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Read extracts from this year’s Bracken Bower Prize finalists.
- Rethinking the Unthinkable by Christopher Clearfield and András Tilcsik
- The Fog of More by Jonathan Hillman
- Brave Old World by Irene Yuan Sun
Winning proposal: Rethinking the Unthinkable
Managing the Risk of Catastrophic Failure in the Twenty-First Century
By Christopher Clearfield and András Tilcsik
This was not our drilling rig, it was not our equipment, it was not our people, our systems or our processes.
– BP CEO Tony Hayward, 13 days after the explosion aboard Deepwater Horizon
Despite Mr. Hayward’s assertion, it was ultimately BP’s failure to manage the myriad risks of deepwater drilling that caused a tragic loss of life, widespread environmental damage, and a bill of upwards of fifty billion dollars. The failure of Deepwater Horizon, and BP’s inability to contain the subsequent oil leak, was not simply a failure—it was a system meltdown.
It’s not hard to find other examples that reveal unexpected fragility in our systems. In the winter of 2009, weather conditions caused the breakdown of Eurostar trains, stranding 2,000 passengers inside the Channel Tunnel and contributing to a transportation standstill across western Europe. In October 2012 emergency generators at New York University’s hospital failed during Hurricane Sandy, forcing the evacuation of critically ill patients. Earlier that same year, incorrectly deployed software at the market maker Knight Capital flooded the stock market with millions of unintended orders and caused Knight to lose nearly half a billion dollars in just 45 minutes. Indeed, the Global Financial Crisis, including the bankruptcy of Lehman Brothers, the near-collapse of AIG, and related liquidity shocks, represents a series of interconnected system failures.
Though these failures look different on the surface, many of the underlying causes are surprisingly similar. Modern systems are steadily becoming both more complex and more interconnected in ways that are not well understood.
In simpler systems, most risks stem from predictable disruptions, and small mistakes tend to have minor and well-understood consequences. In contrast, in many modern systems, small errors can combine in novel ways to yield large failures that are hard to understand even as they unfold. To understand this distinction, compare the physics of throwing a ball with the dynamics of an avalanche. A ball follows a predictable path, and the harder you throw it, the farther it will go. In contrast, an avalanche can be triggered by a small event that unleashes a wildly more powerful response.
Systemic challenges are proliferating and reshaping the modern risk landscape. In a recent survey of C-suite executives, nearly 60% reported that the volume and complexity of the risks they face have increased substantially over the past five years. Objective measures, too, suggest that the physical and financial context in which organizations operate has become radically riskier. According to the IMF, the recent worldwide cost of natural disasters has far outpaced the growth of global GDP. Similarly, since 1973, banking and currency crises around the world have been occurring twice as frequently as they did during the Bretton Woods period, leading some economists to conclude that “there is something different and disturbing about our age.”
As systemic challenges proliferate, they are increasing the penalties for failing to address technological complexities, organizational weaknesses, and cognitive challenges that organizations might have been able to safely absorb in the past. As a result, the measures that once served organizations well in managing risk—instituting rules and controls, scenario planning, and bringing in additional expertise—are no longer sufficient.
Through our research, we have identified a set of complementary interventions that are taking on new importance in enabling organizations to detect early warning signals, reduce the number of errors that can trigger cascading failures, and develop more effective crisis response capabilities. Tracking near misses, for example, is a powerful way to learn from early signals of potential catastrophe, and there are notable success cases, particularly in aviation and healthcare. Likewise, organizations become more resilient when leaders appoint designated sceptics: devil’s advocates who stress test estimates, explore extreme scenarios, and challenge optimistic assumptions.
It is also fundamentally important to avoid pushing through during a crisis. Sticking to an existing plan even in the face of new, contradictory information has played a key role in a variety of failures, including the Deepwater Horizon oil spill, Nasdaq’s handling of the Facebook IPO, and numerous aviation accidents. While there will always be pressures to continue in the face of uncertainty, executives can foster norms that help organization members overcome the psychological challenge of conceding (temporary) defeat by halting an ongoing process or giving up on a planned course of action. At a trading firm we worked with, for example, one junior trader reported that he had never received as much praise from senior managers as when he stopped an apparently profitable trade after realizing that he did not fully understand it. Such feedback helps to create norms that, one day, may prevent catastrophe.
