Accidents are the mother of invention

Here’s a nice piece on the invention of the Slurpee (via Marginal Revolution). An excerpt:

Knedlik’s [Dairy Queen] franchise didn’t have a soda fountain, so he began placing shipments of bottled soda in his freezer to keep them cool. On one occasion, he left the sodas in a little too long, and had to apologetically serve them to his customers half-frozen; they were immensely popular.

When people began to show up demanding the beverages, Knedlik realized he had to find a way to scale, and formulated plans to build a machine that could help him do so.

You never know what customers are going to like. Here’s a secret, kids,– they do not teach you how to figure that out in business school. There’s not a formula or process to follow to do it, other than trial-and-error.

I think executives who are trying to find ways to grow their company should consider using more low-cost, trial-and-error discovery .

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Avoiding reality sometimes works

Good blog post from Clay Shirky about the Obamacare website (Thanks to Russ Roberts @ Cafe Hayek). Here are a few excerpts.

Shirky demonstrates another lesson from The Croods, on why executive paid him to collect information from their own employees. Here he describes an instance where he is with a company’s programmer in the presence of its executives (emphasis mine):

…the programmer leaned forward and said “You know, we have all that information downstairs, but nobody’s ever asked us for it.”

I remember thinking “Oh, finally!” I figured the executives would be relieved this information was in-house, delighted that their own people were on it, maybe even mad at me for charging an exorbitant markup on local knowledge. Then I saw the look on their faces as they considered the programmer’s offer. The look wasn’t delight, or even relief, but contempt. The situation suddenly came clear: I was getting paid to save management from the distasteful act of listening to their own employees.

Humility is not common in the executive suite.

On bottoms up vs. top down (trial and error, specifically):

The idea that “failure is not an option” is a fantasy version of how non-engineers should motivate engineers. That sentiment was invented by a screenwriter, riffing on an after-the-fact observation about Apollo 13; no one said it at the time. (If you ever say it, wash your mouth out with soap. If anyone ever says it to you, run.) Even NASA’s vaunted moonshot, so often referred to as the best of government innovation, tested with dozens of unmanned missions first, several of which failed outright.

Failure is always an option. Engineers work as hard as they do because they understand the risk of failure. And for anything it might have meant in its screenplay version, here that sentiment means the opposite; the unnamed executives were saying “Addressing the possibility of failure is not an option.”

Unfortunately, every once in a while, avoiding reality sometimes works. Sometimes people get lucky when they exclaim that ‘failure is not an option’ and actually create something successful. Those people can be dangerous.

Emerging failure

Arnold Kling discusses the Obamacare website troubles here and here. I agree with his view. In fact, it ties in with my recent posts about bottom-up vs. top-down.

From the first post:

Start by asking why it is that Healthcare.gov is not as good as Amazon.com or Kayak.com. One answer is that the government is not good enough at deploying information technology. However, I think that is only a shallow answer.

The deeper answer is that when we look at Kayak and Amazon, we are seeing the survivors that emerged from an intense tournament. In this tournament, thousands of competing firms fell by the wayside. Competitors tried many different business models, web site designs, business cultures, and so on.

Healthcare.gov did not emerge from this sort of competition. It came about because Congress passed a law.

From the 2nd post:

The progressives are much less forgiving of the Obama Administration’s management failures than are the rest of us. Some of us saw the problem as baked into the law. It was pointed out that the law mentions the word “web site” over 130 times, which is an indication of how complex the requirements could be. I made my point that Amazon and Kayak emerged out of a tournament involving thousands of companies. I said that if Obamacare had been a private-sector start-up, its odds of success would have been less than one in a thousand. Others pointed out that in the private sector you usually start with a small, minimally-functional prototype, not with a full-blown, full-featured system. Still others pointed out that the features of Obamacare are so tightly interconnected that it required perfect execution, which was extremely unlikely.

The progressives (especially those over age 40) wanted instead to emphasize the fundamental management flaws, such as not having a strong executive in charge of the project. They insist that Obamacare could have worked. Clearly, to suggest otherwise was to cast some doubts about the progressive approach.

