The Math Behind Big Thinking

If you are thinking this is a motivation piece about the power of ambitious thinking, it’s not. What I’m going to lay out here has nothing to do with psychology or inspiration. This is basic math. A concept so simple, you will grow frustrated that your company doesn’t embrace it. My 11-year-old gets it. But the $50bn company I worked with yesterday doesn’t.

This simple idea could overcome your company’s aversion to risk, help them see failure as learning, and accelerate its growth rate.

For the last 50 years, strategy has been premised on the idea that strategy is about making big choices. Who do we serve? What do we prove to them? How do we get it to them?

Michael Porter advises we choose promising industries. Jim Collins that we build the right organizational structures. Clayton Christensen that we pick the right customer segments.

Your growth strategy, then, becomes a collection of big decisions.

But strategy is evolving.

In today’s faster-paced, more agile world, companies that are winning – Amazon, Google, Tesla/SpaceX – are operating at a higher order. They understand the simple mathematical principle of diversification.

Investors live by this principle. If you spread your money across a variety of risky investments, you can create a predictable return. While some investments fail, others pop. The average results can be stable even if the individual results are erratic.

This is why smart investors assemble portfolios of investments, instead of funneling all of their capital into just one stock or bond.

Yet most companies fail to apply this simple principle to their growth agendas. They assess each growth idea individually. Taking each opportunity – each new product, new channel, new customer segment – they assess whether its risk-adjusted return fits what the company wishes to deliver. As a result, they only pursue growth ideas with a comfortable level of safety. They grow risk averse because few new, innovative ideas promise the level of predictability that their core business can.

New ideas carry risk. To remove that risk, most companies simply kill off new ideas.

Diversify your risks.

But a smarter option is to take more risks, not fewer, while measuring the diversified return of those risks. Jeff Bezos said it best:

Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

The key to applying this diversification rule to accelerate your growth is to change your unit of measurement. Stop judging teams by the success or failure of their individual projects. Instead, give them a portfolio of ideas, and judge them by the return of their portfolio.

Let’s say you have five ideas for building new businesses with data. Don’t pick just one and hope it works. Pursue all five, understanding that some will fail while others will take off. Don’t assemble your team around one idea, organize them around a portfolio of ideas.

In other words, think bigger.

Think in groups of ideas rather than individual ideas.

But what if your budget only allows you to pursue one idea? In that case, you have two choices. You could pick just one, as most companies do. Or, a better choice, you could conduct less-expensive experiments that will bring down the cost of each idea by 80%. Instead of taking your $5 and betting it on one stock, put $1 into each of the five stocks in your portfolio.

New agile experimentation techniques make this easy. Read Sprint by the Google Ventures folks, Scrum by Jeff Sutherland, or The Start-Up Owner’s Manual by Steve Blank and Bob Dorf, and you will quickly understand how to do it.

Bundle your ideas.

Now your bosses may want to hear your idea, while you know you need to pitch them a portfolio of ideas. Getting their heads around this diversification concept may take more time and effort than you think. So instead, simply trick the system. Put the bundle of ideas into one group and give the group a name. Call it a multi-prong strategy or call it a concept. Take your five ideas for generating growth from data and call it “Data Services.” Take your five designs for new shoes and call it the “Shoe of the Future Project.”

1. Pick five ideas
2. Bundle them together into one project
3. Give the project a name
4. Assemble an idea
5. Run five inexpensive experiments
6. Drop what fails and advance what works

This article was originally published on Outthinker.com.