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A Theoretical Physicist (and Entrepreneur) on Why Companies Stop Innovating

A Theoretical Physicist (and Entrepreneur) on Why Companies Stop Innovating

Safi Bahcall, a former biotech CEO, began his profession as a theoretical physicist before joining the business world. He compares the second that progressive corporations grow to be complacent ones to a glass of water freezing, turning into ice. The weather are the same, but the structure of the company has changed. Bahcall gives ways for growing corporations to avoid these inevitable forces and proceed to innovate. He’s the writer of the e-book Loonshots: Find out how to Nurture the Loopy Concepts That Win Wars, Remedy Illnesses, and Rework Industries and the HBR article “The Innovation Equation.”

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TRANSCRIPT

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Enterprise Evaluation. I’m Curt Nickisch.

For a while there, Nokia was the poster baby of an revolutionary company. The Finnish conglomerate went from manufacturing rubber boots and toilet paper to building the primary mobile community. In the early 2000s, Nokia was selling half the cell phones all over the world.

CEO Jorma Ollila pinned the success on tradition. “You’re allowed to have a bit of fun,” he informed Fortune journal. “To think unlike the norm … to make a mistake.”

Assume in contrast to the norm is what a workforce of Nokia engineers did in 2004. They pitched a telephone with a shade touchscreen, and an app retailer to go together with it. Company management shot the ideas down.

Properly, Apple launched these concepts three years later, and the remaining is history.

So how did Nokia go from being one where innovation is taking off, everyone is nimble, and issues simply appear to click, to at least one that seemingly in a single day gets stuck in previous methods?

Our guest at the moment compares this sudden shift in enterprise to a part transition in chemistry, like when a glass of water freezes, turning into ice. And he believes corporations want to know the forces working towards them. Identical to including salt to water to lower its freezing temperature, he says corporations can add issues like higher incentives to take care of an revolutionary structure.

Our guest as we speak is Safi Bahcall. He’s the previous CEO of the biotech firm Synta Prescription drugs. He’s the writer of the guide Loonshots: How one can Nurture the Crazy Ideas that Win Wars, Remedy Illnesses, and Rework Industries. And he wrote the HBR article “The Innovation Equation.”

Safi, thanks for coming on the present.

SAFI BAHCALL: Thanks for having me. Delighted to be here.

CURT NICKISCH: Now you came to business from science. You truly received a doctorate in a tough science and your mother and father have been truly dissatisfied that you simply went into enterprise from there. Inform us about that.

SAFI BAHCALL: Positive. Both my mother and father are scientists. They’re truly both in theoretical astrophysics. And I…

CURT NICKISCH: Yeah, critical stuff…

SAFI BAHCALL: Yeah, not kidding around. Truly, my mom works in cosmology and she or he once in a while, when she’s sitting on a aircraft next to anyone, she says, “oh. I’m a cosmologist.” they usually start dialogue magnificence ideas.

CURT NICKISCH: And make-up.

SAFI BAHCALL: Precisely. Not likely that sort of cosmologist. That may be cosmetology. However no, I grew up in arduous science and did type of physics and math, and that’s what I was positive I used to be going to be doing until, you get into your 20’s and later 20’s begin to actually assume, is this what I need to do for the remainder of my life?

And I don’t assume I had set foot off a university until I was 28 or 29. However I just observed I needed to – the world was rather a lot greater than the world of quarks, gluons, string concept. There was much more, and most the individuals I might meet truly were not specialists in quarks, gluons and string principle.

And I simply acquired very curious as a result of I, the folks that I encountered thought they have been as sensible as anyone in academia, if no more so. They have been just fixing totally different sorts of problems. But relatively than have type of infinite time, like you do in a graduate program and limited assets, it was the opposite method round. That they had restricted time and practically infinite assets.

CURT NICKISCH: It’s humorous that you simply left sort of this theoretical educational area to enter enterprise and now you’re writing a ebook that takes enterprise and tries to make scientific comparisons to it. So, I’m simply curious, what about your background obtained you into excited about enterprise in a different way than the individuals you have been working with?

SAFI BAHCALL: I feel I heard one physicist describe it pretty nicely. One of the things that you simply study is find out how to see via noise. Once I first began a company, a biotech company, creating new most cancers medicine, I used to be in my early 30’s. And I was a first time CEO, making an attempt to learn every thing I might, consuming from a fireplace hose all of the articles and books.

