Tag: Donald Sull

Breaking the Rules: Moneyball Edition

Most of the book Simple Rules by Donald Sull and Kathleen Eisenhardt talks about identifying a problem area (or an area ripe for “simple rules”) and then walks you through creating your own set of rules. It's a useful mental process.

An ideal situation for simple rules is something repetitive, giving you constant feedback so you can course correct as you go. But what if your rules stop working and you need to start over completely?

Simple Rules recounts the well-known Moneyball tale in its examination of this process:

The story begins with Sandy Alderson. Alderson, a former Marine with no baseball background became the A’s general manager in 1983. Unlike baseball traditionalists, Alderson saw scoring runs as a process, not an outcome, and imagined baseball as a factory with a flow of players moving along the bases. This view led Alderson and later his protege and replacement, Billy Beane, to the insight that most teams overvalue batting average (hits only) and miss the relevance of on-base percentage (walks plus hits) to keeping the runners moving. Like many insightful rules, this boundary rule of picking players with a high on base percentage has subtle second – and third-order effects. Hitters with a high on-base percentage are highly disciplined (i.e., patient, with a good eye for strikes). This means they get more walks, and their reputation for discipline encourages pitchers to throw strikes, which are easier to hit. They tire out pitchers by making them throw more pitches overall, and disciplined hitting does not erode much with age. These and other insights are at the heart of what author Michael Lewis famously described as moneyball.

The Oakland A’s did everything right, they had examined the issues, they tried to figure out those areas which would most benefit from a set of simple rules and they had implemented them. The problem was, they were easy rules to copy. 

They were operating in a Red Queen Effect world where everyone around them was co-evolving, where running fast was just enough to get ahead temporarily, but not permanently. The Red Sox were the first and most successful club to copy the A's:

By 2004, a free-spending team, the Boston Red Sox, co-opted the A’s principles and won the World Series for the first time since 1918. In contrast, the A’s went into decline, and by 2007 the were losing more games than they were winning Moneyball had struck out.

What can we do when the rules stop working? 

We must break them.

***

When the A's had brought in Sandy Alderson, he was an outsider with no baseball background who could look at the problem in a different and new light. So how could that be replicated?

The team decided to bring in Farhan Zaidi as director of baseball operations in 2009. Zaidi spent most of his life with a pretty healthy obsession for baseball but he had a unique background: a PhD in behavioral economics.

He started on the job of breaking the old rules and crafting new ones. Like Andy Grove did once upon a time with Intel, Zaidi helped the team turn and face a new reality. Sull and Eisenhardt consider this as a key trait:

To respond effectively to major change, it is essential to investigate the new situation actively, and create a reimagined vision that utilizes radically different rules.

The right choice is often to move to the new rules as quickly as possible. Performance will typically decline in the short run, but the transition to the new reality will be faster and more complete in the long run. In contrast, changing slowly often results in an awkward combination of the past and the future with neither fitting the other or working well.

Beane and Zaidi first did some house cleaning: They fired the team’s manager. Then, they began breaking the old Moneyball rules, things like avoiding drafting high-school players. They also decided to pay more attention to physical skills like speed and throwing.

In the short term, the team performed quite poorly as fan attendance showed a steady decline. Yet, once again, against all odds, the A’s finished first in their division in 2012. Their change worked. 

With a new set of Simple Rules, they became a dominant force in their division once again. 

Reflecting their formidable analytic skills, the A’s brass had a new mindset that portrayed baseball as a financial market rife with arbitrage possibilities and simple rules to match.

One was a how-to rule that dictated exploiting players with splits. Simply put, players with splits have substantially different performances in two seemingly similar situations. A common split is when a player hits very well against right-handed pitchers and poorly against left-handed pitchers, or vice versa. Players with spits are mediocre when they play every game, and are low paid. In contrast, most superstars play well regardless of the situation, and are paid handsomely for their versatility. The A’s insight was that when a team has a player who can perform one side of the split well and a different player who excels at the opposite split, the two positives can create a cheap composite player. So the A’s started using a boundary rule to pick players with splits and how-to rule to exploit those splits with platooning – putting different players at the same position to take advantage of their splits against right – or left-handed pitching.

