Collins’s (and our) third stage, “Denial of Risk and Peril,” is, yes, about denial, but it’s really about how to decide whether to go forward in a world of ambiguity, incomplete and contradictory information, and inconsistent advice.
In other words, it’s not just about “denial of risk and peril;” that would be easy to avoid if we knew we were doing it, after all. More importantly, it’s also about affirmation of risk and peril and above all about how to decide when and where to affirm and embrace that risk and and when and where (and again, how) to decline assuming that risk. It’s about the circumstances for optimal decision-making under uncertainty.
Collins pivots the chapter around two contemporaneous stories of failure and of success: Motorola’s disastrous “Iridium” global satellite/cellphone network and Texas Instruments’ tremendously successful dominance of DSP (digital signal processing) chip technology.
Many people know only how the Iridium debacle ended, which in and of itself is not informative in the least: “Of course we wouldn’t make that wretched investment again!” Far too pat. What is instructive, as Collins lays out, is how Motorola got to that end point with Iridium. The story began when a Motorola engineer carrying one of their brand-new cellphones vacationed in the Bahamas and found he couldn’t get a signal to call his wife. The notion dawned on him that a globe-spanning satellite network would have solved his frustration. The year? 1985.
Robert Galvin (1922—2011), the son of Motorola founder Paul Galvin and CEO at the time, believed in avoiding “big discontinuous leaps” and instead investing small amounts in a number of little things to see what potential they might have. So he allocated seed capital to test a low-orbit satellite system. So far so good.
The crucial decision point came a decade later in 1996 (Galvin having retired years earlier), when Motorola had to choose whether to launch the 66 satellites that Iridium would require. Note that up until that point the project could have been aborted at minimal cost. And note—more importantly—that the world had changed in important ways since 1985. First of all, cellphone coverage was, if not ubiquitous all across the globe, certainly thick and spreading in any significantly populated region. Cellphones themselves had shrunk drastically in size and price, while Iridium handsets were “nearly the size of a brick,” cost $3,000 to purchase while calls were billed at $3-$7/minute. And the only places in the world where Iridium might be a preferable alternative to conventional cell service were—where hardly anyone lived.
At this point, you might think Motorola’s decision to abort Iridium would be open-and-shut, but since it’s 2016 we know that’s not the course they chose. What on earth happened? I refer you back to the name for Stage 3: “denial of risk and peril.” Five years earlier (after Bob Galvin had retired), Motorola publicly committed to doubling revenue every five years. Iridium was to deliver that promise, and the 1997 annual report claimed that “with Iridium…, Motorola has created a new industry.” It went live for customers in 1998 and filed for bankruptcy in 1999; Motorola reported a charge of more than $2-billion, and careened on towards Stage 4.
Meanwhile, what was happening at TI with DSP chips?
Slow and steady. Until the market delivered its verdict on the bet. Flashback to the 1970’s when TI engineers came up with an ingenious tool to help children learn to spell: An electronic toy that spoke words out loud and asked the children to type the word out on a keypad—it became “Speak & Spell,” and it required them to invent what became DSP chips, which (simplistically) convert analog data like voices or music into digital bits. Here’s the timeline:
- 1979: TI invests $150,000 (< 0.01% of revenue) to investigate DSP;
- 1986: TI is collecting $6-million/year in DSP revenues;
- customers continue to find new uses for the chips, in modems, speech translation, and telecom;
- TI sets up a DSP business unit;
- 1993: Nokia awards TI a contract for DSP chips for its digital cellphones;
- 1997: More than 22-million cellphones contain TI DSP chips.
Then and only then did TI double down on DSP, selling its defense and commodity memory-chip businesses, shrinking the company to intensify its focus on DSP. By 2004, it had half the DSP market.
Now, the critical point is actually a bit more subtle than may appear. It’s not just that Motorola proceeded to ruin in the face of highly persuasive market evidence that Iridium had been overtaken by events, and it’s not just that TI waited for the market to deliver the (opposite) message that with DSP it had a winner on its hands. Would it were that simple.
As Collins puts it:
Life doesn’t always present the facts with stark clarity; the situation can be confusing, noisy, unclear, open to interpretation. And the greatest danger comes not in ignoring cldear and unassailable facts, but in misinterpreting ambiguous data when you face severe or catastrophic consequences if the ambiguity resolves itself not in your favor.
As a coda to this stage, Collins presents a visual map of “leadership team dynamics,” contrasting the behavior and assumptions of those on the way up vs. those on the way down. Condensing and paraphrasing it:
|Moving Up||Moving Down|
|People bring up unpleasant facts for discussion; leaders welcome frank talk about harsh realities||People shield leaders from grim news fearful of penalties and criticism|
|Data, evidence, logic, and solid arguments dominate discussion||Strong opinions are asserted without data or evidence|
|The leader employs a Socratic style: high questions-to-statements; challenging people||The leader avoids critical input, allows sloppy reasoning and unsupported opinions|
|The team unifies behind a decision once made and works to make it succeed, even if they vigorously disagreed beforehand||Team members acquiesce on the surface to are passive or undermine the chosen course|
|Team members share credit generously||Team members hog credit and distrust others|
|Argument and debate are aimed at finding the best answers and the optimal overall course||Arguments are aimed at making the proponent look smarter or to advance their self-interest|
|“Autopsies without blame” are welcomed for what can be learned from painful setbacks||Autopsies seek culprits on whom to pin responsibility for failure|
|Team members accept full responsibility for setbacks and learn from mistakes||Others or outside factors are blamed for setbacks, mistakes, and failures|
To sum up, indicia that your firm might be in Stage 3 include:
- Broadcasting the positive, silencing the negative
- Big bets and bold goals without empirical support
- Eroding healthy team dynamics
- Externalizing blame
- Obsessively reorganizing; focusing on internal rivalries and politics rather than external opportunities and threats
- Indulging leaders in “imperious detachment”—symbols and perks of executive-class status.