Things fell into type of two common buckets. One was the type of CEO biography. The second one was this type of extra educational, we surveyed 50 or 100 or 1,000 or no matter corporations and probably the most successful corporations appeared to do this. And those who have been much less profitable seemed to try this. Subsequently it is best to do extra of this, and never that.

The problem with that – and that’s in all probability the place my first physics, some more scientific coaching came in – was that suppose you do a survey and found that, take a look at complete return to shareholders throughout X corporations and you find that CEO’s who drank scotch outperformed CEO’s who drank bourbon. You’re like: “Oh, ok, so I should be drinking scotch. Let’s go shift and I’ll get three points up…”

No, that’s not likely – the methodology there doesn’t actually make it easier to.

CURT NICKISCH: So, you as a scientist have been taking a look at a number of the administration recommendation books that have been out there and just noticed weak and empirical considering in a whole lot of them. And also you have been troubled by that?

SAFI BAHCALL: Yeah. No, I used to be, I simply needed more. It’s like you realize, you’re hungry. You need something that might really assist you out. You’re making an attempt to build an incredible group, construct an awesome firm. You’re making an attempt to realize a noble, massive mission. You’re making an attempt to get good returns on your shareholders, on your stakeholders.

You’re making an attempt to do all that, so that you want one thing useful, but you also need the inspiration of what you get to be strong. So, for those who’re going to take recommendation and takeaways, you sort of need some confidence that it’s real. It’s not like, “oh, you should drink bourbon because we got this analysis.” You want one thing a bit more strong. So, I was slightly annoyed with that.

I feel there’s this mindset, it’s all concerning the CEO and the culture. So, you learn loads of administration books and stated, nicely the CEO have to be the CIO, the Chief Incentives Officer. Just pound the desk that you simply love innovation. And the problem is that doesn’t work. There’s so many books about tradition, however I don’t assume we’ve been spending sufficient time fascinated by construction.

CURT NICKISCH: Tell me more about that.

SAFI BAHCALL: All right. I’d start with a weird instance, however bear with me. Imagine you will have a glass of water and you stick your finger in the glass of water. You’ll be able to swirl it round and the whole lot just sloshes round. And that’s all the time true. Except, as you regularly decrease the temperature, unexpectedly the conduct utterly modifications. You possibly can’t stick your finger anymore. It freezes. It comes utterly rigid.

CURT NICKISCH: In science, this can be a part transition —

SAFI BAHCALL: It’s referred to as the part transition —

CURT NICKISCH: – in chemistry.

SAFI BAHCALL: However the molecules inside are precisely the identical. So, why do they abruptly change conduct? How do they know to instantly change conduct? There’s no CEO molecule with a bullhorn saying: “All right, let’s be liquid now,” and then “Oh, I think the temperature’s changing. Let’s be solid tomorrow.” There’s no CEO molecule. There’s no management. There’s no cultural discussion. It simply all of a sudden modifications.

And that’s what I mean by structure. Those sudden modifications should do with the dynamics of the interplay. They arise collectively from the dynamics of the interplay. And so, I sat down sooner or later and I stated: is there some way that this might probably be applicable to groups and corporations and organizations in a more systematic means?

And it turns out in case you write down what is kind of the mathematics of incentives for individuals, you find something that you simply see in the glass of water, or that you simply see in any part transition, any sudden change. Which is that any sudden change in nature is due to two competing forces.

So, in the case of water, you’ve molecules need to run around and be free – that’s entropy – they usually additionally need to lock rigidly in place. Those are two competing forces. And the relative strengths of these forces relies upon on temperature. The will to run around and be free dominates at high temperature. And at low temperature, the binding power wins. So, someplace between the two, as you lower temperature, growth. These two things cross. At a break-even, water freezes. The system snaps.

CURT NICKISCH: Now you’re speaking right here about elementary natures of molecules. They comply with laws. And making the comparability to teams of people, the best way individuals work in a corporation which is rather more complicated. Does that – can you make that comparison?

SAFI BAHCALL: That’s an excellent query. The thought of a part transition applies to a system.

CURT NICKISCH: And we do speak in enterprise about ecosystems, too. So I can see that, nevertheless it’s also rather more, it feels far more complicated than two competing forces.

SAFI BAHCALL: It’s a unique mindset, however one thing to think about is that everytime you arrange individuals into a gaggle – and it’s a reasonably common precept – you all the time get two types of incentives. In case you run an organization or run HR, you may name it cash and fairness. Cash has to do with base salary – like your degree inside a corporation, as you get promoted you get increasingly base wage.

