By Richard Eichen
The 2017 Nobel Prize in economics went to Richard Thaler for his work on how humans, being irrational, don’t always follow economic theory and dogma. Funny how the world changes. Many years ago I studied Mathematically Oriented Macro Economics where we attempted to model the US economy by a series of complex equations. My favorite was the fudge factor component, to help adjust any long formula to retroactively ‘predict’ the past (and therefore presumably, the future). The underlying assumption is we were all rational actors, making enlightened decisions, describable in the language of mathematics. We just needed to find the correct equation. We never quite got there.
Companies are the sum of its people, not rational actors in of themselves, and so we have to apply human economic behavior to make them work effectively. The key speedbump hindering innovation and new product launches in large established companies is what Mr. Thaler termed the ‘endowment effect,’ where people most value (and therefore defend to the death) that which they already own. By changing the definition of what is owned, companies can turn this current form of internal resistance from speedbump to accelerator.
Look at any established company’s org chart, and you will see Brand Management, Product Management, Engineering, Legal and Sales groups. One owns marketing and messaging with its definition of success; another owns bringing products and new iterations to market with its definition of success, while the others have still additional definitions of success. The Senior Leadership Team is where the all these definitions of success converge into the common definition of success, be it top-line revenue, or EPS. However, what would happen if, leveraging the endowment effect, we defined success not as an entity to be produced, marketed and sold, but as a specific product domain derived EBITDA flow over 12+ months to be filled with a mix of products and messages? It moves the common definition of success down at least two levels.
By reconfiguring the Product, Brand, Engineering and other groups to focus on their assigned EBITDA, employees would own, and therefore most value a commonly defined outcome. This approach is by its very nature, initially disruptive, as giving teams a financial target and not product specifics requires mental agility and deprogramming from the way they were hired, trained and operate. It also requires the company to give them room to think.
Much like economics, it is time to refocus Management Theory on human nature, not forcing people to act in theoretical ways. How many MBA’s would that obsolete?