CHAPTER 1: THE STONE IN DAVID’S SLINGSHOT

1. Brian Apelt, The Corporation: A Centennial Biography of United States Steel Corporation, 1901–2001 (Pittsburgh, Penn.: Cathedral Publishing, 2001); Kenneth Warren, Big Steel: The First Century of the United States Steel Corporation, 1901–2001 (Pittsburgh, Penn.: University of Pittsburgh Press, 2008).

2. Mark Houser, “The Fall and Rise of the Mon Valley,” Pittsburgh Tribune-Review, September 9, 2007.

3. Martin Woertler et al., Global Steel: Breaking the Stalemate, Boston Consulting Group, 2002.

4. Warren, Big Steel, table A9.

5. Most of the data on Mittal draws from Donald Sull, “Spinning Steel into Gold: The Case of Ispat International N.V.,” European Management Journal 17, 4 (1999): 368–81. Other helpful sources include Simon Clark and Matthew Craze, “Man of Steel,” Bloomberg Markets, July 2005, and various equity analyst reports and SEC filings.

6. Woertler et al., Global Steel.

7. For a detailed description of these studies, see the research design and methodology appendix in Donald N. Sull, Made in China, (Boston: Harvard Business School Press, 2005), and the introductory chapter of Donald N. Sull and Martin Escobari, Success Against the Odds, (London: Elsevier/Campus, 2005).

8. In his outstanding book The Halo Effect, (New York: Free Press, 2007), Professor Phil Rosenzweig describes a set of factors that obscure our ability to distinguish the underlying sources of corporate performance. These include the halo effect created by superior performance, which leads observers to view every aspect of an organization—from strategy to culture—in a positive light. Many variables, moreover, are closely correlated with one another, frustrating our ability to untangle causal relationships. Scholars studying corporate performance cannot ignore Phil’s trenchant analysis, but nor should they abandon the search for actions that can increase the odds of success. My own approach was to treat the paired-case research findings as preliminary, and submit them to further scrutiny as described in the text.

9. John Y. Campbell et al., “Have Individual Stocks Become More Volatile? An Empirical Explanation of Idiosyncratic Risk,” Journal of Finance 56 (2001): 1–43. Campbell and colleagues found no increase in aggregate stock market volatility, confirming the finding that aggregate stock market volatility has remained essentially flat between the 1920s and the late 1990s. See G. William Schwert, “Why Does Stock Market Volatility Change over Time?” Journal of Finance 44 (1989): 1115–53. Recent research argues that idiosyncratic volatility has not followed a steady upward trend, but rather switches between periods of relative stability and higher volatility. See Michael W. Brandt et al., “The Idiosyncratic Volatility Puzzle: Time Trend or Speculative Episodes,” unpublished working paper, 2008; and Geert Bekaert et al., “Is There a Trend in Idiosyncratic Volatility?” unpublished working paper, 2008.

10. Diego A. Comin, and Sunil Mulani, “Diverging Trends in Macro and Micro Volatility,” Review of Economics and Statistics 88, 2 (2006): 374–83; Diego A. Comin and Thomas Philippon, “The Rise in Firm-Level Volatility: Causes and Consequences,” NBER Macroeconomics Annual 20 (2005): 167–228; Diego A. Comin, Erica L. Groshen, and Bess Rabin, “Turbulent Firms, Turbulent Wages?” Journal of Monetary Economics 56, 1 (2009): 109–33.

11. Average life span of an S&P company from Richard Foster and Sarah Kaplan, Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Transform Them (New York: Currency, 2001); probability of exit data from George P. Baker and Robert E. Kennedy, “Survivorship and the Economic Grim Reaper,” Journal of Law, Economics, and Organization 18, 2 (2002): 324–61.

12. A leading firm is defined as one in the top quintile of industry performance, and dethronement takes place when they fall from the top quintile during any five-year period for reasons including declining performance, bankruptcy, or acquisition by another firm. See William I. Huyett and S. Patrick Viguerie, “Extreme Competition,” McKinsey Quarterly 2005, no. 1, 47–57. Their findings are supported by a more systematic study of over six thousand firms across more than forty industries and twenty-five years that also explored the persistence of superior performance. See Robert R. Wiggins and Timothy W. Ruefli, “Schumpeter’s Ghost: Is Hypercompetition Making the Best of Times Shorter?” Strategic Management Journal 26 (2005): 887–911.

13. One recent study analyzed volatility of return on investment for an average of 5,700 business units over twenty years and found it increased from the late 1970s through the mid-1980s and decreased thereafter. See Gerry McNamara, Paul M. Vaaler, and Cynthia Devers, “Same as It Ever Was: The Search for Evidence of Increasing Hypercompetition,” Strategic Management Journal 24 (2003): 261–78. Their findings support industry-level studies that have found that turbulence ebbs and flows within an industry over time. That said, Campbell et al., “Have Individual Stocks Become More Volatile?” found that eight of the ten largest industries they studied (ranked by average market capitalization) experienced increased volatility in returns between the early 1960 and the late 1990s. It is also important to note that volatility for the economy as a whole, as measured by fluctuations in GDP, has decreased—it was one-third less in the period between 1984 to 2002 than it had been between 1960 and 1983. This drop in volatility occurred in Japan, Germany, the United Kingdom, France, and Italy as well, although the precise timing and magnitudes differed. Two separate analyses identified a break point in U.S. GDP variance at 1984; see Chang-Jin Kim and Charles R. Nelson, “Has the U.S. Economy Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle,” Review of Economics and Statistics 81 (1999): 608–16, and Margaret M. McConnell and Gabriel Perez-Quiros, “Output Fluctuations in the United States: What Has Changed Since the Early 1980s,” American Economic Review 90, 5 (2000): 1464–76. On volatility measured as variance of four-quarter GDP growth, see James H. Stock and Mark W. Watson, “Has the Business Cycle Changed? Evidence and Explanations,” in Monetary Policy and Uncertainty (Kansas City, Mo.: Federal Reserve Bank of Kansas City, 2003), 9–56. This so-called “great moderation” of GDP volatility is not inconsistent with greater turbulence at the firm level, since the volatility of individual firms cancels out in the process of aggregating performance to calculate national output.

14. Summary of PricewaterhouseCoopers CEO survey 2007, PWC Web site, accessed October 3, 2008. (www.pwc.com/servlet/pwcPrintPreview?LNLoc=/extweb/insights.nsf/docid/0F319E656181B1A18525729D0073E055).

15. F. E. Emery and E. L. Trist, “The Causal Texture of Organizational Environments,” Human Relations 18 (1965): 21–31; J. D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967); R. B. Duncan, “Characteristics of Organizational Environments and Perceived Environmental Uncertainty,” Administrative Science Quarterly 17 (1972): 313–27. These authors focus on dynamism, or the rate of change in variables that influence performance, and complexity, or the number of variables and interrelationships among them that must be considered in order to model a firm’s performance.

16. David Miles and Andrew Scott, Macroeconomics: Understanding the Wealth of Nations (Chichester, U.K.: John Wiley, 2005), 555.

