How To Be A Good Boss

In the book, Radical Candor: Be a Kickass Boss Without Losing Your Humanity by Kim Scott, she explains how to be a highly successful manager. I highly recommend this book to anyone who manages people. Below is an excerpt from the book that you might find useful:

How To Be A Good BossRadical Candor.jpg

Given my line of work, I get asked by almost everyone I meet how to be a better boss/manager/leader. I get questions from the people who worked for me, the CEOs I coached, the people who attended a class I taught or a talk I gave. I get questions from people who are using the management software system that Russ Laraway and I cofounded a company, Candor, Inc., to build. Others have submitted their management dilemmas to our Web site (radicalcandor.com). But questions also come from the harried parent sitting next to me at the school play who doesn’t know how to tell the babysitter not to feed the kids so much sugar; the contractor who is frustrated when his crew doesn’t show up on time; the nurse who’s just been promoted to supervisor and is telling me how bewildering it is-as she takes my blood pressure, I feel I should be taking hers; the business executive who’s speaking with exaggerated patience into his cell phone as we board a plane, snaps it shut, and asks nobody in particular, “Why did I hire that goddamn moron?”; the friend still haunted by the expression on the face of an employee whom she laid off years ago. Regardless of who asks the questions, they tend to reveal an underlying anxiety: many people feel they aren’t as good at management as they are at the “real” part of the job. Often, they fear they are failing the people who report to them.

While I hate to see this kind of stress, I find these conversations productive because I know I can help. By the end of these talks, people feel much more confident that they can be a great boss.

There’s often a funny preamble to the questions I get, because most people don’t like the words for their role: “boss” evokes injustice, “manager” sounds bureaucratic, “leader” sounds self-aggrandizing. I prefer the word “boss” because the distinctions between leadership and management tend to define leaders as BSers who don’t actually do anything and managers as petty executors. Also, there’s a problematic hierarchical difference implied in the two words, as if leaders no longer have to manage when they achieve a certain level of success, and brand-new managers don’t have to lead. Richard Tedlow’s biography of Andy Grove, Intel’s lengendary CEO, asserts that management and leadership are like forehand and backhand. You have to be good at both to win. I hope by the end of this book you’ll have a more positive association with all three words: boss, manager, leader. Having dispensed with semantics, the next question is often very basic: what do bosses/managers/leaders do? Go to meetings? Send emails? Tell people what to do? Dream up strategies and expect other people to execute them? It’s tempting to suspect them of doing a whole lot of nothing.

Ultimately, though, bosses are responsible for results. They achieve these results not by doing all the work themselves but by guiding the people on their teams. Bosses guide a team to achieve results.

The questions I get asked next are clustered around each of these three areas of responsibility that managers do have: guidance, team-building, and results.

First, guidance.

Guidance is often called “feedback.” People dread feedback-both the praise, which can feel patronizing, and especially the criticism. What if the person gets defensive? Starts to yell? Threatens to sue? Bursts into tears? What if the person refuses to understand the criticism, or can’t figure out what to do to fix the problem? What if there isn’t any simple way to fix the problem? What should a boss say then? But it’s no better when the problem is really simple and obvious. Why doesn’t the person already know it’s a problem? Do I actually have to say it? Am I too nice? Am I too mean? All these questions loom so large that people often forget they need to solicit guidance from others, and encourage it between them.

Second, team-building.

Building a cohesive team means figuring out the right people for the right roles: hiring, firing, promoting. But once you’ve got the right people in the right jobs, how do you keep them motivated? Particularly in Silicon Valley, the questions sound like this: why does everyone always want the next job when they haven’t even mastered the job they have yet? Why do millennials expect their career to come with instructions like a Lego set? Why do people leave the team as soon as they get up to speed? Why do the wheels keep coming off the bus? Why won’t everyone just do their job and let me do mine?

Third, results.