If you’re reading this as a baseball fan, you’re probably thinking that exploiting splits isn’t anything new. So why did it have such an effect on their season? Well, no one had pushed it this hard before, which had some nuanced effects that might not have been immediately apparent.

For example, exploiting these splits keeps players healthier during the long 162-game season because they don’t play every day. The rule keeps everyone motivated because everyone has a role and plays often. It provides versatility when players are injured since players can fill in for each other.

They didn't stop there. Zaidi and Beane looked at the data and kept rolling out new simple rules that broke with their highly successful Moneyball past.

In 2013 they added a new boundary rule to the player-selection activity: pick fly-ball hitters, meaning hitters who tend to hit the ball in the air and out of the infield (in contrast with ground-ball hitters). Sixty percent of the A’s at-bat were by fly-ball hitters in 2013, the highest percentage in major-league baseball in almost a decade, and the A’s had the highest ratio of fly ball to ground balls, by far. Why fly-ball hitters?

Since one of ten fly balls is a home run, fly-ball hitters hit more home runs: an important factor in winning games. Fly-ball hitters also avoid ground-ball double plays, a rally killer if ever there as one. They are particularly effective against ground-ball pitches because they tend to swing underneath the ball, taking way the advantage of those pitchers. In fact, the A’s fly-ball hitters batted an all-star caliber .302 against ground-ball pitchers in 2013 on their way to their second consecutive division title despite having the fourth-lowest payroll in major-league baseball.

Unfortunately, the new rules had a short-lived effectiveness: In 2014 the A's fell to 2nd place and have been struggling the last two seasons. Two Cinderella stories is a great achievement, but it’s hard to maintain that edge. 

This wonderful demonstration of the Red Queen Effect in sports can be described as an “arms race.’” As everyone tries to get ahead, a strange equilibrium is created by the simultaneous continual improvement, and those with more limited resources must work even harder as the pack moves ahead one at a time.

Even though they have adapted and created some wonderful “Simple Rules” in the past, the A's (and all of their competitors) must stay in the race in order to return to the top: No “rule” will allow them to rest on their laurels. Second Level Thinking and a little real world experience shows this to be true: Those that prosper consistently will think deeply, reevaluate, adapt, and continually evolve. That is the nature of a competitive world. 

Simple Rules for Business Strategy

The book Simple Rules by Donald Sull and Kathleen Eisenhardt has a very interesting chapter on strategy, which tries to answer the following question: How do you translate your broad objectives into a strategy that can provide guidelines for your employees from day to day?

It’s the last bit there which is particularly important — getting everyone on the same page. 

Companies don’t seem to have a problem creating broad objectives (which isn't really a strategy). Your company might not call them that, they might call them “mission statements” or simply “corporate goals.”  They sound all well and good, but very little thought is given to how we will actually implement these lofty goals.

As Sull and Eisenhardt put it: 

Developing a strategy and implementing it are often viewed as two distinct activities — first you come up with the perfect plan and then you worry about how to make it happen. This approach, common through it is, creates a disconnect between what a company is trying to accomplish and what employees do on a day-to-day basis.

The authors argue that companies can bridge this gap between strategic intent and actual implementation by following three steps:

  1. Figure out what will move the needles.
  2. Choose a bottleneck.
  3. Craft the rules.

1. Moving the Needles

The authors use a dual needle metaphor to visualize corporate profits. They see it as two parallel needles: an upper needle which represents revenues and a lower needle which represents costs. The first critical step is to identify which actions will drive a wedge between the needles causing an increase in profits, a decrease in costs, and sustain this over time.

In other words, as simple as it sounds, we need an actual set of steps to get from figure a. to figure b.

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What action will become the wedge that will move the needles?