17. Paul Cashin and C. John McDermott, “The Long Run Behavior of Commodity Prices: Small Trends and Big Variability,” IMF Staff Papers 49, 2 (2002): 175–99.

18. A September 2006 poll by ABC News found that 35 percent of respondents worried that they might personally be a victim of a terrorist attack. ABC News Poll, September 5–7, 2006; N = 1,003 adults nationwide.

19. Ali H. Mokdad et al., “Actual Causes of Death in the United States, 2000,” Journal of the American Medical Association 291, 10 (March 10, 2004): 1238–41.

20. David Kesmodel and Janet Adamy, “Why Price Increases Are Brewing for Craft Beers,” Wall Street Journal, October 5, 2007, B1.

21. I am grateful to my colleague Andrew Scott for helping me to wade through the voluminous literature on globalization, and also for the summary in his excellent textbook, David Miles and Andrew Scott, Macroeconomics: Understanding the Wealth of Nations, 2nd ed. (Chichester, U.K.: John Wiley, 2005).

22. The study looked at the pace of diffusion globally for twenty-nine technological breakthroughs in transportation, communication, manufacturing, and medical technologies from 1750 to the present. Diffusion was measured by adoption within 80 percent of the countries for which data were available. See the International Bank for Reconstruction and Development (World Bank), Global Economic Prospects: Technology Diffusion in the Developing World (Washington, D.C.: World Bank, 2008). For a useful summary, see table 2.14.

23. “New Champions, Global Challenger,” Harvard Business Review–World Economic Forum CEO Survey, presented at “Made in India Multinationals: A Discussion,” London Business School, October 2007.

24. Thomson Financial, National Venture Capital Association Yearbook (New York: NY: Thomson, 2007). Venture-backed IPOs represented 14 percent of all companies receiving initial funding in the period 1980–2006, while exit through M&A accounted for 15 percent.

25. Charles Emmerson, Global Risks 2007 (Geneva: World Economic Forum, 2007).

26. The survey was conducted during September and October 2007 in twenty countries. Adam Cohen, “The Age of Fear,” Wall Street Journal Europe, December 7–9, 2007.

27. Clark G. Gilbert, “Unbundling the Structure of Inertia: Resource Versus Routine Rigidity,” Academy of Management Journal 48, 5 (2005): 741–63; Clark G. Gilbert, “Change in the Presence of Residual Fit: Can Competing Frames Coexist?” Organization Science 17, 1 (2006): 150–67.

28. J. E. Dutton and S. B. Jackson, “Categorizing Strategic Issues: Links to Organizational Action,” Academy of Management Review 12, 1 (1987): 76–90.

29. “The Carnegie from Calcutta,” Economist, January 8, 1998: 56.

30. Paul R. Ehrlich, The Population Bomb, (New York: Ballantine, 1968): xi.

31. Alberto Capatti and Massimo Montanari, Italian Cuisine: A Cultural History (New York: Columbia University Press, 1999), 42–43.

32. N. A. M. Rodger, The Insatiable Earl: A Life of John Montagu, 4th Earl of Sandwich (London: HarperCollins, 1993). Rodger notes that only one source attributes Montagu’s creation of the sandwich to the gaming table, and he might have invented the meal to allow him to work rather than gamble.

33. BBC, “Obituary: Dr. Robert Atkins,” April 17, 2003, http://news.bbc.co.uk/1/hi/world/americas/2957623.stm.

34. Douglas Martin, “Dr. Robert C. Atkins, Author of Controversial but Best-Selling Diet Books, Is Dead at 72,” New York Times, April 18, 2003.

35. Howard E. Aldrich, Organizations Evolving, (London: Sage, 1999); and Lowell W. Busenitz and Jay B. Barney, “Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making,” Journal of Business Venturing, 12, 1 (1997): 9-30.

CHAPTER 2: TIME, TIMING, AND LUCK

1. Most of the information on Carnival Cruise Lines in this chapter is from Donald Sull et al., “Carnival Corporation: The P&O Acquisition,” unpublished London Business School case study, interviews with cruise industry executives; and Bob Dickinson and Andy Vladimir, Selling the Sea: An Inside Look at the Cruise Industry (Hoboken, N.J.: John Wiley, 2008). I am particularly grateful to Stefano Turconi and Barbara Muckermann for their diligent and creative research assistance on this project.

2. Richard Tedlow, Andy Grove (New York: Portfolio, 2006), 178.

3. Adam Brandenburger provides the clearest definition of value. See A. M. Brandenburger and H. Stuart, “Value-Based Business Strategy,” Journal of Economics and Management Strategy 5 (1996): 5–25. For a more accessible introduction, see A. M. Brandenburger and B. J. Nalebuff, Co-opetition (New York: Doubleday, 1996). The cost here is not the out-of-pocket expense, but the opportunity cost, or the income foregone by not using the resource for its best available use, including the much-adjusted cost of capital.

4. Peter Jayaswal, “Danmarks Nationalbank’s Costs of Supporting Ship Finance,” Danmarks Nationalbank Monetary Review 43, 3 (2004): 35–46. Denmark also offered additional subsidies to support its maritime industry; see U.S. Department of Commerce Maritime Administration, Maritime Subsidies 1978 (Washington, D.C.: Government Printing Office, 1978), 35–38.

5. U.S. Department of Transportation, Bureau of Transportation Statistics, Air Carrier Traffic Statistics (Washington, D.C.: U.S. Government Printing Office, 2007); Transportation Research Board, “Winds of Change, Domestic Air Transport Since Deregulation,” National Research Council, Washington, D.C., 1991, 230.

6. The number of passengers embarking from the Miami port totaled 1.1 million in 1976 and had grown to 3.1 million by 1989. See Arthur Chapman, “Watch the Port of Miami,” Tequesta: the Journal of the Historical Association of Southern Florida 53 (1993): 7–30.

7. W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy Web site, www.blueoceanstrategy.com/qa/FullAnswer.php?qid=1, accessed September 2, 2008.

8. Constantinos C. Markides, Game Changing Strategies (San Francisco: Jossey-Bass, 2006).

9. The books I reviewed were Blue Ocean Strategy, Gary Hamel, Leading the Revolution, (Boston: Harvard Business School Press, 2002); Larry Bossidy, Ram Charan, and Charles Burck, Execution, (New York: Crown Business, 2002); Peter Senge, The Fifth Discipline, (New York: Doubleday, 1990); Gary Hamel and C. K. Prahalad, (Boston: Harvard Business School Press, 1994); Adrian J. Slywotzky and David J. Morrison, (New York: Crown Business, 1997); Chris Zook with James Allen, Profit from the Core, (Boston: Harvard Business School Press, 2001); Thomas J. Peters and Robert Waterman, In Search of Excellence, (New York: Harper Collins, 1982); Jim Collins, Good to Great: Why Some Companies Make the Leap and Others Don’t (New York: HarperBusiness, 2001); James C. Collins and Jerry I. Porras, Built to Last, (New York: HarperBusiness, 1994). I am not arguing that these are bad books, to be clear, but only that they would benefit from qualifying their findings with the disclaimer that outcomes depended not only on managerial actions, but also on contextual forces.