The solutions we present don’t require large financial investments or expensive technologies. But that does not mean that they are trivial to implement. Organizational cultures often celebrate self-confidence, decisiveness, persistence, accord within a group, and good news. In contrast, reducing the potential for catastrophic failures requires an emphasis on the importance of doubt, hesitation, dissent, and the sharing of bad news. A cultural shift in this direction can be an extremely difficult leadership challenge, especially in high-performing organizations unaccustomed to failure.
Despite these challenges, there are important cases of success. Since the late 1970s, for example, commercial aviation has undertaken radical changes to create an effective risk management culture—reducing hierarchy to encourage dissent, creating designated skeptics, tracking near misses, and fostering norms of stopping. As a result the industry has achieved massive improvements in safety even as aircraft and operations have become significantly more complex. As the risk landscape continues to shift, the ability to implement such interventions will become one of the defining traits of successful organizations.
Christopher Clearfield is a Principal with System Logic, a boutique consultancy focused on risk and decision making.
András Tilcsik is an Assistant Professor of Strategic Management at the Rotman School of Management at the University of Toronto and a Fellow at the Michael Lee-Chin Institute for Corporate Citizenship.
You can read more about their collaboration here.
The Fog of More
By Jonathan Hillman
Go ahead, quit. Throw in the towel. Pull the plug. Jump ship. Drop out. Retreat. What’s stopping you from stopping?
Quite a lot, as anyone who has ever considered leaving a job, unwinding a losing investment, or terminating a costly project can attest. The more you’ve sacrificed and the closer the finish line feels, the greater the temptation to continue. Quitting also carries a nearly universal stigma. At best, it’s failure’s cowardly cousin. When friends and colleagues are urging you on, quitting sits on the table like a toxic cocktail, part embarrassment and part betrayal. Add in organizational and political forces resistant to change, and even when all signs point toward failure, the pressures to persist can be overwhelming.
Yet before they were winners, many of history’s heroes were quitters. While leading America to independence, George Washington won only three of the nine major battles he fought against the British. By mastering the art of retreating, he learned from each encounter and always survived to fight another day. For others, quitting freed up resources and provided the focus needed to succeed. While launching a historic turnaround of General Electric, CEO Jack Welch oversaw the divestment of 117 business units responsible for roughly 20 percent of GE’s corporate assets. From the battlefield to the boardroom, success is often recounted as a steady crescendo of victories, each achievement building seamlessly on the other. But a closer look often reveals false starts, dead ends, and a few savvy quits.
Widely overlooked and undervalued as a skillset, quitting will become even more important in the coming years. As businesses adapt to rapidly changing environments and prepare for the possibility of a prolonged period of lower global growth, quitting will be essential for increasing productivity and protecting margins. Already, consumer goods giants are shrinking their brand portfolios, retailers are consolidating their stores, and energy companies are slashing capital and exploration spending . According to one survey, almost one in four American CEOs plan to divest a majority stake or exit a business in 2015, nearly twice as many to give the same response just a year ago. These decisions can ripple across organizations and even outside them, impacting employee morale, resource availability, and investor confidence.
Looking forward, innovators will also need to be well-versed in quitting. In a number of industries, rising research and development costs make it essential to identify and terminate failing projects early on. Semiconductor producers, for example, are brushing up against the limits of physics as engineers struggle to keep pace with the well-established trend of higher computing performance at lower cost, predicted by Moore’s Law. Creating challenges for researchers and patients alike, the cost of developing new medicines has skyrocketed tenfold over the past four decades. Examining these dynamics, one study of over 800 molecules found that the single strongest predictor of development success was having a high early termination rate. In other words, the most successful drug developers quit fast—and often.
