simple rules

Entrepreneurs can pursue an opportunity much as scientists pursue knowledge–by following a disciplined process of identifying an anomaly in the market, formulating a plan to fill the gap, testing their plan in the real world, and revising their assumptions in light of new information.  Menlo Park based ONSET Ventures, a venture capital firm focused on fledgling start-ups, has codified a set of practices that increase the odds that entrepreneurs formulate, test, and revise their working hypothesis in a disciplined fashion.

Since its founding in 1984, ONSET has backed over 100 early stage start-ups, 80% of which have gone on to receive subsequent rounds of financing, a much higher success rate than the average for investments in raw start-ups. When they co-founded ONSET in 1984, Terry Opdendyk and David Kelley (who also founded IDEO) conducted a systematic study of 300 seed stage ventures, with an eye to understanding the factors that influenced their ultimate success or failure.  They found that a few factors accounted for most of the variation between successful and failed start-ups, and codified these findings into a set of principles for incubating new ventures.

Simple rules are a practical tool to guide choices, balance flexibility with structure, and improve coordination in organizations. To implement the tool, managers create a set of rules to guide a key process. Simple in principle, but tricky in practice. Over the past decade I have worked with dozens of companies which adopted simple rules, and identified recurrent mistakes that derail simple rules. Managers who recognize these common pitfalls can avoid them.

Simple rules can improve decision making, balance structure with flexibility, and foster coordination in organizations.  Implementing simple rules consists of three steps: select a critical process, craft the rules, and avoid common mistakes. This post discusses how to formulate effective rules, and the next describes how to avoid common mistakes.

Where do simple rules come from? Gerd Gigerenzer, whose research is summarized in an earlier post,

My previous post illustrated how simple rules can structure organizational processes, such as capital budgeting or new product development, while leaving flexibility for employees to exercise initiative and creativity. Simple rules can also mitigate a fundamental challenge facing large, complex organizations–breakdowns in coordination across silos.

When coordination breaks down in companies, employees often attribute the failure to incompetence or bad faith on the part of colleagues in other departments–”those bozos in headquarters/marketing/finance/etc. screw everything up.”  But breakdowns in coordination are inevitable in large corporations. In Organization

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

In the boom, abundant resources allowed managers to avoid hard choices–they could spread cash evenly over alternatives like peanut butter on a slice of bread. In the current downturn, scarcity of cash forces hard choices on what to do, what not to do, and what to stop doing. How can managers make these difficult choices?

Many believe that complex choices demand complicated analysis. Economic theory holds that decision

My last post introduced simple rules as a practical technique to allocate scarce resources to their best use. The approach works across a range of processes, such as capital budgeting, investment decisions, and employee selection. This post provides some real-world examples of simple rules in action to illustrate the breadth of application and what effective rules look like.

America Latina Logistica (ALL), the largest independent logistics company in Latin America, illustrates how  simple rules can guide capital expenditure decisions when funds are limited. ALL was formed from one newly privatized branch of Brazil’s freight railway, which had owned by the government for decades. The new company had only $15 million for capital spending, which represented less than 10 per cent of the total funds requested by managers for projects to offset decades of underinvestment under government ownership. ALL crafted a set of simple rules to prioritize capital spending.

During the boom, many managers dodged tough choices because abundant resources could fund most requests. In the current recession, resources have evaporated while opportunities to acquire struggling competitors or win share have arisen.  Making hard calls has acquired a new urgency for companies, but many lack the processes to make disciplined choices.

What can leaders do? At one extreme, they could seize authority from subordinates by consolidating

Leading in turbulent times

This blog is no longer active but it remains open as an archive.

Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.

Don Sull’s blog: a guide

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Managing in an Unpredictable World
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