10. Niccolò Machiavelli, The Prince, trans. Mark Musa (New York: St. Martin’s Press, 1964 [1532]), ch. XXV.

11. Ibid., 209.

CHAPTER 3: THE MAP PARADOX

1. “The Communist Putsch in Vienna failed”, Die Neue Zeitung, June 19, 1919, 1–3; “Severe blood sacrifice from the attempted putsch,” Reichspost, June 16, 1919, 1–2 (in German, translated by author). Descriptions of the events of June 16, 1919, including estimates of the crowd size, composition, and identity of dead and injured, are from the Reichspost, Die Neue Zeitung, and Wiener Abendpost newspaper reports on the following day. See also Karl Popper, Unended Quest (London: Routledge, 2002), 34.

2. Alan Sked, The Decline and Fall of the Hapsburg Empire: 1815–1918 (London: Longman, 1989).

3. Value of currency measured in the exchange rate of krone per U.S. dollar. Raw data from Emanuel H. Vogel, “The Currency Problem of Austria,” Annals of the American Academy of Political and Social Science 98 (1921), supplement: “Present-Day Social and Industrial Conditions in Austria,” 28–34.

4. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980). The five forces are rivalry among existing competitors, the threat of potential substitutes, the threat of new entrants, the bargaining power of customers, and the bargaining power of suppliers.

5. Popper, Unended Quest, 34. Popper later published an extensive analysis of Marxist theory in the second volume of The Open Society and Its Enemies: Hegel, Marx, and the Aftermath (London: Routledge, 1980), a book that many Marxists viewed as the most damning critique ever written of Marxist theory.

6. See Malachi Haim Hacohen’s outstanding biography, Karl Popper: The Formative Years, 1902–1945: Politics and Philosophy in Interwar Vienna (Cambridge: Cambridge University Press, 2000).

7. Times (London), November 7, 1919.

8. Popper, Unended Quest, 37.

9. Karl R. Popper, The Open Universe: An Argument for Indeterminism (London: Routledge, 1982), 42.

10. The logic of conjecture and refutation permeates Popper’s writing, but a good summary exists in Karl R. Popper, Conjectures and Refutations: The Growth of Scientific Knowledge (New York: Basic Books, 1962). Many people think that Popper’s big idea is falsifiability, the notion that there is an asymmetry between new information that confirms our beliefs and data that disconfirm our map. While we never conclusively prove a theory no matter how high we pile the supporting examples (a million white swans do not prove that all swans are white), we can conclusively disprove it with a single disconfirming example (finding a single black swan). Popper believed that falsifiability, a theory’s exposure to refutation via empirical testing, provided a shining line of demarcation between true science and the deficient theories such as Marxism and psychoanalysis that falsely claimed the mantle of science. Scientists, according to Popper, should go out of their way to expose their theories to refutation and actively seek out anomalies—the black swans that reveal the limits of their theories. Critics have largely discredited falsifiability in both the philosophy and practice of science. Few tests are as clear-cut as Popper’s simplified examples, for instance, and it is often the test or model specification that is flawed rather than the underlying theory. Rudolf Carnap, for example, fought for common sense and argued that confirmatory evidence must increase our confidence in a theory. See Rudolf Carnap’s response to Popper in The Philosophy of Rudolf Carnap (LaSalle, Ill.: Open Court, 1963). I accept the critique of falsifiability but find it misplaced. Popper’s true contribution lies in the iterative approach to science that alternates between periods of commitment and skepticism.

11. Popper, Unended Quest, 155.

12. Karl Popper, The Logic of Scientific Discovery (New York: Basic Books, 1959).

13. Popper, The Open Universe, xv.

14. Hacohen, Karl Popper, 148

15. Bryan Magee, Philosophy and the Real World: An Introduction to Karl Popper (La Salle, Ill.: Open Court, 1973).

16. Probably the most comprehensive study of start-up survival was conducted on more than two hundred thousand new establishments founded in the second quarter of 1998 across all industries and across all U.S. states. The found an average four-year mortality rate of 56 percent and a surprisingly narrow range across industries, with the lowest four-year mortality rate in education and health service (45 percent) and the highest in information technology (62 percent). See Amy E. Knaup, “Survival and Longevity in the Business Employment Dynamics Data,” Monthly Labor Review, May 2005, 50–56. A similar study conducted of Swiss start-ups founded between 2000 and 2004 found a five-year mortality rate of 51 percent; see Bundesamt für Statistik, “Unternehmensdemografie: Überlebensraten der zwischen 2000 und 2004 gegründeten Unternehmen,” Industrie und Dienstleistungen 2008. Canadian data found a 64 percent mortality rate across all sectors for start-ups founded between 1984 and 1994; see John Baldwin et al., Failure Rates for New Canadian Firms: New Perspectives on Entry and Exit (Ontario: Ministry of Industry, 2000). In two successive studies of more than three hundred thousand U.S. manufacturing firms between 1963 and 1982, Timothy Dunne and his colleagues found an average five-year exit rate for new entrants building new plants of 62 percent; see Timothy Dunne, Mark J. Roberts, and Larry Samuelson, “Patterns of Firm Entry and Exit in U.S. Manufacturing Industries,” RAND Journal of Economics 29, 4 (1988): 495–515, esp. table 11. A study of more than three thousand Portuguese manufacturing firms found a four-year exit rate of 48 percent; see José Mata and Pedro Portugal, “Life Duration of New Firms,” Journal of Industrial Economics 42, 3 (1994): 227–45. One study that controlled for the stage of the industry life cycle and the size of the entrant found five-year failure rates ranging from 30 percent to 43 percent; see Rajshree Agarwal and David B. Audretsch, “Does Entry Size Matter? The Impact of the Life Cycle and Technology on Firm Survival,” Journal of Industrial Economics 49, 1 (2001): 21–43. A recent study of 788 Internet firms founded between 1999 and 2002 found a five-year failure rate of 52 percent to 60 percent (depending on whether acquisitions were coded as survival or failure); see Brent Goldfarb, David Kirsch, and David A Miller, “Was There Too Little Entry During the Dot-Com Era?” Journal of Financial Economics 86, 1 (2007): 100–44.

17. Michael Roberts and Nicole Tempest, ONSET Ventures, Case Study 9-898-154 (Boston: Harvard Business School, 1998); and author’s interview with Terry Opdendyk, ONSET Ventures cofounder.

18. For a fuller discussion of entrepreneurship as an iterative sequence of experiments, see Donald N. Sull, “Disciplined Entrepreneurship.” Sloan Management Review 46, 1 (2004): 71–77.

19. Thomas Kuhn, The Structure of Scientific Revolutions (Chicago: University of Chicago Press, 1962). Kuhn’s influence is indisputable. The Structure of Scientific Revolutions has sold more than a million copies and been translated into over twenty languages. See Steve Fuller, Kuhn vs. Popper (Cambridge: Icon Books, 2003), 2. The book was first among all books cited in the Arts and Humanities Citation Index between 1976 and 1983. See Eugene Garfield, “A Different Sort of Great Books List,” Current Contents 16 (1987): 3–7.

