Chapter 1
THE PERILS OF THE PRESENT-FORWARD FALLACY
Life can only be understood backwards, but it must be lived forwards.
—Søren Kierkegaard
A string of stage coaches, a horseless carriage, and the Goodyear space tire • When present-forward and when future-back? • The first law of incumbent organizations • The vicious cycle of cognitive biases and organizational incentives • Heating houses by burning the furniture • The tyranny of the urgent • The most reliable predictor of high shareholder returns • The cavalry is not coming
Virtually every mature company tries to produce breakthrough innovations, but often what they tout as the wave of the future is just an incremental improvement on what they are already doing—the same old thing, but with a few added bells and whistles, like a coffee-maker that you can operate with your smartphone. Sometimes they do invent something that has the potential to be transformative, but they develop it within a system that is defined and constrained by the facts of the present—like a spaceship in a Jules Verne story with lace curtains hanging over its portholes and a cockpit fitted out with gas lamps, Persian rugs, and over-stuffed armchairs.
Have you ever seen a picture of a very early railroad train? The passenger cars looked exactly like stagecoaches, with the good seats inside and the cheap seats on their roofs.
It wasn’t much different when the earliest automobiles hit the roads. They looked very much like the horseless carriages that they were, and they were almost as noxious and noisy and uncomfortable to ride in as those early trains. Their passengers knew they were traveling in something novel, but few of them could have realized the extent to which those contraptions would redefine the geography of the future, even as they democratized the privilege of mobility.
c. 1831. Rooftop passengers in the “cheap seats” were usually treated to a face full of smoke and cinders
Source: Science History Images / Alamy Stock Photo.
The inventors of those early trains and cars weren’t thinking about what was to come so much as what already was. They took the transportation concepts of their day, coupled them with new technologies, and projected them out into the world without imagining the array of other developments that were needed for them to achieve their full potential. They exploited those new technologies, but they didn’t use them as propellants to new possibilities.
An even more eye-popping example of this is what the Research and Development people at Goodyear’s aviation division dreamed up in 1961 for a manned space station. Torus-shaped, with fabric walls that could be folded up flat for the launch and inflated upon deployment, its prototype looked exactly like a giant rubber tire. Needless to say, it didn’t get the green light from NASA.
c. 1894. The “horseless carriage”: one of the first designs for the automobile
Source: Mercedes-Benz Classic.
The designers of Salyut, Skylab, and the International Space Station understood that space is an altogether different environment than earth’s, so they allowed their functions to determine their forms. Goodyear’s R&D people, in contrast, were like the proverbial hammer that sees only nails. When tasked with the creation of something unprecedented, they made a great big tire instead.
Of course, there is nothing wrong with thinking and acting from the present forward when circumstances call for it. It’s appropriate when managing an ongoing business, striving for efficiency, improving quality, adding new features to, or otherwise enhancing an existing offering—which describes the majority of managerial challenges. The problem arises when present-forward thinking and processes are employed to address something truly new, unformed, or discontinuous—a breakthrough invention like a passenger train, an automobile, a space station, or a personal computer. To fully leverage the potential of inventions like these, you need to think in a different direction, from the future back.
c. 1961. Goodyear’s grand idea for a space station
Source: NASA.
There are countless business cases about long-established companies that failed because they could not imagine a future in which their core product didn’t play a dominant role. Their leaders extrapolated the present forward instead of envisioning a truly different competitive environment. Given the speed of developments with the internet and information technology in general, the computer business is replete with such stories. When the newspaper industry first began to feel the effects of the internet, its present-forward thinkers responded by making a literal PDF replica of the print newspaper and putting it on line. A handful of future-back thinkers, in contrast, recognized how different the digital environment was than print, so they created websites that changed dynamically in real time, and that were hyperlinked, allowing for nonlinear navigation, searching, and the serendipitous discoveries that the web made possible.
To see what can happen when the government applies present-forward thinking to a future-back problem, consider the case of Robert McNamara, the whiz-kid statistician Henry Ford II hired in 1946 to lift his company’s bottom line. John F. Kennedy appointed McNamara as his defense secretary in 1961. When the Vietnam War began to heat up during the Johnson administration, McNamara attempted to use the same quantitative methods that had rejuvenated Ford to achieve a military victory. But victory or defeat in war (especially another country’s civil war, one that is being fought by unconventional guerilla tactics) is not as easily measurable as success or failure in business.
Instead of evaluating why the Vietcong were fighting and how much each side was willing to sacrifice to achieve their goals; instead of conjuring up a plausible vision of the future and figuring out all the things that would have to be true for the United States to be able to claim victory for itself or for South Vietnam (or what such a victory would even look like), McNamara relied on enemy body counts as his most significant metric of success. But while the United States and South Vietnam consistently stacked up more Vietcong bodies than vice versa, they didn’t win the war. A master of execution and operation, McNamara aspired to play the game of war as he knew it more effectively. But his adversary was playing a different game.
