The Firm

Marvin Bower faced a critical choice. He had led McKinsey & Company from its earliest years, in the process helping to define the fledgling field of management consulting.1 Now nearing retirement age, it was time to hand the reins to the next generation of leaders. As the principal shareholder in the partnership, Bower’s ownership stake was a gold mine, appreciating to many multiples of its value since his joining roughly thirty years prior.

To cash out he could sell to a third-party buyer interested in taking over operations. Alternatively, he could require the current partners of the firm to buy out his stake at market value. This would involve significant indebtedness that could constrain future agility.

Bower chose a radical, nearly unprecedented path. When the time came for him to step down as managing director, he elected to sell his shares back to the partnership at their nominal book value instead of their true market price. In the process he would forego a massive windfall, while also setting an example that would reverberate throughout the organization for decades to come. For Bower, a one-time gain was not worth more than investing in the culture and health of the institution he had laboriously built up. Read more…

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Network effects

The scrappy technology startup faced an existential threat. The company was down to its final arguments in the United States Supreme Court, where the ruling would determine its fate and if millions of invested dollars would be lost. The fact that Aereo existed at all was a byproduct of arcane telecommunications regulations, which had evolved over the decades along with the medium of broadcast television, which it intended to disrupt.

The American government mandated that over-the-air channels using the public airwaves be distributed for free.1 Their shows could be viewed by anyone with a basic antenna.2 This could be a clunky means of accessing television, as broadcasting is subject to the vagaries of weather and topography that interfere with the signal.

Cable and satellite providers stepped into the gap, becoming the preferred entertainment sources for many households. In addition to numerous specialty channels they always included the primary broadcast networks viewers demanded. The wrinkle in this arrangement arose from the fact that television providers had to pay over-the-air networks for the rights to carry their programming, even though a home viewer could presumably access the same content for free. Read more…

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Case study

Harvard Business School’s campus is an extreme outlier, even when compared to those of peer institutions with similar histories. Situated on the Charles River across from the main buildings of its parent university, the self-contained layout was originally conceived in the 1920s.1 At the time of construction funding constraints scuttled plans for a dedicated classroom building. Burgeoning enrollments plus the favorable economics of the post-World War II years brought this need back to the foreground.

HBS was a pioneer of the case method of teaching, which involves continuous interaction between faculty and students, so the traditional classroom design with a grid of desks would not suffice. Architects tasked with creating an alternative experimented with a tiered seating arrangement curving around a central space, from which the professor could guide the discussion as a conductor directing a symphony. This allowed students to more easily see and engage with both their teacher and each other. Read more…

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Idea one and idea two

Author Theodor Geisel was dealing with some tough constraints. The audience for his next book required an instantly captivating story with a clear narrative arc, but there was a catch: they could only process a limited set of words, ideally fewer than 300, most of which would have to be monosyllabic. This was understandable given his target was students in the first grade, who would be around six years old.

Geisel had written children’s books previously, but this was to be his first in a new publishing imprint aimed at the youngest readers. After wrestling with these limitations for almost a year, Geisel worked out a deceptively sophisticated tale that differed markedly from those of the simple reading primers used to increase literacy in 1950s America. It featured a whimsical cat whose unexpected encounter with two children generated amusingly outlandish antics, all told with unusual irreverence.

The text itself was poetic, emphasizing regular rhythms and clear rhymes that gave the book an easy flow and nearly hypnotic cadence. Published under the pen name of Dr. Seuss,1 The Cat and the Hat became an instant smash in the world of children’s publishing. It has since gone on to sell millions of copies, spawning a media empire and establishing its place as a defining book for multiple generations of children. Read more…

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Future tense

A good strategy should be responsive to the various scenarios that could plausibly materialize, but even the most tightly crafted ones get blown apart when their subject is hit by an asteroid. In our current situation the object wreaking havoc on a planetary scale happens to be a microscopic bit of encapsulated genetic information containing less data than an image used as website filler.

Starting in an animal market in a city that is larger than many globally prominent ones and yet unknown to the average person outside China, the newest coronavirus variant has managed to vaporize years of effort and planning. Retail, hospitality, and travel businesses have watched their markets disappear overnight, the wealthy are packing off to second homes away from the urban crush, and politicians are unleashing fiscal and monetary interventions at a scale unprecedented in history.

Workers are understandably concerned about resuming the jobs that sustain them, and if they will have companies or even industries to which they can return. Governments worry about the strain on healthcare systems. Most importantly, the infected and their loved ones are preoccupied with basic survival. Several of the support beams underpinning modern life seem to have fallen away.