20. F. Scott Fitzgerald, “The Crack Up,” Esquire, February, 1936: 19.

21. Jacques Brunschwig, “Skepticism,” in Jacques Brunschwig and Geoffrey E. R. Lloyd, eds., Greek Thought: A Guide to Classical Knowledge (Cambridge, Mass.: Belknap, 2000), 937–55.

22. David Hume, An Enquiry Concerning Human Understanding (Oxford: Oxford University Press, 1951), XII: 2, 160.

23. Imre Lakatos, Criticism and the Growth of Knowledge (New York: Cambridge University Press, 1970), 22.

CHAPTER 4: ACTIVE INERTIA

1. For the history of Harvey Firestone, see Alfred Lief, Harvey Firestone: Free Man of Enterprise (New York: McGraw-Hill, 1951). The history of the early tire industry draws on Donald N. Sull, “From Community of Innovation to Community of Inertia: The Rise and Fall of the Akron Tire Cluster,” Harvard Business School Working Paper 01-025, 2001; and Steve Love and David Giffels, Wheels of Fortune: The Story of Rubber in Akron (Akron: University of Akron Press, 1998).

2. Love and Giffels, Wheels of Fortune.

3. Using multiple archival sources, Stanislav Dobrev and his co-authors identified 2,197 new entrants to the automobile industry between 1885 and 1981. See Stanislav D. Dobrev, Tai-Young Kim, and Glenn R. Carroll, “Shifting Gears, Shifting Niches: Organizational Inertia and Change in the Evolution of the U.S. Automobile Industry, 1885–1981,” Organization Science 14, 3 (2003): 264–82. Like start-ups today, many of these entrants failed to secure the funding to actually produce their design, but they nevertheless contributed to uncertainty in product and process technology.

4. Steven Klepper, “The Capabilities of New Firms and the Evolution of the U.S. Automobile Industry,” Industrial and Corporate Change 11, 4 (2001): 645–66.

5. Zephyr Frank and Aldo Musacchio, “The International Natural Rubber Market, 1870–1930,” in EH.Net Encyclopedia, 2008, http://eh.net/encyclopedia/article/frank.international.rubber.market.

6. U.S. Bureau of Labor Statistics, Bulletin 572: Wholesale Prices (Washington, D.C.: Government Printing Office, 1934); Lloyd G. Reynolds, “Competition in the Rubber-Tire Industry,” American Economic Review 28, 3 (1938): 459–68.

7. See B. Stern, “Labor Productivity in the Automobile Tire Industry,” U.S. Bureau of Labor Statistics Bulletin 585 (1933); U.S. Bureau of Labor Statistics, “Productivity of Labor in Eleven Manufacturing Industries,” Monthly Labor Review, March (1930): 501–17.

8. More precisely, a commitment is an action taken by a person in a time period that increases the probability that she, or the organization she represents, will behave in a specified way in subsequent time periods. Commitments operate by increasing the costs of deviating from the specified behavior in the future, up to the limit of excluding the possibility of alternative courses of action altogether. This definition of commitment is closest to the construct of “precommitment” used in game theory and defined in Jon Elster, Ulysses and the Sirens: Studies in Rationality and Irrationality (Cambridge: Cambridge University Press, 1979), 36–103.

9. Lief, Harvey Firestone, 103, 105.

10. This perspective is commonly referred to as the resource-based view of the firm. See B. Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal 5, 2 (1984): 171–80, and J. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, 1 (1991): 99–120.

11. Many scholars interpret technological innovation in terms of big breakthroughs, but the advances in tire technology were a story of many incremental improvements over decades. Improved tire construction offered the potential to enhance performance, but realizing this potential required a host of innovations in complementary technologies, especially the raw materials, including chemical additives, steel wire, and textiles. Cord tires, for example, reduced tire failure resulting from fabric friction but did not address rubber degradation. New chemical additives, however, significantly increased the durability of tread rubber, while advances in steel wire allowed the balloon tire to attach to a rim.

12. Patricia M. Zonsius, “The Centennial History of the Portage Country Club: 1894–1994,” in author’s possession. While the entire manuscript is a fascinating history of a social institution central to Akron’s tire industry, the most valuable data are a complete list of members in 1906 that presents a snapshot of the social networks in Akron’s early tire industry.

13. Sull, “From Community of Innovation to Community of Inertia,” figure 4.

14. Leon Festinger, A Theory of Cognitive Dissonance (Evanston, Ill.: Row, Peterson, 1957). See also Gerald R. Salancik, “Commitment and the Control of Organizational Behavior and Belief,” in Barry M. Staw and Gerald R. Salancik, eds., New Directions in Organizational Behavior (Chicago: St. Clair, 1977), 1–54.

15. Much of the research in the escalation of commitment literature has focused on the individual and is based on laboratory experiments. For a recent review of this literature, see Joel Brockner, “The Escalation of Commitment to a Failing Course of Action: Toward Theoretical Progress,” Academy of Management Review 17, 1 (1992): 39–61. Recently, scholars in this tradition have broadened their focus to study escalation at the organizational level. See Jerry Ross and Barry M. Staw, “Organizational Escalation and Exit: Lessons from the Shoreham Nuclear Power Plant,” Academy of Management Journal 36, 4 (1993): 701–32, and Barry M. Staw and Jerry Ross, “Behavior in Escalation Situations: Antecedents, Prototypes, and Solutions,” in B. M. Staw and L. L. Cummings, eds., Research in Organizational Behavior (Greenwich, Conn.: JAI, 1987), 9:39–78.

16. See Lynne G. Zucker, “The Role of Institutionalization in Cultural Persistence,” American Sociological Review 42 (1977): 726–43.

17. For an extended discussion of factors that harden commitments to a mental map, see Donald N. Sull, Why Good Companies Go Bad and How Great Managers Remake Them (Boston: Harvard Business School Press, 2005), ch. 3; Joseph F. Porac, Howard Thomas, and Charles Baden-Fuller, “Competitive Groups as Cognitive Communities: The Case of Scottish Knitwear Manufacturers,” Journal of Management Studies 26, 4 (1989): 397–416.

18. D. Harkleroad, “Pneumatiques Michelin,” INSEAD case study, imprint 438 (1978): 6.

19. M. French, “Structural Change and Competition in the United States Tire Industry, 1920-1937,” Business History Review, 60 (1986): 33.

20. D. Darryl Wyckoff, Firestone Tire and Rubber Company, case study 9-684-044 (Boston: Harvard Business School, 1980).

21. Sull, “From Community of Innovation to Community of Inertia,” table 8.

22. Wyckoff, Firestone Tire and Rubber Company, 3; Love and Giffels, Wheels of Fortune, 150–51.

23. Love and Giffels, Wheels of Fortune, 152.

CHAPTER 5: MIND THE GAP

1. The original incident was described by Frank Rooney, “The Cyclists’ Raid,” Harper’s Magazine, January 1951.

2. Sources for Honda include “Establishing American Honda Motor Co: An Unknown Market a New Challenge,” http://world.honda.com/history/challenge/1959establishingamericanhonda/index.html; Masaaki Sato, The Honda Myth: The Genius and His Wake, trans. Hiroko Yoda (New York: Vertical, 2006); Tetsuou Sakiya, Honda Motor: The Men, the Management, the Machines (New York: Kodansha, 1982).