Equity has to do together with your stake within the undertaking, or the stake within the staff’s challenge. Now you may have the ability to see where this is going. Whenever you run a very small company, how do these forces stability out? Let’s say you’re operating a small biotech company. Your stake is gigantic within the drug. Whereas, the perks of rank are type of irrelevant. If there’s 10 individuals in the company and you understand, are you the staff member or the staff captain, it’s a small change in base wage, but when the drug works, everyone’s a millionaire and a hero. And if the drug fails, everyone’s unemployed. So, when you might have very small groups in corporations, a type of forces dominates it. That’s the fairness aspect.

CURT NICKISCH: That’s your binding power, primarily.

SAFI BAHCALL: Now, let’s say you’re at Pfizer. Similar you. Similar challenge. Now it’s a 100,000 individual company. Similar venture. What’s your fairness? Nicely, a very good drug may sell $500 million in sales. But what’s Pfizer’s income? It’s about $50 billion. So, your stake in equity, your stake is about one %. But should you might sound sensible at committee conferences and making type of sarcastic remarks concerning the flaws in any early stage challenge, may get promoted. And for those who get promoted, what happens?

CURT NICKISCH: You get an enormous –

SAFI BAHCALL: You get an enormous bump. You may get 30 %, or 50. So, now they’ve utterly switched. Identical to the 2 forces in a glass of water, the place you’ve gotten one part by which everyone unites around these loopy concepts to save lots of them because their equity is so excessive. In one other part where everyone’s just targeted on politics, and promotion, and profession, as a result of the incentives are all about getting promoted. And fairness incentive is far much less.

CURT NICKISCH: I mean is this your method of explaining why some corporations which were very revolutionary, grow to be danger averse and stop innovating?

SAFI BAHCALL: Positive. For example, I ran a small company and we ultimately received to about 200 some individuals. Everyone’s tremendous motivated and working actually onerous once you’re a small firm. Now, what about, what happens whenever you grow greater? Everyone type of knows intuitively that something modifications. You already know that in your gut. And you may see that and around, individuals start caring a bit of bit less.

OK. Nicely what do you do with that? There are lots of fascinating things that comply with in the event you truly can sit down and work that out. For instance, when it snows at night time, what do you sprinkle on your sidewalks?

CURT NICKISCH: Nicely, a lot of people did this in Boston very just lately. You set salt out.

SAFI BAHCALL: You set salt out.

CURT NICKISCH: Primarily to lower the freezing temperature.

SAFI BAHCALL: Exactly. Lower the freezing temperature. So, that’s referred to as a management parameter. If you really begin to understand those forces, you can begin to determine the little tweaks that you would be able to make that regulate the system. And that’s what you are able to do with teams and corporations. Once you sit down and assume this via and write down the incentives, you can also make comparable tweaks. You possibly can determine what do you do to adjust the incentives that can design extra revolutionary teams and corporations? Identical to you can also make liquids that stay liquid longer.

I may give you another example. Whenever you take iron – uncooked iron is definitely a reasonably weak metallic. However you add a tiny little little bit of carbon and it turns into strong metal. These are the small modifications in construction and also you add slightly bit extra tungsten and nickel it becomes this super robust alloy that’s used inside jet engines. So, the fascinating thing and what’s new here is which you could determine these small modifications in structure, like including a bit of salt or slightly carbon, that may design more progressive teams. And that’s the place it becomes practical.

CURT NICKISCH: I noticed Drew Houston, the CEO of Dropbox converse just lately and he described the growth of that firm as like, surfing a tidal wave. After which it stopped, and then it’s simply type of organic progress and everyone’s wanting round like the place’s the subsequent tidal wave? And it’s a unique company at that point.

I can see that this can be a widespread drawback for corporations which were revolutionary, have reaped the rewards of it and then are principally in a special place and try to recapture that spirit. So, what are your methods of adding salt and carbon to a company at that point to attempt —

SAFI BAHCALL: And I, I sympathize having been there and having lots of buddies from the same state of affairs. You’re like, when you’re the CEO you’ve gotten this monumental fairness stake and you care passionately. And as quickly as you cross a sure quantity, individuals’s fairness stuff goes down. Yours truly stays very giant and then it simply turns into very irritating. How come they only seem to be working to get promoted, slightly than for ardour of their challenge? And that’s —

CURT NICKISCH: As a result of you possibly can’t get everyone —

SAFI BAHCALL: You’ll be able to’t give everyone half your organization anymore. There are solely so many halves of the company you will get. So, one of the levers you can do is change what you may call “return on politics.” Just to consider that qualitatively, if your average worker spends an hour a day on lobbying his or her boss, by what incremental probability do they improve their chance of promotion?