At the same time, a future-back thinker who is weak in present-forward execution is no better off than his or her less-visionary peers. Elon Musk, for example, has become a multibillionaire by capturing the imaginations of investors with his futuristic visions of hyperloop transportation systems, high-speed tunnel borers, vertical take-off electric jets, and more. If the United States resumes the exploration of outer space, it will have much to do with SpaceX, the company Musk began in 2002 with a goal of sending people to Mars, and that has pioneered the development of reusable, orbital-grade rockets. As the CEO and guiding spirit of Tesla, Musk has done more to advance battery technology and the commercial viability of electric cars than anyone. But if Tesla is to become more than a high-tech novelty for the well-heeled, it must continue to rise to its present operational challenge of delivering a $35,000 vehicle in high quantities, on schedule, and of a consistent quality. Real progress is being made as we send this book to press, but only time will tell if Tesla fully pulls it off.
The point is, even great visionaries must master the present. Just ask John DeLorean, whose eponymous car company failed to scale, or Dean Kamen, whose Segway, initially touted as an innovation on the scale of the PC and the internet, turned out to be something less.
Why We Get Stuck in the Present
If Newton’s first law is the law of inertia, it is also, alas, the first law of incumbent organizations. When they are at rest, they tend to stay at rest. And when they are moving in a certain direction, it requires a great deal of energy and effort to alter their courses. Most incumbent organizations are led by people who are much less future-facing than their founders. As the economist Herbert Simon postulated in a different context, “Whereas economic man maximizes, selects the best alternative from among all those available to him, his cousin, administrative man, satisfices” (an apt portmanteau of satisfies and suffices).1 The managers of big organizations tend to be administrative men and women by definition.
It’s not their fault. The business schools they attended inculcated their present-forward approaches; the organizational and financial ecosystems that surround them reinforce them; and the incentive structures that they work within reward them. Bonuses are generally based on the annual results they deliver; even their so-called long-term incentives seldom run any longer than three to five years. Overcoming these barriers to vision requires you to unlearn a lifetime’s worth of lessons that taught you to focus on the short term.
Our Ingrained Cognitive Biases
Psychologists and behavioral economists like Daniel Kahneman and Amos Tversky have identified a host of innate cognitive biases that bind us to the present while blinding us to long-term threats and opportunities. Among them are bounded rationality, which is our instinct to solve problems based solely on the information that we have immediately at hand. Other cognitive biases are automaticity, the ingrained habits borne of doing the same things over and over again; the availability bias, which is our tendency to overweigh the data that is the freshest in our minds; the confirmation bias, which leads us to interpret data in a way that supports our pre-existing expectations; loss aversion, which makes us hate losing money even more than we like to make it; the sunk cost fallacy, which compels us to keep wasting money on losing propositions because we’ve wasted so much on them already; and the normalcy bias, which inclines us to overrate the likelihood of things continuing to go as they always have and to discount the possibility of them going horribly wrong. Hyperbolic discounting is our tendency to choose a smaller reward that we will receive sooner over a larger reward that we will receive later. There are dozens more of these tendencies and they tend to reinforce each other, working together in vicious cycles that compel us to keep doing what we’ve always done in the same ways that we’ve always done them.
Evolutionary psychologists argue that our brains were hard-wired for survival in the Pleistocene epoch, when life was nastier, more brutish, and much shorter than it is today, to paraphrase the philosopher Thomas Hobbes. “Like all animals,” Harvard’s Dan Gilbert wrote in an LA Times op ed some years ago, “people are quick to respond to clear and present danger, which is why it takes us just a few milliseconds to duck when a wayward baseball comes speeding toward our eyes.” Despite our evolutionary proclivity for imminent action, humanity has also evolved to anticipate and plan for things that haven’t yet happened, which gives us incredible power. But we have to summon up that capability deliberately, making a conscious effort to think both critically and creatively while putting our short-term biases on hold. “The application that allows us to respond to visible baseballs is ancient and reliable,” as Gilbert put it, “but the add-on utility that allows us to respond to … an unseen future is still in beta testing.”2
Financial and System Rewards and Incentives
Then there is the dynamic that Clay Christensen defined as “the innovators dilemma.”3 In order to improve their margins and please their best customers, corporations tend to allocate the bulk of their investments toward improvements that sustain, enhance, and make their existing businesses more efficient. New, exciting, and potentially disruptive growth initiatives may get a lot of buzz, but they rarely receive the funding they need. When times are tough and money is tight, they are usually the first to be cut.
