Great by Choice Chapter 7: Return on Luck

Great by Choice Chapter 7: Return on Luck

GREAT BY CHOICE Chapter 7: Return on Luck 5 T E A A M N D V R A E N R A



M ID T STORY OF LUCK? DALY & DONINI Malcolm Daly and Jim Donini were making their final ascent on Thunder Mountain in Alaska when disaster struck Daly was making the ascent towards the summit and placing protection screws along the way with Donini anchored below when something gave way Daly began to fall; protection screws ripped out; on his way down he punctured Doninis thigh with his boot spikes; something sharp sliced 10 of 12 strands of rope; and Daly fell 200ft and crumpled to the ground Donini descended toward Daly who had shattered his legs and realizing he couldnt safely move Daly, he ascended 3000ft and unexpectedly ran across an air taxi, flown by his friend Roderick

Donini and Roderick flew to a ranger station, planned a rescue, and plucked Daly from the mountain 44hrs later with 4hrs to spare before a storm hit LUCK OR SKILL? Bad luck? Solid ice giving way Good luck? Rope wasnt cut all the way through Daly didnt die in the fall Didnt kill Donini on the way down Donini reached base as air taxi flew by Luck clearly played a role in Planned rescue just in

Dalys survival, but luck didnt time save Daly in the end. People did. Skill Daly had physically trained: climbing, running, skiing, mountaineering Read survival books Studied helicopter rescues Maintained positive outlook Upper body exercise regimen Picked an experienced partner in Donini Developed relationships who loved him and would risk their lives for him (Billy Shot, rescue leader)

WHAT IS THE ROLE OF LUCK? Analyze luck by asking three questions: 1. Is luck a common or rare element in the histories of the 10X and comparison cases? 2. What role, if any, does luck play in explaining the divergent trajectories of 10X and comparison cases? 3. What can leaders do about luck to help them build great companies on a 10X journey? A luck event meets three tests: 1. Some significant aspect of the event occurs largely or entirely independent of the actions of the key actors 2. The event has a potentially significant consequence (good or bad) 3. The event has some element of unpredictability LUCK EVENT Luck Event Example 1. Independent of the actions of the key actors: Daly and Donini didnt cause the air taxi to fly by at just the right moment 2. Must have a potentially significant consequence: Two of the twelve rope strands did not break and helped stop Dalys fall 3. Must have some element of unpredictability: Daly did not foresee that the seemingly solid ice would give way LUCK-CODING

Method that considers each luck event to account for the fact that some events have greater impact than others Comparing luck events of a 10X company, Amgen and its comparison company, Genentech Compared 7 back-luck and good-luck events for Amgen and its comparison company AMGEN LUCK EVENT ASSESSMENT 1981: A Taiwanese scientist named Fu-Kuen Lin just happened to see (and respond to) a small help-wanted classified advertisement placed by Amgen.4 Amgen could neither control who saw the ad nor predict that one of the respondents would be a genius with the ferocity to persist against all odds and skeptics to lead the EPO-gene breakthrough. Amgens decision to take out a classified ad isnt luck; that Fu-Kuen Lin happened to see the ad at the precise moment he was looking for a job opportunity is luck.5 GOOD LUCK, HIGH IMPORTANCE

AMGEN LUCK EVENT ASSESSMENT 1982: The biotechnology industry experienced a downturn, which impacted investor sentiment and funding options for the fledgling company; this was potentially significant for Amgen given that it planned to go public soon thereafter. BAD LUCK MEDIUM IMPORTANCE GENENTECH LUCK EVENT ASSESSMENT 1975: Financier Robert Swanson and molecular biologist Herbert Boyer happened to be in the right place (the San Francisco Bay Area) at the right time (just as scientific advancements made gene splicing viable) when they met for the first time. They hit it off, becoming fast friends, and realized that a confluence of forces (the rise of venture capital and the advancement of gene-splicing technology) made possible the creation of the first biotechnology company in history.12 That they started a company isnt luck; that they happened to be in precisely the right place at precisely the right time to be first is luck. GOOD LUCK, HIGH

GENENTECH LUCK ASSESSMENT 1982: The biotechnology industry experienced a downturn, impacting investor sentiment; shares fell to less than $35 from the IPO high of $89, raising the cost of capital. Markets are always uncontrollable and unpredictable. The downturn was potentially significant as Genentech had less than $1 million in profits and depended upon access to equity capital to fund breakthrough R&D. BAD LUCK, MEDIUM GOOD-LUCK EVENTS Matched Pairs Number of Significant Good-Luck Events 10X Case Comparison Case 10 18 Biomet & Kirschner 4

4 Intel & AMD 7 8 15 14 Progressive & Safeco 3 1 Southwest & PSA 8 6 Stryker & USSC 2 5 Average

7 8 49 56 Amgen & Genentech Microsoft & Apple Total BAD-LUCK EVENTS Matched Pairs Number of Significant Bad-Luck Events 10X Case Comparison Case Amgen & Genentech 9 9

Biomet & Kirschner 7 4 14 11 Microsoft & Apple 9 7 Progressive & Safeco 8 10 13 13 5 6 Average

9.3 8.6 Total 65 60 Intel & AMD Southwest & PSA Stryker & USSC HIGH ROL (RETURN ON LUCK) Bill Gates Luck: Born into upper middle class American family Born at the right time, coming age at advancement of microelectronics Enrolled in school with access to a teletype connection unusual for schools 1960s/70s