Bottom-up vs. Top-down: Don’t put all your eggs in one basket

This is the 3rd post in this series. Here are posts 1 and 2.

In post 1 of this series, I explained what I think are the key differences between top-down and bottom-up organizations and why it’s helpful to think in those terms, rather than other common organization characterizations like government vs. private sector.

At the end of post 1, I listed three reasons why I think bottom-up systems work better than top-down. In Post 1, I elaborated on the first reason. In this post, I elaborate on the second: No single point of failure.

This has been conventional wisdom for a long-time and you may know it better as the phrase, Don’t put all your eggs in one basket.

Why? Because you might drop the basket. This sage advice helps reduce the risk of breaking all the eggs should you drop that basket.

We use this advice when investing. No matter how much homework we do on a company, there are no sure bets. Best not to bet everything on one company.

We consider the advice when planning careers. We train for one career path, but we know it could be automated or outsourced, so it’s best to have backups.

Sports teams try not to bank too much on a single player. Great players are good to have, but they can get injured.

Engineers try to avoid single points of failure when designing systems. Bridges are designed with redundant supports, so they won’t fall if a single support fails. Systems without single points of failure save lives.

Bottom-up systems do not have single points of failure. Baskets can be dropped in such systems. Eggs will be broken, but there are plenty of other baskets to go around.

Why is this good? Because failure happens and it happens more often than success. We live in a trial-and-error universe.

Capitalism is a good example of a bottom-up system. When one business fails, there are others to take its place. It doesn’t take down the whole system. We survived Enron’s collapse, for example. It was not ‘too big to fail’.

Local government is also a good example of a bottom-up system. Local governments can and do fail. Detroit is failing, but it’s not bringing down the whole system. There are thousands more cities, counties and townships. 

School districts don’t yet have a single point of failure. Failing school districts do not bring down the whole system.

Though, school districts have moved toward becoming more top-down over the past few decades as a small group of folks in DC use taxpayer dollars to encourage school districts to deliver on what the folks in DC think is a good education.

This has moved accountability away from parents toward a central point of failure, the ‘common core’ curriculum.

Of course, ‘too big to fail’ is code for ‘single point of failure.’ If it is true that some organization has become ‘too big to fail’ (though I don’t think that was the case in the financial crisis), we should spend more time thinking about how we let a single point of failure crawl into our lives, much the same way the common core curriculum is doing now.

Bottom-up systems are not painless. Failure can be painful. But, bottom-up systems deal with pain and failure better than top-down systems.

Attempting to avoid pain and failure is one reason people advocate for top-down systems. Unfortunately, they soon learn that was a fairy tale.

One reason bottom-up does better: Try, try, try again

In this post, I wrote that bottom-up systems tend to do better than top-down systems. In the following post, I expand on the #1 reason why I think that is.

I use to think feedbacks were the most important difference between productive and unproductive organizations or systems.

I don’t anymore.

I still think feedbacks are important and much can be gained from addressing feedback problems. But, I think something else makes the difference between good and bad: The number of trials.

I credit Nassim Taleb for planting this thought in my head. In one of his books he said something like capitalism doesn’t work because of profits and losses [feedbacks], it works because it induces a lot of trials and some of those happen to work.

I think Jeff Bezos understands this idea about trials. But, I don’t think many others do.

We see success stories after the fact and credit visionary leadership, brilliant insights and clever innovations, but this is too simple of a view of what really happened.

Since Taleb planted this idea I started noticing other things about success stories.

I noticed that for every success, there were dozens or more failures. Successful people are often brilliant. We conclude that to be the cause of their success, but that doesn’t account for the failures that are often led by equally bright people. Why did one succeed while the others didn’t? That gets tougher to distinguish.

A story Taleb tells about dolphins illustrates this well. We hear about dolphins pushing to shore people who are stranded at sea and conclude dolphins know what they’re doing and are kind and gentle. Maybe that’s true. But, we don’t hear from the folks when the dolphins took them the other way. Maybe the dolphins that pushed to shore just got lucky.

