As an investor, I always wonder what makes some companies prosper while other companies are just left in the dust. Around 50% of the S&P 500 companies will be replaced over the next 10 years. What this means is that past record does not dictate future performance. So, what is it that makes a company, or even a nation, succeed in the long run? Loonshots : How To Nurture The Crazy Ideas That Win Wars, Cure Diseases, And Transform Industries, written by Safi Bahcall, is the book which addressed that question for me in an elegant way. Bahcall points out that a company’s structure matters a lot more than its culture. According to Bahcall, a Loonshot is a neglected project, widely dismissed, and its champion is written off as unhinged/crazy. He provided some great research and examples of companies like Nokia, Merck, Amgen, Friendster, IBM, Intel, Microsoft, Apple, Disney, Pixar, Polaroid, Boeing, Pan Am, McKinsey, etc to go along with his thesis. In this week’s blog post, I will talk about 5 key takeaways from this book. Let’s dive in.
- Recognize the difference between the soldiers and artists within a company. Soldiers are the folks responsible for the marketing, construction, and delivery of the product, whereas the artists are responsible for coming up with crazy ideas. Both soldiers and artists need to work on each other’s inputs. Loonshots are fragile and need to be sheltered. So, it is important to keep the soldiers and artists in separate groups while nurturing both of them. Said differently, one can not manage both the groups in the same way. Wide management spans, loose controls, and flexible creative metrics work best for loonshot groups; narrow management spans, tight controls, and rigid quantitative metrics work best for franchise groups. Love the artists and soldiers equally.
- Watch and recognize the blind side traps. There are 2 types of loonshots: S-type loonshots and P-type loonshots. S-type loonshots are the small changes in Strategy, which noone thinks will amount to much (Example of S-type idea: Apple coming out with buying individual songs for 99 cents). P-type loonshots are technologies/products, which no-one thinks will work (Example of P-type idea: Polaroid Camera and instant pictures). A company shall nurture both kinds of loonshots. The book pointed out how IBM failed to nurture these loonshots, and that is the reason why Microsoft and Intel (who were once a tiny supplier to IBM) became billion dollar companies today.
- Raise the magic number. M = (E * S^2 * F) / G, where M is the magic number, E is the equity fraction, S is the management span, F is the organization fitness, and G is the salary growth rate up hierarchy. It is important to reduce return on politics, and make lobbying for promotion and compensation decision difficult. The greater the “G” i.e. hierarchy, the greater incentive people have for politics since the goal is simply to move up the ladder. A higher G results in a lower magic number. Bahcall provided example of how McKinsey company has about a 3 month review process when deciding which candidate to promote, and this is independently assessed by another department within the company (not the direct manager). Lastly, middle manager levels are the most dangerous and need the most attention since they are the weakest points between loonshots and politics.
- LSC – Listen to the Suck with Curiosity. Although it is hurtful when an investor walks away or a partner declines an idea, the loonshot shall genuinely investigate the underlying reasons. It is hard to accept that noone likes his/her baby, however it is even harder to keep asking why. The idea might simply need to be presented a different way or might be the solution to a completely different problem. Bahcall talks about “Surviving three deaths” in the pharmaceutical industry, where it is not a good drug unless it has been killed atleast 3 times.
- SRT – Spirit, Relationship, and Time. One’s life purpose or mission is what feeds the Spirit, and Spirit is the engine that keeps us going as it steadies us for the battles ahead. Relationship (people) is our most important need. In other words, family and loved ones are crucial for ones success and well being; Bahcall provides example of physician conducting end of life conversations, when it is always the relationships that matter a lot more than material things. Just as how Relationships are our most precious source of joy and support, Time is our most precious resource.
While culture is important, it is crucial that a company fosters crazy innovative ideas. A company that is simply focused on the bottom line, and does not promote new ideas, will soon be left in the dust. So, when we analyze companies, we should factor in whether the company recognizes and supports loonshots. We notice companies like Google or Amazon are constantly innovating and pursuing those loonshot ideas.
Hope you learned a little and found this blog post helpful. We talked about the 5 key takeaways from the book Loonshots : How To Nurture The Crazy Ideas That Win Wars, Cure Diseases, And Transform Industries. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
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