Many managers are perpetually frustrated that it seems harder than it should be to get things done. We just doubled the size of the team, but the results are not twice as good. In fact, they are worse. What happened? Some-times things move too slowly: the people who work for me would debate forever ifI let them. Why can’t they make a decision? But other times things move too fast: we missed our deadline because the team was totally unwilling to do a little planning-they insisted on just firing willy-nilly, no ready, no aim! Why can’t they think before they act? Or they seem to be on automatic pilot: they are doing exactly the same thing this quarter that they did last quarter, and they failed last quarter. Why do they expect the results to be different?

Guidance, team, and results: these are the responsibilities of any boss. This is equally true for anyone who manages people-CEOs, middle managers, and first-time leaders. CEOs may have broader problems to deal with, but they still have to work with other human beings, with all the quirks and skills and weaknesses just as apparent and relevant to their success in the C Suite as when they got their very first management role. It’s natural that managers who wonder whether they are doing right by the people who report to them want to ask me about these three topics. I’ll address each fully over the course of this book.

Ben Franklin’s Third Virtue – Order

In the book Messy: The Power of Disorder to Transform Our Lives by Tim Harford, he talks about Ben Franklin’s Thirteen Virtues. Below is an excerpt from the book about the third virtue:

 

Ben Franklin’s Third Virtue: OrderMessy.jpg

 

Whiling away the long voyage from London to Philadelphia in 1726, a young printer named Benjamin Franklin conceived the notion of a notebook in which he would record systematically his efforts at self-improvement. Franklin aspired to thirteen virtues, including frugality, industry, sincerity, and cleanliness. His plan was to spend a week focusing on a particular virtue, in the hope of making it a habit, before moving to the next virtue, and the next, cycling through the virtues in an unending quest to become a better man. Each day he would reflect on his activities and every failure to live up to his own standards would be commemorated with black mark in his notebook. The custom stuck with him his entire life. Fifty-none years later, while writing his memoirs, Franklin lingered on the merits of his virtue journal longer than on any other topic, reconfirming his commitment to the habit.

Franklin’s aims were ambitious, but his virtue journal was a success: the black spots in the notebook, initially numerous, became scarcer over time. Perhaps this is no surprise, since Franklin had a habit of doing whatever he set out to do. He lived one of the most celebrated lives in history. He charted the Gulf Stream; he invented bifocals, the lightning conductor, and the flexible urinary catheter; he was the first U.S. postmaster general, served as America’s ambassador to France, and was president of Pennsylvania. And, of course, Benjamin Franklin’s signature is on the U.S. Declaration of Independence.

Yet the great man had one weakness-or so he thought.

Ben Franklin’s third virtue was: Order. Let all your things have their places; let each part of your business have its time. Franklin never mastered this seemingly simple task. “My scheme of ORDER gave me the most trouble,” he wrote in frustration in his memoirs, adding, “my faults in it vexed me so much, and I made so little progress in amendment, and had such frequent relapses, that I was almost ready to give up the attempt.”

He was not exaggerating. One scholar wrote, “Strangers who came to see him were amazed to behold papers of the greatest importance scattered in the most careless way over the table and floor.” Franklin’s diary and his home remained chaotic, resisting sixty years of focused effort from one of the most determined men who ever lived. No matter how many disorderly decades passed, Franklin remained convinced that orderliness was an unalloyed virtue: that if only he could fix this deficiency in his character, and become less messy, he would become a more admirable, successful, and productive person.

Franklin was surely deluding himself. It is hard to believe such a rich life could possibly have been made still richer by closer attention to filing papers and tidying up. His error is no surprise. We are tidy-minded people, instinctively admiring order and in denial about the way mess tends to be the inevitable by-product of good things, and is sometimes a good thing in its own right.

What seems more surprising is not Franklin’s error, but his failure to keep his ill-advised resolution. This is a man who did almost everything he set out to do; why is it that he failed on this one occasion? Perhaps he realized, on some unconscious level, that disorderliness was no bar to success. Many of us have yet to make the same realization, in areas that define much of our daily lives: organizing our documents, tasks, and time; looking for love; socializing; raising our kids. Benjamin Franklin’s mistake is a mistake from which we can all learn, every day of our lives.

