children. And then it dawns on him and he says, oh my God I’ve been stupid. I’ve been developing an engineer solution to a child’s problem of anxiety. I need to develop a child solution, to the child’s problem of anxiety. And what does he do? In the new line of things that he’s come up with, and he had to fight against a lot of people in GE who were saying, do we need to do this? Do we not? Why and where for?

So, in the new line of products, what’s amazing is, if you go to an MRI, one of the MRI, the front end of the MRI, actually looks like a space capsule. So, you tell a young kid, hey, you’re going inside a space capsule. They’ve forgotten it’s narrow that it’s actually claustrophobic. You’re kind of saying, you know? Okay, that sounds cool. So what, you know?

Another one. There’s an X-ray machine that shakes a lot. And, so what they’ve done is they’ve redesigned it as like the rapids. So, they tell people, hey, you’re in a raft. It’s going to go over the rapids. It’s going to shake like hell. But, it’s going to be fun and, they do all these little things and it’s extraordinary what happened to sedation rates, they actually fell down by a large margin. Customer satisfaction went up and, of course, processing times improved.

Doug got promotions, and as we were writing this book, Bob and I were on the phone with Doug. And, you know, Doug, what’s going to happen to you, now that you’ve become a VP? And he says, no I just declined the promotion.

I said what? Why did you decline the promotion?

And Doug said well, I came home one day. And my wife had just come back from a mammogram. And like most males, I sort of asked her, honey, is everything okay? Was it okay? And Doug’s wife is definitely pissed off. So, she kind of quickly realized that Doug needed some serious user feedback to put it mildly. So she looked at Doug and said, come, let me show you what it feels like.

So, yeah, I know, I know. Poor Doug, you know? Unsuspecting Doug. He’s actually led into the garage. She opens the garage door, and says, Doug, put your thing out. I’ll show you what it feels like. And Doug says, oh my God. And he looks at her, and says, message received. I actually, I’m going to focus on this. And that’s what he’s been doing for the last year and a half. What’s he been doing? Coming out with a new range of mammography environments, where you actually can lie so fine and the images are much better. You don’t need to face the excruciating pain, pressure, all of these kinds of things that a lot of people go through.

So, when I think of that young school teacher, it’s like, you don’t wait for people to tell you what to do. You do sort of what you need to. Yes, please. Right there.

Audience: You talked a little earlier about the pre-mortem as an idea where people kind of write down how they would fail.

Huggy Rao: Or how they would succeed, too.

Audience: Yes, how do you prevent the people who write the failure condition from freaking out? Or you know, maybe fulfilling the prophecy themselves?

Huggy Rao: So, that’s a reasonable question. So what you want is you want to stimulate their imagination, but you don’t want to arouse their anxiety is kind of the other way that you put it. So, what you have to do is you actually have to give them reasonably detailed instructions that serve as kind of mental scaffolding, so they’re not going to go off the deep end. So, what you want is you actually — so for instance, you would say, here’s a story that, when you fail, this is the kind of story that’s going to feature in the pages of NYT or whatever magazine. And then you say, write a story. And when you write a story, you actually give them a page limit. So they don’t need to go on and on. And you tell them you can write the story any way you want. You can write it as a memo. You can write it as whatever, but it has to be a story and not a list.

And usually what people do is they actually give pretty granular kinds of accounts. Now, I found that the stories of failure are actually little more concrete than stories of success, and the reason you need to do both is, what causes failure may be quite different from what causes success. It’s not like you have five factors, high on everything success, low on everything failure, it doesn’t work like that. Life’s too complicated to work like that, and so you have to take those things. You then have to put them together, and then you have to analyze what the common themes are. I usually like to — after reading when I work with companies, I usually gather all these premortems, and I present them not in the sense of, like so many people said this or that, but you present them more in the visual of a downward spiral and then an upward spiral, people say oh my God, that’s where we need to start earning.

Audience: Do the same people write both stories?

Huggy Rao: No, you have to actually – because once you’ve imagined one thing, it’s hard to reimagine the other. So you got to make it random and not say, well, let me go to the optimist and let me go to the pessimist and that kind of thing. You don’t want to do all that. Just make it random, one page, and anonymous, independent, they actually ask, you can actually get a lot of useful things. By the way, you might want to do that if you’re thinking of taking new jobs, too. So you should really do a pre-mortem of the job and ask the person hiring you, or if you’re the person hiring somebody, you can actually do this sort of interchanging because that’s really what you want to negotiate about, not simply how much you’re going to be paid, because everything’s about the runway. Is it a short runway, is it a long runway, how to prepare the runway?

One more question please. Then we’re going to be out of time.

