Norman Augustine has a reputation for saying exactly what he means. When he says something like: “If stock market experts were so expert, they would be buying stock, not selling advice,” he transforms an obvious point into a humorous barb. As another example of his wit, he recently said: “We’ve all heard the criticism ‘He talks too much.’ When was the last time you heard someone criticized for listening too much?” Augustine has been the CEO of both Martin Marietta and Lockheed. He started his career at Douglas Aircraft and served as United States Under Secretary of the Army.
Augustine is the creator of the satirical Augustine’s Laws, some of which appear below. All of the laws have been assembled in a book he wrote entitled Augustine’s Laws.
- “There are a large number of factors that make a company good or not good at innovation. One does have to take risks that have been carefully considered if one hopes to produce change, which is what innovation is about.”
There are many important rules in business. The most fundamental aspect of innovation in a business is that the innovator must break at least one of those rules. Part of what makes innovation hard is that breaking an important rule to create change happens in the context of risk, uncertainty and ignorance. What makes the challenge of creating a meaningful innovation even harder is an issues cause by scale: as the business gets bigger the innovation must be correspondingly bigger to financially “move the needle.” For example, a Fortune 500 business must innovate in bis ways to impact its financial results. One of the very best examples of rule breaking creating breakthrough innovation at scale is what Reed Hastings has done at Netflix over the years. For example, streaming movies and creating original content may seem like obvious choices now but they were not at the time Netflix decided to do so. When mistakes were made, like decision to to spin off the company’s legacy DVD business under the name Qwikster, Netflix was willing to reverse a decision. When the world is changing as quickly as it is today, being willing to change your mind when new data becomes available is increasingly an essential attribute of success.
The businesses that are most successful at creating and profiting from valuable innovations have developed skill in determining which rule or rules to break. The best way to do develop this skill without a lot of personal pain caused by making mistakes is to look at many examples of people who have successfully done and not done so. The objective is to try recognize the patterns that can increase the probability of success. After all, good judgment is fundamentally about pattern recognition. People who recognize this have said many times over the years: “Good judgment comes from experience, and experience comes from poor judgment.”
Of course, in order to know which rules to break it is a good idea to know the rules in the first place. Do innovators sometimes break a rule that they did not even know was a rule? Sure. But that is relying more on luck than is wise. Being lucky is great, but I would rather be skilled and lucky than just lucky, because the expected value is higher. One caveat comes with rule breaking: the more rules that are broken in any given business at one time, the greater the probability that the consequences of breaking one of the rules will kill the innovation and or the business. As was the case with Goldilocks, the amount of rule breaking at any given time at a business should be “just right.”
2. “Part of creating a culture [which generates innovation] is a willingness to tolerate occasional failure, perhaps even more than occasional failure. I say that not because I want to encourage failure, but if people are punished for every failure, then you won’t have innovation. If you have a baseball manager who wants to get rid of his .300 hitter every time he strikes out, he’s not going to have many .300 hitters around. When you’re trying to innovate, chances are you’re going to have more failures than successes.”
Most attempts at innovation fail. But the innovations that are a success are so valuable that the failure is dwarfed by the resulting benefits. That is the way evolution and life works. The pain associated with the inevitable failures is best overcome by making intelligent choices, the best of which offer significant convexity (i.e., huge upside and limited downside). Here is what I wrote about Sam Zell’s approach to making decisions like this in a post long ago:
“Listen, business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.” This statement is all about the value of seeking positive optionality. Every once in a while, if you are looking hard for opportunities, you will find a mispriced bet within your circle of competence with a relatively capped downside and a huge potential upside. It is wise to bet aggressively in these cases since it allows you to harvest positive optionality. Putting money at risk when the optionality of the situation is negative is a fool’s errand. Situations with a big up side and a big downside are by contrast problematic. This situation is likely to result in the most work and for that reason alone it may be wise to put these decisions in the “too hard” pile.
What the most successful innovators do today is test innovative new solutions in the real world using the equivalent of the scientific method and modern data science driven tools. The most effective way to think about that process is that you are solving the what Andy Rachleff called “The Value Hypothesis.” Rachleff describes his approach this way:
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.”