In brief, if you want to understand a company’s strategy, don’t listen to what it says; look at where it spends its money. Disruption tends to start at the low end of the market and only gradually work itself upward; compared to what the core regularly delivers, disruptive products can seem less relevant at first, and hence more dispensable. That said, prioritizing the tried-and-true over the not-yet-known is not foolish or irrational; it’s sound management—until it’s not, when disruptive developments are reaching full boil. Even then, it is very hard to prioritize the new-and-untried when the old-and-familiar still has some life left in it. Everyone knows that the days of the internal combustion engine are numbered, but if you’re running a big car manufacturer, you must sell more of the gas-guzzling SUVs that your customers are still clamoring for. That’s why Christensen called it a dilemma. Privileging future-oriented ventures like electric cars over relatively safe ones like SUVs is something of an unnatural act.
So how do you resolve the dilemma? By looking out at a longer-term horizon and judging your present state from the future back. If you define the long-term as three to five years, as most enterprise leaders do, then by definition you are only looking at the present, as both disruption and new ventures take time to develop. Looking out five to ten years (or even more), when the negative effects of disruption are impossible to deny and your new investments will have begun to deliver substantial returns, enhances your ability to balance your short- and long-term priorities and better leverage the art of the possible.
Breakthrough efforts are further disadvantaged relative to mature businesses in defined markets when they are assessed by the kinds of financial metrics that typically guide corporate decision making. Risk-adjusted estimates of profitability for new and untried products can almost never stack up against those for established products because there is so much yet to be learned and discovered. Financial data comes from the past; relying too much on it to make decisions about the future is like looking in the rearview mirror to see where you’re going. The only way to override comparative profitability forecasts is with a well-founded judgment that the forecasts are likely wrong because markets will change in fundamental ways.
Leaders naturally worry that investments in altogether new initiatives may starve or even cannibalize their organization’s core businesses. Two-time Procter & Gamble CEO A. G. Lafley had some choice words to say about this risk: “Whenever you bring a new product or product improvement to the table in an established business,” he told us, “a bright young finance person will raise their hand and say, ‘Well, that’s going to cannibalize X percent of our business.’ But the obvious question that never gets asked is, ‘What happens if we don’t do it, and competitor A, B, or C does?’ ” The next question, he said, should always be, “Given the real risks of cannibalization, what are all the things we can do to minimize its effects?”4
A related dynamic that Christensen identified is what he called “the capitalist’s dilemma.” Since financiers are rightly taught to believe that the efficiency of capital is a virtue, they measure profitability not in dollars but as ratios like return on net assets (RONA), return on invested capital (ROIC), and internal rate of return (IRR). But the problem, Christensen wrote, is that “These ratios gave investors and managers twice the number of levers to pull to improve their measured performance.”5 Deferring maintenance, offshoring workers, and cutting investments in research reduce the denominators, improving the ratios. All of these choices make sense if the aim is to drive up reported profits in the short term, as opposed to ensuring long-term growth and sustainability.
“The only sure way to increase shareholder value,” as Roger Martin has noted, “is to raise expectations about the future performance of the company. Unfortunately, executives simply can’t do that indefinitely. Shareholders will look at good results … and ratchet up their expectations to the point where managers can’t continue to meet them.… So the executives invest in short-term strategies, hoping to get out before the inevitable crash.”6
Business leaders are being motivated and rewarded to heat their houses by burning the furniture.
As much as Wall Street celebrates successful long-term investors like Warren Buffett, the majority of analysts, hedge-fund managers, and institutional investors are looking to place bets that they can collect on right away. Activist investors often reward CEOs who use available cash to buy back shares and punish CEOs who reinvest it. Plus, as noted above, executives’ salaries, bonuses, and incentives are pegged to the short-term profits they deliver. “Most incentive systems are backwards,” Scott Cook, the cofounder and leader of Intuit and a member of the boards of P&G and eBay told us in an interview. “They pay for last year’s successes. Yet investors invest for a company’s future performance.”7
The Tyranny of the Urgent
Beyond these cognitive biases, organizational rules and norms, and short-term incentives, the senior leaders who make the most important resource allocation decisions are being crushed by what has been called the tyranny of the urgent.8
They may admire business visionaries in the abstract, but they typically blanch at the costs in time and mental bandwidth that being one entails. We once worked closely with the CEO of a major American corporation who spent his fifteen-hour days racing from meeting to meeting with his twenty-plus direct reports to put out fires—when he wasn’t traveling to plants and branch offices around the world. The only time he had to himself, he told us, was the hour he spent exercising on his treadmill before dawn, which he used to read and answer the emails he hadn’t gotten to the day before. He might as well have been on that treadmill all day. His case is hardly unusual. A 2018 report by Michael E. Porter and Nitin Nohria, published in Harvard Business Review, analyzed the calendars of twenty-seven CEOs over a full quarter.9 On average, they had thirty-seven meetings per week, which took up 72 percent of their time.