The question of when everything will go back to normal is generating lots of speculation, including the kind that rattles financial markets, but in one sense it has already been answered: never. Once the curve has been flattened and flareups of infection have been tamped down, what remains is a world with the knowledge that it can all be upended in an instant.

Emerging threads

In the wake of coronavirus some things have changed, others have accelerated, still others are essential to the human condition and are likely to persist. Sorting them out will help inform the best response.

1. Behaviors will change. Like an earthquake powerful enough to jolt the earth on its axis, the collective economic and social disruption of COVID-19 will be enough to change behaviors permanently. Such effects persist across generations even as external circumstances return to normal. Those who came of age in the Great Depression of the 1930s lived out the rest of their lives with an orientation to frugality and saving even when their economic circumstances no longer required it. Some of this thrifty impulse is passed on to future generations, allowing a discrete historic event to reverberate through the decades. The more people are personally touched by this disease, the more the center of gravity will shift. We’ll have to reconsider social conventions like shaking hands, unremarkable acts like riding a bus, basic choices like eating in a crowded restaurant. All will feel different, and for many these differences will become part of their new identity.
2. The seams are showing. A television news broadcast is impressively slick for a home viewer, but just outside the frame are the humdrum elements that keep the machine running, with cables hanging from the ceiling and a crew that’s seen it all. Once you’ve seen behind the curtain, some of the illusions melt away. The unprecedented reordering of the global economy and forced adoption of remote work and teaching have knocked down traditional views of decorum and professionalism. Not long ago the hapless father whose BBC interview was thrown into memorable chaos by the appearance of his children captivated the world. Today such disruptiveness is a regular occurrence for many who spend their days in Zoom. Lives outside of work are full of the mundane and messy stuff of life, and it’s harder now to demarcate the two spheres. We always knew the seams were there. In the future it will be harder to pretend that they aren’t.
3. The system is fragile. Our exquisitely tuned supply chains were designed to get goods to consumers right when they needed, and for years six sigma black belts across the corporate world have been beavering away at eliminating waste or excess capacity. That’s great until social contagion convinces populations en masse to hoard canned goods or paper towels or milk.1 Shopping for necessities suddenly takes on a vaguely apocalyptic edge, as our expectations of abundance and unlimited choice bump against bare shelves and delays. Even Amazon is unable to meet its usual standards—it turns out their products come from warehouses stocked and emptied by people, as human as the rest. So far these are largely first world problems, as seeing your local bakery go down to four flavors of muffins from its usual ten has nothing on the privations many experience daily and will continue to, whatever trajectory this disease takes. Most modern lives are built around a huge set of assumed conveniences that ignore the complexity enabling them. We understand conceptually that tropical fruits don’t grow anywhere near Canada, but Torontonians are still miffed if the local supermarket is out of pineapples. Post-pandemic we may be better at remembering this reality.
4. The system is robust. In countries under quarantine citizens are still being fed, power is supplied, the water is running and potable. An extraordinary global mobilization is underway to rush scientific research such that human trials have already begun for potential vaccines only a few months after the virus was first discovered. Given the typical pace of pharmaceutical research this is a remarkable achievement. Several manufacturers across industries are repurposing their lines to manufacture much-needed protective equipment for frontline personnel. Humans want to create and make valuable contributions, and that impulse has been channeled in admirable ways. In another era a complete cessation of public economic activity could have led to hunger and anarchy, and our world seems to have escaped that.2 Aside from the personal inconveniences, most basic needs are still being met. Lifesaving medical equipment has been in short supply in certain cities, but many more have learned the lessons from the hardest-hit places and thus far managed to avoid similarly tragic outcome.
5. Our lives are inescapably embodied ones. Contra Ray Kurzweil and his visions of a hive mind that merges human consciousness with technology, the stubborn fact remains that human existence is designed for presence and relationships. Arenas for sports, theaters for the arts, classrooms for education—these were necessary not for transmitting information but for the weaving of the human web. Solitary confinement is exceptionally damaging to mental health, and the mind can only take so much self-numbing via passive entertainment.3 There’s a lot of signaling involved in most organizations, which takes the form of face time. In organizations whose business models are relational, which is most of them, sacrificing is the first indicator of commitment. Few really believe those Ivy Leaguer graduates still in the office at 4 am in some investment bank’s Manhattan tower are generating profound insights, nor that they’re especially productive.4 They are there to show total commitment, at the expense of the other elements of their lives. In vocations, in personal relationships, in social interactions, we demonstrate this through physical presence. At the deepest level, that won’t change.