3. The original study is publicly available because it was commissioned and paid for by the British Secretary of State for Industry. See J. V. B. Dresser, M. Goold, and B. Hedley, Strategy Alternatives for the British Motorcycle Industry, report prepared for the Secretary of State for Industry by the Boston Consulting Group Limited (London: Her Majesty’s Stationery Office, 1975).

4. In September 1982, Richard Pascale, a professor at Stanford’s Graduate School of Business Administration, assembled the six executives who had led Honda’s entry into the U.S. motorcycle industry, to hear firsthand their version of Honda’s move to North America. See Richard T. Pascale, “Perspectives on Strategy: The Real Story Behind Honda’s Success,” California Management Review 26, 3 (1984): 47–72. Pascale’s article sparked an ongoing discussion in the strategy field. For a summary of the debate, see Henry Mintzberg, “The Design School: Reconsidering the Basic Premises of Strategic Management,” Strategic Management Journal 11, 6 (1990): 171–95, and H. I. Ansoff, “The Design School: Reconsidering the Basic Premises of Strategic Management,” Strategic Management Journal 12, 6 (1991): 4449–51, and “The ‘Honda Effect’ Revisited,” California Management Review 38, 4 (1996): 78–117.

5. Israel Kirzner argued that surprise was the defining characteristic of entrepreneurs when discovering an opportunity. For an accessible summary of his argument, see Israel Kirzner, “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature 35 (1997): 60–85.

6. The sample was from one hundred founders selected randomly from the 1989 Inc. 500 list of fast-growing companies. See Amar Bhide, “How Entrepreneurs Craft Strategies That Work,” Harvard Business Review, March/April 1994, 150–61. Karl Vesper lists deliberate search last among ways to find opportunities; see Karl H. Vesper, New Venture Strategies (Englewood Cliffs, N.J.: Prentice-Hall, 1992).

7. Scott Shane, “Prior Knowledge and the Discovery of Entrepreneurial Opportunities,” Organization Science 11, 4 (2000): 448–69.

8. For a recent review on the confirmation bias, see R. S. Nickerson, “Confirmation Bias: A Ubiquitous Phenomenon in Many Guises,” Review of General Psychology 2 (1998): 175–220; P. H. Ditto and D. F. Lopez, “Motivated Skepticism: Use of Differential Decision Criteria for Preferred and Non-Preferred Conclusions,” Journal of Personality and Social Psychology 63 (1992): 568–84; K. Edwards and E. E. Smith, “A Disconfirmation Bias in the Evaluation of Arguments,” Journal of Personality and Social Psychology 71 (1996): 5–24.

9. Kuhn, The Structure of Scientific Revolutions, 59.

10. For an excellent review of historical failures to seize unexpected success, see Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles (New York: HarperCollins, 1985), 51–61.

11. Sarah Thorp and Linda A. Cyr, Kate Spade New York, case study 9-800-002 (Boston: Harvard Business School, 2001).

12. Ibid., 2.

13. Michael J. Roberts, William Sahlman, and Jack McDonald, ArthroCare, case study 9-898-056 (Boston: Harvard Business School, 1998).

14. From Donald N. Sull, Made in China: What Western Managers Can Learn from China’s Trailblazing Entrepreneurs (Boston: Harvard Business School, 2005), ch. 7.

15. Harriet Rubin, “The Perfect Vision of Dr. V.,” Fast Company, January 2001, 146–54; Stephen Miller, “McSurgery: A Man Who Saved 2.4 Million Eyes,” Wall Street Journal, August 5, 2006, A6.

16. Richard G. Hamermesh and Indra A. Reinbergs, Shurgard Self-Storage: Expansion to Europe, case study 9-804-112 (Boston: Harvard Business School, 2005).

17. Charles D. Ellis, The Partnership: A History of Goldman Sachs (New York: Allen Lane, 2008), 415–35.

18. Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton, N.J.: Princeton University Press, 2005), ch. 2.

19. Michael J. Roberts and Alison Berkley Wagonfeld, Joint Juice, case study 9-803-146 (Boston: Harvard Business School, 2003), and author’s discussion with Dr. Stone.

20. Mark S. Granovetter, “The Strength of Weak Ties,” American Journal of Sociology 78, 6 (1973): 1360–80.

21. S. Kaish and B. Gilad, “Characteristics of Opportunity Search of Entrepreneurs Versus Executives: Sources, Interests, General Alertness,” Journal of Business Venturing 3 (1991): 31–40.

22. Andrew Gowers, “Exposed: Dick Fuld, the Man Who Brought the World to Its Knees,” Sunday Times (London), December 14, 2008.

23. Andrew S. Grove, Only the Paranoid Survive: How to Exploit Crisis Points That Challenge Every Company and Every Career (New York: HarperCollins Business, 1996), 159.

24. Alfred N. Whitehead, Adventures of Ideas (New York: Macmillan, 1931), 119.

25. In a Bain & Company survey, 46 percent of all large enterprises used Six Sigma in 2006. See Darrell Rigby and Barbara Bilodeau, Management Trends and Tools 2007, Bain & Company, 2007, 21.

26. Mary J. Benner and Michael Tushman, “Process Management and Technological Innovation: A Longitudinal Study of the Photography and Paint Industries,” Administrative Science Quarterly 47 (2002): 678–708.

27. Rigby and Bilodeau, Management Trends and Tools. In 2006, Six Sigma was third among all tools tracked by Bain in terms of the percentage of companies abandoning the tool that year, and in terms of declining satisfaction in the preceding two years.

28. Charles C. Krulak, “The Strategic Corporal: Leadership in the Three Block War,” Marines Magazine, January 1999.

29. U.S. Marine Corps, Warfighting, Fleet Marine Force Manual 1, (Washington, D.C.: Department of the Navy, 1989).

30. John C. Dencker, Marc Gruber, and Sonali Shah, “Pre-Entry Knowledge, Learning, and the Survival of New Firms,” Organization Science, published online before print, November 25, 2008, DOI:10.1287/orsc.1080.0387.

31. B. H. Liddell Hart, “The ‘Man-in-the-Dark’ Theory of Infantry Tactics and the ‘Expanding Torrent System of Attack,’” Journal of the RUSI, February 1921, 13. Quoted in William S. Lind, “The Theory and Practice of Maneuver Warfare,” in Richard D. Hooker, ed., Maneuver Warfare: An Anthology (Novato, Calif.: Presidio, 1993), 7.

CHAPTER 6: KEEPING THE MAP FLUID

1. I recognize that some improvisational comedians will disagree, and argue that the principles of complete agreement (i.e., “yes, and…”) or generosity in offers is the “big idea” in improvisation. This principle is important, of course, but a means to the end of discovering emerging patterns, not the end itself.

2. Claude Lévi-Strauss described bricolage as a process of making do with the materials on hand to respond to new opportunities or threats. Claude Lévi-Strauss, The Savage Mind (Chicago: University of Chicago Press, 1967).

