Don Sull's blog

My last post summarized research showing that simple rules work as well or better than sophisticated analyses, using less time and data. To date, this research has focused on individuals decision-making. Making choices in organizations is rarely a solo sport.  Employees of large corporations face myriad considerations that research subjects can safely ignore in a laboratory experiment. These issues include fragmented information, office politics, the need to coordinate choices with others, and balancing discipline with flexibility. Simple rules can help employees navigate the social and political aspects of making choices. My next few posts will discuss the organizational benefits of simple rules.

Simple rules can help firms strike a balance between too much structure and too little. In their book Competing on the Edge, Stanford professor Kathy Eisenhardt and Shona Brown (now a senior executive at Google) argued that firms competing in turbulent markets must navigate between the dangers of too little structure and too much. (Kathy discusses how to achieve the right level of structure in this interview). In subsequent research, Kathy and I have found that a few rules, typically about three to seven, provide a process with sufficient structure while leaving employees latitude to adapt as circumstances change. To put this approach into practice, managers first select a process that puts their organization in the flow of attractive opportunities, and then craft a set of rules to prioritize which opportunities to pursue.

One way to visualize the approach is as fishing for opportunities with a net. In the first step, a manager finds a river with lots of fish–that is identifies a process that exposes the organization to a steady flow of opportunities. She then weaves the simple rules, which function like a fishing net, catching the most attractive opportunities while letting the smaller ones swim by.

There is no cookie-cutter way to select a process. The choice depends on many factors, including industry, a company’s strategy, economic conditions, etc. The list below illustrates the diversity of processes well-suited to simple rules:

• Acquisition (Mittal Steel)
• Selecting projects to fund (Miramax)
• Identifying target market segments (eBay)
• Prioritizing new markets (Cisco)
• Selecting partners (Siebel Systems)
• Capital budgeting (America Latina Logistica)

When deciding which processes would benefit from simple rules, managers should begin by focusing on those that are most critical to their overall strategy. As Cisco pursues revenue growth, the new market selection process is key. A few general questions can help identify the most appropriate processes.

• Which processes expose us to the most uncertainty? Uncertainty breeds opportunity and also requires flexibility in making choices. Processes that expose a firm to market, technological, or macroeconomic volatility lend themselves to the simple rules approach. The processes to select R&D projects or joint-venture partners in a new business are good candidates for simple rules.
• Where do opportunities exceed available resources? The bigger the gap between available cash and potential investments, the greater the payoff to a structured selection process. Private equity firms, for instance, could benefit from articulating simple rules to screen potential investments that warrant deeper analysis.
• Where are competitors not focused? Firms can seize opportunities by focusing on processes that their competitors are ignoring. In the 1990s, Cisco used its acquisition process to acquire technology, while many rivals relied primarily or exclusively on in-house R&D to develop new products.

You might think that codification, even a light handed approach like simple rules, would stifle creative processes such as developing software or generating new ideas. Surprisingly, creative processes lend themselves well to simple rules. The award winning design house IDEO uses seven simple rules to guide its brainstorming process, rules which include”defer judgment”-i.e., don’t kill an idea prematurely, “be visual” by sketching idea, and “encourage wild ideas.” (For the full list, see Green Business Innovators).

The agile methodology of software programming relies on a set of principles to guide new product development without imposing unnecessary structure. Some of these principles express values (e.g., simplicity, technical excellence, self-organizing teams) while others describe the process and its outcomes. A core set of principles, however, provide concrete rules to guide the development process without stifling creativity.

• “Welcome changing requirements, even late in development.” Late changes allow a company to respond to emerging market opportunities.
• “Deliver working software frequently, from a couple of weeks to a couple of months.” Working software allows customers to respond to a concrete artifact. Frequent iterations provide regular opportunities for customers to give developers feedback.
• “Business people and developers must work together daily throughout the project.” Ongoing interaction minimizes the risk that technical development will diverge from market realities.
• “Convey information through face-to-face conversation.” Discussion reduces the misunderstandings common when teams rely on email or written documentation.
• “Working software is the primary measure of progress.” This rule keeps the team focused on the end product that a customer can use.
• “At regular intervals, the team reflects on how to become more effective.” Agile development incorporates periodic reflection on ways to improve the process.

My next post will discuss how simple rules help coordinate activity within an organization.