Contagious: Why Things Catch On

Contagious: Why Things Catch On by Jonah Berger is full of ideas for promoting your brands or company. This book is an easy read and goes into details on how to be contagious. Below is an excerpt from the book:

 

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After analyzing hundreds of contagious messages, products, and ideas, we noticed that the same six “ingredients,” or principles, were often at work. Six key STEPPS, as I call them, that cause things to be talked about, shared, and imitated.

Principle 1: Social Currency

How does it make people look to talk about a product or idea? Most people would rather look smart than dumb, rich than poor, and cool than geeky. Just like the clothes we wear and the cars we drive, what we talk about influences how others see us. It’s social currency. Knowing about cool things-like a blender that can tear through an iPhone-makes people seem sharp and in the know. So to get people talking we need to craft messages that help them achieve these desired impressions. We need to find our inner remarkability and make people feel like insiders. We need to leverage game mechanics to give people ways to achieve and provide visible symbols of status that they can show to others.

Principle 2: Triggers

How do we remind people to talk about our products and ideas? Triggers are stimuli that prompt people to think about related things. Peanut butter reminds us of jelly and the word “dog” reminds us of the word “cat.” If you live in Philadelphia, seeing a cheesesteak might remind you of the hundred-dollar one at Barclay Prime. People often talk about whatever comes to mind, so the more often people think about a product or idea, the more it will be talked about. We need to design products and ideas that are frequently triggered by the environment and create new triggers by linking our products and ideas to prevalent cues in that environment. Top of mind leads to tip of tongue.

Principle 3: Emotion

When we care, we share. So how can we craft messages and ideas that make people feel something? Naturally contagious content usually evokes some sort of emotion. Blending an iPhone is surprising. A potential tax hike is infuriating. Emotional things often get shared. So rather than harping on function, we need to focus on feelings. But as we’ll discuss, some emotions increase sharing, while others actually decrease it. So we need to pick the right emotions to evoke. We need to kindle the fire. Sometimes even negative emotions may be useful.

Principle 4: Public

Can people see when others are using our product or engaging in our desired behavior? The famous phrase “Monkey see, monkey do” captures more than just the human tendency to imitate. It a) so tells us that it’s hard to copy something you can’t see. Making things more observable makes them easier to imitate, which makes them more likely to become popular. So we need to make our products and ideas more public. We need to design products and initiatives that advertise themselves and create behavioral residue that sticks around even after people have bought the product or espoused the idea.

Principle 5: Practical Value

How can we craft content that seems useful? People like to help others, so if we can show them how our products or ideas will save time, improve health, or save money, they’ll spread the word. But given how inundated people are with information, we need to make our message stand out. We need to understand what makes something seem like a particularly good deal. We need to highlight the incredible value of what we offer-monetarily and otherwise. And we need to package our knowledge and expertise so that people can easily pass it on.

Principle 6: Stories

What broader narrative can we wrap our idea in? People don’t just share information, they tell stories. But just like the epic tale of the Trojan Horse, stories are vessels that carry things such as morals and lessons. Information travels under the guise of what seems like idle chatter. So we need to build our own Trojan horses, embedding our products and ideas in stories that people want to tell. But we need to do more than just tell a great story. We need to make virality valuable. We need to make our message so integral to the narrative that people can’t tell the story without it.

 

HOW TO SPOT A BULLSH!TTER

Feminist Fight Club: An Office Survival Manual for a Sexist Workplace by Jessica Bennett Is a very insightful book on fighting sexism. Below is an excerpt from the book:

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HOW TO SPOT A BULLSH!TTER

Here’s what business bros are great at filling the air to sound like they know what they’re talking about, even when they know about as much as the white board they’re gesturing in front of. But since the ban on bullsh!t isn’t coming to America any time soon, a few crib notes for recognizing the practitioners of this dubious art.