Strategic quitters will also have an edge in tomorrow’s workplace. Online talent platforms like Upwork are helping millions of workers market their skills to clients around the world, and co-working spaces are emerging to support virtual work. As more people tap into this infrastructure and work as freelancers in the coming years, they’ll need to become their own portfolio managers, deciding when to start and leave projects. Meanwhile, many of the same global forces increasing worker freedom will also increase worker competition. To thrive, workers will need to become even more highly specialized. This preference for depth over breadth will advantage those who can find a passion, focus intensively on it, and quit unnecessary distractions.
Despite its importance, quitting remains poorly understood and haphazardly practiced. Part of the challenge is that much more attention has been given to starting ventures than ending them. One survey of American businesses found that 87 percent of owners did not have an exit strategy or had not documented or communicated their strategy. The Boston Consulting Group has suggested that most businesses don’t have R&D project termination policies, or don’t follow them. Another difficulty is that because of its stigma, quitting is rarely discussed, even after contributing to success. Thanks to effective public communications strategies, some well-executed quits are barely noticed because they don’t seem like quitting at all.
Unfortunately, the popular business literature has treated quitting as more harmful than helpful. As one bestselling author tells readers, “Minimally invested in their work, quitters are the dead weight of any organization.” Despite a growing recognition that quitting can be useful, writing in this area remains long on platitudes and short on practical tools for deciding when, and how, to quit.
But when quitting is viewed as a process of de-escalation, there is a fragmented academic literature that is waiting to be unified and made more accessible. Behavioral economists and psychologists have uncovered a minefield of cognitive biases that make quitting difficult, including the difficulty of recognizing sunk costs, the need to justify past decisions, and over-optimism, among others. Management experts have revealed barriers to business exits and project dynamics resistant to change. Other social scientists have identified political impediments to ending everything from nuclear power plants to military conflicts, including what the military strategist Carl von Clausewitz famously called the “fog” of war. Each of these perspectives provides insights for navigating what I call the fog of more: a cloud of psychological, organizational, and political factors that favor persistence and escalation over de-escalation.
Weaving together recent academic research and colorful case studies, The Fog of More is an entertaining and practical guide to leveraging the power of quitting. It identifies the most common barriers to quitting, and pushing back against empty aphorisms like “winners never quit,” it shows how winners quit. Successful quitting strategies are illustrated in a number of competitive contexts, from the wilderness to war, and from the Tour de France to the fighting ring. Also profiled are successful companies that are embracing quitting to improve their performance. Pulling these lessons together, a final section provides recommendations for exit planning, assessment, and execution.
The point isn’t that quitting is always the right choice. But that too often, quitting isn’t seriously considered until it’s too late. Recognizing and confronting the barriers to quitting can also reveal better paths forward or provide the confidence needed to persevere. Approaching quitting as a strategic process forces decision makers to think systematically: clarifying goals, gathering intelligence, exploring alternatives, and assessing options. Casting aside the stigma of quitting reveals that sometimes, the best endings are also beginnings.
Jonathan Hillman is Policy Advisor at the Office of the US Trade Representative. The views expressed here are his alone and do not reflect the official policy or position of the US government
Brave Old World
Why China’s Investments in Africa Should Make Us Rethink Economic Development
By Irene Yuan Sun
Sun Jian is from Wenzhou, a mid-size city in southeastern China. Nearly four thousand years ago, Wenzhou invented a lustrous pale green glaze called celadon, and in the process, became the birthplace of Chinese ceramics.
By the 1970s, however, times in China were tough. After elementary school, Mr. Sun dropped out. At age 13, he started working in factories. But at least he was in the right place: in 1978, two years after Mao Zedong’s death, Wenzhou became the first city in China to set up private enterprises.
Mr. Sun worked his way up several factories in the leather processing business, eventually saving enough to own his own factory. By the late 2000s, however, costs were climbing at an alarming pace, and he knew he needed to move his factory out of China. After considering everywhere from Bangladesh to Uzbekistan, a friend told him about a place called Nigeria.