3. Keith Johnstone, Impro: Improvisation and the Theatre (London: Faber and Faber, 1979), and author’s interviews with Keith Johnstone.

4. Most of the data on fast fashion in this chapter are derived from Donald N. Sull and Stefano Turconi, “Fast Fashion,” Business Strategy Review, Summer 2008; and interviews with executives, designers, and store personnel. See also Peter Doeringer and Sarah Crean, “Can Fast Fashion Save the U.S. Apparel Industry?” Socio-Economic Review 4, 3 (2006): 353–77.

5. J. Ginsberg et al., “Detecting influenza epidemics using search engine query data,” Nature, 457 (19 February 2009): 1012-1015.

6. Janet Adamy, “McDonald’s seeks way to keep sizzling,” Wall Street Journal, March 10, 2009.

7. Andrew McAfee, “Do You Have Too Much IT?” Sloan Management Review 45, 3 (2004): 18–22.

8. Amy C. Edmondson, “Learning from Mistakes Is Easier Said than Done: Group and Organizational Influences on the Detection and Correction of Human Error,” Journal of Applied Behavioral Science 32 (1996): 5–32; Amy C. Edmondson, “Psychological Safety and Learning Behavior in Work Teams,” Administrative Science Quarterly 44, 2 (1999): 350–83; Amy C. Edmondson, “Speaking Up in the Operating Room: How Team Leaders Promote Learning in Interdisciplinary Action Teams,” Journal of Management Studies 40 (2003): 1419–52.

CHAPTER 7: THE ESSENCE OF AGILITY

1. Information on the U.S. Air Force during the Korean War available from the U.S. Air Force Museum’s exhibition to commemorate the fiftieth anniversary of the conflict. See www.wpafb.af.mil/museum/history/korea50/k50.html.

2. The official U.S. Air Force estimates from the National Museum of the United States Air Force, www.wpafb.af.mil/museum/ac/pg000106.html. Documents from recently opened archives from the former Soviet Union suggest a less lopsided kill ratio.

3. Any reader with even a slight interest in learning more about Boyd should read Robert Coram’s outstanding biography, Boyd: The Fighter Pilot Who Changed the Art of War (New York: Back Bay Books, 2002). Other useful sources for this chapter include Grant T. Hammond, The Mind of War: John Boyd and American Security (Washington, D.C.: Smithsonian Books, 2004), and interviews with Colonel Michael Wyly, USMC (ret.).

4. Gloria Macias-Lizaso and Kiko Thiel, “Building a Nimble Organization: A McKinsey Global Survey,” McKinsey Quarterly, June 2006.

5. Conference Board, CEO Challenge 2007: Top 10 Challenges, 2007. Sustained and steady top-line growth, which led the pack in 2006, slipped to second, with profit growth fourth, and finding qualified managerial talent fifth.

6. M. Baghai, S. Smit, and S. P. Viguerie, “The Granularity of Growth,” McKinsey Quarterly, 2 (2007): 41-51.

7. Although Boyd himself never depicted the OODA loop as an iterative circle, that is how most of his interpreters have visualized the cycle. Unfortunately, Boyd never committed his expansive point of view to writing, but instead communicated it through a series of overhead transparencies entitled Patterns of Conflict, which he modified repeatedly over time. His thinking is summarized in the Coram and Hammond books cited above. Boyd’s colleague Chet Richards has written two excellent books elaborating Boyd’s thinking and extending it to modern conflict and business. See Chet Richards, A Swift, Elusive Sword: What if Sun Tzu and John Boyd Did a National Defense Review? (Washington, D.C.: Center for Defense Information, 2001), and Chet Richards, Certain to Win: The Strategy of John Boyd, Applied to Business (Philadelphia: Xlibris, 2004). Richards points out that at the end of his career, Boyd moved away from an iterative view of the OODA loop to a conceptualization that emphasized the need for constant observation.

8. Frans P. B. Osinga, Science, Strategy and War: The Strategic Theory of John Boyd (London: Routledge, 2006).

9. Craig Larman and Victor R. Basili, “Iterative and Incremental Development: A Brief History,” Computer, June 2003, 47–56.

10. Department of Defense results reported in Crosstalk, the journal of defense software engineering, www.stsc.hill.af.mil/Crosstalk/2002/04/leishman.html.

11. A study of four hundred projects over a fifteen-year period found that less than 5 percent of code was regularly used. See D. Cohen, G. Larson, and B. Ware, “Improving Software Investment Through Requirements Validation,” paper presented at the IEEE 26th Software Engineering Workshop, 2001. Alan MacCormack and colleagues have conducted extensive qualitative research comparing linear (referred to as waterfall) and agile programming approaches. See Alan MacCormack, “Product-Development Practices That Work,” Sloan Management Review 42, 2 (2001), and Alan MacCormack et al., “Trade-offs Between Productivity and Quality in Selecting Software Development Practices.” IEEE Software 20, 5 (September/October 2003): 78–85. A large-scale study is M. Thomas, “IT Projects Sink or Swim,” British Computer Society Review, 2001.

12. P. Clements and D. Parnas, “A Rational Design Process: How and Why to Fake It,” IEEE Transactions on Software Engineering, February 1986.

CHAPTER 8: THE AGILITY LOOP

1. The findings of several studies of how managers spend their time have found with remarkable consistency that formal and informal conversations are by far the primary activity. See E. Brewer and J. W. C. Tomlinson, “The Manager’s Working Day,” Journal of Industrial Economics 12, 3 (1964): 191–97; Henry Mintzberg, “Managerial Work: Analysis from Observation,” Management Science 18, 2 (1971): 97–110; and Lance B. Kurke and Howard Aldrich, “Mintzberg Was Right! A Replication and Extension of The Nature of Managerial Work,” Management Science 29, 8 (1983): 975–84.

2. See Arthur Schlesinger Jr., A Thousand Days (Boston: Houghton Mifflin, 1965), and Robert Kennedy, Thirteen Days: A Memoir of the Cuban Missile Crisis (New York: W. W. Norton, 1969). For an overview of decision making by Kennedy’s team, see M. A. Roberto, Why Great Leaders Don’t Take Yes for an Answer (Upper Saddle River, N.J.: Wharton School Publishing, 2005), ch. 2.

3. See R. E. Rubin and J. Weisberg, In an Uncertain World (New York: Random House, 2003), and L. Endlich, Goldman Sachs: The Culture of Success (New York: Alfred A. Knopf, 1999).

4. Tom Kelley with Jonathan Littman, “The 10 Faces of Innovation,” Fast Company, October 2005.

5. This question is a slightly modified version of Professor Alexander’s question described in R. E. Neustadt and E. R. May, Thinking in Time: The Uses of History for Decision Makers (New York: Free Press, 1988), 152–53.

6. Donald Sull, Diageo Ireland: Building an Execution Culture, LBS CS-07-008, -009, -010 (London: London Business School, 2007).