BULLSH!TTER: The Synergist

Says “synergy” and “pipeline” without an actual noun. Thinks “ideating” and “decisioning” are words and refuses to acknowledge otherwise.

SPIRIT ANIMAL: The Rabbit

Much like the rabbit, the Synergist excretes a particular type of crap that is not particularly offensive when taken individually. But if you have to spend a day with this guy, these small pellets will amount to a huge, heaping pile of smelly crap.

BULLSH!TTER: The Empty Wordsmith

Fills the room with long, vague phrases that mean nothing like, “Let’s take a step back for a minute” or “Let’s focus on the low-hanging fruit,” then offers a generic platitude like, “We’re all in this for the mission, right?”

SPIRIT ANIMAL: The Pigeon

Like the pigeon, the Wordsmith’s sh!t drops in unexpectedly in the middle of a meeting, leaving your mouth agape and your blazer covered in goo .

BULLSH!TTER: The Grammarian

Loves the phrase “Let’s unpack that statement” as an excuse to break said statement into its component parts, repeating what you’ve already said but in terms a child could understand. Also prone to chiming in at the end of a meeting to say, “So in summary … “

SPIRIT ANIMAL: The Mouse

The mouse’s bullsh!t is inoffensive and even sort of cute, if you take the repetition of your words as his way of complimenting your idea. But one too many rounds of “Let’s unpack that” and you’ve likely got a full-fledged infestation on your hands.

BULLSH!TTER: The Flatterer

Compliments the overall tone of the meeting without saying anything of substance. “I don’t want to be too navel gazing but I feel like we’re making great progress.” He also enjoys agreeing with smart things other people have said, in hopes that his words will be associated with their wisdom.

SPIRIT ANIMAL: The Dog

Like a puppy, this bullsh!tter smells a good idea and feels the need to piss on top of it, in order to add his own scent to the mix.

BULLSH!TTER: The Disrupter

Uses the words “disrupt,” “disruption,” or “disruptive technology” because he thinks it makes him sound cool. Also frequently insists on “action items” and “key takeaways.”

SPIRIT ANIMAL: The Cow

The cow can’t help but put forth a horribly “disruptive” pile of heaping sh!t. The good news is he’s impossible to miss for anyone with a sense of smell.

BULLSH!TTER: The PowerPointer

Produces elaborate paper handouts or PowerPoint presentations. The more he dresses up the content-Venn diagrams, fancy fonts-the more he thinks it will “distract” from the lack of substance.

SPIRIT ANIMAL: The Sloth

The sloth takes days to coordinate its weekly poop, traveling a rough terrain of foliage, branches, and tree trunk in order to finally get the job done (at the bottom of its tree). It’s a lot of effort put into an act that leaves the sloth vulnerable to predators.

BULLSH!TTER: The Closer

Arrives to the meeting completely unprepared, waits until it’s almost over, then chimes in to question the reason for having the meeting in the first place. “Wait, guys, can I just ask what we’re trying to do here?”

SPIRIT ANIMAL: The Cat

Sneaky, undetectable, and likely to be hiding in a dark corner under a whiteboard somewhere-you won’t see this bullsh!t coming until its stench suddenly hits you.

Three Traps: Complacency, Cannibalization, Competency

The Three-Box Solution: A Strategy for Leading Innovation by Vijay Govindarajan is a great book to help leader innovate with simple and proven methods for allocating an organization’s energy, time, and resources across the three boxes:

Box 1: The present—Strengthen the core

Box 2: The past— Let go of the practices that fuel the core business but fail the new one

Box 3: The future—Invent a new business model.

Below is an excerpt on the three behavior traps. How do you manage them to the lead your organization to innovate?

Three TrapsThree Box Solution.jpg

While there were many within IBM who clearly understood the implications of both nonlinear shifts, their insights had difficulty penetrating the entrenched logic of the past. The dominant logic of the past exerts its hold on business cultures and practices in three distinctive but tightly interlocking ways. I think of their dynamic effects as traps that snare the unprepared. All three have common origins in mind-sets that focus excessively on past values, behavior, and beliefs.