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Great circle route

The next time you travel by airplane, look out the window and see if you can count how many engines are attached to the wings. Chances are pretty good you will find only one on each side. This holds true even on routes with long stretches over water or harsh terrain that provide no suitable diversion sites in case of mechanical trouble.

With few exceptions, most jets in commercial service now come fitted with two engines, a notable change from the status quo in the middle of the 20^th century. In those earlier days of air travel the norm was to have four, and not because they provided the optimal ratio of power or efficiency. The main reason for this redundancy was the perceived unreliability of existing engines.

If there were only two to begin with, a blown piston or other mishap would leave just a single engine operating, a prospect too risky for regulators. This led manufacturers and their airline customers to converge on four engines as the standard. (For obvious reasons of symmetrical thrust an odd number wasn’t a popular choice, although some models featured a third engine embedded in the tail.)

What’s more, regulatory bodies like the Federal Aviation Administration in the U.S. mandated that aircraft couldn’t stray too far from possible landing sites, in case of emergencies requiring immediate help from the ground. This meant routes were carefully plotted not to take the shortest distance between origin and destination but to stay within range of potential diversion airports throughout the flight.1

Planes with four engines were given more leeway in how far they could be from emergency landing sites as multiple simultaneous breakdowns were improbable, so for the longest trips they were still king. Such policies enhanced safety but came at a price, as each deviation from the ideal path used up time and fuel. In certain cases this incremental cost of the rules made service between city pairs economically unviable.

With the advent of simpler and highly reliable jet turbines, regulators began relaxing the restrictions on how closely aircraft needed to remain to possible landing sites mid-route. Under the rubric of “ETOPS”, standing for Extended Operations,2 operators were able to prove through rigorous safety certification that in-flight failure was unlikely, and manageable should it occur, so tight constraints were not needed.

An original rule requiring planes to be within 60 minutes of an airport was relaxed, first to 90 minutes, then two or even three hours, until today there are some craft certified to fly over six hours away from any runway. The implications sound extreme at first—passengers on such planes trust they can remain airborne for six hours in the event of a technical problem that can’t be solved while in the skies.

Fortunately, these modified regulations have been standardized globally and steadily expanded without incident. Planes today are designed to be perfectly airworthy if all but one of their engines fail, and such issues are exceedingly rare.3 The prior approach has been discarded as unnecessarily conservative.

This is a valuable change for travelers who now have direct options between locations that would not be profitable for airlines to service were the more cautious routings still required. Airlines save on fuel, and with fewer expensive and complicated engines to service they have lower capital and maintenance costs. Manufacturers have in turn designed massive new powerplants that operate with record-breaking efficiency. New planes from Boeing and Airbus have globe-spanning reach and take for granted that extreme redundancy won’t be required.

Known unknowns

Policies like ETOPS might seem foolhardy—after all, why not add extra safety requirements just in case the worst happens? If they were costless that wouldn’t be a problem, but in the real world of aviation more backup adds more weight and drag. Circuitous routings cost time and fuel, which can be calculated with precision. Even still, these known costs may be preferred over the unknown cost of an emergency, since ambiguity is unsettling.

This reflects a broader psychological phenomenon known as risk aversion, which has been well-attested in the social sciences. Humans prefer to avoid losses and will incur real costs to mitigate them, even if these costs are greater than the expected loss. This effect works at the level of organizations, or even more complex systems like aviation regulation.4

When evaluating the merits of a new path the downsides can be obvious, since what you have to lose is generally clearer than what you have to gain. For instance, if a company launches a new product it may risk cannibalizing its existing profitable ones. The status quo will have managers who are quick to point out that fact, and those whose performance evaluations are contingent on it will provide especially sharp calculations of the risks of change. That consideration can overwhelm the fact that their market share is already under pressure and competitors are circling with their own offerings.

Building in every possible contingency as part of a strategy can end up producing something so encrusted with extraneous elements that agility is compromised. Alternatively, it may hew so closely to known and safe paths that it ends up losing the novelty that would make it compelling. If you can’t cut yourself loose from a certain strategy or mental model, your degrees of freedom become limited. In the process new paths are closed off, even though they might unlock a different way of operating. Sometimes caution is a crutch whose real costs are not adequately calculated. A better path might involve getting rid of the safety net.

When faced with ambiguity too often we choose the guaranteed loss, which might be greater than the as-yet unknown costs of taking the riskier path. The safe route may be comfortable, but it is costly.