7. See K. M. Eisenhardt, “Making Fast Strategic Decisions in High-Velocity Environments,” Academy of Management Journal 32 (1989): 543–76, and K. M. Eisenhardt, “Speed and Strategic Choice: How Managers Accelerate Decision Making,” California Management Review 32 (1990): 39–54.

8. Eisenhardt,” Speed and Strategic Choice.”

9. K. M. Eisenhardt and D. N. Sull, “Strategy as Simple Rules,” Harvard Business Review 79 (January 2001): 107–16.

10. The memo was written by Brad Garlinghouse, a Yahoo senior vice president, and was published in total by the Wall Street Journal. For full text, see http://online.wsj.com/public/article/SB1163798219338266570mbjXoHnQwDMFH_PVeb_jqe3Chk_20061125.html.

11. M. Arndt, “3M’s Rising Star: Jim McNerney Is Racking Up Quite a Record at 3M. Now, Can He Rev Up Its Innovation Machine?” Business Week, April 12, 2004, 62–63; D. Del Re, “Pushing Past Post-Its by Allowing His Top Scientists to Peek Over the Horizon, 3M’s Larry Wendling Helped Turn a Century-Old Giant into a Nanotech Pioneer,” Business 2.0, November 2005, 54–57.

12. A survey of 125,000 respondents representing one thousand organizations in more than fifty countries found that employees in 60 percent of organizations ranked their employer as weak at translating strategic and operational decisions into action. See Gary L. Neilson et al., “The Secrets to Successful Strategy Execution,” Harvard Business Review, June 2008, 61–70. Another study by OnPoint Consulting of four hundred respondents found that 49 percent of managers identified a gap between their organization’s ability to develop and communicate a sound strategy and their capacity to execute on that strategy, and 64 percent of respondents did not believe their company could close that gap. Seven of ten major corporate failures studied by Ram Charan and Geoffrey Colvin failed because of poor execution. See Ram Charan and Geoffrey Colvin, “Why CEOs Fail,” Fortune, June 21, 1999, 69–78.

13. In their research, McKinsey & Company divided workers into three categories: manual laborers, workers engaged in standardized tasks (such as clerks, technicians, analysts, loan officers, programmers), and knowledge workers, who must exercise judgment in coordinating complex interactions. According to their analysis, the U.S. economy has undergone a fundamental transformation in the nature of work. In 1900, manual laborers accounted for over 80 percent of all employment, but by 2004 their share had dropped to just 15 percent. Knowledge work has increased dramatically as companies have eliminated manual labor and routine tasks by outsourcing, improving processes, and automating standardized activities. McKinsey’s most recent analysis, published in 2005, studied more than eight hundred occupations in detail, and then reconciled their analysis with more comprehensive statistics published by the U.S. government, the International Labour Organization, and the World Bank. See Bradford C. Johnson, James M. Manyik, and Lareina A. Lee, “The Next Revolution in Interactions,” McKinsey Quarterly, 2005, no. 4, 20–33.

14. For an in-depth perspective on the promise-based view of the firm, see Donald N. Sull and Charles Spinosa, “Promise-Based Management: The Essence of Execution,” Harvard Business Review 85 (April 2007): 78–86, and Donald N. Sull and Charles Spinosa, “Using Commitments to Manage Across Units,” Sloan Management Review 47 (Fall 2005): 73–81.

15. The Prussian army—which had a long tradition of granting autonomy to local commanders to seize the initiative when opportunities arose—originated mission-based orders, known as Auftragtaktik. And the Prussian approach built on the earlier Jäger, or hunter, tradition in the German military that stretched back centuries. Jäger units, composed primarily of game wardens, were accustomed to rapid movement and exercising initiative in battle. Bruce I. Gudmundsson, “Maneuver Warfare: The German Tradition,” in Richard D. Hooker, ed., Maneuver Warfare: An Anthology (Novato, Calif.: Presidio, 1993), 273–93; Martin van Creveld, Fighting Power: German and U.S. Performance 1939–1945 (Westport, Conn.: Greenwood Press, 1982).

16. For a thoughtful and practical guide to after-action reviews based on practices within the U.S. Army, see D. A. Garvin, Learning in Action: A Guide to Putting the Learning Organization to Work (Boston: Harvard Business School Press, 2003), 106–16.

CHAPTER 9: BUILDING AN AGILE ORGANIZATION

1. This chapter draws on a teaching case study of Brahma. See Donald N. Sull and Martin Escobari, Brahma Versus Antarctica: Reversal of Fortune in Brazil’s Beer Market, case study CS04-015-001 (London: London Business School, 2004); Donald N. Sull and Martin Escobari, Success Against the Odds: What Brazilian Champions Teach Us About Thriving in an Unpredictable Market (London: Elsevier Campus, 2005), as well as several interviews with Marcel Telles, his partners at Garantia Partners, and employees of AmBev.

2. GDP decline measured in real terms. Data from Laura Alfaro, Brazil: Embracing Globalization? case study 9-701-104 (Boston: Harvard Business School, 2002), exhibits 2, 3, and 4.

3. This and all subsequent direct quotes are from author’s interviews.

4. Sull and Escobari, Success Against the Odds, introduction.

5. Information on Garantia from interviews with partners including Marcel Telles, Alberto Sicupira, Claudio Haddad, and Alex Behring. For an overview of Garantia, see R. Jeffrey Ellis, “Grupo Garantia: Globalization, Industry Rivalry, and Conglomerate Diversification in Brazil,” Case Research Journal 25, 2 (2005).

6. For a comprehensive review, see Nelson Cowan, “The Magical Number 4 in Short-Term Memory: A Reconsideration of Mental Storage Capacity,” Behavioral and Brain Sciences 24 (2001): 87–119; for an accessible summary, see Nelson Cowan, Candice C. Morey, and Zhijian Chen, “The Legend of the Magical Number Seven,” in Sergio Della Sala, ed., Tall Tales About the Brain: Separating Fact from Fiction (Oxford: Oxford University Press, 2007), 45–59. This research builds on the seminal and better-known research by George Miller that found people can remember between five and nine items. See George Miller, “The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information,” Psychological Review 63 (1956): 81–97.

7. Donald Sull, Choelsoon Park, and Seonghoon Kim, Samsung and Daewoo: Two Tales of One City, case study 804-055 (Boston: Harvard Business School, 2004).

CHAPTER 10: AVOIDING A CORPORATE MIDLIFE CRISIS

1. Larry E. Greiner published the seminal piece on organizational life cycles. See L. E. Greiner, “Evolution and Revolution as Organizations Grow,” Harvard Business Review 50 (July-August 1972): 37–76. Subsequent scholars explored the life cycle model in greater detail. See J. R. Kimberly and R. H. Miles, The Organizational Life Cycle (San Francisco: Jossey-Bass, 1980). For a recent review of life cycle theories, see A. H. Van de Ven and M. S. Poole, “Explaining Development and Change in Organizations,” Academy of Management Review 20, 3 (1995): 510–40.