I was talking to an Amazon employee recently who was re-reading the book The Everything Store. She said that what struck her about the company and its culture is the amount of failure that it took to create the innovations that drive the business. She said that Bezos has created a company that is driven by innovation in a business that some people thought was a commodity business. Bezos has said:
“At Amazon, we have to grow the size of our failures as the size of our company grows,” he said on Saturday. “We have to make bigger and bigger failures — otherwise none of our failures will be needle movers. It’s a very bad sign over the long run if Amazon wasn’t making larger and larger failures. If you do that all along the way, that is going to protect you from ever having to make that big ‘hail Mary’ bet that you sometimes see companies make right before they fail or go out of existence. …You have to be experimental to accomplish anything important. That means you will be wrong a lot. You will try something on your way to that vision and that will be the wrong decision. You’ll have to back up and take a little course correction and try again. …If you already know it’s going to work, it’s not an experiment. “Only through experimentation can you get real invention. The most important inventions come from trial and error with lots of failure.”
- “Another part of creating the right environment is to give people a reasonable amount of freedom to pursue opportunities that might have been unexpected. There are many examples, but the one I like best is the discovery of penicillin; its discovery was really an accident, but Fleming had the opportunity to pursue what struck him as kind of an interesting observation, and as a result he discovered penicillin. If he had been constrained to do only the things that his defined projects were calling for, those that were dictated from above, somebody else would’ve had to find penicillin later on. I think a big part of innovation is to give people the freedom to think out of the box.”
When people conduct experiments about a value or growth hypothesis, sometimes they discover innovation that they did not expect to find. The best innovators seize that opportunity. For example, an entrepreneur can begin an experiment to find a value hypothesis solution that was intended to create a video game and they end up with a result that is instead a communication system. Being willing to consider the unexpected like this means the entrepreneur has captured the benefits of optionality. In other words, the best entrepreneurs recognize favorable outcomes when they occur. The beauty of this approach is that successful prediction isn’t necessarily required. In short, the best entrepreneurs will know unexpected innovation when they see it and capitalize when they do.
- “You can say over and over that innovation is important and that it requires taking risks, and you can even write it in books, but that doesn’t have much meaning. People watch how you act, what you do when someone takes a reasonable risk and fails, despite the fact that they did their very best. You have to be understanding of that. Other people watch and see how the management team reacts.”
If employees do not see management walking the talk about how employees are treated if an effort to create innovation fails, the right people in the company will not take risks. It is that simple. This is important since as noted above most attempts to create innovation fail. So an effort is needed to help employees who take risks associated with an innovation that is not successful. For example, at one highly innovative company known for its innovative culture anyone who works on an unsuccessful product has 90 days to find a new job in the company and receives the active assistance of a human resources person in finding that job. Another way for managers to kill innovation at a business is to politicize the process and to repeatedly not let innovation see the light of day. If employees see that the business is only focused on existing processes, product and methods, they will be far less interested in being innovative. There comes a time where the management of a business must step up and put resources behind an innovation. It is at that point the potential innovation is not just a small incubation, but rather something that requires significant resources which may distract the company from its existing business. The innovation may even be disruptive of the existing business. At this point in the business there is no substitute for courage combined with rational thought. The math of the calculation is simple: “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain.” Judgement about what to insert as the variables in that equation is what makes a great manager/entrepreneur/founder.
- “The early bird gets the worm. The early worm… gets eaten.”
Craig McCaw has said to me many times that pioneers often get killed by arrow in the back. He is an expert on this topic since he was a pioneer in both the cable TV and wireless businesses. He survived while many others died or quit. The goal of an innovator is to be the “last mover” rather than the “first mover.” First-mover advantage, is the advantage gained by the initial significant business in a market. Sometimes the first mover is able to harvest network effects and is the last mover. Or not. It depends. Peter Thiel talks about a “Last Mover Advantage.” In his view: “People often talk about ‘first mover advantage.’ But focusing on that may be problematic; you might move first then fade away…. More important than being the first mover is the last mover. You have to be durable.” As an example, Facebook was not the first social network and Google was not the first search engine.
- “Find good people, tell them what you want, and then leave them alone. That’s my management secret.”
Augustine is similar to Warren Buffett in that he believes the core of what a manager must do is find great people. If you can find great people, you can delegate with confidence. Buffett says he “delegates to the point of abdication.” Augustine has a different approach: “One of the big mistakes that some leaders make is they delegate a job and then keep trying to help do the job. You’ve got to watch. You can’t delegate a job and then walk away.” Watching people who work for you while at the same time leaving them alone is tricky, but if striking the right balance was easy great managers would be far more common. The difference between these Buffett and Augustine is in part based on scope scope. Buffett’s approach is more about choosing the right CEO who then finds more great people for his business, whereas Augustine is speaking more generally about placing great people at many levels of an organization. The general principle is: the more time you spend finding great people the more you can delegate with confidence.
