How should you react to the ups and downs of business life? Often, you shouldn’t, says Michael Blastland in this regular column.
You’re a dynamic business leader. Let’s say you make widgets - though you might equally make big-budget Hollywood movies.
Your widgets, or your movies, vary. Some widgets are perfect, some a tad too long. Some movies make mega-bucks at the box office, some bomb.
So what do you do? Well, you’re dynamic, so you react, of course. Something must be done.
If your studio boss once delivered golden geese but has since lost her Midas touch and turned out a row of turkeys, maybe it’s time she left. If a run of widgets comes out too long, have your widget machine adjusted to make them shorter. And because your customers expect, do it fast.
In the first case, that’s roughly what happened to Sherry Lansing at Paramount Pictures. For nearly a decade, she was a genius. Three disappointing years later, she was out.
But her story, as told by Leonard Mlodinow in his book The Drunkard’s Walk, then took another turn. Several films commissioned by her but released after she left turned out to be blockbusters.
Why didn’t they leave her be? Because, says Mlodinow, the industry didn’t understand the part that randomness plays in success.
What happened to Lansing happens almost everywhere - the ups and downs of bad luck, or good luck, mask - for a while - underlying quality.
But few people are confident enough to stand by their judgements about underlying quality or character and so remain glued instead to short-term indicators - indicators bedevilled by chance.
Mlodinow’s best-selling book tells the story of the fight against our instinct to read meaning into chance. For its ups and downs are a routine part of life. Thus the same lesson can apply all the way from Tinseltown to widgets.
Writing about people in industry, Tony Greenfield, a statistician, says they ignore the fact that there are ordinary ups and downs and instead look for some deep meaning in short-term change.
He’s a former head of process computing and statistics at the British Iron and Steel Research Association, and a professor of medical computing and statistics at Queen’s University, Belfast.
"In general, I believe that they look at the world through deterministic eyes. If anything goes wrong they look for a special cause and tackle the problem by troubleshooting.
"The simplest example is in process control. You have a set point for the output and then you adjust the control for every deviation without distinguishing between common cause [intrinsic] variation and special cause variation. The consequence is that the total variation becomes greater than it would if the process were allowed to run uncontrolled."
In other words, you make the variability of your widgets worse by trying to fix it. But is it really that difficult? Things go up and down. How hard can a concept be?
We all bow to the model of the dynamic business executive. It’s a myth of leadership that when there’s change, it requires action. But maybe leadership is also about asking if change is real change, and knowing when to sit still.
Since I’ve never run a business, you might reasonably ask if I’ve the faintest idea what I’m talking about. The answer might depend on how much business has to learn from elementary statistics.
Contrary to statistics’ reputation, one lesson it rams home time and again is the uncertainty of numbers created by variability.
That’s not to say all ups and downs are random. But it does suggest that reading too much into the data can be as damaging as ignoring it.
Of course, ups and downs can have real and important causes. But even these don’t necessarily tell you about the underlying quality of a business.
A wise friend of mine, Clive Hutchinson, who does run a successful business on the South Coast, Cougar Automation, had this to say:
"2010 was a terrible year with most of our customers cutting back or totally stopping spending, but I am so pleased we managed to get through it without any redundancies. It was tough for everyone but they all stuck together.
"It’s funny how quickly things change round, just last September I was worrying I’d made the wrong call and we should have made redundancies at the start of the year, and now we have the biggest order backlog the company has ever seen."
It’s another victory for managing by doing nothing, he suggests.
"Unfortunately, management generally ignores variability. A great example is the amount of time managers have to spend ’explaining’ variance to budget. Woe betide any manager who just ways ’well, sometimes things go up, and sometimes they go down’. We have to pretend to be in control."
It’s for this reason that the fashion for corporate dashboards displaying up-to-the-minute information about company performance makes me wonder - will bosses everywhere be staring at the numbers, twitching with every down, feeling the pulse race with every up, on the phone demanding action with every flicker on the dial?
The risk of playing down change is that you miss the next big thing. But since there’s an equal risk of over-reaction, does anyone know of a business bestseller with the mantra: "Calm down?"
By Michael Blastland
April 28, 2011