The authors believe the best way to answer this is to sit down with your management team and ask them to work as a group to answer the following three questions:

  1. Who will we target as customers?
  2. What product or service will we offer?
  3. How will we provide this product at a profit?

When you are trying to massage out these answers remember to use inversion as well. 

Equally important are the choices on who not to serve and what not to offer.

Steve Jobs once pointed out that Apple was defined as much by what it didn't do as by what it did.

2. Bottlenecks

Speaking of inversion, in order to complete our goal we must also figure out what's holding us back from moving the needles — the bottlenecks standing in our way.

When it comes to implementing a strategy of simple rules, pinpointing the precise decision or activity where rules will have the most impact is half the battle. We use the term bottleneck to describe a specific activity or decision that hinders a company from moving the needles.

You may be surprised at the amount of bottlenecks you come across, so you'll have to practice some “triage” of your issues, sorting what's important from what's really important.

The authors believe that the best bottlenecks to focus your attention on share three characteristics:

  1. They have a direct and significant impact on value creation.
  2. They should represent recurrent decisions (as opposed to ‘one off’ choices).
  3. They should be obstacles that arise when opportunities exceed available resources.

Once we’ve established what the bottlenecks are, it’s time to craft the rules which will provide you a framework in which to remove them.

3. Craft the Rules

Developing rules from the top down is a big mistake. When leaders rely on their gut instincts, they overemphasize recent events, build in their personal biases, and ignore data that doesn’t fit with their preconceived notions. It is much better to involve a team, typically ranging in size from four to eight members, and use a structured process to harness members’ diverse insights and points of view. When drafting the dream team to develop simple rules, it is critical to include some of the people who will be using them on a day-to-day basis.

This probably seems like common sense but we’re guessing you have worked at least one place where all information and new initiatives came from above, and much of it seemingly came out of nowhere because you weren’t likely involved.

In these situations it's very hard to get buy-in from the employees — yet they are the ones doing the work, implementing the rules. So we need to think about their involvement from the beginning.

Having users make the rules confers several advantages. First, they are closest to the facts on the ground and best positioned to codify experience into usable rules. Because they will make decisions based on the rules, they can strike the right balance between guidance and discretion, avoiding rules that are overly vague or restrictive. User can also phrase the rules in language that resonates for them, rather than relying on business jargon. By actively participating in the process, users are more likely to buy into the final rules and therefore apply them in practice. Firsthand knowledge also makes it easier to explain the rules, and their underlying rationale, to colleagues who did not participate in the process.

It’s important to note here that this is a process, a process in which you are never done – there is no real finish line. You must always plan to learn and to iterate as you learn — keep changing the plan as new information comes in. Rigidity to a plan is not a virtue; learning and adapting are virtues

***

There's nothing wrong with strategy. In fact, without a strategy, it's hard to figure out what to do; some strategy or another must guide your actions as an organization. But it's simply not enough: Detailed execution, at the employee level, is what gets things done. That's what the Simple Rules are all about.

Strategy, in our view, lives in the simple rules that guide an organization’s most important activities. They allow employees to make on-the-spot decisions and seize unexpected opportunities without losing sight of the big picture.

The process you use to develop simple rules matters as much as the rules themselves. Involving a broad cross-section of employees, for example, injects more points of view into the discussion, produces a shared understanding of what matters for value creation, and increases buy-in to the simple rules. Investing the time up front to clarify what will move the needles dramatically increases the odds that simple rules will be applied where they can have the greatest impact.

***

Still Interested? Read the book, or check out our other post where we cover the details of creating your simple rules.

Simple Rules: How to Thrive in a Complex World

Simple Rules

“Simple rules are shortcut strategies that save time and effort by focusing our attention and simplifying the way we process information. The rules aren’t universal— they’re tailored to the particular situation and the person using them.”

We use simple rules to guide decision making every day. In fact, without them, we'd be paralyzed by the sheer mental brainpower required to sift through the complicated messiness of our world. You can think of them as heuristics. Like heuristics, most of the time they work yet some of the time they don't.