The Complacency Trap

Current success conditions a business to suppose that securing the future requires nothing more than repeating what it did to succeed in the past. This is the complacency trap. Complacency shrouds the future in a fog of misplaced confidence, hiding from view a clear understanding of the extent to which the world is changing around you.

IBM’s extraordinary success driving revenues in its Box 1 mainframe business masked difficulties to come. Rather than face up to looming threats to the mainframe business, IBM applied temporary patches. One such patch ‘was to change the revenue model from leasing mainframes to selling them outright. S This produced a pleasing surge in near-term revenues that postponed IBM’s day of reckoning.

The loyalty of successful organizations to the past is often so potent that they become quite ingenious at ignoring the onset of fatigue in the Box 1 business. Instead of building the future day by day, IBM prolonged it’s past with what amounted to an accounting change. The resulting years-long period of bolstered revenues made it easy for the company to think that everything was just fine-four words that fairly summarize complacency.

Another way to understand how IBM fell into the complacency trap is that the company’s continuing Box 1 profitability delayed development of a sense of urgency that might have motivated a more prescient Box 2 judgment: that it was important to invest aggressively in the new enterprise model of client/server computing.

This is the dark side of success. No matter the industry or company, each great innovation spawns a steady accumulation of Box I-based structures, processes, and attitudes of the kind that blinded IBM to its predicament. IBM mainframes were not simply smart machines; they were smart machines that over the years had created at customer work sites whole new layers of enterprise management that had never existed before.

Mainframe computers were island fortresses, secured and operated by a newly empowered IT function and inaccessible, except through IT proxies, to the rest of the enterprise. If a technology can embody a governing philosophy, the mainframe’s philosophy was exactly opposite that of the open, accessible internet that was yet to appear. Even before the internet emerged as a business tool, there were pitched battles within almost every company about making valuable mainframe data accessible to and usable by employees with networked PCs. This increasingly loud demand clashed with the mind-set of IBM’s IT customers, who saw their mission as protecting the security and integrity of corporate data: allowing liberal access would lead to data corruption and to proliferating unreliable versions of the “truth.”

In fact, customers can play an important role in deepening a complacency trap. IBM had collaborated with its customers in creating what became an entrenched system of governance for computerized organizations. That system’s structures and attitudes were a self-reinforcing feedback loop amplified by IBM’s large-enterprise customers.

Ultimately, a more modern version of the mainframe emerged and made peace with the rest of the IT infrastructure. Today’s version powers big data analytics and other applications in many large enterprises. But in the IBM of the 1990s, mainframes cast a long shadow over the emergent model of more open, democratized network computing.

The Cannibalization Trap

The cannibalization trap persuades leaders that new business models based on nonlinear ideas will jeopardize the firm’s present prosperity. So, like antibodies attacking an invading virus, they protect the Box 1 business by resisting ideas that don’t conform to models of the past.

At its heart, the fear of cannibalization reflects a wish to keep the world from changing. It is perhaps easy to understand that wish, but it’s much harder to excuse it. The glib answer to those who suffer from this fear is to remind them that change is inevitable and the world will change either with them or without them. When a business allows worries about cannibalization to interfere with its strategy, it has overinvested in its past and is doomed to undermine its future.

Cannibalization is typically understood-and feared-as a near-term threat. As foresighted as IBM was in developing its personal computer in the early 1980s, forces marshaled within the company to protect the legacy business. Those who feared the PC believed it had the potential to threaten the mainframe computing model, perhaps by feeding the growing appetite to liberate enterprise data or by diverting attention and investment away from the company’s dominant business.

People who fear new technology are usually more right than wrong about its potential to supersede legacy products. The truth is, every Box 1 business has reason to fear, sometimes even hate, whatever shiny new thing is being launched. When Steve Jobs gave a big push to the Macintosh launch toward the end of his first stint at Apple, the group in charge of the incumbent Apple II felt threatened and undercut. It was as if cofounder Jobs had sponsored an insurrection.”