It that sounds somewhat technical, but I’m type of saying that to empathize you could work this out. And what you see is, not surprisingly, corporations where the methods are such that in case you spend a variety of time lobbying your boss you may truly enhance your promotion. What do you assume individuals do? They spend loads of time on politics. They speak about how nice their concept is and how dangerous the concepts of the individual down the corridor. Nicely, so what are you able to do about that? It turns out –

CURT NICKISCH: Don’t reward these individuals.

SAFI BAHCALL: Properly, it’s a deeper query because you possibly can’t inform managers, don’t pay attention to lobbying. Everyone’s prone to lobbying. But some corporations, let’s say McKinsey’s one example, Google’s one other instance. There are a couple of other corporations. They do something more radical which is they take promotion and bonus selections out of the palms of managers.

So, for those who’re a manager you’ve gotten numerous individuals working for you, you truly don’t get to determine their destiny. In reality they’ve, it’s expensive, however they’ve an unbiased individual coming from let’s say, a special office and a unique group who might not know both the supervisor or the worker and do some interviewing and actually research the question about this individual’s performance, identical to a real drawback and fact-checking train, after which fly out when that exercise is completed.

So, in that type of state of affairs, what do they do? They only scale back the return on politics. Say there’s 10 friends who’re all competing for one spot, hastily these 10 peers get nothing out of lobbying their vice chairman, or their boss. Their return on politics could be very low. Why? Because that guy has nothing to do with the choice.

CURT NICKISCH: What else are you able to do?

SAFI BAHCALL: So, another thing is venture talent match. So, think about you might have someone working on a venture who’s just not likely notably great at that venture. You’d say, why are they still on that challenge? Properly, typically there’s loads of resistance. Managers need to maintain individuals, or individuals don’t need to go, or they’re snug or whatever and also you don’t need give up.

Properly, the more they work on their undertaking, they’re not getting any extra return because they’re simply not excellent. So, the additional incremental work that they do shouldn’t be really doing much for them. However, they might spend that point on politics and lobbying and which may help them. They could get promoted, or they could get individuals to overlook how not quite nice their venture is.

So, what you discover is throughout a number of corporations there aren’t actually systematic processes for saying, is this individual actually good of their position? Is that this individual stretched – however not an excessive amount of and not too little? As a result of additionally, in the event that they’re not stretched at all by their position, then they’re achieved with their great challenge. If in case you have a man constructing a coffee machine design or something and he’s like, he’s an award-winning designer, he’s completed in two hours. However in case you have him on that challenge for two months, what’s he going to do with the rest of his time?

So, you’ll find a number of the actually good corporations at this have an unbiased group that’s all they do is that they scan the organization. Why not the supervisor? Nicely, typically the one that’s let’s say operating design isn’t the individual to say, “Oh this guy would be a great salesperson.” He doesn’t know. Or, this man can be an amazing product advertising individual.

You want someone unbiased who has the eye of – who’s scanning the entire organization and says, I don’t assume this individual matches right here and that supervisor, that’s not his or her job to know where he may, he or she may fit higher.

CURT NICKISCH: It’s fascinating that a few of these concepts are taking administration selections out of the palms of managers.

SAFI BAHCALL: That’s right.

CURT NICKISCH: Quite than making an attempt to assist managers make better selections. It’s virtually, you’re virtually saying, let’s simply understand that that is flawed, we’ll produce other individuals make these selections and allow you to focus on something else.

SAFI BAHCALL: Nicely, it’s finally making an attempt to take politics out of the organization. And if managers are responding to lobbying which is type of an inevitable human attribute, then you definitely’re just encouraging politics.

CURT NICKISCH: Certainly one of your ideas is to nominate a Chief Incentives Officer. Which is fascinating because you’re type of saying that if that’s the nature of people, is to actually respond to incentives, it is advisable pay far more nearer consideration to incentives to get them to work for whatever you’re making an attempt to get the company to do.

SAFI BAHCALL: Proper. And you understand, there’s something analogous, I feel in economics, for a few years up until about 10 or 20 years in the past, there was this view that folks have been perfectly rational and they might reply and you recognize, like a pc to the methods around them.

And then, these ideas of Kahneman and Frisch and a variety of others, however I feel the ideas of psychology, that individuals are not good computers. Individuals do respond in ways which are quite shocking to the design of the setting, and the way they’re introduced with decisions and delicate points of their incentives, which is more refined.