Simple Rules: How to Thrive in a Complex World, a book by Donald Sull and Kathleen Eisenhardt, explores the understated power that comes from using simple rules. As they define them, simple rules refer to “a handful of guidelines tailored to the user and the task at hand, which balance concrete guidance with the freedom to exercise judgment.” These rules “provide a powerful weapon against the complexity that threatens to overwhelm individuals, organizations, and society as a whole. Complexity arises whenever a system— technical, social, or natural— has multiple interdependent parts.”

They work, the authors argue, because they do three things well.

First, they confer the flexibility to pursue new opportunities while maintaining some consistency. Second, they can produce better decisions. When information is limited and time is short, simple rules make it fast and easy for people, organizations, and governments to make sound choices. They can even outperform complicated decision-making approaches in some situations. Finally, simple rules allow the members of a community to synchronize their activities with one another on the fly.

Effective simple rules share four common traits …

First, they are limited to a handful. Capping the number of rules makes them easy to remember and maintains a focus on what matters most. Second, simple rules are tailored to the person or organization using them. College athletes and middle-aged dieters may both rely on simple rules to decide what to eat, but their rules will be very different. Third, simple rules apply to a well-defined activity or decision, such as prioritizing injured soldiers for medical care. Rules that cover multiple activities or choices end up as vague platitudes, such as “Do your best” and “Focus on customers.” Finally, simple rules provide clear guidance while conferring the latitude to exercise discretion.

***
Simple Rules for a Complex World

People often attempt to address complex problems with complex solutions. For example, governments tend to manage complexity by trying to anticipate every possible scenario that might arise, and then promulgate regulations to cover every case.

Consider how central bankers responded to increased complexity in the global banking system. In 1988 bankers from around the world met in Basel, Switzerland, to agree on international banking regulations, and published a 30-page agreement (known as Basel I). Sixteen years later, the Basel II accord was an order of magnitude larger, at 347 pages, and Basel III was twice as long as its predecessor. When it comes to the sheer volume of regulations generated, the U.S. Congress makes the central bankers look like amateurs. The Glass-Steagall Act, a law passed during the Great Depression, which guided U.S. banking regulation for seven decades, totaled 37 pages. Its successor, Dodd-Frank, is expected to weigh in at over 30,000 pages when all supporting legislation is complete.

Meeting complexity with complexity can create more confusion than it resolves. The policies governing U.S. income taxes totaled 3.8 million words as of 2010. Imagine a book that is seven times as long as War and Peace, but without any characters, plot points, or insight into the human condition. That book is the U.S. tax code.

[…]

Applying complicated solutions to complex problems is an understandable approach, but flawed. The parts of a complex system can interact with one another in many different ways, which quickly overwhelms our ability to envision all possible outcomes.

[…]

Complicated solutions can overwhelm people, thereby increasing the odds that they will stop following the rules. A study of personal income tax compliance in forty-five countries found that the complexity of the tax code was the single best predictor of whether citizens would dodge or pay their taxes. The complexity of the regulations mattered more than the highest marginal tax rate, average levels of education or income, how fair the tax system was perceived to be, and the level of government scrutiny of tax returns.

***
Overfitting

Simple rules do not trump complicated ones all the time but they work more often than we think. Gerd Gigerenzer is a key contributor in this space. He thinks that simple rules can allow for better decision making.

Why can simpler models outperform more complex ones? When underlying cause-and-effect relationships are poorly understood, decision makers often look for patterns in historical data under the assumption that past events are a good indicator of future trends. The obvious problem with this approach is that the future may be genuinely different from the past. But a second problem is subtler. Historical data includes not only useful signal, but also noise— happenstance correlations between variables that do not reveal an enduring cause-and-effect relationship. Fitting a model too closely to historical data hardwires error into the model, which is known as overfitting. The result is a precise prediction of the past that may tell us little about what the future holds.