In reality, however, cannibalization should be understood as a long- term benefit. The new Apple Macintosh embodied features that soon enough would make its predecessors obsolete. If Apple hadn’t moved quickly, a competitor-maybe even IBM-would have filled the vacuum. Given its history, IBM’s embrace of microcomputing was unexpected. But it quickly set the standard for PCs and legitimized them as tools for both home and business users. While IBM’s marketing of the PC initially tilted toward home users, the real revenue bonanza came from businesses. Suddenly, at least part of IBM had reason to root for client/ server computing. No matter what anyone in the mainframe business thought about it, the client/server model had the shine of inevitability.

So, while companies must take the fear of cannibalization seriously as a problem to manage, it can’t become a reason not to act with foresight when new nonlinear strategies or business models present an opportunity.

The Competency Trap

The competency trap arises when positive results the current core business encourage the organization to invest mainly in Box 1 competencies and provide little incentive for investing in new and future-oriented competencies. In established companies built around a spectacular success, such as IBM’s industry-defining mainframe computers, it is natural to want to create a workforce whose skills dominantly reflect the legacy success. But a competency trap is a double- edged sword. IBM’s investments in Box 1 competencies helped its mainframe business. But Box 1 logic asks, why invest in skills not vital to the company’s current profitability? That is why Box 2 is necessary.

IBM eventually recognized that the dominant computing model it had exploited to achieve such great success was changing. Yet, despite having made significant investments in a robust R&D function, it was having chronic difficulty incubating new ventures. It struggled to find what IBM insiders called “The Next Big Thing.” The organization appeared to have succumbed to a “four monkeys” value system.

Believing that there were indeed systemic problems, then-CEO Louis Gerstner commissioned an internal inquiry to identify root causes. The inquiry, led by Bruce Harreld, IBM’s head of corporate strategy, confirmed Gerstner’s fears. Looking at a number of recent examples of flawed new-business incubation, Harreld’s team concluded that the company’s dominant Box 1 systems, structures, processes, and culture had:

  • Created a powerful bias for near-term results.
  • Encouraged a focus on existing customers and offerings to the extent that new technologies and nonlinear trends were either underestimated or escaped detection entirely.
  • Burdened new businesses with unreasonably high performance goals-especially damaging to ventures that targeted newer, riskier, but often more promising markets.
  • Motivated an unimaginative approach to market analysis that impaired the company’s ability to understand the sorts of “embryonic markets” most likely to spawn nonlinear Box 3 ideas.
  • Interfered with development of the skills necessary to adaptively transition a new business through its emergent and growth stages until it finally became an established enterprise.
  • Caused assorted failures of execution, many owing to the inflexibility of Box l=driven organizational structures, which leaders of new ventures “were expected to rise above … Voicing concerns over [such challenges], even when they were major barriers to new business initiatives, was seen as a sign of weakness.”

What the report didn’t say is important to note. IBM’s problem was not caused by a lack of research competency. On the contrary, its workforce possessed at least some expertise in a wide array of disciplines and technologies. Among its research projects were some that were quite promising and others that were highly speculative, unproven, and obscure. But for all the reasons listed, even ideas that managed to get traction were being ineptly developed and executed. What IBM needed was a well-designed process for enabling, supporting, and rewarding its maverick monkeys and likewise for managing new ventures onward through their developmental stages.

Such a process typically should incorporate a range of structural, cultural, and leadership remedies. At IBM-first under Gerstner and later Sam Palmisano-these distinctive remedies came together under the emerging business opportunities (EBO) framework, which created new structures, changes to the buttoned-down IBM culture, and more versatile and adaptive leadership behavior.

A TRIPOLITAN TRAGICOMEDY

This is a funny story about chopping down a flag pole from the book Thomas Jefferson and the Tripoli Pirates: The Forgotten War That Changed American History by Brian Kilmeade, Don Yaeger.