He went for a five-day visit. “I got off the plane, and immediately all these poor people were asking for money,” he recounts. “But then I realized there are a lot of rich people too, and although it’s hard to make it in this market, I realized that it’s just as hard for everyone else as it is for me to make a factory here.” Back in China, he called a contact at the customs authority and asked him what the physically heaviest product being shipped in large quantities to Nigeria was. The answer? Ceramics.
With that, Mr. Sun devoted nearly forty million dollars to building a ceramic tile factory in Nigeria. His factory runs 24/7, and it produces 56,000 square meters of ceramic tiles—enough to cover ten football fields—every day. He employs nearly eleven hundred workers, a thousand of which are locals. Electricity is unreliable and costly, but still, business is good. Nigeria, with its relative lack of competition and booming demand, allows Mr. Sun to earn a 7% profit margin, compared with 5% in China.
Mr. Sun is making more money in Nigeria than he could in China, and he believes Nigeria is profiting too. “The train of development—which station first and then which station you need to go through—we Chinese know exactly what the path is. Nigeria needs to learn from China! For Africa, the Western path is unwalkable.”
* * * * * * * *
China is the biggest foreign player in Africa. In 2009, China became Africa’s largest trade partner, with double the volumes of U.S.-Africa trade. In infrastructure, China has provided two-thirds of Africa’s new investment since 2007. And Chinese entrepreneurs like Mr. Sun are flooding into Africa: China is Africa’s fastest growing source of foreign direct investment, with an annual growth rate of 53% from 2001 to 2012.
This rapid development of China-Africa ties is no mere curiosity. For fifty years, the West has engaged in countless poverty alleviation and development assistance programs in Africa, yet Africa still has the largest number of people living in extreme poverty of any region in the world. The fact that the Chinese see Africa not for its poverty but for its potential wealth is striking. What makes the Chinese development mindset so brave, allowing it to envision prosperity where others only see dire need? What about this old civilization allows it to pursue this new vision with such sureness? And what does it mean, for Africa and for the world? Does it offer yet another path towards dystopia, or a truly new way for poor countries to build a better future?
* * * * * * * *
Brave Old World is an account of Chinese development practice in Africa that destabilizes Western dogmas about economic development and invites readers to consider whether a radically different path toward prosperity is possible. It challenges readers to consider whether the best partners for developing countries are not Western nations that have long sat atop the economic ladder, but rather other developing countries with fresh, practical experience in climbing that ladder.
In the West, the term economic development has become intertwined with aid, but to Chinese actors, it means business. In its sheer scale, China’s investments in Africa connote a seriousness about Africans as consumers and African countries as markets that the West has never shown. And far from being a concerted, carefully strategized push orchestrated by the Chinese government, the Chinese relationship with Africa features individual entrepreneurs like Mr. Sun, whose business plans are highly flexible. These features—market-driven, decentralized, flexible—allow Chinese entrepreneurs to find business niches where others struggle and to create markets where there were none before.
For Africa, there is a fight just beginning to become the next ‘factory of the world’—that is, to win a share of the Chinese manufacturing operations that are now looking offshore for lower labor costs. China itself developed on the backs of factories offshoring from Hong Kong and Taiwan, and China’s entrepreneurs in turn might provide the scale of jobs and technology transfer necessary to transform African economies.
But to take advantage of this development, Africa needs to step back from the false clarity of recent Western-led development programs that privilege delivery of social services today over longer-term goals. The international public health apparatus is one example: in its seemingly unobjectionable push to save lives as soon as possible, it unwittingly reinforces Africa’s inability to make the drugs it needs to treat its own people.
We live in a once-in-a-century moment in which the entire global development apparatus is being reconfigured, with China driving the creation of the $100 billion New Development Bank, the $100 billion Asian Infrastructure Development Bank, and the $40 billion Silk Road Fund. For the first time, developing countries are shaping the core institutional structures and norms of global development. In this context, China’s approach in Africa matters profoundly. It shows that another way of helping poor countries grow is possible, and it may be our best hope yet that the next century will be one of global shared prosperity.
Irene Sun is a graduate student at Harvard Kennedy School / Harvard Business School