Failure is Life. Stasis is Death

The human ability to learn from others is the source of our enormous advantage in the animal kingdom. We can pass on knowledge across time and space to a much greater degree than other species and build on that knowledge over time in ways that no life before us could. And yet we suck horribly at learning from others.

In my business, I have seen many occasions where someone has been exposed to a profitable strategy at one firm and then utterly failed to replicate it. Very smart people who understand exactly how a trading algorithm works can have enormous difficulty reproducing it.

Blockbuster video could see Netflix and Red Box coming a mile away. It tried to compete with both of them, and was much bigger and had more resources than either at one time, but it just couldn’t get the details right.

Amazon’s business strategy was no secret (at least its retail strategy). Wal-Mart had an enormous and very efficient distribution system and has spent many $billions trying to compete, and yet Amazon continues to grow and take market share year after year.

In “Thinking Fast And Slow” Kahneman describes 2 different systems for thinking. Type 1 thinking is fast, easy and intuitive. Type 2 thinking is slow, deliberative, effortful and more logical.

I think the notion of Type 1 vs Type 2 thinking can be easily generalized to organizations. The tasks that the organization has been streamlined to accomplish with little bureaucracy or internal effort are Type 1. New or different tasks that the org is not optimized for are Type 2. Amazon was built to be a Type 1 e-commerce business. Wal-Mart, even with so many more resources and expertise, couldn’t make that effortful change to develop new efficiencies and become Type 1 at e-commerce as well.

On Jon Stewart’s episode of “Comedians in Cars Getting Coffee” he says that the hardest thing he ever did was shifting the focus of the Daily Show from celebrity news and a light tone to political news and a harder satirical tone. It seems like such a small change. The format stayed the same. It was still a half hour TV show where he sat a desk and read jokes about news stories. But apparently just making an adjustment in the content of the jokes was a multi-year battle behind the scenes. Its amazing just how difficult it is to make any deliberate changes to the core functioning of an organization that is successful. The inertia and habits are ingrained at every level.

This is my experience in the trading industry. Every successful strategy seems to be embedded within the very particular organizational capital and capabilities of a specific firm. Trying to do something similar elsewhere seems like it would be so easy, but in practice it is next to impossible. The whole organization has to shift to accommodate the strategy and most of the time it simply can’t be done. Earlier in my career, my thought was always that if I could just learn what the successful firms were doing, their secrets, then I could be much more successful. Mostly, there aren’t secrets and what there are can’t really be transferred.

We dig ruts of habit and efficiency in our organizations, and getting out of them to make a change is an enormous task. Therefore, its a very good thing that corporations tend to not live too long. Its inevitable that successful corporations will develop habits that make it difficult to adapt to major changes. So once new firms bring that change about we see old firms shrink and die. All the innovation and success of our economy is based on this ability to destroy organizations as soon as they are not useful and free up the resources within them.

Other organizations like governments and Universities have the same issues. They get good at doing certain things in certain ways, and it is very difficult to get them to make substantial changes. For core government services it seems like stability and predictability are more valuable than innovation, so having a very long-lived and hard to change organization may be an advantage. However, everyone expects universities to be crucibles of innovation, and many people expect government to change in fundamental ways, and those hopes are probably in vain. Other people fear potential change in these very old and nearly static organizations, and those fears are almost always overblown.

Someone overestimating the risk of change.

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