Gates went to college at Harvard, which had a PDP-10 computer Yes, he was LUCKY, but NOT WHY he became a 10Xer. Thousands of people could have done the exact same thing as Gates, at the exact same time, but they didnt. He did more with his luck and created a huge return on his luck HIGH ROL (RETURN ON LUCK) Luck happens whether we like it or not! Return on Luck (ROL) Grea t Defining moments in the 10X journey

Essential skill for the 10X results Dont Confuse Luck with Return on Luck A sure path to mediocrity Can lead to hitting the Death Line Poor Bad Good Luck HIGH ROL (RETURN ON LUCK) Two Extreme view of the topic of luck: One View: Sees luck as the dominant explanation for abnormal success Big winners are those who received a series of lucky coins Second View:

Luck plays NO role. Success comes entirely from skill, preparation, hard work, and tenacity Research supports neither. Data supports one concept of return on luck. Return on luck entails staying on a 20 Mile March, firing bullets, then big cannonballs, productive paranoia to avoid the Death Line, develop a SMaC recipe. SQUANDERING LUCK: POOR RETURN ON GOOD LUCK Squander: to lose (as an advantage or opportunity) through negligence or inaction AMD was cleared by federal court to clone Intel microprocessors

Developed K5 chip and gained market share and sales Decreasing Intels power IBM then halted shipments of Intels Pentium chip because of a highly publicized glitch Intel announced $475 million charge against earnings to replace glitch chip to customers AMDS RESPONSE TO GOOD LUCK K5 projects slipped months behind schedule and customers returned to Intel Dropped AMDs microprocessor sales by 60% By the time AMD solved the glitches Intel was already proceeding to the next generation of microprocessors TWO MORE CHANCES FOR GOOD LUCK NexGen developed a working clone of Intels next generations microprocessor

AMD acquired NexGen and returned to the game AMD-K6 was faster and cheaper than Intels chip Market share shifted drastically back to AMD yet again AMD failed to meet the surplus of demand for the chip and the market share returned to Intel The AMD story illustrates a common pattern we observed in the comparison companies during their respective eras of analysis, the squandering of good luck. When the time came to execute on their good fortune, they stumbles. They didnt fail for lack of good luck; they failed for lack of superb execution.-Great by Choice 10XERS SHINE: GREAT RETURN ON BAD LUCK On November 8, 1988, Peter Lewis received news that shocked and stunned the insurance industry.

Chastened by what hed heard, Lewis called his staff together, told everyone, Our customers actually hate us, and challenged his team to create a better company. Lewis came to see Proposition 103 as a gift, and he used this gift to deepen the companys core purpose, to reduce the economic cost and trauma caused by auto accidents. Immediate Response 10Xers use difficulty as a catalyst to deepen purpose, recommit to values, increase discipline, respond with creativity, and heighten productive paranoia. Resilience, not luck, is the signature of greatness. HOCKEY, EH? Analysis of Canadian-born hockey players, wherein academic researchers identified a correlation between birth date and hockey success. First half of year (70%) VS Second half of year (30%) Author Malcolm Gladwell popularized these findings, writing that this pattern eventually played out all the way to the National Hockey League (NHL)

But a closer look at the data leads to a very different conclusion for truly great hockey players, the 10Xers, those few who make it to the Hockey Hall of Fame. Half of Canadian-born Hall of Famers had birth dates in the second half of the year, like Ray Bourque. We all get bad luck. The question is how to use that bad luck to make us stronger, to turn it into one of the best things that ever happened, to not let it become a psychological prison. And thats precisely what 10Xers do. BAD LUCK, POOR RETURN The one place you really dont want to be Both Southwest and PSA were hit with a series of bad-luck events in the late 70s and early 80s High jet-fuel prices Air-traffic control strike Recession and spiraling inflation Interest rates that increased the cost of jet leasing Unexpected change of CEO PSA raised prices and destroyed culture with increased layoffs and union battles and fell permanently behind Southwest

You have to be skilled, strong, prepared and resilient to endure the bad luck long enough to get to the good luck Luck favors the persistent, but you can persist only if you survive. LUCK IS NOT A STRATEGY Managing Luck involves: 1.Cultivating the ability to zoom out and recognize luck when it happens 2.Developing the wisdom to see when, and when not, to let luck disrupt you plans 3.Being sufficiently well-prepared to endure an inevitable spate of bad luck 4.Creating a positive return on luck, both goo and bad, when it comes Luck is not a strategy, but getting a positive return on luck is. Luck and life are uncertain, uncontrollable, and consequential.

HOW DO YOU GO ABOUT GETTING THE HIGHEST POSSIBLE ROL? 10Xer Behaviors: Leaders who possess fanatic discipline, empirical creativity, productive paranoia, and Level 5 ambition keep pushing toward goals in the face of good or bad luck 20 Mile March: 10Xers seize good luck and build on it. They build a culture to achieve success despite good or bad luck, creating confidence not dependent on luck. Fire bullets, then cannonballs: Increase the chances of discovering something that works; combines creativity and empirical validation, so 10Xers can fire cannonballs that dont rely on luck for success Leading above the Death Line: Building buffers and margins of safety; manage Death Line risk, asymmetrical risk, and uncontrollable risk; zoom in then zoom out SMaC: Behaviors that lessen mistakes that increase bad luck and increase odds of success in good luck; helps decide when and how to let luck disrupt plans

BETTER TO BE GREAT THAN LUCKY The best leaders have a paradoxical relationship with luck They credit good luck in retrospect for playing a role in their successes despite the fact that others were just as lucky They dont blame bad luck for their failures but hold themselves responsible Leaders understand that by blaming bad luck, they succumb to fate and by failing to recognize the role of good luck, they risk overestimating their skills when luck runs out There may be good luck down the road, but 10Xers never count on it

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