What I’m making an attempt to get at right here is that we’ve considered incentives in the identical means inside corporations for decades. And to the extent that we say “Yeah, it’s important for people to have equity,” we say, “let’s give everybody a stock option,” for instance. Properly, that’s type of a lazy answer and never a fantastic answer because let’s say you’re at a 50,000 individual company and I offer you a inventory choice. Nicely, how a lot does your challenge actually move the stock of the corporate? For most individuals, not very a lot. So, what’s that inventory choice doing? It’s principally type of wasteful and in economics you’d name it a free rider drawback. You may as properly simply sit back and if the stock goes up, take pleasure in it and if it goes —

CURT NICKISCH: Because other individuals work arduous.

SAFI BAHCALL: Exactly. That’s a free journey. So, we’re not even touching the surface of structure because we simply write a clean examine – oh this can be a good yr, everyone gets 10 % bonus. Let’s say cash. Or, will get a inventory choice. They need to be pleased. However that doesn’t really work.

Anyone who’s a sensible manager, or a sensible chief and has run – having been a CEO for 13 or so years, I might meet with my head of HR weekly, quarterly, annually and we might speak about compensation and it’s robust, particularly when you’re busy. You’ve obtained tons of fires to place out. Tons of issues to unravel.

It’s straightforward to say, you understand what? Let’s simply give everyone this. Just give everyone that and move on. But that doesn’t work very nicely. So, the purpose is let’s take that up a degree. If we need to encourage Joe or Mary, how can we create a system that’s actually, aligns what Joe and Mary are doing and how much worth they’re creating for the enterprise with their incentives. How can we make it in order that they couldn’t care less in the event that they’re promoted?

CURT NICKISCH: How does this work in the context of a competitive landscape the place Joe might go and work for an additional company and get that additional 10 %? Simply sort of routinely annually without having to do the extra effort, or provide you with the concepts that you simply’re making an attempt to incentivize in your personal?

SAFI BAHCALL: That’s an incredible query. So, who do you assume you’ll appeal to in case you have those sort of incentives in place the place you’re encouraging individuals to have massive stakes in their concept? You’re going to attract the more progressive individuals.

CURT NICKISCH: Yeah. And the people who want to coast are going to go away.

SAFI BAHCALL: Precisely. So, now you’re getting right on the coronary heart of it. It might sound a bit technical, but finally the message could be very easy. We’ve been spending all this time fascinated by culture, culture, culture. Just spend some time fascinated by construction. And perhaps the return on investment of let’s say, hiring a Chief Incentives Officer, simply serious about it more professionally, extra systematically.

As an alternative of spending one hour every quarter just saying properly, “Our stock option pool will be this,” which is what you do with a comp committee and a board, and have every VP, or every supervisor say this is my pool and I’m going to distribute it like that and I’m carried out. As an alternative of getting that be a one – spend a day, or spend two days and have a group saying, in each group, what are the suitable metrics and incentives we would like in place?

So, you really need a professional who is thinking about this very intensely, take that job again, as we say, out of the palms of the managers the place it’s the 19th factor on their precedence record, and into the palms of knowledgeable. So, will it value you extra money? Yeah. You’ll want a more refined and higher degree HR group and Chief Incentives Officers than you have got in the present day. Most of those in most corporations in the present day are sort of rubber stampers.

Now, right here’s the factor. How essential is it for you to have a correctly motivated and incentivized workforce? Is it as necessary that everyone has the newest pc and gadget? The point is that the return on investment of getting a greater, extra thoughtful system where you’re aligning individuals higher to the objectives of the corporate is going to be very high, at the least nearly as good as making sure everyone has the iPhone X quite than the iPhone 9.

CURT NICKISCH: How have you learnt if your system’s working?

SAFI BAHCALL: How have you learnt if your techniques working?

CURT NICKISCH: Yeah. How have you learnt for those who’ve turned your organization from ice again into water?

SAFI BAHCALL: For those who stroll the hallways and you hear individuals speaking about careers and promotion that’s a nasty signal. When you stroll the hallways and also you hear individuals pounding the table excited concerning the subsequent wild or loopy concept, you’ve achieved the fitting factor.

CURT NICKISCH: Safi, thanks for coming on the show.

SAFI BAHCALL: Thanks for having me.

CURT NICKISCH: That’s Safi Bahcall. He’s the writer of the ebook “Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries.” He also wrote the article “The Innovation Equation.” It’s in the March-April 2019 situation of Harvard Business Evaluation and at HBR.org.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager.

Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.