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Fit to print

In the early twentieth century Americans seeking the news had plenty of print sources to choose from, many of which were local papers. Even smallish towns had markets deep enough to support multiple publications, each jockeying to make their presence known in a bustling marketplace. Beyond the daily news cycle there was demand for a more reflective, comprehensive perspective. This space was filled by magazines that bypassed regional reporting in favor of issues with national significance.

These titles curated articles across a wide range of topics, assembling them into issues with broad appeal. Among this group Time and Newsweek would become two of the most prominent, launching around the same time and reaching similar audiences.1 Their solidly middle-market voices helped them grow steadily in circulation, able to attract urbanites on the coasts as well as those in the heartland.

The cover of Time would become particularly desirable real estate. Attaining it meant that a topic or personality had a sufficient level of importance for the entire country to merit being framed by its iconic red border. In the quest for circulation numbers Newsweek was in a strong second place, with a personality that was largely indistinguishable from Time’s, understandable given the need to draw in the widest set of potential readers. Read more…

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Sleep tight

The choice of a mattress is fraught with implications, given how much of life is spent asleep and the infrequency of their purchase, not to mention the high price tag. Manufacturers are keenly aware of this and do their best to stoke the wallet-opening concerns of customers, using florid language to highlight coil counts or the latest in cushioning technology. Models receive names that evoke cruise ships or luxury sedans or vaguely European locales, and are further tagged with inscrutable indicators somehow related to quality.

Buyers are at a natural disadvantage as the innards of the product are invisible, leaving them to trust that the features advertised are present in the product and actually meaningful.1 Mattresses are difficult to transport and even harder to return, so the category does not lend itself to comparison shopping.

Behind the scenes, manufacturers have quietly consolidated and gained scale, rolling up the industry into a handful of mega-players, each with numerous offerings across the price spectrum. As the market matured these were increasingly sold in standalone shops dedicated solely to mattresses, featuring spartan décor, opaque pricing and a haggling experience not unlike that of a car dealership.

To top it off manufacturers adopted an especially cunning tactic to obscure costs and keep prices high. They created unique names for identical products and distributed them to exclusive sales outlets, ensuring that consumers would be unable to check prices at a competing store. Imagine if a Honda Accord was called by a different name at every dealership and you get the idea.2 Maximizing bewilderment and confusion led to a highly profitable business model for many years, such that mattress stores sprouted up across the United States, jammed into often marginal real estate. Read more…

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Job perks

Beyond the obvious global consequences, the upheaval of the Second World War was causing significant reverberations in the American labor market. Millions of workers who would normally have been filling jobs on the home front were instead deployed around the world as soldiers. For domestic businesses this meant intense competition for the people needed to sustain operations. In keeping with the basic predictions of Econ 101, limited supply in the face of high demand was inflating wages and prices all around.

As a response the federal government made unprecedented interventions in the economy, establishing detailed price ceilings and even rationing scarce goods whose main supply was redirected to the military. As the war progressed, Congress passed a law regulating the wages that employers could pay, specifically restricting increases. A minor term, tucked away at the end of the statute, exempted insurance and pensions from the definition of wages.

This meant that employers unable to distinguish themselves on salaries would have to find another lure to attract candidates. The nascent market for health benefits fit the bill. Providing such coverage became common, a trend that continued in earnest long after the war concluded. In 1954 the tax courts added their imprimatur to this practice by clarifying that companies could pay health premiums for their workers with pre-tax dollars, with no limits on generosity. Read more…

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Come all ye faithful

Some of the devoted choose to meet in the early morning, braving the cold and arriving at their nondescript buildings in the pre-dawn darkness. The name on the sign outside might reference “soul” or “cross,” but there is nothing outwardly grand about these places. The real draw is the service about to start inside.

The congregants’ earlier interactions have acclimated them to social norms like dress codes, so they choose their attire with the fastidiousness of early Puritans. This leads to a generic sameness among the group—deviation would make one stick out, and this experience is not about the individual.1

As the session begins the leader takes a position up front, ready to guide the assembled congregants through a prescribed set of activities, both comfortingly familiar yet novel enough to maintain interest. The program is carefully choreographed, with moments of uplift and intensity interspersed with opportunities for deeper reflection. Upholding it all is a pervasive sense of belonging to a community united for a higher purpose.

Many in the West once gathered regularly with their fellow believers in church pews, but in recent years formal affiliation with a faith community has dropped off drastically. Yet it turns out these activities are still happening, just in new ways that obscure the forms being imitated. The inescapable human search for meaning and relationships has been co-opted by savvy entrepreneurs, particularly in the realm of fitness. Read more…

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