2. The evolution of firms in a cohort often follows the life cycle of the underlying product technology. See S. Klepper and K. L. Simons, “The Making of an Oligopoly: Firm Survival and Technological Change in the Evolution of the U.S. Tire Industry,” Journal of Political Economy 108, 4 (2000): 728–60; S. Klepper and E. Graddy, “The Evolution of New Industries and the Determinants of Market Structure,” RAND Journal of Economics 21 (1990): 27–44; and S. Klepper and K. L. Simons, “Technological Extinctions of Industrial Firms: An Inquiry into Their Nature and Causes,” Industrial and Corporate Change 6, 2 (1997): 379–460.

3. M. C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers,” American Economic Review 76 (1986): 323–29; R. M. Stulz, “Managerial Discretion and Optimal Financing Policies,” Journal of Financial Economics 26 (1990): 3–27; Y. Amihund and B. Lev, “Risk Reduction as a Managerial Motive for Conglomerate Mergers,” Bell Journal of Economics 12 (1981): 605–17; M. C. Jensen and K. J. Murphy, “Performance Pay and Top Management Incentives,” Journal of Political Economy 98 (1990): 225–64; A. Shleifer and R. Vishny, “Managerial Entrenchment: The Case of Manager-Specific Investments,” Journal of Financial Economics 25 (1989): 123–39.

4. H. Servaes, “The Value of Diversification Through the Conglomerate Merger Wave,” Journal of Finance 51 (1996): 1201–25; L. H. P. Lang and R. E. Stulz, “Tobin’s q, Corporate Diversification and Firm Performance,” Journal of Political Economy 102 (1994): 1248–80.

5. Philip G. Berger and Eli Ofek, “Diversification’s Effect on Firm Value,” Journal of Financial Economics 37 (1995): 39–65.

6. J. Hagel III and M. Singer, “Unbundling the Corporation,” Harvard Business Review 77 (1999): 133–41; C. Zook with J. Allen, Profit from the Core: Growth Strategy in an Era of Turbulence (Boston: Harvard Business School Press, 2000). Recently strategy scholars have argued that this logic applies not only to routine tasks such as customer service but also to innovation—the core activity in renewing a company for the future. See C. Markides and P. Geroski, Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets (San Francisco: Jossey-Bass, 2004), and H. W. Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Boston: Harvard Business School Press, 2003). The argument again boils down to focus. Established firms excel at commercializing innovations by reducing their cost and bringing them to a wider market. They rarely do well in developing nonincremental innovations to rejuvenate their product or service offering.

7. José Manuel Campa and Simi Kedia, “Explaining the Diversification Discount,” Journal of Finance 57, 4 (2002): 1731–62; Belén Villalonga, “Does Diversification Cause the ‘Diversification Discount’?” Financial Management 33, 2 (2004): 5–27; Belén Villalonga, “Diversification Discount or Premium? New Evidence from the Business Information Tracking Series,” Journal of Finance 59, 2 (2004): 479–506.

8. See Ellis, The Partnership, 153–82, and Endlich, Goldman Sachs, 60–61.

9. Carl W. Stern and George Stalk, Perspectives on Strategy from the Boston Consulting Group (New York: John Wiley, 1998).

10. J. S. Armstrong and R. Brodie, “Effects of Portfolio Planning Methods on Decision Making: Experimental Results,” International Journal of Research in Marketing 11, 1 (1994): 73–84; S. F. Slater and T. J. Zwirlein, “Shareholder Value and Investment Strategy Using the General Portfolio Model,” Journal of Management 18, 4 (1992): 717–32.

11. Joseph L. Bower, The Resource Allocation Process (Boston: Harvard Business School Press, 1970). For a review of recent research, see J. L. Bower and C. G. Gilbert, eds., From Resource Allocation to Strategy (New York: Oxford University Press, 2006).

12. Donald N. Sull, “The Dynamics of Standing Still: Firestone Tire and Rubber and the Radial Revolution,” Business History Review 73 (1999): 430–64.

13. Kim B. Clark and Carliss Y. Baldwin, “Capital Budgeting Systems and Capabilities Investments in U.S. Companies After World War II,” Business History Review 68, 1 (1994): 73–109.

14. M. Baghai, S. Coley, and D. White, “The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise” (New York: Perseus, 2000). For an excellent description of IBM’s changes, see David Garvin and Lynn Levesque, Emerging Business Opportunities at IBM, case study 304-075 (Boston: Harvard Business School, 2004).

CHAPTER 11: AGILE ABSORPTION

1. Sources on Muhammad Ali and George Foreman include Thomas Hauser, Muhammad Ali: His Life and Times (New York: Simon and Schuster, 1991); Mark Collings, ed., Muhammad Ali: Through the Eyes of the World (London: Sanctuary, 1991); David Remnick, King of the World (New York: Vintage, 1999); Norman Mailer, The Fight (New York: Little, Brown, 1975). This chapter draws in part on my article, “Can Your Company Go the Distance?” Harvard Business Review, February 2009.

2. Ferdie Pacheco, comments in Mark Collings, ed., Muhammad Ali: Through the Eyes of the World (London: Sanctuary, 2001), 346.

3. In a recent study of 618 firms in the U.S. medical sector between 1978 and 1995, Janet Bercovitz and Will Mitchell found that size enhanced a firm’s probability of survival, even when they controlled for profitability and diversification. See J. Bercovitz and W. Mitchell, “When Is More Better? The Impact of Business Scale and Scope on Long-Term Business Survival, While Controlling for Profitability,” Strategic Management Journal 28, 1 (2007): 61–79.

4. James D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967). His implicit model was clearly manufacturing operations, which led him to enumerate buffering actions such as slack inventory, preventive maintenance, smoothing demand, project scheduling, and demand forecasting. The narrowness of the original specification of buffering mechanisms helps explain why the construct has received relatively little interest among business academics in recent decades. Indeed, much of the subsequent research has focused on a single mechanism—slack resources—to buffer organizations against environmental uncertainty. See, for example, Jay Bourgeois, “On the Measurement of Organizational Slack,” Academy of Management Review 26 (1981): 29–39. Viewed as a more general concept, however, buffering is an extremely useful lens for understanding how organizations cope with uncertainty.

5. See E. Geoffrey Love and Nitin Nohria, “Reducing Slack: The Performance Consequences of Downsizing by Large Industrial Firms, 1977–93,” Strategic Management Journal 26, 12 (2005): 1087–108.

6. Theresa Howard, “Pepsi Beats Coke with Stock Surge,” USA Today, December 13, 2005. PepsiCo’s market capitalization was approximately 80 percent of Coca-Cola’s in February 2008.

7. Antoine van Agtmael, The Emerging Markets Century (New York: Free Press, 2007), ch. 6; IBM research news, http://www.research.ibm.com/resources/news/20030423_edgar-passaway.shtml.

8. See Trevor N. Dupuy, Numbers, Predictions and War (New York: Macdonald, 1979) and Martin van Creveld, Fighting Power: German and U.S. Performance, 1939–1945 (Westport, Conn.: Greenwood Press, 1982). These calculations analyze separate engagements and measure causalities inflicted by each force, controlling for a number of factors including weapons, terrain, air support, etc. The analyses demonstrate a remarkably robust finding that the German troops, particularly those following maneuver tactics, were more effective than the allies.