Simple rules focus on the critical variables that govern a situation and help you ignore the peripheral ones. Of course, in order to identify the key variables, you need to be operating in your circle of competence. When we pay too much attention to irrelevant or otherwise unimportant information, we fail to grasp the power of the most important ones and give them the weighting they deserve. Simple rules also make it more likely people will act on them. This is something Napoleon intuitively understood.

When instructing his troops, Napoleon realized that complicated instructions were difficult to understand, explain, and execute. So, rather than complicated strategies he passed along simple ones, such as: Attack.

***
Making Better Decisions

The book mentions three types of rules that “improve decision making by structuring choices and centering on what to do (and what not to do): boundary, prioritizing, and stopping rules.

Boundary Rules cover what to do …

Boundary rules guide the choice of what to do (and not do) without requiring a lot of time, analysis, or information. Boundary rules work well for categorical choices, like a judge’s yes-or-no decision on a defendant’s bail, and decisions requiring many potential opportunities to be screened quickly. These rules also come in handy when time, convenience, and cost matter.

Prioritizing rules rank options to help decide which of multiple paths to pursue.

Prioritizing rules can help you rank a group of alternatives competing for scarce money, time, or attention. … They are especially powerful when applied to a bottleneck, an activity or decision that keeps individuals or organizations from reaching their objectives. Bottlenecks represent pinch-points in companies, where the number of opportunities swamps available resources, and prioritizing rules can ensure that these resources are deployed where they can have the greatest impact. In business settings, prioritizing rules can be used to assign engineers to new-product-development projects, focus sales representatives on the most promising customers, and allocate advertising expenditure across multiple products, to name only a few possibilities.

Stopping rules help you learn when to reverse a decision. Nobel Prize-winning economist Herbert Simon argued that we lack the information, time, and mental engine to determine the single best path when faced with a slew of options. Instead we rely on a heuristic to help us stop searching when we find something that's good enough. Simon called this satisficing. If you think that's hard, it's even hard to stop doing something we're already doing. Yet when it comes to our key investments of time, money, and energy we have to know when to pull the plug.

Sometimes we pursue goals at all costs and ignore our self-imposed stopping rule. This goal induced blindness can be deadly.

A cross-continental team of researchers matched 145 Chicagoans with demographically similar Parisians. Both the Chicagoans and Parisians used stopping rules to decide when to finish eating, but the rules themselves were very different. The Parisians employed rules like “Stop eating when I start feeling full,” linking their decision to internal cues about satiation. The Chicagoans, in contrast, were more likely to follow rules linked to external factors, such as “Stop eating when I run out of a beverage,” or “Stop eating when the TV show I’m watching is over.” Stopping rules that rely on internal cues— like when the food stops tasting good or you feel full— decrease the odds that people eat more than their body needs or even wants.

Stopping rules are particularly critical in situations when people tend to double down on a losing hand.

These three decision rules—boundary, prioritizing, and stopping—help provide guidelines on what to do—”what is acceptable to do, what is more important to do, and what to stop doing.”

***
Doing Things Better

Process rules, in contrast to boundary rules, focus on how to do things better.

Process rules work because they steer a middle path between the chaos of too few rules that can result in confusion and mistakes, and the rigidity of so many rules that there is little ability to adapt to the unexpected or take advantage of new opportunities. Simply put, process rules are useful whenever flexibility trumps consistency.

The most widely used process rule is the how-to rule. How-to rules guide the basics of executing tasks, from playing golf to designing new products. The other process rules, coordination and timing, are special cases of how-to rules that apply in particular situations. Coordination rules center on getting something done when multiple actors— people, organizations, or nations— have to work together. These rules orchestrate the behaviors of, for example, schooling fish, Zipcar members, and content contributors at Wikipedia. In contrast, timing rules center on getting things done in situations where temporal factors such as rhythms, sequences, and deadlines are relevant. These rules set the timing of, for example, when to get up every day and when dragonflies migrate.

While I was skeptical, the book is well worth reading. I suggest you check it out.