As overwhelmed by the stresses of the present as they are, where can these over-pressed leaders find the time to think about the future? The stresses of the present are palpable; we feel them in our bodies as we scramble to deal with them, while the threats and opportunities of the future are just ideas. When a pipe bursts in our basement, we rush to call the plumber. When we read about the rising water levels in the oceans, it’s easier to push the concern from our minds.
It’s dauntingly hard to run a big organization and it gets harder every day. Leaders must set aside time for the future. If that requires them to delegate some of their routine managerial responsibilities to others, then that is what they must do.
Why Long-Term Planning Is Critical
You should always seek out opportunities for beyond-the-core growth, because growth today does not foretoken growth tomorrow, even if you are the most valuable company in the world. As Sandi Peterson, a former vice chairman of Johnson & Johnson who currently sits on the board of Microsoft, put it to us, “People do get lulled into thinking that the future must be fine because they’re making their quarters.”10 Even if—especially if—you are certain that your organization is on an unstoppable path of multifactorial growth, that growth could easily plateau or plummet if you haven’t been building new platforms and opening up new markets, laying the groundwork for a future that is likely to be as different from the present as the present is from the past. When you are thinking solely in the short term, you are by definition blind to both threats (the sudden decline in year six that results from a disruptor’s attack) and longer-term opportunities (the sharp spike in revenues that would have come from an initiative that finally started to scale in, let’s say, year seven).
Growth is never assured and essential growth, to be clear, is not just financial. There is growth in value and relevance to customers; growth in technological, scientific, and other capabilities; growth in understanding; and growth in organizational wisdom. Absent growth, an organization, like an individual, must be in a state of stagnation or decay.
Efficiency improvements and sustaining innovations may boost your margins for the next few quarters or even the next several years, but they will not keep you ahead of the curve of long-term change. As Scott Cook put it in our interview with him,
If you are commoditizing, incremental improvement won’t help. The best people and companies do both at the same time: both execute and look to the future to invent and disrupt. Don’t kid yourself, Amazon is a relentless executor and that’s critical to their success. At the same time, they’ve created unprecedented industries of the future: cloud computing (Amazon Web Services), e-books (Kindle), conversational computing (Alexa), and more. Toyota too—they re-invented assembly line manufacturing in the ’60s and ’70s (Toyota Production System) and popularized the hybrid drive. But 99.9 percent of companies focus on today.11
Cook’s 99.9 percent figure might be hyperbolic, but neither the prevalence nor the danger of this corporate myopia can be denied. The only way to stay relevant, Cook continued, is via constant innovation, and not just at the margins but throughout your whole enterprise:
How do you drive sustainable growth? You have to think about innovation in three buckets: First you improve the game, or push it by operating better, but second, you can change the game, change the business, by figuring out new ways to leave the competition in the dust. And third, you can create a new game. The CEO has to drive the org to change the game and create the next game. It’s a personal assessment of how much you’re doing of each. They’re all three important.12
Even if you are lucky enough to escape disruption, an exclusively incremental present-forward approach is unlikely to create the long-term growth you need. As the charts on the next page show, the most reliable predictor of high shareholder returns over an eight-year-plus period is not the size of your margins, which don’t correlate with long-term share value, but your rate of top-line growth, which does.
Companies that merely keep pace with the growth rate of the economy as a whole have a survival advantage that is six to twelve times that of companies that don’t. But to grow faster than the stock market, companies must grow their revenues at a rate that exceeds the GDP.
Privileging risky future-oriented ventures over relatively safe present-forward ones may seem like something of an unnatural act, but no one, least of all us, is telling leaders to mortgage their core businesses and stake everything on an untested vision. The aim is to get as much as you can from your core for as long as you can but at the same time to always be planting seeds you can harvest in the future.
The Cavalry Is Not Coming
Having a powerful vision of the future can go a long way to overcoming all these barriers to long-term, beyond-the-core growth. Really, it may be the only thing that can. The cavalry is not coming: human nature will not change, and the organizational and financial systems that we humans invented will be with us for a long time.13 But that is not the end of the story.
As bound to the present as we are, we do have that add-on utility that allows us to respond to unseen threats and opportunities. Entrepreneurs often wield it instinctively; if you’re in a leadership position in a long-established organization that is biased to the short term, you might have to learn when and how to switch off your present-forward biases, access your future-back capabilities, and use them intentionally. Leading from the future must be a conscious choice, or the present will keep pulling you back.
Just as the innovation teams in great R&D organizations formulate hypotheses and methodically test them to retire risk, senior leaders should continually shape and reshape their vision for the future of their organizations. Think of it as breakthrough R&D for business.
As the next chapter will show, future-back thinking enables you to do just that.