Monday, December 19, 2011

Return on Luck

Jim Collins, the author of business megasellers Built to Last and Good to Great, wrote a new book recently with Prof. Morten Hansen of UC Berkeley and INSEAD, entitled Great by Choice, part of which tackles the long intriguing problem in business strategy  - Why do some people and their businesses thrive in uncertainty, even chaos and others don't? And what is the role luck plays in this context?

Luck is an abstract and elusive concept which is hard to quantify. However, Collins and Hansen tried to study it more systematically by defining luck as an event which satisfies some three basic criteria. Then they counted the number of "luck events" - good luck, bad luck, the timing of luck, and so on - for each subject across the window of the study. They found out that for enterprises that were eventually built into companies which outperformed their industries by a factor of 10, or 10Xers, as the authors dubbed, they weren't generally "luckier" than the rest. Then the question is, what on earth differentiates 10Xers from the comparison cases?

Their answer is that, luck - whether good or bad - is not the determining factor for a business to thrive in any circumstance, what really matters is how you manage luck and make choices in order to create a huge return on it, i.e., Return on Luck (ROL). To illustrate this, real world examples of how people choose differently when facing "luck events" are adopted, such as Bill Gates, Progressive insurance, Southwest Airlines among others, which are palatable and of course make their stories more compelling. But since choices are always made by people, does this mean different outcomes are in the end driven by different people? If so, unless clear links between the difference in people and difference in ROL are made explicit, it may still be hard to really opertionalize the notion of ROL.

Another interesting and somewhat counterintuitive point the authors have raised is that people or companies that follow a disciplined approach in turbulent times often outperform those who constantly adjust to adapt to the environment. The metaphor is built around the story of two explorers who set out separately to reach the South Pole in 1911. The one who set ambitious goals for each day but never overshoot on good days or undershoots on bad ones eventually won the race. So are companies like Progressive Insurance, Intel and Southwest Airlines. But from a theoretical point of view, why and when does discipline trump adjustment and adaptation? Is it a result of some optimization process and how? Is discipline working more effectively as environment becomes more turbulent and chaotic? In industries that are less affected by disruptive and chaotic change, would companies with strict disciplines still outperform those without?

Here are some reviews and interviews from WSJ, FT, Forbes, Knowledge@Wharton (part 1, 2) and INSEAD Knowledge.

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