I also started noticing that success stories often includes information about how the discoveries were not planned, but were accidentally stumbled upon while the great leaders were trying to do something else. Sometimes these leaders even resisted going the direction the discovery led them because it didn’t fit their original vision.

Finally, I started seeing the dumb luck that is a part of almost every success.

When I look at success, I try to remember its causes can be elusive and that the easy explanations are usually incomplete.

Capitalism works well for us because it encourages a lot of trials.

I believe organizations can improve (not guarantee) chances of long-term success by employing the same incentives as capitalism. Encourage a lot of trials. Let failures fail and reward success.

We even have evidence of this respect for trials embedded in common, inspirational phrases like:

• If at first you don’t succeed, try, try, try again
• Fail often to succeed sooner
• If you fall off the horse, get back on

But, perhaps one quality of the successful that I may have overlooked is that they aren’t afraid to fail.

You miss 100 percent of the shots you never take. – Wayne Gretzky

I didn’t fail the test, I just found a 100 ways to do it wrong. -Ben Franklin

I’ve never been afraid to fail. -Michael Jordan

Planned blockbusters

A timely blog post from Seth Godin. It’s timely because it addresses the number one reason I think bottoms-up systems work better than top-down. I happen to be working on a blog post to expand on that reason.

Seth G. says it well. This is about working on a big budget movies in a top-down environment:

Every meeting is about avoiding coming anywhere near the sentence, “this might not work,” and instead giving ammunition to the groupthink belief that this must work.

And as soon as you do that, you’ve guaranteed it won’t.

Every bestseller is a surprise bestseller, and in fact, nobody knows anything.

(And of course, it’s not just movies, is it?)

Of course, it isn’t.

That’s nature: trial and error

Many seem surprised with the problematic launch of the Obamacare website and not only those with a political ax to grind. I’ve even heard Obamacare friendlies ask, How could government get this so wrong after hiring experts, spending so much money and having so much time to prepare?

I’m not surprised. It fits well with how I think the world works. Most things fail. Some things work. We don’t know beforehand which will fail and which will work.

I’m not surprised the Obamacare launch failed. Most new things do.

It doesn’t matter that it was government or not, since we live in a trial-and-error universe. Government and free markets are subject to failing more often than succeeding.

Few people see this trial-and-error process. We see success stories and forget the failures. We forget Starbucks wasn’t always big and had its fits and starts and still does. Apple, too. Every company did. And for every success story, there are numerous failed attempts of competitors that we forget about.

The one thing that is a little more rare about the Obamacare trial is that it is on such a grand scale. Again, that’s not unique to government. Plenty of companies have had big roll-outs of products or business plans they were certain would work, only to fail. JC Penney, anyone?

The error, though, that some don’t seem to learn from is that we should avoid doing new things on such grand scales because most things fail.

Start small, test it and grow it through the crucible of trial-and-error.

Simple Rental Car Innovation

A new airport car parking/rental model? Instead of paying to park at the airport, while you are away, let this company rent your car out to someone in your hometown.

I love this observation from the company’s CEO:

“How does it make sense that there’s one parking lot at the airport where there are thousands of cars sitting there and people are paying for them to sit there and do nothing, and there’s another parking lot with thousands of cars owned by Hertz?” 18-year-old FlightCar CEO Rujul Zaparde said.

Of course, it can’t be that simple. Bureaucrats are having conniptions about it because it hurts their rent-seeking model.

“Experiments” Update

As noted in the sidebar, the photo at the top of this screen is titled “Experiments” and is from a 2010 post of mine with the same title.

I liked it because it represents what goes on around us everyday. Almost everything we do is a trial-and-error experiment. We find something that works and stick with it until we find something that works better.

If you tried a new bathroom cleaner, you are evaluating whether it does a better job than your regular cleaner and whether it’s worth the price.

Every new business and product is a trial-and-error experiment and I thought this photo was a good representation of it. Not only does it show drink makers experimenting with different varieties of drinks to find out what satisfies consumer preferences, but it shows the store management experimenting with how to use its space to offer the most value for its customers and drive the most sales.