Audience: I read Marty Seligman’s book which references the five to one ratio for couples, and he also talks about how there’s a three to one ratio for organizations, of positive comments to negative comments. So I’ve implemented this in my organization, but one of the questions that I’ve always had is, if people in meetings sit around telling each other how fantastic they are, then there can be a demotivating effect of basically being average or okay. So is there any experimental evidence of a top side to that ratio of when organizations are too positive and the employees don’t feel enough motivation?

Huggy Rao: That’s an excellent question. I think what you don’t want to do is, Seligman’s view, of course, is it’s all about positive thinking and positive emotion and there’s certainly quite a bit to kind of recommend about that. But if you only give people information about what is it that they’re good at and you don’t talk about their failure, clearly, you’re giving them biased information, and paradoxically, that very bias in the information causes people to discount the usefulness of it.

So, what you want to give people is, the way I sort of think about it is, it’s not feedback but feed forward. So it’s not like what did you do well or what did you do poorly. What is it you need to do in the future? Because a little bit of the rearview glass is a useful thing, but you got to get them to think of what is it they’re going to do in the future? And I think when you think of the negative things, here the important thing, of course, is not to fall prey to the fundamental attribution error.

Audience: [Question Inaudible]

Huggy Rao: Yeah. I don’t think there’s like an upper bound if that’s kind of what you’re referring to. Our interest of course, in the bad being stronger than good is I sort of think of that as a nice study. That tells you how potent bad is and why you need to pay attention to it. I think a lot of it is also quite honestly the kinds of people you hire. I was actually with the CEO recently and I said, what’s your secret of hiring? How do you scale excellence? And he says, well, I try and actually look for people who are tougher on themselves than I am on them. I don’t need to micromanage it. Then I can put an arm around them.

Now the catch is, how do you find those people? And sometimes you can find them in the oddest of spaces. One lovely story I heard from a hedge fund executive in New York was, I said, how do you hire people at the entry level? You get to like math jocks and, so forth, or whizzes and so on and so forth, or how do you go about doing it? He says, no, we actually aim to hire athletes from the best university. I said, athletes, like, exactly what does that tell you?

He looked at me and he said, the great thing about athletes from the best universities, is they may not eventually succeed in terms of a professional career but they have two amazing characteristics. The first thing is, these athletes have an incredible capacity to do repetitive work. Hundred meter, swim. Do it again. Do it again. They can do that for a long period of time. The other thing he said, which was like a brilliant line was, he said they’re the most open to feedback. They can be coached. Because what do you do if you’re an athlete? You get the hundred meters. And then you sort of look at the coach and say, what did I do wrong? What do I need to fix? So he said, that’s why we need to — we hire people like that, because they’re actually craving that feedback. But they keep on doing the repetitive work. And they’re not all thinking they want to be running the company, imminently soon or whatever it is.

So it’s 6:15. My hope is this has been useful to you. And you want to actually think of taking some of these ideas about scaling excellence. So as you scale them and if you have a chance to read the book, by all means please write to me with questions, stories, and the like. That’s how at least I get educated.

But I want to close with one little story, hopefully that kind of inspires you a little bit. And that is, sometimes when you have to scale excellence, you don’t have resources. You don’t have money, you don’t have the people, you don’t have all these things, how do you do that? And a great example of that is this chain here called Cost Plus World Market in California, when the CEO took over the company, the stock was I think at a buck and a half a share, when he sold it to Bed Bath & Beyond I think he sold it for twenty two dollars a share.

So I asked Barry Feld, I said, Barry, how did you turn this place around? I said, did you pay out big bonuses? He said, can’t do that, no money to do that. Did you hire great people? Can’t do that. Did you train them? He said, how can I train people? We sell, jam from Sweden to handicrafts from Kenya to whatever, nobody can have all the product knowledge, it’s too complicated.

So, I said, what did you do? And he said like, well, we figured out that the real task is to get people to buy more than one thing when they walk into a store. So I said, what did you do? Did you have an incentive program? The more people bought, the more people got paid? He said no.

I said, what if you do, then? He said, we told our employees to do two things. When a customer walks in, smile. And the second thing is, when a customer walks in, give him or her a basket. That’s it. That’s what you need to do. Because the moment you give them a basket, the probability of them purchasing more than one product has shot up substantially.

Then I’m going to just buy one thing. They’ll probably buy three things. It was the most effective thing that we did, he said.

And my question to you, as you’re thinking about scaling up excellence in your own respective organizations is, what’s the equivalent of your basket? So think about that.

It’s 6:15, I’m out of time. Thank you so very much. Thank you.

 

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