- “Motivation will almost always beat mere talent.” “A hungry dog hunts best. A hungrier dog hunts even better.”
Augustine is not saying that talent isn’t important. He is instead saying that talent does not matter as much as motivation and dedication. Everything is relative as Einstein famously said. This point about motivation and dedication is essentially what other people are saying when they make the point that missionaries are more often successful than mercenaries. Some mercenaries do succeed. There are also plenty of missionaries who do not achieve their goals, but they are more likely to do so than mercenaries.
- “No. 1 is integrity. Judgment is awfully important. It’s nice if you’re at least halfway smart and that you work hard.”
No amount of talent or motivation will result in success if the employee does not have integrity. In fact, a talented and motivated person who does not have integrity is more dangerous and can cause more frequent and bigger problems. No one should want an employee who is smart, motivated and hardworking but who has low integrity. That is a recipe for disaster. Judgement, which is Augustine’s #2 attribute, is hard to teach so it is great to find a person who has that already. Like Buffett, Augustine wants a person who works hard. He also believes that a very high IQ is not necessary. The nature of the gap between real IQ and imagined IQ is important. What you want is someone who has an IQ that is lower than what they think it is since that helps avoid mistakes cause by hubris. Humility is an underrated attribute in an employee.
- “The weaker the data available upon which to base one’s conclusion, the greater the precision which should be quoted in order to give the data authenticity.”
This is something that you see all the time in the form of false precision. Augustine gave this example of this principle in his book:
- “Fools rush in where incumbents fear to tread.”
If you read his book you will see that in this quote Augustine is referring to people and businesses who make bids without knowing the risks and costs involved. But there is another interpretation. Nassim Taleb wrote in his book Antifragile: “the idea present in California, and voiced by Steve Jobs at a famous speech: “Stay hungry, stay foolish.” He probably meant “Be crazy but retain the rationality of choosing the upper bound when you see it…. Any trial and error can be seen as the expression of an option, so long as one is capable of identifying a favorable result and exploiting it…” Society does want to have a significant number of “foolish” people trying to make positive dreams come true. That is no small part of how we generate breakthrough innovation.
- “We knew that [Russia charging NASA more for Soyuz rides to the space station] was going to happen. I mean, when you have a unique position in the marketplace, it’s almost inevitable.”
Augustine is talking in this example about wholesale transfer pricing. Wholesale transfer pricing = the bargaining power of company A that supplies a unique product XYZ to Company B which may enable company A to take the profits of company B by increasing the wholesale price of XYZ. The principle is simple- it is your options that matter. Famous Getting to Yes author and negotiation expert Roger Fisher referred to this as a BATNA (best alternative to a negotiated agreement). If you have a single supplier for anything or a very hard time changing your supplier you have have a wholesale transfer pricing problem.
- “Bulls do not win bullfights; people do. People do not win people fights; lawyers do.”
People tend to be far too quick to turn to lawyers to resolve a dispute. Litigation especially should be considered a last resort alternative. Unfortunately, the situation can rapidly deteriorate once lawyers are involved. The simplest way to avoid or resolve conflicts is to anticipate them and to act quickly to resolve them before they escalate. What makes a relationship work is a mutually beneficial relationship. No amount of lawyers, arbitration or litigation can keep a relationship in place if one party no longer sees any benefit in the relationship. In my book on negotiation, which is available free on my web site, is this paragraph:
Extra Norman Augustine quotes:
A picture from Augustine’s book on his “Laws”:
“There are no lazy veteran lion hunters.”
“It is better to be the reorganizer than the reorganizee.”
“Most projects start out slowly – and then sort of taper off.”
“For every scientific (or engineering) action, there is an equal and opposite social reaction.”
“The last 10 percent of performance generates one-third of the cost and two-thirds of the problems.” “One-tenth of the participants produce over one-third of the output. Increasing the number of participants merely reduces the average output.”
“Ninety percent of the time things will turn out worse than you expect. The other 10 percent of the time you had no right to expect so much.”
“Software is like entropy. It is difficult to grasp, weighs nothing, and obeys the Second Law of Thermodynamics; i.e., it always increases.”
“The best way to make a silk purse from a sow’s ear is to begin with a silk sow. The same is true of money.”
Augustine’s Book: https://www.amazon.com/Augustines-Chairman-Lockheed-Corporation-Augustine/dp/1563472406
- Benoit Mandelbrot’s Ideas about Investing and Markets (Made as Simple as Possible, but not Simpler).
- Investing and Business Lessons from The Princess Bride