Below is a picture of the same space, nearly two years later.

This refrigerated end-cap in a high traffic area of the grocery store use to carry health and sports beverages (see top of screen). It was recently converted to a “You Pick Six” craft beer cabinet.

Store management may have had several reasons to make the change. This end cap is close to the liquor section, so it may have made sense from a product placement.

They might also have six packs with broken bottle or two, and this might be a good way to get rid of the extra inventory.

The sports beverages may not have sold well here. They have been moved to another area of the store and the selection has been reduced to the best sellers.

From a consumer standpoint, this might represent a trend. It seems the latest trend in partying is to offer a variety of craft beers to choose from. This type of cabinet may allow smaller group of people to do just that without having to buy full six packs.

Do you need another can of green beans in your pantry?

"Creating" Demand

I enjoyed Arnold Kling’s column (econblogger at EconLog), Government Cannot Create Sustainable Jobs, published in the European edition of The Wall Street Journal.

I think the following two paragraphs contain the most concise and understandable contrast of two competing visions on how the economy works (emphasis mine):

For Keynesians, job creation is simple. Entrepreneurs have knowledge of how and what to produce. All that is required is more demand, in order to induce them to undertake more hiring.

n contrast, in our [Adam] Smith-Ricardo story, the knowledge of how and what to produce has to be discovered. Entrepreneurs have to figure out ways to utilize resources that satisfy wants in an efficient way. The market mechanism first must undertake trial and error to create production processes that exploit comparative advantage. Until these new patterns of sustainable specialization and trade are discovered, there are no job slots.

I bolded the key phrases.  Do you believe that progress comes from stimulating evermore demand or from trial and error experimentation?

I believe the latter.  Progress, wealth, improvements in the standard of living, GDP per capita growth — whatever you call it — comes from experimentation and trial and error and a process that allows the valued to survive and multiply and the least valued to die off (i.e. evolution).  This trial-and-error market process is driven by the ultimate democracy of individuals voting with their own value store on the the things they value and vote against those things they don’t value.

The problem for me with the former explanation, creating more demand, is where this new demand comes from.

The theory says that more government spending will put more money into some folks pockets, which they then spend.  So, then the businesses that benefit from that extra spending will spend more too.  And so on.  This is a chained spending effect.  By the time the that extra dollar of government spending has worked its way through the economy, it’s spawned more than a dollar of economic activity.

This seems reasonable on the surface.  But pry deeper.  Where did that extra dollar of government spending come in from in the first place?  It either came from current or future spending.

If it came from current spending, then all we’ve done is take a dollar from someone to get the spending chain started.  That someone may have started their own chain by spending it themselves.

Defenders of this theory will say, yes, but that someone wasn’t going to spend it any time soon so it’s best for everyone that the government took it and spent it.

I believe the miss in this line of thinking is that someone was waiting to discover something of value to spend it on, while spending it now does not help him find that value.

What’s really happened is that demand was pulled forward from the future and we’ve spent it on something that doesn’t add value.

Companies see this when they run ineffective limited time promotion.  The sale will produce a sales spike during the offer period and a lull afterwards.  The sale encouraged people who were going to buy the product anyway to buy it sooner, and buy less later.

But, in the case of the government pulling forward demand, it makes things worse.

That someone with the original dollar was waiting to spend that dollar on something he valued — maybe a new pill that will reduce his sick days and make him more productive.

Instead, the government takes it and spends it on another can of green beans.  So, instead of having four cans of green beans in the pantry (that he’s never going to eat), he has five now — something that doesn’t bring as much value as that new pill.  But, hey, the green bean growers and canners are better off.  Except, we find that since there’s a glut of canned green beans now, green bean makers will sell fewer cans in the coming months.

So, creating demand through government spending is a myth.  There is no creation.  Just moving demand from one place to another or from the future to now — and in either case, we replace careful spending with careless.

Related articles

• The value of a college education (ourdinnertable.wordpress.com)
• Grandpa’s Lament (ourdinnertable.wordpress.com)