A TRIPOLITAN TRAGICOMEDYThomas Jefferson.jpg

Three days later, the bashaw (Yusuf Qaramanli) made good on his threat. On May 14, 1801, he dispatched his men to the American consulate; the party of soldiers arrived at one o’clock that Thursday afternoon.

(James Leander) Cathcart was ready to make one last offer to keep the peace, to avoid what had begun to seem inevitable. He approached the seraskier, the leader of the squad and the bashaw’s minister of war, and asked that the promise of a tribute of $lO,OOO be conveyed to the bashaw. A messenger departed for the castle, but returned minutes later. The bashaw had rejected the offer.

(James Leander) Cathcart knew any further attempts at diplomacy would be futile, and stopping the bashaw’s men by force was impossible. Helpless, he stood watching on that bright, hot Thursday as the Tripolitans began hacking at the flagpole.

The bashaw’s men shouted encouragement to one another as they swung their axes but to their dismay, felling the pole was harder than it looked. Chips flew, but the flagpole refused to fall. As if to mock the men, the flag fluttered with each stroke of the ax, its staff staunchly in place. A gesture meant to humble the Americans was rapidly becoming a humiliation for the Tripolitans.

The bashaw had ordered that, if the men had trouble dropping the pole, they should pull on the halyard, the line anchored at the top of the pole used to hoist the flag. He thought they might be able to break the pole in half by doing so. To the dismay of the men, that strategy failed, too, and once again, the resilient flagpole refused. to fall. The men who had arrived to dishonor the flag were proving singularly inept.

More than an hour passed before the Tripolitans finally caused the pole to splinter just enough to lean against the consulate house. The American diplomats looked on, darkly amused by the whole episode. (James Leander) Cathcart wryly recorded the events in a dispatch to Secretary of State James Madison.

“At a quarter past two they effected the grand atchievement and our Flagstaff was chop’d down six feet from the ground & left reclining on the Terrace …. Thus ends the first act of this Tragedy.”

 

Why Winner-Take-AII Is Winning

Is the building supply industry going to turn into a winner-take-all market? Do you have a strategy if technology disrupts the distribution of goods and service? The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee

Why Winner-Take-AII Is WinningSecond Machine Age.jpg

Why are winner-take-all markets more common now? Shifts in the technology for production and distribution, particularly these three changes:

  1. the digitization of more and more information, goods, and services,
  2. the vast improvements in telecommunications and, to a lesser extent, transportation, and
  3. the increased importance of networks and standards.

Albert Einstein once said that black holes are where God divided by zero, and that created some strange physics. While the marginal costs of digital goods do not quite approach zero, they are close enough to create some pretty strange economics. As discussed in chapter 3, digital goods have much lower marginal costs of production than physical goods. Bits are cheaper than atoms, not to mention human labor.

Digitization creates winner-take-all markets because, as noted above, with digital goods capacity constraints become increasingly irrelevant. A single producer with a website can, in principle, fill the demand from millions or even billions of customers. Jenna Marbles’s homemade YouTube video “How to trick people into thinking you’re good looking,” to take one wildly successful example, garnered 5.3 million views the week she posted it in July 2010.13 She’s now earned millions of dollars from over one billion viewings of her videos around the world. Every digital app developer, no matter how humble its offices or how small its staff, almost automatically becomes a micro-multinational, reaching global audiences with a speed that would have been inconceivable in the first machine age.

In contrast, the economics of personal services (nursing) or physical work (gardening) are very different, since each provider, no matter how skilled or hard-working, can only fulfill a tiny fraction of the overall market demand. When an activity transitions from the second category to the first the way tax preparation did, the economics shift toward winner-take-all outcomes. What’s more, lowering prices, the traditional refuge for second-tier products, is of little benefit for anyone whose quality is not already at or near the world’s best. Digital goods have enormous economies of scale, giving the market leader a huge cost advantage and room to beat the price of any competitor while still making a good profit.” Once their fixed costs are covered, each marginal unit produced costs very little to deliver.